UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K/A

(Amendment No. 1)

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

OR

¨ 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: 333-177233-19 and 000-50280

iPayment Holdings, Inc.

iPayment, Inc.

(Exact name of registrant as specified in its charter)

Delaware Delaware	20-4777880 62-1847043
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
126 East 56th Street New York, New York	10022
(Address of principal executive offices)	(Zip Code)

Registrants’ telephone number, including area code: (212) 802-7200

Securities registered pursuant to Section 12(b) of the Act:

iPayment Holdings, Inc.	NONE
iPayment, Inc.	NONE

Securities registered pursuant to Section 12(g) of the Act:

iPayment Holdings, Inc.	NONE
iPayment, Inc.	NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

iPayment Holdings, Inc.	Yes  ¨    No  þ
iPayment, Inc.	Yes  ¨    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.

iPayment Holdings, Inc.	Yes  ¨    No  þ
iPayment, Inc.	Yes  ¨    No  þ

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.

iPayment Holdings, Inc.	Yes  ¨    No  þ
iPayment, Inc.	Yes  ¨    No  þ

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).

iPayment Holdings, Inc.	Yes  ¨    No  þ
iPayment, Inc.	Yes  ¨    No  þ

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/A or any amendment to this Form 10-K/A. 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.

iPayment Holdings, Inc.	Large accelerated filer  ¨	Accelerated filer  ¨	Non-accelerated filer  þ	Smaller reporting company  ¨
iPayment, Inc.	Large accelerated filer  ¨	Accelerated filer  ¨	Non-accelerated filer  þ	Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

iPayment Holdings, Inc.	Yes  ¨    No  þ
iPayment, Inc.	Yes  ¨    No  þ

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter was:

iPayment Holdings, Inc.	NONE
iPayment, Inc.	NONE

Title of each class	Shares Outstanding at March 23, 2012
iPayment Holdings, Inc. (Common stock, $0.01 par value)	4,875,000
iPayment, Inc. (Common stock, $0.01 par value)	100

Documents incorporated by reference: Certain exhibits filed with the registrants’ (i) Registration Statement on Form S-1 filed with the Securities and Exchange Commission (the “SEC”) on March 4, 2003, File No. 333-101705, (ii) Registration Statement on Form S-4 filed with the SEC on July 21, 2006, File No. 333-135959, and (iii) Registration Statement on Form S-4 filed with the SEC on October 11, 2011, File No. 333-177233, are incorporated by reference into Part IV.

Explanatory Note

iPayment, Inc. (the “Company”) and iPayment Holdings, Inc. (“Holdings”) are filing this Amendment No. 1 to Annual Report on Form 10-K/A (the “Amended Filing”) to our Annual Report on Form 10-K for the year ended December 31, 2011, originally filed with the Securities and Exchange Commission (the “SEC”) on March 23, 2012 (the “Original Filing”), to amend and restate our audited financial statements and related disclosures for the years ended December 31, 2009, 2010, and 2011. This Amended Filing also includes restated unaudited quarterly financial information for each of the years ended December 31, 2009, 2010, and 2011 and amends certain other Items in the Original Filing as listed in “Items Amended in this Filing” below, as a result of the restatement of our financial statements. The details of the restatement are discussed below and in Note 2 to the accompanying restated financial statements.

Background of Restatement

In August 2012, as disclosed in the Company’s Current Reports on Form 8-K filed on September 12, 2012 and November 5, 2012 the Company and Holdings were presented with accusations from one of the Company’s employees that certain of the Company’s employees and outside contractors had engaged in financial misconduct. Following an initial inquiry into these accusations by the Company, the Board of Directors of the Company engaged Debevoise & Plimpton LLP and forensic accountants of Ernst & Young LLP to work with management to conduct an internal investigation of the alleged misconduct. During the course of the Company’s investigation, certain executives of the Company and Holdings were terminated or resigned.

The Company’s internal investigation revealed financial misconduct by certain former officers and employees of the Company and certain of its outside contractors. Such misconduct occurred in five principal areas: (i) failure to maintain an adequate control environment that set a proper culture within our operations; (ii) creation of false obligations to make residual and other payments (which resulted in the Company making such payments in respect of merchant accounts that were not subject to legitimate payment obligations); (iii) overstatement of certain vendor invoices, principally in the information technology area; (iv) falsification of certain employee expense reimbursements and other payments; and (v) the posting of manual journal entries without sufficient supporting documentation or adequate review and approval. The adjustments related to the financial misconduct and the recording of immaterial prior period adjustments not related to the financial misconduct are set forth in the table below.

	Cumulative embezzlement costs through December 31, 2011		iPayment Holdings, Inc. & iPayment, Inc. (Successor & Predecessor combined)			iPayment Holdings, Inc. & iPayment, Inc.
(Dollars in thousands)			2011			2010			2009			2008(1)
Embezzlement costs
Residual expense	$	3,672	$	1,760		$	1,100		$	736		$	76
Property and equipment		1,942		741			265			—			936
Other intangible assets		1,682		1,527			—			155			—
Residual buyout		1,625		—			1,625			—			—
Travel and entertainment		229		106			—			58			65
Prepaids and other receivables		208		—			155			—			53
Other		123		—			3			2			118
Total embezzlement costs	$	9,481		4,134			3,148			951			1,248
Embezzlement costs previously included in the statements of operations as:
Other costs of services				(2,319	)		(1,611	)		(1,018	)		(158	)
Selling, general and administrative				(106	)		(3	)		(68	)		(151	)
Prior period adjustments not related to fraudulent transactions
Reversal of residual buyout amortization expense				(1,996	)		—			—			—
Reversal of deferred gain amortization				613			—			—			—
Other adjustments recorded in connection with the restatement				(609	)		(334	)		485			N/A
Tax adjustments
Tax effect of the above recorded adjustments				4			(341	)		(233	)		(360	)
Prior period tax adjustments not related to fraudulent transactions				(1,375	)		(1,081	)		—			—
Net (increase) decrease				(1,654	)		(222	)		117		$	579
Net income (loss), as previously reported(2)				(18,044	)		22,828			15,328
Net income (loss), as restated(2)			$	(16,390	)	$	23,050		$	15,211

(1) adjustments to beginning retained earnings at January 1, 2009

(2) for 2011, net (loss) is for iPayment Holdings, Inc.

2

Total embezzlement costs incurred by the Company cumulatively through December 31, 2011 were approximately $9.5 million. Approximately $5.1 million of such identified losses through December 31, 2011 were previously classified as residual and other expenses within other costs of services in the financial statements during the periods in which the misconduct took place. Approximately $0.3 million of such identified losses were classified as selling, general and administrative expenses in the financial statements during the periods in which the misconduct took place. The Company reclassified these costs as embezzlement costs included in total operating expenses. These embezzlement costs had no effect on the Company’s income from operations and net income (loss) in the prior periods. The remaining amount of such identified embezzlement costs totaling approximately $4.1 million through December 31, 2011 were capitalized in the financial statements as property and equipment, other intangible assets or other assets during the periods in which the misconduct took place. Such losses were written off as embezzlement costs in the restated financial statements in the periods in which the misconduct took place and do affect the Company’s income from operations and net income (loss) in its restated financial statements.

Based on the results of the Company’s internal investigation, and the financial impact thereof on prior financial periods, the Boards of Directors of the Company and Holdings, at meetings held on November 1, 2012, determined that the Company’s financial statements (i) for the fiscal years ended December 31, 2009, 2010, and 2011 included in the Company’s Annual Reports on Form 10-K for the years then ended and Ernst & Young LLP’s reports thereon, (ii) for the interim periods within such fiscal years included in the Company’s Quarterly Reports on Form 10-Q, and (iii) for the quarters ended March 31, 2012 and June 30, 2012 included in the Company’s Quarterly Reports on Form 10-Q (the “Affected Financial Statements”), should no longer be relied upon. As a result, the Company has restated the Affected Financial Statements to reflect the effect of such financial misconduct on the Affected Financial Statements. This Form 10-K/A contains more information about the restatement in Note 2 to our consolidated financial statements “Restatement of Consolidated Financial Statements,” which accompanies the financial statements in Item 8 of this report. Additionally, more information regarding the internal investigation is included in Item 3 of this report.

Items Amended in This Filing

For the convenience of the reader, this Amended Filing sets forth the Original Filing, as modified and superseded where necessary to reflect the restatement. The following items have been amended as a result of, and to reflect, the restatement:

• Part I –Item 1. Business

• Part I – Item 1A. Risk Factors

• Part I – Item 3. Legal Proceedings

• Part II – Item 6. Selected Financial Data

• Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

• Part II – Item 8. Financial Statements and Supplementary Data

• Part II – Item 9A. Controls and Procedures

• Part III – Item 10. Directors, Executive Officers and Corporate Governance

• Part III – Item 14. Principal Accountant Fees and Services

Although this Amended Filing amends and restates the Original Filing in its entirety, it amends only the items of the Original Filing identified above to reflect the restatement. Except for the foregoing amended information or where otherwise noted, this Form 10-K/A does not reflect events that occurred after the Original Filing or modify or update those disclosures affected by subsequent events. Rather, except as described above, information is unchanged and reflects the disclosures made at the time of the Original Filing on March 23, 2012. Events occurring after the date of the Original Filing (other than items changed as a result of the restatement as well as certain disclosures made to reflect subsequent events, all contained in our consolidated financial statements which occurred after December 31, 2011 through the date of filing), have been or will be addressed in our amended Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2012 and June 30, 2012 and our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012, which will be filed shortly after the filing of this Form 10-K/A, and/or in other reports filed with the SEC subsequent to the date of the Original Filing.

The sections of the Original Filing affected by the restatement should no longer be relied upon. In addition, this Form 10-K/A has been repaginated and references to “Form 10-K” have been revised to refer to “Form 10-K/A.”

In addition, in accordance with applicable SEC rules, this Amended Filing includes new currently dated certifications from the Company’s Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications of the Company’s Chief Executive Officer and Chief Financial Officer are attached to this Amendment as Exhibits 31.1, 31.2, 32.1 and 32.2.

Restatement of Other Financial Statements

In addition to this Amended Filing, we will file an amendment to each of our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2012 and June 30, 2012 (the “March 10-Q/A” and the “June 10-Q/A”). The March 10-Q/A and June 10-Q/A will be filed shortly after this Amended Filing to restate our unaudited financial statements and related financial information for the periods contained in those reports and to amend certain other Items within the previously issued quarterly filings.

3

Internal Control Considerations

As discussed in Part II — Item 9A of this Amended Filing, the Board of Directors of the Company concluded on November 1, 2012 that material weaknesses in the internal control over financial reporting exist at the Company, and consequently the Board of Directors has determined that management’s report on internal control over financial reporting as of December 31, 2009, 2010 and 2011, included in the Company’s Annual Reports on Form 10-K for the years then ended, should no longer be relied upon. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The existence of one or more material weaknesses precludes a conclusion by management that a corporation’s internal control over financial reporting is effective. The Company is currently in the process of remediating the weaknesses in internal control over financial reporting referred to above by designing and implementing new procedures and controls throughout the Company and its subsidiaries.

For a discussion of management’s consideration of our disclosure controls and procedures and the material weaknesses identified, see Part II — Item 9A included in this Amended Filing.

4

Table of Contents

Cautionary Note Regarding Forward-Looking Statements	6
Basis of Presentation	7
PART I	8
ITEM 1. BUSINESS	8
ITEM 1A. RISK FACTORS	15
ITEM 1B. UNRESOLVED STAFF COMMENTS	16
ITEM 2. PROPERTIES	16
ITEM 3. LEGAL PROCEEDINGS	16
ITEM 4. MINE SAFETY DISCLOSURES	29
PART II	30
ITEM  5. MARKET FOR REGISTRANTS’ COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	30
ITEM 6. SELECTED FINANCIAL DATA	30
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	32
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	107
ITEM 9A. CONTROLS AND PROCEDURES	107
ITEM 9B. OTHER INFORMATION	110
PART III	110
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	110
ITEM 11. EXECUTIVE COMPENSATION	112
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT	116
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	117
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES	117
PART IV	118
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES	118

5

Cautionary Note Regarding Forward-Looking Statements

Certain statements in this annual report on Form 10-K/A (this “Annual Report”), including, but not limited to, certain statements set forth under “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are based on the beliefs of our management and information currently available to them. The statements included in this Annual Report regarding our future financial performance, results and other statements that are not historical facts are forward-looking statements. The words “may,” “could,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “believe,” “project,” “predict,” “potential,” “future” and similar terms are intended to identify forward-looking statements.

The forward-looking statements included in this Annual Report are subject to risks and uncertainties, many of which are beyond our control, that could cause actual results to differ materially from those which may be forecast and projected. Under no circumstances should the inclusion of such information in this Annual Report be regarded as a representation, warranty or prediction with respect to the accuracy of the underlying assumptions by us or any other person. Investors are cautioned not to place undue reliance on these forward-looking statements. These forward-looking statements are subject to various factors that could cause our actual results to differ materially from the results expressed or anticipated in these statements. These factors include, without limitation:

• the impact of any new or changes made to laws, regulations, card network rules or other industry standards affecting our business;

• the impact of any significant chargeback liability and liability for merchant or customer fraud, which we may not be able to accurately anticipate;

• our ability to secure or successfully migrate merchant portfolios to new bank sponsors if current sponsorships are terminated;

• our and our bank sponsors’ ability to adhere to the standards of the Visa and MasterCard payment card associations;

• our reliance on third-party processors and service providers;

• our dependence on independent sales groups (“ISGs”) that do not serve us exclusively to introduce us to new merchant accounts;

• our ability to pass along increases in interchange costs and other costs to our merchants;

• our ability to protect against unauthorized disclosure of merchant and cardholder data, whether through breach of our computer systems or otherwise;

• the effect of the loss of key personnel on our relationships with ISGs, card associations, bank sponsors and our other service providers;

• the impact on our reputation of negative publicity arising from the fraud committed by certain of our former employees;

• the effects of increased competition, which may adversely influence our financial performance;

• the impact of any increase in attrition due to an increase in closed merchant accounts and/or a decrease in merchant charge volume that we cannot anticipate or offset with new accounts;

• the effect of adverse business conditions on our merchants;

• our ability to adopt technology to meet changing industry and customer needs or trends;

• the impact of any 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;

• the impact of any adverse conditions in industries in which we obtain a substantial amount of our bankcard processing volume;

• the impact of seasonality on our operating results;

• the impact of any failure in our systems due to factors beyond our control;

• the impact of any material breaches in the security of our systems;

• the impact of any new and potential governmental regulations designed to protect or limit access to consumer information;

6

• the impact on our profitability if we are required to pay federal, state or local taxes on transaction processing;

• the impact on our growth and profitability if the markets for the services that we offer fail to expand or contract;

• our ability to successfully defend against various legal proceedings;

• the impact on our operating results as a result of impairment of our goodwill and intangible assets;

• our material weaknesses in internal control over financial reporting; and

• the other factors identified in the section of this Annual Report entitled “Risk Factors.”

All future written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. In light of these and other risks, uncertainties and assumptions, the forward-looking events discussed in this Annual Report might not occur. You should read this Annual Report completely and with the understanding that actual future results may be materially different from what we expect. The forward-looking statements speak only as of the date stated or otherwise, as of the date of this Annual Report, and, except as required by law, we do not undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, even if experience or future events make it clear that any expected results expressed or implied by these forward-looking statements will not be realized.

Basis of Presentation

As used in this Annual Report, the terms “we,” “us,” “our,” “the Company,” “our Company” or similar terms refer to iPayment Holdings, Inc. and its subsidiaries, unless otherwise stated or required by the context. The term “iPayment” refers to iPayment, Inc. and “Holdings” refers to iPayment Holdings, Inc., in each case, without their subsidiaries.

As more fully described in “Business—Our History” on May 23, 2011, iPayment Investors, L.P. (“iPayment Investors”), our ultimate parent, and iPayment GP, LLC (“iPayment GP”), the general partner of iPayment Investors, completed the redemption (the “Equity Redemption”) of all of the direct and indirect equity interests in iPayment Investors and iPayment GP of (i) Gregory Daily, iPayment’s former Chairman and Chief Executive Officer and (ii) the trusts for the benefit of, and other entities controlled by, members of Mr. Daily’s family that held equity interests in iPayment Investors. The Equity Redemption resulted in a change in control and accordingly has been accounted for as a business combination in accordance with ASC 805 “Business Combinations.” As a result of the Equity Redemption, our results of operations, financial position and cash flows prior to the date of the Equity Redemption are presented as the “Predecessor.” The financial effects of the Equity Redemption and our results of operations, financial position and cash flows following the Equity Redemption are presented as the “Successor.” In addition, the results provided for the year ended December 31, 2011 refer to the combined results of the Predecessor and Successor entities for such period.

7

PART I

ITEM 1. BUSINESS

General

We are a provider of credit and debit card payment processing services to small merchants across the United States. During December 2011, we generated revenue from approximately 192,000 merchants. Of these merchants, approximately 132,000 were active merchants that had each processed at least one Visa or MasterCard transaction during that month. We conduct all of our operations through our operating company, iPayment, Inc., or “iPayment,” and its subsidiaries. iPayment and its direct parent, iPayment Holdings, Inc., or “Holdings,” are incorporated in Delaware. Holdings is a holding company that does not have any operations or material assets other than the direct and indirect ownership of all of the capital stock of iPayment and its subsidiaries, respectively. All of the capital stock of Holdings is owned by iPayment Investors, L.P., or “iPayment Investors.” All of the partnership interests of iPayment Investors are owned by Carl A. Grimstad, iPayment’s Chairman and Chief Executive Officer, and certain entities and persons affiliated with him.

Our payment processing services enable our merchants to accept credit cards as well as other forms of payment, including debit cards, checks, gift cards and loyalty programs in traditional card-present, or swipe transactions, as well as card-not-present transactions, such as those done over the phone or through the internet. We market and sell our services primarily through independent sales groups, or “ISGs,” which are non-employee, external sales organizations and other third party resellers of our products and services. We also market our services directly to merchants through electronic media, telemarketing and other programs utilizing partnerships with other companies that market products and services to small businesses. In addition, we 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, primarily 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. Our charge volume processed for 2011 was $22.7 billion equal to the charge volume processed in 2010. However, our revenues increased $9.0 million or 1.3% to $708.2 million in 2011 from $699.2 million in 2010. Our net revenue increased 4.7% to $286.3 million in 2011 from $273.4 million in 2010. Our net revenue is composed of total revenue reduced by interchange fees and network fees. Revenues increased primarily due to an increase in other revenues. Income from operations decreased 24.7% to $65.3 million during 2011 from $86.7 million during 2010, primarily as a result of increased amortization expense due to the application of ASC Topic 805 “Business Combinations.” Loss before income taxes was $9.2 million in 2011, compared with $40.0 million of income before income taxes in 2010 for iPayment and its consolidated subsidiaries. Loss before income taxes was $21.8 million in 2011, compared with $40.0 million of income before income taxes in 2010 for Holdings and its consolidated subsidiaries. Our loss before income taxes in 2011 is net of non-recurring expenses totaling $18.7 million related to the Refinancing (defined below) and the Equity Redemption, including $6.5 million of expenses attributable to the write off of the unamortized balance of debt issuance costs and discount for the then existing senior secured credit facilities and senior subordinated notes, $4.7 million for a premium paid for early redemption of iPayment’s senior subordinated notes and $7.5 million of strategic advisory fees discussed in “Certain Relationships and Related Transactions, and Director Independence.” Excluding these items, income before income taxes would have been income of approximately $9.5 million and a loss of approximately $3.1 million for iPayment and Holdings and their consolidated subsidiaries, respectively, for the year ended December 31, 2011.

Industry Overview

Significant market opportunity

The use of electronic forms of payment, such as credit and debit cards, by consumers in the United States has increased steadily over the past ten years and is projected by The Nilson Report to continue to increase through at least 2015. The growth is a result of wider merchant acceptance, growth in consumer spending, increased consumer use of bankcards and advances in payment processing and telecommunications technology. According to The Nilson Report, in 2009, merchant locations in the United States generated approximately $3.4 trillion of total purchases using card-based systems compared to approximately $2.6 trillion in 2005, and are expected to grow to approximately $5.8 trillion by 2015, representing a compound annual growth rate of approximately 8.2% from 2005 to 2015. As credit and debit card usage increases, we believe that businesses, both large and small, will need to increasingly accept card-based payment to remain competitive.

8

Key participants comprise an efficient value chain

The payment processing industry is made up of a number of key participants, including retail merchants, merchant acquirers (like iPayment), processing vendors, sponsor banks, card issuing banks and card network associations. The various players work together at different points of the value chain with the goal of ensuring seamless processing of transactions, reliable transmission of data, effective risk management and customer service. The diagram below illustrates the payment service providers’ value chain.

Services and economics

We enable small merchants to accept credit and debit cards by providing a range of services, which include transaction processing, risk management, fraud detection, merchant assistance and support and chargeback services in connection with disputes with cardholders. For these services, we charge our merchants a discount fee, or the “Merchant Discount,” which is based primarily on a percentage of the dollar amount of each transaction we process. The Merchant Discount may vary based on several other factors, including the type of merchant, the type of card used and whether the transaction process is a swipe transaction or a card-not-present transaction (i.e., over the Internet or by mail, fax or telephone). For example, the Merchant Discount we typically receive for a credit card transaction is approximately 2.8% of the dollar amount of the transaction. In 2011, we derived approximately 87% of our revenues from the Merchant Discount that we charge for each transaction, which we believe has contributed to a stable, recurring revenue base.

A transaction is initiated when a consumer purchases a product or service at a merchant using his or her card. At the point of sale, the consumer’s credit card information is submitted to our processing vendor, which then communicates with the card-issuing bank through the proper association network (such as Visa or MasterCard) to authorize the transaction. After authorization, we instruct our processing vendor to route funds from the card-issuing bank to our sponsoring bank. Our sponsoring bank, which sponsors us for membership in the Visa, MasterCard or other card association, settles the transaction with the merchant. We pay interchange fees and assessment fees to the card-issuing bank and the credit card association, respectively, which are typically passed through in the Merchant Discount. We believe this structure allows us to maintain an efficient operating structure and enables us to expand our operations without significantly increasing our fixed costs or capital expenditures.

9

The following table provides an example of a typical transaction, including amounts paid to the card-issuing bank, Visa, MasterCard or other card association, the processing vendor, the sponsoring bank and us. This example also presents some of our other costs of services, which typically include payments to ISGs in the form of residuals, merchant losses and various other expenses.

Purchase amount	$	100.00
Less: cash to merchant		(97.00	)
iPayment gross revenue (Merchant Discount)	$	3.00
Less: interchange fee		(1.75	)
Less: network dues and assessments and bank processing fees		(0.21	)
iPayment net settlement	$	1.04
Less: other transaction costs		(0.61	)
iPayment processing margin	$	0.43

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 and other third party resellers. We also market our services directly to merchants through electronic media, telemarketing and other programs utilizing partnerships with other companies that market products and services to small businesses. Our relationships with ISGs 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 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 but not limited to 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, 2011, we had outstanding loans to ISGs in an aggregate amount of $1.4 million. We may decide to loan additional amounts in the future. The notes representing these loans bear interest in amounts ranging from 6.5% to 15.0% and are due through 2015. 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 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

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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 First Data Merchant Services Corporation (“FDMS”). 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 large portfolio of approximately 132,000 active small merchants that are engaged in a wide variety of businesses and industries. We believe this diversity contributes to a stable revenue base. No single merchant accounted for more than 1% of our aggregate charge volume for 2011. Because of our limited customer concentration, variation in charge volume from any one merchant or industry has a limited effect on our total charge volume and financial results. The following chart shows the primary categories of the merchants we serve based on 2011charge volume:

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We define a merchant as “active” if the merchant processes at least one Visa or MasterCard transaction in a given calendar month. In 2011, the small merchants we serve had an average annual charge volume of approximately $172,000 per year and an average transaction value of approximately $67. Small merchants, such as those served by our 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.

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 we serve makes them less likely to change providers because of the inconvenience associated with a transfer. Historically, we experienced monthly volume attrition ranging from 1.5% to 2.5% of our total annual charge volume on our merchant portfolios. The primary cause of attrition among our small business customers is business failure.

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, 2011, we had a staff of 32 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 management’s extensive experience with higher risk market segments, has resulted in our development and implementation of highly effective risk management and fraud prevention systems and procedures.

We employ the following systems and procedures to minimize our exposure to merchant fraud and transaction-based fraud:

Underwriting. Our sales agents send new applications to our underwriting department for their review and screening. 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 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 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 merchant’s 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, 2011, our total reserve deposits were approximately $33.9 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.

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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 merchant’s 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 merchant’s reserve account. If we or our sponsoring banks are unable to collect the chargeback from the merchant’s account, or, if the merchant refuses or is financially unable to reimburse the merchant’s bank for the chargeback, we bear the loss for the amount of the refund paid to the cardholder’s 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 MasterCard’s 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 in an effort to isolate our databases from unauthorized access and implements detailed security rules to limit access to all critical systems. Application components communicate using sophisticated security protocols and are directly accessible by a limited number of employees on a need-only basis. Our operation and customer support systems are primarily located at our facilities in Westlake Village, California.

We also rely on connections to the systems of our third-party processing providers. In all cases, we install encrypted or tunneled communications circuits with backup connectivity to withstand telecommunications problems.

Competition

The payment processing industry is highly competitive. We compete with other providers of payment processing services on the basis of the following factors:

• quality and reliability of service;

• ability to evaluate, undertake and manage risk;

• ability to attract and retain sales organizations;

• speed in approving merchant applications and deploying equipment; and

• cost to the customer.

Many large and small companies compete with us in providing payment processing services and related services to a wide range of merchants. Many of our large 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. Large transaction processors, such as FDMS, Bank of America Merchant Services, Chase Paymentech and Elavon, Inc., 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 many smaller transaction processors that provide various services to small and medium sized merchants. See “Risk Factors—Risk Factors Relating to Our Business—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 derive approximately 87% of our revenue and results of operations from processing revenues and other fees from electronic payments. During 2011, 2010, and 2009, no single merchant accounted for more than 1% of our revenues. All of our revenue is generated from, and all of our long-lived assets are located in, the United States. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of the impact of seasonality on our business.

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Our History

iPayment Technologies, Inc., (“Technologies”) was formed in 1992 as a California corporation. In February 2001, iPayment was formed by the majority stockholders of Technologies under the name iPayment Holdings, Inc., a Tennessee corporation, which acted as a holding company for Technologies and other card processing businesses. In August 2002, iPayment was reincorporated in Delaware under the name iPayment, Inc. and in May 2003 iPayment completed an initial public offering. In May 2006, iPayment became a wholly-owned subsidiary of iPayment Holdings, Inc. in a going private transaction. Holdings is a wholly-owned subsidiary of iPayment Investors L.P., a Delaware limited partnership.

In May 2011, iPayment completed an offering of $400.0 million in aggregate principal amount of 10.25% Senior Notes due 2018 (the “10.25% Notes”) and entered into its new senior secured credit facilities consisting of (i) a $375.0 million term facility and (ii) a $75.0 million revolving facility (the “Senior Secured Credit Facilities”). The new revolving facility will mature on May 6, 2016, and the new term facility will mature on May 8, 2017. Also in May 2011, Holdings completed an offering of 125,000 units (the “Units”), consisting of $125.0 million in aggregate principal amount of 15.00%/15.00% Senior Notes due 2018 (the “15.00%/15.00% Notes”) and 125,000 warrants (the “Warrants”) to purchase common stock of Holdings. The Warrants represent an aggregate 2.5% of the outstanding common stock of Holdings on a fully diluted basis.

The majority of the proceeds from the offerings of the 10.25% Notes and the Units, together with borrowings under the Senior Secured Credit Facilities, were used to (i) permanently repay all of the outstanding indebtedness under iPayment’s then existing senior secured credit facilities; (ii) redeem and satisfy and discharge all of iPayment’s then existing senior subordinated notes; (iii) redeem and satisfy and discharge all of iPayment Investors’ then existing paid-in-kind (“PIK”) toggle notes and (iv) pay fees and expenses in connection with the offerings. All of the remainder of such proceeds and borrowings were used to consummate the Equity Redemption on May 23, 2011, including payment of the transaction fee discussed in “Certain Relationships and Related Transactions, and Director Independence” and other related fees and expenses.

In this Annual Report, we refer to the entry into the Senior Secured Credit Facilities, the offer and sale of the 10.25% Notes and the Units, including the application of the net proceeds of the 10.25% Notes and the Units and borrowings under the Senior Secured Credit Facilities as described above, as the “Refinancing.” In addition, as used in this Annual Report, the term “Notes” refers collectively to the 10.25% Notes and the 15.00%/15.00% Notes.

Employees

As of December 31, 2011, we employed 356 full-time personnel, including 222 in operations, 83 in sales and administration, 32 in risk management, and 19 in information systems and technology. Many of our employees are highly skilled. We believe our future success will depend in large part on our ability to attract and retain such employees. As of December 31, 2011, none of our employees were 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 SEC.

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ITEM 1A. RISK FACTORS

Risk Factors 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 filed 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 and limiting debit card fees charged by certain issuer banks and allowing merchants to offer discounts for different payment methods, as well as other measures. The impact of the Dodd-Frank Act on the Company is difficult to estimate, as it will take time for the market to react and adjust to regulations that have been implemented and because certain additional regulations have yet to be developed.

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. Furthermore, regulatory actions may cause changes in business practices by us and other industry participants which could affect how we market, price and distribute our products and services. These regulations may materially and adversely affect the Company’s 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 merchant’s bank and credited to the account of the cardholder. If we or our sponsoring banks are unable to collect the chargeback from the merchant’s account, or, if the merchant refuses or is financially unable (due to bankruptcy or other reasons) to reimburse the merchant’s bank for the chargeback, we bear the loss for the amount of the refund paid to the cardholder’s bank.

We also have potential liability for losses caused by fraudulent card-based payment transactions. Card fraud occurs when a merchant’s 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 $3.8 million, or 0.5% of revenues in 2011, $3.5 million, or 0.5% of revenues in 2010, and $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. 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 to us, as well as our competitors, newly-established and existing small merchants, including retailers, restaurants and other service providers. Generally, our agreements with ISGs are not exclusive and they have the right to refer merchants to other providers of transaction payment processing services. 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.

We periodically experience increases in interchange costs, and if we cannot pass these increases along to our merchants, our profit margins will decline.

We pay interchange fees and assessments to issuing banks through the 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 merchant discount, our profit margins will decline.

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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, driver’s 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 a material adverse effect on our business, financial condition and results of operations. As a result of our internal fraud investigation discussed in Note 2 to our consolidated financial statements, “Restatement of Consolidated Financial Statements,” certain of our senior officers were terminated or resigned in September 2012. We have acted expeditiously to replace these officers or to reassign their responsibilities to other employees, and we are not aware of any merchants or agents that have been lost or adversely affected as a result of their departures. However, there can be no assurance that their departures will not have a material adverse effect on our business, financial condition or results of operations in the future.

Our reputation could be damaged as a result of negative publicity.

We depend upon our reputation to compete for agents, merchants and employees. Unfavorable publicity can damage our reputation and negatively impact our economic performance. For example, the fraud committed by certain of our former employees and contractors as discussed in Note 2 to our consolidated financial statements “Restatement of Consolidated Financial Statements,” could adversely impact our reputation. While we have made efforts to mitigate this risk by terminating those former employees who were responsible for such fraud, and by implementing new policies, procedures and internal controls, there can be no assurance that unfavorable publicity arising from the forgoing will not have a material adverse effect on our business.

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 in recent years have consolidated as large banks merged and combined 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 adequately, our business, financial condition and results of operations could be materially 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 2011, we experienced volume attrition ranging from 1.5% to 2.5% per month on our various merchant portfolios. Substantially all of our processing contracts with merchants can be terminated by either party on relatively short notice. Therefore, merchants could close their processing accounts with us and move to other providers with minimal financial liability or 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.

Our business could be adversely affected by a challenging economic environment that causes our merchants to experience adverse business conditions, as they may generate fewer transactions for us to process or may become insolvent, thereby increasing our exposure to chargeback liabilities.

We believe that challenging economic conditions in recent years have caused some of the merchants we serve to experience difficulty in supporting their current operations and implementing their business plans, and any deterioration in economic conditions has the potential to negatively impact consumer confidence and consumer spending. 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.

Our inability to adopt technology to meet changing industry or customer needs and 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, our inability to adopt technological advancements surrounding point-of-sale technology available to merchants could have an adverse impact on our business. Our inability to respond to new industry standards, trends and technological advancements could have a material adverse effect on our business, financial condition and results of operations.

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 business, financial condition 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. Maintaining or increasing our profitability is dependent on consumers and businesses continuing to use credit cards at the same or greater rate than previously. 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 business, financial condition and results of operations may be materially adversely affected.

Adverse conditions in industries in which we obtain a substantial amount of our bankcard processing volume, such as the fuel 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 fuel and restaurant industries represented 14.4% and 13.5% of our bankcard processing volume, respectively, in 2011. As a result, any adverse economic or other conditions in the fuel and restaurant industries, or other industries in which we obtain a substantial amount of our bankcard processing volume, could negatively affect our business, financial condition and results of operations.

Our operating results are subject to seasonality, and, if our revenues are below our seasonal norms during our historically stronger 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 business, financial condition and results of operations could be materially 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 disasters, 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 designed to help ensure that our information systems will operate in the event of a breach or power failure. We also have what we believe to be sufficient security around our information systems to prevent unauthorized access to such systems. 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 and theft of confidential information, such as credit or debit card numbers and related information, could have a significant impact on our business operations, including 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, or the value of, the services we currently provide to 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. 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 currently 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;

• restrict or limit our ability to sell certain products and services to certain customers;

• 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, financial condition and results of operations.

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If we are required to pay federal, state or local taxes on transaction processing, it could negatively impact our profit margins.

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 profit margins.

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 profit margins 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 Company’s business, financial condition and results of operations. For more information about the Company’s 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 90% of our total assets at December 31, 2011. These assets consist primarily of goodwill and identifiable intangible assets associated with our merchant portfolios and 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 results of operations.

We have identified material weaknesses in our internal controls over financial reporting.

Maintaining effective internal controls over financial reporting is necessary for us to produce reliable financial statements. The Board of Directors of the Company concluded on November 1, 2012 that material weaknesses in the internal control over financial reporting exist at the Company, and consequently the Board of Directors determined that management’s report on internal control over financial reporting as of December 31, 2009, 2010, and 2011, included in the Company’s Annual Reports on Form 10-K for the years then ended, should no longer be relied upon. These material weaknesses led to the need for the restatement of the Company’s financial statements for the years ended December 31, 2009, 2010, and 2011 and for the first two quarters of 2012 and the failure of the Company to file on a timely basis its Quarterly Report on Form 10-Q for the interim period ended September 30, 2012. These material weaknesses are discussed further within Item 9A “Controls and Procedures” of this Annual Report on Form 10-K/A. The existence of one or more material weaknesses precludes a conclusion by management that a corporation’s internal control over financial reporting is effective.

The Company and Holdings are currently in the process of remediating these material weaknesses in internal control over financial reporting by, among other things, designing and implementing new procedures and controls throughout the Company and its subsidiaries and by strengthening our accounting department through the addition of new personnel and resources. If we fail to remediate these material weaknesses or fail to otherwise maintain effective controls over financial reporting in the future, it could result in a material misstatement of our financial statements that would not be prevented or detected on a timely basis. Management continues to devote significant time and attention to remediating these material weaknesses and improving our internal controls, and we expect to continue to incur costs associated with implementing appropriate processes, which could include fees for additional audit and consulting services, which could negatively affect our financial condition and operating results.

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Risk Factors 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 additional risks 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 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 business or portfolio of merchant accounts that we propose to acquire. Our due diligence review, however, may not adequately uncover all of the contingent or undisclosed liabilities we may incur as a consequence of the proposed acquisition. For example, in the past we were obligated to fund certain credits and chargebacks after discovering that a merchant account from an acquired merchant processing portfolio was in substantial violation of the Visa and MasterCard card association rules. In the future we may make acquisitions that may obligate us to make similar payments resulting in potentially significant, unanticipated costs.

We may encounter delays and operational difficulties in completing the necessary transfer of data processing functions and connecting systems links required by an acquisition, resulting in increased costs for, and a delay in the realization of revenues from, that acquisition.

The acquisition of a provider of payment processing services, as well as a portfolio of merchant processing accounts, requires the transfer of various data processing functions and connecting links to our systems and those of our 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 or change of control payments. These expenses, charges or 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.

Risk Factors Relating to Our Indebtedness

The indentures governing the Notes, as well as other agreements governing our debt, include financial and other covenants that impose restrictions on our financial and business operations.

The indentures governing the notes and the Senior Secured Credit Facilities contain negative covenants customary for such financings, such as limiting our and our restricted subsidiaries’ ability to pay dividends, redeem stock or make other distributions or restricted payments, make certain investments, incur or guarantee additional debt, create liens, agree to dividend and payment restrictions affecting restricted subsidiaries, consummate mergers, consolidations or other business combinations, designate subsidiaries as unrestricted, change our or their line of business, or enter into certain transactions with affiliates. The Senior Secured Credit Facilities have various financial and other covenants that require iPayment to maintain minimum coverage ratios as well as make timely financial statement filings with the Securities and Exchange Commission. We may also incur future debt obligations, which might subject us to additional restrictive covenants that could affect our financial and operational flexibility.

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In addition, iPayment’s ability to make distributions to Holdings is subject to restrictions in the indenture governing the 10.25% Notes and the Senior Secured Credit Facilities. The indenture governing the 10.25% Notes permits payment of dividends to Holdings to satisfy its interest payments on the 15.00%/15.00% Notes that are required to be paid in cash provided no event of default has occurred and is continuing. The indenture governing the 10.25% Notes otherwise limits the amount of “restricted payments,” including dividends, that iPayment can make to Holdings to a percentage of cumulative net income and proceeds of equity issuances, subject to satisfaction of certain other tests and certain exceptions. The Senior Secured Credit Facilities permit payment of dividends to Holdings to satisfy its interest payments on the 15.00%/15.00% Notes that are required to be paid in cash provided no event of default has occurred and is continuing.

In November 2012, we were unable to satisfy the conditions precedent for borrowing under the Senior Secured Credit Facilities’ revolving credit facility in order to fund scheduled interest payments due on November 15, 2012 on the Company’s 10.25% Notes and Holdings’ 15.00%/15.00% Notes. As a result, on November 14, 2012, we entered into a waiver, consent and amendment (the “Waiver”) with a majority of the lenders under the Senior Secured Credit Facilities. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

The covenants in the indentures governing the notes and in the Senior Secured Credit Facilities could adversely affect our ability to finance our future operations or capital needs, pursue available business opportunities or make payments upon the Notes. Our ability to comply with these covenants may be subject to events outside our control. Moreover, if we fail to comply with these covenants and are unable to obtain a waiver or amendment, an event of default would result. If an event of default were to occur, the trustee under the indentures governing the Notes or the lenders under the Senior Secured Credit Facilities could, among other things, declare outstanding amounts immediately due and payable. We cannot provide assurance that we would have sufficient liquidity to repay or refinance the Notes or borrowings under the Senior Secured Credit Facilities if such amounts were accelerated upon an event of default. In addition, an event of default or declaration of acceleration under the indentures or the Senior Secured Credit Facilities could also result in an event of default under other financing agreements.

Our substantial debt, and any funds iPayment may distribute to Holdings to service its debt, could adversely affect our financial condition and prevent us from fulfilling our obligations to holders of the Notes.

We have a substantial amount of debt which requires significant interest payments. As of December 31, 2011, we had approximately $903.1 million of total debt outstanding, including $774.3 million, net of discount of $1.7 million, of indebtedness under the 10.25% Notes and Senior Secured Credit Facilities and $128.8 million, net of discount of $1.1 million, of indebtedness under the 15.00%/15.00% Notes. Our substantial debt could adversely affect our financial condition and operating results and make it more difficult for us to satisfy our obligations with respect to holders of the Notes.

Our substantial debt, any new debt we may incur as described below 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 debt, 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 future payments under our debt agreements, including the indentures governing the Notes and the credit agreement governing the Senior Secured Credit Facilities;

• 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;

• increase our exposure to rising interest rates because a portion of our debt is at variable interest rates; and

• limit our ability to borrow additional funds on terms that are satisfactory to us or at all.

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In addition, iPayment is permitted to distribute funds to Holdings, its direct parent, to pay interest on the 15.00%/15.00% Notes. Through and including the interest payment date on May 15, 2015, at least 50% of the interest on the 15.00%/15.00% Notes must be paid in cash, and thereafter, subject to limited exceptions, 100% of the interest on the 15.00%/15.00% Notes generally must be paid in cash. The covenants in the indenture governing the 15.00%/15.00% Notes generally require Holdings to pay interest in cash to the extent permitted by iPayment’s debt agreements, including the indenture governing the 10.25% Notes. Holdings is a holding company with no material assets of its own, and iPayment will serve as the primary source of funds for payments on its debt. Any funds that iPayment may distribute to Holdings to service its debt could increase the risks associated with iPayment’s substantial debt, including making it more difficult for iPayment to satisfy its obligations to holders of the 10.25% Notes.

We may incur more debt, which could exacerbate the risks associated with our substantial leverage.

Subject to the limitations contained in the agreements governing our debt, we are able to incur significantly more debt in the future, including the ability to issue additional notes under the indentures governing the Notes. Although these agreements restrict us and our restricted subsidiaries from incurring additional debt, these restrictions are subject to important exceptions and qualifications. For example, the Senior Secured Credit Facilities provide for aggregate borrowings of up to $450.0 million, which are secured by liens on substantially all of our assets. Furthermore, the Senior Secured Credit Facilities and the indentures governing the Notes permit us to incur significant additional debt, including additional debt of Holdings’ subsidiaries that will be structurally senior to the 15.00%/15.00% Notes and additional secured debt that will be effectively senior to the Notes to the extent of the value of the collateral securing such debt. If we incur additional debt, the risks that we face as a result of our high leverage, including our possible inability to service our debt, could increase.

We may not be able to generate sufficient cash flow from operations 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 or sale of assets would be possible on commercially reasonable terms or at all. In addition, any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations.

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 the Notes and iPayment’s ability to satisfy its obligations under the Senior Secured Credit Facilities. Any failure to make scheduled payments of interest and principal on our outstanding debt would likely result in a reduction of our credit rating, which could harm our ability to incur additional debt on commercially reasonable terms or at all and negatively impact the market value of the Notes. In addition, if we are unable to meet our debt service obligations on our outstanding debt, the holders of such indebtedness would have the right to cause the entire outstanding amount of such indebtedness to become immediately due and payable. If the amounts outstanding under any of our debt instruments are accelerated, we cannot assure you that our assets will be sufficient to repay in full the money owed to our debt holders, including holders of the Notes.

All of Holdings’ operations, and substantially all of iPayment’s operations, are conducted at the subsidiary level, which may materially adversely affect our ability to service our debt.

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 the 10.25% Notes, which may be released under certain circumstances. Because all of Holdings’ operations and most of iPayment’s operations are conducted through our subsidiaries, our ability to service our debt 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 the Senior Secured Credit Facilities and the indentures governing the 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, including exempting restrictions imposed under the indenture governing the 10.25% Notes and the Senior Secured Credit Facilities. If our subsidiaries do not have sufficient earnings or cannot distribute their earnings or other funds to us, our ability to service our debt may be materially adversely affected.

Payment of principal and interest on the Notes will be effectively subordinated to our secured debt to the extent of the value of the assets securing that debt.

The Notes are not secured. Therefore, the Notes will be effectively subordinated to claims of our secured creditors, and the guarantees of the 10.25% Notes will be effectively subordinated to the claims of the secured creditors of such guarantors. As of December 31, 2011, iPayment had approximately $376.0 million of total secured debt outstanding and $59.5 million of capacity under the revolving portion of the Senior Secured Credit Facilities. iPayment’s obligations under the Senior Secured Credit Facilities are guaranteed by Holdings and each of iPayment’s existing and future direct and indirect material domestic subsidiaries. Holders of our secured obligations, including

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obligations under the Senior Secured Credit Facilities, will have claims that are prior to claims of the holders of the Notes with respect to the assets securing those obligations. In the event of a liquidation, dissolution, reorganization, bankruptcy or any similar proceeding, our assets and those of the guarantors of the 10.25% Notes will be available to pay obligations on the Notes and the guarantees of the 10.25% Notes only after holders of our secured debt have been paid in full from the proceeds of the assets securing such debt. Accordingly, there may not be sufficient funds remaining to pay amounts due on all or any of the Notes.

The 10.25% Notes and related guarantees are structurally subordinated to debt of iPayment’s nonguarantor subsidiaries.

As of December 31, 2011, all of iPayment’s subsidiaries were guarantors of the 10.25% Notes. However, under certain circumstances, the guarantees of iPayment’s subsidiaries may be released and iPayment’s future subsidiaries may not be required to guarantee the 10.25% Notes. The 10.25% Notes will be structurally subordinated to all debt and other liabilities and commitments, including trade payables, of iPayment’s subsidiaries that do not guarantee the 10.25% Notes. iPayment relies substantially upon distributions from its subsidiaries to meet its debt obligations, including its obligations with respect to the 10.25% Notes. Any right of the holders of the 10.25% Notes to participate in the assets of a nonguarantor subsidiary upon any liquidation or reorganization of such subsidiary will be subject to the prior claims of the subsidiary’s creditors.

The 15.00%/15.00% Notes are structurally subordinated to indebtedness of its existing and future subsidiaries, including borrowings under the Senior Secured Credit Facilities and the 10.25% Notes.

Holdings’ subsidiaries, including iPayment, do not currently guarantee its obligations under, and do not have any obligation with respect to, the 15.00%/15.00% Notes. Therefore, the 15.00%/15.00% Notes are structurally subordinated to all debt and liabilities of Holdings’ subsidiaries, including the 10.25% Notes and borrowings under the Senior Secured Credit Facilities. The lenders under the Senior Secured Credit Facilities, the holders of the 10.25% Notes and all other creditors of Holdings’ subsidiaries, including trade creditors, have the right to be paid before Holdings from the assets of Holdings’ subsidiaries. In addition, if Holdings causes a subsidiary to pay a dividend or other distribution to enable it to make payments in respect of the 15.00%/15.00% Notes, and if such transfer were deemed to be a fraudulent transfer or an unlawful distribution, the holders of the 15.00%/15.00% Notes could be required to return the payment to (or for the benefit of) the creditors of such subsidiary, including lenders under the Senior Secured Credit Facilities and holders of the 10.25% Notes. In the event of bankruptcy, liquidation or dissolution of a subsidiary, following payment by such subsidiary of its liabilities, such subsidiary may not have sufficient assets necessary to make any payments to Holdings as its direct or indirect equity holder or otherwise. This would adversely affect Holdings’ ability to make payments to the holders of the 15.00%/15.00% Notes.

We may be unable to repay or repurchase the Notes at maturity.

At maturity, the entire outstanding principal amount of the Notes, together with accrued and unpaid interest, will become due and payable. We may not have the funds to fulfill these obligations or the ability to refinance these obligations. If the maturity date occurs at a time when other arrangements prohibit us from repaying the Notes, we could try to obtain waivers of such prohibitions from the lenders and holders under those arrangements, or we could attempt to refinance the borrowings that contain the restrictions. In these circumstances, if we cannot obtain such waivers or refinance these borrowings, we would be unable to repay the Notes.

Under certain circumstances, a court could cancel the Notes or void the guarantees of the 10.25% Notes under fraudulent conveyance laws.

Our issuance of the Notes and the guarantees of the 10.25% Notes may be subject to review under federal or state fraudulent transfer laws, in particular due to the Equity Redemption and because all of the net proceeds from the offering of iPayment Investors’ PIK toggle notes were distributed to iPayment Investors’ equity holders and a portion of the proceeds of the offerings of the Notes were used to fund the Equity Redemption and to redeem and satisfy and discharge such PIK toggle notes. If we become a debtor in a case under the United States Bankruptcy Code or encounter other financial difficulty, a court might avoid (that is, cancel) our obligations under the Notes. The court might do so if it finds that when we issued the Notes and the guarantees of the 10.25% Notes, (i) we or any guarantor of the 10.25% Notes issued the Notes or incurred the guarantee, as applicable, with actual intent of hindering, delaying or defrauding creditors or (ii) we or any guarantor of the 10.25% Notes received less than reasonably equivalent value or fair consideration in return for either issuing the Notes or incurring the guarantee, as applicable (which may be deemed to be zero, because we distributed a portion of the funds from the offerings of the Notes to iPayment Investors to fund the Equity Redemption and to redeem and satisfy and discharge the PIK toggle notes), and, in the case of (ii) only, one of the following is also true at the time thereof:

• we or any guarantor of the 10.25% Notes were insolvent or rendered insolvent by reason of the issuance of the Notes or the incurrence of the guarantee, as applicable;

• the issuance of the Notes or the incurrence of the guarantee of the 10.25% Notes left us or any guarantor, as applicable, with an unreasonably small amount of capital to carry on our or its business; or

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• we or any guarantor of the 10.25% Notes intended to, or believed that we or such guarantor would, incur debts beyond our or such guarantor’s ability to pay such debts as they mature.

The measures of insolvency for purposes of these fraudulent transfer laws will vary depending upon the governing law. Generally, however, an entity would be considered insolvent if:

• the sum of its debts, including contingent liabilities, were greater than the fair saleable value of all of its assets; or

• if the present fair saleable value of its assets were less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or

• it could not pay its debts as they become due.

For this analysis, “debts” include contingent and unliquidated debts. If a court avoided our obligations under the Notes and the obligations of all of the guarantors of the 10.25% Notes under their guarantees, holders of the Notes would cease to be our creditors or creditors of the guarantors and likely have no source from which to recover amounts due under the Notes. In addition, a court could avoid any payment by us or any guarantor of the 10.25% Notes pursuant to the Notes or a related guarantee, as the case may be, and require any payment to be returned to us or the guarantor, as the case may be, or to be paid to a fund for the benefit of our or the guarantor’s creditors. Further, the avoidance of the Notes could result in an event of default with respect to our other debt that could result in the acceleration of such debt. Even if the guarantee of a guarantor of the 10.25% Notes is not avoided as a fraudulent transfer, a court may subordinate the guarantee to that guarantor’s other debt. In that event, the guarantees of the 10.25% Notes would be structurally subordinated to all of that guarantor’s other debt. If the court were to avoid any guarantee, we cannot assure you that funds would be available to pay the 10.25% Notes from another guarantor or from any other source.

The guarantees of the 10.25% Notes contain a provision intended to limit each guarantor’s liability to the maximum amount that it could incur without causing its guarantee to be a fraudulent transfer. However, this provision may automatically reduce one or more of the guarantor’s obligations to an amount that effectively makes the guarantee worthless and, in any case, this provision may not be effective to protect a guarantee from being avoided under fraudulent transfer laws.

Our unrestricted subsidiaries under the indentures governing the Notes will not be subject to any of the covenants in the indentures and will not guarantee the 10.25% Notes, and we may not be able to rely on the cash flow or assets of those unrestricted subsidiaries to pay any of our debt, including the Notes.

Our unrestricted subsidiaries will not be subject to the covenants under the indentures and will not guarantee the 10.25% Notes. As of December 31, 2011, none of our subsidiaries were unrestricted subsidiaries. However, subject to compliance with the covenants contained in the indentures, we will be permitted to designate our subsidiaries as unrestricted subsidiaries. If we designate a guarantor of the 10.25% Notes as an unrestricted subsidiary in accordance with the indenture governing the 10.25% Notes, the guarantee of the 10.25% Notes by such guarantor will be released under such indenture. The creditors of the unrestricted subsidiary and its subsidiaries will generally be entitled to payment of their claim from the assets of such unrestricted subsidiary and its subsidiaries before those assets would be available for distribution to us. In addition, our unrestricted subsidiaries may enter into financing arrangements that limit their ability to make loans or other payments to fund payments in respect of the Notes. Accordingly, we cannot assure you that the cash flow or assets of our unrestricted subsidiaries will be available to pay any of our debt, including the Notes.

We may not have the ability to raise the funds necessary to finance the respective change of control offer required by the indentures governing the Notes.

Upon the occurrence of a “change of control,” as defined in the indentures governing the Notes, we must offer to buy back the Notes at a price equal to 101% of the principal amount of the Notes, together with any accrued and unpaid interest, if any, to the date of the repurchase. Our failure to purchase the Notes, or to give notice of the offer to repurchase the Notes, would be an event of default under the applicable indenture.

The definition of a change of control in the indentures includes a phrase relating to the sale, conveyance, transfer or lease of “all or substantially all” of our assets. There is no precise established definition of the phrase “all or substantially all” and it will likely be interpreted under New York State law, which is the law that governs the indentures, and will be dependent upon the particular facts and circumstances. As a result, there may be a degree of uncertainty in ascertaining whether a sale or disposition of “all or substantially all” of our capital stock or assets has occurred, in which case, the ability of a holder of the Notes to obtain the benefit of an offer to repurchase all or a portion of the Notes held by such holder may be impaired.

If a change of control occurs, it is possible that we may not have sufficient assets at the time of the change of control to make the required repurchase of Notes or to satisfy all obligations under our other debt instruments. Holdings is a holding company for its subsidiaries, with no material operations of its own and only limited assets. See “Risk Factors — All of Holdings’ operations, and substantially all of iPayment’s operations, are conducted at the subsidiary level, which may materially adversely affect our ability to service our debt.” Debt of Holdings’ subsidiaries, including the Senior Secured Credit Facilities and the 10.25% Notes, contains prohibitions and restrictions on dividends to Holdings, including for purposes of funding a change of control offer.

25

In order to satisfy our obligations, we could seek to refinance our debt or obtain a waiver from the other lenders or the holders of the Notes. We cannot assure you that we would be able to obtain a waiver or refinance our debt on terms acceptable to us, if at all. Our failure to pay the change of control purchase price when due will constitute an event of default under the respective indenture and give the holders of the Notes certain rights under such indenture. The same events constituting a change of control under the indentures may also constitute an event of default under the Senior Secured Credit Facilities and permit the lenders thereunder to accelerate any and all outstanding debt. If such debt is not paid, the lenders may enforce security interests in the collateral securing such debt, thereby limiting our ability to raise cash to purchase the Notes and reducing the practical benefit to the holders of the Notes of the offer to purchase provisions of the indentures.

The interests of our equity holders may not be aligned with the interests of the holders of the Notes.

All of our issued and outstanding capital stock is held directly, in the case of Holdings, and indirectly, in the case of iPayment, by iPayment Investors. All of the partnership interests of iPayment Investors are owned by Carl A. Grimstad, iPayment’s Chairman and Chief Executive Officer, and certain entities and persons affiliated with him. Messrs. Grimstad and Mark C. Monaco, our Chief Financial Officer, are the sole members of the board of directors of iPayment GP, LLC, the general partner of iPayment Investors, and two of the three members of the boards of directors of iPayment and Holdings, along with John A. Vickers.

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 the 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 the Notes. In addition, iPayment Investors and its equity holders may have an interest in pursuing acquisitions, divestitures or other transactions that could enhance their equity investment, even though such transactions might involve risks to holders of the 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 on the Notes and the Senior Secured Credit Facilities or cause a change of control. To the extent permitted by the indentures governing the Notes and the Senior Secured Credit Facilities, iPayment Investors and its equity holders may cause us to pay dividends rather than make capital expenditures.

Changes in the financial and credit markets or in our credit ratings could adversely affect the market prices of the Notes.

The future market prices of our Notes will 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 debt instruments in the past, and further fluctuation may have adverse effects on the market prices of the Notes in the future. 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 Notes will maintain their ratings on the Notes. A negative change in our rating could have an adverse effect on the market prices of the 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 Notes. The market for the Notes may be subject to similar disruptions, which could adversely affect their value.

The 15.00%/15.00% Notes are treated as being issued with original issue discount for U.S. federal income tax purposes and if a bankruptcy petition were filed by or against Holdings, holders of the 15.00%/15.00% Notes may receive a lesser amount for their claim than they would have been entitled to receive under the indenture governing the 15.00%/15.00% Notes.

The 15.00%/15.00% Notes are treated as being issued with original issue discount, or “OID,” for U.S. federal income tax purposes. Holders subject to U.S. federal income taxation will have to report such OID as gross income on a constant yield to maturity basis in advance of the receipt of cash payments thereof and regardless of such holder’s method of accounting for U.S. federal income tax purposes.

26

In addition, if a bankruptcy petition were filed by or against Holdings under applicable U.S. federal bankruptcy laws, the issuance of the 15.00%/15.00% Notes and the claim by any holder of the 15.00%/15.00% Notes for the principal amount of such notes may be limited to an amount equal to the sum of:

• the original issue price of such notes; and

• that portion of the OID that does not constitute “unmatured interest” for purposes of the applicable U.S. federal bankruptcy laws.

Any OID that was not amortized as of the date of the bankruptcy filing may constitute unmatured interest. Accordingly, holders of the 15.00%/15.00% Notes under these circumstances may receive a lesser amount than they would be entitled to under the terms of the indenture governing the 15.00%/15.00% Notes, even if sufficient funds are available.

The 15.00%/15.00% Notes may be classified as contingent payment debt instruments for U.S. federal income tax purposes.

No existing authority addresses whether debt instruments with terms similar to the 15.00%/15.00% Notes will be characterized as contingent payment debt instruments for U.S. federal income tax purposes. It is possible that the IRS could assert that, due to certain redemption and repurchase features of the 15.00%/15.00% Notes or options exercisable by us with respect to payments of interest on such notes, the 15.00%/15.00% Notes are subject to the rules governing contingent payment debt instruments. If the IRS were to determine the 15.00%/15.00% Notes are contingent payment debt instruments, the timing and amount of income inclusions on such notes and the character of income recognized with respect to a taxable disposition of such notes may be different from the consequences discussed herein.

We will be subject to interest deductibility limitations with respect to interest accruing on the 15.00%/15.00% Notes.

The 15.00%/15.00% Notes constitute an “Applicable High Yield Discount Obligation” for U.S. federal income tax purposes. Consequently, a portion of the interest payable under the 15.00%/15.00% Notes would be non-deductible by Holdings and a portion would be deductible only when paid. Any limit on Holdings’ ability to deduct interest for U.S. federal income tax purposes would have the effect of increasing our taxable income and may adversely affect the cash flow available for interest payments under the 15.00%/15.00% Notes.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our principal executive offices are located in approximately 3,800 square feet of leased office space in New York, New York. We also lease approximately 44,000 square feet in Westlake Village, California, and approximately 9,600 square feet in Minden, Nevada. 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

Bruns Class Action (the “Bruns Lawsuit”) and the related Truck Insurance Exchange (“TIE”) Declaratory Action

Bruns Lawsuit

The Bruns Lawsuit was initially filed in Orange County, California Superior Court on or about February 22, 2000 by plaintiff Dana Bruns on her behalf and on behalf of a purported class of persons in California who, during the five years prior to the filing of the lawsuit, allegedly received fax transmissions from third-party defendant Fax.Com and its advertisers, including our subsidiary, E-Commerce Exchange Inc. (“ECX”). The plaintiff alleged that the defendants sent “fax blast” transmissions to telephone facsimile machines in violation of the Telephone Consumer Protection Act of 1991 (“TCPA”). The plaintiff sought injunctive relief, damages, attorneys’ fees and costs (i) under the TCPA and California’s Unfair Competition Act and (ii) for negligence.

As previously described in Amendment No. 1 to our Registration Statement on Form S-4 filed with the SEC on November 23, 2011, the California Court of Appeals issued an opinion affirming in full the trial court’s order dismissing the plaintiff’s action and the order of final judgment in September 2011, which opinion became final in October 2011. The plaintiff filed a petition for review with the California Supreme Court, which was denied on November 16, 2011. As a result, the trial court’s prior order of final judgment dismissing the litigation with prejudice became final on February 29, 2012 and therefore all claims against ECX have been finally dismissed.

27

TIE Declaratory Action

Following the filing of the Bruns Lawsuit in February 2000, ECX tendered the Bruns Lawsuit to TIE, a member of Farmers Insurance Group of Companies, as a “covered” claim under insurance policies then in effect that indemnified ECX for “losses” and for costs of defense for “covered” claims. TIE agreed, subject to a reservation of rights, to assume the defense of ECX in the litigation and has paid all costs of the defense since April 2000. On or about January 29, 2010, TIE brought a declaratory judgment action in Orange County, California Superior Court against ECX and Dana Bruns (individually and as alleged class representative of all others similarly situated), asserting that the insurance policies issued to ECX do not cover the claim tendered by ECX relating to the underlying Bruns Lawsuit. TIE sought (i) a judicial declaration that it did not have a duty to defend ECX in the Bruns Lawsuit and that it had a right to withdraw its defense of ECX in such case and (ii) reimbursement from ECX of fees and costs incurred by TIE to defend ECX in the Bruns Lawsuit.

Since our last report on the TIE declaratory action in Amendment No. 1 to our Registration Statement on Form S-4 filed with the SEC on November 23, 2011, all claims and matters in the subject litigation have been fully settled and released pursuant to a settlement agreement entered into by ECX and TIE in February 2012. A request for dismissal was filed with the Superior Court on February 29, 2012, and the dismissal was entered by the court on the same date. We do not expect the terms of the settlement to have a material adverse effect on our business, financial condition or results of operations.

Tisa’s Cakes Class Action

This matter related to a purported class action lawsuit initially filed on or about December 30, 2009 by plaintiff L. Green (d/b/a Tisa’s Cakes) in the U.S. District Court for the Eastern District of New York, naming iPayment and one of our subsidiaries, Online Data Corporation (“ODC”), as defendants. The plaintiff asserted claims for unjust enrichment and for declaratory judgment in connection with an early termination fee, allegedly imposed under a contract between the plaintiff and ODC and contracts between each class member and ODC, which fee the plaintiff alleged constitutes an unlawful penalty.

Since our last report on the Tisa’s Cakes class action in Amendment No. 1 to our Registration Statement on Form S-4 filed with the SEC on November 23, 2011, all claims and matters in the subject litigation have been resolved amicably through a confidential settlement in which neither side admitted any liability or wrongdoing. A stipulation of dismissal with prejudice was filed with the District Court on January 12, 2012 and the subject litigation was finally settled in January 2012. We do not expect the terms of the settlement to have a material adverse effect on our business, financial condition or results of operations.

California Employment Development Department (“EDD”) Notice of Assessment

This matter relates to Notice of Assessment No. 00008, dated July 10, 2007 (the “Notice”), sent to our subsidiary, iPayment of California, LLC (“iPOC”), by the EDD for amounts claimed to be due arising during a three-year period starting April 1, 2004. 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 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 included an assessment of approximately $1.4 million, plus an additional $0.1 million for accrued interest billed to the date of the assessment (the “Assessment”).

As previously described in Amendment No. 1 to our Registration Statement on Form S-4 filed with the SEC on November 23, 2011, we are continuing to work with the EDD auditor that issued the Assessment to resolve the Assessment, have had several voluntary tax audit review conferences with the EDD auditor and senior EDD audit managers, and have submitted all additional records and information requested by the EDD relating to the Assessment. Although we cannot predict with certainty the timing of adjustment for, and the ultimate amount of, the Assessment, we do not expect the outcome of this matter and our liability associated with it to have a material adverse effect on our business, financial condition or results of operations.

Vericomm, Inc. (“Vericomm”) ISG Lawsuit

This matter relates to a lawsuit against us by Vericomm, one of our ISGs, initially filed in the U.S. District Court for the Central District of California, Western Division on January 20, 2011. Vericomm’s amended complaint, filed on October 3, 2011, alleges that we breached our contract with Vericomm by (i) incorrectly calculating, reporting and paying certain residual compensation due to Vericomm and (ii) interfering with merchant relationships in order to deprive Vericomm of residual compensation related to such merchants. Vericomm seeks damages in an amount yet to be determined, but which Vericomm believes to be in excess of $7.0 million, including general, special and punitive damages, an accounting, and other relief deemed proper.

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As previously described in Amendment No. 1 to our Registration Statement on Form S-4 filed with the SEC on November 23, 2011, on October 24, 2011, the parties filed a joint stipulation with the District Court, requesting that the District Court (i) enter an order pursuant to which Vericomm’s claims be submitted to arbitration, (ii) vacate any and all dates on the calendar and (iii) administratively stay the case pending a resolution of the arbitration. On November 16, 2011, the District Court granted the parties’ stipulation and entered an order upon the terms requested in the joint stipulation.

On March 13, 2012, pursuant to the District Court’s order, Vericomm filed and served an Arbitration Demand, which will be heard by Judicial Arbitration Mediation Services (“JAMS”) in Los Angeles, California. The allegations made in, and relief sought through, the Arbitration Demand are materially similar to the Vericomm FAC. Vericomm brings causes of action for (i) breach of contract; (ii) fraud; (iii) breach of the covenant of good faith and fair dealing; and (iv) accounting. We subsequently brought a motion to dismiss Vericomm’s fraud claim, which was granted by the arbitrator pursuant to an Order dated July 2, 2012. The Arbitration hearing as to the remaining claims is set to commence on May 13, 2013. We intend to continue to vigorously defend ourselves; however, at this time, the ultimate outcome of the dispute and our potential liability associated with the claims asserted against us 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.

Internal Investigation

In August 2012, the Company and Holdings were presented with accusations from one of the Company’s employees that certain of the Company’s employees and outside contractors had engaged in financial misconduct. Following an initial inquiry into these accusations by the Company, the Board of Directors of the Company engaged Debevoise & Plimpton LLP and forensic accountants of Ernst & Young LLP to work with management to conduct an internal investigation of the alleged misconduct. During the course of the Company’s investigation, certain executives of the Company and Holdings were terminated or resigned.

The Company’s internal investigation revealed financial misconduct by certain former officers and employees of the Company and certain of its outside contractors. Such misconduct occurred in five principal areas: (i) failure to maintain an adequate control environment that set a proper culture within our operations, (ii) creation of false obligations to make residual and other payments (which resulted in the Company making such payments in respect of merchant accounts that were not subject to legitimate payment obligations); (iii) overstatement of certain vendor invoices, principally in the information technology area; (iv) falsification of certain employee expense reimbursements and other payments; and (v) the posting of manual journal entries without sufficient supporting documentation or adequate review and approval. See Note 2 to our consolidated financial statements “Restatement of Consolidated Financial Statements,” which accompanies the financial statements in Item 8 of this report.

The Company has entered into cooperation and restitution agreements with several participants in the misconduct and is in discussions regarding similar agreements with the remaining participants. There can be no assurance, however, that we will reach additional settlement agreements or that we will be able to recover a material portion of the losses described above.

SEC Inquiry

On or around January 8, 2013, the Company was advised by the staff of the SEC that it is conducting an inquiry into the events disclosed in the Company’s Current Reports on Form 8-K filed on September 12, 2012 and November 5, 2012. The Company intends to cooperate with the SEC staff in its inquiry.

Proceedings and claims in the ordinary course of business

We are also 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 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 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 management’s attention. All litigation settlements are recorded within “other expense” on our consolidated statements of operations.

ITEM 4. MINE SAFETY DISCLOSURES

None

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PART II

ITEM 5. MARKET FOR REGISTRANTS’ COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

As of December 31, 2011, iPayment’s authorized capital stock consisted of 1,000 shares of common stock, $0.01 par value per share, of which 100 shares were issued and outstanding, all of which were owned by Holdings. As of December 31, 2011, Holdings’ authorized capital stock consisted of 8,000,000 shares of common stock, $0.01 par value per share, of which 4,875,000 shares were issued and outstanding, all of which were owned by iPayment Investors.

In connection with the Refinancing, Holdings issued Units that consisted of the 15.00%/15.00% Notes and the Warrants to purchase 125,000 shares of Holdings’ common stock at $0.01 per share, subject to adjustment upon the occurrence of certain events described in the warrant agreement entered into by Holdings and Wilmington Trust, National Association (as successor by merger to Wilmington Trust FSB) (the “Warrant Agreement”). In accordance with the terms of the Warrant Agreement, the 15.00%/15.00% Notes and the Warrants separated on November 2, 2011. The Warrants are exercisable as of the opening of business on such date until 5:00 p.m., New York City time, on November 15, 2018. Each Warrant not exercised during such period will become void and all rights thereunder and all rights in respect thereof under the Warrant Agreement will cease as of such time.

There is no established public trading market for our common stock or for the Warrants.

In 2011, iPayment paid a $135.5 million dividend to Holdings in connection with the consummation of the Refinancing and Holdings paid a $257.3 million dividend to iPayment Investors in connection with the consummation of the Refinancing. Historically, we have funded certain expenses of iPayment Investors. In August 2010, the board of directors of iPayment declared a $1.0 million dividend to iPayment Investors to cover certain operating and legal costs, including reimbursement to us of certain costs previously paid for by us on behalf of iPayment Investors. Subsequent to the dividend payment, iPayment Investors settled $1.0 million of the intercompany receivable outstanding at that time. In September 2011, iPayment declared another dividend in the amount of $0.4 million to iPayment Investors for other operating costs with which iPayment Investors subsequently settled $0.4 million of the outstanding intercompany receivable at that time.

Pursuant to the terms of credit agreement governing the Senior Secured Credit Facilities and the indentures governing the Notes, we are limited in the amount of dividends we can declare or pay on our outstanding shares of common stock.

ITEM 6. SELECTED FINANCIAL DATA

As discussed in the Explanatory Note to this Amended Filing, the Company is amending and restating its audited financial statements for certain of the periods presented in this Item. The following table and related footnotes thereto present the restated selected historical consolidated financial and other data as of and for the periods indicated of Holdings and iPayment and, in each case, their respective subsidiaries. Except as otherwise indicated in such footnotes, the restated selected historical consolidated financial and other data of Holdings and its consolidated subsidiaries and iPayment and its consolidated subsidiaries is the same. See Note 2 to our consolidated financial statements “Restatement of Consolidated Financial Statements,” which accompanies the financial statements in Item 8 of this report for further information about the restatement.

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	iPAYMENT, INC.
	Restated Period from
	May 24			January 1			Restated			Restated			Restated
	through			through			Year Ended			Year Ended			Year Ended			Year Ended
	December 31,			May 23,			December 31,			December 31,			December 31,			December 31,
	2011			2011			2010			2009			2008			2007
(Dollars in thousands, unless otherwise indicated)	Successor			Predecessor			Predecessor			Predecessor			Predecessor			Predecessor
													(unaudited)
Statement of Operations Data:
Revenues	$	431,511		$	276,690		$	699,174		$	717,928		$	794,825		$	759,109
Operating expenses:
Interchange		226,366			147,779			380,577			397,530			450,570			437,955
Other costs of services		160,190			87,130			214,928			227,720			240,723			228,537
Selling, general and administrative		10,550			6,736			13,824			20,280			20,789			21,144
Embezzlement costs		2,981			1,153			3,148			951			1,248			—
Total operating expenses		400,087			242,798			612,477			646,481			713,330			687,636
Income from operations		31,424			33,892			86,697			71,447			81,495			71,473
Other income (expenses):
Interest expense, net(1)		40,279			15,578			45,662			46,488			56,289			60,216
Other		(115	)		18,804			1,058			1,245			750			(179	)
Total other expense(2)		40,164			34,382			46,720			47,733			57,039			60,037
Income (loss) before income taxes(3)		(8,740	)		(490	)		39,977			23,714			24,456			11,436
Income tax provision (benefit)(4)		(2,781	)		411			16,927			8,503			9,745			6,005
Net income (loss)(5)		(5,959	)		(901	)		23,050			15,211			14,711			5,431
Less: Net income attributable to noncontrolling interests		—			—			—			(3,588	)		(987	)		—
Net income (loss) attributable to iPayment, Inc.	$	(5,959	)	$	(901	)	$	23,050		$	11,623		$	13,724		$	5,431
Balance Sheet Data (as of period end) (in thousands):
Cash and cash equivalents		1			N/A			1			2			3,589			33
Working capital (deficit)		(2,214	)		N/A			(10,097	)		(7,108	)		(10,437	)		(8,713	)
Total assets(6)		998,311			N/A			735,486			745,003			768,361			767,545
Total long-term debt including current portion(7)		774,284			N/A			624,967			651,519			687,326			697,357
Stockholders’ equity(8)		154,349			N/A			71,967			42,442			27,013			17,216
Financial and Other Data:
Charge volume (in millions) (unaudited)(9)		13,928			8,733			22,653			23,526			26,783			26,797
Capital expenditures		5,349			1,292			2,643			2,302			2,374			1,110

(1) Net interest expense of Holdings and its consolidated subsidiaries for the period from January 1 through May 23 and May 24 through December 31, 2011 were $16.5 million and $51.9 million, respectively.

(2) Total other expense of Holdings and its consolidated subsidiaries for the period from January 1 through May 23 and May 24 through December 31, 2011 were $35.3 million and $51.8 million, respectively.

(3) Loss before income taxes of Holdings and its consolidated subsidiaries for the period from January 1 through May 23 and May 24 through December 31, 2011 were $1.4 million and $20.4 million, respectively.

(4) Holdings and its consolidated subsidiaries recorded income tax provision of $0.2 million for the period from January 1 through May 23, 2011 and income tax benefit of $5.6 million for the period from May 24 through December 31, 2011.

(5) Net loss of Holdings and its consolidated subsidiaries for the period from January 1 through May 23 and May 24 through December 31, 2011 were $1.6 million and $14.8 million, respectively.

(6) Total assets of Holdings and its consolidated subsidiaries as of December 31, 2011 is $1,002.3 million.

(7) Total long-term debt including current portion of Holdings and its consolidated subsidiaries as of December 31, 2011 is $903.1 million.

(8) Stockholders’ equity of Holdings and its consolidated subsidiaries as of December 31, 2011 is $30.0 million.

(9) 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 and is not independently verified by us.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Notes to Consolidated Financial Statements” for information regarding accounting changes, asset acquisitions and dispositions, litigation matters, and other costs and other items affecting comparability.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section includes financial information for Holdings and iPayment and, in each case, their respective subsidiaries. Except as otherwise indicated, the results of operations of Holdings and its consolidated subsidiaries and iPayment and its consolidated subsidiaries are the same. Figures presented in tables in this section of this Annual Report have been rounded and have not been adjusted to correct rounding differences.

As discussed in the Explanatory Note to this Amended Filing and in Note 2 to our consolidated financial statements “Restatement of Consolidated Financial Statements,” which accompanies the financial statements in Item 8 of this report, we are amending and restating our audited consolidated financial statements and related disclosures for all periods presented in this Amended Filing. The following discussion and analysis of our financial condition and results of operations incorporates the restated amounts. The discussion in this section contains forward-looking statements based on management’s current expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” included elsewhere in this Annual Report.

Executive overview

The results of operations for the year ended December 31, 2011 are the combined results of the Predecessor and Successor entities.

We are a provider of credit and debit card payment processing services to small merchants across the United States. During December 2011, we generated revenue from approximately 192,000 merchants. Of these merchants, approximately 132,000 were active merchants that had each processed at least one Visa or MasterCard transaction during that month. Our payment processing services enable our merchants to accept credit cards as well as other forms of payment, including debit cards, checks, gift cards and loyalty programs in traditional card-present, or swipe transactions, as well as card-not-present transactions, such as those done over the phone or through the internet. We market and sell our services primarily through independent sales groups, or “ISGs,” which are non-employee, external sales organizations and other third party resellers of our products and services. We also market our services directly to merchants through electronic media, telemarketing and other programs utilizing partnerships with other companies that market products and services to small businesses. In addition, we 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, primarily 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. Our charge volume processed for 2011 was $22.7 billion, equal to the charge volume processed in 2010. However, our revenues increased $9.0 million or 1.3% to $708.2 million in 2011 from $699.2 million in 2010. Our net revenue increased 4.7% to $286.3 million in 2011 from $273.4 million in 2010. Our net revenue is composed of total revenue reduced by interchange fees and network fees. Revenues increased primarily due to an increase in other revenues. Income from operations decreased 24.7% to $65.3 million during 2011 from $86.7 million during 2010, primarily as a result of increased amortization expense due to the application of ASC Topic 805 “Business Combinations.” Loss before income taxes was $9.2 million in 2011, compared with $40.0 million of income before income taxes in 2010 for iPayment and its consolidated subsidiaries. Loss before income taxes was $21.8 million in 2011, compared with $40.0 million of income before income taxes in 2010 for Holdings and its consolidated subsidiaries. Our loss before income taxes in 2011 is net of non-recurring expenses totaling $18.7 million related to the Refinancing (as defined below) and the Equity Redemption, including $6.5 million of expenses attributable to the write off of the unamortized balance of debt issuance costs and discount for the then existing senior secured credit facilities and senior subordinated notes, $4.7 million for a premium paid for early redemption of iPayment’s senior subordinated notes and $7.5 million of strategic advisory fees discussed in “Certain Relationships and Related Transactions, and Director Independence.” Excluding these items, income before income taxes would have been income of approximately $9.5 million and a loss of approximately $3.1 million for iPayment and Holdings and their consolidated subsidiaries, respectively, for the year ended December 31, 2011.

Acquisitions

Since our inception, we have expanded our card-based payment processing services through the acquisition of businesses, significant portfolios and several smaller portfolios of merchant accounts. 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 132,000 on December 31, 2011. In addition, primarily due to these acquisitions, our revenues grew from $226.1 million in 2003 to $708.2 million in 2011, which represents a 15.3% compound annual growth rate from 2003 to 2011.

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The following table lists each of the acquisitions that we have made since December 2007:

Acquired Business or Significant Portfolio of Merchant Accounts	Date of Acquisition
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
New ISG Portfolio		June 2011
Existing ISG Portfolio		August 2011
Existing ISG Portfolio		August 2011
Existing ISG Portfolio		September 2011

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 payments 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 portfolio of 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 entered into a purchase and sale agreement with the shareholders of Central Payment Co., LLC (“CPC”), whereby iPayment acquired a merchant portfolio 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 entered into a purchase and sale agreement with the shareholders of Flagship Merchant Services (“Flagship”), whereby iPayment acquired a merchant portfolio from Flagship. The consideration included cash at closing from our cash on hand and from borrowings under our then existing revolving facility. The effect of the portfolio acquisition was included in our consolidated financial statements beginning October 1, 2010. 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. Consideration at closing was $5 million in cash which was funded from borrowings under our then existing revolving facility. The effect of the portfolio acquisition was included in our consolidated financial statements beginning December 1, 2010.

In June 2011, we entered into a purchase and sale agreement with a new ISG, whereby we acquired a portfolio of merchant accounts. Consideration at closing was $3.6 million in cash, which was funded at closing from borrowings under our revolving facility. The effect of the portfolio acquisition was included in our consolidated financial statements beginning June 1, 2011.

In August 2011, we entered into a purchase and sale agreement with an existing ISG, whereby we acquired a portfolio of merchant accounts. Consideration at closing was $2.5 million in cash, which was funded at closing from borrowings under our revolving facility. The effect of the portfolio acquisition was included in our consolidated financial statements beginning August 1, 2011.

In August 2011, we entered into a purchase and sale agreement with an existing ISG, whereby we acquired a portfolio of merchant accounts. Consideration at closing was $11.0 million in cash, which was funded at closing from borrowings under our revolving facility. The effect of the portfolio acquisition was included in our consolidated financial statements beginning August 1, 2011.

In September 2011, we entered into a purchase and sale agreement with an existing ISG, whereby we acquired a portfolio of merchant accounts. Consideration at closing was $7.2 million in cash, which was funded at closing from borrowings under our revolving facility. The effect of the portfolio acquisition was included in our consolidated financial statements beginning July 1, 2011.

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.

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Critical Accounting Policies

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“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. 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 management’s most subjective judgment in making estimates about the effect of matters that are inherently uncertain.

Accounting for Goodwill and Intangible Assets. We follow ASC 350 “Intangibles — Goodwill and Other Topics,” which addresses financial accounting and reporting for acquired goodwill and other intangible assets, and requires that 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 and trade name. We also 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 their fair value, calculated as the sum of the expected cash flows discounted at a market rate, represents the impairment loss.

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. 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. 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 1.5% to 2.5% of our total charge volume on our various merchant portfolios. We utilize an accelerated method of amortization over a 15-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 has occurred on a portfolio-by-portfolio basis. In reviewing the current attrition rate trends, we consider relevant benchmarks such as charge volume, revenues, number of merchant accounts, gross profit and future expectations of the aforementioned factors compared to historical amounts and rates. If we identify any significant changes or trends in the attrition rate of any portfolio, we will adjust our current and prospective estimated attrition rates so that the amortization expense better approximates the distribution of actual cash flows generated by the merchant processing portfolios. Any adjustments made to the amortization schedules would be reported in the current consolidated statements of operations and on a prospective basis until further evidence becomes apparent.

As a result of the Equity Redemption, we have determined the fair value of our intangible assets and goodwill in accordance with ASC 805, and we engaged an independent, third party valuation firm to assist in evaluating the fair value of certain assets as of May 23, 2011.

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 merchant’s favor. In these cases, the transaction is “charged back” to the merchant, which means the purchase price is refunded to the customer through the merchant’s 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 merchant’s 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, 2011, December 31, 2010 and December 31, 2009, our reserve for losses on merchant accounts included in accrued liabilities and other totaled $1.2 million, $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 and the incurred but not yet reported losses at December 31, 2011, December 31, 2010 and December 31, 2009.

Income Taxes. We account for income taxes pursuant to the provisions of ASC 740 “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.

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Components of Revenues and Expenses

Substantially all of our revenues are generated from fees charged to merchants for card-based payment processing services. We typically charge these merchants a bundled rate, primarily based upon the merchant’s 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 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, payment card industry compliance, ancillary products and fees for other miscellaneous services, such as handling chargebacks. We recognize discounts and other fees related to payment transactions at the time the merchant’s 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 included in the Revenue Recognition Topic of ASC 605, Reporting Revenue Gross as a Principal Versus Net as an Agent. 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 recognized at the time transactions are processed. Revenues generated from certain bank portfolios acquired from FDMS are 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.

The most significant component of operating expenses is interchange fees, which are amounts we pay to the card issuing banks. Interchange fees are primarily based on transaction processing volume, except in the case of regulated debit transactions where they are based primarily on a per transaction basis, 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 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. 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 primarily recognized using an accelerated method over a 15-year period. Amortization of intangible assets results from our acquisitions of portfolios of merchant contracts or acquisitions of a business where we allocated a portion of the purchase price to the existing merchant processing portfolios and other intangible assets.

Selling, general and administrative expenses consist primarily of salaries and wages, as well as other general administrative expenses such as marketing expenses and professional fees.

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.

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.

Results of Operations

The results of operations for the year ended December 31, 2011 are the combined results of the Predecessor and Successor entities. We have presented the combination of these periods to facilitate comparison of operations. Please refer to our audited consolidated statements of operations and related notes thereto for a separate presentation of the results for the Predecessor and Successor periods in accordance with GAAP.

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Years ended December 31, 2011 and 2010

	iPAYMENT, INC.
	Restated			% of Total			Restated		% of Total			Change
(Dollars in thousands, except percentages)	2011			Revenue			2010		Revenue			Amount			%
Revenues	$	708,201			100.0	%	$	699,174		100.0	%	$	9,027			1.3	%
Operating expenses:
Interchange		374,145			52.8			380,577		54.4			(6,432	)		(1.7	)
Other costs of services		247,320			34.9			214,928		30.7			32,392			15.1
Selling, general and administrative		17,286			2.4			13,824		2.0			3,462			25.0
Embezzlement costs		4,134			0.6			3,148		0.5			986			31.3
Total operating expenses		642,885			90.7			612,477		87.6			30,408			5.0
Income from operations		65,316			9.3			86,697		12.4			(21,381	)		(24.7	)
Other expense:
Interest expense, net (1)		55,857			7.9			45,662		6.5			10,195			22.3
Other expense, net (2)		18,689			2.6			1,058		0.2			17,631			1,666.4
Total other expense (3)		74,546			10.5			46,720		6.7			27,826			59.6
Income (loss) before income taxes (4)		(9,230	)		(1.2	)		39,977		5.7			(49,207	)		(123.1	)
Income tax provision (benefit) (5)		(2,370	)		(0.3	)		16,927		2.4			(19,297	)		(114.0	)
Net income (loss) (6)	$	(6,860	)		(0.9	)%	$	23,050		3.3	%	$	(29,910	)		(129.8	)%

(1) Net interest expense of Holdings and its consolidated subsidiaries for the year ended December 31, 2011 is $68.4 million.

(2) Net other expense of Holdings and its consolidated subsidiaries for the year ended December 31, 2011 is $18.7 million.

(3) Total other expense of Holdings and its consolidated subsidiaries for the year ended December 31, 2011 is $87.1 million.

(4) Loss before income taxes of Holdings and its consolidated subsidiaries for the year ended December 31, 2011 is $21.8 million.

(5) Income tax benefit of Holdings and its consolidated subsidiaries for the year ended December 31, 2011 is $5.4 million.

(6) Net loss of Holdings and its consolidated subsidiaries for the year ended December 31, 2011 is $16.4 million.

Revenues. Revenues increased 1.3% to $708.2 million in 2011 from $699.2 million in 2010. The increase in revenues was largely due to an increase in other revenues and in merchant processing revenues, which was partially attributable to portfolio acquisitions. Our charge volume in 2011, which represents the total value of transactions processed, was comparable to 2010 at $22.7 billion, despite a 0.4% decrease in the number of transactions to 338.6 million in 2011 from 339.9 million in 2010.

Interchange Expenses. Interchange expenses decreased 1.7% to $374.1 million in 2011 from $380.6 million in 2010. Interchange expenses decreased due to a reduction in the average interchange rate as a percentage of charge volume, driven in large part by the impact from the Durbin Amendment that became effective on October 1, 2011.

Other Costs of Services. Other costs of services increased 15.1% to $247.3 million in 2011 from $214.9 million in 2010. The increase in other costs of services was primarily due to higher sales expenses, network fees related to the increased charge volume and depreciation and amortization as a result of the equity redemption.

Selling, General and Administrative. Selling, general and administrative expenses increased 25.0% to $17.3 million in 2011 from $13.8 million in 2010. The increase is due to higher compensation expenses, professional services and other service-related expenses.

Other Expense. Total other expense increased $27.8 million to $74.5 million for iPayment and its consolidated subsidiaries in 2011 from $46.7 million in 2010. Total other expense increased $40.4 million to $87.1 million for Holdings and its consolidated subsidiaries in 2011 from $46.7 million in 2010. Other expense in 2011 primarily consisted of $18.7 million of expenses related to the Refinancing and the Equity Redemption, including $6.5 million of expenses attributable to the write off of the unamortized balance of debt issuance costs and discount for the then existing senior secured credit facilities and senior subordinated notes, $4.7 million for a premium paid for the redemption of iPayment’s senior subordinated notes and $7.5 million of strategic advisory fees discussed in “Certain Relationships and Related Transactions, and Director Independence.” Interest expense increased to $55.9 million for iPayment and its consolidated subsidiaries and $68.4 million for Holdings and its consolidated subsidiaries in 2011 from $45.7 million for iPayment and its consolidated subsidiaries and $45.7 million for Holdings and its consolidated subsidiaries in 2010, largely due to a higher average debt balance as a result of the Refinancing as well as higher weighted average interest rates.

Income Tax. We recognized an income tax benefit of $2.4 million and $5.4 million for iPayment and its consolidated subsidiaries and Holdings and its consolidated subsidiaries, respectively, for the year ended December 31, 2011, as compared to an income tax expense of $16.9 million for both consolidated groups in 2010. The change was primarily due to the decrease in pre-tax income

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resulting from the non-recurring expenses related to the Refinancing. iPayment and its consolidated subsidiaries’ effective income tax rate decreased to 25.7% for 2011, compared to 42.3% for 2010, as a result of permanent disallowance of certain Refinancing-related costs, adjustments to deferred tax liabilities and changes in unrecognized tax benefits. Holdings and its consolidated subsidiaries’ effective income tax rate decreased to 24.8% for 2011, compared to 42.3% for 2010, as a result of the aforementioned items as well as the permanent disallowance of a portion of interest accrued on the 15.00%/15.00% Notes which are considered “Applicable High Yield Discount Obligations” for tax purposes.

Years ended December 31, 2010 and 2009

	iPAYMENT, INC.
	Restated		% of Total			Restated			% of Total			Change
(Dollars in thousands, except percentages)	2010		Revenue			2009			Revenue			Amount			%
Revenues	$	699,174		100	%	$	717,928			100	%	$	(18,754	)		(2.6	)%
Operating expenses:
Interchange		380,577		54.4			397,530			55.4			(16,953	)		(4.3	)
Other costs of services		214,928		30.7			227,720			31.7			(12,792	)		(5.6	)
Selling, general and administrative		13,824		2.0			20,280			2.8			(6,456	)		(31.8	)
Embezzlement costs		3,148		0.5			951			0.1			2,197			231.0
Total operating expenses		612,477		87.6			646,481			90.0			(34,004	)		(5.3	)
Income from operations		86,697		12.4			71,447			10.0			15,250			21.3
Other expense:
Interest expense, net		45,662		6.5			46,488			6.5			(826	)		(1.8	)
Other expense, net		1,058		0.2			1,245			0.2			(187	)		(15.0	)
Total other expense		46,720		6.7			47,733			6.7			(1,013	)		(2.1	)
Income before income taxes		39,977		5.7			23,714			3.3			16,263			68.6
Income tax provision		16,927		2.4			8,503			1.2			8,424			99.1
Net income	$	23,050		3.3	%	$	15,211			2.1	%	$	7,839			51.5	%
Less: Net income attributable to noncontrolling interests		—		—			(3,588	)		(0.5	)		3,588			(100.0	)
Net income attributable to iPayment Holdings, Inc.	$	23,050		3.3	%	$	11,623			1.6	%	$	11,427			98.3	%

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 charge volume, which represents the total value of transactions processed by us, declined 3.4% to $22.7 billion during 2010 from $23.5 billion 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 $397.5 million 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 5.6% to $214.9 million in 2010 from $227.7 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 31.8% 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 in 2009 without selling, general and administrative expenses related to CPC. The increase was due to increased compensation expense in 2010.

Other Expense. Total 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 $46.5 million in 2009, reflecting a lower average interest rate and lower funded debt.

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Income Tax. Income taxes increased $8.4 million to $16.9 million in 2010 from $8.5 million in 2009 primarily due to an increase in our income before income taxes. Our effective income tax rate increased to approximately 42.3% in 2010, from approximately 35.9% 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, 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.

Liquidity and Capital Resources

As of December 31, 2011 and 2010, 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. As of December 31, 2011, iPayment and its consolidated subsidiaries had a working deficit (current liabilities in excess of current assets) of $2.2 million compared to a working deficit of $10.1 million as of December 31, 2010. The working deficit decrease resulted primarily from an increase in accounts receivable of $6.1 million, an increase in prepaid expenses of $1.0 million, an increase in current deferred tax assets of $0.9 million, a reduction in income taxes payable of $5.2 million, and $5.8 million of paydowns on the current portion of our long term debt, offset by an increase in accounts payable of $2.6 million, an increase in accrued interest of $4.2 million, and an increase in accrued liabilities of $4.3 million.

As of December 31, 2011, Holdings and its consolidated subsidiaries had a working deficit (current liabilities in excess of current assets) of $1.9 million compared to a net deficit of $10.1 million as of December 31, 2010. The working deficit decrease resulted primarily from an increase in accounts receivable of $6.1 million, an increase in prepaid expenses of $1.0 million, an increase in deferred tax assets of $0.9 million, a reduction in income taxes payable of $8.0 million, and $5.8 million of paydowns on the current portion of our long term debt, offset by an increase in accounts payable of $2.6 million, an increase in accrued interest of $6.6 million, and an increase in accrued liabilities of $4.3 million.

We expect that our cash flow from operations and proceeds from borrowings under our revolving facility will be our primary sources of liquidity and will be sufficient to fund our cash requirements for at least the next twelve months. See “Contractual Obligations” below for a description of future required uses of cash.

We have significant outstanding long-term debt as of December 31, 2011. The terms of our long-term debt contain various nonfinancial and financial covenants as further discussed in Note 8 to the consolidated financial statements. If we fail to comply with these covenants and are unable to obtain a waiver or amendment or otherwise cure the breach, an event of default would result. If an event of default were to occur, the trustee under the indentures governing the Notes or the lenders under the Senior Secured Credit Facilities could, among other things, declare outstanding amounts 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. As of December 31, 2011, our Senior Secured Leverage Ratio, as defined in the Senior Secured Credit Facilities, was 2.84 to 1.00 compared to the allowed maximum of 3.75 to 1.00. As of December 31, 2011, our Consolidated Interest Coverage Ratio, as defined in the Senior Secured Credit Facilities, was 2.15 to 1.00 compared to the allowed minimum of 1.40 to 1.00.

The determination by the Boards of Directors of the Company and Holdings, at meetings held on November 1, 2012, that the Affected Financial Statements should no longer be relied upon resulted in a breach of certain representations, warranties and covenants set forth in the Senior Secured Credit Facilities, including but not limited to certain representations and warranties that the Affected Financial Statements (i) were prepared in accordance with GAAP consistently applied and (ii) fairly presented the financial condition of the Company and its subsidiaries as of the date thereof and their results of operations for the periods covered thereby in accordance with GAAP. Further, as a result of the decision to restate the Affected Financial Statements, we were unable to comply with the covenant set forth in the Senior Secured Credit Facilities that we deliver our 3^rd Quarter 2012 financial statements by no later than November 14, 2012. Finally, as a result of the foregoing breaches and defaults, we were unable to satisfy the conditions precedent for borrowing under the Senior Secured Credit Facilities’ revolving credit facility in order to borrow the funds necessary to make the scheduled interest payments due on November 15, 2012 under the indentures related to the Company’s 10.25% Notes and Holdings’ 15.00%/15.00% Notes.

On November 14, 2012, we entered into a waiver, consent and amendment (the “Waiver”) with a majority of the lenders under the Senior Secured Credit Facilities. Among other things, the Waiver waives (a) defaults arising from the restatement of our financial statements (i) for the fiscal years ended December 31, 2008, 2009, 2010, and 2011 included in the Company’s Annual Reports on Form 10-K for the years then ended, (ii) for the interim periods within such fiscal years included in the Company’s Quarterly Reports on Form 10-Q and (iii) for the quarters ended March 31, 2012 and June 30, 2012 included in the Company’s Quarterly Reports on

38

Form 10-Q and (b) until February 1, 2013, the Company’s failure to timely provide to the Administrative Agent its 3^rd Quarter 2012 financial statements. Finally, under the terms of the Waiver, the revolving lenders under the Senior Secured Credit Facilities agreed that, absent any default thereunder that may occur after the date of the Waiver, each such revolving lender would continue to honor requests for borrowing under the Senior Secured Credit Facilities’ revolving credit facility, provided that the aggregate principal amount of all borrowings thereunder do not exceed $58 million, a reduction from $95 million, which represents the total revolving commitments under the Senior Secured Credit Facility. Such reduction in revolving commitments shall no longer be in effect upon the Company’s delivery, on or prior to February 1, 2013, of the restated financial statements and the Company’s unaudited financial statements (and related documentation) for the quarterly period ended September 30, 2012. Following receipt of the Waiver, the Company borrowed amounts under the Senior Secured Credit Facilities’ revolving credit facility so as to make the scheduled interest payments due on November 15, 2012 under the indentures related to the Company’s 10.25% Notes and Holdings’ 15.00%/15.00% Notes.

Operating activities

Net cash provided by iPayment and its consolidated subsidiaries’ operating activities was $46.1 million during 2011, consisting of a net loss of $6.9 million adjusted by depreciation and amortization of $59.3 million, non-cash interest expense and other of $9.2 million, loss on disposal of property and equipment of $0.9 million, and a net unfavorable change in operating assets and liabilities of $16.4 million primarily due to decreases in accounts payable and income taxes payable as a result of federal and state tax payments made during 2011 and increases in accounts receivable and other assets, partially offset by an increase in accrued interest.

Net cash provided by Holdings and its consolidated subsidiaries’ operating activities was $41.2 million during 2011, consisting of a net loss of $16.4 million adjusted by depreciation and amortization of $59.3 million, non-cash interest expense and other of $9.4 million, loss on disposal of property and equipment of $0.9 million, and a net unfavorable change in operating assets and liabilities of $12.0 million primarily due to decreases in accounts payable and income taxes payable as a result of federal and state tax payments made during 2011 and increases in accounts receivable and other assets, partially offset by an increase in accrued interest.

Net cash provided by operating activities was $60.1 million in 2010, consisting of net income of $23.1 million, adjusted for depreciation and amortization of $40.7 million, noncash interest expense of $3.2 million and net unfavorable changes in operating assets and liabilities of $6.9 million. The net unfavorable change in operating assets and liabilities was primarily caused by an increase in accounts receivable and other assets, partially offset by 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 $15.2 million, adjusted for depreciation and amortization of $45.3 million, noncash interest expense of $2.6 million, and net unfavorable changes in operating assets and liabilities of $0.4 million. The net unfavorable change in operating assets and liabilities was primarily caused by increases in deferred taxes, accounts receivable and other assets after the effects of the sale of our equity in CPC, offset by increases in accounts payable, income taxes payable and accrued liabilities.

Investing activities

Net cash used in investing activities was $31.0 million during 2011. Net cash used in investing activities consisted of $5.2 million of capital expenditures, $24.3 million for acquisitions of merchant portfolios, and $1.6 million for payments for contract modifications for prepaid residual expenses and other intangible assets. 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 $32.2 million in 2010. Net cash used by investing activities primarily consisted of $25.0 million for the acquisition of merchant portfolios, $4.7 million of payments for contract modifications for prepaid residual expenses and $2.6 million of capital expenditures.

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.

Financing activities

Net cash used in iPayment and its consolidated subsidiaries’ financing activities was $15.1 million during 2011, consisting of proceeds from the issuance of long term debt of $785.1 million, net of discount, related to the Senior Secured Credit Facilities and the 10.25% Notes, offset by $22.1 million of debt issuance costs related to the Refinancing, $141.0 million in dividends to Holdings

39

which mostly related to the consummation of the Equity Redemption, $629.6 million of net repayments on our senior secured credit facilities and previously existing senior subordinated notes, of which $615.1 million was paid under iPayment’s previously existing senior secured credit facilities and previously existing senior subordinated notes and $14.5 million under our term facility, and $7.5 million of net repayments under our revolving facility.

Net cash used in Holdings and its consolidated subsidiaries’ financing activities was $10.1 million during 2011, consisting of proceeds from the issuance of long term debt of $910.1 million, net of discount, related to the Senior Secured Credit Facilities, the 10.25% Notes and the 15.00%/15.00% Notes, offset by $25.4 million of debt issuance costs related to the Refinancing, $257.7 million paid as a dividend in connection with the consummation of the Equity Redemption, including $0.4 million paid as a dividend to iPayment Investors, $629.6 million of net repayments on our senior secured credit facilities and previously existing senior subordinated notes, of which $615.1 million was paid under iPayment’s previously existing senior secured credit facilities and previously existing senior subordinated notes and $14.5 million under our term facility, and $7.5 million of net repayments under our revolving facility.

Net cash used in financing activities was $27.9 million in 2010, primarily consisting of repayments on iPayment’s previously existing senior secured credit facilities of $27.0 million. In August 2010, the board of directors of iPayment declared a $1.0 million dividend to our parent company, iPayment Investors, 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.

Net cash used in financing activities was $38.7 million in 2009, primarily consisting of repayments on iPayment’s previously existing senior secured credit facilities 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 iPayment’s previously existing revolving facility.

Contractual Obligations

The following table of our material contractual obligations as of December 31, 2011 summarizes the aggregate effect that these obligations are expected to have on our cash flows in the periods indicated. The following table excludes contingent payments in connection with earnout payments related to completed acquisitions. We cannot quantify the exact amounts to be paid because they are based on future EBITDA results. We currently do not anticipate that earnout payments will be made in the near future.

	Payments due by period
(Dollars in thousands)	Total		Less than 1 year		1-3 years		4-5 years		More than 5 years
Contractual Obligations of iPayment
Senior Secured Credit Facilities	$	376,000	$	—	$	—	$	21,625	$	354,375
10.25% Notes		400,000		—		—		—		400,000
Interest, net of discount and amortization(1)		377,304		63,091		126,181		125,480		62,552
Operating lease obligations		14,411		1,599		3,387		3,286		6,139
Purchase obligations and other(2)		3,238		945		1,231		1,062		—
Total contractual obligations	$	1,170,953	$	65,635	$	130,799	$	151,453	$	823,066
Contractual Obligations of Holdings
15.00%/15.00% Notes(3)	$	168,112	$	—	$	—	$	—	$	168,112
Interest(1)(3)		126,449		9,927		22,187		43,901		50,434
Total contractual obligations	$	294,561	$	9,927	$	22,187	$	43,901	$	218,546

(1) Future interest obligations are calculated using current interest rates on existing debt balances as of December 31, 2011, and assume no principal reduction other than mandatory principal repayments in accordance with the terms of the debt instruments as discussed in Note 8 to the consolidated financial statements.

(2) Purchase obligations represent costs of contractually guaranteed minimum processing volumes with certain of our third-party transaction processors and other service-related obligations.

(3) Assumes that (i) for all interest periods through and including May 15, 2015, Holdings will pay interest on 50% of the outstanding principal amount of its 15.00%/15.00% Notes in cash and 50% in kind and (ii) after May 15, 2015, Holdings will make all interest payments on the 15.00%/15.00% Notes entirely in cash.

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 the Senior Secured Credit Facilities and (ii) the Notes) using our cash from operations. We intend to use our revolving facility primarily to fund temporary working capital needs and 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 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

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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.

New Accounting Standards

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income,” which updates Topic 220: “Comprehensive Income.” The FASB’s objective in updating this area of the codification is to increase comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. This update requires all non-owner changes in stockholder’s equity to be presented in either a single continuous statement of comprehensive income, or in two separate but consecutive statements. The provisions of this update are effective for interim and annual periods beginning after December 15, 2011.

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU No. 2011-04 results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. generally accepted accounting principles (“GAAP”) and International Financial Reporting Standards. The changes to GAAP as a result of ASU No. 2011-04 are as follows: (1) The concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets (that is, it does not apply to financial assets or any liabilities); (2) GAAP currently prohibits application of a blockage factor in valuing financial instruments with quoted prices in active markets. ASU No. 2011-04 extends that prohibition to all fair value measurements; (3) An exception is provided to the basic fair value measurement principles for an entity that holds a group of financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk that are managed on the basis of the entity’s net exposure to either of those risks. This exception allows the entity, if certain criteria are met, to measure the fair value of the net asset or liability position in a manner consistent with how market participants would price the net risk position; (4) Aligns the fair value measurement of instruments classified within an entity’s shareholders’ equity with the guidance for liabilities; and (5) Disclosure requirements have been enhanced for recurring Level 3 fair value measurements to disclose quantitative information about unobservable inputs and assumptions used, to describe the valuation processes used by the entity, and to describe the sensitivity of fair value measurements to changes in unobservable inputs and interrelationships between those inputs. In addition, entities must report the level in the fair value hierarchy of items that are not measured at fair value in the statement of condition but whose fair value must be disclosed. The provisions of ASU No. 2011-04 are effective for the Company’s interim reporting period beginning on or after December 15, 2011. The adoption of ASU No. 2011-04 is not expected to have a material impact on the Company’s statements of operations and balance sheets.

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 other operating expenses, 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.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In addition to the effects of inflation described above under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Effects of Inflation,” the following is a description of additional market risks to which we may be exposed.

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 materially 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 credit markets because a significant amount of our indebtedness is subject to variable rates. As of December 31, 2011, we had $376.0 million of loans outstanding under our Senior Secured Credit Facilities, all of which were at a variable interest rate based on LIBOR, subject to a floor equal to 1.50%. Accordingly, a one percent increase in the applicable LIBOR above the floor would result in net additional annual interest expense on our outstanding borrowings as of December 31, 2011 of approximately $3.8 million. 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 have resulted 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, 2011 (Successor – Restated), 2010 (Predecessor – Restated), and 2009 (Predecessor – Restated) and the related consolidated statements of operations, changes in stockholder’s equity and comprehensive income, and cash flows for the period May 24, 2011 through December 31, 2011 (Successor – Restated), the period January 1, 2011 through May 23, 2011 (Predecessor – Restated), and each of the two years in the period ended December 31, 2010 (Predecessor – Restated). Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule 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 Company’s 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 Company’s 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, 2011 (Successor – Restated), 2010 (Predecessor – Restated), and 2009 (Predecessor – Restated) and the consolidated results of its operations and its cash flows for the period May 24, 2011 through December 31, 2011 (Successor – Restated), the period January 1, 2011 through May 23, 2011 (Predecessor – Restated), and each of the two years in the period ended December 31, 2010 (Predecessor – Restated), in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, the accompanying consolidated financial statements have been restated to properly account for previously unknown embezzlement activities as well as other previously unrecorded adjustments.

/s/ ERNST & YOUNG LLP

Los Angeles, California

January 29, 2013

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholder of iPayment Holdings, Inc.

We have audited the accompanying consolidated balance sheets of iPayment Holdings, Inc. (the Company) as of December 31, 2011 (Successor – Restated), 2010 (Predecessor – Restated), and 2009 (Predecessor – Restated), and the related consolidated statements of operations, changes in stockholder’s equity and comprehensive income, and cash flows for the period May 24, 2011 through December 31, 2011 (Successor – Restated), the period January 1, 2011 through May 23, 2011 (Predecessor – Restated), and each of the two years in the period ended December 31, 2010 (Predecessor – Restated). Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule 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 Company’s 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 Company’s 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 Holdings, Inc. at December 31, 2011 (Successor – Restated), 2010 (Predecessor – Restated), and 2009 (Predecessor – Restated), and the consolidated results of its operations and its cash flows for the period May 24, 2011 through December 31, 2011 (Successor – Restated), the period January 1, 2011 through May 23, 2011 (Predecessor – Restated), and each of the two years in the period ended December 31, 2010 (Predecessor – Restated), in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, the accompanying consolidated financial statements have been restated to properly account for previously unknown embezzlement activities as well as other previously unrecorded adjustments.

/s/ ERNST & YOUNG LLP

Los Angeles, California

January 29, 2013

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iPAYMENT, INC.

CONSOLIDATED BALANCE SHEETS

	iPAYMENT, INC.
(Dollars in thousands, except share data)	December 31, 2011 (Restated)			December 31, 2010 (Restated)		December 31, 2009 (Restated)
	Successor			Predecessor		Predecessor
ASSETS
Current assets:
Cash and cash equivalents	$	1		$	1	$	2
Accounts receivable, net of allowance for doubtful accounts of $1,580, $735 and $857 at December 31, 2011, 2010, and 2009, respectively		33,765			27,701		25,185
Prepaid expenses and other current assets		2,104			1,075		1,109
Deferred tax assets		2,988			2,116		2,425
Total current assets		38,858			30,893		28,721
Restricted cash		542			556		680
Property and equipment, net		5,530			4,167		4,072
Merchant portfolios and other intangible assets, net of accumulated amortization of $41,725, $177,328, and $138,762 at December 31, 2011, 2010, and 2009, respectively		259,957			155,225		163,645
Goodwill		669,562			529,060		527,978
Deferred tax assets		—			5,121		8,760
Other assets, net		23,862			10,464		11,147
Total assets	$	998,311		$	735,486	$	745,003
LIABILITIES and STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	5,773		$	3,149	$	3,957
Income taxes payable		6,650			11,845		8,550
Accrued interest		6,750			2,573		2,735
Accrued liabilities and other		21,899			17,600		20,587
Current portion of long-term debt		—			5,823		—
Total current liabilities		41,072			40,990		35,829
Deferred tax liabilities		27,267			—		—
Long-term debt		774,284			619,144		651,519
Other liabilities		1,339			3,385		15,213
Total liabilities		843,962			663,519		702,561
Commitments and contingencies (Note 7)
Equity
Common stock of iPayment, Inc., $0.01 par value; 1,000 shares authorized, 100 shares issued and outstanding at December 31, 2011, 2010, and 2009, respectively		165,764			20,055		20,055
Accumulated other comprehensive loss, net of tax benefits of $0, $4,984, and $3,195 at December 31, 2011, 2010, and 2009, respectively		—			—		(7,475	)
Retained earnings (accumulated deficit)		(11,415	)		51,912		29,862
Total stockholder’s equity		154,349			71,967		42,442
Total liabilities and stockholder’s equity	$	998,311		$	735,486	$	745,003

See accompanying notes to Consolidated Financial Statements.

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iPAYMENT HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

	iPAYMENT HOLDINGS, INC.
(Dollars in thousands, except share data)	December 31, 2011 (Restated)			December 31, 2010 (Restated)		December 31, 2009 (Restated)
	Successor			Predecessor		Predecessor
ASSETS
Current assets:
Cash and cash equivalents	$	1		$	1	$	2
Accounts receivable, net of allowance for doubtful accounts of $1,580, $735 and $857 at December 31, 2011, 2010, and 2009, respectively		33,765			27,701		25,185
Prepaid expenses and other current assets		2,104			1,075		1,109
Deferred tax assets		2,988			2,116		2,425
Total current assets		38,858			30,893		28,721
Restricted cash		542			556		680
Property and equipment, net		5,530			4,167		4,072
Merchant portfolios and other intangible assets, net of accumulated amortization of $41,725, $177,328, and $138,762 at December 31, 2011, 2010, and 2009, respectively		259,957			155,225		163,645
Goodwill		670,362			529,060		527,978
Deferred tax assets		—			5,121		8,760
Other assets, net		27,051			10,464		11,147
Total assets	$	1,002,300		$	735,486	$	745,003
LIABILITIES and STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	5,773		$	3,149	$	3,957
Income taxes payable		3,820			11,845		8,550
Accrued interest		9,186			2,573		2,735
Accrued liabilities and other		21,935			17,600		20,587
Current portion of long-term debt		—			5,823		—
Total current liabilities		40,714			40,990		35,829
Deferred tax liabilities		27,059			—		—
Long-term debt		903,141			619,144		651,519
Other liabilities		1,339			3,385		15,213
Total liabilities		972,253			663,519		702,561
Commitments and contingencies (Note 7)
Equity
Common stock of iPayment, Inc., $0.01 par value; 1,000 shares authorized, 100 shares issued and outstanding at December 31, 2011, 2010, and 2009, respectively		—			20,055		20,055
Common stock of iPayment Holdings, Inc., $0.01 par value; 8,000,000, 50,000 and 50,000 shares authorized, 4,875,000, 20 and 20 shares issued and outstanding at December 31, 2011, 2010 and 2009, respectively		45,268			—		—
Accumulated other comprehensive loss, net of tax benefits of $0, $4,984, and $3,195 at December 31, 2011, 2010, and 2009, respectively		—			—		(7,475	)
Retained earnings (accumulated deficit)		(15,221	)		51,912		29,862
Total stockholder’s equity		30,047			71,967		42,442
Total liabilities and stockholder’s equity	$	1,002,300		$	735,486	$	745,003

See accompanying notes to Consolidated Financial Statements.

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iPAYMENT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

	Period From
	May 24			January 1
	through			through
	December 31,			May 23,			Years Ended December 31,
(Dollars in thousands)	2011 (Restated)			2011 (Restated)			2010 (Restated)		2009 (Restated)
	Successor			Predecessor			Predecessor		Predecessor
Revenues	$	431,511		$	276,690		$	699,174	$	717,928
Operating expenses:
Interchange		226,366			147,779			380,577		397,530
Other costs of services		160,190			87,130			214,928		227,720
Selling, general and administrative		10,550			6,736			13,824		20,280
Embezzlement costs		2,981			1,153			3,148		951
Total operating expenses		400,087			242,798			612,477		646,481
Income from operations		31,424			33,892			86,697		71,447
Other expense:
Interest expense, net		40,279			15,578			45,662		46,488
Other (income) expense, net		(115	)		18,804			1,058		1,245
Income (loss) before income taxes		(8,740	)		(490	)		39,977		23,714
Income tax provision (benefit)		(2,781	)		411			16,927		8,503
Net income (loss)	$	(5,959	)	$	(901	)	$	23,050	$	15,211
Less: Net income attributable to noncontrolling interests		—			—			—		(3,588	)
Net income (loss) attributable to iPayment, Inc.	$	(5,959	)	$	(901	)	$	23,050	$	11,623

See accompanying notes to Consolidated Financial Statements.

47

iPAYMENT HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

	Period From
	May 24			January 1
	through			through
	December 31,			May 23,			Years Ended December 31,
(Dollars in thousands)	2011 (Restated)			2011 (Restated)			2010 (Restated)		2009 (Restated)
	Successor			Predecessor			Predecessor		Predecessor
Revenues	$	431,511		$	276,690		$	699,174	$	717,928
Operating expenses:
Interchange		226,366			147,779			380,577		397,530
Other costs of services		160,213			87,130			214,928		227,720
Selling, general and administrative		10,565			6,736			13,824		20,280
Embezzlement costs		2,981			1,153			3,148		951
Total operating expenses		400,125			242,798			612,477		646,481
Income from operations		31,386			33,892			86,697		71,447
Other expense:
Interest expense, net		51,917			16,455			45,662		46,488
Other (income) expense, net		(100	)		18,804			1,058		1,245
Income (loss) before income taxes		(20,431	)		(1,367	)		39,977		23,714
Income tax provision (benefit)		(5,610	)		202			16,927		8,503
Net income (loss)	$	(14,821	)	$	(1,569	)	$	23,050	$	15,211
Less: Net income attributable to noncontrolling interests		—			—			—		(3,588	)
Net income (loss) attributable to iPayment Holdings, Inc.	$	(14,821	)	$	(1,569	)	$	23,050	$	11,623

See accompanying notes to Consolidated Financial Statements.

48

iPAYMENT, INC.

CONSOLIDATED STATEMENTS of CHANGES IN STOCKHOLDER’S EQUITY and COMPREHENSIVE INCOME

	Stockholder’s Equity
					Accumulated Other Comprehensive Loss			Retained Earnings (Accumulated Deficit)			Non- controlling Interest
	Common Stock
(Dollars in thousands)	Shares		Amount											Total
Predecessor:
Balance at January 1, 2009 (As Previously Reported)		100	$	20,055	$	(12,268	)	$	18,818		$	987		$	27,592
Adjustments		—		—		—			(579	)		—			(579	)
Balance at January 1, 2009 (Restated)		100	$	20,055	$	(12,268	)	$	18,239		$	987		$	27,013
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 (Restated)		—		—		—			11,623			3,588			15,211
Comprehensive income:															20,004
Balance at December 31, 2009 (Restated)		100	$	20,055	$	(7,475	)	$	29,862		$	—		$	42,442
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 (Restated)		—		—		—			23,050			—			23,050
Comprehensive income:		—		—		—			—			—			30,525
Balance at December 31, 2010 (Restated)		100	$	20,055	$	—		$	51,912		$	—		$	71,967
Dividend paid to parent company		—		—		—			(135,539	)		—			(135,539	)
Comprehensive loss:
Net loss (Restated)		—		—		—			(901	)		—			(901	)
Comprehensive loss:		—		—		—			—			—			(901	)
Balance at May 23, 2011 (Restated)		100	$	20,055	$	—		$	(84,528	)	$	—		$	(64,473	)
Revaluation of equity following change of control		—		145,709		—			84,528			—			230,237
Successor:
Balance at May 24, 2011 (Restated)		100	$	165,764	$	—		$	—		$	—		$	165,764
Dividend paid to parent company		—		—		—			(5,456	)		—			(5,456	)
Comprehensive loss:
Net loss (Restated)		—		—		—			(5,959	)		—			(5,959	)
Comprehensive loss:		—		—		—			—			—			(5,959	)
Balance at December 31, 2011 (Restated)		100	$	165,764	$	—		$	(11,415	)	$	—		$	154,349

See accompanying notes to Consolidated Financial Statements.

49

iPAYMENT HOLDINGS, INC.

CONSOLIDATED STATEMENTS of CHANGES IN STOCKHOLDER’S EQUITY and COMPREHENSIVE INCOME

	Stockholder’s Equity
					Accumulated Other Comprehensive Loss			Retained Earnings (Accumulated Deficit)			Non- controlling Interest			Total
	Common Stock
(Dollars in thousands)	Shares		Amount
Predecessor:
Balance at January 1, 2009 (As Previously Reported)		20	$	20,055	$	(12,268	)	$	18,818		$	987		$	27,592
Adjustments									(579	)					(579	)
Balance at January 1, 2009 (Restated)		20	$	20,055	$	(12,268	)	$	18,239		$	987		$	27,013
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 (Restated)		—		—		—			11,623			3,588			15,211
Comprehensive income:															20,004
Balance at December 31, 2009 (Restated)		20	$	20,055	$	(7,475	)	$	29,862		$	—		$	42,442
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 (Restated)		—		—		—			23,050			—			23,050
Comprehensive income:		—		—		—			—			—			30,525
Balance at December 31, 2010 (Restated)		20	$	20,055	$	—		$	51,912		$	—		$	71,967
Dividend paid to parent company		—		—		—			(257,335	)		—			(257,335	)
Issuance of common stock		—		1,166		—						—			1,166
Comprehensive loss:
Net loss (Restated)		—		—		—			(1,569	)		—			(1,569	)
Comprehensive loss:															(1,569	)
Balance at May 23, 2011 (Restated)		20	$	21,221	$	—		$	(206,992	)	$	—		$	(185,771	)
Revaluation of equity following change of control		4,874,980		24,047		—			206,992						231,039
Successor:
Balance at May 24, 2011 (Restated)		4,875,000	$	45,268	$	—		$	—		$	—		$	45,268
Dividend paid to parent company		—		—		—			(400	)		—			(400	)
Comprehensive loss:
Net loss (Restated)		—		—		—			(14,821	)		—			(14,821	)
Comprehensive loss:		—		—		—			—			—			(14,821	)
Balance at December 31, 2011 (Restated)		4,875,000	$	45,268	$	—		$	(15,221	)	$	—		$	30,047

See accompanying notes to Consolidated Financial Statements.

50

iPAYMENT, INC.

CONSOLIDATED STATEMENTS of CASH FLOWS

	Period From
	May 24			January 1
	through			through
	December 31,			May 23,			Years Ended December 31,
(Dollars in thousands)	2011 (Restated)			2011 (Restated)			2010 (Restated)			2009 (Restated)
	Successor			Predecessor			Predecessor			Predecessor
Cash flows from operating activities
Net income (loss)	$	(5,959	)	$	(901	)	$	23,050		$	15,211
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization		43,083			16,208			40,711			45,302
Noncash interest expense and other		1,634			7,529			3,217			2,584
Loss on disposal of property and equipment		624			262			—			—
Changes in assets and liabilities, excluding effects of redemption:
Accounts receivable		(6,113	)		48			(2,516	)		(1,109	)
Prepaid expenses and other current assets		(64	)		(515	)		33			690
Other assets		(10,384	)		92			(4,356	)		(5,657	)
Accounts payable and income taxes payable		8,263			(10,627	)		2,488			2,985
Accrued interest		1,218			2,959			(152	)		(313	)
Accrued liabilities and other		(7,933	)		6,657			(2,367	)		3,010
Net cash provided by operating activities		24,369			21,712			60,108			62,703
Cash flows from investing activities
Change in restricted cash		14			—			124			9
Expenditures for property and equipment		(4,074	)		(1,085	)		(2,643	)		(2,302	)
Investment in merchant advances, net		—			—			—			4,460
Proceeds from disposition of noncontrolling interest		—			—			—			2,772
Acquisitions of businesses and portfolios		(24,300	)		—			(25,000	)		(24,629	)
Payments related to businesses previously acquired		—			—			—			(2,734	)
Payments for prepaid residual expenses		(1,035	)		(539	)		(4,690	)		(5,126	)
Net cash used in investing activities		(29,395	)		(1,624	)		(32,209	)		(27,550	)
Cash flows from financing activities
Net borrowings (repayments) on line of credit		8,000			(15,500	)		100			10,900
Repayments of debt		(14,500	)		(615,138	)		(27,000	)		(47,000	)
Net dividends paid to parent company		(5,456	)		(135,539	)		(1,000	)		—
Proceeds from issuance of long-term debt, net of discount		—			785,125			—			—
Distributions to noncontrolling interest in equity of subsidiary		—			—			—			(2,640	)
Debt issuance costs		—			(22,054	)		—			—
Net cash used in financing activities		(11,956	)		(3,106	)		(27,900	)		(38,740	)
Net (decrease) increase in cash and cash equivalents		(16,982	)		16,982			(1	)		(3,587	)
Cash and cash equivalents, beginning of period		16,983			1			2			3,589
Cash and cash equivalents, end of period	$	1		$	16,983		$	1		$	2
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes	$	332		$	11,518		$	14,197		$	13,712
Cash paid during the period for interest	$	37,412		$	11,596		$	43,231		$	44,218
Non-cash increase (decrease) in assets and liabilities:
Merchant portfolios and other intangible assets	$	132,595		$	—		$	—		$	—
Goodwill	$	141,374		$	—		$	—		$	—
Other assets	$	(1,820	)	$	—		$	—		$	—
Accrued liabilities and other	$	2,861		$	—		$	—		$	—

See accompanying notes to Consolidated Financial Statements.

51

iPAYMENT HOLDINGS, INC.

CONSOLIDATED STATEMENTS of CASH FLOWS

	Period From
	May 24			January 1
	through			through
	December 31,			May 23,			Years Ended December 31,
(Dollars in thousands)	2011 (Restated)			2011 (Restated)			2010 (Restated)			2009 (Restated)
	Successor			Predecessor			Predecessor			Predecessor
Cash flows from operating activities
Net income (loss)	$	(14,821	)	$	(1,569	)	$	23,050		$	15,211
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization		43,083			16,208			40,711			45,302
Noncash interest expense and other		1,873			7,539			3,217			2,584
Loss on disposal of property and equipment		624			262			—			—
Changes in assets and liabilities, excluding effects of redemption:
Accounts receivable		(6,113	)		48			(2,516	)		(1,109	)
Prepaid expenses and other current assets		(64	)		(515	)		33			690
Other assets		(10,384	)		92			(4,356	)		(5,657	)
Accounts payable and income taxes payable		5,434			(10,836	)		2,488			2,985
Accrued interest		7,710			3,827			(152	)		(313	)
Accrued liabilities and other		(8,029	)		6,790			(2,367	)		3,010
Net cash provided by operating activities		19,313			21,846			60,108			62,703
Cash flows from investing activities
Change in restricted cash		14			—			124			9
Expenditures for property and equipment		(4,074	)		(1,085	)		(2,643	)		(2,302	)
Investment in merchant advances, net		—			—			—			4,460
Proceeds from disposition of noncontrolling interest		—			—			—			2,772
Acquisitions of businesses and portfolios		(24,300	)		—			(25,000	)		(24,629	)
Payments related to businesses previously acquired		—			—			—			(2,734	)
Payments for prepaid residual expenses		(1,035	)		(539	)		(4,690	)		(5,126	)
Net cash used in investing activities		(29,395	)		(1,624	)		(32,209	)		(27,550	)
Cash flows from financing activities
Net borrowings (repayments) on line of credit		8,000			(15,500	)		100			10,900
Repayments of debt		(14,500	)		(615,138	)		(27,000	)		(47,000	)
Net dividends paid to parent company		(400	)		(257,335	)		(1,000	)		—
Proceeds from issuance of long-term debt, net of discount		—			910,125			—			—
Distributions to noncontrolling interest in equity of subsidiary		—			—			—			(2,640	)
Debt issuance costs		—			(25,392	)		—			—
Net cash used in financing activities		(6,900	)		(3,240	)		(27,900	)		(38,740	)
Net (decrease) increase in cash and cash equivalents		(16,982	)		16,982			(1	)		(3,587	)
Cash and cash equivalents, beginning of period		16,983			1			2			3,589
Cash and cash equivalents, end of period	$	1		$	16,983		$	1		$	2
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes	$	332		$	11,518		$	14,197		$	13,712
Cash paid during the period for interest	$	42,334		$	11,596		$	43,231		$	44,218
Non-cash increase (decrease) in assets and liabilities:
Merchant portfolios and other intangible assets	$	132,595		$	—		$	—		$	—
Goodwill	$	142,174		$	—		$	—		$	—
Other assets	$	(1,820	)	$	—		$	—		$	—
Accrued liabilities and other	$	2,861		$	—		$	—		$	—
Long-term debt	$	4,992		$	—		$	—		$	—

See accompanying notes to Consolidated Financial Statements.

52

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization, Business and Basis of Presentation

Organization

We are a provider of credit and debit card payment processing services to small merchants across the United States. We conduct all of our operations through our operating company, iPayment, Inc. (“iPayment”), and its subsidiaries. iPayment and its direct parent, iPayment Holdings, Inc. (“Holdings”), are incorporated in Delaware. Holdings is a holding company that does not have any operations or material assets other than the direct and indirect ownership of all of the capital stock of iPayment and its subsidiaries, respectively. All of the capital stock of Holdings is owned by iPayment Investors, L.P. (“iPayment Investors”). All of the partnership interests of iPayment Investors are owned by Carl A. Grimstad, iPayment’s Chairman and Chief Executive Officer, and certain entities and persons affiliated with him.

As discussed further in Note 4, on May 23, 2011, iPayment Investors and its general partner, iPayment GP, LLC (the “iPayment GP”), completed the redemption (the “Equity Redemption”) of all of the direct and indirect equity interests in iPayment Investors and the iPayment GP of (i) Gregory Daily, iPayment’s former Chairman and Chief Executive Officer and (ii) the trusts for the benefit of, and other entities controlled by, members of Mr. Daily’s family that held equity interests in Investors. The Equity Redemption resulted in a change in control and accordingly has been accounted for as a business combination in accordance with ASC 805 “Business Combinations.”

As used in these notes to the consolidated financial statements, the terms “we,” “us,” “our,” “the Company,” “our Company” or similar terms refer to iPayment Holdings, Inc. and its subsidiaries, unless otherwise stated or required by the context. The term “iPayment” refers to iPayment, Inc. and “Holdings” refers to iPayment Holdings, Inc., in each case, without their subsidiaries.

Business

Our payment processing services enable our merchants to accept credit cards as well as other forms of payment, including debit cards, checks, gift cards and loyalty programs in traditional card-present, or swipe transactions, as well as card-not-present transactions, such as those done over the phone or through the internet. We market and sell our services primarily through independent sales groups (“ISGs”) which are non-employee, external sales organizations and other third party resellers of our products and services. We also market our services directly to merchants through electronic media, telemarketing and other programs utilizing partnerships with other companies that market products and services to small businesses. In addition, we 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.

In May 2011, iPayment completed an offering of $400.0 million in aggregate principal amount of 10.25% Senior Notes due 2018 (the “10.25% Notes”) and entered into its new senior secured credit facilities consisting of (i) a $375.0 million term facility and (ii) a $75.0 million revolving facility (the “Senior Secured Credit Facilities”). The new revolving facility will mature on May 6, 2016, and the new term facility will mature on May 8, 2017. Also in May 2011, Holdings completed an offering of 125,000 units (the “Units”), consisting of $125.0 million in aggregate principal amount of 15.00%/15.00% Senior Notes due 2018 (the “15.00%/15.00% Notes”) and 125,000 warrants (the “Warrants”) to purchase common stock of Holdings. The Warrants represent an aggregate 2.5% of the outstanding common stock of Holdings on a fully diluted basis. The Senior Secured Credit Facilities, the 10.25% Notes and the 15.00%/15.00% Notes are discussed further in Note 8.

The majority of the proceeds from the offerings of the 10.25% Notes and the Units, together with borrowings under the Senior Secured Credit Facilities, were used to (i) permanently repay all of the outstanding indebtedness under iPayment’s then existing senior secured credit facilities; (ii) redeem and satisfy and discharge all of iPayment’s then existing senior subordinated notes; (iii) redeem and satisfy and discharge all of iPayment Investors’ then existing paid-in-kind (“PIK”) toggle notes and (iv) pay fees and expenses in connection with the offerings. All of the remainder of such proceeds and borrowings were used to consummate the Equity Redemption on May 23, 2011, including payment of the transaction fee discussed in Note 11 and other related fees and expenses.

In these notes to the consolidated financial statements, we refer to the entry into the Senior Secured Credit Facilities, the offer and sale of the 10.25% Notes and the Units, including the application of the net proceeds of the 10.25% Notes and the Units and borrowings under the Senior Secured Credit Facilities as described above, as the “Refinancing.” In addition, as used in these notes to the consolidated financial statements, the term “Notes” refers collectively to the 10.25% Notes and the 15.00%/15.00% Notes.

53

As a result of the Refinancing, we had significant outstanding long-term debt as of December 31, 2011. The terms of our long-term debt contain various nonfinancial and financial covenants as further discussed in Note 8. 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. As of December 31, 2011, our Senior Secured Leverage Ratio, as defined in the Senior Secured Credit Facilities, was 2.84 to 1.00 compared to the allowed maximum of 3.75 to 1.00. As of December 31, 2011, our Consolidated Interest Coverage Ratio, as defined in the Senior Secured Credit Facilities, was 2.15 to 1.00 compared to the allowed minimum of 1.40 to 1.00. As described in detail in Note 8, on November 14, 2012, the Company and Holdings entered into a waiver, consent and amendment (the “Waiver”) to the credit agreement governing the Company’s Senior Secured Credit Facilities. Among other things, the Waiver waives (a) defaults arising from the restatement of certain of the Company’s financial statements (i) for the fiscal years ended December 31, 2008, 2009, 2010, and 2011, (ii) for the interim periods within such fiscal years and (iii) for the quarters ended March 31, 2012 and June 30, 2012 and (b) until February 1, 2013, the Company’s failure to timely provide to the administrative agent for the Senior Secured Credit Facilities the Company’s financial statements for the quarterly period ended September 30, 2012.

Basis of Presentation

The accompanying consolidated financial statements of iPayment and Holdings 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 the consolidated financial position and results of operations for the related periods. All significant intercompany transactions and balances have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year presentation.

As a result of the Equity Redemption, as further discussed in Note 4, our results of operations, financial position and cash flows prior to the date of the Equity Redemption are presented as the “Predecessor.” The financial effects of the Equity Redemption and our results of operations, financial position and cash flows following the Equity Redemption are presented as the “Successor.” Accordingly, as used in these notes to the consolidated financial statements, the terms “during 2011” and “year ended December 31, 2011” refer to the combined results of the Predecessor and Successor entities for such period.

2. Restatement of Consolidated Financial Statements

In August 2012, as disclosed in the Company’s Current Reports on Form 8-K filed on September 12, 2012 and November 5, 2012 the Company and Holdings were presented with accusations from one of the Company’s employees that certain of the Company’s employees and outside contractors had engaged in financial misconduct. Following an initial inquiry into these accusations by the Company, the Board of Directors of the Company and management conducted an internal investigation of the alleged misconduct. During the course of the Company’s investigation, certain executives of the Company and Holdings were terminated or resigned.

The Company’s internal investigation revealed financial misconduct by certain former officers and employees of the Company and certain of its outside contractors. Such misconduct occurred in five principal areas: (i) failure to maintain an adequate control environment that set a proper culture within our operations; (ii) creation of false obligations to make residual and other payments (which resulted in the Company making such payments in respect of merchant accounts that were not subject to legitimate payment obligations); (iii) overstatement of certain vendor invoices, principally in the information technology area; (iv) falsification of certain employee expense reimbursements and other payments; and (v) the posting of manual journal entries without sufficient supporting documentation or adequate review and approval. The Company believes that the foregoing activities, which generally occurred over a period from the third quarter of 2008 through September 2012, involved a total loss of funds to the Company of approximately $9.5 million through December 31, 2011 ($11.9 million through September 30, 2012). The adjustments related to the financial misconduct and the recording of immaterial prior period adjustments not related to the financial misconduct are set forth in the table below.

54

	Cumulative embezzlement costs through December 31, 2011		iPayment Holdings, Inc. & iPayment, Inc. (Successor & Predecessor combined)			iPayment Holdings, Inc. & iPayment, Inc.
(Dollars in thousands)			2011			2010			2009			2008(1)
Embezzlement costs
Residual expense	$	3,672	$	1,760		$	1,100		$	736		$	76
Property and equipment		1,942		741			265			—			936
Other intangible assets		1,682		1,527			—			155			—
Residual buyout		1,625		—			1,625			—			—
Travel and entertainment		229		106			—			58			65
Prepaids and other receivables		208		—			155			—			53
Other		123		—			3			2			118
Total embezzlement costs	$	9,481		4,134			3,148			951			1,248
Embezzlement costs previously included in the statements of operations as:
Other costs of services				(2,319	)		(1,611	)		(1,018	)		(158	)
Selling, general and administrative				(106	)		(3	)		(68	)		(151	)
Prior period adjustments not related to fraudulent transactions
Reversal of residual buyout amortization expense				(1,996	)		—			—			—
Reversal of deferred gain amortization				613			—			—			—
Other adjustments recorded in connection with the restatement				(609	)		(334	)		485			N/A
Tax adjustments
Tax effect of the above recorded adjustments				4			(341	)		(233	)		(360	)
Prior period tax adjustments not related to fraudulent transactions				(1,375	)		(1,081	)		—			—
Net (increase) decrease				(1,654	)		(222	)		117		$	579
Net income (loss), as previously reported(2)				(18,044	)		22,828			15,328
Net income (loss), as restated(2)			$	(16,390	)	$	23,050		$	15,211

(1) adjustments to beginning retained earnings at January 1, 2009

(2) for 2011, net (loss) is for iPayment Holdings, Inc.

Total embezzlement costs incurred by the Company cumulatively through December 31, 2011 were approximately $9.5 million. Approximately $5.1 million of such identified losses through December 31, 2011 were previously classified as residual and other expenses within other costs of services in the financial statements during the periods in which the misconduct took place. Approximately $0.3 million of such identified losses were classified as selling, general and administrative expenses in the financial statements during the periods in which the misconduct took place. The Company reclassified these costs as embezzlement costs included in total operating expenses. These embezzlement costs had no effect on the Company’s income from operations and net income (loss) in the prior periods. The remaining amount of such identified embezzlement costs totaling approximately $4.1 million through December 31, 2011 were capitalized in the financial statements as property and equipment, other intangible assets or other assets during the periods in which the misconduct took place. Such losses were written off as embezzlement costs in the restated financial statements in the periods in which the misconduct took place and do affect the Company’s income from operations and net income (loss) in its restated financial statements.

In addition to the items described above, the Company also included in the restated consolidated financial statements other previously unrecorded adjustments identified during the preparation of the consolidated financial statements at December 31, 2009, 2010 and 2011. These adjustments primarily were:

55

• Reversal of excess amortization expense of $2.0 million in 2011 related to residual buy-out (RBO) amortization expense. As part of the May 2011 Equity Redemption, the RBO assets were revalued in purchase accounting but the company continued to record amortization at the previous rate. This entry corrects that error;

• Reversal of excess tax amortization expense of $1.4 million in 2011 related to tax basis goodwill. As part of the May 2011 Equity Redemption, the tax basis goodwill deferred tax liability was revalued in purchase accounting but the company continued to record tax amortization at the previous rates. This entry corrects that error; and

• An adjustment of $1.1 million in 2010 related to correcting deferred taxes for previous period differences, primarily in intangible assets and goodwill.

The impact of all items discussed above on the consolidated balance sheets, consolidated statements of operations, consolidated statements of cash flow and consolidated statements of changes in stockholders’ equity is shown in the accompanying tables. The impact of all quarterly adjustments to the consolidated balance sheets and consolidated statement of operations for the Company and Holdings is shown in Note 15 “Summarized Quarterly Financial Data.”

56

Consolidated Balance Sheet (iPayment, Inc.) – As of December 31, 2011

	iPayment, Inc.
	As of December 31, 2011
(Dollars in thousands, except share data)	As Previously Reported			Adjustments			Restated
ASSETS
Current assets:
Cash and cash equivalents	$	1		$	—		$	1
Accounts receivable, net of allowance for doubtful accounts of $1,580 ($973 as previously reported)		33,961			(196	)		33,765
Prepaid expenses and other current assets		2,221			(117	)		2,104
Deferred tax assets		3,306			(318	)		2,988
Total current assets		39,489			(631	)		38,858
Restricted cash		542			—			542
Property and equipment, net		6,636			(1,106	)		5,530
Merchant portfolios and other intangible assets, net of accumulated amortization of $41,725 ($43,220 as previously reported)		259,980			(23	)		259,957
Goodwill		669,483			79			669,562
Other assets, net		23,798			64			23,862
Total assets	$	999,928		$	(1,617	)	$	998,311
LIABILITIES and STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	5,826		$	(53	)	$	5,773
Income taxes payable		6,445			205			6,650
Accrued interest		6,750			—			6,750
Accrued liabilities and other		23,195			(1,296	)		21,899
Total current liabilities		42,216			(1,144	)		41,072
Deferred tax liabilities		29,178			(1,911	)		27,267
Long-term debt		774,284			—			774,284
Other liabilities		1,440			(101	)		1,339
Total liabilities		847,118			(3,156	)		843,962
Commitments and contingencies (Note 7)
Equity
Common stock of iPayment, Inc., $0.01 par value; 1,000 shares authorized, 100 shares issued and outstanding at December 31, 2011		165,764			—			165,764
Accumulated deficit		(12,954	)		1,539			(11,415	)
Total iPayment, Inc. stockholder’s equity		152,810			1,539			154,349
Total liabilities and stockholder’s equity	$	999,928		$	(1,617	)	$	998,311

57

Consolidated Balance Sheet (iPayment Holdings, Inc.) – As of December 31, 2011

	iPayment Holdings, Inc.
	As of December 31, 2011
(Dollars in thousands, except share data)	As Previously Reported			Adjustments			Restated
ASSETS
Current assets:
Cash and cash equivalents	$	1		$	—		$	1
Accounts receivable, net of allowance for doubtful accounts of $1,580 ($973 as previously reported)		33,961			(196	)		33,765
Prepaid expenses and other current assets		2,221			(117	)		2,104
Deferred tax assets		3,306			(318	)		2,988
Total current assets		39,489			(631	)		38,858
Restricted cash		542			—			542
Property and equipment, net		6,636			(1,106	)		5,530
Merchant portfolios and other intangible assets, net of accumulated amortization of $41,725 ($43,220 as previously reported)		259,980			(23	)		259,957
Goodwill		670,283			79			670,362
Other assets, net		26,987			64			27,051
Total assets	$	1,003,917		$	(1,617	)	$	1,002,300
LIABILITIES and STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	5,826		$	(53	)	$	5,773
Income taxes payable		3,615			205			3,820
Accrued interest		9,186			—			9,186
Accrued liabilities and other		23,231			(1,296	)		21,935
Total current liabilities		41,858			(1,144	)		40,714
Deferred tax liabilities		28,970			(1,911	)		27,059
Long-term debt		903,141			—			903,141
Other liabilities		1,440			(101	)		1,339
Total liabilities		975,409			(3,156	)		972,253
Commitments and contingencies (Note 7)
Equity
Common stock of iPayment Holdings, Inc., $0.01 par value; 8,000,000 shares authorized, 4,875,000 shares issued and outstanding at December 31, 2011		45,268			—			45,268
Accumulated deficit		(16,760	)		1,539			(15,221	)
Total iPayment Holdings, Inc. stockholder’s equity		28,508			1,539			30,047
Total liabilities and stockholder’s equity	$	1,003,917		$	(1,617	)	$	1,002,300

58

Consolidated Statement of Operations (iPayment, Inc.) – Period from May 24 through December 31, 2011 (Successor) and January 1 through May 23, 2011 (Predecessor)

	Period from
	May 24 through December 31, 2011 (Successor)									January 1 through May 23, 2011 (Predecessor)
(Dollars in thousands)	As Previously Reported			Adjustments			Restated			As Previously Reported			Adjustments			Restated
Revenues	$	432,124		$	(613	)	$	431,511		$	276,690		$	—		$	276,690
Operating expenses:
Interchange		226,366			—			226,366			147,779			—			147,779
Other costs of services		164,378			(4,188	)		160,190			88,474			(1,344	)		87,130
Selling, general and administrative		10,048			502			10,550			6,736			—			6,736
Embezzlement costs		—			2,981			2,981			—			1,153			1,153
Total operating expenses		400,792			(705	)		400,087			242,989			(191	)		242,798
Income from operations		31,332			92			31,424			33,701			191			33,892
Other expense:
Interest expense, net		40,279			—			40,279			15,578			—			15,578
Other (income) expense, net		(115	)		—			(115	)		18,804			—			18,804
Loss before income taxes		(8,832	)		92			(8,740	)		(681	)		191			(490	)
Income tax provision (benefit)		(1,334	)		(1,447	)		(2,781	)		335			76			411
Net loss attributable to iPayment, Inc.	$	(7,498	)	$	1,539		$	(5,959	)	$	(1,016	)	$	115		$	(901	)

59

Consolidated Statement of Operations (iPayment Holdings, Inc.) – Period from May 24 through December 31, 2011 (Successor) and January 1 through May 23, 2011 (Predecessor)

	Period from
	May 24 through December 31, 2011 (Successor)									January 1 through May 23, 2011 (Predecessor)
(Dollars in thousands)	As Previously Reported			Adjustments			Restated			As Previously Reported			Adjustments			Restated
Revenues	$	432,124		$	(613	)	$	431,511		$	276,690		$	—		$	276,690
Operating expenses:
Interchange		226,366			—			226,366			147,779			—			147,779
Other costs of services		164,401			(4,188	)		160,213			88,474			(1,344	)		87,130
Selling, general and administrative		10,063			502			10,565			6,736			—			6,736
Embezzlement costs		—			2,981			2,981			—			1,153			1,153
Total operating expenses		400,830			(705	)		400,125			242,989			(191	)		242,798
Income from operations		31,294			92			31,386			33,701			191			33,892
Other expense:
Interest expense, net		51,917			—			51,917			16,455			—			16,455
Other (income) expense, net		(100	)		—			(100	)		18,804			—			18,804
Loss before income taxes		(20,523	)		92			(20,431	)		(1,558	)		191			(1,367	)
Income tax provision (benefit)		(4,163	)		(1,447	)		(5,610	)		126			76			202
Net loss attributable to iPayment Holdings, Inc.	$	(16,360	)	$	1,539		$	(14,821	)	$	(1,684	)	$	115		$	(1,569	)

60

Consolidated Statement of Cash Flows (iPayment, Inc.) – Period from May 24 through December 31, 2011 (Successor) and January 1 through May 23, 2011 (Predecessor)

	Period from
	May 24 through December 31, 2011 (Successor)									January 1 through May 23, 2011 (Predecessor)
(Dollars in thousands)	As Previously Reported			Adjustments			Restated			As Previously Reported			Adjustments			Restated
Cash flows from operating activities
Net loss	$	(7,498	)	$	1,539		$	(5,959	)	$	(1,016	)	$	115		$	(901	)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization		45,404			(2,321	)		43,083			16,441			(233	)		16,208
Noncash interest expense and other		1,634			—			1,634			7,529			—			7,529
Loss on disposal of property and equipment		624			—			624			262			—			262
Changes in assets and liabilities, excluding effects of redemption:
Accounts receivable		(6,467	)		354			(6,113	)		48			—			48
Prepaid expenses and other current assets		(123	)		59			(64	)		(457	)		(58	)		(515	)
Other assets		(10,669	)		285			(10,384	)		123			(31	)		92
Accounts payable and income taxes payable		8,056			207			8,263			(10,869	)		242			(10,627	)
Accrued interest		1,218			—			1,218			2,959			—			2,959
Accrued liabilities and other		(5,967	)		(1,966	)		(7,933	)		7,178			(521	)		6,657
Net cash provided by operating activities		26,212			(1,843	)		24,369			22,198			(486	)		21,712
Cash flows from investing activities
Change in restricted cash		14			—			14			—			—			—
Expenditures for property and equipment		(5,917	)		1,843			(4,074	)		(1,571	)		486			(1,085	)
Acquisitions of businesses and portfolios		(24,300	)		—			(24,300	)		—			—			—
Payments for prepaid residual expenses		(1,035	)		—			(1,035	)		(539	)		—			(539	)
Net cash used in investing activities		(31,238	)		1,843			(29,395	)		(2,110	)		486			(1,624	)
Cash flows from financing activities
Net borrowings (repayments) on line of credit		8,000			—			8,000			(15,500	)		—			(15,500	)
Repayments of debt		(14,500	)		—			(14,500	)		(615,138	)		—			(615,138	)
Net dividends paid to parent company		(5,456	)		—			(5,456	)		(135,539	)		—			(135,539	)
Proceeds from issuance of long-term debt, net of discount		—			—			—			785,125			—			785,125
Debt issuance costs		—			—			—			(22,054	)		—			(22,054	)
Net cash used in financing activities		(11,956	)		—			(11,956	)		(3,106	)		—			(3,106	)
Net (decrease) increase in cash and cash equivalents		(16,982	)		—			(16,982	)		16,982			—			16,982
Cash and cash equivalents, beginning of period		16,983			—			16,983			1			—			1
Cash and cash equivalents, end of period	$	1		$	—		$	1		$	16,983		$	—		$	16,983
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes	$	332		$	—		$	332		$	11,518		$	—		$	11,518
Cash paid during the period for interest	$	37,412		$	—		$	37,412		$	11,596		$	—		$	11,596
Non-cash increase (decrease) in assets and liabilities:
Merchant portfolios and other intangible assets	$	131,797		$	798		$	132,595		$	—		$	—		$	—
Goodwill	$	141,505		$	(131	)	$	141,374		$	—		$	—		$	—
Other assets	$	(1,820	)	$	—		$	(1,820	)	$	—		$	—		$	—
Accrued liabilities and other	$	2,861		$	—		$	2,861		$	—		$	—		$	—

61

Consolidated Statement of Cash Flows (iPayment Holdings, Inc.) – Period from May 24 through December 31, 2011 (Successor) and January 1 through May 23, 2011 (Predecessor)

	Period from
	May 24 through December 31, 2011 (Successor)									January 1 through May 23, 2011 (Predecessor)
(Dollars in thousands)	As Previously Reported			Adjustments			Restated			As Previously Reported			Adjustments			Restated
Cash flows from operating activities
Net loss	$	(16,360	)	$	1,539		$	(14,821	)	$	(1,684	)	$	115		$	(1,569	)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization		45,404			(2,321	)		43,083			16,441			(233	)		16,208
Noncash interest expense and other		1,873			—			1,873			7,539			—			7,539
Loss on disposal of property and equipment		624			—			624			262			—			262
Changes in assets and liabilities, excluding effects of redemption:
Accounts receivable		(6,467	)		354			(6,113	)		48			—			48
Prepaid expenses and other current assets		(123	)		59			(64	)		(457	)		(58	)		(515	)
Other assets		(10,669	)		285			(10,384	)		123			(31	)		92
Accounts payable and income taxes payable		5,227			207			5,434			(11,078	)		242			(10,836	)
Accrued interest		7,710			—			7,710			3,827			—			3,827
Accrued liabilities and other		(6,063	)		(1,966	)		(8,029	)		7,311			(521	)		6,790
Net cash provided by operating activities		21,156			(1,843	)		19,313			22,332			(486	)		21,846
Cash flows from investing activities
Change in restricted cash		14			—			14			—			—			—
Expenditures for property and equipment		(5,917	)		1,843			(4,074	)		(1,571	)		486			(1,085	)
Acquisitions of businesses and portfolios		(24,300	)		—			(24,300	)		—			—			—
Payments for prepaid residual expenses		(1,035	)		—			(1,035	)		(539	)		—			(539	)
Net cash used in investing activities		(31,238	)		1,843			(29,395	)		(2,110	)		486			(1,624	)
Cash flows from financing activities
Net borrowings (repayments) on line of credit		8,000			—			8,000			(15,500	)		—			(15,500	)
Repayments of debt		(14,500	)		—			(14,500	)		(615,138	)		—			(615,138	)
Net dividends paid to parent company		(400	)		—			(400	)		(257,335	)		—			(257,335	)
Proceeds from issuance of long-term debt, net of discount		—			—			—			910,125			—			910,125
Debt issuance costs		—			—			—			(25,392	)		—			(25,392	)
Net cash used in financing activities		(6,900	)		—			(6,900	)		(3,240	)		—			(3,240	)
Net (decrease) increase in cash and cash equivalents		(16,982	)		—			(16,982	)		16,982			—			16,982
Cash and cash equivalents, beginning of period		16,983			—			16,983			1			—			1
Cash and cash equivalents, end of period	$	1		$	—		$	1		$	16,983		$	—		$	16,983
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes	$	332		$	—		$	332		$	11,518		$	—		$	11,518
Cash paid during the period for interest	$	42,334		$	—		$	42,334		$	11,596		$	—		$	11,596
Non-cash increase (decrease) in assets and liabilities:
Merchant portfolios and other intangible assets	$	131,797		$	(798	)	$	132,595		$	—		$	—		$	—
Goodwill	$	142,305		$	(131	)	$	142,174		$	—		$	—		$	—
Other assets	$	(1,820	)	$	—		$	(1,820	)	$	—		$	—		$	—
Accrued liabilities and other	$	2,861		$	—		$	2,861		$	—		$	—		$	—
Long-term debt	$	4,992		$	—		$	4,992		$	—		$	—		$	—

62

Consolidated Statements of Changes in Stockholder’s Equity and Comprehensive Income (iPayment, Inc. and iPayment Holdings, Inc.) – As of December 31, 2011

	iPayment, Inc.								iPayment Holdings, Inc.
	December 31, 2011								December 31, 2011
(Dollars in thousands)	As Previously Reported			Adjustments		Restated			As Previously Reported			Adjustments		Restated
Common stock	$	165,764		$	—	$	165,764		$	45,268		$	—	$	45,268
Accumulated deficit		(12,954	)		1,539		(11,415	)		(16,760	)		1,539		(15,21	)
Total iPayment, Inc. and iPayment Holdings, Inc. stockholder’s equity	$	152,810		$	1,539	$	154,349		$	28,508		$	1,539		$30,047

63

Consolidated Balance Sheet (iPayment, Inc. and iPayment Holdings, Inc.) – As of December 31, 2010

	iPayment, Inc. and iPayment Holdings, Inc.
	As of December 31, 2010
(Dollars in thousands, except share data)	As Previously Reported		Adjustments			Restated
ASSETS
Current assets:
Cash and cash equivalents	$	1	$	—		$	1
Accounts receivable, net of allowance for doubtful accounts of $735		27,542		159			27,701
Prepaid expenses and other current assets		1,191		(116	)		1,075
Deferred tax assets		2,073		43			2,116
Total current assets		30,807		86			30,893
Restricted cash		556		—			556
Property and equipment, net		4,766		(599	)		4,167
Merchant portfolios and other intangible assets, net of accumulated amortization of $177,328 ($177,600 as previously reported)		156,734		(1,509	)		155,225
Goodwill		527,978		1,082			529,060
Deferred tax assets		4,324		797			5,121
Other assets, net		10,464		—			10,464
Total assets	$	735,629	$	(143	)	$	735,486
LIABILITIES and STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	3,265	$	(116	)	$	3,149
Income taxes payable		11,818		27			11,845
Accrued interest		2,573		—			2,573
Accrued liabilities and other		17,060		540			17,600
Current portion of long-term debt		5,823		—			5,823
Total current liabilities		40,539		451			40,990
Long-term debt		619,144		—			619,144
Other liabilities		3,505		(120	)		3,385
Total liabilities		663,188		331			663,519
Commitments and contingencies (Note 7)
Equity
Common stock of iPayment, Inc., $0.01 par value; 1,000 shares authorized, 100 shares issued and outstanding at December 31, 2010		20,055		—			20,055
Retained earnings		52,386		(474	)		51,912
Total iPayment, Inc. and iPayment Holdings, Inc. stockholder’s equity		72,441		(474	)		71,967
Total liabilities and stockholder’s equity	$	735,629	$	(143	)	$	735,486

64

Consolidated Statement of Operations (iPayment, Inc. and iPayment Holdings, Inc.) – Year Ended December 31, 2010

	iPayment, Inc. and iPayment Holdings, Inc.
	Year Ended December 31, 2010
(Dollars in thousands)	As Previously Reported		Adjustments			Restated
Revenues	$	699,174	$	—		$	699,174
Operating expenses:
Interchange		380,577		—			380,577
Other costs of services		216,873		(1,945	)		214,928
Selling, general and administrative		13,827		(3	)		13,824
Embezzlement costs		—		3,148			3,148
Total operating expenses		611,277		1,200			612,477
Income from operations		87,897		(1,200	)		86,697
Other expense:
Interest expense, net		45,662		—			45,662
Other expense, net		1,058		—			1,058
Income before income taxes		41,177		(1,200	)		39,977
Income tax provision		18,349		(1,422	)		16,927
Net income attributable to iPayment, Inc. and iPayment Holdings, Inc.	$	22,828	$	222		$	23,050

65

Consolidated Statement of Cash Flows (iPayment, Inc. and iPayment Holdings, Inc.) – Year Ended December 31, 2010

	iPayment, Inc. and iPayment Holdings, Inc.
	Year Ended December 31, 2010
(Dollars in thousands)	As Previously Reported			Adjustments			Restated
Cash flows from operating activities
Net income	$	22,828		$	222		$	23,050
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		41,221			(510	)		40,711
Noncash interest expense and other		3,217			—			3,217
Changes in assets and liabilities, excluding effects of redemption:
Accounts receivable		(2,465	)		(51	)		(2,516	)
Prepaid expenses and other current assets		272			(239	)		33
Other assets		(3,049	)		(1,307	)		(4,356	)
Accounts payable and income taxes payable		2,422			66			2,488
Accrued interest		(151	)		(1	)		(152	)
Accrued liabilities and other		(2,301	)		(66	)		(2,367	)
Net cash provided by operating activities		61,994			(1,886	)		60,108
Cash flows from investing activities
Change in restricted cash		124			—			124
Expenditures for property and equipment		(2,904	)		261			(2,643	)
Acquisitions of businesses and portfolios		(25,000	)		—			(25,000	)
Payments for prepaid residual expenses		(6,315	)		1,625			(4,690	)
Net cash used in investing activities		(34,095	)		1,886			(32,209	)
Cash flows from financing activities
Net borrowings on line of credit		100			—			100
Repayments of debt		(27,000	)		—			(27,000	)
Net dividends paid to parent company		(1,000	)		—			(1,000	)
Net cash used in financing activities		(27,900	)		—			(27,900	)
Net decrease in cash and cash equivalents		(1	)		—			(1	)
Cash and cash equivalents, beginning of period		2			—			2
Cash and cash equivalents, end of period	$	1		$	—		$	1
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes	$	14,197		$	—		$	14,197
Cash paid during the period for interest	$	43,231		$	—		$	43,231

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Consolidated Statements of Changes in Stockholder’s Equity and Comprehensive Income (iPayment, Inc. and iPayment Holdings, Inc.) – As of December 31, 2010

	iPayment, Inc. and iPayment Holdings, Inc.
	December 31, 2010
(Dollars in thousands)	As Previously Reported		Adjustments			Restated
Common stock	$	20,055	$	—		$	20,055
Retained earnings		52,386		(474	)		51,912
Total iPayment, Inc. and iPayment Holdings, Inc. stockholder’s equity	$	72,441	$	(474	)	$	71,967

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Consolidated Balance Sheet (iPayment, Inc. and iPayment Holdings, Inc.) – As of December 31, 2009

	iPayment, Inc. and iPayment Holdings, Inc.
	As of December 31, 2009
(Dollars in thousands, except share data)	As Previously Reported			Adjustments			Restated
ASSETS
Current assets:
Cash and cash equivalents	$	2		$	—		$	2
Accounts receivable, net of allowance for doubtful accounts of $857		25,077			108			25,185
Prepaid expenses and other current assets		1,463			(354	)		1,109
Deferred tax assets		2,353			72			2,425
Total current assets		28,895			(174	)		28,721
Restricted cash		680			—			680
Property and equipment, net		4,673			(601	)		4,072
Merchant portfolios and other intangible assets, net of accumulated amortization of $138,762 ($138,789 as previously reported)		163,774			(129	)		163,645
Goodwill		527,978			—			527,978
Deferred tax assets		8,219			541			8,760
Other assets, net		11,147			—			11,147
Total assets	$	745,366		$	(363	)	$	745,003
LIABILITIES and STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	4,132		$	(175	)	$	3,957
Income taxes payable		8,529			21			8,550
Accrued interest		2,735			—			2,735
Accrued liabilities and other		20,100			487			20,587
Total current liabilities		35,496			333			35,829
Long-term debt		651,519			—			651,519
Other liabilities		15,213			—			15,213
Total liabilities		702,228			333			702,561
Commitments and contingencies (Note 7)
Equity
Common stock of iPayment, Inc., $0.01 par value; 1,000 shares authorized, 100 shares issued and outstanding at December 31, 2009		20,055			—			20,055
Accumulated other comprehensive loss, net of tax benefits of $4,984 at December 31, 2009		(7,475	)		—			(7,475	)
Retained earnings		30,558			(696	)		29,862
Total iPayment, Inc. and iPayment Holdings, Inc. stockholder’s equity		43,138			(696	)		42,442
Total liabilities and stockholder’s equity	$	745,366		$	(363	)	$	745,003

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Consolidated Statement of Operations (iPayment, Inc. and iPayment Holdings, Inc.) – Year Ended December 31, 2009

	iPayment, Inc. and iPayment Holdings, Inc.
	Year Ended December 31, 2009
(Dollars in thousands)	As Previously Reported			Adjustments			Restated
Revenues	$	717,928		$	—		$	717,928
Operating expenses:
Interchange		397,530			—			397,530
Other costs of services		228,253			(533	)		227,720
Selling, general and administrative		20,348			(68	)		20,280
Embezzlement costs		—			951			951
Total operating expenses		646,131			350			646,481
Income from operations		71,797			(350	)		71,447
Other expense:
Interest expense, net		46,488			—			46,488
Other expense, net		1,245			—			1,245
Income before income taxes		24,064			(350	)		23,714
Income tax provision		8,736			(233	)		8,503
Net income	$	15,328		$	(117	)	$	15,211
Less: Net income attributable to noncontrolling interests		(3,588	)		—			(3,588	)
Net income attributable to iPayment, Inc. and iPayment Holdings, Inc.	$	11,740		$	(117	)	$	11,623

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Consolidated Statement of Cash Flows (iPayment, Inc. and iPayment Holdings, Inc.) – Year Ended December 31, 2009

	iPayment, Inc. and iPayment Holdings, Inc.
	Year Ended December 31, 2009
(Dollars in thousands)	As Previously Reported			Adjustments			Restated
Cash flows from operating activities
Net income	$	15,328		$	(117	)	$	15,211
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		45,828			(526	)		45,302
Noncash interest expense and other		2,584			—			2,584
Changes in assets and liabilities, excluding effects of redemption:
Accounts receivable		(1,001	)		(108	)		(1,109	)
Prepaid expenses and other current assets		344			346			690
Other assets		(5,804	)		147			(5,657	)
Accounts payable and income taxes payable		3,139			(154	)		2,985
Accrued interest		(313	)		—			(313	)
Accrued liabilities and other		2,600			410			3,010
Net cash provided by operating activities		62,705			(2	)		62,703
Cash flows from investing activities
Change in restricted cash		9			—			9
Expenditures for property and equipment		(2,304	)		2			(2,302	)
Investment in merchant advances, net		4,460			—			4,460
Proceeds from disposition of noncontrolling interest		2,772			—			2,772
Acquisitions of businesses and portfolios		(24,629	)		—			(24,629	)
Payments related to businesses previously acquired		(2,734	)		—			(2,734	)
Payments for prepaid residual expenses		(5,126	)		—			(5,126	)
Net cash used in investing activities		(27,552	)		2			(27,550	)
Cash flows from financing activities
Net borrowings on line of credit		10,900			—			10,900
Repayments of debt		(47,000	)		—			(47,000	)
Distributions to noncontrolling interest in equity of subsidiary		(2,640	)		—			(2,640	)
Net cash used in financing activities		(38,740	)		—			(38,740	)
Net decrease in cash and cash equivalents		(3,587	)		—			(3,587	)
Cash and cash equivalents, beginning of period		3,589			—			3,589
Cash and cash equivalents, end of period	$	2		$	—		$	2
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes	$	13,712		$	—		$	13,712
Cash paid during the period for interest	$	44,218		$	—		$	44,218

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Consolidated Statements of Changes in Stockholder’s Equity and Comprehensive Income (iPayment, Inc. and iPayment Holdings, Inc.) – As of December 31, 2009

	iPayment, Inc. and iPayment Holdings, Inc.
	December 31, 2009
(Dollars in thousands)	As Previously Reported			Adjustments			Restated
Common stock	$	20,055		$	—		$	20,055
Accumulated other comprehensive loss		(7,475	)		—			(7,475	)
Retained earnings		30,558			(696	)		29,862
Total iPayment, Inc. and iPayment Holdings, Inc. stockholder’s equity	$	43,138		$	(696	)	$	42,442

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3. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements of iPayment include the accounts of iPayment 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, iPayment Acquisition Sub, LLC, iAdvantage, LLC and IPMT Transport, LLC. The consolidated financial statements of Holdings include the accounts of Holdings and the entities listed in the preceding sentence. All significant accounts, transactions and profits between the consolidated companies have been eliminated in consolidation. Significant accounts and transactions between the Company, including its subsidiaries, on the one hand, and their directors and officers on the other hand, are disclosed as related party transactions in Note 11 below.

Use of Estimates

The preparation of our financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of our 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. As a result of the change in control discussed in Note 4 and the application of ASC 805, we engaged an independent, third party valuation firm to assist in evaluating the fair value of certain assets as of May 23, 2011. The results of this valuation are further discussed in Note 4 below.

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 for revenues earned, net of related interchange and bank processing fees, 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, 2011, 2010, and 2009 was $1.6 million, $0.7 million, and $0.9 respectively. We record allowances for doubtful accounts when it is probable that the accounts receivable balance will not be collected.

Property and Equipment, net

Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method for financial reporting purposes and primarily accelerated methods for tax purposes. For financial reporting purposes, equipment is depreciated over two to five years. Leasehold improvements are amortized over the useful life of the asset. For the period from May 24 through December 31, 2011, depreciation expense related to property and equipment was $1.4 million. For the period from January 1 through May 23, 2011, depreciation expense related to property and equipment was $0.8 million. Depreciation expense for property and equipment for the years ended December 31, 2010 and 2009 was $1.9 million and $1.9 million, respectively. Maintenance and repairs are charged to expense as incurred. Expenditures for renewals and improvements that extend the useful life are capitalized.

Revenue and Cost Recognition

Substantially all of our revenues are generated from fees charged to merchants for payment processing services. We typically charge these merchants a bundled rate, primarily based upon each merchant’s monthly charge volume and risk profile. Our fees principally consist of discount fees, which are a percentage of the dollar amount of each transaction. We recognize discounts and other fees related to payment transactions at the time the merchant’s 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 compliance fees, ancillary products 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 included in the Revenue Recognition Topic of ASC 605, Reporting Revenue Gross as a Principal Versus Net as an Agent. 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

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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 recognized at the time transactions are processed. Revenues generated from certain bank portfolios acquired from First Data Merchant Services Corporation are 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 Costs of Services

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 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. 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 15-year period.

Amortization of Intangible Assets

The following table includes the components of our restated intangible assets by major class as of December 31, 2011:

	Portfolios (Restated)			Trade name		Assets (Restated)			Total (Restated)
Gross amount	$	228,515		$	65,480	$	7,687		$	301,682
Accumulated amortization		(38,363	)		—		(3,362	)		(41,725	)
Carrying amount	$	190,152		$	65,480	$	4,325		$	259,957

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. 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. The estimated useful lives of our merchant processing portfolios are assessed by evaluating each portfolio to ensure that the recognition of the costs of revenues, represented by amortization of the intangible assets, approximate the distribution of the expected revenues from each processing portfolio. If, upon review, the actual costs of revenues differ from the expected costs of revenues, we will adjust amortization expense accordingly. Historically, we have experienced an average monthly volume attrition of approximately 1.5% to 2.5% of our total charge volume.

We utilize an accelerated method of amortization over a 15-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. For the period from May 24 through December 31, 2011, amortization expense related to our merchant processing portfolios and other intangible assets was $41.7 million. For the period from January 1 through May 23, 2011, amortization expense related to our merchant processing portfolios and other intangible assets was $15.4 million. For the years ended December 31, 2010 and 2009, amortization expense related to our merchant processing portfolios and other intangible assets were $38.8 million and $43.4 million, respectively.

As of December 31, 2011, estimated amortization expense for each of the five succeeding years is expected to be as follows (in thousands):

Year ended December 31,	Amount
2012	$	56,705
2013		41,571
2014		28,534
2015		19,049
2016		13,362

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In addition, we have implemented both quarterly and annual procedures to determine whether a significant change in the trend of the current attrition rates being used has occurred on a portfolio-by-portfolio basis. In reviewing the current attrition rate trends, we consider relevant benchmarks such as charge volume, revenues, number of merchant accounts, gross profit and future expectations of the aforementioned factors compared to historical amounts and rates. If we identify any significant changes or trends in the attrition rate of any portfolio, we will adjust our current and prospective estimated attrition rates so that the amortization expense better approximates the distribution of actual cash flows generated by the merchant processing portfolios. Any adjustments made to the amortization schedules would be reported in the current consolidated statements of operations and on a prospective basis until further evidence becomes apparent. As a result of the Equity Redemption, we appraised merchant processing portfolios as of May 23, 2011. There were no unfavorable trends identified in the attrition rates used for the year ended December 31, 2011. Consequently, there were no related increases to amortization expense for these periods. Please refer to Note 4 for further discussion.

Our intangible assets are amortized over their estimated lives, except the “iPayment, Inc.” trade name, which was determined to have an indefinite life as there are no legal, regulatory, contractual, economic or other factors that limit the useful life of the intangible asset to us, and we have no plans to cease using such name. We believe the trade name has an inherent value due to brand strength. Trade name is subject to an annual impairment test. Based on the analyses we performed as of May 31, 2011, we concluded that our trade name was not impaired.

Goodwill

We follow ASC 350 “Intangibles – Goodwill and Other Topics,” which addresses financial accounting and reporting for acquired goodwill and other intangible assets, and requires that 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 appropriate market multiples of other publicly traded institutions in our industry, the current economic environment, 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, 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. Based on the analyses we performed as of May 31, 2011, 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, 2011, we concluded that none of our long-lived assets were impaired.

Other Assets

Other assets at December 31, 2011, 2010, and 2009, include approximately $1.0 million, $1.0 million, and $0.1 million, respectively, of notes receivable (the current portions of $0.4 million, $0.5 million, $0.7 million, are included in prepaid expenses and other current assets at December 31, 2011, 2010, and 2009, respectively), representing amounts advanced to sales agents. The notes bear interest at amounts ranging from 6.5% to 15.0%, and are payable back to us through 2015. We secure the loans by attaching the ISG’s 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, in certain cases, by obtaining personal guarantees from the individuals who operate the ISGs.

Also included in other assets for iPayment and its consolidated subsidiaries at December 31, 2011, 2010, and 2009, are approximately $20.4 million, $6.2 million, and $8.7 million, of debt issuance costs (net of accumulated amortization of $1.7 million, $10.3 million, and $8.1 million, respectively), which are being amortized over the terms of the related debt agreements using the effective interest method. Included in other assets for Holdings and its consolidated subsidiaries at December 31, 2011, 2010, and 2009, are approximately $23.6 million, $6.2 million, and $8.7 million, of debt issuance costs (net of accumulated amortization of $1.8 million, $10.3 million, and $8.1 million, respectively), which are being amortized over the terms of the related debt agreements using the effective interest method.

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

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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. For the period from May 24 through December 31, 2011, provision for merchant losses was $2.5 million. For the period from January 1 through May 23, 2011, provision for merchant losses was $1.3 million. Provisions for merchant losses were $3.3 million, and $5.1 million for the years ended December 31, 2010 and 2009, respectively. Provisions for merchant losses are included in other costs of services in the accompanying consolidated statements of operations. At December 31, 2011, 2010, and 2009, our reserve for losses on merchant accounts included in accrued liabilities and other totaled $1.2 million and $1.4 million, and $1.5 million, respectively.

Financial Instruments

ASC 820 “Fair Value Measurement and Disclosures” establishes a framework for measuring fair value and a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

• Level 1: Observable quoted prices in active markets for identical assets and liabilities.

• Level 2: Observable quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

• Level 3: Model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash-flow models and similar techniques.

We believe the carrying amounts of financial instruments at December 31, 2011 approximate fair value. Due to the short maturities of cash and cash equivalents and accounts receivable, carrying amounts approximate their respective fair values. The carrying value of the 10.25% Notes was $400.0 million as of December 31, 2011. We estimate their fair value to be approximately $376.0 million, considering executed trades occurring around December 31, 2011. As of December 31, 2011, under the Senior Secured Credit Facilities, the carrying value of the term facility, net of a discount of $1.7 million, was $358.8 million and the carrying value of the revolver facility was $15.5 million. We estimate its fair value to be approximately $366.8 million, considering executed trades occurring around December 31, 2011. The carrying value of the 15.00%/15.00% Notes, net of discount of $1.1 million, was $128.9 million as of December 31, 2011. We estimate their fair value to be approximately $113.4 million, considering executed trades occurring around December 31, 2011. The fair value of the 10.25% Notes, the Senior Secured Credit Facilities, and the 15.00%/15.00% Notes 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. We are contractually obligated to repay our borrowings in full and we do not believe the creditors under our borrowing arrangements are willing to settle these instruments with us 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. Historically, these instruments have consisted solely of interest rate swaps. Under the interest rate swaps, the Company historically received variable interest rate payments and made fixed interest rate payments, thereby effectively creating fixed-rate debt. The Company enters into derivative instruments solely for cash flow hedging purposes and does not speculate using derivative instruments.

The Company accounts for its derivative financial instruments in accordance with ASC 815 “Derivatives and Hedging.” Under ASC 815, we recognized all derivatives as either other assets or other liabilities, measured at fair value. As of December 31, 2011, the Company was not a party to any derivative financial instruments.

Under iPayment’s previously existing senior secured credit facilities, which were refinanced as of May 6, 2011, 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, were identical to those of the associated debt

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instruments and therefore the hedging relationship resulted in no material ineffectiveness. Accordingly, such derivative instruments were classified as cash flow hedges, and any changes in the fair value of the derivative instruments were previously included in accumulated other comprehensive income (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 period from May 24 through December 31, 2011, advertising costs were $0.1 million. For the period from January 1 through May 23, 2011, advertising costs were $0.1 million. For the years ended December 31, 2010 and 2009, advertising costs were $0.1 million. Advertising costs are included in selling, general and administrative expenses.

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. Although the sale of our equity in CPC does not require pro forma disclosure within our financial statements, within Note 15 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, 2011 and 2010 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

iPayment and Holdings have 100 and 4,875,000 shares of common stock, respectively, issued and outstanding at December 31, 2011. The Company has elected not to present earnings per share data as management believes such presentation would not be meaningful. There is no established public trading market for our common stock or for the Warrants.

4. Equity Redemption, Refinancing and Change in Control

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 $300.0 million, plus punitive damages in the amount of $50.0 million, against Gregory Daily, iPayment’s former Chairman and Chief Executive Officer, in connection with litigation over Mr. Daily’s beneficial ownership in us. This lawsuit was brought against Mr. Daily individually and not in his previous capacities as the Chairman and Chief Executive Officer of iPayment. Neither iPayment, nor any other shareholders, officers, employees or directors were a party to this action. 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 United States Bankruptcy Court for the Middle District of Tennessee ordered the appointment of a trustee (the “Daily Bankruptcy Trustee”) to administer the estate of Mr. Daily.

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On April 12, 2011, iPayment Investors and iPayment GP entered into a redemption agreement (the “Redemption Agreement”) with (i) Mr. Daily, (ii) the Daily Bankruptcy Trustee and (iii) the trusts for the benefit of, and other entities controlled by, members of Mr. Daily’s family that held equity interests in iPayment Investors (together with Mr. Daily and the Daily Bankruptcy Trustee, on behalf of the Daily bankruptcy estate, the “Daily Parties”). Pursuant to the Redemption Agreement, iPayment Investors and iPayment GP agreed to redeem from the Daily Parties, and the Daily Parties agreed to transfer and surrender to iPayment Investors and iPayment GP, as applicable, all of the equity interests of the Daily Parties in iPayment Investors and iPayment GP, representing approximately 65.8% of the outstanding equity of iPayment Investors, for an aggregate price of $118.5 million. The interests redeemed pursuant to the Redemption Agreement constituted all of the direct and indirect equity interests of the Daily Parties in the Company.

On May 6, 2011, iPayment completed the offering of the 10.25% Notes and the closing of the Senior Secured Credit Facilities. Also on May 6, 2011, Holdings completed the offering of the Units. The majority of the proceeds from the offerings of the 10.25% Notes and the Units, together with borrowings under the Senior Secured Credit Facilities, were used to (i) permanently repay all of the outstanding indebtedness under iPayment’s then existing senior secured credit facilities; (ii) redeem and satisfy and discharge all of iPayment’s then existing senior subordinated notes; (iii) redeem and satisfy and discharge all of iPayment Investors’ then existing PIK toggle notes and (iv) pay fees and expenses in connection with the offerings. All of the remainder of such proceeds and borrowings were used to consummate the Equity Redemption on May 23, 2011, including payment of the transaction fee discussed in Note 11 and other related fees and expenses.

Upon the closing of the Equity Redemption, Mr. Daily resigned as a director and officer, as applicable, of iPayment GP, iPayment Investors and each of iPayment Investors’ subsidiaries, including his former positions as iPayment’s Chairman and Chief Executive Officer. In connection with Mr. Daily’s resignation, Carl Grimstad became the new Chairman and Chief Executive Officer of iPayment and Mark Monaco, iPayment’s Chief Financial Officer, became a member of iPayment’s and Holdings’ boards of directors. The Redemption Agreement includes covenants on the part of Mr. Daily not to compete with iPayment and its affiliates for one year, and not to solicit employees, independent sales agents and independent sales organizations and merchants of iPayment and its affiliates for three years, in each case from May 23, 2011, the closing date of the Equity Redemption.

The description set forth above is intended to be a summary only, is not complete and is qualified in its entirety by reference to the full and complete terms contained in the Redemption Agreement, a copy of which is included as Exhibit 99.1 to iPayment’s Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on April 13, 2011, which is incorporated herein by reference.

Change of Control

In accordance with ASC 805, “Business Combinations” the Company determined that a change of control occurred as a result of the Equity Redemption requiring assets and liabilities to be recorded at fair value. The following table presents the restated fair values of assets acquired and liabilities assumed and is based on information that was available to us as of the closing date of the Equity Redemption, subject to additional adjustments that we recorded during the “measurement period” (not to exceed one year as defined by ASC 805) in 2011, with corresponding increases or decreases to goodwill:

	iPAYMENT, INC. May 23, 2011 (Restated)			iPAYMENT HOLDINGS, INC. May 23, 2011 (Restated)
	Successor			Successor
Assets:
Cash and restricted cash	$	17,539		$	17,539
Accounts receivable		27,653			27,653
Prepaid expenses & other current assets		1,590			1,590
Property and equipment		4,412			4,412
Merchant portfolios & other intangible assets		273,655			273,655
Other assets		23,729			27,056
Goodwill		669,562			670,362
Liabilities:
Accounts payable and accrued liabilities & other		(39,081	)		(39,870	)
Deferred tax liabilities, net		(32,660	)		(32,660	)
Long term debt		(780,635	)		(904,469	)
Adjusted Purchase Price Allocation	$	165,764		$	45,268

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As part of the purchase accounting for the Equity Redemption for iPayment and its consolidated subsidiaries, approximately $273.7 million was assigned to merchant portfolios and other intangible assets and $669.6 million was assigned to goodwill. Of the amount assigned to merchant portfolios and other intangible assets, $205.8 million related to merchant portfolios, $65.5 million related to a trade name for iPayment and $2.4 million was primarily attributable to software development and other intangible assets. The aforementioned amounts resulted in increases over the historical basis prior to the Equity Redemption, of $132.6 million and $141.4 million in merchant portfolios and other intangible assets and goodwill, respectively. In addition, $32.7 million was assigned to deferred tax liabilities on the cumulative step-up of assets and liabilities that were adjusted to fair value using combined federal and state tax rates.

As part of the purchase accounting for the Equity Redemption for Holdings and its consolidated subsidiaries, approximately $273.7 million was assigned to merchant portfolios and other intangible assets and $670.4 million was assigned to goodwill. Of the amount assigned to merchant portfolios and other intangible assets, $205.8 million related to merchant portfolios, $65.5 million related to a trade name for iPayment and $2.4 million was primarily attributable to software development and other intangible assets. The aforementioned amounts resulted in increases over the historical basis prior to the Equity Redemption, of $132.6 million and $142.2 million in merchant portfolios and other intangible assets and goodwill, respectively. In addition, $32.7 million was assigned to deferred tax liabilities on the cumulative step-up of assets and liabilities that were adjusted to fair value using combined federal and state tax rates.

As previously discussed, iPayment Investors and iPayment GP redeemed all of the equity interests of the Daily Parties in iPayment Investors and iPayment GP, representing approximately 65.8% of the outstanding equity of iPayment Investors, for an aggregate price of $118.5 million, implying an unadjusted purchase price for 100.0% of the Company of approximately $180.1 million. This amount is adjusted by (i) total net dividends of $134.8 million primarily to Holdings that were used to redeem and satisfy and discharge all of iPayment Investors’ then existing PIK toggle notes and to pay fees and expenses in connection with the offerings of the 10.25% Notes and the Units, and (ii) the net equity of $122.5 million recorded at Holdings and reduction of (iii) $1.2 million of equity related to the Warrants and $0.8 million of issuance costs which are eliminated in consolidation at Holdings and its consolidated subsidiaries. These adjustments resulted in an adjusted purchase price of $165.8 million for iPayment and its consolidated subsidiaries.

For Holdings and its consolidated subsidiaries, the unadjusted purchase price previously discussed of $180.1 million is adjusted by (i) net dividends of $257.3 million primarily to iPayment Investors that was used by iPayment Investors to redeem and satisfy and discharge all of its then existing PIK toggle notes and to consummate the Equity Redemption, offset by (ii) $122.5 million of net equity from Holdings. These adjustments resulted in an adjusted purchase price of $45.3 million.

If the Equity Redemption had occurred on January 1, 2010, we would have recorded amortization expense on our merchant processing portfolios of approximately $54.8 million for the year ended December 31, 2010. If the Equity Redemption had occurred on January 1, 2011, we would have recorded amortization expense on our merchant processing portfolios of approximately $56.1 million for the year ended December 31, 2011. The Company did not identify any other changes that would have been made to the Consolidated Statements of Operations in the aforementioned periods as a result of the Equity Redemption.

We incurred $18.7 million related to the Refinancing and the Equity Redemption, including $6.5 million of expenses attributable to the write off of the unamortized balance of debt issuance costs and discount for the then existing senior secured credit facilities and senior subordinated notes, $4.7 million for a premium paid for early redemption of iPayment’s senior subordinated notes and $7.5 million of strategic advisory fees discussed in “Certain Relationships and Related Transactions, and Director Independence.”

5. 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 period from May 24 through December 31, 2011, amortization expense related to our merchant processing portfolios and other intangible assets was $41.7 million. For the period from January 1 through May 23, 2011, amortization expense related to our merchant processing portfolios and other intangible assets was $15.4 million. For the years ended December 31, 2010 and 2009, amortization expense related to our merchant processing portfolios and other intangible assets was $38.8 million and $43.4 million, respectively.

Payments for Prepaid Residual Expenses

During 2011, we made payments totaling $1.6 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.

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Other Acquisitions

In November 2009, we entered into a purchase and sale agreement with the shareholders of Central Payment Co., LLC (“CPC”), whereby we acquired a portfolio of merchant accounts 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 portfolio of merchant accounts from Flagship. Consideration at closing was $20 million in cash, which was funded from our cash on hand and from borrowings under our then existing revolving facility. The effect of the portfolio acquisition was included in our consolidated statements of operations 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. Consideration at closing was $5 million in cash which was funded from borrowings under our then existing revolving facility. The effect of the portfolio acquisition was included in our consolidated financial statements beginning December 1, 2010.

In June 2011, we entered into a purchase and sale agreement with a new ISG, whereby we acquired a portfolio of merchant accounts. Consideration at closing was $3.6 million in cash, which was funded at closing from borrowings under our revolving facility. The effect of the portfolio acquisition was included in our consolidated financial statements beginning June 1, 2011.

In August 2011, we entered into a purchase and sale agreement with an existing ISG, whereby we acquired a portfolio of merchant accounts. Consideration at closing was $2.5 million in cash, which was funded at closing from borrowings under our revolving facility. The effect of the portfolio acquisition was included in our consolidated financial statements beginning August 1, 2011.

In August 2011, we entered into a purchase and sale agreement with an existing ISG, whereby we acquired a portfolio of merchant accounts. Consideration at closing was $11.0 million in cash, which was funded at closing from borrowings under our revolving facility. The effect of the portfolio acquisition was included in our consolidated financial statements beginning August 1, 2011.

In September 2011, we entered into a purchase and sale agreement with an existing ISG, whereby we acquired a portfolio of merchant accounts. Consideration at closing was $7.2 million in cash, which was funded at closing from borrowings under our revolving facility. The effect of the portfolio acquisition was included in our consolidated financial statements beginning July 1, 2011.

6. Property and Equipment

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. Our restated property and equipment balances are comprised of the following:

	December 31,
(Dollars in thousands)	2011 (Restated)			2010 (Restated)			2009 (Restated)
Property and Equipment, net:
Machinery and equipment	$	3,533		$	4,636		$	3,663
Furniture and fixtures		729			1,068			1,337
Leasehold improvements		483			601			457
Computer software and equipment		1,144			2,902			3,518
		5,889			9,207			8,975
Less: accumulated depreciation		(359	)		(5,040	)		(4,903	)
	$	5,530		$	4,167		$	4,072

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7. Commitments and Contingencies

Leases

Our facilities include locations in New York, New York; Westlake Village, California; and Minden, Nevada. Our future minimum lease commitments under noncancelable leases are as follows at December 31, 2011 (in thousands):

Year ended December 31,	Amount
2012	$	1,599
2013		1,797
2014		1,590
2015		1,624
2016		1,662
Thereafter		6,139
Total	$	14,411

The Company has amended the original lease executed in July 2009 to increase leasing space by 12,300 square feet in Westlake Village, California. 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 $0.3 million.

The Company has entered into a new lease through November 2021 for 3,800 square feet in New York, New York that commenced in December 2011. In January 2012, the Nashville headquarters moved from its current location in Nashville, Tennessee to the new location in New York, New York. Annual commitments under this lease will approximate $0.5 million.

For the period from May 24 through December 31, 2011, total rent expense was $1.1 million. For the period from January 1 through May 23, 2011, total rent expense was $0.7 million. Total rent expense for the years ended December 31, 2010 and 2009 was $2.0 million, and $2.3 million, respectively.

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 merchant’s processing activity. As of December 31, 2011, these reserve cash deposits totaled approximately $33.9 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 statements of operations.

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 merchant’s 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 merchant’s reserve account. If we or our sponsoring banks are unable to collect the chargeback from the merchant’s account, or, if the merchant refuses or is financially unable due to bankruptcy or other reasons, to reimburse the merchant’s bank for the chargeback, we bear the loss for the amount of the refund paid to the cardholder’s bank. At December 31, 2011, 2010, and 2009, our reserve for losses on merchant accounts included in accrued liabilities and other totaled $1.2 million, $1.4 million, and $1.5 million, respectively.

Legal

We are party to certain legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the ultimate outcome of these 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 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 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 management’s attention. All litigation settlements are recorded within “other expense” on our consolidated statements of operations.

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8. Long-Term Debt

Our long-term debt is comprised of the following:

	iPAYMENT, INC.								iPAYMENT HOLDINGS, INC.
	As of December 31,								As of December 31,
(Dollars in thousands)	2011			2010			2009		2011			2010			2009
	Successor			Predecessor			Predecessor		Successor			Predecessor			Predecessor
Predecessor
Senior secured credit facilities:
Term facility	$	—		$	420,638		$	447,638	$	—		$	420,638		$	447,638
Revolving facility		—			11,000			10,900		—			11,000			10,900
Senior subordinated notes		—			194,500			192,981		—			194,500			192,981
Discount on Senior subordinated notes		—			(1,171	)		—		—			(1,171	)		—
Successor
Senior Secured Credit Facilities:
Term facility		360,500			—			—		360,500			—			—
Revolving facility		15,500			—			—		15,500			—			—
Discount on Senior Secured Credit Facilities		(1,716	)		—			—		(1,716	)		—			—
10.25% Notes		400,000			—			—		400,000			—			—
15.00%/15.00% Notes		—			—			—		129,922			—			—
Discount on 15.00%/15.00% Notes, net of amortization of $101		—			—			—		(1,065	)		—			—
		774,284			624,967			651,519		903,141			624,967			651,519
Less: Current portion of long-term debt		—			(5,823	)		—		—			(5,823	)		—
Total long-term debt	$	774,284		$	619,144		$	651,519	$	903,141		$	619,144		$	651,519

On May 6, 2011, iPayment completed an offering of $400.0 million in aggregate principal amount of 10.25% Senior Notes due 2018 and Holdings completed an offering 125,000 Units, consisting of $125.0 million in aggregate principal amount of 15.00%/15.00% Senior Notes due 2018 and Warrants to purchase 125,000 shares of Holdings’ common stock. iPayment also completed the closing of its $450.0 million Senior Secured Credit Facilities. The majority of the proceeds from the offerings of the 10.25% Notes and the Units, together with borrowings under the Senior Secured Credit Facilities, were used to (i) permanently repay all of the outstanding indebtedness under iPayment’s then existing senior secured credit facilities; (ii) redeem and satisfy and discharge all of iPayment’s then existing senior subordinated notes; (iii) redeem and satisfy and discharge all of iPayment Investors’ then existing PIK toggle notes and (iv) pay fees and expenses in connection with the offerings. All of the remainder of such proceeds and borrowings were used to consummate the Equity Redemption on May 23, 2011, including payment of the transaction fees discussed in Note 11 and other related fee and expenses.

The shares of iPayment’s common stock held by Holdings have been pledged by Holdings to secure the obligations of iPayment under the Senior Secured Credit Facilities.

10.25% Notes

The 10.25% Notes were issued pursuant to an indenture, dated as of May 6, 2011 (the “10.25% Notes Indenture”), among the Company, each of the guarantors identified therein and Wilmington Trust, National Association (as successor by merger to Wilmington Trust FSB), as trustee (the “Trustee”). iPayment will pay interest on the 10.25% Notes in cash on November 15 and May 15 of each year at a rate of 10.25% per annum. Interest on the 10.25% Notes will accrue from and including the issue date of the 10.25% Notes, and the first interest payment date was November 15, 2011. The 10.25% Notes will mature on May 15, 2018. The 10.25% Notes Indenture contains covenants that, among other things, restrict iPayment and its restricted subsidiaries’ ability to pay dividends, redeem stock or make other distributions or restricted payments, make certain investments, incur or guarantee additional indebtedness, create liens, agree to dividend and payment restrictions affecting restricted subsidiaries, consummate mergers, consolidations or other business combinations, designate subsidiaries as unrestricted, change its or their line of business, or enter into certain transactions with affiliates. The covenants in the 10.25% Notes Indenture generally permit iPayment to distribute funds to Holdings, to make interest payments on the 15.00%/15.00% Notes to the extent required to be paid in cash by the terms of the indenture governing such notes and for certain other operating expenses of Holdings.

The 10.25% Notes Indenture also provides for customary events of default including non-payment of principal, interest or premium, failure to comply with covenants, and certain bankruptcy or insolvency events.

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Senior Secured Credit Facilities

iPayment also entered into a Credit Agreement, dated May 6, 2011 (the “Credit Agreement”), with Holdings, the subsidiaries of iPayment identified therein as guarantors, JPMorgan Chase Bank, N.A. and the other lenders party thereto. The Senior Secured Credit Facilities consist of (i) a six-year, $375.0 million term facility and (ii) a five-year, $75.0 million revolving facility, which includes a swing line loan facility and letter of credit facility and is available from time to time until the fifth anniversary of the closing date of the Senior Secured Credit Facilities (or in the case of the letter of credit facility, five business days prior to the fifth anniversary). The terms of the Senior Secured Credit Facilities give iPayment the ability, subject to certain conditions, to request an increase in the amount of the revolving facility in an aggregate amount of up to $25.0 million.

The interest rates under the Senior Secured Credit Facilities (other than in respect to swing line loans, which will accrue interest at the base rate described below) are calculated, at iPayment’s option, at either the Eurodollar rate (which is the higher of BBA LIBOR, and in respect of the term facility, 1.50%) or the base rate (which is the highest of JPMorgan Chase Bank, N.A.’s prime rate, the Federal Funds effective rate plus 0.50%, the one-month Eurodollar rate plus 1.00%, and in respect of the term facility, 2.50%) plus, in each case, the applicable margin which differs for the term facility and the revolving facility (and, which in the case of the revolving facility is subject to adjustment based on a pricing grid set forth in the Credit Agreement). Overdue principal, interest, fees and other amounts bear interest at a rate that is 2.00% above the rate then borne by such borrowing or the base rate in respect of the term facility, as applicable. iPayment also pays a quarterly commitment fee equal to 0.625% on the unused portion of the revolving facility which can decline to 0.375% of such unused portion based upon our consolidated leverage ratio as determined in accordance with the related pricing grid set forth in the Credit Agreement.

At December 31, 2011, iPayment had $358.8 million of term loans outstanding, net of discount of $1.7 million at a weighted average interest rate of 5.75% and $15.5 million of borrowings under its revolving facility at a weighted average interest rate of 4.53%.

The Credit Agreement contains certain customary covenants that, subject to certain exceptions, restrict iPayment and its subsidiaries’ ability to, among other things (i) declare dividends or redeem or repurchase equity interests by iPayment or its subsidiaries; (ii) prepay, redeem or purchase certain debt; (iii) incur liens and engage in sale-leaseback transactions; (iv) make loans and investments; (v) incur additional indebtedness; (vi) amend or modify specified debt and other material agreements; (vii) engage in mergers, acquisitions and asset sales; (viii) change accounting policies; (ix) become a general partner; (x) enter into speculative transactions; (xi) transact with affiliates; and (xii) engage in businesses that are not related to iPayment’s existing business. In addition, under the Credit Agreement, iPayment will be required to comply (subject to a right to cure in certain circumstances) with specified financial ratios and tests, including a minimum consolidated interest coverage ratio and a maximum senior secured leverage ratio.

In addition, the Credit Agreement contains certain customary affirmative covenants, including requirements for financials reports and other notices from iPayment.

Events of default, which are subject to grace periods and exceptions, as set forth in the Credit Agreement include, among others: (i) iPayment’s failure to pay principal or interest or any other amount when due under the Credit Agreement; (ii) any representation or warranty proving to have been materially incorrect; (iii) covenant defaults; (iv) judgment defaults; (v) customary ERISA defaults; (vi) invalidity of loan documents or impairment of collateral; (vii) events of bankruptcy; (viii) a change of control; (ix) cross-default to material debt; and (x) cancellation or termination of a material contract, in certain circumstances.

15.00%/15.00% Notes

The 15.00%/15.00% Notes were issued pursuant to an indenture, dated as of May 6, 2011 (the “15.00%/15.00% Notes Indenture”), between Holdings and the Trustee. Interest on the 15.00%/15.00% Notes will accrue from and including the issue date of the 15.00%/15.00% Notes, and the first interest payment date was November 15, 2011. The 15.00%/15.00% Notes will mature on November 15, 2018. For any interest period through and including May 15, 2015, Holdings may elect to pay interest on the 15.00%/15.00% Notes (i) entirely in cash (“cash interest”) or (ii) pay interest on 50% of the outstanding principal amount of the 15.00%/15.00% Notes in cash interest and on 50% of the outstanding principal amount of the 15.00%/ 15.00% Notes by increasing the principal amount of the outstanding 15.00%/15.00% Notes or by issuing additional 15.00%/15.00% Notes (“PIK interest”). Notwithstanding the foregoing, Holdings will pay cash interest on the 15.00%/15.00% Notes to the extent that iPayment would, on the date notice of such election is required to be made, be permitted pursuant to its debt agreements to pay a dividend or distribution to Holdings in an amount sufficient to pay such cash interest on the relevant interest payment date. After May 15, 2015, Holdings will pay cash interest on the 15.00%/15.00% Notes, subject to certain rights to pay partial PIK interest for up to two additional interest periods.

Cash interest and PIK interest each accrue at a rate of 15.00% per annum. If Holdings’ leverage ratio exceeds 7.25 to 1.00 as of the most recent quarter end prior to an interest payment date, then for the interest period ending on such date, the interest rate will be retroactively increased by 2.00% in the form of PIK interest. The 15.00%/15.00% Notes will bear interest on the increased principal amount thereof from and after the applicable interest payment date on which a payment of PIK interest is made. Holdings must elect the form of interest payment with respect to each interest period not later than the beginning of each interest period. In the absence of such an election, Holdings will pay interest according to the election for the previous interest period. Interest for the first interest period will be paid 50% as cash interest and 50% as PIK interest.

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The 15.00%/15.00% Notes Indenture contains covenants that, among other things, restrict Holdings and its restricted subsidiaries’ ability to pay dividends, redeem stock or make other distributions or restricted payments, make certain investments, incur or guarantee additional indebtedness, create liens, agree to dividend and payment restrictions affecting restricted subsidiaries, consummate mergers, consolidations or other business combinations, designate subsidiaries as unrestricted, change its or their line of business, or enter into certain transactions with affiliates. The 15.00%/15.00% Notes Indenture also provides for customary events of default including non-payment of principal, interest or premium, failure to comply with covenants, and certain bankruptcy or insolvency events.

The 125,000 Units issued by Holdings on May 6, 2011, consists of $125.0 million in aggregate principal amount of 15.00%/15.00% Notes and Warrants to purchase 125,000 shares of common stock at $0.01 per share, subject to adjustment upon the occurrence of certain events described in the warrant agreement entered into by Holdings and Wilmington Trust, National Association (as successor by merger to Wilmington Trust FSB) (the “Warrant Agreement”). The gross proceeds from the issuance of the Units were allocated between the 15.00%/15.00% Notes and the Warrants based on the relative fair value of the items. The fair value of the Warrants was computed using the following assumptions:

	As of May 23, 2011
Common stock at fair market value	$	9.43
Exercise price	$	0.01
Term		7.5 years
Volatility		42.68	%
Risk-free interest rate		2.54	%
Dividend yield		—

The total proceeds from the issuance of the Units was $121.7 million, net of issuance costs of $3.3 million. The valuation resulted in $1.2 million of the gross proceeds being allocated to the Warrants and accordingly, was recorded as a debt discount as of May 23, 2011.

In accordance with the terms of the Warrant Agreement, the 15.00%/15.00% Notes and the Warrants separated on November 2, 2011, which is 180 days after the issue date of the Units. The Warrants are exercisable as of the opening of business on such date until 5:00 p.m., New York City time, on November 15, 2018. Each Warrant not exercised during such period will become void and all rights thereunder and all rights in respect thereof under the Warrant Agreement will cease as of such time. No warrants were exercised as of December 31, 2011.

The descriptions set forth in this Note are intended to be summaries only, are not complete and are qualified in their entirety by reference to the full and complete terms contained in the 10.25% Notes Indenture (including the form of the notes attached thereto), the 15.00%/15.00% Notes Indenture (including the form of the notes attached thereto), the Credit Agreement and the Warrant Agreement. Copies of the 10.25% Notes Indenture and the Credit Agreement are included as Exhibits 4.1 and 10.1, respectively, to iPayment’s Report on Form 8-K filed with the SEC on May 12, 2011, and copies of the 15.00%/15.00% Notes Indenture and the Warrant Agreement are included as Exhibits 4.3 and 10.29, respectively, to the Company’s Registration Statement on Form S-4 filed with the SEC on October 11, 2011.

iPayment and its consolidated subsidiaries had net capitalized debt issuance costs related to the Senior Secured Credit Facilities and 10.25% Notes of $10.4 million and $9.9 million, respectively, as of December 31, 2011. Holdings and its consolidated subsidiaries had net capitalized debt issuance costs related to the 15.00%/15.00% Notes of $3.2 million and a debt discount related to the Warrants of $1.1 million as of December 31, 2011.

These costs are being amortized to interest expense with amounts computed using an effective interest method over the life of the related debt instruments.

Amortization expense of iPayment and its consolidated subsidiaries related to the debt issuance costs for the Senior Secured Credit Facilities and the 10.25% Notes were $1.0 million and $0.6 million, respectively, for the period from May 24 through December 31, 2011. Amortization expense of Holdings and its consolidated subsidiaries related to the debt issuance costs for the 15.00%/15.00% Notes was less than $0.2 million for the period from May 24 through December 31, 2011. Amortization expense of iPayment and its consolidated subsidiaries related to iPayment’s previously existing senior secured credit facilities and senior subordinated notes were $0.4 million and $0.4 million, respectively, for the period from January 1 through May 23, 2011. Amortization expense of Holdings and its consolidated subsidiaries related to the 15.00%/15.00% Notes was less than $0.1 million for the period from May 6 through May 23, 2011. The remaining unamortized balance of debt issuance costs related to iPayment’s previously existing senior secured credit facilities and senior subordinated notes, as well as the remaining unamortized net discount on iPayment’s senior subordinated notes in the amount of $2.2 million, $3.3 million and $1.0 million, respectively, were written off to other expense as a result of the Refinancing.

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The maturities of long-term debt (before unamortized discount) for iPayment Holdings, Inc. and its consolidated subsidiaries as of December 31, 2011 are as follows (in thousands):

Year ending December 31,	Amount
2012	$	—
2013		—
2014		—
2015		2,375
2016		19,250
Thereafter		884,297
Total	$	905,922

The determination by the Boards of Directors of the Company and Holdings, at meetings held on November 1, 2012, that the Affected Financial Statements should no longer be relied upon resulted in a breach of certain representations, warranties and covenants set forth in the Senior Secured Credit Facilities, including but not limited to certain representations and warranties that the Affected Financial Statements (i) were prepared in accordance with GAAP consistently applied; and (ii) fairly presented the financial condition of the Company and its subsidiaries as of the date thereof and their results of operations for the periods covered thereby in accordance with GAAP. Further, as a result of the decision to restate the Affected Financial Statements, we were unable to comply with the covenant set forth in the Senior Secured Credit Facilities that we deliver our 3^rd Quarter 2012 financial statements by no later than November 14, 2012. Finally, as a result of the foregoing breaches and defaults, we were unable to satisfy the conditions precedent for borrowing under the Senior Secured Credit Facilities’ revolving credit facility in order to borrow the funds necessary to make the scheduled interest payments due on November 15, 2012 under the indentures related to the Company’s 10.25% Notes and Holdings’ 15.00%/15.00% Notes.

On November 14, 2012, we entered into a waiver, consent and amendment (the “Waiver”) with a majority of the lenders under the Senior Secured Credit Facilities. Among other things, the Waiver waives (a) defaults arising from the restatement of our financial statements (i) for the fiscal years ended December 31, 2008, 2009, 2010 and 2011 included in the Company’s Annual Reports on Form 10-K for the years then ended, (ii) for the interim periods within such fiscal years included in the Company’s Quarterly Reports on Form 10-Q, and (iii) for the quarters ended March 31, 2012 and June 30, 2012 included in the Company’s Quarterly Reports on Form 10-Q and (b) until February 1, 2013, the Company’s failure to timely provide to the Administrative Agent its 3^rd Quarter 2012 financial statements. Finally, under the terms of the Waiver, the revolving lenders under the Senior Secured Credit Facilities agreed that, absent any default thereunder that may occur after the date of the Waiver, each such revolving lender would continue to honor requests for borrowing under the Senior Secured Credit Facilities’ revolving credit facility, provided that the aggregate principal amount of all borrowings thereunder do not exceed $58 million, a reduction from $95 million, which represents the total revolving commitments under the Senior Secured Credit Facility. Such reduction in revolving commitments shall no longer be in effect upon the Company’s delivery, on or prior to February 1, 2013, of the restated financial statements and the Company’s unaudited financial statements (and related documentation) for the quarterly period ended September 30, 2012. Following receipt of the Waiver, the Company borrowed amounts under the Senior Secured Credit Facilities’ revolving credit facility so as to make the scheduled interest payments due on November 15, 2012 under the indentures related to the Company’s 10.25% Notes and Holdings’ 15.00%/15.00% Notes.

9. Income Taxes

We account for income taxes pursuant to the provisions of ASC 740 “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. As of December 31, 2011, we have income taxes payable of $6.7 million and $3.8 million for iPayment and its consolidated subsidiaries and Holdings and its consolidated subsidiaries, respectively.

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The provision for income taxes and liabilities for the years ended December 31, 2011, 2010, and 2009, was comprised of the following:

iPAYMENT, INC.

PROVISION FOR INCOME TAXES AND LIABILITIES

	Period From
	May 24			January 1
	through			through
	December 31			May 23,			Years Ended December 31,
	2011			2011			2010			2009
(Dollars in thousands)	(Restated)			(Restated)			(Restated)			(Restated)
	Successor			Predecessor			Predecessor			Predecessor
Current:
Federal	$	5,764		$	475		$	14,380		$	11,755
State		669			44			1,943			2,437
Deferred:
Federal		(8,222	)		(99	)		(380	)		(5,190	)
State		(571	)		(9	)		(47	)		(209	)
Change in valuation allowance		362			—			(238	)		80
Changes in uncertain tax positions		(783	)		—			1,269			(370	)
Total income tax provision (benefit)	$	(2,781	)	$	411		$	16,927		$	8,503

iPAYMENT HOLDINGS, INC.

PROVISION FOR INCOME TAXES AND LIABILITIES

	Period From
	May 24			January 1
	through			through
	December 31			May 23,			Years Ended December 31,
	2011			2011			2010			2009
(Dollars in thousands)	(Restated)			(Restated)			(Restated)			(Restated)
	Successor			Predecessor			Predecessor			Predecessor
Current:
Federal	$	3,288		$	283		$	14,380		$	11,755
State		524			27			1,943			2,437
Deferred:
Federal		(8,418	)		(99	)		(380	)		(5,190	)
State		(583	)		(9	)		(47	)		(209	)
Change in valuation allowance		362			—			(238	)		80
Changes in uncertain tax positions		(783	)		—			1,269			(370	)
Total income tax provision (benefit)	$	(5,610	)	$	202		$	16,927		$	8,503

We have income tax benefits of $2.8 million and $5.6 million for iPayment and its consolidated subsidiaries and Holdings and its consolidated subsidiaries, respectively, for the period from May 24 through December 31, 2011. We have income tax benefits of $2.4 million and $5.4 million for iPayment and its consolidated subsidiaries and Holdings and its consolidated subsidiaries, respectively, for the year ended December 31, 2011, in each case, compared to income tax expense of $16.9 million and $8.5 million in 2010 and 2009, respectively.

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The differences between the federal statutory tax rate of 35.0% and effective tax rates are primarily due to state income tax provisions, and changes in uncertain positions, as follows:

iPAYMENT, INC.

EFFECTIVE TAX RATES

	Period From
	May 24			January 1
	through			through
	December 31,			May 23,			Years Ended December 31,
	2011			2011			2010			2009
	(Restated)			(Restated)			(Restated)			(Restated)
	Successor			Predecessor			Predecessor			Predecessor
Statutory Rate		35.0	%		35.0	%		35.0	%		35.0	%
Increase (decreases) in taxes resulting from the following:
State income taxes net of federal tax benefit		(7.1	)		(6.1	)		4.4			5.5
Adjustments to deferred taxes		(0.6	)		—			(2.2	)		(0.9	)
Permanent differences		(1.8	)		(112.8	)		0.2			(4.0	)
Changes in valuation allowance		(4.2	)		—			—			—
Changes in uncertain positions		9.1			—			3.1			(2.0	)
Other		1.4			—			1.8			2.3
Total		31.8	%		(83.9	)%		42.3	%		35.9	%

iPAYMENT HOLDINGS, INC.

EFFECTIVE TAX RATES

	Period From
	May 24			January 1
	through			through
	December 31			May 23,			Years Ended December 31,
	2011			2011			2010			2009
	(Restated)			(Restated)			(Restated)			(Restated)
	Successor			Predecessor			Predecessor			Predecessor
Statutory Rate		35.0	%		35.0	%		35.0	%		35.0	%
Increase (decreases) in taxes resulting from the following:
State income taxes net of federal tax benefit		(2.1	)		(1.2	)		4.4			5.5
Adjustments to deferred taxes		(0.3	)		—			(2.2	)		(0.9	)
Permanent differences		(7.8	)		(48.6	)		0.2			(4.0	)
Changes in valuation allowance		(1.8	)		—			—			—
Changes in uncertain positions		3.9			—			3.1			(2.0	)
Other		0.6			—			1.8			2.3
Total		27.5	%		(14.8	)%		42.3	%		35.9	%

Effective income tax rate decreased to 31.8% and 27.5% for iPayment and its consolidated subsidiaries and Holdings and its consolidated subsidiaries, respectively, for the period from May 24 through December 31, 2011. We have an effective income tax rate of 25.7% and 24.8% for iPayment and its consolidated subsidiaries and Holdings and its consolidated subsidiaries, respectively, for the year ended December 31, 2011, in each case, compared to an effective income tax rate of 42.3% in 2010.

iPayment and its consolidated subsidiaries’ effective income tax rate decreased to 25.7% for 2011, compared to 42.3% for 2010, as a result of permanent disallowance of certain Refinancing-related costs and changes in unrecognized tax benefits. Holdings and its consolidated subsidiaries’ effective income tax rate decreased to 24.8% for 2011, compared to 42.3% for 2010, as a result of the aforementioned items as well as the permanent disallowance of a portion of interest accrued on the 15.00%/15.00% Notes which are considered “Applicable High Yield Discount Obligations” for tax purposes.

Deferred income tax assets are included as a component of other assets in the accompanying consolidated balance sheets as of December 31, 2011 and 2010 and were comprised of the following:

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iPAYMENT, INC

DEFERRED INCOME TAX ASSETS AND LIABILITIES

	As of December 31,
	2011			2010			2009
(Dollars in thousands)	(Restated)			(Restated)			(Restated)
	Successor			Predecessor			Predecessor
Current deferred tax assets:
State taxes	$	33		$	—		$	—
Reserves		2,745			1,063			1,971
Gain on sale of noncontrolling interest		—			362			367
Accrued liabilities		617			—			—
Other		610			791			965
Valuation allowances		(1,032	)		(62	)		(140	)
Total current deferred tax assets		2,973			2,154			3,163
Current deferred tax liabilities:
Prepaid expenses		15			(38	)		(116	)
Other		—			—			(622	)
Total current deferred tax liabilities		15			(38	)		(738	)
Net current deferred tax asset	$	2,988		$	2,116		$	2,425
Long-term deferred tax assets:
Tax benefit of unrealized loss on fair value of derivatives	$	—		$	—		$	4,976
Net operating loss		1,403			2,069			2,103
Cancellation of debt income		—			549			704
Gain on sale of noncontrolling interest		—			258			889
Other(1)		698			15,935			7,500
Residual Buyout		296			—
Valuation allowances		(617	)		(527	)		(687	)
Total long-term deferred tax assets(2)		1,780			18,284			15,485
Long-term deferred tax liabilities:
Intangible assets, net of depreciation and amortization		(27,719	)		(3,651	)		(6,725	)
Goodwill		(1,187	)		(9,512	)
Other		(141	)		—
Total long-term deferred tax liabilities		(29,047	)		(13,163	)		(6,725	)
Net long-term deferred tax (liabilities) assets(3)	$	(27,267	)	$	5,121		$	8,760

(1) Other long-term deferred tax assets of Holdings and its consolidated subsidiaries as of December 31, 2011 is $0.9 million.

(2) Total long-term deferred tax assets of Holdings and its consolidated subsidiaries as of December 31, 2011 is $2.0 million.

(3) Net long-term deferred tax liabilities of Holdings and its consolidated subsidiaries as of December 31, 2011 is $27.1 million.

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, 2011, our liabilities for unrecognized tax benefits totaled $1.3 million, and are included in other long-term liabilities in our consolidated balance sheets. Interest and penalties related to income tax liabilities are included in income tax expense. We recognized less than $0.1 million of interest and penalties for both periods from May 24 through December 31, 2011 and January 1 through May 23, 2011. The balance of accrued interest and penalties recorded in the consolidated balance sheets at December 31, 2011 was $0.2 million.

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The following table presents a rollforward of our restated unrecognized tax benefits:

(Dollars in thousands)	iPayment, Inc.			iPayment Holdings, Inc.
	(Restated)			(Restated)
Balance at December 31, 2009	$	1,087		$	1,087
Reductions due to lapse of the applicable statute of limitations		(125	)		(125	)
Increase in prior year tax positions		1,009			1,009
Increase for tax positions taken during the current period		634			634
Balance at December 31, 2010				$	2,605
Reductions due to lapse of the applicable statute of limitations		(834	)		(834	)
Decrease in prior year tax positions		(451	)		(451	)
Increase for tax positions taken during the current period		4			4
Balance at December 31, 2011	$	1,324		$	1,324

As of December 31, 2011, the total amount of unrecognized tax benefits that would affect the tax rate, if recognized, would be $0.1 million.

We file federal income tax returns and various states. With limited exceptions, we are no longer subject to federal, state and local income tax audits by taxing authorities for the years prior to 2007.

At December 31, 2011, we had federal and state net operating loss carryforwards of approximately $3.5 million and $67.2 million, respectively. Our federal net operating loss carryforward begins to expire in 2021 and is subject to annual limitations under Section 382 of the Internal Revenue Code. Our various state net operating loss carryforwards begin to expire between 2016 through 2027, several of which are also subject to annual limitations. 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, 2011, we had $1.6 million of valuation allowances on deferred tax assets for iPayment and Holdings. The net deferred taxes recorded at December 31, 2011, represent amounts that are more likely than not to be utilized in the near term.

The Company may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to financial results. In the event the Company has an assessment from a taxing authority, any resulting interest and penalties are recognized as a component of income tax expense.

During the first quarter of 2012, we made tax payments totaling $2.7 million to cover federal and state taxes payable relating to 2011.

10. Comprehensive Income

Comprehensive income includes our net income plus the net-of-tax impact of fair value changes in our interest rate swap agreements, which expired on December 31, 2010. There was no swap agreement and no other comprehensive income for the year ended December 31, 2011. Other comprehensive income for years ended December 31, 2010 and 2009 was $7.5 million and $4.8 million, respectively. Changes in fair value, net of tax, on our swap agreements amounted to $7.5 million and $4.8 million for the years ended December 31, 2010 and 2009, respectively. The related deferred tax expense was $5.0 million and $3.2 million for the years ended December 31, 2010 and 2009, respectively.

11. Related Party Transactions

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 for minimum annual payments of $60,000 beginning November 2010 for three years.

In 2010, iPayment and the financial services firm Perella Weinberg Partners LP (“Perella Weinberg”) entered into an engagement letter providing for Perella Weinberg to act as our financial advisor in connection with a potential change of control or similar transaction involving the Company. In March 2010, Adaero Holdings, LLC (“Adaero”), an entity majority owned and controlled by Mark Monaco, entered into a consulting agreement with Perella Weinberg. Mr. Monaco became Chief Financial Officer of iPayment in October 2010 and a member of the boards of directors of iPayment and Holdings following the Refinancing. When the Equity Redemption was consummated, we paid to Perella Weinberg a transaction fee of approximately $7.5 million pursuant to such engagement letter and, following such payment, Perella Weinberg made a payment of $1.0 million to Adaero pursuant to the consulting agreement described above.

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12. Significant Concentration

Our customers consist of a diverse portfolio of small merchants whose businesses frequently are newly established. As of December 31, 2011, 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 1% of revenues during any of the 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.

The principal sponsoring bank through which we process the significant majority of our transactions is Wells Fargo.

13. Segment Information and Geographical Information

We consider our business activities to be in a single reporting segment. For years ended December 31, 2011, 2010, and 2009, we derive greater than 87%, 88%, and 89%, respectively, of our revenue and results of operations from processing revenues from card-based payments. Substantially all revenues are generated in the United States.

14. Employee Agreements and Employee Benefit Plans

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 participant’s salary. For the period from May 24 through December 31, 2011, employer contribution was $0.1 million. For the period from January 1 through May 23, 2011, employer contribution was $0.1 million. Employer contributions for the years ended December 31, 2011, 2010, and 2009 were $0.2 million, $0.2 million, and $0.2 million, respectively.

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15. Summarized Quarterly Financial Data

The following unaudited schedule indicates our restated quarterly results of operations for 2011, 2010 and 2009 (in thousands, except charge volume). We have also included restated 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 restated 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. The tables following this schedule detail the quarterly restatements of the consolidated balance sheets and statements of operations as discussed in Note 2 “Restatement of Consolidated Financial Statements.”

				April 1			May 24,
				through			through
	1st			May 23,			June 30,			2nd		3rd			4th
(Dollars in thousands, except noted otherwise)	Quarter			2011			2011			Quarter		Quarter			Quarter			Total
	(Restated and Unaudited)			(Restated and Unaudited)			(Restated and Unaudited)			(Restated and Unaudited)		(Restated and Unaudited)			(Restated and Unaudited)			(Restated and Audited)
	Predecessor			Predecessor			Successor			Successor		Successor			Successor
2011—iPAYMENT, INC.
Revenue	$	169,613		$	107,077		$	77,431			N/A	$	180,740		$	173,340		$	708,201
Interchange		90,728			57,051			42,262			N/A		100,396			83,708			374,145
Other cost of services, excluding depreciation and amortization		43,787			27,135			19,989			N/A		46,523			50,595			188,029
Selling, general, and administrative		4,290			2,446			1,718			N/A		3,784			5,048			17,286
Embezzlement costs		375			778			438			N/A		1,442			1,101			4,134
Income from operations		20,056			13,836			7,435			N/A		10,508			13,481			65,316
Depreciation and amortization		10,377			5,831			5,589			N/A		18,087			19,407			59,291
Net income (loss) attributable to iPayment, Inc.		7,764			(8,665	)		266			N/A		(3,411	)		(2,814	)		(6,860	)
Charge Volume (in millions, unaudited)		5,385			3,383			2,425			N/A		5,872			5,596			22,661
2011—iPAYMENT HOLDINGS, INC.
Revenue	$	169,613		$	107,077		$	77,431			N/A	$	180,740		$	173,340		$	708,201
Interchange		90,728			57,051			42,262			N/A		100,396			83,708			374,145
Other cost of services, excluding depreciation and amortization		43,787			27,135			19,989			N/A		46,523			50,618			188,052
Selling, general, and administrative		4,290			2,446			1,718			N/A		3,784			5,063			17,301
Embezzlement costs		375			778			438			N/A		1,442			1,101			4,134
Income from operations		20,056			13,836			7,435			N/A		10,508			13,443			65,278
Depreciation and amortization		10,377			5,831			5,589			N/A		18,087			19,407			59,291
Net income (loss) attributable to iPayment Holdings, Inc.		7,764			(9,332	)		(1,325	)		N/A		(7,328	)		(6,169	)		(16,390	)
Charge Volume (in millions, unaudited)		5,385			3,383			2,425			N/A		5,872			5,596			22,661
2010—iPAYMENT, INC. and iPAYMENT HOLDINGS, INC.
Revenue	$	159,540			N/A			N/A		$	183,933	$	175,098		$	180,603		$	699,174
Interchange		90,997			N/A			N/A			98,544		97,200			93,836			380,577
Other cost of services, excluding depreciation and amortization		39,370			N/A			N/A			45,359		44,093			45,395			174,217
Selling, general, and administrative		3,079			N/A			N/A			3,303		3,766			3,676			13,824
Embezzlement costs		1,824			N/A			N/A			342		414			568			3,148
Income from operations		13,739			N/A			N/A			26,371		20,059			26,528			86,697
Depreciation and amortization		10,531			N/A			N/A			10,014		9,566			10,600			40,711
Net income attributable to iPayment, Inc. and iPayment Holdings, Inc.		1,099			N/A			N/A			8,199		5,213			8,539			23,050
Charge Volume (in millions, unaudited)		5,541			N/A			N/A			5,853		5,718			5,541			22,653
2009—iPAYMENT, INC. and iPAYMENT HOLDINGS, INC.
Revenue	$	170,053			N/A			N/A		$	190,745	$	182,716		$	174,414		$	717,928
Interchange		96,910			N/A			N/A			103,575		101,975			95,070			397,530
Other cost of services, excluding depreciation and amortization		43,489			N/A			N/A			48,639		45,478			44,812			182,418
Selling, general, and administrative		4,751			N/A			N/A			4,938		5,145			5,446			20,280
Embezzlement costs		216			N/A			N/A			162		306			267			951
Income from operations		12,844			N/A			N/A			21,389		19,182			18,032			71,447
Depreciation and amortization		11,843			N/A			N/A			12,042		10,630			10,787			45,302
Net income (loss) attributable to iPayment, Inc. and iPayment Holdings, Inc.		(149	)		N/A			N/A			4,156		3,478			4,138			11,623
Charge Volume (in millions, unaudited)		5,737			N/A			N/A			6,091		6,030			5,668			23,526
2009—PRO FORMA—iPAYMENT, INC. and iPAYMENT HOLDINGS, INC.
Revenue, unaudited	$	165,349			N/A			N/A		$	185,082	$	175,766		$	171,765		$	697,962
Interchange, unaudited		95,254			N/A			N/A			100,814		98,645			93,862			388,575
Other cost of services, unaudited		42,087			N/A			N/A			46,666		43,219			43,957			175,929
Selling, general, and administrative, unaudited		2,850			N/A			N/A			2,880		2,968			4,662			13,360
Embezzlement costs		216			N/A			N/A			162		306			267			951
Income from operations, unaudited		12,150			N/A			N/A			21,568		19,051			17,914			70,683
Depreciation and amortization, unaudited		12,792			N/A			N/A			12,992		11,577			11,103			48,464

90

Consolidated Balance Sheet (iPayment, Inc. and iPayment Holdings, Inc.) – As of September 30, 2011 (Unaudited)

	iPayment, Inc.									iPayment Holdings, Inc.
	September 30, 2011									September 30, 2011
(Dollars in thousands, except share data)	As Previously Reported			Adjustments			Restated			As Previously Reported			Adjustments			Restated
ASSETS
Current assets:
Cash and cash equivalents	$	773		$	—		$	773		$	773		$	—		$	773
Accounts receivable, net of allowance for doubtful accounts of $1,043		24,489			159			24,648			24,489			159			24,648
Income taxes receivable		1,823			—			1,823			3,262			—			3,262
Prepaid expenses and other current assets		1,929			(12	)		1,917			1,929			(12	)		1,917
Total current assets		29,014			147			29,161			30,453			147			30,600
Restricted cash		549			—			549			549			—			549
Property and equipment, net		6,319			(930	)		5,389			6,319			(930	)		5,389
Merchant portfolios and other intangible assets, net of accumulated amortization of $22,913 ($24,102 as previously reported)		274,013			(1,832	)		272,181			274,013			(1,832	)		272,181
Goodwill		683,560			1,162			684,722			684,268			1,162			685,430
Deferred tax assets		—			1,617			1,617			—			1,617			1,617
Other assets, net		25,883			—			25,883			28,994			—			28,994
Total assets	$	1,019,338		$	164		$	1,019,502		$	1,024,596		$	164		$	1,024,760
LIABILITIES and STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	2,467		$	(12	)	$	2,455		$	2,467		$	(12	)	$	2,455
Income taxes payable		—			211			211			—			211			211
Accrued interest		17,838			—			17,838			25,338			—			25,338
Accrued liabilities and other		15,569			(755	)		14,814			15,569			(755	)		14,814
Deferred tax liabilities		—			449			449			—			449			449
Total current liabilities		35,874			(107	)		35,767			43,374			(107	)		43,267
Deferred tax liabilities		44,862			230			45,092			44,862			230			45,092
Long-term debt		772,229			—			772,229			896,125			—			896,125
Other liabilities		2,520			(317	)		2,203			2,520			(317	)		2,203
Total liabilities		855,485			(194	)		855,291			986,881			(194	)		986,687
Commitments and contingencies (Note 7)
Equity
Common stock of iPayment, Inc., $0.01 par value; 1,000 shares authorized, 100 shares issued and outstanding at September 30, 2011		167,756			—			167,756			—			—			—
Common stock of iPayment Holdings, Inc., $0.01 par value; 8,000,000 shares authorized, 4,875,000 shares issued and outstanding at September 30, 2011		—			—			—			47,127			—			47,127
Accumulated deficit		(3,903	)		358			(3,545	)		(9,412	)		358			(9,054	)
Total iPayment, Inc. and iPayment Holdings, Inc. stockholder’s equity		163,853			358			164,211			37,715			358			38,073
Total liabilities and stockholder’s equity	$	1,019,338		$	164		$	1,019,502		$	1,024,596		$	164		$	1,024,760

91

Consolidated Balance Sheet (iPayment, Inc. and iPayment Holdings, Inc.) – As of June 30, 2011 (Unaudited)

	iPayment, Inc.							iPayment Holdings, Inc.
	June 30, 2011							June 30, 2011
(Dollars in thousands, except share data)	As Previously Reported		Adjustments			Restated		As Previously Reported			Adjustments			Restated
ASSETS
Current assets:
Cash and cash equivalents	$	1,084	$	—		$	1,084	$	1,084		$	—		$	1,084
Accounts receivable, net of allowance for doubtful accounts of $998		27,016		158			27,174		27,016			158			27,174
Income taxes receivable		—		—			—		298			(211	)		87
Prepaid expenses and other current assets		1,650		(46	)		1,604		1,650			(46	)		1,604
Total current assets		29,750		112			29,862		30,048			(99	)		29,949
Restricted cash		555		—			555		555			—			555
Property and equipment, net		5,492		(719	)		4,773		5,492			(719	)		4,773
Merchant portfolios and other intangible assets, net of accumulated amortization of $5,379 ($5,674 as previously reported)		248,252		(2,104	)		246,148		248,252			(2,104	)		246,148
Goodwill		694,736		1,162			695,898		695,536			1,162			696,698
Deferred tax assets		—		879			879		—			879			879
Other assets, net		24,287		—			24,287		27,590			—			27,590
Total assets	$	1,003,072	$	(670	)	$	1,002,402	$	1,007,473		$	(881	)	$	1,006,592
LIABILITIES and STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	3,728	$	(47	)	$	3,681	$	3,728		$	(47	)	$	3,681
Income taxes payable		291		211			502		—			—			—
Accrued interest		7,635		—			7,635		10,447			—			10,447
Accrued liabilities and other		15,779		(821	)		14,958		15,913			(821	)		15,092
Deferred tax liabilities		—		449			449		—			449			449
Current portion of long-term debt		250		—			250		250			—			250
Total current liabilities		27,683		(208	)		27,475		30,338			(419	)		29,919
Deferred tax liabilities		35,437		(96	)		35,341		35,437			(96	)		35,341
Long-term debt		769,414		—			769,414		893,259			—			893,259
Other liabilities		2,663		(513	)		2,150		2,663			(513	)		2,150
Total liabilities		835,197		(817	)		834,380		961,697			(1,028	)		960,669
Commitments and contingencies (Note 7)
Equity
Common stock of iPayment, Inc., $0.01 par value; 1,000 shares authorized, 100 shares issued and outstanding at June 30, 2011		167,756		—			167,756		—			—			—
Common stock of iPayment Holdings, Inc., $0.01 par value; 8,000,000 shares authorized, 4,875,000 shares issued and outstanding at June 30, 2011		—		—			—		47,248			—			47,248
Retained earnings (accumulated deficit)		119		147			266		(1,472	)		147			(1,325	)
Total iPayment, Inc. and iPayment Holdings, Inc. stockholder’s equity		167,875		147			168,022		45,776			147			45,923
Total liabilities and stockholder’s equity	$	1,003,072	$	(670	)	$	1,002,402	$	1,007,473		$	(881	)	$	1,006,592

92

Consolidated Balance Sheet (iPayment, Inc. and iPayment Holdings, Inc.) – As of March 31, 2011 (Unaudited)

	iPayment, Inc. and iPayment Holdings, Inc.
	March 31, 2011
(Dollars in thousands, except share data)	As Previously Reported		Adjustments			Restated
ASSETS
Current assets:
Cash and cash equivalents	$	1	$	—		$	1
Accounts receivable, net of allowance for doubtful accounts of $795		28,418		158			28,576
Prepaid expenses and other current assets		1,454		(81	)		1,373
Deferred tax assets		2,074		42			2,116
Total current assets		31,947		119			32,066
Restricted cash		558		—			558
Property and equipment, net		4,938		(523	)		4,415
Merchant portfolios and other intangible assets, net of accumulated amortization of $187,169 ($187,516 as previously reported)		147,620		(1,437	)		146,183
Goodwill		527,978		1,082			529,060
Deferred tax assets		3,876		797			4,673
Other assets, net		10,160					10,160
Total assets	$	727,077	$	38		$	727,115
LIABILITIES and STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	2,483	$	(81	)	$	2,402
Income taxes payable		4,315		27			4,342
Accrued interest		7,194		—			7,194
Accrued liabilities and other		16,740		485			17,225
Total current liabilities		30,732		431			31,163
Long-term debt		613,481		—			613,481
Other liabilities		2,861		(120	)		2,741
Total liabilities		647,074		311			647,385
Commitments and contingencies (Note 7)
Equity
Common stock of iPayment, Inc., $0.01 par value; 1,000 shares authorized, 100 shares issued and outstanding at March 31, 2011		20,055		—			20,055
Retained earnings		59,948		(273	)		59,675
Total iPayment, Inc. and iPayment Holdings, Inc. stockholder’s equity		80,003		(273	)		79,730
Total liabilities and stockholder’s equity	$	727,077	$	38		$	727,115

93

Consolidated Statement of Operations (iPayment, Inc. and iPayment Holdings, Inc.) – Three Months Ended September 30, 2011 (Unaudited)

	iPayment, Inc.									iPayment Holdings, Inc.
	Three Months Ended September 30, 2011									Three Months Ended September 30, 2011
(Dollars in thousands)	As Previously Reported			Adjustments			Restated			As Previously Reported			Adjustments			Restated
Revenues	$	181,003		$	(263	)	$	180,740		$	181,003		$	(263	)	$	180,740
Operating expenses:
Interchange		100,396			—			100,396			100,396			—			100,396
Other costs of services		66,049			(1,439	)		64,610			66,049			(1,439	)		64,610
Selling, general and administrative		3,848			(64	)		3,784			3,848			(64	)		3,784
Embezzlement costs		—			1,442			1,442			—			1,442			1,442
Total operating expenses		170,293			(61	)		170,232			170,293			(61	)		170,232
Income from operations		10,710			(202	)		10,508			10,710			(202	)		10,508
Other expense:
Interest expense, net		16,503			—			16,503			21,311			—			21,311
Other expense, net		60			—			60			60			—			60
Loss before income taxes		(5,853	)		(202	)		(6,055	)		(10,661	)		(202	)		(10,863	)
Income tax benefit		(2,232	)		(412	)		(2,644	)		(3,123	)		(412	)		(3,535	)
Net loss attributable to iPayment, Inc. and iPayment Holdings, Inc.	$	(3,621	)	$	210		$	(3,411	)	$	(7,538	)	$	210		$	(7,328	)

94

Consolidated Statement of Operations (iPayment, Inc.) – Period from May 24 to June 30, 2011 (Successor) and April 1 to May 23, 2011 (Predecessor) (Unaudited)

	iPayment, Inc.
	Period from May 24 to June 30, 2011 (Successor)									Period from April 1 to May 23, 2011 (Predecessor)
(Dollars in thousands)	As Previously Reported			Adjustments			Restated			As Previously Reported			Adjustments			Restated
Revenues	$	77,519		$	(88	)	$	77,431		$	107,077		$	—		$	107,077
Operating expenses:
Interchange		42,262			—			42,262			57,051			—			57,051
Other costs of services		26,104			(526	)		25,578			33,733			(767	)		32,966
Selling, general and administrative		1,728			(10	)		1,718			2,446			—			2,446
Embezzlement costs		—			438			438			—			778			778
Total operating expenses		70,094			(98	)		69,996			93,230			11			93,241
Income from operations		7,425			10			7,435			13,847			(11	)		13,836
Other expense:
Interest expense, net		7,237			—			7,237			7,677			—			7,677
Other (income) expense, net		(4	)		—			(4	)		18,834			—			18,834
Income (loss) before income taxes		192			10			202			(12,664	)		(11	)		(12,675	)
Income tax provision (benefit)		73			(137	)		(64	)		(4,086	)		76			(4,010	)
Net income (loss) attributable to iPayment, Inc.	$	119		$	147		$	266		$	(8,578	)	$	(87	)	$	(8,665	)

95

Consolidated Statement of Operations (iPayment Holdings, Inc.) – Period from May 24 to June 30, 2011 (Successor) and April 1 to May 23, 2011 (Predecessor) (Unaudited)

	iPayment Holdings, Inc.
	Period from May 24 to June 30, 2011 (Successor)									Period from April 1 to May 23, 2011 (Predecessor)
(Dollars in thousands)	As Previously Reported			Adjustments			Restated			As Previously Reported			Adjustments			Restated
Revenues	$	77,519		$	(88	)	$	77,431		$	107,077		$	—		$	107,077
Operating expenses:
Interchange		42,262			—			42,262			57,051			—			57,051
Other costs of services		26,104			(526	)		25,578			33,733			(767	)		32,966
Selling, general and administrative		1,728			(10	)		1,718			2,446			—			2,446
Embezzlement costs		—			438			438			—			778			778
Total operating expenses		70,094			(98	)		69,996			93,230			11			93,241
Income from operations		7,425			10			7,435			13,847			(11	)		13,836
Other expense:
Interest expense, net		9,208			—			9,208			8,553			—			8,553
Other (income) expense, net		(4	)		—			(4	)		18,834			—			18,834
Loss before income taxes		(1,779	)		10			(1,769	)		(13,540	)		(11	)		(13,551	)
Income tax benefit		(307	)		(137	)		(444	)		(4,295	)		76			(4,219	)
Net loss attributable to iPayment Holdings, Inc.	$	(1,472	)	$	147		$	(1,325	)	$	(9,245	)	$	(87	)	$	(9,332	)

96

Consolidated Statement of Operations (iPayment, Inc. and iPayment Holdings, Inc.) – Three Months Ended March 31, 2011 (Unaudited)

	iPayment, Inc. and iPayment Holdings, Inc.
	Three Months Ended March 31, 2011
(Dollars in thousands)	As Previously Reported			Adjustments			Restated
Revenues	$	169,613		$	—		$	169,613
Operating expenses:
Interchange		90,728			—			90,728
Other costs of services		54,741			(577	)		54,164
Selling, general and administrative		4,290			—			4,290
Embezzlement costs		—			375			375
Total operating expenses		149,759			(202	)		149,557
Income from operations		19,854			202			20,056
Other expense:
Interest expense, net		7,901			—			7,901
Other income, net		(30	)		—			(30	)
Income before income taxes		11,983			202			12,185
Income tax provision		4,421			—			4,421
Net income attributable to iPayment, Inc. and iPayment Holdings, Inc.	$	7,562		$	202		$	7,764

97

Consolidated Balance Sheet (iPayment, Inc. and iPayment Holdings, Inc.) – As of September 30, 2010 (Unaudited)

	iPayment, Inc. and iPayment Holdings, Inc.
	As of September 30, 2010
(Dollars in thousands, except share data)	As Previously Reported			Adjustments			Restated
ASSETS
Current assets:
Cash and cash equivalents	$	1		$	—		$	1
Accounts receivable, net of allowance for doubtful accounts of $867		23,190			108			23,298
Prepaid expenses and other current assets		1,240			(14	)		1,226
Deferred tax assets		2,353			72			2,425
Total current assets		26,784			166			26,950
Restricted cash		657			—			657
Property and equipment, net		4,919			(562	)		4,357
Merchant portfolios and other intangible assets, net of accumulated amortization of $167,229 ($167,430 as previously reported)		140,227			(1,580	)		138,647
Goodwill		527,978			—			527,978
Deferred tax assets		6,149			541			6,690
Other assets, net		11,307			—			11,307
Total assets	$	718,021		$	(1,435	)	$	716,586
LIABILITIES and STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	2,253		$	(14	)	$	2,239
Income taxes payable		8,162			20			8,182
Accrued interest		7,340			—			7,340
Accrued liabilities and other		14,649			491			15,140
Total current liabilities		32,404			497			32,901
Long-term debt		616,430			—			616,430
Other liabilities		5,849			—			5,849
Total liabilities		654,683			497			655,180
Commitments and contingencies (Note 7)
Equity
Common stock of iPayment, Inc., $0.01 par value; 1,000 shares authorized, 100 shares issued and outstanding at September 30, 2010		20,055			—			20,055
Accumulated other comprehensive loss, net of tax benefits of $1,347 at September 30, 2010		(2,022	)		—			(2,022	)
Retained earnings		45,305			(1,932	)		43,373
Total iPayment, Inc. and iPayment Holdings, Inc. stockholder’s equity		63,338			(1,932	)		61,406
Total liabilities and stockholder’s equity	$	718,021		$	(1,435	)	$	716,586

98

Consolidated Balance Sheet (iPayment, Inc. and iPayment Holdings, Inc.) – As of June 30, 2010 (Unaudited)

	iPayment, Inc. and iPayment Holdings, Inc.
	As of June 30, 2010
(Dollars in thousands, except share data)	As  Previously Reported			Adjustments			Restated
ASSETS
Current assets:
Cash and cash equivalents	$	1		$	—		$	1
Accounts receivable, net of allowance for doubtful accounts of $792		24,617			108			24,725
Prepaid expenses and other current assets		1,107			(56	)		1,051
Deferred tax assets		2,352			72			2,424
Total current assets		28,077			124			28,201
Restricted cash		668			—			668
Property and equipment, net		4,910			(471	)		4,439
Merchant portfolios and other intangible assets, net of accumulated amortization of $158,216 ($158,346 as previously reported)		148,815			(1,651	)		147,164
Goodwill		527,978			—			527,978
Deferred tax assets		5,969			541			6,510
Other assets, net		11,001			—			11,001
Total assets	$	727,418		$	(1,457	)	$	725,961
LIABILITIES and STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	3,576		$	(56	)	$	3,520
Income taxes payable		5,538			20			5,558
Accrued interest		2,574			—			2,574
Accrued liabilities and other		15,727			507			16,234
Total current liabilities		27,415			471			27,886
Long-term debt		633,743			—			633,743
Other liabilities		8,916			—			8,916
Total liabilities		670,074			471			670,545
Commitments and contingencies (Note 7)
Equity
Common stock of iPayment, Inc., $0.01 par value; 1,000 shares authorized, 100 shares issued and outstanding at June 30, 2010		20,055			—			20,055
Accumulated other comprehensive loss, net of tax benefits of $2,532 at June 30, 2010		(3,798	)		—			(3,798	)
Retained earnings		41,087			(1,928	)		39,159
Total iPayment, Inc. and iPayment Holdings, Inc. stockholder’s equity		57,344			(1,928	)		55,416
Total liabilities and stockholder’s equity	$	727,418		$	(1,457	)	$	725,961

99

Consolidated Balance Sheet (iPayment, Inc. and iPayment Holdings, Inc.) – As of March 31, 2010 (Unaudited)

	iPayment, Inc. and iPayment Holdings, Inc.
	As of March 31, 2010
(Dollars in thousands, except share data)	As  Previously Reported			Adjustments			Restated
ASSETS
Current assets:
Cash and cash equivalents	$	1		$	—		$	1
Accounts receivable, net of allowance for doubtful accounts of $917		22,847			108			22,955
Prepaid expenses and other current assets		1,252			(105	)		1,147
Deferred tax assets		2,352			72			2,424
Total current assets		26,452			75			26,527
Restricted cash		672			—			672
Property and equipment, net		4,764			(535	)		4,229
Merchant portfolios and other intangible assets, net of accumulated amortization of $148,713 ($148,772 as previously reported)		156,862			(1,722	)		155,140
Goodwill		527,978			—			527,978
Deferred tax assets		7,291			541			7,832
Other assets, net		11,869			—			11,869
Total assets	$	735,888		$	(1,641	)	$	734,247
LIABILITIES and STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	2,658		$	(105	)	$	2,553
Income taxes payable		6,312			20			6,332
Accrued interest		7,380			—			7,380
Accrued liabilities and other		15,970			262			16,232
Total current liabilities		32,320			177			32,497
Long-term debt		644,122			—			644,122
Other liabilities		12,512			—			12,512
Total liabilities		688,954			177			689,131
Commitments and contingencies (Note 7)
Equity
Common stock of iPayment, Inc., $0.01 par value; 1,000 shares authorized, 100 shares issued and outstanding at March 31, 2010		20,055			—			20,055
Accumulated other comprehensive loss, net of tax benefits of $3,933 at March 31, 2010		(5,899	)		—			(5,899	)
Retained earnings		32,778			(1,818	)		30,960
Total iPayment, Inc. and iPayment Holdings, Inc. stockholder’s equity		46,934			(1,818	)		45,116
Total liabilities and stockholder’s equity	$	735,888		$	(1,641	)	$	734,247

100

Consolidated Statement of Operations (iPayment, Inc. and iPayment Holdings, Inc.) – Three Months Ended September 30, 2010, June 30, 2010, and March 31, 2010 (Unaudited)

	iPayment, Inc. and iPayment Holdings, Inc.
	Three Months Ended September 30, 2010							Three Months Ended June 30, 2010							Three Months Ended March 31, 2010
(Dollars in thousands)	As Previously Reported		Adjustments			Restated		As Previously Reported		Adjustments			Restated		As Previously Reported			Adjustments			Restated
Revenues	$	175,098	$	—		$	175,098	$	183,933	$	—		$	183,933	$	159,540		$	—		$	159,540
Operating expenses:
Interchange		97,200		—			97,200		98,544		—			98,544		90,997			—			90,997
Other costs of services		54,069		(410	)		53,659		55,605		(232	)		55,373		50,601			(700	)		49,901
Selling, general and administrative		3,766		—			3,766		3,303		—			3,303		3,082			(3	)		3,079
Embezzlement costs		—		414			414		—		342			342		—			1,824			1,824
Total operating expenses		155,035		4			155,039		157,452		110			157,562		144,680			1,121			145,801
Income from operations		20,063		(4	)		20,059		26,481		(110	)		26,371		14,860			(1,121	)		13,739
Other expense:
Interest expense, net		11,477		—			11,477		11,449		—			11,449		11,371			—			11,371
Other (income) expense, net		608		—			608		602		—			602		(229	)		—			(229	)
Income before income taxes		7,978		(4	)		7,974		14,430		(110	)		14,320		3,718			(1,121	)		2,597
Income tax provision		2,761		—			2,761		6,121		—			6,121		1,498			—			1,498
Net income attributable to iPayment, Inc. and iPayment Holdings, Inc.	$	5,217	$		(4)	$	5,213	$	8,309	$	(110	)	$	8,199	$	2,220		$	(1,121	)	$	1,099

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Consolidated Balance Sheet (iPayment, Inc. and iPayment Holdings, Inc.) – As of September 30, 2009 (Unaudited)

	iPayment, Inc. and iPayment Holdings, Inc.
	As of September 30, 2009
(Dollars in thousands, except share data)	As  Previously Reported			Adjustments			Restated
ASSETS
Current assets:
Cash and cash equivalents	$	900		$	—		$	900
Accounts receivable, net of allowance for doubtful accounts of $1,535		23,947			—			23,947
Prepaid expenses and other current assets		1,810			(47	)		1,763
Investment in merchant advances, net of allowance for doubtful accounts of $3,374		311			—			311
Deferred tax assets		3,442			(156	)		3,286
Total current assets		30,410			(203	)		30,207
Restricted cash		733			—			733
Property and equipment, net		4,051			(663	)		3,388
Merchant portfolios and other intangible assets, net of accumulated amortization of $128,453 ($128,467 as previously reported)		147,993			(142	)		147,851
Goodwill		528,191			—			528,191
Deferred tax assets		2,449			516			2,965
Other assets, net		11,910			—			11,910
Total assets	$	725,737		$	(492	)	$	725,245
LIABILITIES and STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	2,385		$	(47	)	$	2,338
Income taxes payable		2,589			—			2,589
Accrued interest		7,423			—			7,423
Accrued liabilities and other		14,263			404			14,667
Total current liabilities		26,660			357			27,017
Long-term debt		643,731			—			643,731
Other liabilities		16,287			—			16,287
Total liabilities		686,678			357			687,035
Commitments and contingencies (Note 7)
Equity
Common stock of iPayment, Inc., $0.01 par value; 1,000 shares authorized, 100 shares issued and outstanding at September 30, 2009		20,055			—			20,055
Accumulated other comprehensive loss, net of tax benefits of $6,075 at September 30, 2009		(9,113	)		—			(9,113	)
Retained earnings		26,574			(849	)		25,725
Total iPayment, Inc. and iPayment Holdings, Inc. stockholder’s equity		37,516			(849	)		36,667
Noncontrolling interest		1,543			—			1,543
Total stockholder’s equity		39,059			(849	)		38,210
Total liabilities and stockholder’s equity	$	725,737		$	(492	)	$	725,245

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Consolidated Balance Sheet (iPayment, Inc. and iPayment Holdings, Inc.) – As of June 30, 2009 (Unaudited)

	iPayment, Inc. and iPayment Holdings, Inc.
	As of June 30, 2009
(Dollars in thousands, except share data)	As  Previously Reported			Adjustments			Restated
ASSETS
Current assets:
Cash and cash equivalents	$	1,032		$	—		$	1,032
Accounts receivable, net of allowance for doubtful accounts of $1,434		24,456			—			24,456
Prepaid expenses and other current assets		1,764			(68	)		1,696
Investment in merchant advances, net of allowance for doubtful accounts of $3,336		680			—			680
Deferred tax assets		2,725			(156	)		2,569
Total current assets		30,657			(224	)		30,433
Restricted cash		1,036			—			1,036
Property and equipment, net		4,268			(726	)		3,542
Merchant portfolios and other intangible assets, net of accumulated amortization of $118,276 ($118,283 as previously reported)		156,328			(43	)		156,285
Goodwill		528,190			—			528,190
Deferred tax assets		3,959			516			4,475
Other assets, net		12,339			—			12,339
Total assets	$	736,777		$	(477	)	$	736,300
LIABILITIES and STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	3,047		$	(68	)	$	2,979
Income taxes payable		904			—			904
Accrued interest		2,763			—			2,763
Accrued liabilities and other		17,095			176			17,271
Total current liabilities		23,809			108			23,917
Long-term debt		660,444			—			660,444
Other liabilities		17,602			—			17,602
Total liabilities		701,855			108			701,963
Commitments and contingencies (Note 7)
Equity
Common stock of iPayment, Inc., $0.01 par value; 1,000 shares authorized, 100 shares issued and outstanding at June 30, 2009		20,055			—			20,055
Accumulated other comprehensive loss, net of tax benefits of $6,631 at June 30, 2009		(9,946	)		—			(9,946	)
Retained earnings		22,834			(585	)		22,249
Total iPayment, Inc. and iPayment Holdings, Inc. stockholder’s equity		32,943			(585	)		32,358
Noncontrolling interest		1,979			—			1,979
Total stockholder’s equity		34,922			(585	)		34,337
Total liabilities and stockholder’s equity	$	736,777		$	(477	)	$	736,300

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Consolidated Balance Sheet (iPayment, Inc. and iPayment Holdings, Inc.) – As of March 31, 2009 (Unaudited)

	iPayment, Inc. and iPayment Holdings, Inc.
	As of March 31, 2009
(Dollars in thousands, except share data)	As Previously Reported			Adjustments			Restated
ASSETS
Current assets:
Cash and cash equivalents	$	235		$	—		$	235
Accounts receivable, net of allowance for doubtful accounts of $1,055		23,492			—			23,492
Prepaid expenses and other current assets		1,828			—			1,828
Investment in merchant advances, net of allowance for doubtful accounts of $3,826		1,962			—			1,962
Deferred tax assets		2,725			(156	)		2,569
Total current assets		30,242			(156	)		30,086
Restricted cash		991			—			991
Property and equipment, net		4,561			(790	)		3,771
Merchant portfolios and other intangible assets, net of accumulated amortization of $106,691 ($106,694 as previously reported)		165,853			(47	)		165,806
Goodwill		528,324			—			528,324
Deferred tax assets		5,029			516			5,545
Other assets, net		13,432			—			13,432
Total assets	$	748,432		$	(477	)	$	747,955
LIABILITIES and STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	2,392		$	—		$	2,392
Accrued interest		7,605			—			7,605
Accrued liabilities and other		13,860			41			13,901
Current portion of long-term debt		23			—			23
Total current liabilities		23,880			41			23,921
Long-term debt		675,990			—			675,990
Other liabilities		19,870			—			19,870
Total liabilities		719,740			41			719,781
Commitments and contingencies (Note 7)
Equity
Common stock of iPayment, Inc., $0.01 par value; 1,000 shares authorized, 100 shares issued and outstanding at March 31, 2009		20,055			—			20,055
Accumulated other comprehensive loss, net of tax benefits of $7,462 at March 31, 2009		(11,193	)		—			(11,193	)
Retained earnings		18,609			(518	)		18,091
Total iPayment, Inc. and iPayment Holdings, Inc. stockholder’s equity		27,471			(518	)		26,953
Noncontrolling interest		1,221			—			1,221
Total stockholder’s equity		28,692			(518	)		28,174
Total liabilities and stockholder’s equity	$	748,432		$	(477	)	$	747,955

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Consolidated Statement of Operations (iPayment, Inc. and iPayment Holdings, Inc.) – Three Months Ended September 30, 2009, June 30, 2009, and March 31, 2009 (Unaudited)

	iPayment, Inc. and iPayment Holdings, Inc.
	Three Months Ended September 30, 2009									Three Months Ended June 30, 2009									Three Months Ended March 31, 2009
(Dollars in thousands)	As Previously Reported			Adjustments			Restated			As Previously Reported			Adjustments			Restated			As Previously Reported			Adjustments			Restated
Revenues	$	182,716		$	—		$	182,716		$	190,745		$	—		$	190,745		$	170,053		$	—		$	170,053
Operating expenses:
Interchange		101,975			—			101,975			103,575			—			103,575			96,910			—			96,910
Other costs of services		56,151			(43	)		56,108			60,774			(93	)		60,681			55,543			(211	)		55,332
Selling, general and administrative		5,145			—			5,145			4,940			(2	)		4,938			4,817			(66	)		4,751
Embezzlement costs		—			306			306			—			162			162			—			216			216
Total operating expenses		163,271			263			163,534			169,289			67			169,356			157,270			(61	)		157,209
Income from operations		19,445			(263	)		19,182			21,456			(67	)		21,389			12,783			61			12,844
Other expense:
Interest expense, net		11,559			—			11,559			11,694			—			11,694			11,656			—			11,656
Other expense, net		308			—			308			1,072			—			1,072			19			—			19
Income before income taxes		7,578			(263	)		7,315			8,690			(67	)		8,623			1,108			61			1,169
Income tax provision (benefit)		2,833			—			2,833			3,709			—			3,709			(116	)		—			(116	)
Net income	$	4,745		$	(263	)	$	4,482		$	4,981		$	(67	)	$	4,914		$	1,224		$	61		$	1,285
Less: Net income attributable to noncontrolling interests		(1,004	)		—			(1,004	)		(758	)		—			(758	)		(1,434	)		—			(1,434	)
Net income (loss) attributable to iPayment, Inc. and iPayment Holdings, Inc.	$	3,741		$	(263	)	$	3,478		$	4,223		$	(67	)	$	4,156		$	(210	)	$	61		$	(149	)

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16. Subsequent Events

Senior Secured Credit Facilities Waiver, Consent and Amendment

On November 14, 2012, we entered into a waiver, consent and amendment (the “Waiver”) with a majority of the lenders under the Senior Secured Credit Facilities. Among other things, the Waiver waives (a) defaults arising from the restatement of our financial statements (i) for the fiscal years ended December 31, 2008, 2009, 2010, and 2011 included in the Company’s Annual Reports on Form 10-K for the years then ended, (ii) for the interim periods within such fiscal years included in the Company’s Quarterly Reports on Form 10-Q and (iii) for the quarters ended March 31, 2012 and June 30, 2012 included in the Company’s Quarterly Reports on Form 10-Q and (b) until February 1, 2013, the Company’s failure to timely provide to the administrative agent for the Senior Secured Credit Facilities the Company’s financial statements for the quarterly period ended September 30, 2012. Finally, under the terms of the Waiver, the revolving lenders under the Senior Secured Credit Facilities agreed that, absent any default thereunder that may occur after the date of the Waiver, each such revolving lender would continue to honor requests for borrowing under the Senior Secured Credit Facilities’ revolving credit facility, provided that the aggregate principal amount of all borrowings thereunder do not exceed $58 million , a reduction from $95 million, which represents the total revolving commitments under the Senior Secured Credit Facility. Such reduction in revolving commitments shall no longer be in effect upon the Company’s delivery, on or prior to February 1, 2013, of the restated financial statements and the Company’s unaudited financial statements (and related documentation) for the quarterly period ended September 30, 2012.

Following receipt of the Waiver, the Company borrowed amounts under the Senior Secured Credit Facilities’ revolving credit facility so as to make the scheduled interest payments due on November 15, 2012 under the indentures related to the Company’s 10.25% Notes and Holdings’ 15.00%/15.00% Notes.

15.00%/15.00% Notes Purchase

On July 20, 2012, iPayment purchased approximately $23.9 million principal amount of the 15.00%/15.00% Notes from a third party in a privately negotiated transaction. The purchase of such 15.00%/15.00% Notes and the expenses associated therewith were funded with cash on hand and borrowings under the revolving facility under the Senior Secured Credit Facilities. Concurrent with the purchase of such 15.00%/15.00% Notes, we requested and obtained a $20 million increase in the aggregate revolving facility commitment under the Senior Secured Credit Facility. The aggregate commitment of the lenders under the revolving facility following such increase was $95 million. On November 14, 2012, as discussed above, we entered into the Waiver which reduced the revolving commitments from $95 million to $58 million.

Flagship Merchant Services Purchase Agreement

On May 2, 2012, we entered into a definitive asset purchase agreement with CardServ, Inc., a Massachusetts corporation doing business as Flagship Merchant Services (“Flagship”). On May 23, 2012, pursuant to the definitive agreement, one of our wholly owned subsidiaries purchased substantially all of the assets of Flagship for a purchase price of approximately $14 million. We funded the acquisition of Flagship through revolver borrowings and cash on hand. Flagship is an independent sales organization with headquarters in Charlestown, Massachusetts.

Other Acquisitions

In April 2012, we entered into a purchase and sale agreement with an existing ISG, whereby we acquired a portfolio of merchant accounts. Consideration at closing was $2.5 million in cash, which was funded at closing from borrowings under our revolving facility. The effect of the portfolio acquisition was included in our consolidated financial statements beginning April 1, 2012.

In April 2012, we entered into a second purchase and sale agreement with an existing ISG, whereby we acquired a portfolio of merchant accounts. Consideration at closing was $2.6 million in cash, which was funded at closing from borrowings under our revolving facility. The effect of the portfolio acquisition was included in our consolidated financial statements beginning April 1, 2012.

In December 2012, we entered into a purchase and sale agreement with an existing ISG, whereby we acquired a portfolio of merchant accounts. Consideration at closing was $8.0 million in cash, which was funded at closing with cash on hand. The effect of the portfolio acquisition will be included in our consolidated financial statements beginning January 1, 2013.

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Adoption of Equity Incentive Plan

On August 27, 2012, the Board of Directors (the “Board”) of Holdings adopted the iPayment Holdings, Inc. Equity Incentive Plan (the “Plan”). The purpose of the Plan is to foster and promote the long-term financial success of Holdings by rewarding executives and key employees of Holdings and its subsidiaries who contribute to Holdings’ profitability and productivity. No awards were granted under the Plan until November 15, 2012.

Grants of Phantom Units

On November 15, 2012, the Board granted 324,074.07 phantom units under the Plan to Mark C. Monaco and entered into a phantom unit agreement with Mr. Monaco. Under the phantom unit agreement, 50% of phantom units are “service units” and the remaining 50% of the phantom units are “performance units.” Service units are 20% vested at the time of the grant, with the remaining service units vesting in equal increments on the first four anniversaries of the grant date. Performance units vest, if at all, upon the earlier of a change in control or a public offering. If neither a change in control nor a public offering has occurred by the seventh anniversary of the grant date, all unvested performance units will be forfeited. In addition, the phantom unit agreement also provides that service units will become fully vested upon a change in control and all performance units will vest or be forfeited in accordance with the performance criteria described above.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Restatement of Consolidated Financial Statements

In August 2012, as disclosed in the Company’s Current Reports on Form 8-K filed on September 12, 2012 and November 5, 2012, the Company and Holdings were presented with accusations from one of the Company’s employees that certain of the Company’s employees and outside contractors had engaged in financial misconduct. Following an initial inquiry into these accusations by the Company, the Board of Directors of the Company and management conducted an internal investigation of the alleged misconduct. During the course of the Company’s investigation, certain executives of the Company and Holdings were terminated or resigned. Based on the results of the Company’s internal investigation and the financial impact thereof on prior financial periods, the Board of Directors and management concluded the Company’s Annual Reports on Form 10-K for the years ended December 31, 2009, 2010 and 2011 should no longer be relied upon. The material weaknesses described below led to the need for the restatement of the Company’s financial statements for the years ended December 31, 2009, 2010 and 2011 (including all interim periods within such years) and for the first two quarters of 2012 and the failure of the Company to file on a timely basis its Quarterly Report on Form 10-Q for the interim period ended September 30, 2012.

Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) that are designed to provide reasonable assurance that information required to be disclosed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified and 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.

Our management, under the supervision and with the participation of our Board of Directors, Chief Executive Officer and Chief Financial Officer, conducted an evaluation, pursuant to Rule 13a-15(c) and 15d-15(d) promulgated under the Exchange Act, of the effectiveness of its disclosure controls and procedures. The Board of Directors and management concluded that our disclosure controls and procedures were not effective as of December 31, 2009, 2010 and 2011 due to the material weaknesses in our internal controls over financial reporting described below.

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. Internal control over financial reporting is a process designed by, or under the supervision of, the issuer‘s principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer‘s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

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(1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;

(2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and

(3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer‘s assets that could have a material effect on the financial statements.

Our internal control system was designed to provide reasonable assurance 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 (“GAAP”). 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 Board of Directors, Chief Executive Officer and Chief Financial Officer, conducted an evaluation, pursuant to Rule 13a-15(c) and 15d-15(d) promulgated under the Exchange Act, of the effectiveness of its internal control over financial reporting. Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2009, 2010 and 2011 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control Integrated Framework. The Board of Directors and management concluded that our internal control over financial reporting was not effective as of December 31, 2009, 2010 and 2011 due to the five material weaknesses described below. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The existence of one or more material weaknesses precludes a conclusion by management that a corporation’s internal control over financial reporting is effective.

The Annual Reports for the years ended December 31, 2009, 2010, and 2011 do not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s reports are not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in our annual reports.

Material Weaknesses

In connection with the assessment described above, management of the Company concluded that five material weaknesses existed in the Company’s internal control over financial reporting.

Entity Level Controls: Certain of the Company’s entity level controls within its control environment were not effectively designed or applied to prevent former members of senior management and other employees from having the ability to circumvent or override controls around residual payments, expense reimbursements, and vendor administration. The Company did not maintain an adequate control environment that set a proper culture within our operations to instill an attitude of compliance and control awareness; including training of our accounting, information technology and operations managers to emphasize the importance of setting the proper culture within our organization, a thorough and proper analysis of proposed transactions, and an effective standardized review process. This material weakness in the Company’s entity level controls increased the likelihood of a material misstatement occurring within the Company’s interim and annual financial statements and not being prevented or detected.

Accounts Payable: Misappropriation of Company assets occurred as a result of an inadequate design of controls around vendor due diligence review and bidding, as well as the override of certain existing controls in the areas of master vendor file data administration and approval of vendor invoices. Certain members of senior management colluded with third party vendors to submit fictitious invoices which were paid by the Company. Those vendors then paid “kickbacks” to certain members of senior management. The override of controls by certain members of senior management responsible for the application and adherence to control procedures further resulted in those fraudulent invoices being inappropriately capitalized to software development and subsequently amortized.

Sales Agent Verification: The Company did not maintain effective internal controls with respect to verifying the authenticity of sales agents or preventing the re-direction of residual payments to fictitious sales agent accounts created by certain members of management. The sales agent review and approval process contained design and operating control deficiencies causing material errors in the Company’s financial statements which were not detected on a timely basis by management in the normal course of business. As compensation for the referral of merchant accounts, the Company pays its sales agents an agreed-upon residual, or a percentage of the income derived from the transactions processed from the merchants they refer. However, merchant accounts that are generated by the Company’s direct sales channels or that are acquired pursuant to acquisitions are typically not subject to residual payments and are labeled “house” accounts. The Company also did not design or maintain effective controls related to residual payments, post-residual payment quality control verification, and the movement of merchant accounts, including “house” accounts.

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Due to a lack of effective system access controls and procedures with respect to verifying the authenticity of sales agents, as well as the lack of effective control over the movement of “house” accounts, fraudulent offices were established within the Company’s residual payment system, certain “house” merchant accounts were transferred to fraudulent sales agents created by certain former members of management and residual payments were subsequently improperly made to those fraudulent sales agent accounts.

Expense Reimbursements: Misappropriation of Company assets occurred due to the lack of appropriate review and approval controls around expense reimbursements. Certain employees were allowed to use personal credit cards to make large dollar purchases rather than those purchases being centrally approved by the purchasing department and centrally processed by the accounts payable department. Further, certain members of senior management created fictitious vendor invoices which were approved by other members of senior management and then paid by the Company. The override of existing controls as well as poorly designed controls over the expense reimbursement process, including lack of policies and controls to preclude fixed assets from being reimbursed through expense reports, resulted in certain fraudulent reimbursements, some of which were inappropriately capitalized to fixed assets and subsequently depreciated.

Manual Journal Entries: A material weakness was identified due to the lack of effective policies and procedures over manual journal entries. Specifically, effective policies and procedures were not in place to ensure that manual journal entries were accompanied by sufficient supporting documentation, that supporting documentation was properly retained, and that these journal entries were adequately reviewed and approved. The existence of design and operating control deficiencies around manual journal entries is considered to be a material weakness, as the lack of policies and proper review and approval of manual journal entries could have resulted in a material misstatement of the Company’s annual and interim financial statements for the periods in which the misconduct took place.

Remediation Steps to Address Material Weaknesses

The Company’s management has been engaged, and continues to engage, in making necessary changes and improvements to the overall design of its control environment to address the material weaknesses in internal control over financial reporting and the ineffectiveness of the Company’s disclosure controls and procedures described above.

Entity Level Controls: To remediate the material weakness described above under “Entity Level Controls,” the Company continues to enhance its training of management, including its accounting, information technology, and operations managers, to emphasize further the importance of setting the proper tone within the organization to instill an attitude of integrity and control awareness and the use of a thorough and proper analysis of proposed transactions. The former employees who initiated or directed the fraud discussed in Note 2 to our consolidated financial statements “Restatement of Consolidated Financial Statements,” were either terminated by the Company or have resigned, and the Company has hired additional qualified accounting and operations personnel. Lastly, the Company has implemented the specific remediation initiatives described below in the fiscal year 2012. These initiatives are intended to provide reasonable assurance regarding the reliability and completeness of the Company’s financial information and disclosures.

Accounts Payable: To remediate the material weakness described above under “Accounts Payable,” the Company has implemented a thorough vendor master due diligence review along with a competitive vendor bidding process. The Company has implemented controls surrounding manual journal entry reviews to capture errors or irregularities within financial reporting including capitalized software development. The Company has also enhanced its entity-level control environment to include related party disclosures for all managers and above.

Sales Agent Verification: To remediate the material weakness described above under “Sales Agent Verification,” the Company has implemented revised policies and procedures around the creation and authorization of new sales agents, monthly review of residual payments, post- residual payment quality control verification, and the movement of merchant accounts, including “house” accounts. The Company will continue to assess its standardized processes to further enhance the effectiveness of financial reviews, including the analysis and monitoring of financial information in a consistent and thorough manner.

Expense Reimbursements: To remediate the material weakness described above under “Expense Reimbursements,” the Company has implemented certain interim revised policies and procedures for travel and entertainment expenditures and the associated approvals of those expenditures. Under the revised policies and procedures, fixed assets can no longer be purchased through expense reports. The Company is also working to strengthen controls in this area, including instituting a corporate credit card program with strict spending limits as well as enforcement of a centralized purchasing system.

Manual Journal Entries: To remediate the material weakness described above under “Manual Journal Entries” the Company has implemented certain revised policies and procedures associated with the preparation and retention of supporting documentation as well as the review and approval of manual journal entries. Under the revised policies and procedures, evidence of proper review and approval of supporting documentation will be required prior to the posting of manual journal entries. In addition, the revised policies and procedures are designed to ensure that journal entries will be tracked and supporting documentation is appropriately retained.

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Management believes there is a need to continue to enhance the effectiveness of the standardized review processes and the remediation measures described above. The policies, procedures, and controls identified have not been operated for an adequate period of time to conclude that the material weaknesses identified above have been remediated. However, the actions described above have significantly improved our internal control over financial reporting by creating and maintaining a control environment in our operations management that are intended to set a proper ethical tone within our operations organization to instill an attitude of compliance and control awareness.

Changes in Internal Control over Financial Reporting

Except for the material weaknesses identified in respect of our entity level controls, accounts payable process, sales agent verification and residual process, expense reimbursement process, and manual journal entry process as discussed above, there have not been any changes in our internal control over financial reporting for the quarter ended December 31, 2011 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, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The following table provides information about our directors and executive officers as of December 31, 2011:

Name and Age	Principal Occupation, Business Experience, Directorships and Education
Carl A. Grimstad Chairman, Chief Executive Officer and President of iPayment and Chief Executive Officer, President and Director of Holdings Age 44	Carl Grimstad co-founded iPayment and is the Company’s Chairman, President and CEO. In 2003, Mr. Grimstad led iPayment in a successful IPO (NASDAQ: IPMT). Mr. Grimstad was instrumental in taking iPayment private in 2006. Mr. Grimstad has served since 1995 as the managing partner of GS Capital, LLC, a private investment company. Mr. Grimstad and his family are active supporters of various charities including the Nashville Zoo and the Sexual Assault Center. Mr. Grimstad currently serves as a board member of the Nashville Symphony and as a board member of the Oasis Center, a safe haven for children in trouble. In the past, Mr. Grimstad has served as a trustee of the Cheekwood Botanical Gardens. Mr. Grimstad graduated with a B.A. in Economics from Boston University in 1989.
Mark C. Monaco Chief Financial Officer, Executive Vice President, Treasurer and Director of iPayment and Holdings Age 46	Mark C. Monaco has served as iPayment’s Chief Financial Officer since October 2010 and as a member of iPayment’s board of directors since May 2011. 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 firm’s 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.

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Robert S. Torino(1) Chief Operating Officer and Executive Vice President of iPayment and Chief Operating Officer, Executive Vice President and Assistant Secretary of Holdings Age 58	Robert S. Torino served as our Chief Operating Officer from 2006 until his termination on September 6, 2012. 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 held various senior level positions in both operations and finance prior to employment with iPayment. Mr. Torino graduated magna cum laude from Boston College with a degree in accounting.
Nasir Shakouri(1) Senior Vice President of Sales & Marketing Age 34	Nasir Shakouri served as our Senior Vice President of Sales and Marketing from 2006 until his resignation on May 29, 2012. From April 2003 to January 2006, he served as our Vice President of Finance. Mr. Shakouri was previously in the Audit group at Arthur Andersen and Ernst & Young specializing in Technology, Retail & Consumer Products in Los Angeles, California. Mr. Shakouri graduated with a B.S. in Accounting and Finance from California State Polytechnic University, San Luis Obispo.
John S. Hong(1) Vice President of Information Technology Age 40	John S. Hong served as our Vice President of Information Technology from 2007 until his termination on September 6, 2012 with responsibility for all iPayment’s software and systems. From 2004 until 2007 he served as our Director of Information Technology. Mr. Hong’s extensive merchant bankcard knowledge came from over 15 years of experience working for Comerica Bank, Imperial bank and Wells Fargo among others. Mr. Hong earned his B.S. in Computer Science from University of Riverside.
Bronson L. Quon(1) Vice President of Finance and Corporate Controller Age 34	Bronson L. Quon served as our Vice President of Finance and Corporate Controller from August 2008 until his resignation on September 7, 2012. From July 2003 to July 2008, Mr. Quon served as our Director of Corporate Accounting. Prior to joining iPayment, Mr. Quon worked in the Assurance & Advisory practices at both Deloitte & Touche LLP and Arthur Andersen, LLP, serving in Retail & Consumer Products, Oil & Gas and the Aerospace industries from May 2000 to July 2003. Mr. Quon earned his B.S. in Accounting from California State Polytechnic University, San Luis Obispo and obtained his CPA license in 2003.
John A. Vickers Director of iPayment and Holdings Age 49	John A. Vickers has served as a member of iPayment’s and Holdings’ boards of directors since September 2011. Mr. Vickers is currently Chairman and Chief Executive Officer of Tishman Realty Corporation and the Tishman Hotel Corporation, having served the Tishman organization for 27 years in various positions. He is responsible for Tishman’s owned portfolio of hotels and for overseeing all of the firm’s service divisions. Mr. Vickers was also Vice Chairman and Principal of Tishman Construction Corporation prior to its sale to AECOM in July 2010.

(1) On September 6, 2012, the Company and Holdings terminated the employment of Robert Torino, formerly Executive Vice President and Chief Operating Officer of the Company and Executive Vice President, Chief Operating Officer and Assistant Secretary of Holdings. On the same date, the Company also terminated the employment of John Hong, formerly Vice President of Information Technology of the Company. Such terminations were the result of alleged violations by such employees of the Company’s Code of Business Conduct and Ethics. On September 7, 2012, Bronson Quon, formerly Vice President and Corporate Controller of the Company, resigned as an employee of the Company. Mr. Quon agreed to cooperate with the Company and assisted the Company in the internal investigation referred to in Item 3 in this Amended Filing. In connection with that investigation, allegations of misconduct were also raised concerning Nasir Shakouri, formerly Senior Vice President of Sales and Marketing of the Company, during his employment with the Company. Mr. Shakouri resigned as an employee of the Company on May 29, 2012.

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 person’s 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 iPayment. Our directors are knowledgeable and experienced in multiple business endeavors

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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. Grimstad has extensive knowledge of our business and the payment processing industry generally, having served as President of iPayment since its inception and having significant involvement in the day-to-day oversight of iPayment’s business operations, (ii) Mr. Monaco has more than 20 years of financial experience, as well as direct experience in the payment industry and (iii) Mr. Vickers has over 25 years of business experience in the hospitality and real estate industries and is currently Chairman and Chief Executive Officer of Tishman Realty Corporation and Tishman Hotel Corporation.

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 Annual Report. 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 Current Report on Form 8-K.

Section 16(a) Beneficial Ownership Reporting Compliance

Neither Holdings nor iPayment has a class of equity securities registered pursuant to Section 12 of the Exchange Act, and therefore, their directors, officers and 10% shareholders are not 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. Each of iPayment’s and Holdings’ board of directors is currently composed of Messrs. Grimstad, Monaco and Vickers. The board of directors of iPayment and the board of directors of Holdings are collectively referred to in this section as the “board.” The board, in consultation with 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 targets at the determined of the board.

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 officer’s salary on an annual basis and may increase salaries based on (i) the individual’s contribution to the Company compared to the preceding year, (ii) the individual’s responsibilities compared to the preceding year and (iii) any increase in median pay levels at peer companies.

Annual bonuses. The board’s policy is to award annual bonuses in order to motivate and reward the Company’s 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. We currently have no share-based compensation plans. However, Investors intends to adopt, or cause Holdings to adopt, a management equity program pursuant to which members of management would be issued equity interests, options or similar rights representing, in the aggregate, up to 20% of the outstanding equity of the issuer thereof on a fully-diluted basis. Investors also intends to effect a merger of itself into Holdings, with Holdings being the surviving corporation in such merger.

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Retirement plan. Certain executive officers participate in iPayment’s defined contribution plan. iPayment’s contributions to its defined contribution plan on behalf of the named executive officers are shown in the “All Other Compensation” column of the Summary compensation table below.

On November 7, 2011, the board of directors of iPayment approved the iPayment Deferred Compensation Plan and the iPayment Executive Retention Plan (each, a “Plan” and collectively, the “Plans”). Each Plan is comprised of the Executive Nonqualified Excess Plan Document (the “Plan Document”) and an Executive Nonqualified Excess Plan Adoption Agreement (collectively, the “Adoption Agreements”). Each Plan is a nonqualified, unfunded plan intended to comply with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended. Each Plan will be effective January 1, 2012.

The board of directors of iPayment will have sole discretion in determining which employees of the Company are eligible for participation in the Plans. The board of directors of iPayment has formed a Deferred Compensation Committee to manage the Plans on behalf of the Company, which committee will initially include Mr. Monaco and David Cronin, iPayment’s Senior Vice President, Human Resources.

Under the iPayment Deferred Compensation Plan, participants will have the option to defer up to 50% of their base salary and up to 100% of any non-performance-based bonus. The Company will not make contributions, matching or otherwise, under this Plan.

Under the iPayment Executive Retention Plan, the Company may make discretionary contributions to the accounts of the participants in such Plan, in an amount determined each year by the Company. A participant will become fully vested in any contributions made by the Company to such participant’s account upon the first to occur of: (i) the participant reaching Normal Retirement Age and (ii) a Change of Control Event, in each case, as such terms are defined in the iPayment Executive Retention Plan Adoption Agreement. Participants will not have the option to defer any of their base salary or non-performance-based bonuses under this Plan.

The Plans may be amended or terminated at any time at the sole discretion of the board of directors of iPayment, subject to certain limitations and requirements set forth in the Plan Document.

The foregoing description of the Plans is not complete and is qualified in its entirety by reference to the Plan Document and the Adoption Agreements, which are filed as Exhibits 10.3 through 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011, filed with the SEC on November 14, 2011 and are incorporated herein by reference.

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, 2011, and has determined that those amounts were not excessive or unreasonable.

The following table sets forth the compensation for the fiscal years 2011, 2010 and 2009 for: (i) each individual serving as the Company’s principal executive officer or acting in a similar capacity during any part of 2011; (ii) each individual serving as the Company’s principal financial officer or acting in a similar capacity during any part of 2011; and (iii) the other three most highly compensated executive officers who were serving as executive officers at December 31, 2011.

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SUMMARY COMPENSATION TABLE

	Annual Compensation
Name and Principal Position	Year		Salary			Bonus		All Other Compensation			Total
Carl A. Grimstad		2011	$	1,000,000		$	1,000,000	$	83,000	(2)(3)	$	2,083,000
Chairman, Chief Executive Officer		2010		708,000			—		—			708,000
and President		2009		300,000			1,000,000		—			1,300,000
Mark C. Monaco		2011	$	600,000		$	300,000	$	24,000	(2)(3)(6)	$	924,000
Executive Vice President, Chief Financial		2010		125,000	(4)		—		—			125,000
Officer, Treasurer and Director		2009		—			—		—			—
Robert S. Torino (1)		2011	$	316,000		$	250,000	$	68,000	(5)	$	634,000
Chief Operating Officer		2010		296,000			—		60,000	(5)		356,000
and Executive Vice President		2009		296,000			220,000		60,000	(5)		576,000
Nasir Shakouri (1)		2011	$	200,000		$	200,000	$	—		$	400,000
Senior Vice President of Sales &		2010		179,000			—		—			179,000
Marketing		2009		150,000			150,000		—			300,000
John Hong (1)		2011	$	171,000		$	140,000	$	—		$	311,000
Vice President of Information Technology		2010		150,000			—		—			150,000
		2009		140,000			125,000		—			265,000
Gregory S. Daily		2011	$	395,000	(7)	$	—	$	8,000	(6)	$	403,000
Former Chairman and		2010		708,000			—		16,500	(6)		724,500
Chief Executive Officer		2009		187,500			1,000,000		3,750	(6)		1,191,250

(1) Excludes any amounts obtained pursuant to the financial misconduct described in the Explanatory Note to this Amended Filing and in Note 2 to our consolidated financial statements “Restatement of Consolidated Financial Statements,” which accompanies the financial statements in Item 8 of this report.

(2) For Mr. Grimstad and Mr. Monaco, includes $12,500 each for Board of Director fees.

(3) The amounts in this column include, the aggregate incremental cost to iPayment of providing personal benefits. For Mr. Grimstad and Mr. Monaco, the figure in this column for 2011 includes approximately $71,000 and $10,000, respectively, for the personal use of iPayment’s aircraft. This value is based on the variable cost per flight hour which consists of the hourly operating fee charged by the aircraft’s operator and other miscellaneous variable costs. The value excludes non-variable costs, such as management fees, fractional ownership commitment fees and any other costs not specifically related to trips. On certain occasions, the executive’s spouse or other family member may accompany the executive on a business flight. Typically, there are no additional incremental costs associated with such spousal or family travel.

(4) Represents Mr. Monaco’s salary for the period commencing upon his hiring on October 15, 2010 and ending on December 31, 2010.

(5) Represents housing reimbursements made to Mr. Torino.

(6) For Mr. Daily, the amounts in this column represent only the Company’s 401(k) plan matching contribution and for Mr. Monaco, the amount includes $1,500 of such matching contribution.

(7) Represent Mr. Daily’s salary for the period from January 1, 2011 through May 23, 2011.

Compensation of directors

All directors are paid a total annual retainer of $50,000, inclusive, for their service as a director on the boards of iPayment and Holdings.

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The following table sets forth the compensation earned by the individuals serving as non-employee directors during 2011:

DIRECTOR COMPENSATION TABLE

Name	Fees Earned or Paid in Cash		Total
John A. Vickers	$	12,500	$	12,500

Compensation Committee Interlocks and Insider Participation

As a private company, we do not have a compensation committee. The board, in consultation with the other executive officers, establishes policies and makes decisions regarding compensation of directors and executive officers.

Employment contracts, termination of employment and change in control arrangements

Carl A. Grimstad

Mr. Grimstad does not currently have an employment agreement with the Company. Mr. Grimstad intends to continue to serve as our Chairman, Chief Executive Officer and President, pursuant to at-will employment arrangements. The board of iPayment 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.

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 iPayment’s Chief Financial Officer since October 15, 2010.

Mr. Monaco’s 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 iPayment from time to time; (iii) the grant of equity awards if and when Investors 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 Company’s 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. Monaco’s employment 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 or prior to the termination date (the “Accrued Compensation”). If Mr. Monaco’s employment 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 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. Monaco’s employment agreement also contains restrictive covenants which generally prohibit Mr. Monaco from (a) disclosing the Company’s 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 Company’s customers, (2) soliciting the Company’s employees or (3) participating in any competing business.

Estimated payments in connection with termination of employment

Subject to the assumptions set forth in the footnotes below, the following table sets forth the estimated amounts of payments and benefits that Mr. Monaco would become entitled to under his employment agreement upon the termination of his employment.

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Executive Officer	Accrued Compensation			Severance Payments			COBRA Payments
Mark C. Monaco	$	28,845	(1)(2)	$	1,200,000	(1)	$	21,924	(1)(3)

(1) Represents the amounts Mr. Monaco would be entitled to receive if his employment was terminated without “cause” or “disability” or with “good reason” on December 31, 2011.

(2) If Mr. Monaco’s employment was terminated due to death, mutual agreement, “cause,” “disability” or otherwise without “good reason” on December 31, 2011, he would also be entitled to receive $28,845 in accrued compensation.

(3) Represents the maximum amount of COBRA payments that Mr. Monaco would be entitled to under his employment.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

As of March 22, 2012, all of the issued and outstanding common stock of iPayment is owned by Holdings, all of the issued and outstanding common stock of Holdings is owned by iPayment Investors and all of the partnership units of iPayment Investors are owned by Carl A. Grimstad, iPayment’s Chairman and Chief Executive Officer, and certain trusts and persons affiliated with him. Messrs. Grimstad and Monaco are the sole members of the board of directors of iPayment GP, LLC, the general partner of iPayment Investors (“iPayment GP”), and two of the three members of the boards of directors of iPayment and Holdings, along with John A. Vickers. Mr. Grimstad, as sole member of iPayment GP, is entitled to designate and remove any director of iPayment GP. As a result, Mr. Grimstad may be deemed to have beneficial ownership of all of our outstanding common stock. Mr. Grimstad disclaims beneficial ownership of such common stock except to the extent of his pecuniary interests therein.

The following table sets forth information regarding the beneficial ownership of Holdings’ common stock as of March 22, 2012 by (i) each of our directors, (ii) each of our named executive officers, (iii) by all of our directors and executive officers as a group and (iv) each person known to us to be the beneficial owner of more than five percent of Holdings’ common stock. We deem shares of Holdings’ common stock that may be acquired by an individual or group within 60 days of March 22, 2012, pursuant to the exercise of options, warrants or convertible securities, to be outstanding for the purpose of computing the percentage ownership of such individual or group, but these shares are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table.

Under SEC rules, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote, or to direct the voting of, the security, or “investment power,” which includes the power to dispose of, or to direct the disposition of, the security. Under these rules, more than one person may be deemed a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which that person has no economic interest. To our knowledge, except as otherwise noted below, each of the security holders listed below has sole voting and investment power as to the securities shown unless otherwise noted and subject to community property laws where applicable.

Name of Beneficial Owner(1)	Number of Shares of Common Stock Beneficially Owned			Percentage of Common Stock Beneficially Owned
Carl A. Grimstad		4,875,000	(2)		100	%(2)
Mark C. Monaco		28,125	(3)		0.6	%(3)
All Directors and Executive Officers as a Group (2 persons)		4,903,125	(3)		100	%

(1) The business address of each person listed is 126 East 56th Street New York, New York, 10022.

(2) As of March 22, 2012, all of Holdings’ outstanding common stock was owned by iPayment Investors and all of the partnership units in iPayment Investors were owned by iPayment GP, Carl A. Grimstad, and certain entities and persons affiliated with Mr. Grimstad. Mr. Grimstad has the right to make investment decisions with respect to all of such partnership units. Therefore, Mr. Grimstad may be deemed to have beneficial ownership of all of the partnership units of iPayment Investors. Mr. Grimstad disclaims beneficial ownership of such partnership units except to the extent of his pecuniary interests therein. As of March 22, 2012, Mr. Grimstad is the sole member of iPayment GP.

(3) Assumes the full exercise of all warrants that are exercisable within 60 days of March 22, 2012 and that are held by Adaero Holdings, LLC, an entity majority owned and controlled by Mr. Monaco.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

In the ordinary course of business, the Company from time to time engages in transactions with other corporations or financial institutions whose officers or directors are also directors or officers of the Company. Transactions with such corporations and financial institutions are conducted on an arm’s-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 boards of directors of Holdings and iPayment do not consider that any such transactions would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and the boards of directors of Holdings and iPayment are not currently aware of any related party transactions other than those set forth below.

In 2010, iPayment and the financial services firm Perella Weinberg Partners LP (“Perella Weinberg”) entered into an engagement letter providing for Perella Weinberg to act as its financial advisor in connection with a potential change of control or similar transaction involving iPayment. In March 2010, Adaero Holdings, LLC (“Adaero”), an entity majority owned and controlled by Mark Monaco, entered into a consulting agreement with Perella Weinberg. Mr. Monaco became Chief Financial Officer of iPayment in October 2010 and a Director of iPayment and Holdings following the consummation of the Refinancing. When the Equity Redemption was consummated, we paid to Perella Weinberg a transaction fee of approximately $7.5 million pursuant to such engagement letter and, following such payment, Perella Weinberg made a payment of $1.0 million to Adaero pursuant to the consulting agreement described above.

iPayment and Holdings do not have securities listed on a national securities exchange or inter-dealer quotation system with requirements that a majority of their board of directors be “independent.” Accordingly, iPayment and Holdings are not subject to rules requiring certain of its directors to be independent. The boards of directors of both iPayment and Holdings have determined that Messrs. Grimstad and Monaco are not, and Mr. Vickers is, independent under the listing standards of the Nasdaq Stock Market. However, if iPayment and Holdings were listed companies, 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 issuer’s board of directors be independent and from certain other rules.

As discussed in the Explanatory Note to this Amended Filing and in Note 2 to our consolidated financial statements “Restatement of Consolidated Financial Statements,” which accompanies the financial statements in Item 8 of this report, certain of the Company’s former officers and employees and certain of its outside contractors engaged in financial misconduct whereby such officers and employees received improper reimbursements and other payments.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

We do not have an audit committee. As a result, our board of directors performs the duties of an audit committee. Our board of directors evaluates and approves in advance the scope and cost of the engagement of an auditor before the auditor renders audit and non-audit services. The following table sets forth the aggregate fees billed to iPayment, Inc. for the years ended December 31, 2011 and 2010, by Ernst & Young LLP. Fees are presented in the period to which they relate rather than the period in which they were billed.

	2011		2010
Audit Fees (1)	$	853,821	$	802,821
Audit Related Fees (2)		356,258		—
Tax Fees (3)		170,877		74,000
All Other Fees (4)		126,762		89,396
	$	1,507,718	$	966,217

(1) Audit Fees consist of professional service fees rendered for the audit of the Company’s annual financial statements and reviews of the Company’s quarterly financial statements included in our Form 10-K annual reports and in our From 10-Q quarterly reports. This category also includes professional service fees related to the restatement of the Company’s Affected Financial Statements.

(2) Audit Related Fees consist of professional service fees rendered for advisory services provided relating to the re-organization of the Company and review of the associated Registration Statement Form S-4 filing.

(3) Tax fees consist of U.S. tax compliance, tax planning and other U.S. tax-related consultations.

(4) All Other Fees consist of professional service fees associated with the internal investigation conducted relating to the revealed financial misconduct.

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) (1) Restated Financial Statements

The restated Consolidated Financial Statements, together with the report thereon of Ernst & Young LLP dated , are included as part of Item 8, Financial Statements and Supplementary Data, commencing on page above.

(2) “Schedule II – Valuation and Qualifying Accounts - Restated” 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 - Restated

iPayment, Inc.

			Additions
Description	Balance at Beginning of Period		Charged to Costs and Expenses		Charged to Other Accounts		Deductions			Balance at End of Period
Predecessor
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		—		81,000		—			827,000
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	(2)		1,524,000
Total	$	6,885,000	$	5,810,000	$	81,000	$	9,041,000		$	3,735,000
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		827,000		—		—		238,000			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	(2)		1,385,000
Total	$	3,735,000	$	3,763,000	$	—	$	4,392,000		$	3,106,000
Period Ended May 23, 2011:
Deducted from asset accounts:
Allowance for doubtful accounts	$	735,000	$	95,000	$	—	$	24,000	(1)	$	806,000
Valuation allowance on deferred tax asset		589,000		—		—		—			589,000
Reserve for merchant advance losses		397,000		—		—		17,782			379,218
Reserve for merchant losses		1,385,000		—		—		92,000	(2)		1,293,000
Total	$	3,106,000	$	95,000	$	—	$	133,782		$	3,067,218
Successor:
Period Ended December 31, 2011:
Deducted from asset accounts:
Allowance for doubtful accounts	$	806,000	$	914,000	$	—	$	140,000	(1)	$	1,580,000
Valuation allowance on deferred tax asset		589,000		—		1,060,000		—			1,649,000
Reserve for merchant advance losses		379,218		—		—		27,218			352,000
Reserve for merchant losses		1,293,000		4,100,000		—		4,163,000	(2)		1,230,000
Total	$	3,067,218	$	5,014,000	$	1,060,000	$	4,330,218		$	4,811,000

(1) Write-off of previously reserved accounts receivables.

(2) Write-off of previously reserved merchant losses.

(3) Exhibits

Reference is made to the Exhibit Index beginning on page 123 hereof.

118

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/ Carl A. Grimstad
	Name:	Carl A. Grimstad
	Title:	Chairman, Chief Executive Officer and President
	January 29, 2013

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 January 29, 2013.

Signature	Title
/s/ Carl A. Grimstad Carl A. Grimstad	Chairman, Chief Executive Officer and President (Principal Executive Officer)
/s/ Mark C. Monaco Mark C. Monaco	Executive Vice President, Chief Financial Officer, Treasurer and Director (Principal Financial Officer and Principal Accounting Officer)
/s/ John A. Vickers John A. Vickers	Director

119

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 HOLDINGS, INC.
By:	/s/ Carl A. Grimstad
	Name:	Carl A. Grimstad
	Title:	Chief Executive Officer, President and Director
	January 29, 2013

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 January 29, 2013.

Signature	Title
/s/ Carl A. Grimstad Carl A. Grimstad	Chief Executive Officer, President and Director (Principal Executive Officer)
/s/ Mark C. Monaco Mark C. Monaco	Executive Vice President, Chief Financial Officer, Treasurer and Director (Principal Financial Officer and Principal Accounting Officer)
/s/ John A. Vickers John A. Vickers	Director

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EXHIBIT INDEX

2.1	Agreement and Plan of Merger, dated as of December 27, 2005, among iPayment Holdings, Inc., iPayment MergerCo, Inc. and iPayment, Inc., incorporated by reference to Exhibit 2.1 of iPayment, Inc.’s Current Report on Form 8-K filed with the SEC on December 28, 2005, File No. 000-50280.
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 iPayment, Inc.’s Current Report on Form 8-K filed with the SEC on December 28, 2005, File No. 000-50280.
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 iPayment, Inc.’s Current Report on Form 8-K filed with the SEC on December 28, 2005, File No. 000-50280.
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 iPayment, Inc.’s Registration Statement on Form S-4 filed with the SEC on July 21, 2006, File No. 333-135959.
3.2	Bylaws of Merger Co., as adopted by iPayment, Inc., incorporated by reference to Exhibit 3.2 of iPayment, Inc.’s Registration Statement on Form S-4 filed with the SEC on July 21, 2006, File No. 333-135959.
3.3	Restated Certificate of Incorporation of iPayment Holdings, Inc., incorporated by reference to Exhibit 3.3 of the Company’s Registration Statement on Form S-4 filed with the SEC on October 11, 2011, File No. 333-177233.
3.4	Bylaws of iPayment Holdings, Inc., incorporated by reference to Exhibit 3.4 of the Company’s Registration Statement on Form S-4 filed with the SEC on October 11, 2011, File No. 333-177233.
3.5	Articles of Incorporation and Articles of Amendment to the Articles of Incorporation of 1st National Processing, Inc. (f/k/a First Acquisition Company), incorporated by reference to Exhibit 3.5 of iPayment, Inc.’s Registration Statement on Form S-4 filed with the SEC on July 21, 2006, File No. 333-135959.
3.6	Amended and Restated Bylaws of 1st National Processing, Inc., incorporated by reference to Exhibit 3.19 of iPayment, Inc.’s Registration Statement on Form S-4 filed with the SEC on July 21, 2006, File No. 333-135959.
3.7	Certificate of Formation of Cambridge Acquisition Sub, LLC, incorporated by reference to Exhibit 3.7 of the Company’s Registration Statement on Form S-4 filed with the SEC on October 11, 2011, File No. 333-177233.
3.8	Limited Liability Company Agreement of Cambridge Acquisition Sub, LLC, incorporated by reference to Exhibit 3.8 of the Company’s Registration Statement on Form S-4 filed with the SEC on October 11, 2011, File No. 333-177233.
3.9	Certificate of Formation and Certificate of Amendment of CardPayment Solutions, L.L.C. (f/k/a CPS Acquisition, L.L.C.), incorporated by reference to Exhibit 3.11 of iPayment, Inc.’s Registration Statement on Form S-4 filed with the SEC on July 21, 2006, File No. 333-135959.
3.10	Limited Liability Company Agreement of CardPayment Solutions, L.L.C., incorporated by reference to Exhibit 3.25 of iPayment, Inc.’s Registration Statement on Form S-4 filed with the SEC on July 21, 2006, File No. 333-135959.
3.11	Articles of Incorporation and Certificate of Amendment of Articles of Incorporation of CardSync Processing, Inc., incorporated by reference to Exhibit 3.3 of iPayment, Inc.’s Registration Statement on Form S-4 filed with the SEC on July 21, 2006, File No. 333-135959.
3.12	Amended and Restated Bylaws of CardSync Processing, Inc., incorporated by reference to Exhibit 3.17 of iPayment, Inc.’s Registration Statement on Form S-4 filed with the SEC on July 21, 2006, File No. 333-135959.
3.13	Amended and Restated Certificate of Incorporation of E-Commerce Exchange, Inc., incorporated by reference to Exhibit 3.4 of iPayment, Inc.’s Registration Statement on Form S-4 filed with the SEC on July 21, 2006, File No. 333-135959.
3.14	Amended and Restated Bylaws of E-Commerce Exchange, Inc., incorporated by reference to Exhibit 3.18 of iPayment, Inc.’s Registration Statement on Form S-4 filed with the SEC on July 21, 2006, File No. 333-135959.
3.15	Articles of Organization of iFunds Cash Solutions, LLC, incorporated by reference to Exhibit 3.15 of the Company’s Registration Statement on Form S-4 filed with the SEC on October 11, 2011, File No. 333-177233.
3.16	Operating Agreement of iFunds Cash Solutions, LLC, incorporated by reference to Exhibit 3.16 of the Company’s Registration Statement on Form S-4 filed with the SEC on October 11, 2011, File No. 333-177233.

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3.17	Certificate of Formation of iAdvantage, LLC, incorporated by reference to Exhibit 3.17 of the Company’s Registration Statement on Form S-4 filed with the SEC on October 11, 2011, File No. 333-177233.
3.18	Limited Liability Company Agreement of iAdvantage, LLC, incorporated by reference to Exhibit 3.18 of the Company’s Registration Statement on Form S-4 filed with the SEC on October 11, 2011, File No. 333-177233.
3.19	Certificate of Formation of iPayment Acquisition Sub LLC, incorporated by reference to Exhibit 3.12 of iPayment, Inc.’s Registration Statement on Form S-4 filed with the SEC on July 21, 2006, File No. 333-135959.
3.20	Limited Liability Company Agreement of iPayment Acquisition Sub LLC, incorporated by reference to Exhibit 3.26 of iPayment, Inc.’s Registration Statement on Form S-4 filed with the SEC on July 21, 2006, File No. 333-135959.
3.21	Plan of Conversion of iPayment of California, LLC (f/k/a iPayment of California, Inc.), incorporated by reference to Exhibit 3.13 of iPayment, Inc.’s Registration Statement on Form S-4 filed with the SEC on July 21, 2006, File No. 333-135959.
3.22	Operating Agreement of iPayment of California, LLC, incorporated by reference to Exhibit 3.27 of iPayment, Inc.’s Registration Statement on Form S-4 filed with the SEC on July 21, 2006, File No. 333-135959.
3.23	Certificate of Incorporation of iPayment of Maine, Inc., incorporated by reference to Exhibit 3.7 of iPayment, Inc.’s Registration Statement on Form S-4 filed with the SEC on July 21, 2006, File No. 333-135959.
3.24	Bylaws of iPayment of Maine, Inc., incorporated by reference to Exhibit 3.21 of iPayment, Inc.’s Registration Statement on Form S-4 filed with the SEC on July 21, 2006, File No. 333-135959.
3.25	Certificate of Formation of IPMT Transport, LLC, incorporated by reference to Exhibit 3.25 of the Company’s Registration Statement on Form S-4 filed with the SEC on October 11, 2011, File No. 333-177233.
3.26	Limited Liability Company Agreement of IPMT Transport, LLC, incorporated by reference to Exhibit 3.26 of the Company’s Registration Statement on Form S-4 filed with the SEC on October 11, 2011, File No. 333-177233.
3.27	Certificate of Formation of iScan Solutions, LLC, incorporated by reference to Exhibit 3.27 of the Company’s Registration Statement on Form S-4 filed with the SEC on October 11, 2011, File No. 333-177233.
3.28	Limited Liability Company Agreement of iScan Solutions, LLC, incorporated by reference to Exhibit 3.28 of the Company’s Registration Statement on Form S-4 filed with the SEC on October 11, 2011, File No. 333-177233.
3.29	Certificate of Formation of MSC Acquisition Sub, LLC, incorporated by reference to Exhibit 3.29 of the Company’s Registration Statement on Form S-4 filed with the SEC on October 11, 2011, File No. 333-177233.
3.30	Limited Liability Company Agreement of MSC Acquisition Sub, LLC, incorporated by reference to Exhibit 3.30 of the Company’s Registration Statement on Form S-4 filed with the SEC on October 11, 2011, File No. 333-177233.
3.31	Certificate of Formation of NPMG Acquisition Sub, LLC, incorporated by reference to Exhibit 3.16 of iPayment, Inc.’s Registration Statement on Form S-4 filed with the SEC on July 21, 2006, File No. 333-135959.
3.32	Limited Liability Company Agreement of NPMG Acquisition Sub, LLC, incorporated by reference to Exhibit 3.30 of iPayment, Inc.’s Registration Statement on Form S-4 filed with the SEC on July 21, 2006, File No. 333-135959.
3.33	Amended and Restated Certificate of Incorporation of Online Data Corp., incorporated by reference to Exhibit 3.8 of iPayment, Inc.’s Registration Statement on Form S-4 filed with the SEC on July 21, 2006, File No. 333-135959.
3.34	Amended and Restated Bylaws of Online Data Corp., incorporated by reference to Exhibit 3.22 of iPayment, Inc.’s Registration Statement on Form S-4 filed with the SEC on July 21, 2006, File No. 333-135959.
3.35	Certificate of Formation of PCS Acquisition Sub, LLC, incorporated by reference to Exhibit 3.14 of iPayment’s Registration Statement on Form S-4 filed with the SEC on July 21, 2006, File No. 333-135959.
3.36	Limited Liability Company Agreement of PCS Acquisition Sub, LLC, incorporated by reference to Exhibit 3.28 of iPayment, Inc.’s Registration Statement on Form S-4 filed with the SEC on July 21, 2006, File No. 333-135959.
3.37	Certificate of Incorporation of Quad City Acquisition Sub, Inc., incorporated by reference to Exhibit 3.9 of iPayment, Inc.’s Registration Statement on Form S-4 filed with the SEC on July 21, 2006, File No. 333-135959.
3.38	Bylaws of Quad City Acquisition Sub, Inc., incorporated by reference to Exhibit 3.23 of iPayment, Inc.’s Form S-4 filed with the SEC on July 21, 2006, File No. 333-135959.
3.39	Certificate of Formation of TS Acquisition Sub, LLC, incorporated by reference to Exhibit 3.15 of iPayment, Inc.’s Registration Statement on Form S-4 filed with the SEC on July 21, 2006, File No. 333-135959.
3.40	Limited Liability Company Agreement of TS Acquisition Sub, LLC, incorporated by reference to Exhibit 3.29 of iPayment, Inc.’s Registration Statement on Form S-4 filed with the SEC on July 21, 2006, File No. 333-135959.

122

4.1	Indenture, dated May 6, 2011, among iPayment, Inc., the guarantors party thereto and Wilmington Trust, National Association (as successor by merger to Wilmington Trust FSB), as trustee, including the form of the notes, incorporated by reference to Exhibit 4.1 of iPayment, Inc.’s Current Report on Form 8-K filed with the SEC on May 12, 2011.
4.2	Registration Rights Agreement, dated May 6, 2011, among iPayment, Inc., the guarantors party thereto and J.P. Morgan Securities LLC, as representative for the several initial purchasers (incorporated by reference to Exhibit 4.2 of iPayment, Inc.’s Current Report on Form 8-K filed with the SEC on May 12, 2011).
4.3	Indenture, dated May 6, 2011, among iPayment Holdings, Inc. and Wilmington Trust, National Association (as successor by merger to Wilmington Trust FSB), as trustee, including the form of the notes, incorporated by reference to Exhibit 4.3 of the Company’s Registration Statement on Form S-4 filed with the SEC on October 11, 2011, File No. 333-177233.
4.4	Registration Rights Agreement, dated May 6, 2011, among iPayment Holdings, Inc. and J.P. Morgan Securities LLC, incorporated by reference to Exhibit 4.4 of the Company’s Registration Statement on Form S-4 filed with the SEC on October 11, 2011, File No. 333-177233.
4.5	First Supplemental Indenture, dated October 7, 2011, among iPayment, Inc., the guarantors party thereto and Wilmington Trust, National Association (as successor by merger to Wilmington Trust FSB), as trustee, incorporated by reference to Exhibit 4.5 of the Company’s Registration Statement on Form S-4 filed with the SEC on October 11, 2011, File No. 333-177233.
10.1	Credit Agreement, dated as of May 6, 2011, among iPayment, Inc., iPayment Holdings, Inc., the guarantors and lenders party thereto and JP Morgan Chase Bank, N.A., as administrative agent, incorporated by reference to Exhibit 10.1 of iPayment, Inc.’s Current Report on Form 8-K filed with the SEC on May 12, 2011.
10.2	Security Agreement, dated as of May 6, 2011, among iPayment, Inc., iPayment Holdings, Inc., the guarantors party thereto and JPMorgan Chase Bank N.A., as administrative agent, incorporated by reference to Exhibit 10.2 of iPayment, Inc.’s Current Report on Form 8-K filed with the SEC on May 12, 2011.
10.3	Pledge Agreement, dated as of May 6, 2011, among iPayment, Inc., iPayment Holdings, Inc., the guarantors party thereto and JPMorgan Chase Bank N.A., as administrative agent, incorporated by reference to Exhibit 10.3 of iPayment, Inc.’s Current Report on Form 8-K filed with the SEC on May 12, 2011.
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 iPayment, Inc.’s Registration Statement on Form S-1 filed with the SEC on March 4, 2003, File No. 333-101705.
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 iPayment, Inc.’s Registration Statement on Form S-1 filed with the SEC on December 6, 2002, File No. 333-101705.
10.6	Second Amendment to Service Agreement, dated as of November 27, 2002, between First Data Merchant Services Corporation and iPayment, Inc., incorporated by reference to Exhibit 10.6 of iPayment, Inc.’s Annual Report on Form 10-K filed with the SEC on March 21, 2011, File No. 000-50280.*
10.7	Third Amendment to Service Agreement, dated as of January 8, 2004, between First Data Merchant Services Corporation and iPayment, Inc., incorporated by reference to Exhibit 10.7 of iPayment, Inc.’s Annual Report on Form 10-K filed with the SEC on March 21, 2011, File No. 000-50280.*
10.8	Fourth Amendment to Service Agreement, dated as of May 25, 2004, between First Data Merchant Services Corporation and iPayment, Inc., incorporated by reference to Exhibit 10.8 of iPayment, Inc.’s Annual Report on Form 10-K filed with the SEC on March 21, 2011, File No. 000-50280.
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 iPayment, Inc.’s Annual Report on Form 10-K filed with the SEC on March 14, 2005, File No. 000-50280.
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 iPayment, Inc.’s Annual Report on Form 10-K filed with the SEC on March 14, 2005, File No. 000-50280.*
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, incorporated by reference to Exhibit 10.11 of iPayment, Inc.’s Annual Report on Form 10-K filed with the SEC on March 21, 2011, File No. 000-50280.*

123

10.12	Fifth Amendment to Service Agreement, dated as of July 11, 2005, between First Data Merchant Services Corporation and iPayment, Inc., incorporated by reference to Exhibit 10.12 of iPayment, Inc.’s Annual Report on Form 10-K filed with the SEC on March 21, 2011, File No. 000-50280.*
10.13	Sixth Amendment to Service Agreement, dated as of August 31, 2006, between First Data Merchant Services Corporation and iPayment, Inc., incorporated by reference to Exhibit 10.13 of iPayment, Inc.’s Annual Report on Form 10-K filed with the SEC on March 21, 2011, File No. 000-50280.*
10.14	Seventh Amendment to Service Agreement, dated as of September 29, 2006, between First Data Merchant Services Corporation and iPayment, Inc., incorporated by reference to Exhibit 10.14 of iPayment, Inc.’s Annual Report on Form 10-K filed with the SEC on March 21, 2011, File No. 000-50280.*
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 iPayment, Inc.’s Quarterly Report on Form 10-Q filed with the SEC on May 14, 2007, File No. 000-50280.*
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 iPayment, Inc.’s Quarterly Report on Form 10-Q filed with the SEC on May 14, 2007, File No. 000-50280.*
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 iPayment, Inc.’s Current Report on Form 8-K filed with the SEC on May 10, 2007.
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., incorporated by reference to Exhibit 10.18 of iPayment, Inc.’s Annual Report on Form 10-K filed with the SEC on March 21, 2011, File No. 000-50280.*
10.19	APRIVA Amendment to Service Agreement, dated as of October 18, 2007, between First Data Merchant Services Corporation and iPayment, Inc., incorporated by reference to Exhibit 10.19 of iPayment, Inc.’s Annual Report on Form 10-K filed with the SEC on March 21, 2011, File No. 000-50280.*
10.20	Gift Card Amendment to Service Agreement, dated as of October 18, 2007, between First Data Merchant Services Corporation and iPayment, Inc., incorporated by reference to Exhibit 10.20 of iPayment, Inc.’s Annual Report on Form 10-K filed with the SEC on March 21, 2011, File No. 000-50280.*
10.21	Amendment to Service Agreement, dated as of October 18, 2007, between First Data Merchant Services Corporation and iPayment, Inc., incorporated by reference to Exhibit 10.21 of iPayment, Inc.’s Annual Report on Form 10-K filed with the SEC on March 21, 2011, File No. 000-50280.
10.22	Discover Amendment to Service Agreement, dated as of September 2008, between First Data Merchant Services Corporation and iPayment, Inc., incorporated by reference to Exhibit 10.22 of iPayment, Inc.’s Annual Report on Form 10-K filed with the SEC on March 21, 2011, File No. 000-50280.
10.23	Ninth Amendment to Service Agreement, dated as of June 11, 2009, between First Data Merchant Services Corporation and iPayment, Inc., incorporated by reference to Exhibit 10.23 of iPayment, Inc.’s Annual Report on Form 10-K filed with the SEC on March 21, 2011, File No. 000-50280.*
10.24	First Amendment to Service Agreement dated as of October 9, 2009, between First Data Merchant Services Corporation and iPayment, Inc., incorporated by reference to Exhibit 10.24 of iPayment, Inc.’s Annual Report on Form 10-K filed with the SEC on March 21, 2011, File No. 000-50280.*
10.25	Eighth Amendment to Service Agreement, dated as of October 9, 2009, between First Data Merchant Services Corporation and iPayment, Inc., incorporated by reference to Exhibit 10.25 of iPayment, Inc.’s Annual Report on Form 10-K filed with the SEC on March 21, 2011, File No. 000-50280.*
10.26	Ninth Amendment to Service Agreement, dated as of November 9, 2009, between First Data Merchant Services Corporation and iPayment, Inc., incorporated by reference to Exhibit 10.26 of iPayment, Inc.’s Annual Report on Form 10-K filed with the SEC on March 21, 2011, File No. 000-50280.*
10.27	Tenth Amendment to Service Agreement, dated as of November 12, 2009, by and between First Data Merchant Services Corporation and iPayment, Inc., incorporated by reference to Exhibit 10.27 of iPayment, Inc.’s Annual Report on Form 10-K filed with the SEC on March 21, 2011, File No. 000-50280.
10.28	Employment Agreement, dated March 4, 2011, between Mark C. Monaco and iPayment, Inc., incorporated by reference to Exhibit 10.1 of iPayment, Inc.’s Current Report on Form 8-K filed with the SEC on March 8, 2011.
10.29	Warrant Agreement, dated as of May 6, 2011, between iPayment Holdings, Inc. and Wilmington Trust FSB, as warrant agent, incorporated by reference to Exhibit 10.29 of the Company’s Registration Statement on Form S-4 filed with the SEC on October 11, 2011, File No. 333-177233.

124

10.30	Amendment to Service Agreement, dated as of August 25, 2011, between First Data Merchant Services Corporation and iPayment, Inc., incorporated by reference to Exhibit 10.31 of the Company’s Registration Statement on Form S-4 filed with the SEC on October 11, 2011, File No. 333-177233.*
10.31	Amendment to Service Agreement, dated as of August 25, 2011, between First Data Merchant Services Corporation and iPayment, Inc., incorporated by reference to Exhibit 10.32 of the Company’s Registration Statement on Form S-4 filed with the SEC on October 11, 2011, File No. 333-177233.*
10.32	Form of Indemnification Agreement, incorporated by reference to Exhibit 10.1 of iPayment, Inc.’s Current Report on Form 8-K filed with the SEC on October 7, 2011.
10.33	Executive Nonqualified Excess Plan Document, incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 14, 2011, File Nos. 000-50280 and 333-177233-19.
10.34	Executive Nonqualified “Excess” Plan Adoption Agreement for the iPayment Deferred Compensation Plan, incorporated by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 14, 2011, File Nos. 000-50280 and 333-177233-19.
10.35	Executive Nonqualified “Excess” Plan Adoption Agreement for the iPayment Executive Retention Plan, incorporated by reference to Exhibit 10.5 of the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 14, 2011, File Nos. 000-50280 and 333-177233-19.
21.1	Subsidiaries of the registrants.†
31.1	Certification of Carl A. Grimstad, 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.†
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.†
32.1	Certification of Carl A. Grimstad, 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.†
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.†
101.INS	XBRL Instance Document.†^
101.SCH	XBRL Taxonomy Extension Schema Document.†^
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.†^
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.†^
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.†^
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.†^

^†  Filed herewith.

^*  Portions of the exhibit omitted and filed separately with the SEC pursuant to a request for confidential treatment.

^{^}  Pursuant to Rule 406T of Regulation S-T, the XBRL files contained in Exhibit 101 are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

125