AMENDMENT NO. 8 T0 FORM S-1

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE

The information in this prospectus is not complete and may be changed. We may not sell these securities until the Securities and Exchange Commission declares our registration statement effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

This is the initial public offering of iPayment, Inc. No public market currently exists for our common stock.

We currently anticipate the initial public offering price of our common stock to be between $14.00 and $16.00 per share. We have applied to have the shares approved for quotation on the Nasdaq National Market under the symbol “IPMT”, subject to notice of issuance.

Investing in the common stock involves risks that are described in the “Risk Factors” section beginning on page 8 of this prospectus.

We have granted the underwriters a 30-day option to purchase up to 675,000 additional shares to cover any over-allotments.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

Bear, Stearns & Co. Inc.


	Thomas Weisel Partners LLC


	Wachovia Securities

You should rely only on the information contained in this document or to which we have referred you. We have not, and the underwriters have not, authorized anyone to provide you with information that is different. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

Until (25 days after the commencement of this offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

This summary highlights information contained elsewhere in this prospectus, but does not contain all the information that is important to you. You should read this entire prospectus carefully, including the section entitled “Risk Factors,” and our consolidated financial statements and the related notes included elsewhere in this prospectus, before making an investment decision. In this prospectus, we define a merchant as “active” if the merchant processes at least one credit or debit transaction in a given month. Unless otherwise specified or the context otherwise requires, references in this prospectus to “we,” “our” and “us” refer to iPayment, Inc. and its direct and indirect subsidiaries on a consolidated basis.

We are one of the fastest growing providers of credit and debit card-based payment processing services to small merchants. As of December 31, 2002, we provided our services to approximately 56,000 active small merchants located across the United States. The small merchants we serve typically generate less than $250,000 of charge volume per year and have an average transaction value of approximately $75. These merchants have traditionally been underserved by larger payment processors due to the difficulty in identifying, servicing and managing the risks associated with these merchants. As a result, these merchants have historically paid higher transaction fees than larger merchants.

Our payment processing services enable merchants to process both traditional card-present, or “swipe,” transactions, as well as card-not-present transactions. A card-not-present transaction occurs whenever a customer does not physically present a payment card at the point-of-sale and may occur over the Internet or by mail, fax or telephone. Our processing services include evaluation and acceptance of card numbers, detection of fraudulent transactions, receipt and settlement of funds and service and support. By outsourcing some of these services to third parties, including the evaluation and acceptance of card numbers and receipt and settlement of funds, we maintain an efficient operating structure, which allows us to easily expand our operations without significantly increasing our fixed costs. We derive the majority of our revenues from fee income related to transaction processing, which is primarily comprised of a percentage of the dollar amount of each transaction we process, as well as a flat fee per transaction. In the event we have outsourced any of the services provided in the transaction, we remit a portion of the fee income to the third parties that have provided these services.

We believe our experience and knowledge in providing payment processing services to small merchants gives us the ability to effectively identify, evaluate and manage the payment processing needs and risks that are unique to small businesses.

We market and sell our services primarily through our relationships with over 500 independent sales organizations, or ISOs, which we define as any non-bank party that sells card-based payment processing services to merchants. ISOs act as a non-employee, external sales force in communities throughout the United States. By providing the same high level of service and support to our ISOs as we do to our merchant customers, we maintain our access to an experienced sales force of approximately 2,000 sales professionals who market our services, with minimal direct investment in sales infrastructure and management. After an ISO refers a merchant to us and we execute a processing agreement with that merchant, we pay the referring ISO a percentage of the revenues generated by that merchant. Although our relationships with ISOs are mutually non-exclusive, we believe that our understanding of the unique payment processing needs of small merchants enables us to develop compelling incentives for ISOs to continue to refer newly identified merchants to us. We also maintain an open dialogue with our ISOs, allowing us to quickly address their concerns and any problems facing the merchants they refer to us.

several smaller portfolios of merchant accounts, which resulted in an aggregate increase in revenues of $65.7 million, representing 85.3% of our total growth in revenues over the prior period. Our net loss decreased by 89.8% from $4.9 million for 2001 to $0.5 million for 2002.

According to The Nilson Report, total expenditures of transactions using card-based payment systems by U.S. consumers grew from $0.5 trillion in 1991, or 19% of all consumer payments, to $1.8 trillion in 2001, or 32% of total payments, and is expected to grow to $4.2 trillion by 2011, or 48% of total payments, which would represent a compound annual growth rate of 9% from 2001 levels. We believe that these increases are due to the benefits of card-based payment systems to both merchants and consumers. By accepting card-based payments, merchants can access a broader universe of consumers, enjoy faster settlement times and reduce transaction errors. By using credit or debit cards, consumers are able to make purchases more conveniently, whether in person, over the Internet, or by mail, fax or telephone, while gaining the benefit of loyalty programs, such as frequent flier miles or cash back, which are increasingly being offered by credit or debit card issuers. Consumers are also beginning to use card-based and other electronic payment methods for purchases at an earlier age. Given these advantages of card-based payment systems to both merchants and consumers, favorable demographic trends and the resulting proliferation of credit and debit card usage, we believe businesses will increasingly seek to accept card-based payment systems in order to remain competitive.

We expect the small merchants we target to increasingly accept and benefit from the increased usage of card-based payment systems. In 1997, the U.S. Census Bureau estimated that 20 million businesses in the United States with on average less than $1.0 million in annual sales or no payroll generated an aggregate of $1.7 trillion in annual sales. Many of these small businesses are seeking, and we expect many new small businesses to seek, to provide customers with the ability to pay for merchandise and services using credit or debit cards, including those in industries that have historically accepted cash and checks as the only forms of payment. For example, the prevalence of consumers making purchases on the Internet incentivizes small businesses to have an on-line presence and, we believe, increases their need to accept credit and debit cards as payment.


	•	Strong Position and Substantial Experience in Our Target Market. As of December 31, 2002, we provided card-based payment processing to approximately 56,000 active small merchants. We believe that while we have a competitive advantage over larger service providers because of our understanding of the unique payment processing needs and risks of small merchants, we also have a competitive advantage over service providers of a similar or smaller size that may lack our experience and resources.

	•	Large, Experienced, Efficient Sales Force. Our relationships with over 500 ISOs provide us with an experienced sales force of approximately 2,000 sales professionals who market our services in local communities throughout the United States, with minimum investment in sales infrastructure and management on our part. We continually strive to strengthen these relationships by delivering superior service and support to the ISOs that refer merchants to us.

	•	Scalable, Efficient Operating Structure. Our operating structure is efficient and scalable, meaning we can easily expand our operations without significantly increasing our fixed costs. We conduct our customer service and risk management operations in-house, where we believe we can add the most value due to our management’s experience and expertise in these areas. We consider customer service and risk management highly important to our operations and overall success. We outsource our remaining processing services to third parties, including the evaluation and acceptance of card numbers and receipt and settlement of funds. By outsourcing these non-core services, we believe we can achieve lower costs per transaction through higher volume purchasing.

	•	Proven Acquisition and Integration Strategy. We have significant experience acquiring providers of payment processing services, as well as portfolios of merchant accounts, having acquired six providers of payment processing services and four large portfolios and several smaller portfolios of merchant accounts since January 2001. We have enhanced revenues and improved operating efficiencies of our acquired


		entities by improving the services, support and benefits we offer to the ISOs that serve the entities and merchant accounts we acquire. In addition, we have increased the operating efficiencies of many of the businesses we have acquired by conducting profitability analyses of acquired merchant accounts and reducing processing fees and overhead.

	•	Comprehensive Underwriting and Risk Management System. Through our experience assessing risks associated with providing payment processing services to small merchants, we have developed business procedures and systems that provide effective risk management and fraud prevention solutions.

Although we believe that we exhibit the competitive strengths described above, many of our competitors have substantially greater capital resources than we have and operate as subsidiaries of financial institutions or bank holding companies, which may allow them to integrate their services to a greater extent than we can. In addition, we are subject to a number of risks discussed in “Risk Factors” and elsewhere in this prospectus. The principal risks include the risk of liability for chargebacks in the event that a billing dispute between a merchant and cardholder is not ultimately resolved in favor of the merchant and the merchant is unable or unwilling to pay the disputed amount, and the risk that we may be liable for undisclosed liabilities associated with companies that we have acquired or will acquire in the future.

Our objective is to take advantage of the proliferation of small merchants and their increasing acceptance of card-based payment systems. We plan to build on our existing competitive strengths and further enhance our position as a provider of card-based payment processing services to small merchants. The principal elements of our strategy include the following:


	•	Expand our portfolio of small merchants who use our processing services;

	•	Enhance our relationships with those ISOs who currently refer small merchants to us and establish relationships with new ISOs;

	•	Maintain a stable and recurring revenue base; and

	•	Continue to pursue strategic acquisitions of other payment processing businesses, as well as individual portfolios of merchant accounts.

Our subsidiary, iPayment Technologies, Inc., was formed in 1992 as a California corporation. In July 2000, iPayment Technologies purchased assets from two former affiliates in exchange for the assumption of debt, cash, a note and the issuance of shares of common stock of iPayment Technologies. In December 2000, iPayment Technologies implemented a restructuring plan, which resulted in a reduction in overhead costs and personnel. In February 2001, Gregory Daily joined iPayment Technologies as its Chief Executive Officer and Chairman of the Board.

In February 2001, we were formed by the majority stockholders of iPayment Technologies, as a Tennessee corporation, under the name iPayment Holdings, Inc. as a holding company for iPayment Technologies and other card processing businesses. We then appointed Gregory Daily as our Chief Executive Officer and Chairman of the Board. In April 2001, we acquired a 94.63% interest in iPayment Technologies, and in July 2002, we acquired the remaining outstanding shares of iPayment Technologies, which then became our wholly owned subsidiary, in each case by issuing our shares to iPayment Technologies stockholders in exchange for iPayment Technologies shares.

In August 2002, we were reincorporated in Delaware under the name iPayment, Inc.

Based on our review of our results of operations for the three months ended March 31, 2003, our merchant processing volume increased to $1,338 million for the three months ended March 31, 2003 from $356 million for the three months ended March 31, 2002. Our revenues increased to $46.7 million for the three months ended March 31, 2003 from $16.5 million for the three months ended March 31, 2002. Our operating expenses increased to $42.1 million for the three months ended March 31, 2003 from $15.8 million for the three months ended March 31, 2002. This increase for the three months ended

March 31, 2003 resulted from an increase of $24.9 million in cost of services, $0.8 million in depreciation and amortization, and $0.6 million in selling, general and administrative expenses, from the three months ended March 31, 2002. Income from operations increased to $4.6 million for the three months ended March 31, 2003 from $0.6 million for the three months ended March 31, 2002. Net income was $0.9 million for the three months ended March 31, 2003, compared to a net loss of $0.7 million for the three months ended March 31, 2002. A substantial majority of the increase in revenues, operating expenses, income from operations and net income was attributable to our acquisition since January 2001 of six businesses, and four large portfolios and several smaller portfolios of merchant accounts. For the three months ended March 31, 2003, cash flow provided by operating activities was $1.3 million.

The financial information discussed above includes all adjustments (consisting of normal, recurring adjustments) necessary for a fair presentation of the interim financial information. The operating results for the three months ended March 31, 2003, or any other quarter, are not necessarily indicative of the operating results for the full year or for any future period.

Our principal executive offices are located at 40 Burton Hills Boulevard, Suite 415, Nashville, Tennessee 37215. Our telephone number at that address is (615) 665-1858.


	•	881,960 shares of common stock issuable upon exercise of outstanding stock options as of April 22, 2003 at a weighted average exercise price of $6.01 per share;

	•	1,431,540 shares of common stock reserved for issuance under our Stock Incentive Plan and Non-Employee Directors Stock Option Plan, including an aggregate of 569,121 shares issuable upon exercise of stock options to be granted to our directors, employees and ISOs immediately following the closing of this offering at an exercise price equal to an assumed initial public offering price of $15.00 per share (consisting of 83,286 shares to non-employee directors, 462,700 shares to officers and other selected employees, and 23,135 shares to ISOs);

	•	890,491 shares of common stock issuable upon exercise of outstanding warrants as of April 22, 2003 at a weighted average exercise price of $0.02 per share; and

	•	the conversion of $16.9 million of our outstanding convertible subordinated promissory notes and $0.4 million of accrued interest into 734,241 shares of common stock assuming conversion on April 22, 2003.


	•	assumes the underwriters have not exercised their option to purchase 675,000 shares to cover over-allotments;

	•	gives effect to a split of our outstanding common stock prior to this offering of 0.4627 shares for each one share of outstanding common stock;

	•	reflects the conversion of all of our outstanding mandatorily redeemable convertible preferred stock into 1,192,470 shares of common stock; and

	•	reflects the issuance of 600,000 shares of common stock upon the conversion of $9.0 million of subordinated promissory notes upon the closing of the offering (which had a carrying value of $8.0 million as of December 31, 2002) held by Gregory S. Daily, our Chairman of the Board and Chief Executive Officer, Clay M. Whitson, our Chief Financial Officer and Treasurer, and entities not affiliated with us, at a conversion price equal to an assumed initial public offering price of $15.00 per share.

The unaudited pro forma as adjusted balance sheet gives effect to the automatic conversion of all of our outstanding mandatorily redeemable convertible preferred stock into 1,192,470 shares of our common stock upon completion of this offering, the receipt of approximately $59.3 million in net proceeds from the sale of 4,500,000 shares of our common stock in the offering at an assumed initial public offering price of $15.00 per share and the application of the estimated net proceeds from this offering to repay $46.1 million of outstanding indebtedness (which had a carrying value of $40.7 million as of December 31, 2002), and the conversion of $9.0 million of subordinated promissory notes upon the closing of the offering (which had a carrying value of $8.0 million as of December 31, 2002) into 600,000 shares of our common stock at an assumed initial public offering price of $15.00 per share. The repayment of the indebtedness and conversion of notes will result in the recognition of a loss equal to the unamortized discount balances at repayment or conversion. These balances totaled $6.4 million as of December 31, 2002. We have prepared the unaudited information on the same basis as the audited consolidated financial statements and have included all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our financial position at those dates and our results of operations for the periods ended.


(1)	Represents the total dollar volume of all Visa and MasterCard transactions processed by our merchants, which is provided to us by our third party processing vendors.

(2)	Represents the conversion of all of our outstanding mandatorily redeemable convertible preferred stock into 1,192,470 shares of common stock.

An investment in our common stock involves a high degree of risk. You should consider carefully the following risks and other information contained in this prospectus before you decide whether to buy our common stock. If any of the events contemplated by the following discussion of risks should occur, our business, results of operations and financial condition could suffer significantly. As a result, the market price of our common stock could decline, and you may lose all or part of the money you paid to buy our common stock.

We have a history of operating losses and will need to generate significant revenues to achieve or maintain our profitability.

Since inception, we have been engaged in start-up activities and have acquired payment processing businesses and portfolios of merchant accounts to grow our business, both of which require substantial capital and other expenditures. As a result, we have not sustained profitability, and may continue to incur losses in the future. We had a net loss of $4.9 million for the year ended December 31, 2001 and a net loss of $493,000 for the year ended December 31, 2002. In addition, a substantial portion of our historical revenue growth has resulted from acquisitions. For the year ended December 31, 2002, revenues attributable to the acquisitions we completed in 2001 and 2002 were $65.7 million, or 85.3% of our total growth in revenues over the prior period. We expect our cash needs to increase significantly for the next several years as we:


	•	acquire additional payment processing businesses and portfolios of merchant accounts;

	•	increase awareness of our services;

	•	expand our customer support and service operations;

	•	hire additional marketing, customer support and administrative personnel; and

	•	implement new and upgraded operational and financial systems, procedures and controls.

As a result of these continuing expenses, we need to generate significant revenues to achieve and maintain profitability. To date, our operations have been supported by financings. We currently intend to use $46.1 million of the estimated net proceeds from this offering to repay these financings and the remainder for general corporate purposes, including up to $5.0 million for working capital. If we do not continue to increase our revenues, our business, results of operations and financial condition could be materially and adversely affected.

The full impact of our recent acquisitions on our operating results is not fully reflected in our historical financial results, which as a result, are not necessarily indicative of our future results of operations.

Since January 2001, we have expanded our card-based payment processing services through the acquisition of six businesses and four large portfolios and several smaller portfolios of merchant accounts. These acquisitions have contributed to a substantial portion of our total revenues. The full impact of these acquisitions on our operating results are not fully reflected in our historical results of operations due to the recent nature of these acquisitions and their varying stages of integration. As a result of these acquisitions, our historical results may not be indicative of results to be expected in future periods.

We have faced, and may in the future face, significant chargeback liability if our merchants refuse or cannot reimburse chargebacks resolved in favor of their customers, and we face potential liability for merchant or customer fraud; we may not accurately anticipate these liabilities.

We have potential liability for chargebacks associated with the transactions we process. If a billing dispute between a merchant and a cardholder is not ultimately resolved in favor of the merchant, the disputed transaction is “charged back” to the merchant’s bank and credited to the account of the cardholder.

If we or our processing 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. For example, our largest chargeback loss resulted from the substantial non-compliance by a merchant with the Visa and MasterCard card association rules. We were obligated to pay the resulting chargebacks and losses that the merchant was unable to fund, which totaled $6.0 million. Please see “Risk Factors — Risks Associated with Acquisitions” for more information.

We also have potential liability for losses caused by fraudulent credit card 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 over the Internet or in response to telephone or mail orders. Because their sales are card-not-present transactions, these merchants are more vulnerable to customer fraud than larger merchants. Because we target these merchants, we experience chargebacks arising from cardholder fraud more frequently than providers of payment processing services that service larger merchants.

Merchant fraud occurs when a merchant, rather than a customer, knowingly uses a stolen or counterfeit card or card number to record a false sales transaction, or intentionally fails to deliver the merchandise or services sold in an otherwise valid transaction. Anytime a merchant is unable to satisfy a chargeback, we are responsible for that chargeback. We have established systems and procedures to detect and reduce the impact of merchant fraud, but we cannot assure you 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. Please see “Business — Risk Management” for a discussion of our procedures for detecting merchant fraud.

Charges incurred by us relating to chargebacks were $0.8 million, or 3.9% of revenues, $4.5 million, or 11.6% of revenues, and $6.4 million, or 5.6% of revenues, for the years ended December 31, 2000, 2001 and 2002, respectively.

We have incurred substantial debt, which can impair our financial and operating flexibility.

We have incurred substantial debt in connection with the financing of our operations and acquisitions. As of December 31, 2002, we had total debt of $78.1 million, net of unamortized warrant discount of $6.4 million, and a net working capital deficit of $14.2 million. On a pro forma basis giving effect to this issuance, the offering and the application of the estimated net proceeds of this offering to repay $40.7 million of this debt (which had an unamortized debt warrant discount of $5.4 million at December 31, 2002), we would have had $29.4 million of indebtedness outstanding (which had no unamortized debt warrant discount at December 31, 2002). We may incur additional debt in the future in order to pursue our acquisition strategy or for other purposes. Substantial indebtedness could impair our ability to obtain additional financing for working capital, capital expenditures or further acquisitions. Covenants governing any indebtedness we incur would likely restrict our ability to take specific actions, including our ability to pay dividends or distributions on, or redeem or repurchase, our capital stock, issue, sell or allow distributions on capital stock of our subsidiaries, enter into transactions with affiliates, merge, consolidate or sell our assets or make capital expenditure investments. In addition, the use of a substantial portion of the cash generated by our operations to cover debt service obligations and any security interests we grant on our assets could limit our financial and business flexibility.

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. 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 give the sponsoring banks substantial discretion in approving certain elements of our business practices, including our solicitation, application and qualification procedures for merchants, the terms of our agreements with merchants, the processing fees that we charge, our customer service levels and our use of independent sales organizations. We cannot guarantee that our sponsoring banks’ actions under these agreements will not be detrimental to us.

One of our principal bank sponsors, Humboldt Bank, Inc., is leaving the payment processing business. We entered into an agreement with JPMorgan Chase Bank on January 31, 2003, and are in the process of migrating our Humboldt merchant portfolios and other smaller merchant portfolios. We cannot guarantee that the transition of our services to JPMorgan Chase Bank will be seamless, and we may encounter difficulties migrating merchant portfolios to new sponsor banks in the future. Any unanticipated problems or delays with this transition could disrupt our business and may cause us to lose merchants. We cannot guarantee that any of our other current sponsor 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 credit card associations, our registrations with these associations could be terminated and we could be required to stop providing payment processing services for Visa and MasterCard.

Substantially all of the transactions we process involve Visa or MasterCard. If we or our bank sponsors fail to comply with the applicable requirements of the Visa and MasterCard credit card associations, Visa or MasterCard could suspend or terminate our registration. The termination of our registration or any changes in the Visa or MasterCard rules that would impair our registration could require us to stop providing payment processing services.

We rely on other card payment processors and service providers; if they fail or no longer agree to provide their services, our merchant relationships could be adversely affected and we could lose business.

We rely on agreements with several other 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 rely on third parties to whom we outsource specific services, such as reorganizing and accumulating daily transaction data on a merchant-by-merchant and card issuer-by-card issuer basis and forwarding the accumulated data to the relevant bankcard associations. Many of these organizations and service providers are our competitors and we do not have long-term contracts with most of them. Typically, our contracts with these third parties are for one-year terms and are subject to cancellation upon limited notice by either party.

The termination by our service providers of their arrangements with us or their failure to perform their services efficiently and effectively may adversely affect our relationships with the merchants whose accounts we serve and may cause those merchants to terminate their processing agreements with us.

To acquire and retain merchant accounts, we depend on ISOs that do not serve us exclusively.

We rely primarily on the efforts of ISOs to market our services to merchants seeking to establish an account with a payment processor. ISOs are companies that seek to introduce both newly-established and existing small merchants, including retailers, restaurants and service providers, such as physicians, to

providers of transaction payment processing services like us. None of the ISOs that refer merchants to us is exclusive to us and all of them have the right to refer merchants to other service providers. Our failure to maintain our relationships with our existing ISOs and those serving other service providers that we may acquire, and to recruit and establish new relationships with other ISOs, could adversely affect our revenues and internal growth and increase our merchant attrition. Please see “Business — Marketing and Sales” for a description of our ISO relationships.

We periodically support our ISOs through loans to help them expand their businesses. As of December 31, 2002, we had outstanding loans to ISOs in the aggregate amount of $1.9 million, and we may decide to loan additional amounts in the future. These notes bear interest in amounts ranging from 6% to 12%. The notes have maturity dates ranging from 2003 through 2005, and payments generally begin on each note one year prior to its maturity date. We have not set a limit on the amount of loans we may make to ISOs. If the business activities of these ISOs do not expand as we expect or they do not use the loans effectively, they may be unable to repay the loans and we may lose the principal amount of the loans and any interest accrued on the loans.

On occasion, we experience increases in interchange and sponsorship fees; if we cannot pass these increases along to our merchants, our profit margins will be reduced.

We pay interchange fees or assessments to card associations for each transaction we process using their credit and debit cards. From time to time, the card associations increase the interchange fees that they charge processors and the sponsoring banks. For example, Visa last increased its interchange fees for retail transactions by an average of 2.8% in October 2002. At their sole discretion, our sponsoring banks have the right to pass any increases in interchange fees on to us. In addition, our sponsoring banks may seek to increase their Visa and MasterCard sponsorship fees to us, all of which are based upon the dollar amount of the payment transactions we process. If we are not able to pass these fee increases along to merchants through corresponding increases in our processing fees, our profit margins will be reduced.

Unauthorized disclosure of merchant and cardholder data, whether through breach of our computer systems or otherwise, could expose us to protracted and costly litigation.

We collect and store sensitive data about merchants and cardholders, including names, addresses, social security numbers, drivers license numbers, checking and savings account numbers and payment history records, such as account closures and returned checks. In addition, we maintain a database of cardholder data relating to specific transactions, including payment card numbers and cardholder addresses, in order to process the transactions and for fraud prevention and other internal processes. If a person penetrates our network security or otherwise misappropriates sensitive merchant or cardholder data, we could be subject to liability or business interruption.

There have been a number of instances reported in the press of hackers penetrating computer systems of payment processors. In 2000, a computer hacker penetrated our computer systems, gained access to several thousand payment card account numbers and demanded a significant sum to keep the stolen numbers secret. When we did not pay the demanded sum, the person posted some of the stolen information on the Internet. We reported the breach to the sponsoring bank, Visa, MasterCard and appropriate governmental criminal authorities, and assisted in the criminal investigation of the individuals involved. Immediately thereafter and since that time, we have retained the services of an outside computer systems security provider and enhanced the security of our computer systems. However, we cannot guarantee that our systems will not be penetrated in the future. If another breach of our system occurs, we may be subject to liability, including claims for unauthorized purchases with misappropriated card information, impersonation or other similar fraud claims. We could also be subject to liability for claims relating to misuse of personal information, such as unauthorized marketing purposes. These claims also could result in protracted and costly litigation.

Although we generally require that our agreements with our ISOs and service providers who have access to merchant and customer data include confidentiality obligations that restrict these parties from using or

disclosing any customer or merchant data except as necessary to perform their services under the applicable agreements, we cannot assure you that these contractual measures will prevent the unauthorized disclosure of merchant or customer data. In addition, our agreements with financial institutions require us to take certain protective measures to ensure the confidentiality of merchant and consumer data. Any failure to adequately take these protective measures could result in protracted or costly litigation.

The loss of key personnel or damage to their reputations could adversely affect our relationships with ISOs, 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, in particular Gregory S. Daily, our Chairman and Chief Executive Officer, 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 Mr. Daily, who has, along with our other senior managers, over their years in the industry, developed long standing and highly favorable relationships with ISOs, card associations, bank sponsors and other payment processing and service providers. We would expect that the loss of the services of one or more of our key employees, particularly Mr. Daily, would have an adverse effect on our operations. We would also expect that any damage to the reputation of our senior managers, including Mr. Daily, would adversely affect our business. We do not maintain any “key person” life insurance on any of our employees other than Mr. Daily.

After November 1, 2003, state and local governments will be permitted to levy additional taxes on Internet access and electronic commerce transactions, which could adversely affect our business.

In 1998, the federal government imposed a three-year moratorium on state and local governments from imposing new taxes on Internet access or electronic commerce transactions. This moratorium has been extended until November 1, 2003. After that date, unless the moratorium is renewed, state and local governments may levy additional taxes on Internet access and electronic commerce transactions. An increase in applicable taxes may make electronic commerce transactions less attractive for merchants and businesses, which could result in a decrease in the volume of transactions we process and reduce our revenues. Additionally, if a tax is levied against the merchants or service providers we serve, they may attempt to pass this additional cost along to us, thereby decreasing our revenues.

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 card processing services is highly competitive. The level of competition has increased in recent years, and other providers of processing services have established a sizable market share in the small merchant processing sector. Some of our competitors are financial institutions, subsidiaries of financial institutions or well-established payment processing companies that have substantially greater capital and technological, management and marketing resources than we have. There are also a large number of small providers of processing services that provide various ranges of services to small and medium sized merchants. This competition may influence the prices we can charge and requires us to control costs aggressively in order to maintain acceptable profit margins. In addition, our competitors continue to consolidate as large banks merge and combine their networks. This consolidation may also require that we increase the consideration we pay for future acquisitions and could adversely affect the number of attractive acquisition opportunities presented to us.

Increased attrition in merchant charge volume due to an increase in closed merchant accounts that we cannot anticipate or offset with new accounts may reduce our revenues.

We experience attrition in merchant charge volume in the ordinary course of business resulting from several factors, including business closures, transfers of merchants’ accounts to our competitors and account “closures” that we initiate due to heightened credit risks relating to, and contract breaches by, a merchant. During 2002, we experienced average volume attrition of 1% per month. In addition, substantially all of our

processing contracts with merchants may be terminated by either party on relatively short notice, allowing merchants to move their processing accounts to other providers with minimal financial liability and cost. Increased attrition in merchant charge volume may have a material adverse effect on our financial condition and results of operations. We cannot predict the level of attrition in the future, particularly in connection with our acquisitions of portfolios of merchant accounts. If we are unable to increase our transaction volume and establish accounts with new merchants in order to counter the effect of this attrition, or, if we experience a higher level of attrition in merchant charge volume than we anticipate, our revenues will decrease.

Our operating results are subject to seasonality, and if our revenues are below our seasonal norms during our historically stronger third and fourth quarters, our net income could be lower than expected.

We have experienced in the past, and expect to continue to experience, seasonal fluctuations in our revenues as a result of consumer spending patterns. Historically, revenues have been weaker during the first two quarters of the calendar year and stronger during the third and fourth quarters. If, for any reason, our revenues are below seasonal norms during the third or fourth quarter, our net income could be lower than expected.

Our systems may fail due to factors beyond our control, which could interrupt our business or cause us to lose business and would likely increase our costs.

We depend on the efficient and uninterrupted operations of our computer network systems, software and data centers. We do not presently have fully redundant systems. Our systems and operations could be exposed to damage or interruption from fire, natural disaster, power loss, telecommunications failure, unauthorized entry and computer viruses. Our property and business interruption insurance may not be adequate to compensate us for all losses or failures that may occur. Defects in our systems, errors or delays in the processing of payment transactions or other difficulties could result in:


	•	additional development costs;

	•	diversion of technical and other resources;

	•	loss of merchants;

	•	loss of merchant and cardholder data;

	•	negative publicity;

	•	harm to our business or reputation; or

	•	exposure to fraud losses or other liabilities.

We face uncertainty about additional financing for our future capital needs, which may prevent us from growing our business.

If we are unable to increase our revenues, we will need to raise additional funds to finance our future capital needs. We may need additional financing earlier than we anticipate if we:


	•	decide to expand faster than planned;

	•	need to respond to competitive pressures; or

	•	need to acquire complementary products, businesses or technologies.

If we raise additional funds through the sale of equity or convertible debt securities, these transactions may dilute the value of our outstanding common stock. We may also decide to issue securities, including debt securities, that have rights, preferences and privileges senior to our common stock. We cannot assure you that we will be able to raise additional funds on terms favorable to us or at all. If future financing is not available or is not available on acceptable terms, we may not be able to fund our future needs. This may

With the exception of one registered mark, we currently rely solely on common law to protect our intellectual property; should we seek additional protection in the future, we may fail to successfully register our trademarks, causing us to potentially lose our rights to use these marks.

Currently, we do not have any patents or copyrights and, other than one registered mark, we rely on common law rights to protect our marks and logos. We do not rely heavily on the recognition of our marks to obtain and maintain business. We have recently applied for trademark registration for certain of our marks. However, we cannot assure you that any such applications will be approved. Even if they are approved, these trademarks may be successfully challenged by others or invalidated. If our trademark registrations are not approved because third parties own these trademarks, our use of these trademarks will be restricted or completely prohibited unless we enter into agreements with these parties which may not be available on commercially reasonable terms, or at all.

If our merchants experience adverse business conditions, they may generate fewer transactions for us to process or become insolvent, increasing our exposure to chargeback liabilities.

General economic conditions have caused some of the merchants we serve to experience difficulty in supporting their current operations and implementing their business plans. If these merchants make fewer sales of their products and services, we will have fewer transactions to process, resulting in lower revenues.

In addition, in a recessionary environment, the merchants we serve could be subject to a higher rate of insolvency which could adversely affect us financially. We bear credit risk for chargebacks related to billing disputes between credit 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.

New and potential governmental regulations designed to protect or limit access to consumer information could adversely affect our ability to provide the services we provide our merchants.

Due to the increasing public concern over consumer privacy rights, governmental bodies in the United States and abroad have adopted, and are considering adopting additional laws and regulations restricting the purchase, sale and sharing of personal information about customers. For example, the Gramm-Leach-Bliley Act requires non-affiliated third party service providers to financial institutions to take certain steps to ensure the privacy and security of consumer financial information. We believe our present activities fall under exceptions to the consumer notice and opt-out requirements contained in this law for third party service providers to financial institutions. The law, however, is new and there have been very few rulings on its interpretation. We believe that current legislation permits us to access and use this information as we do now. The laws governing privacy generally remain unsettled, however, even in areas where there has been some legislative action, such as the Gramm-Leach-Bliley Act and other consumer statutes, it is difficult to determine whether and how existing and proposed privacy laws will apply to our business. Limitations on our ability to access and use customer information could adversely affect our ability to provide the services we offer to our merchants or could impair the value of these services.

Several states have proposed legislation that would limit the uses of personal information gathered using the Internet. Some proposals would require proprietary online service providers and website owners to establish privacy policies. Congress has also considered privacy legislation that could further regulate use of consumer information obtained over the Internet or in other ways. The Federal Trade Commission has also recently settled a proceeding with one on-line service regarding the manner in which personal information is collected from users and provided to third parties. Our compliance with these privacy laws and related regulations could materially affect our operations.


	•	create uncertainty in the marketplace that could reduce demand for our services;

	•	limit our ability to collect and to use merchant and cardholder data;

	•	increase the cost of doing business as a result of litigation costs or increased operating costs; or

	•	in some other manner have a material adverse effect on our business, results of operations and financial condition.

We do not intend to pay cash dividends on our common stock in the foreseeable future.

We currently anticipate that we will retain all future earnings, if any, to finance the growth and development of our business and do not anticipate paying cash dividends on our common stock in the foreseeable future. Any payment of cash dividends will depend upon our financial condition, capital requirements, earnings and other factors deemed relevant by our board of directors. Further, under the terms of a loan agreement, we are restricted from paying cash dividends and making other distributions to our stockholders. Please see “Dividend Policy” for additional information.

We have previously acquired, and expect to continue to acquire, other providers of payment processing services and portfolios of merchant processing accounts. These acquisitions entail risks in addition to those incidental to the normal conduct of our business.

Revenues generated by acquired businesses or account portfolios may be less than anticipated, resulting in losses or a decline in profits, as well as potential impairment charges.

In evaluating and determining the purchase price for a prospective acquisition, we estimate the future revenues from that acquisition based on the historical transaction volume of the acquired provider of payment processing services or portfolio of merchant accounts. Following an acquisition, it is customary to experience some attrition in the number of merchants serviced by an acquired provider of payment processing services or included in an acquired portfolio of merchant accounts. Should the rate of post-acquisition merchant attrition exceed the rate we have forecasted, the revenues generated by the acquired providers of payment processing services or portfolio of accounts may be less than we estimated, which could result in losses or a decline in profits, as well as potential impairment charges.

We may fail to uncover all liabilities of acquisition targets through the due diligence process prior to an acquisition, exposing us to potentially large, unanticipated costs.

Prior to the consummation of any acquisition, we perform a due diligence review of the provider of payment processing services or portfolio of merchant accounts that we propose to acquire. Our due diligence review, however, may not adequately uncover all of the contingent or undisclosed liabilities we may incur as a consequence of the proposed acquisition. For example, after we acquired the merchant processing portfolio of First Bank of Beverly Hills in June 2001, we discovered that one of the merchants for which it was providing processing services was in substantial violation of the Visa and MasterCard card association rules. This merchant was unable to fund the resulting credits and chargebacks. As a result, we were obligated to fund these credits and chargebacks, which resulted in a net loss to us of approximately $6.0 million. Please see “Business — Legal Proceedings” for additional information.

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

The acquisition of a provider of payment processing services, as well as a portfolio of merchant processing accounts, requires the transfer of various data processing functions and connecting links to our

systems and those of our own third party service providers. If the transfer of these functions and links does not occur rapidly and smoothly, payment processing delays and errors may occur, resulting in a loss of revenues, increased merchant attrition and increased expenditures to correct the transitional problems, which could preclude our attainment of, or reduce, our profits.

Special non-recurring and integration costs associated with acquisitions could adversely affect our operating results in the periods following these acquisitions.

In connection with some acquisitions, we may incur non-recurring severance expenses, restructuring charges and change of control payments. These expenses, charges and payments, as well as the initial costs of integrating the personnel and facilities of an acquired business with those of our existing operations, may adversely affect our operating results during the initial financial periods following an acquisition. In addition, the integration of newly acquired companies may lead to diversion of management attention from other ongoing business concerns.

Our facilities, personnel and financial and management systems may not be adequate to effectively manage the future expansion we believe necessary to increase our revenues and remain competitive.

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 assure you that our facilities, personnel and financial and management systems and controls will be adequate to support the expansion of our operations, and provide adequate levels of service to our merchants and ISOs. If we fail to effectively manage our growth, our business could be harmed.

We have significant intangible assets and goodwill, the carrying value of which we may have to reduce if our revenues relating to these assets decline.

We have acquired numerous intangible assets related to purchased portfolios of merchant accounts and business operations. The intangible assets represent a substantial portion of our total assets. Statement of Financial Accounting Standards Nos. 141 and 142 require us to periodically re-examine the value of our purchased assets. A material decline in the revenues generated from any of our purchased portfolios of merchant accounts or business operations could reduce the fair value of the portfolio or operations. In that case, we may be required to reduce the carrying value of the related intangible asset. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” for a discussion of how we test impairment of the assets. Additionally, changes in accounting policies or rules that affect the way in which we reflect these intangible assets in our financial statements, or the way in which we treat the assets for tax purposes, could have a material adverse effect on our financial condition.

Our executive officers, directors and principal stockholders have substantial control over our business, and their interests may not align with the interests of our other stockholders.

Following this offering, our officers and directors, together with their affiliates, will beneficially own approximately 44.6% of our outstanding common stock. Accordingly, these stockholders, acting together, will be able to exert significant influence over all matters requiring stockholder approval, including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders may dictate the day-to-day management of our business. This concentration of ownership could have the effect of delaying, deferring or preventing a change in control, or impeding a merger or consolidation, takeover or other business combination or a sale of all or substantially all of our assets.

Future sales of our common stock, or the perception in the public markets that these sales may occur, could depress our stock price.

Sales of substantial amounts of our common stock in the public market, or the perception in the public markets that these sales may occur, could cause the market price of our common stock to decline. This could also impair our ability to raise additional capital through the sale of our equity securities. Upon completion of this offering, we will have 14,228,279 shares of our common stock outstanding. In addition, we will have options to purchase a total of 881,960 shares outstanding under our Amended and Restated Stock Incentive Plan, of which 199,209 will be vested. We intend to file a Form S-8 registration statement to register all the shares of common stock issuable under our Amended and Restated Stock Incentive Plan. Our current stockholders and holders of shares of our mandatorily redeemable convertible preferred stock, convertible subordinated promissory notes and options and warrants to acquire our common stock, on a fully-diluted basis assuming exercise of all outstanding options and warrants and conversion of the mandatorily redeemable convertible preferred stock and convertible subordinated promissory notes, are expected to own 73.1% of the outstanding shares of our common stock, or 70.3% if the underwriters’ over-allotment option is exercised in full. Following the expiration of a 180-day “lock-up” period to which over 99% of our outstanding shares and shares issuable upon the exercise of outstanding options and warrants are subject, the holders of those shares will generally be entitled to freely transfer of those shares. Please see “Shares Eligible for Future Sale.” Moreover, Bear, Stearns & Co. Inc. may, in its sole discretion and at any time without notice, release those holders from the sale restrictions on their shares. In addition to the adverse effect a price decline could have on holders of our common stock, such a decline could impede our ability to raise capital or to make acquisitions through the issuance of additional shares of our common stock or other equity securities.

After this offering, the holders of approximately 3,815,652 shares of our common stock, including shares to be issued upon the conversion of mandatorily redeemable convertible preferred stock and convertible subordinated promissory notes immediately prior to this offering, will have rights to include their shares in registration statements that we may file on our behalf or on behalf of other stockholders. By exercising their registration rights and selling a large number of shares, these holders could cause the price of our common stock to decline which could impede our ability to make acquisitions through the issuance of additional shares of our common stock. Furthermore, if we file a registration statement to offer additional shares of our common stock and have to include shares held by those holders, it could impair our ability to raise needed capital by depressing the price at which we could sell our common stock.

Our stockholder rights agreement and provisions of Delaware law could discourage a takeover you may consider favorable or could cause current management to become entrenched and difficult to replace.

Our stockholder rights agreement may discourage, delay or prevent a merger or acquisition that you may consider favorable or may cause current management to become entrenched and difficult to replace. Please see “Description of Capital Stock — Stockholder Rights Agreement” for a description of its terms.

In addition, we are subject to provisions of the Delaware corporation law that, in general, prohibit any business combination with a beneficial owner of 15% or more of our common stock for three years unless the holder’s acquisition of our stock was approved in advance by our board of directors. These provisions could affect our stock price adversely.

The price of our common stock may be volatile, which could cause our investors to incur trading losses and fail to realize upon their investments.

Prior to this offering, there has been no public market for our common stock. We cannot predict the extent to which investor interest will lead to the development of an active and liquid trading market in our common stock. The initial public offering price for the shares will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of the market price of the common stock that will prevail in the trading market. The market price of the common stock may decline below the initial public offering price. Some companies that have had volatile market prices for their securities have been subject to securities class action suits filed against them. If a suit were to be filed against us, regardless

We will have broad discretion over how we use the proceeds of this offering, and we may use them for corporate purposes that do not immediately enhance our profitability or market share.

Our management will have considerable discretion in the application of the net proceeds of this offering, and you will not have the opportunity, as part of your investment decision, to assess whether we are using the proceeds appropriately. We will use $46.1 million or 76.5% of the estimated net proceeds for the repayment of debt and, therefore, this amount will be unavailable to support our operations. We may use the remaining net proceeds for corporate purposes that do not immediately enhance our profitability or increase our market value.

The initial public offering price per share is expected to be substantially higher than the net tangible book value per share immediately after the offering. As a result, you will pay a price per share that substantially exceeds the book value of our assets after subtracting our liabilities. Assuming an offering price of $15.00, you will incur immediate and substantial dilution of $16.33 in the net tangible book value per share of the common stock from the price you paid. We also have outstanding warrants to purchase 890,491 shares of our common stock at a weighted average exercise price of $0.02 per share and stock options to purchase 881,960 shares of our common stock at a weighted average exercise price of $6.01 per share. We also have outstanding $16.9 million of convertible subordinated promissory notes and $0.4 million of accrued interest that are convertible into 734,241 shares of our common stock assuming conversion on April 22, 2003. To the extent these warrants or options are exercised, or the convertible subordinated promissory notes are converted, there will be further dilution.

This prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business,” contains forward-looking statements. These statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks outlined under “Risk Factors.” These factors may cause our actual results to differ materially from any forward-looking statement.

Although we believe that the expectations in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this prospectus to conform these statements to actual results.

We estimate that we will receive approximately $59.3 million in net proceeds from the sale of our common stock in this offering, or approximately $68.7 million if the underwriters’ over-allotment option is exercised in full, based on an assumed initial offering price of $15.00 per share and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

We currently intend to use the estimated net proceeds from this offering as follows:


	•	$46.1 million for the repayment of outstanding subordinated promissory notes (which had a carrying value of $40.7 million as of December 31, 2002);

	•	up to $5.0 million for working capital; and

	•	the remaining net proceeds for general corporate purposes, including potential acquisitions of businesses and merchant portfolios that are complementary to our own. Currently, we have no specific plans or commitments with respect to any acquisition. We cannot assure you that we will complete any acquisitions or that, if completed, any acquisition will be successful.

As of December 31, 2002, we had notes outstanding in an aggregate principal amount of $78.1 million (net of discount of $6.4 million), owed to various individuals and entities, with interest rates ranging from 0% to 14% as described below. We will repay the following notes with the proceeds from this offering:

Of these notes, $43.4 million were issued within a year of the date of this prospectus. In each case, we used the proceeds to fund acquisitions of businesses and portfolios of merchant accounts, as well as to fund working capital. In addition, $11.4 million of the notes to be repaid are held by affiliates and related parties. Please see “Certain Relationships and Related Transactions.”

We will retain broad discretion in the allocation and use of the remaining net proceeds of this offering. Pending application of the net proceeds, as described above, we will invest any remaining proceeds in short-term, investment-grade, interest-bearing securities.

We have never declared nor paid cash dividends on our common stock. We currently intend to retain our future earnings, if any, to finance the further development and expansion of our business and have no intention of paying cash dividends on our common stock. In addition, the terms of our line of credit restrict us from paying cash dividends and making other distributions to our stockholders. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in current or future financing instruments and other factors that our board of directors deems relevant.


	•	an actual basis;

	•	a pro forma basis to give effect to the conversion of all of our outstanding mandatorily redeemable convertible preferred stock into 1,192,470 shares of common stock; and

	•	a pro forma as adjusted basis to give effect to:


	—	the conversion of our mandatorily redeemable convertible preferred stock referred to above;

	—	the sale of 4,500,000 shares of our common stock in this offering at an assumed initial public offering price of $15.00 per share, after deducting the estimated underwriting discounts and commissions of $4.7 million and our estimated offering expenses of $7.0 million, and the application of a portion of the estimated net proceeds to repay $46.1 million in outstanding indebtedness (which had a carrying value of $40.7 million as of December 31, 2002); and

	—	the issuance of 600,000 shares upon the conversion into common stock of $9.0 million of subordinated promissory notes upon the closing of the offering (which had a carrying value of $8.0 million as of December 31, 2002) at a conversion price equal to the per share price in this offering.


	•	881,960 shares of common stock issuable upon exercise of outstanding stock options as of April 22, 2003 at a weighted average exercise price of $6.01 per share;

	•	1,431,540 shares of common stock reserved for issuance under our Stock Incentive Plan and our Non-Employee Directors Stock Option Plan, including an aggregate of 569,121 shares issuable upon exercise of stock options to be granted to our directors, employees and ISOs immediately following the closing of this offering at an exercise price equal to the per share price in this offering;

	•	890,491 shares of common stock issuable upon exercise of outstanding warrants as of April 22, 2003 at a weighted average exercise price of $0.02 per share; and

	•	the conversion of an aggregate of $16.9 million of convertible promissory notes and $0.4 million of accrued interest into 734,241 shares of common stock, assuming conversion on April 22, 2003.

You should read the following table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes, which are included elsewhere in this prospectus.

As of December 31, 2002, our net tangible deficit was $(86.6) million, or $(12.85) per share of common stock. Our pro forma net tangible deficit was $(79.9) million or $(10.08) per share of common stock. Pro forma net tangible deficit per share represents total tangible assets (which excludes goodwill, intangible assets and capitalized offering costs totaling $100.1 million), less total liabilities, divided by the pro forma number of shares of our outstanding common stock after giving effect to the automatic conversion of our mandatorily redeemable convertible preferred stock into shares of common stock. After giving effect to (1) the conversion of our mandatorily redeemable preferred stock referred to above, (2) the sale of our common stock in this offering at an assumed initial public offering price of $15.00 per share after deducting the estimated underwriting discounts and commissions and estimated offering expenses and the application of a portion of the net proceeds to repay $40.7 million of indebtedness (which had an unamortized debt warrant discount of $5.4 million at December 31, 2002) and (3) the conversion of $9.0 million of debt into equity (with $1.0 million of unamortized debt warrant discount as of December 31, 2002), our pro forma as adjusted net tangible deficit, as of December 31, 2002, would have been $(17.4) million, or $(1.33) per pro forma share of common stock. This represents an immediate increase in pro forma net tangible book value of $8.75 per share to existing stockholders and an immediate dilution of $16.33 per share to new investors participating in this offering. The following table illustrates this per share dilution:

The following table sets forth, on a pro forma as adjusted basis as of December 31, 2002, the differences between the total cash consideration paid and the average price per share paid by existing stockholders and new investors participating in this offering with respect to the number of shares of our common stock purchased from us based on an assumed initial public offering price of $15.00 per share:

The foregoing discussion and tables assume no exercise of any stock options or warrants and no issuance of shares reserved for future issuance under our equity plans. As of December 31, 2002, there were 7,928,545 shares of common stock outstanding (assuming the conversion of all of our outstanding mandatorily redeemable convertible preferred stock into 1,192,470 shares of common stock), which excludes:


	•	956,820 shares of common stock issuable upon exercise of outstanding stock options as of December 31, 2002 at a weighted average exercise price of $5.58 per share;


	•	1,356,680 shares of common stock reserved for issuance under our Stock Incentive Plan and our Non-Employee Directors Stock Option Plan as of December 31, 2002, including an aggregate of 569,121 shares issuable upon exercise of stock options to be granted to our directors, employees and ISOs immediately following the closing of this offering at an exercise price equal to the per share price in this offering;

	•	1,958,517 shares of common stock issuable upon exercise of outstanding warrants as of December 31, 2002 at a weighted average exercise price of $0.02 per share; and

	•	the conversion of an aggregate of $16.9 million of our outstanding convertible subordinated promissory notes and $0.3 million of accrued interest into 731,828 shares of common stock assuming conversion on December 31, 2002.

Assuming the exercise in full of the underwriters’ option to purchase 675,000 shares of common stock to cover over-allotments, our pro forma as adjusted net tangible deficit as of December 31, 2002 would have been $(8.0) million, or $(0.58) per share. This represents an immediate increase in the pro forma net tangible book value of $9.50 per share to existing stockholders and immediate dilution of $15.58 per share to new investors participating in this offering.

To the extent the warrants and options are exercised and the underlying shares of common stock are issued, there will be further dilution to new investors. In addition, we may grant additional options or warrants or issue other equity securities in the future that may be dilutive to investors in this offering.

The following summary historical consolidated financial information and other data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus. In our discussion throughout this prospectus references to the year ended December 31, 2000 refer to the period January 1, 2000 through July 19, 2000 for iPayment Technologies, our predecessor, and July 20, 2000 (inception) through December 31, 2000 for us. The selected statement of operations data set forth below for our predecessor company for the period from January 1, 2000 through July 19, 2000, and for us for the period from July 20, 2000 through December 31, 2000, and for the years ended December 31, 2001 and 2002, and the selected balance sheet data set forth below for us at December 31, 2000, 2001 and 2002, are derived from the audited consolidated financial statements that are included elsewhere in this prospectus. The historical consolidated financial information is derived from our audited financial statements which have been audited by Ernst & Young LLP with respect to our predecessor company for the period from January 1, 2000 to July 19, 2000, and with respect to us for the period from July 20, 2000 to December 31, 2000, and the years ended December 31, 2001 and 2002. The selected statement of operations data set forth below for our predecessor company for each of the years ended December 31, 1998, and 1999, and the selected balance sheet data set forth at December 31, 1998, and 1999 are derived from the audited consolidated financial statements of our predecessor company not included in this prospectus. The historical results presented below are not necessarily indicative of the results to be expected for any future period.


(1)	Represents the total dollar volume of all Visa and MasterCard transactions processed by our merchants, which is provided to us by our third party processing vendors.

The unaudited pro forma combined statements of operations for the year ended December 31, 2002 give effect to the following transactions as if they had been completed as of January 1, 2002:


	•	the acquisition of E-Commerce Exchange, Inc. acquired on March 19, 2002;

	•	the acquisition of OnLine Data Corp. acquired on August 22, 2002;

	•	the acquisition of First Merchants Bancard Services, Inc. acquired on August 28, 2002; and

	•	the acquisition of CardSync Processing Services, Inc. acquired on September 5, 2002.

Our historical consolidated financial statements include the results of operations of E-Commerce Exchange, OnLine Data, First Merchants Bancard Services, Inc. and CardSync from their respective acquisition date to December 31, 2002. There were no material acquisitions occurring or that were probable subsequent to December 31, 2002.

The unaudited pro forma combined financial statements are not necessarily indicative of operating results which would have been achieved had the foregoing transactions actually been completed at the beginning of the respective periods and should not be construed as representative of future operating results. Certain reclassifications have been made in the acquired companies’ financial statements, which are included in the pro forma financial statements, to conform to the presentation in our pro forma financial statements.

These unaudited pro forma combined financial statements should be read in conjunction with the accompanying notes, the historical consolidated financial statements and the historical financial statements of the businesses acquired, including the notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” all of which are included elsewhere in this prospectus.

On March 19, 2002, we entered into an agreement and plan of merger with E-Commerce Exchange, a card-payment processor, whereby E-Commerce Exchange merged with a wholly owned subsidiary of ours. Under the terms of the agreement, we issued a series of convertible notes to the prior series A preferred shareholders of E-Commerce Exchange in the aggregate amount of $15.0 million in exchange for all of the outstanding common shares of E-Commerce Exchange. Subject to certain restrictions, such notes were initially convertible into an aggregate of 647,780 shares of our common stock, and the notes bear interest at a rate of 4.5% and are due March 2008. One-half of the interest is capitalized to the principal amount of the note, which through March 31, 2003 increased (on a pro rata basis) the number of shares of our common stock the notes are convertible into and after March 31, 2003, increases the amount payable. The operating results of E-Commerce Exchange from March 20, 2002 are included in our consolidated statements of operations included elsewhere in this prospectus. For the period from January 1, 2002 to March 19, 2002, E-Commerce Exchange recorded revenues of $1.7 million. The acquisition was recorded under the purchase method and total consideration was allocated to the fair value of assets and liabilities acquired as follows (in thousands):

Intangible assets consist of merchant portfolios of $80,000 and are being amortized over seven years. Goodwill and intangible assets recognized are not deductible for income tax purposes. Included in accounts payable and accrued liabilities is approximately $100,000 due to an investment banker hired to market E-Commerce Exchange. The original amount due to the investment banker was $1.5 million; however, we entered into an agreement with the holders of the E-Commerce Exchange notes such that the holders would indemnify us for any costs or expenses in excess of $100,000 related to the engagement letter with the

On August 22, 2002, we entered into an agreement and plan of merger with OnLine Data Corporation, whereby OnLine Data merged with a wholly owned subsidiary of ours. Under the terms of the agreement, we purchased OnLine Data for $2.0 million in cash, a note for $5.0 million and 844,428 shares of our common stock (valued at $7.69 per share by our Board of Directors), as well as a deferred cash payment of $2.1 million due fifteen days prior to the six-month anniversary of the effective date of the agreement. The note is due and payable on August 22, 2007, unless certain changes of control occur, with interest payable quarterly at a rate of 6% annually. The operating results of OnLine Data from August 23, 2002 are included in our consolidated statements of operations included elsewhere in this prospectus. For the period from January 1, 2002 to August 22, 2002, OnLine Data recorded revenues of $15.2 million. The acquisition was recorded under the purchase method and total consideration was allocated to the fair value of assets and liabilities acquired as follows (in thousands):

Intangible assets consist of merchant portfolios of $4.8 million and are being amortized over seven years. Goodwill and intangible assets recognized are not deductible for income tax purposes. On August 8, 2002 OnLine Data entered into a Promissory Note with BlueLine Data Corporation, replacing a series of notes between the parties totaling $1.3 million. The notes were due to BlueLine Data by OnLine Data prior to the acquisition of OnLine Data by us, however these notes were amended. Under terms of the amended notes, interest is payable monthly at an annual rate of 12%, and are due at the earliest of our initial public offering, a change of control, or August 31, 2007. Certain shareholders of OnLine Data were also shareholders of BlueLine Data.

On August 28, 2002, we entered into an agreement and plan of merger with First Merchants Bancard Services, Inc., whereby First Merchants Bancard Services merged with a wholly owned subsidiary of ours. Under the terms of the agreement, we purchased First Merchants Bancard Services for $3.4 million in cash and 740,320 shares of our common stock (valued at $7.69 per share by our Board of Directors). We acquired all assets and liabilities of First Merchants Bancard Services. The operating results of First Merchants Bancard Services from August 29, 2002 are included in our consolidated statements of operations included elsewhere in this prospectus. For the period from January 1, 2002 to August 28, 2002, First Merchants Bancard Services recorded revenues of $25.0 million. The acquisition was recorded under the purchase method and total consideration was allocated to the fair value of assets and liabilities acquired as follows (in thousands):

Intangible assets consist of merchant portfolios of $5.4 million and are being amortized over seven years. Goodwill and intangible assets recognized are not deductible for income tax purposes. Debt assumed in the acquisition includes an amended and restated note payable to Michael Schneider for $1.9 million (which also contained a one-time $250,000 loan fee which is due upon the repayment of the note). Under terms of the amended note, interest is payable monthly at an annual rate of 12.5%. The note was subsequently amended to extend the maturity date from December 30, 2002 to April 1, 2004, and Mr. Schneider was granted an option to convert the note into 71,057 shares of our common stock anytime prior to the repayment of the note or April 1, 2004 (at which time the $250,000 loan fee will be waived).

On September 5, 2002, we entered into an agreement and plan of merger with CardSync Processing, Inc., whereby CardSync merged with a wholly owned subsidiary of ours. Under the terms of the CardSync Agreement, we purchased CardSync for $1.1 million in cash and 670,915 shares of our common stock (valued at $7.69 per share by our Board of Directors). We acquired all of the assets and liabilities of CardSync. The operating results of CardSync from September 6, 2002 are included in our consolidated statements of operations included elsewhere in this prospectus. For the period from January 1, 2002 to September 5, 2002, CardSync recorded revenues of $13.3 million. The acquisition was recorded under the purchase method and total consideration was allocated to the fair value of assets and liabilities acquired as follows (in thousands):

Intangible assets consist of merchant portfolios of $3.0 million and are being amortized over seven years. Goodwill and intangible assets recognized are not deductible for income tax purposes. Debt assumed in the acquisition is pursuant to a settlement of litigation between CardSync and NOVA Corporation under which CardSync was required to pay NOVA $8.0 million, of which, $2.0 million was due from us at the closing of the acquisition of CardSync, and was allocated as an accounts payable in purchase accounting. The remaining $6.0 million is classified as debt in purchase accounting, and is payable as follows: $2.0 million in December 2002, and the remaining $4.0 million in equal quarterly installments in March, June, September and December 2003, with no stated interest rate.

Please see the accompanying notes to the unaudited pro forma consolidated financial statements.

(1) Represents the audited statement of operations for iPayment, Inc. for the year ended December 31, 2002, including the results of E-Commerce Exchange for the period from March 20, 2002 to December 31, 2002, OnLine Data for the period from August 23, 2002 to December 31, 2002, First Merchants Bancard Services for the period from August 29, 2002 to December 31, 2002 and for CardSync Processing for the period from September 6, 2002 to December 31, 2002.

(2) Represents the audited statement of operations of E-Commerce Exchange for the period from January 1, 2002 through March 19, 2002.

(3) Represents the audited statement of operations of OnLine Data for the period from January 1, 2002 through August 22, 2002.

(4) Represents the audited statement of operations of First Merchants Bancard Services for the period from January 1, 2002 through August 28, 2002.

(5) Represents the audited statement of operations of CardSync for the period from January 1, 2002 through September 5, 2002.

(6) Represents the pro forma adjustments to record depreciation and amortization expense as follows:


	(a) To record amortization expense of intangible assets related to the acquisitions of the following as if acquired at January 1, 2002:


	(b) To record depreciation expense of fixed assets related to the acquisitions of the following as if acquired at January 1, 2002:


	(a) To record interest on the notes issued in association with the acquisitions of the following as if acquired at January 1, 2002, at interest rates ranging from 4.5% to 12%, representing the actual rates on the notes issued:


	(b) To record increase in interest expense for the amortization of warrants issued in connection with subordinated promissory notes to finance the acquisition of the following:

(8) Represents the pro forma weighted average shares as if shares issued in connection with acquisitions occurred on January 1, 2002.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Historical Consolidated Financial Information and Other Data” and our consolidated financial statements and related notes included elsewhere in this prospectus. References in this section to “iPayment, Inc.,” the “Company,” “we,” “us,” and “our” refer to iPayment, Inc. and our direct and indirect subsidiaries on a consolidated basis unless the context indicates otherwise.

We are one of the fastest growing providers of credit and debit card-based payment processing services to small merchants. As of December 31, 2002, we provided our services to approximately 56,000 active small merchants located across the United States. Our payment processing services enable our merchants to process both traditional card-present, or swipe transactions, as well as card-not-present transactions. A traditional card-present transaction, occurs whenever a cardholder physically presents a credit or debit card to a merchant at the point-of-sale. Card-not-present transactions occur whenever the customer does not physically present a payment card at the point-of-sale and may occur over the Internet or by mail, fax or telephone.

Our subsidiary, iPayment Technologies, Inc., was formed in 1992 as a California corporation. In July 2000, iPayment Technologies purchased assets from two former affiliates in exchange for the assumption of debt, $400,000 in cash, a $2.0 million note and the issuance of 2,314 shares of iPayment Technologies’ common stock. We refer to this as the Caymas acquisition. In connection with the Caymas acquisition, Caymas, LLC purchased a majority interest in iPayment Technologies. We accounted for the Caymas acquisition as a purchase allocating its investment to the fair value of assets acquired and liabilities assumed and the excess basis allocated to goodwill. The Caymas acquisition was completed in order to transfer ownership of certain assets owned by former affiliates of iPayment Technologies, and to separate iPayment Technologies from its former affiliates.

In December 2000, iPayment Technologies implemented a restructuring plan, which resulted in a reduction in overhead costs and personnel. Expenses related to the restructuring included severance and future lease costs, write downs of fixed assets and leasehold improvements.

In February 2001, we were formed by the majority stockholders of iPayment Technologies under the name iPayment Holdings, Inc. as a holding company for iPayment Technologies and other card processing businesses. We then appointed Gregory Daily as our Chief Executive Officer and Chairman of the Board. In April 2001, we acquired a 94.63% interest in iPayment Technologies, and in July 2002, we acquired the remaining outstanding shares of iPayment Technologies, which then became our wholly owned subsidiary, in each case by issuing our shares to iPayment Technologies stockholders in exchange for iPayment Technologies shares.

In August 2002, we were reincorporated in Delaware under the name iPayment, Inc.

Since January 2001, we have expanded our card-based payment processing services through the acquisition of six businesses and four large portfolios and several smaller portfolios of merchant accounts, as set forth below. These acquisitions have significantly impacted our revenues, results of operations, and financial condition. Revenues increased to $115.8 million for the year ended December 31, 2002 from $38.9 million for the year ended December 31, 2001. Income from operations improved to $9.6 million for 2002, from a loss from operations of $2.7 million for 2001. The net loss decreased to $0.5 million for 2002 from $4.9 million for 2001. Net cash used in operating activities increased to $9.0 million for 2002 from $2.2 million for 2001. The full impact of the acquisitions discussed below on our operating results are not fully reflected in our historical results of operations due to the recent nature of these acquisitions and their varying stages of integration. We expect our revenues, results of operations, and net cash provided by operating activities to continue to improve in 2003, as the full impact of these acquisitions are realized.

On January 12, 2001, we entered into an agreement to purchase a portfolio of merchant accounts originally sold by iPayment Technologies to Electronic Check Processing, and to extinguish a note payable. The purchase price totaled $1.6 million of which $749,000 represented the fair value of the merchant processing portfolio and $826,000 represented the full extinguishment of the note and related accrued interest.

On February 16, 2001, we entered into an agreement to purchase a portfolio of merchant accounts from E-Commerce Exchange and to extinguish trade payables owed to E-Commerce Exchange under an agreement between E-Commerce Exchange and us. On April 12, 2001, we paid E-Commerce Exchange $3.1 million under the agreement in connection with two separate transactions: we extinguished a trade payable of $1.7 million and we acquired for $1.4 million the rights, title and interest in a merchant processing portfolio, which represented the fair market value of the portfolio as of the acquisition date, as determined by the present value of the estimated future cash flows. In connection with the agreement, E-Commerce Exchange dismissed a lawsuit filed against us, which related to amounts due to E-Commerce Exchange by us under a prior agreement. On March 19, 2002, we acquired E-Commerce Exchange, as described below.

Prior to acquiring the portfolios of merchant accounts from Electronic Check Processing and E-Commerce Exchange, we had entered into merchant agreements with both companies to process each portfolio’s transactions. As a result, we were already recognizing revenues from these portfolios when they were acquired. Therefore, the financial effect of each of these portfolio acquisitions was primarily the elimination of residuals paid to Electronic Check Processing and E-Commerce Exchange, which resulted in a decrease in our costs of services.

In May 2001, we acquired two merchant portfolios from unrelated independent sales groups, Payment Processing, Inc. and American Credit Card Processing Corporation. We paid $763,000 in cash for Payment Processing’s portfolio and $5.5 million in cash for American Credit’s portfolio.

On July 1, 2001, we acquired all of the rights, titles and interests in the merchant processing division of First Bank of Beverly Hills, F.S.B., along with certain assets, for $6.1 million in cash, including $156,000 in direct acquisition costs. The acquisition was recorded under the purchase method as the assets acquired were deemed to constitute a business (because we acquired physical facilities, an employee base, access to an agent network, all contracts with an existing merchant base and operating policies and procedures), with the total consideration allocated to the fair value of assets acquired, including goodwill of $289,000, a merchant-processing portfolio of $5.6 million, and fixed assets of $175,000. There were no liabilities assumed in the acquisition. The operating results of the merchant processing division of First Bank of Beverly Hills from July 1, 2001 are consolidated with ours in our consolidated statements of operations included elsewhere in this prospectus. For the period from January 1, 2001 to June 30, 2001, the merchant processing division of First Bank of Beverly Hills recorded revenues of $7.1 million.

On August 9, 2001, we entered into an agreement to purchase the rights, titles and interests in substantially all of the assets of 1st National Processing, Inc. for an aggregate purchase price of $8.7 million.

The purchase price consisted of $5.1 million in cash, including direct acquisition costs of $305,000, a non-interest bearing note in the amount of $3.0 million and 313,711 shares of our common stock. Under the agreement, we will receive from the former owner of 1st National Processing $900,000 plus 6% interest from August 9, 2001 upon consummation of this offering. There were no significant liabilities assumed in connection with the acquisition. The acquisition was recorded under the purchase method as the assets were deemed to constitute a business (because we acquired physical facilities, an employee base, access to an agent network, all contracts with an existing merchant base and operating policies and procedures) with the total consideration allocated to the fair value of assets acquired, including goodwill of $4.3 million and a merchant-processing portfolio of $4.3 million. The operating results of 1st National Processing from August 10, 2001 are consolidated in the accompanying consolidated statements of operations included elsewhere in this prospectus. For the period from January 1, 2001 to August 9, 2001, 1st National Processing recorded revenues of $8.5 million.

On March 19, 2002, we entered into an agreement and plan of merger with E-Commerce Exchange, Inc. under which E-Commerce Exchange merged with a wholly owned subsidiary of ours. E-Commerce Exchange is a provider of an end-to-end solution which enables merchants to accept credit card payments via the Internet in as little as three days from submitting an application. E-Commerce Exchange also holds a portfolio of leases of secure payment processing solutions. In connection with the merger, we issued a series of convertible notes in the aggregate principal amount of $15.0 million in exchange for all of the outstanding common shares of E-Commerce Exchange. Subject to certain restrictions, these notes were initially convertible into an aggregate of 647,780 shares of our common stock. The acquisition was recorded under the purchase method with the total consideration allocated to the fair value of assets acquired and liabilities assumed, including goodwill of $15.5 million and a merchant-processing portfolio of $80,000. The operating results of E-Commerce Exchange from March 20, 2002 are included in our consolidated statements of operations included elsewhere in this prospectus. For the period from January 1, 2002 to March 19, 2002, E-Commerce Exchange recorded revenues of $1.7 million.

On August 22, 2002, we entered into an agreement and plan of merger with OnLine Data Corporation under which OnLine Data merged with a wholly owned subsidiary of ours. OnLine Data is an integrated provider of credit card transaction processing services. We purchased OnLine Data for $2.0 million in cash, a note in the aggregate principal amount of $5.0 million and 844,428 shares of our common stock, as well as a deferred cash payment of $2.1 million due fifteen days prior to the six-month anniversary of the effective date of the merger agreement. The note is due and payable on August 22, 2007, unless certain changes of control occur, with interest payable quarterly at a rate of 6% per annum. The merger was recorded under the purchase method with the total consideration allocated to the fair value of assets acquired and liabilities assumed, including goodwill of $12.9 million and a merchant-processing portfolio of $4.8 million. The operating results of OnLine Data from August 23, 2002 are included in our consolidated statements of operations included elsewhere in this prospectus. For the period from January 1, 2002 to August 22, 2002, OnLine Data recorded revenues of $15.2 million.

On August 28, 2002, we entered into an agreement and plan of merger with First Merchants Bancard Services, Inc. under which First Merchants Bancard Services was merged with a wholly owned subsidiary of ours. First Merchants Bancard Services is an integrated provider of credit card transaction processing services. We purchased First Merchants Bancard Services for $3.4 million in cash and 740,320 shares of our common stock. The merger was recorded under the purchase method with the total consideration allocated to the fair value of assets acquired and liabilities assumed, including goodwill of $6.6 million and a merchant-processing portfolio of $5.4 million. The operating results of First Merchants Bancard Services from August 29, 2002 are included in our consolidated statements of operations included elsewhere in this prospectus. For the period from January 1, 2002 to August 28, 2002, First Merchants Bancard Services recorded revenues of $25.0 million.

On September 5, 2002, we entered into an agreement and plan of merger with CardSync Processing, Inc. under which CardSync merged with a wholly owned subsidiary of ours. CardSync is an integrated provider of credit card transaction processing services. We purchased CardSync for $1.1 million in cash and 670,915 shares of our common stock. The acquisition was recorded under the purchase method with the

total consideration allocated to the fair value of assets acquired and liabilities assumed, including goodwill of $12.0 million and a merchant-processing portfolio of $3.0 million. The operating results of CardSync from September 6, 2002 are included in our consolidated statements of operations included elsewhere in this prospectus. For the period from January 1, 2002 to September 5, 2002, CardSync recorded revenues of $13.3 million.

For the year ended December 31, 2001, revenues attributable to the acquisitions we completed in 2001 were $20.0 million, or 51.4% of our total revenues. For the year ended December 31, 2002, revenues attributable to the acquisitions we completed in 2002 were $43.7 million, or 37.7% of our total revenues, and the revenues attributable to the acquisitions we completed in 2001 and 2002 combined were $95.1 million, or 82.1% of our total revenues for the year ended December 31, 2002. If we engage in fewer acquisitions in the future, the revenues attributable to new acquisitions may decline as a percentage of our total revenues. Please see “Risk Factors — Risks Relating to Acquisitions.”

Primarily due to these acquisitions, our merchant portfolio base increased from approximately 7,000 active small merchants on January 1, 2001 to approximately 56,000 active small merchants on December 31, 2002.

We have accounted for all of these acquisitions 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 companies with modest growth prospects, our purchase prices primarily reflect the value of merchant portfolios, and purchase price allocations reflect primarily intangible assets. Acquisition targets we identified as having entrepreneurial management teams, efficient operating platforms, proven distribution capabilities, all of which contribute to higher growth prospects, commanded purchase prices in excess of their merchant portfolio values. Consequently, purchase price allocations for these targets reflect a greater proportion of goodwill. The acquisitions in 2001 consisted of four portfolios of merchant accounts and two acquisitions of businesses with modest growth prospects, leading to an increase in intangible assets of approximately $18.4 million, while goodwill increased by approximately $4.6 million. The acquisitions in 2002 primarily consisted of four significant businesses with strong management teams, sophisticated platforms and higher growth prospects. As a result, goodwill increased by $47.0 million in 2002, while intangibles increased by only $13.4 million.

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require that management make numerous estimates and assumptions. Actual results could differ from those estimates and assumptions, impacting our reported results of operations and financial position. Our significant accounting policies are more fully described in note 3 to our consolidated financial statements included elsewhere in this prospectus. 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.

We adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, in the first quarter of 2002 (certain provisions of SFAS No. 142 were adopted in the third quarter of 2001). SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets, and requires that goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill is subject to at least an annual assessment for impairment. If facts and circumstances indicate goodwill may be impaired, we perform a recoverability evaluation. Prior to the adoption of SFAS No. 142 on January 1, 2002, our policy was to compare undiscounted estimated future cash flows to the carrying amount of our net assets, including goodwill, to determine if the carrying amount was not recoverable and a write-down to fair value was required. Effective January 1, 2002, in accordance with SFAS No. 142, we began performing the recoverability analysis based on fair value rather than undiscounted cash flows. 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.

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 transaction and estimate its potential loss for chargebacks based primarily on historical experience and other relevant factors. At December 31, 2002, our reserve for losses on merchant accounts totaled $4.4 million, of which $2.6 million related to reserves from one merchant.

We account for income taxes pursuant to the provisions of SFAS No. 109, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are recorded to reflect the future tax consequences attributable to the effects of differences between the carrying amounts of existing assets and liabilities for financial reporting and for income tax purposes. We have placed a significant valuation allowance on our net operating loss carryforwards as a result of limitations placed on the ability to utilize the net operating loss carryforwards due to two ownership changes which occurred in July 2000 and April 2001, and an ownership change that we believe may have occurred in August 2002.

We have historically issued debt securities with detachable stock warrants at a ratio of 32,389 warrants for every $1,000,000 borrowed. Accounting Principles Board Opinion No. 14 requires that portion of the proceeds of debt securities issued with detachable stock purchase warrants which is allocable to the warrants should be accounted for as paid-in capital. The allocation is based on the relative fair values of the two securities at time of issuance. The resulting discount on the debt securities is recorded initially as a reduction to the carrying amount of the debt securities and is amortized as a component of interest expense over the life of the debt securities.

We had federal and state net operating loss carryforwards at December 31, 2002 of approximately $27.7 million that were available, subject to significant limitations, to offset regular taxable income through 2022. Due to our prior ownership changes, it is unlikely that we will be able to use any significant amount of these net operating loss carryforwards. We also have state net operating loss carryforwards that will expire through 2012.

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. Discount fees, which are a percentage of the dollar amount of each credit or debit transaction, represent approximately 75% of our total revenues. We charge all merchants higher discount rates for card-not-present transactions than for card-present transactions in order to compensate us 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 and fees for other miscellaneous services, such as handling chargebacks. We recognize discounts and other fees related to payment transactions at the time the merchants’ transactions are processed. We recognize revenues derived from service fees at the time the service is performed. We report revenues gross of amounts paid to sponsoring banks, as well as interchange and assessments paid by us to credit card associations pursuant to which these associations receive payments based primarily on processing volume for particular groups of merchants. Related interchange and assessment costs and bank processing fees are also recognized at that time.

Costs of services includes all costs directly attributable to our provision of payment processing and related services to our merchants. The most significant component of costs of services is interchange fees, which are amounts we pay to the card issuing banks. Interchange fees are based on transaction processing volume and are recognized at the time transactions are processed. Costs of services also includes residual payments to ISOs, which are commissions we pay to our ISOs based upon a percentage of the net revenues

we generate from their merchant referrals, and assessment fees payable to card associations, which is a percentage of the processing volume we generate from Visa and MasterCard. In addition, costs of services includes telecommunications costs, personnel costs, occupancy costs, losses due to merchant defaults, other miscellaneous merchant supplies and services expenses, sponsorship costs and other third-party processing costs.

Selling, general and administrative expenses consist primarily of salaries and wages and other general administrative expenses.

Depreciation and amortization expenses are recognized on a straight-line basis over the estimated useful life of the asset. Amortization of intangible assets and goodwill resulted from our acquisitions of portfolios of merchant accounts or acquisitions of a business where we allocated purchase price to the existing merchant processing portfolio. Goodwill recognized from acquisitions initiated after June 30, 2001 is not amortized. Accordingly, the goodwill generated through the acquisitions of 1st National Processing and the merchant-processing portfolio of First Bank of Beverly Hills were not amortized in 2001. The impact of not amortizing goodwill for the other acquisitions described above from the dates of such acquisitions to December 31, 2001 would have been an increase in amortization expense of $93,000. Goodwill is no longer amortized and is subject to periodic testing for impairment.

From time to time, we enter into transactions with our ISOs. Sometimes, we acquire from an ISO the right, title and interest to a merchant portfolio, including the residual cash flow stream for merchants the ISOs have brought to us. The accounting for those acquisitions is dependent on the ISO’s relationship with us. If the ISO is considered an agent, then we record prepaid commission and amortize the asset through cost of sales. Otherwise, if we have no ongoing agent relationship with the ISO, we will record an intangible asset for that residual cash flow stream. Also, from time to time, we lend money to ISOs, usually to assist the ISOs in establishing and growing their businesses. This directly impacts the number, quality and type of merchants these ISOs are able to bring to us.

We have recently settled a number of disputes that have affected our results of operations as we make payments on our obligations under these settlements. In October 2002, we settled a dispute with Auerbach Acquisitions Associates for $1.5 million. On April 24, 2002, we entered into a settlement and release agreement with Richard J. Gordon, the Chief Executive Officer of our predecessor company, iPayment Technologies, Inc., and two of his affiliated companies in which we agreed to make periodic payments to Mr. Gordon in lieu of payment on a $2.0 million note we had issued to his company, ITSV, Inc., in connection with our reorganization discussed above. As of December 31, 2002, we had paid all of our obligations under this settlement and release agreement. For further discussion of these settlements, please see note 13 to our audited consolidated financial statements included elsewhere in this prospectus.

In addition, in November 2002, we executed formal settlement agreements relating to a class action lawsuit brought by Rae Lynn Copitka against Leasecomm Corporation and E-Commerce Exchange, Inc., which we acquired in March 2002. In connection with the settlement, we have also agreed to pay $500,000 in attorneys fees and costs, a damage and representative award of $15,000 to the named plaintiff and a partial indemnification payment to Leasecomm equal to the value of the leases that are, in fact, cancelled by class members under the settlement terms. Based on the leases that will be subject to cancellation rights under the settlement, the partial indemnification payment to Leasecomm is expected not to exceed $1.5 million. A settlement amount was included in accounts payable and accrued liabilities on the balance sheet of E-Commerce Exchange on the date of its acquisition by us. For more information regarding the Copitka litigation and settlement, see “Business — Legal Proceedings” and note 13 to our audited consolidated financial statements included elsewhere in this prospectus.

Revenues. Revenues increased 197.8% from $38.9 million for 2001 to $115.8 million for 2002. This increase was primarily attributable to our acquisitions since January 2001 of six businesses and four large portfolios and several smaller portfolios of merchant accounts, which resulted in an aggregate increase in revenues of $65.7 million, representing 85.3% of our total growth in revenues over the prior period. The remaining revenues increase was a result of internal growth from an increase in new merchant accounts.

Costs of Services. Costs of services increased 180.4% from $33.6 million for 2001 to $94.3 million for 2002. The increase was due primarily to costs associated with increased processing volume and the addition

of 178 personnel related to our acquisitions, as well as a $7.3 million increase in residual payments to ISOs related to the increase in the number of merchant accounts opened or acquired through acquisitions. Costs of services represented 86.5% of revenues for 2001 as compared to 81.5% of revenues for 2002. Costs of services as a percentage of revenues decreased primarily due to lower margins on portfolios acquired in connection with business acquisitions in 2002, partially offset by cost savings from renegotiation of a third-party processing contract and a $2.7 million loss recognized in the fourth quarter of 2001 attributable to chargebacks relating to one merchant, compared to a $3.3 million loss related to that merchant recognized in the first half of 2002.

Selling, General and Administrative. Selling, general and administrative expenses increased 73.0% from $3.8 million for 2001 to $6.5 million for 2002. The increase was primarily due to an increase in personnel cost resulting from our acquisitions and an increase in professional fees incurred in connection with litigation. Selling, general and administrative expenses were 9.7% of net revenues for 2001 as compared to 5.6% of revenues for 2002. Selling, general and administrative expenses as a percentage of revenues for 2002 decreased because revenues increased at a higher rate than those expenses due to our acquisitions as described above.

Depreciation and Amortization. Depreciation and amortization expenses increased 23.7% from $4.3 million for 2001 to $5.3 million for 2002. The increase was due to the allocation of purchase price to the portfolios of merchant accounts related to the acquisitions described above. Intangible assets were approximately $19.7 million at December 31, 2001 as compared to $31.8 million at December 31, 2002. Depreciation and amortization expenses were 11.1% of total revenues in 2001 as compared to 4.6% for 2002. We recognized an expense of approximately $0.3 million due to the amortization of goodwill during 2001. Goodwill is not included in amortization in 2002 as a result of our adoption of SFAS 142, which changed our accounting method relative to the recognition of goodwill amortization expense. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” and “— New Accounting Standards” for more information on our adoption of SFAS 142.

Interest Expense. Interest expense increased 135.5% from $2.9 million for 2001 to $6.9 million for 2002. This increase was primarily due to increased borrowings to fund our acquisitions and for working capital.

Other Income (Expense). Other income decreased from a benefit of $0.6 million in 2001 to an expense of $3.2 million in 2002. The decrease was primarily due to expenses of $1.5 million from the settlement of litigation and $1.0 million related to the amendment of certain terms of the existing processing agreements and the termination of an acquisition agreement, and the nonrecurrence of savings recognized in 2001 from the renegotiation of certain amounts due vendors from our predecessor company.

Income Tax. Income tax provision increased from a benefit of $107,000 for 2001 to an expense of $10,000 for 2002. The increase was attributable to state income tax expense generated during 2002 compared to the reversal of $111,000 of income tax liabilities that were determined to be unnecessary in 2001.

The following discussion compares our results of operations for the year ended December 31, 2001, with our results of operations and those of our predecessor for the year ended December 31, 2000. Our operations began on July 20, 2000 and our results of operations for the period from July 20, 2000 to December 31, 2000 have been combined with the results of operations of our predecessor for the period from January 1, 2000 to July 19, 2000 for the 2000 calendar year. Due to the nature of our inception on July 20, 2000 (as more fully described in Note 1 of the accompanying consolidated financial statements) the assets and liabilities of our predecessor were the same as ours, with the exception of goodwill in the amount of $7.0 million. Because goodwill was our only balance sheet item that differed from the historical balance sheet of our predecessor, we believe that goodwill amortization (included in depreciation and amortization) is the only income statement item for which comparison between the years December 31, 2001 and 2000 may not be meaningful. Any amortization expense attributable to the $7.0 million of goodwill will be explained in the analysis below.

Revenues. Revenues increased 87.8% from $20.7 million for 2000 to $38.9 million for 2001. This increase was due entirely to our acquisitions of the merchant processing division of First Bank of Beverly Hills, 1st National Processing, Inc., and four smaller portfolio acquisitions.

Costs of Services. Costs of services increased 76.8% from $19.0 million for 2000 to $33.6 million for 2001. The increase was due primarily to increased processing volume associated with our acquisitions. Costs of services as a percentage of revenues declined from 91.9% in 2000 to 86.5% in 2001, primarily as a result of residual buyouts and reduced processing costs. Residual buyouts are buyouts of our ISO’s rights to their cash flow streams. The renegotiation of our contract with Humboldt Bank reduced costs by $1.8 million and residual buyouts reduced costs of services by $1.2 million in 2001.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 42.6% from $6.6 million for 2000 to $3.8 million for 2001. Selling, general and administrative expenses decreased from 31.8% of revenues for 2000 to 9.7% of revenues for 2001. This decrease was due primarily to cost reductions realized from the closure of our Los Angeles, California facility as a result of our restructuring in 2000.

Depreciation and Amortization. Depreciation and amortization expenses increased 52.0% from $2.8 million for 2000 to $4.3 million for 2001. This increase was due primarily to an increase in intangible assets acquired in connection with acquisitions. Intangible assets were $4.3 million at December 31, 2000 as compared to $19.7 million at December 31, 2001. Depreciation and amortization expenses were 13.7% of revenues for 2000 as compared to 11.1% for 2001. Depreciation and amortization expenses as a percentage of revenues decreased as a result of acquisitions that led to an increase in revenues that was higher than the increase in depreciation and amortization expenses. Amortization of our goodwill was $0.2 million for 2000 and $0.3 million for 2001. Amortization of goodwill ceased in 2001.

Restructuring Costs. Restructuring costs decreased from $1.6 million in 2000 to $(0.1) million in 2001. Restructuring costs were 7.7% of revenues for 2000. In December 2000, we formalized a restructuring plan which resulted in a 25% reduction of overhead costs and the termination of 30 employees. Restructuring charges in 2000 consisted of $0.7 million of severance, lease termination and other costs, as well as a $0.8 million write-down of fixed assets relating to the planned move of our operations to a new location. There were no restructuring charges recorded in 2001.

Interest Expense. Interest expense increased from $0.8 million for 2000 to $2.9 million for 2001. This increase was due primarily to higher interest expense incurred on higher levels of outstanding debt resulting from $25.5 million of notes issued in connection with acquisitions and for working capital.

Other Income (Expense). Other income (expense) increased from $(0.4) million in 2000 to $0.6 million in 2001. The increase was primarily due to savings from the renegotiation of certain amounts due vendors from our predecessor company.

Income Tax. Income tax provision decreased from $2,000 for the year ended December 31, 2000 to a benefit of $107,000 during the year ended December 31, 2001, due primarily to the reversal of $111,000 of income tax liabilities that were determined to be unnecessary in 2001.

At December 31, 2002, we had cash and cash equivalents totaling $1.8 million, and at December 31, 2001 and 2000, we had cash and cash equivalents totaling $290,000 and $568,000, respectively.

Net cash used in operating activities was $9.0 million in the year ended December 31, 2002. We used $11.0 million of our cash for the payment of accounts payable and accrued and other liabilities. Net cash used in operating activities was $2.2 million in the year ended December 31, 2001 and $2.0 million in the year ended December 31, 2000. During the year ended December 31, 2001, net cash used in operating activities was primarily used for the payment of accounts payable and accrued and other liabilities and funding our internal growth. Additionally, we used funds to settle older vendor amounts from our

Total capital expenditures for the year ended December 31, 2002 were $0.4 million. These expenditures were primarily related to the purchase of computers and other equipment. Total capital expenditures were $0.4 million for 2001 and 2000, and were primarily related to the purchase of computer equipment, furniture and fixtures and leasehold improvements. We do not expect capital expenditures to exceed $1.0 million in any year through 2004.

Net cash used in investing activities was $10.0 million for the year ended December 31, 2002, $21.1 million for the year ended December 31, 2001 and $1.0 million for the year ended December 31, 2000. During the years ended December 31, 2002 and 2001, substantially all cash used in investing activities was used for acquisitions of four businesses in 2002 and two businesses and four portfolios of merchant accounts in 2001. In 2000, cash was used to purchase capital equipment and to acquire our predecessor. We currently have no significant capital spending or purchase commitments, but expect to continue to engage in capital spending in the ordinary course of business.

We have historically funded our principal operations through private placements of debt and equity securities to executive officers, directors, principal stockholders and third parties and a line of credit from Bank of America.

Net cash provided by financing activities was $20.5 million for the year ended December 31, 2002, $23.0 million for the year ended December 31, 2001 and $3.6 million for the year ended December 31, 2000. For the years ended December 31, 2002, 2001 and 2000, we obtained $31.0 million, $28.3 million and $3.6 million in funding, respectively, through the issuance of notes to executive officers, directors, principal stockholders and third parties and the sale of 1,208,035 shares of our mandatorily redeemable preferred stock to First Avenue Partners, L.P. The funds obtained were offset partially by the payment of an aggregate principal amount of $10.3 million in 2002 and $5.1 million in 2001 to repay notes.

As of December 31, 2002, we had notes, capital lease obligations and a line of credit arrangement outstanding in an aggregate principal amount of $84.5 million, owed to executive officers, directors, principal stockholders and third parties, of which $15.0 million were convertible at issuance into 647,780 shares of our common stock and $1.9 million were convertible into 71,057 shares. The $15.0 million of convertible subordinated promissory notes may be converted into shares of our common stock at the discretion of the holders at a price per share of $23.16 upon the earlier of March 19, 2003 or the completion of this offering. Fifty percent of the interest that accrues on the notes is payable on a quarterly basis. Through March 31, 2003, the remaining 50% of the interest was added to the principal amount of the notes on a quarterly basis and at the election of the holder this interest either increased the amount payable or increases the amount of shares of our common stock into which the notes may be converted. After March 31, 2003, the remaining 50% of the interest increases the amount payable. The remaining $1.9 million of convertible promissory notes may be converted at any time until April 1, 2004 at a price per share of $26.73. Our notes mature between August 2003 and August 2007. See “— Commitments.” Of these notes, $54.7 million are held by our affiliates and related parties. See “Certain Relationships and Related Transactions.” These notes bear interest at rates ranging from 0% to 14%, and the weighted average interest rate of these notes was 9.5%, in each case as of December 31, 2002.

As of December 31, 2002, we had a line of credit with Bank of America that allows us to borrow up to an aggregate of $3.0 million. The line of credit matures on March 1, 2004. The line of credit is personally guaranteed by our Chief Executive Officer. Borrowings under the line of credit bear interest at the prime rate, which was 4.25% at December 31, 2002, are secured by a lien on our assets and contain customary covenants and events of default. As of December 31, 2002, we had $1.1 million of outstanding indebtedness under our line of credit.

We intend to repay $46.1 million of our outstanding indebtedness with the estimated net proceeds of this offering. Please see “Use of Proceeds.”

If we were not to complete this offering, we believe that our cash on hand will be sufficient to meet our working capital requirements and contractual commitments until December 31, 2003. We will fund our working capital needs from revenues generated from our operations.

If we are unable to increase our revenues, we will need to raise additional funds to finance our future capital needs. We may need additional financing earlier than we anticipate if we:


	•	decide to expand faster than planned;

	•	need to respond to competitive pressures; or

	•	need to acquire complementary products, businesses or technologies.

The following tables and discussion reflect our significant contractual obligations and other commercial commitments as of December 31, 2002 (notes payable are reported net of unamortized warrant discount of $6.4 million):

We intend to use $46.1 million of the estimated net proceeds from this offering to repay outstanding indebtedness (which had a carrying value of $40.7 million as of December 31, 2002). We expect that we will be able to fund our remaining obligations and commitments with cash flow from operations. To the extent we are unable to fund these obligations and commitments with cash flow from operations, we intend to fund these obligations and commitments with proceeds from borrowings under our credit facility or future debt or equity financings.

Our monetary assets, consisting primarily of cash and receivables, are not significantly affected by inflation. Our non-monetary assets, consisting primarily of intangible assets and goodwill, are not affected by inflation. We believe that replacement costs of equipment, furniture and leasehold improvements will not materially affect our operations. However, the rate of inflation affects our expenses, such as those for employee compensation and telecommunications, which may not be readily recoverable in the price of services offered by us.

We transact business with merchants exclusively in the United States and receive payment for our services exclusively in United States dollars. As a result, our financial results are unlikely to be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets.

Our interest expense is generally not sensitive to changes in the general level of interest rates in the United States, particularly because a substantial majority of our indebtedness is at fixed rates.

We do not hold derivative financial or commodity instruments, nor engage in any foreign currency denominated transactions, and all of our cash and cash equivalents are held in money market and checking funds.

Based on our review of our results of operations for the three months ended March 31, 2003, revenues increased 183.2% from $16.5 million for the three months ended March 31, 2002 to $46.7 million for the comparable period in 2003. Income from operations increased 609.0% from $0.6 million for the three months ended March 31, 2002 to $4.6 million for the comparable period in 2003. Net income was $0.9 million for the three months ended March 31, 2003 compared to a net loss of $0.7 million for the comparable period in 2002. A substantial majority of the increase in revenues, income from operations and net income was attributable to our acquisitions since January 2001 of six businesses and four large portfolios and several smaller portfolios of merchant accounts. For the three months ended March 31, 2003, cash flow provided by operating activities was $1.3 million.

Our operating expenses increased 166.0% from $15.8 million for the three months ended March 31, 2002 to $42.1 million for the comparable period in 2003. This increase for the three months ended March 31, 2003, resulted from a 183.5% increase in cost of services from $13.5 million to $38.4 million primarily as a result of increased costs associated with higher processing volumes from our acquisitions, a 56.5% increase in selling, general and administrative expenses from $1.2 million to $1.8 million primarily as a result of increased personnel costs resulting from our acquisitions, and a 69.2% increase in depreciation and amortization expenses from $1.1 million to $1.9 million as a result of the allocation of purchase price to the portfolios of merchant accounts related to our acquisitions. As a percentage of revenues, cost of services were 82.1% for the three months ended March 31, 2002 compared to 82.2% for the comparable period in 2003, and selling, general and administrative expenses were 7.1% for the three months ended March 31, 2002 compared to 3.9% for the comparable period in 2003. Selling, general and administrative expenses decreased as a percentage of revenues for the three months ended March 31, 2003 because revenues increased at a faster rate than those expenses due to the acquisitions described above.

In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 addresses financial accounting and reporting for business combinations and is effective for all business combinations completed after June 30, 2001. SFAS No. 141 requires all business combinations to be accounted for using the purchase method. We adopted SFAS No. 141 during the third quarter of 2001, and the acquisitions of 1st National Processing, as well as the merchant-processing portfolio of First Bank of Beverly Hills have been accounted for under this standard. The adoption of SFAS No. 141 did not have a material impact on our consolidated balance sheets or results of operations.

SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. With the January 1, 2002 adoption of SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life, rather goodwill is subject to at least an annual assessment for impairment. SFAS No. 142 became effective for us on January 1, 2002, with a provision that states goodwill acquired in a business combination for which the acquisition dates is after June 30, 2001 should not be amortized. Accordingly, the goodwill generated through the acquisitions of 1st National Processing and the merchant-processing portfolio of First Bank of Beverly Hills, which are discussed in note 6 to our audited financial statements included elsewhere in this prospectus, were not amortized in 2001. Our management has assessed the impact of the adoption of SFAS No. 142 on our financial statements, and the impact of not amortizing goodwill for the acquisitions described above from the dates of such acquisitions from July 1, 2001 to December 31, 2001 would have been a decrease in amortization expense of approximately $93,000. In

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Asset, which addresses financial accounting and reporting for the impairment of long-lived assets. This standard became effective January 1, 2002. The adoption of SFAS No. 144 did not have any impact on our financial condition or results of operations at the time of adoption.

In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, Rescission FASB Statements 4, 44 and 64 which rescinds the provisions of SFAS 4 that requires companies to classify certain gains and losses from debt extinguishments as extraordinary items, eliminates the provisions of SFAS 44 regarding transition to the Motor Carrier Act of 1980 and amends the provisions of SFAS 13 to require that certain lease modifications be treated as sale leaseback transactions. The provisions of SFAS No. 145 related to classification of debt for fiscal years beginning after May 15, 2002, however, as earlier adoption is encouraged, we have reclassified $540,000 of debt extinguishments as extraordinary items to other income.

In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost was recognized at the date of a company’s commitment to an exit plan. SFAS No. 146 also establishes that the liability should be initially measured and recorded at fair value. We will adopt the provisions of SFAS No. 146 effective January 1, 2003. We do not expect that the adoption of this standard will have any immediate effect on our consolidated financial statements.

In November 2002, the Financial Accounting Standards Board issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others.” This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. This interpretation does not prescribe a specific approach for subsequently measuring the guarantor’s recognized liability over the time of the related guarantee. The initial recognition and initial measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued as modified after December 31, 2002, irrespective of the guarantor’s fiscal year end. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of this interpretation is not expected to have a material affect on our financial position or results of operations.

In December 2002, the Financial Accounting Standards Board issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment to FASB Statement No. 123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, FASB Statement No. 123 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002. Our management has adopted this standard effective January 1, 2003, and the adoption of this standard is not expected to have a material impact on our consolidated results of operations or financial position, since we continue to use the intrinsic-value method of accounting for employee stock-based compensation as outlined in APB Opinion No. 25.

Our payment processing services enable our merchants to process both traditional card-present, or “swipe,” transactions, as well as card-not-present transactions. A traditional card-present transaction occurs whenever a cardholder physically presents a credit or debit card to a merchant at the point-of-sale. A card-not-present transaction occurs whenever the customer does not physically present a payment card at the point-of-sale and may occur over the Internet or by mail, fax or telephone.

We believe our experience and knowledge in providing payment processing services to small merchants give us the ability to effectively evaluate and manage the payment processing needs and risks that are unique to small businesses. In order to identify small merchants, we market and sell our services primarily through 500 independent sales organizations, or ISOs, a non-employee, external sales force representing approximately 2,000 sales professionals. ISOs allow us to access a large and experienced sales force with a local presence and access to small merchants over a broad geographic area without incurring the additional overhead costs associated with an internal sales force. ISOs frequently market and sell our services to merchants under their own brand name and do so by directly approaching merchants and enrolling them for our services. We enable merchants to accept credit and debit cards as payment for their merchandise and services by providing processing, risk management, fraud detection, merchant assistance and support and chargeback services in connection with disputes with cardholders. In addition, we rely on third parties to provide card authorization, data capture, settlement and merchant accounting payment processing services, which allows us to maintain an efficient operating structure, and enables us to easily expand our operations without significantly increasing our fixed costs. We rely on ISOs to market our products and services to merchants, on processors to authorize and process transactions and on banks to sponsor us for membership in the Visa and MasterCard associations and settle card transactions for our merchants.

The Nilson Report, a publication specializing in consumer payment systems worldwide, listed us in its 2001 ranking of the top bank card acquirers, or owners of merchant card processing contracts, as one of the fastest growing providers of card-based payment processing services in the United States. In 2002, we have continued to grow as our merchant processing volume increased by 257.6% from approximately $802 million for the year ended December 31, 2001 to approximately $2,868 million for the year ended December 31, 2002. During the same period, our revenues increased by 197.8% from $38.9 million for 2001 to $115.8 million for 2002. This increase was primarily attributable to our acquisitions since January 2001 of six businesses and four large portfolios and several smaller portfolios of merchant accounts, which resulted in an aggregate increase in revenues of $65.7 million, representing 85.3% of our total growth in revenues over the prior period. As we have grown, our net loss decreased by 89.8% from $4.9 million for 2001 to $0.5 million for 2002. We believe our ability to recruit and retain ISOs, combined with our experience in identifying, completing and integrating acquisitions, provides us with significant opportunities for future growth.

The use of card-based forms of payment, such as credit and debit cards, by consumers in the United States has steadily increased over the past ten years. According to The Nilson Report, total expenditures of transactions by U.S. consumers using card-based systems grew from $0.5 trillion in 1991 to $1.8 trillion in 2001. The proliferation of credit and debit cards has made the acceptance of card based payment a necessity for businesses, both large and small, in order to remain competitive. Consumer expenditures using card-based

We believe that the card-based payment processing industry will continue to benefit from the following trends:


	•	Favorable Demographics. As consumers age, we expect that they will continue to use the payment technology to which they have grown accustomed. Consumers are beginning to use card-based and other electronic payment methods for purchases at an earlier age. According to Nellie Mae, the number of college students who have credit cards has grown from 67% in 1998 to 83% in 2001. As these consumers who have witnessed the wide adoption of card products, technology and the Internet comprise a greater percentage of the population and increasingly enter the work force, we expect that purchases using card-based payment methods will comprise an increasing percentage of total consumer spending.

	•	Increased Card Acceptance by Small Businesses. Small businesses are a vital component of the U.S. economy and are expected to contribute to the increased use of card-based payments methods. In 1997, the U.S. Census Bureau estimated that approximately 20 million businesses with on average less than $1.0 million in annual sales in the United States or no payroll generated an aggregate of $1.7 trillion in annual sales. The lower costs associated with card-based payment methods are making these services more affordable to a larger segment of the small business market. In addition, we believe these businesses are experiencing increased pressure to accept card-based payment methods in order to remain competitive and to meet consumer expectations. As a result, many of these small businesses are seeking, and we expect many new small businesses to seek, to provide customers with the ability to pay for merchandise and services using credit or debit cards, including those in industries that have historically accepted cash and checks as the only forms of payment for their merchandise and services.

	•	Growth in Card-Not-Present Transactions. Market researchers expect dramatic growth in card-not-present transactions due to the rapid growth of the Internet. According to Jupiter Media Corporation, 94% of the dollar value of all merchandise and services ordered online by consumers in 2003 will be purchased using card-based systems. In total, IDC, an independent market intelligence firm, expects U.S. consumer electronic commerce to grow from $66.6 billion in 2001 to $322.8 billion in 2006, representing a compound annual growth rate of 37.1%. In addition, IDC estimates that approximately two-thirds of all small businesses have online capabilities. The prevalence of the Internet makes having an online presence a basic consideration for those forming a new business today. In December 2002, approximately one-third of our charge volume resulted from card-not-present transactions.


	•	Strong Position and Substantial Experience in Our Target Market. As of December 31, 2002, we were providing card-based payment processing to approximately 56,000 active small merchants located across the United States. We believe our understanding of the unique payment processing needs and risks of small merchants provides us with a competitive advantage over larger service providers that have a broader market perspective. We also believe that we have a competitive advantage over service providers of a similar or smaller size that may lack our extensive experience and resources.

	•	Large, Experienced, Efficient Sales Force. We market our services primarily through our contractual relationships with over 500 ISOs throughout the United States. Although it is not customary in our industry to obligate ISOs to refer their merchant applications to any one processing provider, many currently refer a majority of their new merchant applications to us as a result of our strong relationships with them. Our sales approach provides us with an experienced sales force of approximately 2,000 sales professionals who market our services, with minimal direct investment in sales infrastructure and management. We continually strive to strengthen these relationships by delivering superior service and support to our ISOs.

	•	Scalable, Efficient Operating Structure. Our scalable, efficient operating structure allows us to easily expand our operations without significantly increasing our fixed costs. We conduct our customer


		service and risk management operations in-house, where we believe we can add the most value due to our management’s experience and expertise in these areas. We consider customer service and risk management highly important to our operations and overall success. Expenses for salaries and wages declined in 2002 as a percentage of revenues to 8.0% from 9.8% in 2001, reflecting improving efficiency. We outsource our remaining processing services to third parties, including the evaluation and acceptance of card numbers and receipt and settlement of funds. By outsourcing these non-core services, we believe we are able to maintain a highly efficient operating structure. We believe there is sufficient capacity among third parties to meet our current and future outstanding needs. Many of our contracts include pricing terms that are more favorable to us as the transaction volume generated by our merchant base increases.

	•	Proven Acquisition and Integration Strategy. We have significant experience acquiring providers of payment processing services as well as portfolios of merchant accounts, having acquired six providers of payment processing services and four large portfolios and several smaller portfolios of merchant accounts since January 2001. We have enhanced revenues and improved operating efficiencies of our acquired entities by improving the services, support and benefits we offer to the ISOs that serve the entities and merchant accounts we acquire. In addition, we have increased operating efficiencies of many of the businesses we have acquired by conducting profitability analyses of acquired merchant accounts and reducing processing fees and overhead. For a discussion of some of the losses we have experienced, please see “Risk Factors — Risks Related to Acquisitions” and “Business — Legal Proceedings” for more information.

	•	Comprehensive Underwriting and Risk Management System. Through our experience and cumulative knowledge in assessing risks associated with providing payment processing services to small merchants, we have developed business procedures and systems that provide effective risk management and fraud prevention solutions. Through our underwriting processes, we evaluate merchant applicants and balance the risks of accepting a merchant against the benefit of the charge volume we anticipate such merchant will generate. We believe our systems and procedures enable us to identify potentially fraudulent activity and other questionable business practices quickly, thereby minimizing our losses and those of our merchants.

Our goal is to build upon our market position as a provider of card-based payment processing services to small businesses. Key elements of our strategy include:


	•	Expand in Existing Small Merchant Market. We believe we have an opportunity to grow our business by further penetrating the small merchant market through our relationships with our ISOs. We intend to focus our efforts on merchants that are newly-established or whose businesses involve card-not-present transactions. We also intend to target industries that have not historically accepted electronic payment methods.

	•	Enhance Relationships with Existing Sales Groups and Establish Relationships with New ISOs. Through our superior customer service and our support of the marketing efforts of the more than 500 ISOs with which we have an existing relationship, we seek to increase the volume of merchant referrals from our ISOs, including ISOs affiliated with the providers of payment processing services that we acquire. We believe that our experience in this industry, coupled with our ability to evaluate and manage the risks related to providing payment processing services, allow us to accept a high rate of merchant applications and position us well to continue to increase the number of ISO relationships we maintain and the number of new applications our existing ISOs refer to us.

	•	Maintain a Stable and Recurring Revenue Base. By providing our merchants a consistently high level of service and support, we strive to build merchant loyalty and limit merchant attrition. Through merchant retention and the benefit of increased card use, we strive to maintain our stable and recurring revenue base. In addition, we believe the low transaction volume of our individual merchants makes them less likely to change providers due to the inconvenience associated with


		transferring to another provider. By limiting merchant attrition, we believe that the increasing use of card-based payment systems will allow us to maintain a stable and recurring revenue base.

	•	Continue to Pursue Strategic Acquisitions. We intend to continue to expand our merchant base by acquiring other providers of payment processing services as well as portfolios of merchant accounts. The small merchant segment of the payment processing market is serviced by many independent providers of payment processing services that lack the resources to generate sufficient scale in this underserved market. We believe opportunities will exist for us to purchase these businesses when their resources begin to limit their ability to continue to grow independently. Other sources of portfolio acquisitions include commercial banks, which, in an effort focus on their core competencies often sell or outsource their card-based payment processing operations, creating the opportunity for buyers to acquire their existing merchant portfolios.

We provide a comprehensive solution for merchants accepting credit cards, including the various services described below:


	•	Application Evaluation/ Underwriting. We recognize that there are varying degrees of risk associated with different merchants based on the nature of their businesses, processing volume and average transaction amounts. We apply varying levels of scrutiny in our application evaluation and underwriting of prospective merchants accounts, ranging from basic due diligence for merchants with a low risk profile to a more thorough and detailed review for higher risk merchants. The results of this review serve as the basis for our decision whether to accept or reject a merchant account and also provide the criteria for establishing reserve requirements, processing limits, average transaction amounts and pricing, which assists us in monitoring merchant transactions for those accounts that exceed pre-determined criteria.

	•	Merchant Set-up and Training. After we establish a contract with a merchant, we create the software configuration that is downloaded to the merchant’s credit card terminal or computer. This configuration includes the merchant identification number, which allows the merchant to accept Visa and MasterCard as well as any other payment cards such as American Express, Discover and Diners Club provided for in the contract. The configuration might also accommodate check verification and gift and loyalty programs. If a merchant requires a pin-pad to accept debit cards, the configuration allows for the terminal or computer to communicate with the peripheral device. After the download has been completed, we conduct a training session on use of the products.

	•	Card Transaction Processing. A transaction begins with authorization of the customer’s credit or debit card. The transaction data is captured by the processor and electronically transmitted to the issuer of the card, which then determines availability of credit or debit funds. The issuer then communicates an approval decision back to the merchant through the purchaser. This process typically takes less than five seconds. After the transaction is completed, the processor transmits the final transaction data to the card issuer for settlement of funds. Generally, we outsource these services to third party processors.

	•	Risk Management/Detection of Fraudulent Transactions. Our risk management staff relies on the criteria set by the underwriting department to assist merchants in identifying and avoiding fraudulent transactions by monitoring exceptions and providing access to other resources for fraud detection. By employing these and other risk management procedures, we enable our merchants to balance the risk of fraud against the loss of a valid transaction.

	•	Merchant Service and Support. We provide merchants with ongoing service and support. Customer service and support includes answering billing questions, responding to requests for supplies, resolving failed payment transactions, troubleshooting and repair of equipment, educating merchants on Visa and MasterCard compliance, and assisting merchants


Delaware	7389	62-1847043
(State or other jurisdiction of	(Primary standard industrial	(I.R.S. employer
incorporation or organization)	classification code number)	identification number)


	Per Share	Total
Public Offering Price	$	$
Underwriting Discount	$	$
Proceeds, before expenses, to iPayment, Inc.	$	$


Common stock offered		4,500,000 shares

Common stock outstanding after this
offering		14,228,279 shares

Use of proceeds		We intend to use the estimated net proceeds from this offering as follows:

		• $46.1 million to repay outstanding indebtedness (which had a carrying value of $40.7 million as of December 31, 2002);

		• up to $5.0 million for working capital; and

		• the remainder for general corporate purposes, including potential acquisitions.

Proposed Nasdaq National Market
symbol		“IPMT”

Risk factors		See “Risk Factors” for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock.



		Predecessor			iPayment, Inc.
		Company
					Period from
		Period from			July 20, 2000						Year Ended
		January 1, 2000			through			Year Ended			December 31,
		through			December 31,			December 31,
		July 19, 2000			2000			2001			2002


		(in thousands, except share and per share data and charge volume)
Statement of Operations Data:
Revenues		$	12,870		$	7,835		$	38,889		$	115,813
Operating expenses:
	Costs of services		12,360			6,668			33,633			94,321
	Selling, general and administrative		2,040			4,546			3,782			6,541
	Depreciation and amortization		477			2,351			4,299			5,319
	Restructuring costs		—			1,585			(131	)		—

	Total operating expenses		14,877			15,150			41,583			106,181

Income (loss) from operations			(2,007	)		(7,315	)		(2,694	)		9,632
Other income (expense):
	Interest expense		(109	)		(706	)		(2,928	)		(6,894	)
	Other		(15	)		(397	)		625			(3,221	)

	Total other expense		(124	)		(1,103	)		(2,303	)		(10,115	)

Loss before income taxes			(2,131	)		(8,418	)		(4,997	)		(483	)
Income tax provision (benefit)			1			1			(107	)		10

Net loss			(2,132	)		(8,419	)		(4,890	)		(493	)
Preferred stock accretion			—			—			(874	)		(1,516	)

Net loss allocable to common stockholders		$	(2,132	)	$	(8,419	)	$	(5,764	)	$	(2,009	)

Basic and diluted loss per common share:
	Loss per share	$	(94.23	)	$	(12.63	)	$	(1.41	)	$	(0.38	)

	Weighted average shares outstanding		22,626			666,499			4,100,784			5,253,826

Financial and Other Data:
Charge volume (in millions) (unaudited)(1)		$	175		$	135		$	802		$	2,868



	December 31, 2002

			Pro Forma As
	Actual		Adjusted


	(numbers in thousands)
Balance Sheet Data:
Cash and cash equivalents	$	1,831	$	15,047
Total assets		116,981		126,705
Long-term debt to related parties, net of current portion and discount of $4,935 and $0		49,767		20,000
Long-term debt to unrelated parties, net of current portion and discount of $8,803 and $4,148		20,921		5,227
Total long-term debt		70,688		25,227
Mandatorily redeemable convertible preferred stock		6,670		—	(2)
Total stockholders’ equity	$	13,519	$	78,609	(2)


Mark L. Mandel, Esq. White & Case LLP 1155 Avenue of the Americas New York, New York 10036 (212) 819-8200		Marc D. Jaffe, Esq. Monica K. Thurmond, Esq. Latham & Watkins LLP 885 Third Avenue New York, New York 10022 (212) 906-1200


Aggregate Principal Amount of Subordinated Promissory Notes	Maturity Date		Interest Rate

$2,408,050		August 31, 2003		12.00%
$827,341		December 31, 2003		10.00%
$9,925,000		January 1, 2004		12.00%
$1,050,000		March 1, 2004		4.75%
$15,775,000		April 1, 2004		12.00%
$2,150,000		April 1, 2004		12.50%
$7,500,000		May 30, 2004		12.00%
$1,100,000		May 30, 2004		14.00%
$4,000,000		April 11, 2006		14.00%
$1,316,105		August 22, 2007		12.00%



			December 31, 2002

									Pro Forma
			Actual			Pro Forma			As Adjusted


						(unaudited)

			(in thousands)
Short-term debt, including related party debt			$	7,383		$	7,383		$	4,148

Long-term debt, including related party debt			$	70,688			70,688			25,227

Series A mandatorily redeemable convertible preferred stock, no par value; 2,577,200 shares authorized, issued and outstanding, actual; no shares issued and outstanding, pro forma and as adjusted; aggregate redemption preference of $15,540,000			$	6,670			—			—

Stockholders’ Equity:
	Preferred stock, $0.01 par value; 17,422,800 shares authorized, actual; 20,000,000 shares authorized, pro forma and as adjusted; no shares issued and outstanding, actual, pro forma and as adjusted			—			—			—

	Common stock, $0.01 par value; 130,000,000 shares authorized, actual; 180,000,000 shares authorized, pro forma and as adjusted; 6,736,075 shares issued and outstanding actual, 7,928,545 shares issued and outstanding pro forma; and 14,228,279 shares issued and outstanding pro forma as adjusted			29,736			36,406			101,181

	Accumulated deficit			(16,192	)		(16,192	)		(22,547	)
		Total stockholders’ equity(1)		13,519			20,189			78,609

		Total capitalization	$	98,260		$	98,260		$	107,984


Assumed initial public offering price per share					$	15.00
	Historical net tangible deficit per share as of December 31, 2002	$	(12.85	)
	Increase attributable to conversion of mandatorily redeemable convertible preferred stock into common stock		2.77

	Pro forma net tangible deficit per share		(10.08	)
	Increase attributable to conversion of $9.0 million of debt into equity with $1.0 million of unamortized debt warrant discount as of December 31, 2002		1.65
	Decrease attributable to payment of $46.1 million of notes with $5.4 million of unamortized debt warrant discount as of December 31, 2002		(0.63	)
	Increase per share attributable to new investors		7.73

Pro forma as adjusted net tangible deficit per share after this offering						(1.33	)

Dilution per share to new investors participating in this offering					$	16.33



	Shares Purchased				Total Consideration
									Average Price
	Number		Percent		Amount		Percent		Per Share

Existing Stockholders		7,928,545		60.9%	$	5,787,965		7.0%	$	0.73
Conversion of Existing Debt		600,000		4.6		9,000,000		11.0		15.00
New Investors		4,500,000		34.5		67,500,000		82.0		15.00

Totals		13,028,545		100%	$	82,287,965		100%	$	6.32



		Predecessor Company									iPayment, Inc.

								Period from			July 20, 2000
		Year Ended			Year Ended			January 1, 2000			through			Year Ended			Year Ended
		December 31,			December 31,			through July 19,			December 31,			December 31,			December 31,
		1998			1999			2000			2000			2001			2002


		(in thousands, except share and per share data and charge volume)
Statement of Operations Data:
Revenues		$	19,226		$	27,856		$	12,870		$	7,835		$	38,889		$	115,813
Operating expenses:
	Costs of services		18,450			22,068			12,360			6,668			33,633			94,321
	Selling, general and administrative		1,454			4,215			2,040			4,546			3,782			6,541
	Depreciation and amortization		96			606			477			2,351			4,299			5,319
	Restructuring costs		—			—			—			1,585			(131	)		—

	Total operating expenses		20,000			26,889			14,877			15,150			41,583			106,181

Income (loss) from operations			(774	)		967			(2,007	)		(7,315	)		(2,694	)		9,632
Other income (expense):
	Interest income (expense), net		43			197			(109	)		(706	)		(2,928	)		(6,894	)
	Other		(11	)		(796	)		(15	)		(397	)		625			(3,221	)

	Total other expense		32			(599	)		(124	)		(1,103	)		(2,303	)		(10,115	)

Income (loss) before income taxes			(742	)		368			(2,131	)		(8,418	)		(4,997	)		(483	)
Income tax provision (benefit)			535			84			1			1			(107	)		10

Net income (loss)			(1,277	)		284			(2,132	)		(8,419	)		(4,890	)		(493	)
Preferred stock accretion			—			—			—			—			(874	)		(1,516	)

Net income (loss) allocable to common stockholders		$	(1,277	)	$	284		$	(2,132	)	$	(8,419	)	$	(5,764	)	$	(2,009	)

Basic and diluted earnings (loss) per common share:
	Earnings (loss) per share	$	(85.07	)	$	13.30		$	(94.23	)	$	(12.63	)	$	(1.41	)	$	(0.38	)

	Weighted average shares outstanding		15,012			21,353			22,626			666,499			4,100,784			5,253,826

Financial and Other Data:
Charge volume (in millions) (unaudited)(1)		$	286		$	367		$	175		$	135		$	802		$	2,868


Cash and restricted cash	$	1,830
Accounts receivable		120
Prepaid expenses and other		1,302
Fixed assets		468
Intangible assets		80
Goodwill		15,491
Merchant loss reserve		(125	)
Accounts payable and accrued liabilities		(4,166	)

	$	15,000


Cash	$	171
Accounts receivable		809
Prepaid expenses and other		401
Fixed assets		165
Intangible assets		4,800
Goodwill		12,855
Merchant loss reserve		(423	)
Accounts payable and accrued liabilities		(1,781	)
Debt		(1,401	)

	$	15,596


Cash and restricted cash	$	1,315
Accounts receivable		545
Prepaid expenses and other		29
Fixed assets		32
Intangible assets		3,000
Goodwill		12,007
Merchant loss reserve		(933	)
Accounts payable and accrued liabilities		(3,083	)
Debt		(6,635	)

	$	6,277


											First
											Merchants
		iPayment,			E-Commerce			OnLine			Bancard			CardSync
		Inc.			Exchange			Data			Services			Processing			Pro Forma
		(1)			(2)			(3)			(4)			(5)			Adjustments			Pro Forma


		(in thousands, except share and per share data)
Revenues		$	115,813		$	1,737		$	15,189		$	24,967		$	13,305		$	—		$	171,011

Operating expenses:
	Costs of services		94,321			1,667			14,252			23,511			12,569			—			146,320
	Selling, general and administrative		6,541			655			1,335			981			9,233			—			18,745
	Depreciation and amortization		5,319			—			81			47			18			1,370	(6)		6,835
	Restructuring and impairment costs		—			—			—			39			—			—			39

	Total operating expenses		106,181			2,322			15,668			24,578			21,820			1,370			171,939

Income (loss) from operations			9,632			(585	)		(479	)		389			(8,515	)		(1,370	)		(928	)
Other income (expense):
	Interest income (expense), net		(6,894	)		—			(24	)		(269	)		(16	)		(2,486	)(7)		(9,689	)
	Other		(3,221	)		—			(76	)		—			—			—			(3,297	)

	Total other expense		(10,115	)		—			(100	)		(269	)		(16	)		(2,486	)		(12,986	)

Income (loss) before income taxes			(483	)		(585	)		(579	)		120			(8,531	)		(3,856	)		(13,914	)
Income tax expense			10			1			—			40			—			—			51

Net income (loss)		$	(493	)	$	(586	)	$	(579	)	$	80		$	(8,531	)	$	(3,856	)	$	(13,965	)

Net loss		$	(493	)																$	(13,965	)
	Less — preferred stock accretion		(1,516	)																	(1,516	)

Net loss allocable to common stockholders		$	(2,009	)																$	(15,481	)

Basic and diluted loss per common share:
	Loss per share	$	(0.38	)																$	(2.30	)

	Weighted average shares outstanding		5,253,826																		6,736,075	(8)


	Year Ended
	December 31, 2002

E-Commerce Exchange	$	3
First Merchants Bancard Services		515
OnLine Data Corporation		457
CardSync Processing		286

Subtotal	$	1,261


Acquired Business or Large Portfolio		Date of
of Merchant Accounts		Acquisition

Merchant processing portfolio of Electronic Check Processing, Inc.		January 2001
Merchant processing portfolio of E-Commerce Exchange, Inc.		February 2001
Merchant processing portfolio of Payment Processing, Inc.		May 2001
Merchant processing portfolio of American Credit Card Processing Corporation		May 2001
Merchant processing division of First Bank of Beverly Hills, F.S.B.		July 2001
1st National Processing, Inc.		August 2001
E-Commerce Exchange, Inc.		March 2002
OnLine Data Corp.		August 2002
First Merchants Bancard Services, Inc.		August 2002
CardSync Processing Inc.		September 2002



		Year Ended December 31,

		2000			2001			2002


		(in thousands)
Statement of Operations Data:
Revenues		$	20,705		$	38,889		$	115,813
Operating expenses:
	Costs of services		19,028			33,633			94,321
	Selling, general and administrative		6,586			3,782			6,541
	Depreciation and amortization		2,828			4,299			5,319
	Restructuring costs		1,585			(131	)		—

	Total operating expenses		30,027			41,583			106,181

Income (loss) from operations			(9,322	)		(2,694	)		9,632
Other income (expense):
	Interest expense		(815	)		(2,928	)		(6,894	)
	Other		(412	)		625			(3,221	)

	Total other expense		(1,227	)		(2,303	)		(10,115	)

Loss before income taxes			(10,549	)		(4,997	)		(483	)
Income tax provision (benefit)			2			(107	)		10

Net loss		$	(10,551	)	$	(4,890	)	$	(493	)

As a percentage of total revenues:
Revenues			100.0	%		100.0	%		100.0	%
Operating expenses:
	Costs of services		91.9			86.5			81.5
	Selling, general and administrative		31.8			9.7			5.6
	Depreciation and amortization		13.7			11.1			4.6
	Restructuring costs		7.7			(0.3	)		0.0

	Total operating expenses		145.0			106.9			91.7

Income (loss) from operations			(45.0	)		(6.9	)		8.3
Other income (expense):
	Interest expense		(3.9	)		(7.5	)		(5.9	)
	Other		(2.0	)		1.6			(2.8	)

	Total other expense		(5.9	)		(5.9	)		(8.7	)

Loss before income taxes			(50.9	)		(12.8	)		(0.4	)
Income tax provision (benefit)			0.0			(0.2	)		0.0

Net loss			(51.0	)%		(12.6	)%		(0.4	)%


Contractual Obligations	Total		2003		2004		2005		2006		2007		Thereafter


	(in thousands)
Notes payable	$	61,753	$	7,235	$	44,202	$	—	$	4,000	$	6,316	$	—
Line of credit		1,050		—		1,050		—		—		—		—
Capital lease obligations		266		147		119		—		—		—		—
Operating lease obligations		2,329		990		563		164		150		154		308
Convertible notes		15,000		—		—		—		—		—		15,000

Total contractual cash obligations	$	80,398	$	8,372	$	45,934	$	164	$	4,150	$	6,470	$	15,308