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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

COMMISSION FILE NUMBER 333-173504

 

 

EVERTEC, LLC

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

 

 

Puerto Rico   66-0449729

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. employer

identification number)

Cupey Center Building, Road 176, Kilometer 1.3,

San Juan, Puerto Rico

  00926
(Address of principal executive offices)   (Zip Code)

(787) 759-9999

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in rule 12b-2 of the Exchange Act).

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

At May 11, 2012, there were 100 outstanding Limited Liability Company Membership Units of EVERTEC, LLC.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page  

Part I. FINANCIAL INFORMATION

     1   

Item 1.

 

Financial Statements

     1   
 

Unaudited Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011

     1   
 

Unaudited Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2012 and 2011

     2   
 

Unaudited Consolidated Statement of Changes in Stockholder’s Equity for the three months ended March 31, 2012

     3   
 

Unaudited Consolidated Statements of Cash Flows for the three months ended March  31, 2012 and 2011

     4   
 

Notes to Unaudited Consolidated Financial Statements

     5   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     25   

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     33   

Item 4.

 

Controls and Procedures

     33   

Part II. OTHER INFORMATION

     34   

Item 1.

 

Legal Proceedings

     34   

Item 1A.

 

Risk Factors

     34   

Item 2.

 

Unregistered Sales of Equity in Securities and Use of Proceeds

     34   

Item 3.

 

Defaults Upon Senior Securities

     34   

Item 4.

 

Mine Safety Disclosures

     34   

Item 5.

 

Other Information

     34   

Item 6.

 

Exhibits

     34   

SIGNATURES

     S-1   


Table of Contents

FORWARD-LOOKING STATEMENTS

Certain statements in this Report contain “forward-looking statements” within the meaning of, and subject to the protection of, the Private Securities Litigation Reform Act of 1995. Such statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “estimates,” “will,” “should,” “plans” or “anticipates” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and may involve significant risks and uncertainties, and that actual results may vary materially from those in the forward-looking statements as a result of various factors. Among the factors that significantly impact our business and could impact our business in the future are:

 

   

our high level of indebtedness and restrictions contained in our debt agreements, including our senior secured credit facilities and the indenture governing our senior notes, as well as debt that could be incurred in the future;

 

   

our ability to generate sufficient cash to service our indebtedness and to generate future profits;

 

   

our reliance on our relationship with Popular, Inc. (“Popular”) for a significant portion of our revenues and with Banco Popular de Puerto Rico, Popular’s principal banking subsidiary, to grow our Merchant Acquiring business;

 

   

our ability to renew our client contracts on terms favorable to us;

 

   

our dependence on our processing systems, technology infrastructure, security systems and fraudulent payment detection systems, as well as on our personnel and certain third parties with whom we do business;

 

   

our ability to develop, install and adopt new software, technology and computing systems;

 

   

a decreased client base due to consolidations and failures in the financial services industry;

 

   

the credit risk of our merchant clients, for which we may also be liable;

 

   

the continuing market position of the ATH network despite competition and potential shifts in consumer payment preferences;

 

   

our dependence on credit card associations, including any adverse changes in credit card association or network rules or fees;

 

   

changes in the regulatory environment and changes in international, legal, political, administrative or economic conditions;

 

   

the geographical concentration of our business in Puerto Rico;

 

   

operating an international business in multiple regions with potential political and economic instability, including Latin America;

 

   

our ability to execute our geographic expansion and acquisition strategies;

 

   

our ability to protect our intellectual property rights against infringement and to defend ourselves against claims of infringement brought by third parties;

 

   

our ability to recruit and retain the qualified personnel necessary to operate our business;

 

   

our ability to comply with federal, state and local regulatory requirements;

 

   

evolving industry standards and adverse changes in global economic, political and other conditions; and

 

   

other factors discussed in this Report, including in the section entitled “Risk Factors.”

These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Forward-looking statements should, therefore, be considered in light of various factors, including those set forth under “Risk Factors,” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” elsewhere in this Report and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (the “Annual Report on Form 10-K”). These forward-looking statements speak only as of the date of this Report, and we do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events.


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

EVERTEC, Inc. (Unaudited) Consolidated Balance Sheets

(Dollar amounts in thousands)

 

 

     March 31, 2012     December 31, 2011  

Assets

    

Current Assets:

    

Cash

   $ 80,358      $ 53,523   

Restricted cash

     5,508        5,288   

Accounts receivable, net

     57,230        60,930   

Prepaid expenses and other assets

     19,592        21,526   
  

 

 

   

 

 

 

Total current assets

     162,688        141,267   

Investments in equity investees

     12,292        12,267   

Property and equipment, net

     35,163        36,685   

Goodwill

     372,506        371,712   

Other intangible assets, net

     436,416        448,914   

Other long-term assets

     21,731        22,894   
  

 

 

   

 

 

 

Total assets

   $ 1,040,796      $ 1,033,739   
  

 

 

   

 

 

 

Liabilities and stockholder’s equity

    

Current Liabilities:

    

Accrued liabilities

   $ 37,783      $ 29,581   

Accounts payable

     17,473        21,786   

Unearned income

     915        900   

Income tax payable

     2,002        3,383   

Deferred tax liability, net

     9,900        9,321   
  

 

 

   

 

 

 

Total current liabilities

     68,073        64,971   

Long-term debt

     524,367        523,833   

Long-term deferred tax liability, net

     89,955        91,431   

Other long-term liabilities

     449        449   
  

 

 

   

 

 

 

Total liabilities

     682,844        680,684   
  

 

 

   

 

 

 

Commitments and contingencies (Note 11)

    

Stockholder’s equity

    

Preferred stock (Par value $1.00; 0.5 million shares authorized; none issued)

     —          —     

Common stock (Par value $1.00; 2.5 million shares authorized; 100 shares issued and outstanding)

     —          —     

Additional paid-in capital

     326,627        326,367   

Retained earnings

     31,537        28,006   

Accumulated other comprehensive loss, net of tax of $19 and $13

     (212     (1,318
  

 

 

   

 

 

 

Total stockholder’s equity

     357,952        353,055   
  

 

 

   

 

 

 

Total liabilities and stockholder’s equity

   $ 1,040,796      $ 1,033,739   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

1


Table of Contents

EVERTEC, Inc. (Unaudited) Consolidated Statements of Income and Comprehensive Income

(Dollar amounts in thousands)

 

 

     Three months ended March 31,  
   2012     2011  

Revenues

    

Transaction processing (from affiliates: $7,127 and $6,074)

   $ 22,899      $ 20,271   

Merchant acquiring, net (from affiliates: $1,929 and $2,226)

     17,661        14,748   

Business solutions (from affiliates: $30,147 and $30,651)

     41,928        40,771   
  

 

 

   

 

 

 

Total revenues

     82,488        75,790   
  

 

 

   

 

 

 

Operating costs and expenses

    

Cost of revenues, exclusive of depreciation and amortization shown below

     37,741        37,504   

Selling, general and administrative expenses

     8,987        8,495   

Depreciation and amortization

     17,922        17,372   
  

 

 

   

 

 

 

Total operating costs and expenses

     64,650        63,371   
  

 

 

   

 

 

 

Income from operations

     17,838        12,419   
  

 

 

   

 

 

 

Non-operating expenses

    

Interest income

     117        314   

Interest expense

     (11,176     (14,122

Earnings of equity method investments

     66        —     

Other expenses

     (2,260     (3,886
  

 

 

   

 

 

 

Total non-operating expenses

     (13,253     (17,694
  

 

 

   

 

 

 

Income (loss) before income taxes

     4,585        (5,275

Income tax expense (benefit)

     1,054        (29,146
  

 

 

   

 

 

 

Net income

     3,531        23,871   

Other comprehensive income, net of tax of $6 and $0

    

Foreign currency translation adjustments

     1,106        444   
  

 

 

   

 

 

 

Total comprehensive income

   $ 4,637      $ 24,315   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

2


Table of Contents

EVERTEC, Inc. (Unaudited) Consolidated Statement of Changes in Stockholder’s Equity

(Dollar amounts in thousands)

 

 

     Number of
Shares of
Common
Stock
     Common
Stock
     Additional
Paid-in
Capital
     Retained
Earnings
     Accumulated Other
Comprehensive
Loss
    Total Stockholder’s
Equity
 

Balance at December 31, 2011

     100       $ —         $ 326,367       $ 28,006       $ (1,318   $ 353,055   

Share-based compensation recognized

           260              260   

Net income

              3,531           3,531   

Other comprehensive income, net of tax of $6

                 1,106        1,106   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance at March 31, 2012

     100       $ —         $ 326,627       $ 31,537       $ (212   $ 357,952   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

3


Table of Contents

EVERTEC, Inc. (Unaudited) Consolidated Statements of Cash Flows

(Dollar amounts in thousands)

 

 

     Three months ended March 31,  
     2012     2011  

Cash flows from operating activities

    

Net income

   $ 3,531      $ 23,871   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     17,922        17,372   

Amortization of debt issue costs and accretion of discount

     1,170        2,192   

Provision for doubtful accounts and sundry losses

     396        231   

Deferred tax benefit

     (962     (29,334

Share-based compensation

     260        112   

Realized loss on derivative

     —          1,214   

Unrealized loss of indemnification assets

     175        476   

Amortization of a contract liability

     (703     (1,053

Loss on disposition of property and equipment and other intangibles

     20        —     

Equity in earnings of investment

     (66     —     

Prepayment penalty related to debt refinancing

     —          (3,387

(Increase) decrease in assets:

    

Accounts receivable, net

     3,930        8,333   

Prepaid expenses and other assets

     1,934        (627

Increase (decrease) in liabilities:

    

Accounts payable and accrued liabilities

     4,477        2,545   

Income tax payable

     (1,381     (190

Unearned income

     15        52   

Other long-term liabilities

     —          (113
  

 

 

   

 

 

 

Total adjustments

     27,187        (2,177
  

 

 

   

 

 

 

Net cash provided by operating activities

     30,718        21,694   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Net (increase) decrease in restricted cash

     (220     577   

Intangible assets acquired

     (1,139     (4,448

Property and equipment acquired

     (2,532     (2,702

Proceeds from sales of property and equipment

     8        —     

Acquisition of an equity method investment

     —          (9,244
  

 

 

   

 

 

 

Net cash used in investing activities

     (3,883     (15,817
  

 

 

   

 

 

 

Cash flows from financing activities

    

Repayment and repurchase of long-term debt and other liabilities

     —          (888
  

 

 

   

 

 

 

Net cash used in financing activities

     —          (888
  

 

 

   

 

 

 

Net increase in cash

     26,835        4,989   

Cash at beginning of the period

     53,523        55,199   
  

 

 

   

 

 

 

Cash at end of the period

   $ 80,358      $ 60,188   
  

 

 

   

 

 

 

Supplemental disclosure of non-cash activities:

    

Foreign currency translation adjustments

   $ 1,106      $ (444

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

4


Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

Note 1 – The Company and Summary of Significant Accounting Policies

     6   

Note 2– Business Combination

     7   

Note 3 – Investment in Equity Investees

     7   

Note 4 – Property and Equipment, net

     8   

Note 5 – Goodwill and Other Intangible Assets

     8   

Note 6 – Debt

     9   

Note 7 – Financial Instruments and Fair Value Measurements

     10   

Note 8 – Merchant Acquiring Revenues

     12   

Note 9 – Share-based Compensation

     12   

Note 10 – Income Tax

     13   

Note 11 – Commitments and Contingencies

     14   

Note 12 – Related Party Transactions

     15   

Note 13 – Segment Information

     16   

Note 14 – Guarantor of the Senior Notes and Non-Guarantor Consolidated Financial Information

     17   

Note 15 – Subsequent Events

     22   

 

5


Table of Contents

EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements

 

Note 1 – The Company and Summary of Significant Accounting Policies

The Company

EVERTEC, LLC (formerly known as EVERTEC, Inc.) and its subsidiaries are a diversified processing business, offering transaction and payment processing services, merchant acquiring services and business process management solutions in Puerto Rico and certain countries throughout the Caribbean and Latin America. We own and operate the ATH network, the leading debit payment and automated teller machine (“ATM”) network in Puerto Rico. Our products and services include point-of-sale (“POS”) processing, network and switch services, ATM driving services, core bank processing, business process outsourcing solutions, technology infrastructure management and merchant acquiring services. Our Merchant Acquiring business is the largest merchant acquirer in Puerto Rico, and the fifth largest in Latin America, providing an end-to-end electronic payment offering to over 16,000 merchants. EVERTEC’s subsidiaries include Sense Software International Corp. (“Sense”), EVERTEC Dominicana SAS., EVERTEC Latinoamérica, S.A., ATH Costa Rica, S.A. (“ATH CR”), EVERTEC Finance Corp. and T.I.I. Smart Solutions, Inc.

On April 17, 2012, EVERTEC was converted from a Puerto Rico corporation to a Puerto Rico limited liability company (the “Conversion”) for the purpose of improving the consolidated tax efficiency of EVERTEC and its subsidiaries by taking advantage of recent changes to the Puerto Rico Internal Revenue Code, as amended, that permit limited liability companies to be treated as partnerships that are pass-through entities for Puerto Rico tax purposes. Concurrent with the Conversion, Carib Holdings, LLC (formerly known as Carib Holdings, Inc., “Carib Holdings”), which is EVERTEC’s direct parent, was also converted from a Puerto Rico corporation to a Puerto Rico limited liability company. Prior to these conversions, Carib Latam Holdings, Inc. (“Carib Inc.”) was formed in order to act as the new parent company of Carib Holdings and its subsidiaries, including EVERTEC. In addition, in connection with the Conversion, EVERTEC formed a new wholly owned subsidiary, EVERTEC Finance Corp., a corporation organized under the laws of the Commonwealth of Puerto Rico (“EVERTEC Finance”), to act as co-issuer of the 11% senior notes due 2018. See Note 15 for additional information regarding these and other significant transactions that occurred after March 31, 2012.

Except as otherwise indicated or unless the context otherwise requires, (a) the terms “EVERTEC, LLC,” “EVERTEC,”“we,” “us,” “our” and “our company” refer for periods on and after the Conversion to EVERTEC, LLC and its subsidiaries (including EVERTEC Finance) on a consolidated basis and refer for periods prior to the Conversion to EVERTEC, Inc. and its subsidiaries on a consolidated basis, (b) the term “Carib Holdings” refers for periods on or after the Conversion to Carib Holdings, LLC and for periods prior to the Conversion to Carib Holdings, Inc. and (c) the term “Co-Issuers” refers to EVERTEC and EVERTEC Finance and none of EVERTEC’s other subsidiaries.

Basis of Presentation

The unaudited consolidated financial statements include the accounts of EVERTEC and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The preparation of the accompanying unaudited consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements. Actual results could differ from the estimates.

In the opinion of management, the accompanying unaudited consolidated financial statements, prepared in accordance with GAAP, contain all adjustments, all of which are normal and recurring in nature, necessary for a fair presentation. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from the unaudited consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). All of these unaudited consolidated financial statements should be read in conjunction with the audited consolidated and combined financial statements for the fiscal year ended December 31, 2011, included in the Company’s Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results of operations for the full year or any future period.

Consolidated Balance Sheet as of December 31, 2011 was derived from the audited consolidated and combined financial statements for the fiscal year ended December 31, 2011 included in the Annual Report on Form 10-K.

Certain reclassifications have been made to the March 31, 2011 unaudited consolidated financial statements and related notes to conform with the presentation in 2012.

 

6


Table of Contents

EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements

 

 

Note 2 – Business Combination

The Merger

On June 30, 2010, Popular, Inc. (“Popular”), EVERTEC, and two newly formed subsidiaries of a fund managed by an affiliate of Apollo Global Management, LLC (“Apollo”), AP Carib Holdings, Ltd. (“AP Carib”) and Carib Acquisition, Inc. (“Merger Sub”), entered into an Agreement and Plan of Merger pursuant to which, on September 30, 2010, Merger Sub was merged with and into EVERTEC (the “Merger”), with EVERTEC continuing as the surviving entity. Following the effective time of the Merger, AP Carib and Popular contributed their respective shares of EVERTEC capital stock to Carib Holdings, Inc. (now known as Carib Holdings, LLC) (“Carib Holdings”) in exchange for shares of Carib Holdings’ voting capital stock. Following that contribution, EVERTEC became a wholly-owned subsidiary of Carib Holdings, with AP Carib and Popular owning approximately 51% and 49%, respectively, of the outstanding voting capital stock of Carib Holdings. The acquisition of EVERTEC was accounted for as a business combination using the purchase method of accounting, whereby the purchase price was allocated to tangible and intangible assets acquired and liabilities assumed, based on their estimated fair market values. Fair value measurements have been applied based on assumptions that market participants would use in the pricing of the assets or liabilities.

During 2011, retrospective adjustments were made to the estimated fair values of assets acquired and liabilities assumed associated with the Merger to reflect new information obtained during the measurement period, about facts and circumstances that existed as of the acquisition date that, if known, would have affected the acquisition date fair value measurements.

The following table presents the changes in the unaudited consolidated statement of income as a result of the retrospective adjustments driven by refinements in the tax treatment assumptions of the indemnification assets and the unfavorable contract liability related to a contract with one of Popular’s clients for the periods below.

 

(Dollar amounts in thousands)    Three months ended
March  31, 2011, as
adjusted
    Three months ended
March  31, 2011, as
reported
 

Loss before income taxes

   $ (5,275   $ (5,275

Income tax benefit

     (29,146     (29,046
  

 

 

   

 

 

 

Net income

   $ 23,871      $ 23,771   
  

 

 

   

 

 

 

The Acquisition of an Equity Interest in Consorcio de Tarjetas Dominicanas, S.A. (“CONTADO”)

On March 31, 2011, the Company acquired a 19.99% interest in CONTADO from a subsidiary of Popular. Popular paid to the Company $10.8 million, which represented 50% of the after tax proceeds received by Popular from the sale of its remaining 33.98% equity interest in CONTADO that was not transferred to the Company, and the Company paid to Popular the $20.0 million held back at the Merger closing date in connection with the anticipated transfer of equity interest in CONTADO. The Company recorded the 19.99% equity interest in CONTADO at approximately $13.0 million, which was the fair value as of March 31, 2011 and accounted for the investment under the equity method of accounting. The purchase price was allocated to assets and liabilities based on their estimated fair values. Fair value measurements have been applied based on assumptions that market participants would use in the pricing of the assets or liabilities.

The agreement to purchase the equity interest in CONTADO and the Company’s right to dividends declared or paid by CONTADO during the period required pursuant to certain rights of first refusal held by the other shareholders of CONTADO were treated as freestanding derivatives since the Merger closing date. The derivatives were settled on March 31, 2011. For the three months ended March 31, 2011, the resulting loss of $1.2 million from settlement of the derivatives was recorded in the other expenses line item in the unaudited consolidated statements of income and comprehensive income.

Note 3 – Investment in Equity Investees

CONTADO is the largest merchant acquirer and ATM network in the Dominican Republic. The Company used the equity method of accounting to account for its 19.99% equity interest in CONTADO. As a result of the acquisition of the equity interest in CONTADO in 2011, the Company calculated an excess cost of the investment in CONTADO over the amount of underlying equity in net assets of approximately $9.0 million, which was mainly attributed to customer relationships, trademark and goodwill intangibles. The Company’s excess basis allocated to amortizable assets is recognized on a straight-line basis over the lives of the appropriate intangibles. The

 

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Table of Contents

EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements

 

 

Company recognized $66,000 as equity in CONTADO’s net income, net of amortization, in the unaudited consolidated statements of income and comprehensive income for the three months ended March 31, 2012.

Note 4 – Property and Equipment, net

Property and equipment, net consists of the following:

 

(Dollar amounts in thousands)    Useful life
in years
   March 31, 2012     December 31, 2011  

Buildings

   30    $ 2,099      $ 2,091   

Data processing equipment

   3 -5      48,275        45,883   

Furniture and equipment

   3 -10      5,974        5,912   

Leasehold improvements

   5 -10      634        610   
     

 

 

   

 

 

 
        56,982        54,496   

Less - accumulated depreciation and amortization

        (23,329     (19,316
     

 

 

   

 

 

 

Depreciable assets, net

        33,653        35,180   

Land

        1,510        1,505   
     

 

 

   

 

 

 
      $ 35,163      $ 36,685   
     

 

 

   

 

 

 

Depreciation and amortization expense related to property and equipment was $4.0 million and $3.8 million for the three months ended March 31, 2012 and 2011, respectively.

Note 5 – Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill, allocated by reportable segments, were as follows (See Note 13):

 

(Dollar amounts in thousands)    Transaction
processing
     Merchant
acquiring,  net
     Business solutions      Total  

Balance at December 31, 2011

   $ 199,745       $ 166,959       $ 5,008       $ 371,712   

Foreign currency translation adjustments

     718         —           76         794   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at March 31, 2012

   $ 200,463       $ 166,959       $ 5,084       $ 372,506   
  

 

 

    

 

 

    

 

 

    

 

 

 

Goodwill is tested for impairment at least annually using a two-step process at each reporting unit level. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired and the second step of the impairment test is unnecessary.

During 2011, the Company completed the impairment evaluation, as described above, and determined that there are no impairment losses to be recognized during the period. The present value of future cash flows was used to determine the fair value of each reporting unit. There were no triggering events or changes in circumstances that subsequent to the impairment test would have required an additional impairment evaluation.

 

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EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements

 

 

The carrying amount of other intangible assets for the three months ended March 31, 2012 and the year ended December 31, 2011 consisted of the following:

 

(Dollar amounts in thousands)         March 31, 2012  
     Useful life in years    Gross
amount
     Accumulated
amortization
    Net carrying
amount
 

Customer relationships

   14    $ 313,786       $ (33,966   $ 279,820   

Trademark

   10-14      39,950         (5,196     34,754   

Software packages

   3-5      108,003         (37,046     70,957   

Non-compete agreement

   15      56,539         (5,654     50,885   
     

 

 

    

 

 

   

 

 

 
      $ 518,278       $ (81,862   $ 436,416   
     

 

 

    

 

 

   

 

 

 
(Dollar amounts in thousands)         December 31, 2011  
     Useful life in years    Gross
amount
     Accumulated
amortization
    Net carrying
amount
 

Customer relationships

   14    $ 313,543       $ (28,372   $ 285,171   

Trademark

   10-14      39,950         (4,330     35,620   

Software packages

   3-5      106,865         (30,569     76,296   

Non-compete agreement

   15      56,539         (4,712     51,827   
     

 

 

    

 

 

   

 

 

 
      $ 516,897       $ (67,983   $ 448,914   
     

 

 

    

 

 

   

 

 

 

For the three months ended March 31, 2012 and 2011, the Company recorded amortization expense related to other intangibles of $13.9 million and $13.6 million, respectively.

Note 6 – Debt

Net debt as of March 31, 2012 and December 31, 2011 was as follows:

 

(Dollar amounts in thousands)    March 31, 2012      December 31, 2011  

Senior Secured Credit Facility due in September 2016 paying interest at a variable interest rate (London InterBank Offered Rate (“LIBOR”) plus margin(1) )

  

$

313,867

  

  

$

313,333

  

Senior Notes due on October 1, 2018, paying interest semi-annually at a rate of 11% per annum

     210,500         210,500   

 

(1)

Subject to a minimum rate (“LIBOR floor”) of 1.50% at March 31, 2012 and December 31, 2011, respectively.

See Note 15 for changes to our long-term debt that occurred after March 31, 2012.

 

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EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements

 

 

Note 7 – Financial Instruments and Fair Value Measurements

Recurring Fair Value Measurements

Fair value measurement provisions establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. This guidance describes three levels of input that may be used to measure fair value:

Level 1: Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.

Level 2: Inputs, other than quoted prices included in Level 1, which are observable for the asset or liability through corroboration with market data at the measurement date.

Level 3: Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

The Company uses observable inputs when available. Fair value is based upon quoted market prices when available. If market prices are not available, the Company may employ internally-developed models that primarily use market-based inputs including yield curves, interest rates, volatilities, and credit curves, among others. The Company limits valuation adjustments to those deemed necessary to ensure that the financial instrument’s fair value adequately represents the price that would be received or paid in the marketplace. Valuation adjustments may include consideration of counterparty credit quality and liquidity as well as other criteria. The estimated fair value amounts are subjective in nature and may involve uncertainties and matters of significant judgment for certain financial instruments. Changes in the underlying assumptions used in estimating fair value could affect the results. The fair value measurement levels are not indicative of risk of investment.

The following table summarizes fair value measurements by level at March 31, 2012 and December 31, 2011 for assets measured at fair value on a recurring basis:

 

(Dollar amounts in thousands)    Level 1      Level 2      Level 3      Total  

March 31, 2012

           

Financial assets:

           

Indemnification assets:

           

Software cost reimbursement

   $ —         $ —         $ 6,580       $ 6,580   

December 31, 2011

           

Financial assets:

           

Indemnification assets:

           

Software cost reimbursement

   $ —         $ —         $ 7,113       $ 7,113   

Expected reimbursement

     —           —           351         351   

The fair value of financial instruments is the amount at which an asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced liquidation sale. Fair value estimates are made at a specific point in time based on the type of financial instrument and relevant market information. Many of these estimates involve various assumptions and may vary significantly from amounts that could be realized in actual transactions.

For those financial instruments with no quoted market prices available, fair values have been estimated using present value calculations or other valuation techniques, as well as management’s best judgment with respect to current economic conditions, including discount rates and estimates of future cash flows.

Indemnification assets include the present value of the expected future cash flows of certain expense reimbursement agreements with Popular. These contracts are a result of the purchase accounting related to the Merger dated September 30, 2010, and have termination dates ranging from February 2012 until September 2015. Management prepared estimates of the expected reimbursements to be received from Popular until the termination of the contracts, discounted the estimated future cash flows and recorded the indemnification assets as of the Merger closing date. Payments received during the quarters reduced the indemnification asset balance. The remaining balance was adjusted to reflect its fair value as of March 31, 2012, therefore resulting in a net unrealized loss of approximately $0.2 million, which is reflected within the other expense caption in the unaudited consolidated statements of income and comprehensive income. The current portion of the indemnification assets is included within accounts receivable, net, and the other long-term portion is included within other long-term assets in the accompanying unaudited consolidated balance sheet.

 

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EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements

 

 

The unobservable inputs related to the Company’s indemnification assets as of March 31, 2012 using the discounted cash flow model include the discounted rate of 7.88% and the present value of the cash flows amounting to $6.7 million.

For indemnification assets a significant increase or decrease in market rates and cash flows could result in a significant impact to the fair value. Also, the credit rating and/or the non-performance credit risk of Popular, which is subjective in nature, also could increase or decrease the sensitivity of the fair value of these assets.

The following table presents the carrying value, as applicable, and estimated fair values for financial instruments at March 31, 2012 and December 31, 2011:

 

     March 31, 2012      December 31, 2011  
(Dollar amounts in thousands)    Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 

Financial assets:

           

Indemnification assets

           

Software cost reimbursement

   $ 6,580       $ 6,580       $ 7,113       $ 7,113   

Expected reimbursements

     —           —           351         351   

Financial liabilities:

           

Senior secured term loan

   $ 313,867       $ 325,429       $ 313,333       $ 317,979   

Senior notes

     210,500         228,129         210,500         213,921   

The senior secured term loan and the senior notes prices at March 31, 2012 and December 31, 2011 were obtained using third party service providers. Their pricing is based on various inputs such as: market quotes, recent trading activity in a non-active market or imputed prices.

The senior secured term loan and senior notes, which are not measured at fair value in the balance sheet, could be categorized as level 3 in the fair value hierarchy.

 

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EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements

 

 

The following table provides a summary of the change in fair value of the Company’s Level 3 assets:

 

     Three months ended March 31,  
(Dollar amounts in thousands)    2012     2011  

Indemnification assets:

    

Beginning balance

   $ 7,464      $ 14,836   

Payments received

     (709     (1,823

Unrealized loss recognized in other expenses

     (175     (476
  

 

 

   

 

 

 

Ending balance

   $ 6,580      $ 12,537   
  

 

 

   

 

 

 

Derivatives assets:

    

Beginning balance

   $ —        $ 4,960   

Net settlement of derivative

     —          (3,746

Realized loss on derivative recognized in other expenses

     —          (1,214
  

 

 

   

 

 

 

Ending balance

   $ —        $ —     
  

 

 

   

 

 

 

Note 8 – Merchant Acquiring Revenues

Merchant acquiring revenues are presented net of interchange fees and assessments charged by credit and debit card associations. Said interchange fees and assessments charged by credit and debit card associations to the Company amounted to $21.1 million and $23.9 million for the three months ended March 31, 2012 and 2011, respectively.

Note 9 – Share-based Compensation

The following table summarizes the nonvested stock options activity for the three months ended March 31, 2012:

 

Nonvested stock options

   Shares     Weighted-average
exercise prices
 

Nonvested at December 31, 2011

     2,530,987      $ 10.00   

Granted(1)

     398,955        16.38   

Forfeitures

     (545,365     10.00   
  

 

 

   

 

 

 

Nonvested at March 31, 2012

     2,384,577      $ 11.07   
  

 

 

   

 

 

 

 

(1) 

Relates to new options granted in February 2012.

Management uses the fair value method of recording stock-based compensation as described in the guidance for stock compensation in ASC topic 718. The fair value of the stock options granted during 2012 was estimated using the Black-Scholes-Merton (“BSM”) option pricing model for “Tranche A” options granted under the Stock Incentive Plan and the Monte Carlo simulation analysis for “Tranche B” and “Tranche C” options granted under the Stock Incentive Plan.

The following table summarizes the nonvested restricted shares activity for the three months ended March 31, 2012:

 

Nonvested restricted shares

   Shares     Weighted-average
grant date fair value
 

Nonvested at December 31, 2011

     63,058      $ 10.00   

Granted

     14,646        17.07   

Vested

     (5,383     10.00   
  

 

 

   

 

 

 

Nonvested at March 31, 2012

     72,321      $ 11.43   
  

 

 

   

 

 

 

 

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EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements

 

 

Share-based compensation recognized was as follows:

 

     Three months ended March 31,  
(Dollar amounts in thousands)    2012      2011  

Share-based compensation recognized, net

     

Stock options, tax benefit of $47 and $29

   $ 157       $ 96   

Restricted shares, tax benefit of $31 and $5

     103         16   

The maximum unrecognized cost for stock options was $7.2 million as of March 31, 2012, which includes $2.3 million, $2.5 million and $2.4 million related to Tranche A, Tranche B and Tranche C options, respectively.

The maximum unrecognized compensation cost for restricted stock was $0.8 million as of March 31, 2012.

See Note 15 for information regarding the payment of a dividend during the second quarter of 2012, which also resulted in a change to the exercise price of the stock options.

Note 10 – Income Tax

Under Puerto Rico income tax law, the Company is not allowed to file consolidated tax returns with its subsidiaries. On January 21, 2011 a new Internal Revenue Code (the “Code”) was approved by the Commonwealth of Puerto Rico providing a maximum corporate income tax rate of 30%, as well as additional tax credits and deductions, among other tax reliefs and changes. As a result, during the first quarter of 2011, the Company recognized a reduction in its deferred tax liability of $27.6 million, which had been recognized at a higher marginal corporate income tax rate.

The components of income tax expense (benefit) for the three months ended March 31, 2012 and 2011 consisted of the following:

 

     Three months ended March 31,  
(Dollar amounts in thousands)    2012     2011  

Current tax provision

   $ 2,016      $ 188   

Deferred tax benefit

     (962     (29,334
  

 

 

   

 

 

 
   $ 1,054      $ (29,146
  

 

 

   

 

 

 

As discussed above, the Company conducts operations in Puerto Rico and certain countries throughout the Caribbean and Latin America. As a result, the income tax expense (benefit) includes the effect of taxes paid to the Puerto Rico government as well as foreign jurisdictions. The following table presents the segregation of income tax expense (benefit) based on location of operations:

 

     Three months ended March 31,  
(Dollar amounts in thousands)    2012     2011  

Current tax provision

    

Puerto Rico

   $ 1,908      $ (386

United States

     184        123   

Foreign countries

     (76     451   
  

 

 

   

 

 

 
   $ 2,016      $ 188   
  

 

 

   

 

 

 

Deferred tax benefit

    

Puerto Rico

   $ (809   $ (29,178

Foreign countries

     (153     (156
  

 

 

   

 

 

 
   $ (962   $ (29,334
  

 

 

   

 

 

 

 

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EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements

 

 

The following table presents the components of the Company’s deferred tax assets and liabilities:

 

(Dollar amounts in thousands)    March 31, 2012     December 31, 2011  

Deferred tax assets

    

Allowance for doubtful accounts

   $ 542      $ 540   

Unfavorable contract liability

     195        211   

Other temporary assets

     1,035        909   
  

 

 

   

 

 

 

Total gross deferred tax assets

     1,772        1,660   
  

 

 

   

 

 

 

Deferred tax liabilities (“DTL”)

    

Deferred compensation

   $ 2,946      $ 2,915   

Difference between the assigned values and the tax basis of assets and liabilities recognized in purchase

     89,883        90,766   

Debt issue cost

     8,409        8,513   

Other temporary liabilities

     389        218   
  

 

 

   

 

 

 

Total gross deferred tax liabilities

     101,627        102,412   
  

 

 

   

 

 

 

Deferred tax liability, net

   $ (99,855   $ (100,752
  

 

 

   

 

 

 

The income tax expense (benefit) differs from the amount computed by applying the Puerto Rico statutory income tax rate to the income before income taxes as a result of the following:

 

(Dollar amounts in thousands)    Three months ended March 31,  
   2012     2011  

Computed income tax at statutory rates

   $ 1,376      $ (1,582

Benefit of net tax-exempt interest income

     (2     (1

Tax benefit due to a change in estimate

     —          (676

Differences in tax rates due to multiple jurisdictions

     152        101   

Effect of income subject to tax-exemption grant

     (126     (214

Adjustment to DTL due to changes in enacted tax rate

     —          (27,629

Reversal of tax uncertainties reserve

     (640     —     

Other

     294        855   
  

 

 

   

 

 

 

Income tax expense (benefit)

   $ 1,054      $ (29,146
  

 

 

   

 

 

 

For the quarter ended March 31, 2012, EVERTEC derecognized a liability balance of $0.6 million and estimated accumulated interest of $0.1 million related to a tax position previously recognized because it was no longer more likely than not that the position will be sustained upon examination by the correspondent authorities. The determination was made due to the expiration of the statute of limitations of the corresponding tax authorities. Accordingly, as of March 31, 2012 EVERTEC recorded a revised liability for unrecognized tax benefits of approximately $0.7 million with accrued estimated interest of $0.1 million. The remaining balance of $0.8 million is expected to be reversed within the next twelve months.

On April 17, 2012, as explained above in Note 1, the Company was converted from a Puerto Rico corporation into a Puerto Rico limited liability company in order to take advantage of recent changes to the Code that allow limited liability companies to be treated as partnerships that are pass-through entities for Puerto Rico tax purposes. Also, the Company entered into a Tax Payment Agreement pursuant to which the Company will be obligated to make certain payments to Carib Holdings or Carib Inc. for taxable periods or portions thereof occurring on or after April 17, 2012, among other things. See Note 15 for additional information regarding this transaction.

Note 11 – Commitments and Contingencies

Certain lease agreements with related parties contain provisions for future rent increases. The total amount of rental payments due over the lease term is being charged to rent expense on the straight-line method over the term of the lease. The difference between rent expense recorded and the amount paid is recorded as a deferred rent obligation. Total deferred rent obligation as of March 31, 2012 and December 31, 2011 amounted to $0.4 million and $0.5 million, respectively, and is included within the accounts receivable, net caption in the accompanying consolidated balance sheets.

Rent expense of office facilities and real estate for the three months ended March 31, 2012 and 2011 amounted to $2.0 million and $2.0 million, respectively. Also, rent expense for telecommunications and other equipment for the three months ended March 31, 2012 and 2011 amounted to $1.8 million and $2.0 million, respectively.

The legal entities within EVERTEC are defendants in a number of legal proceedings arising in the ordinary course of business. Based on the opinion of legal counsel, management believes that the final disposition of these matters will not have a material adverse effect on the business, results of operations or financial condition of the Company.

 

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EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements

 

 

On a quarterly basis, the Company assesses its liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. For matters where it is probable that the Company will incur a loss and the amount can be reasonably estimated, an accrual for the loss is established. Once established, the accrual is adjusted as appropriate to reflect any relevant developments. For matters where a loss is not probable or the amount of the loss cannot be estimated, no accrual is established. Based on this process, the Company has identified certain claims where it is probable that it will incur a loss, but in the aggregate the loss would be minimal. For other claims, where the proceedings are in an initial phase, the Company is unable to estimate the range of possible loss for such legal proceedings. However, the Company at this time believes that any loss related to these latter claims will not be material.

Note 12 – Related Party Transactions

The following table presents the Company’s transactions with related parties for the three months ended March 31, 2012 and 2011:

 

     Three months ended March 31,  
(Dollar amounts in thousands)    2012      2011  

Total revenues from affiliates (1)(2)

   $ 39,203       $ 38,951   
  

 

 

    

 

 

 

Selling, general and administrative expenses

     

Rent and other fees (3)

   $ 3,159       $ 2,967   
  

 

 

    

 

 

 

Interest earned from and charged by affiliates

     

Interest income

   $ 93       $ 295   
  

 

 

    

 

 

 

Interest expense(4)

   $ 1,885       $ 2,309   
  

 

 

    

 

 

 

 

(1) 

Total revenues from Popular represent 46% and 51% of total revenues for each of the periods presented above.

(2) 

Includes revenues generated from investees accounted for under the equity method (CONTADO) of $0.9 million for the quarter ended March 31, 2012.

(3) 

Includes management fees paid to stockholders amounting to $1.3 million and $0.7 million for the quarters ended March 31, 2012 and 2011, respectively.

(4) 

Interest expense relates to interest accrued on our senior secured term loan and senior notes held by Popular.

At March 31, 2012 and December 31, 2011, EVERTEC had the following balances arising from transactions with related parties:

 

(Dollar amounts in thousands)    March 31, 2012     December 31, 2011  

Cash and restricted cash deposits in affiliated bank

   $ 77,074      $ 52,613   
  

 

 

   

 

 

 

Indemnification assets from Popular
reimbursement
(1)

    

Accounts receivable

   $ 1,895      $ 2,553   
  

 

 

   

 

 

 

Other long-term assets

   $ 4,685      $ 5,212   
  

 

 

   

 

 

 

Liability related to contract with Popular(2)

    

Accounts payable

   $ —        $ 703   
  

 

 

   

 

 

 

Other due from affiliates

    

Accounts receivable

   $ 15,820      $ 21,077   
  

 

 

   

 

 

 

Accounts payable

   $ (3,060   $ (3,036
  

 

 

   

 

 

 

Long-term debt due to affiliate

   $ 90,186      $ 90,186   
  

 

 

   

 

 

 

 

(1)

Recorded in connection with (a) reimbursement from Popular regarding services the Company provides to certain customers of Popular at preferential prices and (b) reimbursement from Popular regarding certain software license fees. For the quarter ended March 31, 2012 and the year ended December 31, 2011, the Company received $0.7 million and $7.1 million, respectively, related to these reimbursements.

(2) 

Represents a contract liability to provide certain services to a customer of Popular until February 2012.

From time to time, EVERTEC obtains performance bonds from insurance companies covering the obligations of EVERTEC under certain contracts. Under the Merger Agreement, Popular is required to, subject to certain exceptions, cause the then outstanding performance bonds to remain outstanding or replace such bonds as needed for five years from the closing date of the Merger. EVERTEC entered into a reimbursement agreement with Popular to mirror Popular’s obligations. As a result, EVERTEC is required to reimburse Popular for payment of premiums and related charges and indemnify Popular for certain losses, in case EVERTEC fails to perform or otherwise satisfy its obligations covered by such performance bonds.

 

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Table of Contents

EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements

 

 

EVERTEC had outstanding letters of credit of $2.9 million at March 31, 2012 for which Popular provided collateral. EVERTEC entered into a reimbursement agreement with Popular to mirror Popular’s obligations. As a result, EVERTEC is required to indemnify Popular for losses, in case EVERTEC fails to honor these letters of credit.

Note 13 – Segment Information

The Company operates in three business segments: transaction processing, merchant acquiring and business solutions.

The transaction processing segment includes diversified payment products and services, including the ATH network and processing services, card processing, payment processing and electronic benefit transfer (“EBT”) services.

The merchant acquiring segment provides services that allow merchants to accept electronic methods of payment such as debit, credit, prepaid and EBT cards carrying the ATH, Visa, MasterCard, Discover and American Express brands. Services include terminal sales and deployment, front-end authorization processing, settlement and funding processing and customer support.

The business solutions segment offers a full suite of business process management solutions, which include core bank processing, cash processing, item processing, network services, business process outsourcing, professional services for developing customized business solutions and fulfillment for producing and distributing various printed documents.

The Company’s business segments are organized based on the nature of products and services. The Chief Operating Decision Maker (“CODM”) reviews their separate financial information to assess performance and to allocate resources.

Management evaluates the operating results of each of its reportable segments based upon revenues and operating income. Segment asset disclosure is not used by the CODM as a measure of segment performance since the segment evaluation is driven by earnings. As such, segment assets are not disclosed in the notes to the accompanying unaudited consolidated financial statements.

The following tables set forth information about the Company’s operations by its three business segments for the periods indicated:

 

(Dollar amounts in thousands)    Transaction
processing
     Merchant
acquiring,  net
     Business
solutions
     Other     Total  

Three months ended March 31, 2012

             

Revenues

   $ 28,229       $ 17,661       $ 41,928       $ (5,330 ) (1)    $ 82,488   

Income from operations

     12,309         8,541         9,080         (12,092 ) (2)      17,838   

Three months ended March 31, 2011

             

Revenues

     24,842         14,748         40,771         (4,571 ) (1)      75,790   

Income from operations

     10,886         7,369         7,411         (13,247 ) (2)      12,419   

 

(1) 

Represents the elimination of intersegment revenues for services provided by the transaction processing segment to merchant acquiring segment, and other miscellaneous intersegment revenues.

(2) 

Represents non-recurring compensation and benefits, professional fees, transaction and/or transition costs, and incremental depreciation and amortization from purchase accounting adjustments and other miscellaneous intersegment revenues.

 

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EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements

 

 

The reconciliation of income from operations to consolidated net income for the three months ended March 31, 2012 and 2011 is as follows:

 

     Three months ended March 31,  
(Dollar amounts in thousands)    2012     2011  

Segment income from operations

    

Transaction processing

   $ 12,309      $ 10,886   

Merchant acquiring

     8,541        7,369   

Business solutions

     9,080        7,411   

Other(1)

     (12,092     (13,247
  

 

 

   

 

 

 

Income from operations

   $ 17,838      $ 12,419   
  

 

 

   

 

 

 

Interest expense

     (11,059     (13,808

Earnings of equity method investments

     66        —     

Other expenses

     (2,260     (3,886

Income tax expense (benefit)

     1,054        (29,146
  

 

 

   

 

 

 

Net income

   $ 3,531      $ 23,871   
  

 

 

   

 

 

 

 

(1) 

Represents non- recurring compensation and benefits, professional fees, transaction and/or transition costs, and incremental depreciation and amortization from purchase accounting adjustments and other miscellaneous intersegment revenues.

Note 14 – Guarantor of the Senior Notes and Non-Guarantor Consolidated Financial Information

On September 30, 2010, the Company issued senior notes with a principal amount of $220.0 million, which were guaranteed by the Company’s 100% owned subsidiaries (see Note 11 of the Company’s audited consolidated and combined financial statements for the year ended December 31, 2011 included in the Company’s Annual Report on Form 10-K). The following financial information presents the balance sheets as of March 31, 2012 and December 31, 2011, the statements of income and the statements of cash flows for the three months ended March 31, 2012 and 2011 of (i) EVERTEC (Parent); (ii) the subsidiaries that are guarantors of the senior notes; (iii) the non-guarantor subsidiaries; and (iv) the Company on a consolidated basis. Investments in subsidiaries are accounted for using the equity method for purposes of the consolidating presentation. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions. The guarantor subsidiaries are 100% owned by EVERTEC (“Parent”) and all guarantees are full and unconditional and joint and several. There are no significant restrictions on the ability of Parent to obtain funds from any of the guarantor subsidiaries by dividends or loan.

 

17


Table of Contents

EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements

 

 

     Consolidated Balance Sheet
as of March 31, 2012
 
(Dollar amounts in thousands)    EVERTEC, Inc.
(Parent Only)
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiary
    Eliminations     EVERTEC,  Inc.
(Consolidated)
 

Assets

          

Current Assets:

          

Cash

   $ 63,032      $ 10,275      $ 7,051      $ —        $ 80,358   

Restricted cash

     5,508        —          —          —          5,508   

Accounts receivable, net

     39,311        8,470        9,449        —          57,230   

Prepaid expenses and other assets

     18,578        560        656        (202     19,592   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     126,429        19,305        17,156        (202     162,688   

Investment in subsidiaries, at equity

     138,460        —          —          (126,168     12,292   

Property and equipment, net

     29,382        773        5,008        —          35,163   

Goodwill

     296,980        44,010        31,516        —          372,506   

Other intangible assets, net

     407,692        16,957        11,767        —          436,416   

Other long-term assets

     21,731        —          —          —          21,731   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 1,020,674      $ 81,045      $ 65,447      $ (126,370   $ 1,040,796   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and stockholder’s equity

          

Current Liabilities:

          

Accrued liabilities

   $ 36,387      $ 697      $ 699      $ —        $ 37,783   

Accounts payable

     9,109        421        7,943        —          17,473   

Unearned income

     557        358        —          —          915   

Income tax payable

     —          1,384        618        —          2,002   

Deferred tax liability, net

     8,959        565        443        (67     9,900   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     55,012        3,425        9,703        (67     68,073   

Long-term debt

     524,367        —          —          —          524,367   

Long-term deferred tax liability, net

     82,894        3,890        3,171        —          89,955   

Other long-term liabilities

     449        —          —          —          449   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     662,722        7,315        12,874        (67     682,844   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholder’s equity

          

Common stock

     —          55        998        (1,053     —     

Additional paid-in capital

     326,627        69,678        50,851        (120,529     326,627   

Retained earnings

     31,537        4,097        726        (4,823     31,537   

Accumulated other comprehensive loss

     (212     (100     (2     102        (212
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholder’s equity

     357,952        73,730        52,573        (126,303     357,952   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilties and stockholder’s equity

   $ 1,020,674      $ 81,045      $ 65,447      $ (126,370   $ 1,040,796   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

18


Table of Contents

EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements

 

 

     Consolidated Balance Sheet
as of December 31, 2011
 
(Dollar amounts in thousands)    EVERTEC, Inc.
(Parent Only)
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiary
    Eliminations     EVERTEC,  Inc.
(Consolidated)
 

Assets

          

Current Assets:

          

Cash

   $ 36,868      $ 11,179      $ 5,476      $ —        $ 53,523   

Restricted cash

     5,288        —          —          —          5,288   

Accounts receivable, net

     41,435        7,097        12,398        —          60,930   

Prepaid expenses and other assets

     20,642        530        504        (150     21,526   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     104,233        18,806        18,378        (150     141,267   

Investment in subsidiaries, at equity

     135,384        —          —          (123,117     12,267   

Property and equipment, net

     30,823        719        5,143        —          36,685   

Goodwill

     296,980        43,389        31,343        —          371,712   

Other intangible assets, net

     419,835        17,104        11,975        —          448,914   

Other long-term assets

     22,894        —          —          —          22,894   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 1,010,149      $ 80,018      $ 66,839      $ (123,267   $ 1,033,739   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and stockholder’s equity

          

Current Liabilities:

          

Accrued liabilities

   $ 28,473      $ 573      $ 535      $ —        $ 29,581   

Accounts payable

     11,192        838        9,756        —          21,786   

Unearned income

     504        404        —          (8     900   

Income tax payable

     —          2,424        959        —          3,383   

Deferred tax liability, net

     8,835        295        246        (55     9,321   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     49,004        4,534        11,496        (63     64,971   

Long-term debt

     523,833        —          —          —          523,833   

Long-term deferred tax liability, net

     83,808        4,204        3,419        —          91,431   

Other long-term liabilities

     449        —          —          —          449   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     657,094        8,738        14,915        (63     680,684   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholder’s equity

          

Common stock

     —          55        998        (1,053     —     

Additional paid-in capital

     326,367        69,358        50,851        (120,209     326,367   

Retained earnings

     28,006        2,827        357        (3,184     28,006   

Accumulated other comprehensive loss

     (1,318     (960     (282     1,242        (1,318
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholder’s equity

     353,055        71,280        51,924        (123,204     353,055   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilties and stockholder’s equity

   $ 1,010,149      $ 80,018      $ 66,839      $ (123,267   $ 1,033,739   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements

 

 

     Consolidated Statement of Income
for the three months ended March 31, 2012
 
(Dollar amounts in thousands)    EVERTEC, Inc.
(Parent Only)
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiary
     Eliminations     EVERTEC,  Inc.
(Consolidated)
 

Revenues

           

Transaction processing

   $ 16,454      $ 2,881      $ 3,572       $ (8   $ 22,899   

Merchant acquiring, net

     17,661        —          —           —          17,661   

Business solutions

     40,312        1,656        63         (103     41,928   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total revenues

     74,427        4,537        3,635         (111     82,488   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Operating costs and expenses

           

Cost of revenues, exclusive of depreciation and amortization shown below

     32,894        2,661        2,237         (51     37,741   

Selling, general and administrative expenses

     8,344        443        633         (433     8,987   

Depreciation and amortization

     16,911        431        580         —          17,922   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total operating costs and expenses

     58,149        3,535        3,450         (484     64,650   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income from operations

     16,278        1,002        185         373        17,838   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Non-operating (expenses) income

           

Interest income

     92        19        6         —          117   

Interest expense

     (11,176     —          —           —          (11,176

Earnings of equity method investments

     1,656        —          —           (1,590     66   

Other (expenses) income

     (2,053     (129     355         (433     (2,260
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total non-operating (expenses) income

     (11,481     (110     361         (2,023     (13,253

Income before income taxes

     4,797        892        546         (1,650     4,585   

Income tax expense (benefit)

     1,266        (378     177         (11     1,054   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income

     3,531        1,270        369         (1,639     3,531   

Other comprehensive income, net of tax of $6

           

Foreign currency translation adjustments

     1,106        860        280         (1,140     1,106   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total comprehensive income

   $ 4,637      $ 2,130      $ 649       $ (2,779   $ 4,637   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

20


Table of Contents

EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements

 

 

     Consolidated Statement of Income
for the three months ended March 31, 2011
 
(Dollar amounts in thousands)    EVERTEC, Inc.
(Parent Only)
    Guarantor
Subsidiaries
     Non-Guarantor
Subsidiary
    Eliminations     EVERTEC,  Inc.
(Consolidated)
 

Revenues

           

Transaction processing

   $ 14,829      $ 2,142       $ 3,300      $ —        $ 20,271   

Merchant acquiring, net

     14,748        —           —          —          14,748   

Business solutions

     39,200        1,589         52        (70     40,771   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     68,777        3,731         3,352        (70     75,790   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating costs and expenses

           

Cost of revenues, exclusive of depreciation and amortization shown below

     32,398        2,615         2,537        (46     37,504   

Selling, general and administrative expenses

     8,094        136         265        —          8,495   

Depreciation and amortization

     16,254        548         570        —          17,372   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     56,746        3,299         3,372        (46     63,371   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income from operations

     12,031        432         (20     (24     12,419   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Non-operating (expenses) income

           

Interest income

     293        9         12        —          314   

Interest expense

     (14,122     —           —          —          (14,122

Earnings of equity method investments

     338        —           —          (338     —     

Other expenses

     (3,887     1         —          —          (3,886
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total non-operating (expenses) income

     (17,378     10         12        (338     (17,694

(Loss) income before income taxes

     (5,347     442         (8     (362     (5,275

Income tax (benefit) expense

     (29,218     36         51        (15     (29,146
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss)

     23,871        406         (59     (347     23,871   

Other comprehensive income, net of tax

           

Foreign currency translation adjustments

     444        207         236        (444     444   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 24,315      $ 613       $ 177      $ (791   $ 24,315   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements

 

 

     Consolidated Statement of Cash Flows
for the three months ended March 31, 2012
 
(Dollar amounts in thousands)    EVERTEC, Inc.
(Parent Only)
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiary
    Eliminations      EVERTEC,  Inc.
(Consolidated)
 

Cash flows from operating activities

   $ 29,754      $ (767   $ 1,731      $ —         $ 30,718   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash flows from investing activities

           

Net increase in restricted cash

     (220     —          —          —           (220

Intangible assets acquired

     (1,091     (35     (13     —           (1,139

Property and equipment acquired

     (2,287     (102     (143     —           (2,532

Proceeds from sales of property and equipment

     8        —          —          —           8   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in investing activities

     (3,590     (137     (156     —           (3,883
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash flows from financing activities

     —          —          —          —           —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net increase (decrease) in cash

     26,164        (904     1,575        —           26,835   

Cash at beginning of the period

     36,868        11,179        5,476        —           53,523   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash at end of the period

   $ 63,032      $ 10,275      $ 7,051      $ —         $ 80,358   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

     Consolidated Statement of Cash Flows
for the three months ended March 31, 2011
 
(Dollar amounts in thousands)    EVERTEC, Inc.
(Parent Only)
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiary
    Eliminations      EVERTEC,  Inc.
(Consolidated)
 

Cash flows from operating activities

   $ 19,560      $ 2,111      $ 23      $ —         $ 21,694   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash flows from investing activities

           

Net decrease in restricted cash

     577        —          —          —           577   

Intangible assets acquired

     (4,449     (3     4        —           (4,448

Property and equipment acquired

     (2,561     (16     (125     —           (2,702

Acquisition of an equity method investee

     (9,244     —          —          —           (9,244
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in investing activities

     (15,677     (19     (121     —           (15,817
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash flows from financing activities

           

Repayment of long-term debt

     (888     —          —          —           (888
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in financing activities

     (888     —          —          —           (888
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net increase (decrease) in cash

     2,995        2,092        (98     —           4,989   

Cash at beginning of the period

     45,551        5,739        3,909        —           55,199   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash at end of the period

   $ 48,546      $ 7,831      $ 3,811      $ —         $ 60,188   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Note 15 – Subsequent Events

The Company evaluated subsequent events through the date that these unaudited consolidated financial statements were issued. There were no additional subsequent events requiring disclosure other than those disclosed below.

Reorganization. On April 17, 2012, EVERTEC was converted from a Puerto Rico corporation to a Puerto Rico limited liability company for the purpose of improving the consolidated tax efficiency of EVERTEC and its subsidiaries by taking advantage of recent changes to the Code that permit limited liability companies to be treated as partnerships that are pass-through entities for Puerto Rico tax purposes. Concurrent with the Conversion, Carib Holdings, EVERTEC’s direct parent, was also converted from a Puerto Rico corporation to a Puerto Rico limited liability company. Prior to these conversions, Carib Inc. was formed in order to act as the new parent company of Carib Holdings and its subsidiaries, including EVERTEC. Carib Inc., Carib Holdings, AP Carib, Popular and each of the holders of then outstanding shares of Class B Non-Voting Common Stock of Carib Holdings entered into a Stock Contribution and Exchange Agreement (the “Contribution and Exchange Agreement”) pursuant to which each of the then outstanding shares of common stock of Carib Holdings was contributed to Carib Inc. in exchange for the same number and class of shares of common stock of Carib Inc. In addition, in accordance with the terms and conditions set forth in the Stock Contribution and Exchange Agreement,

 

22


Table of Contents

EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements

 

 

Carib Inc. assumed the Carib Holdings, Inc. 2010 Equity Incentive Plan (the “Plan”) and all of the outstanding equity awards issued thereunder or subject thereto. As a result, each of the then outstanding stock options to purchase shares of Carib Holdings’ Class B Non-Voting Common Stock became a stock option to purchase the same number and class of shares of Carib Inc.’s Class B Non-Voting Common Stock, in each case on the same terms (including exercise price) as the original stock option. Similarly, each of the then outstanding shares of restricted stock of Carib Holdings was converted into the same number of shares of restricted stock of Carib Inc. In addition, in connection with the Conversion, EVERTEC formed a new wholly owned subsidiary, EVERTEC Finance, to act as co-issuer of the senior notes.

The consolidated financial statements of EVERTEC, LLC following the Conversion will be substantially the same in all material respects as the consolidated financial statements of EVERTEC, Inc. except that separate financial statements of EVERTEC, LLC, included in the consolidated financial statements of EVERTEC, LLC, will not include tax expense, deferred tax assets or liabilities or tax receivables or payables as EVERTEC, LLC will be considered a flow through entity from a Puerto Rico tax perspective.

Supplemental Indenture regarding the Conversion. On April 17, 2012, the Company, EVERTEC Finance, and Wilmington Trust, National Association, as trustee (the “Trustee”), entered into Supplemental Indenture No. 1 (the “First Supplemental Indenture”) to the indenture dated as of September 30, 2010 among the Company, the guarantors named therein and the Trustee (as amended, the “Indenture”). Pursuant to the First Supplemental Indenture, (a) the Company affirmed and, to the extent required under the Indenture, assumed its obligations following the Conversion as issuer under the Indenture and the 11% senior notes due 2018 issued thereunder, (b) EVERTEC Finance was added as a co-issuer under the Indenture and the senior notes, (c) the limitation on restricted payments covenant was amended to permit the Company to make payments to its direct parent company, Carib Holdings, and to Carib’s newly formed direct parent company and the Company’s indirect parent company, Carib Inc., pursuant to the Tax Payment Agreement so long as (i) the Company is not in default under the Indenture, (ii) such payments are with respect to taxes imposed by Puerto Rico, the United States of America or by any other jurisdictions that the Company would have been required to pay if it was a corporation instead of being treated as a partnership for tax purposes in those jurisdictions, reduced by taking into account the amount of any applicable net operating losses or other tax attributes of Carib Holdings or Carib Inc. that reduce Carib Holdings’ or Carib Inc.’s taxes in such period and (iii) the payments do not exceed the net amount of taxes that Carib Holdings and Carib Inc. actually owe to the appropriate taxing authority for a taxable period and (d) the definitions of “Consolidated Net Income” and “Consolidated Taxes” were adjusted so that payments under the Tax Payment Agreement would reduce Consolidated Net Income and be treated as Consolidated Taxes even if they do not reduce Consolidated Net Income under GAAP. The First Supplemental Indenture also added a covenant that limits the ability of EVERTEC Finance to hold assets, incur Indebtedness or become liable for obligations, engage in business activities or consolidate, amalgamate or merge with or into or wind up into any person, subject in each case to certain exceptions.

Separately, following the execution of the First Supplemental Indenture, EVERTEC Finance also became a guarantor under the Company’s senior secured credit facility in accordance with the terms thereof.

Tax Payment Agreement. On April 17, 2012, the Company, Carib Holdings and Carib Inc. entered into a Tax Payment Agreement pursuant to which the Company will be obligated to make certain payments to Carib Holdings or Carib Inc. for taxable periods or portions thereof occurring on or after April 17, 2012. Under the Tax Payment Agreement, the Company will make payments with respect to any and all taxes (including estimated taxes) imposed under the laws of Puerto Rico, the United States of America and any other jurisdiction or any political (including municipal) subdivision or authority or agency in Puerto Rico, the United States of America or such other jurisdiction, that would have been imposed on the Company if the Company had been a corporation for tax purposes of that jurisdiction, together with all interest and penalties with respect thereto (“Taxes”), reduced by taking into account any applicable net operating losses or other tax attributes of Carib Holdings or Carib Inc. that reduce Carib Holdings’ or Carib Inc.’s taxes in such period. For the avoidance of doubt, the Tax Payment Agreement provides that the payments thereunder shall not exceed the net amount of Taxes that Carib Holdings and Carib Inc. actually owe to the appropriate taxing authority for a taxable period. Further, the Tax Payment Agreement provides that if Carib Holdings or Carib Inc. receives a tax refund attributable to any taxable period or portion thereof occurring on or after the Effective Date, Carib Inc. shall be required to recalculate the payment for such period required to be made by the Company to Carib Holdings or Carib Inc. If the payment, as recalculated, is less than the amount of the payment the Company already made to Carib Holdings or Carib Inc. in respect of such period, Carib Holdings or Carib Inc. shall promptly make a payment to the Company in the amount of such difference.

New Notes. On May 7, 2012, EVERTEC and EVERTEC Finance, as co-issuers, issued $40.0 million aggregate principal amount of 11% senior notes due 2018 (the “New Notes”) as “Additional Notes” under the Indenture pursuant to which $220.0 million aggregate principal amount of 11% senior notes due 2018 were originally issued on September 30, 2010 and $210.5 million principal amount were outstanding as of March 31, 2012 (the “Existing Notes”). The New Notes were issued pursuant to Supplemental Indenture No. 2 to the Indenture and will be treated as a single class under the Indenture with the Existing Notes.

 

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EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements

 

 

Consent Solicitation. On May 4, 2012, the Company and EVERTEC Finance obtained the requisite consents from holders of at least a majority of the aggregate principal amount of all outstanding Existing Notes on the record date of April 27, 2012, pursuant to their previously announced consent solicitation. As a result, on May 7, 2012, the Company, EVERTEC Finance, certain subsidiaries of the Company and the Trustee executed Supplemental Indenture No. 3 to the Indenture to provide the Company with additional dividend capacity of up to $270.0 million (the “Proposed Amendment”). On May 9, 2012, the Company paid an aggregate consent fee of approximately $2.8 million and, as a result, the Proposed Amendment became operative.

Credit Agreement Amendment and Incremental Term Loan Facility. On May 9, 2012, the Company entered into an amendment to the agreement governing its senior secured credit facilities to allow, among other things, a restricted payment in an amount not to exceed $270.0 million and certain adjustments to the financial covenant therein. In addition, the Company borrowed an additional $170.0 million under a secured incremental term loan.

Dividend. On May 9, 2012, the Company used the net proceeds from the incremental term loan described above and the New Notes, together with cash on hand, to pay a cash distribution of approximately $267.0 million to its direct parent, Carib Holdings (which in turn was ultimately paid, together with cash on hand at Carib Holdings of approximately $3.0 million, as a cash dividend to the stockholders of Carib Inc., the Company’s indirect parent). As a result of the dividend, on May 9, 2012, the board of directors of Carib Inc. approved an equitable adjustment to stock options previously granted pursuant to the Plan in order to reduce the exercise price of the outstanding options granted under or subject to the terms of the Plan by $7.41 per share.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis (“MD&A”) covers: (i) the results of operations for the three months ended March 31, 2012 and 2011, respectively; and (ii) the financial condition as of March 31, 2012. You should read the following discussion and analysis in conjunction with the audited consolidated and combined financial statements and related notes for the fiscal year ended December 31, 2011, included in the Company’s Annual Report on Form 10-K and with the unaudited consolidated financial statements and related notes appearing elsewhere herein. This MD&A contains forward-looking statements that involve risks and uncertainties. Our actual results may differ from those indicated in the forward-looking statements. See “Forward-Looking Statements” for a discussion of the risks, uncertainties and assumptions associated with these statements.

Overview

We are a diversified processing business, offering transaction and payment processing services, merchant acquiring services and business process management solutions in Puerto Rico and certain countries throughout the Caribbean and Latin America. We are based in San Juan, Puerto Rico. Our business segments are based on the products we offer and the markets we serve. While we often provide multiple services to various customers, we generally view our business as operating in three reportable segments: Transaction Processing, Merchant Acquiring and Business Solutions. Further discussion of our operating results and our results by reportable segments are presented in this MD&A.

The Transaction Processing segment includes diversified payment products and services including the ATH Network and Processing Services, Card Processing, Payment Processing and Electronic Benefit Transfer (“EBT”) services. We own and operate the ATH network, the leading debit payment and automated teller machine (“ATM”) network in Puerto Rico. The ATH network processed over 625 million transactions in 2011. Over 70% of all ATM transactions and over 80% of all debit transactions in Puerto Rico are processed over the ATH network.

The Merchant Acquiring segment provides an end-to-end electronic payment offering to more than 16,000 merchants in Puerto Rico and the U.S. and British Virgin Islands. This segment provides services that allow merchants to accept electronic methods of payment such as debit, credit, prepaid and EBT cards carrying the ATH, Visa, MasterCard, Discover and American Express brands. Services include terminal sales and deployment, front-end authorization processing, settlement and funding processing, and customer support.

The Business Solutions segment offers a full suite of business process management solutions, which include Core Bank Processing, Network Hosting and Management, Information Technology (“IT”) Professional Services, Business Process Outsourcing, Item Processing, Cash Processing, and Fulfillment.

We continue to implement a series of strategic initiatives to achieve our principal business objectives: (i) penetrate our broad financial institution customer base by offering incremental business solutions products and services to clients that currently perform similar functions in-house, (ii) expand our business geographically in the Latin America region, both through the introduction of new products and services to customers in existing Latin American markets and by entering new markets, (iii) leverage the ATH network and technology platform to develop new products and services, taking advantage of our access to Puerto Rico’s entire cardholder base as well as our real-time, data-based knowledge of consumer spending behaviors, (iv) leverage our broad merchant customer base by developing and offering additional products and services to cross sell along with our core merchant offerings, (v) improve and increase operating efficiency and scale in order to deliver revenue growth and improve profitability, and (vi) selectively acquire complementary businesses to further expand geographically and broaden our product offering.

Recent Developments

On April 17, 2012, EVERTEC was converted from a Puerto Rico corporation to a Puerto Rico limited liability company (the “Conversion”) for the purpose of improving the consolidated tax efficiency of EVERTEC and its subsidiaries by taking advantage of recent changes to the Code that permit limited liability companies to be treated as partnerships that are pass-through entities for Puerto Rico tax purposes. Through this new structure, the Company will benefit from at least $30.0 million of net operating losses and certain other tax attributes for Puerto Rico income tax purposes that prior to the Conversion and change in tax law were available to the Company’s parent but not to the Company. Concurrent with the Conversion, Carib Holdings, LLC (formerly known as Carib Holdings, Inc., “Carib Holdings”), which is EVERTEC’s direct parent, was also converted from a Puerto Rico corporation to a Puerto Rico limited liability company and Carib Latam Holdings, Inc. (“Carib Inc.”) was formed in order to act as the new parent company of Carib Holdings.

In addition, in May 2012, among other things, we (i) issued $40.0 million principal amount of additional senior notes, (ii) incurred $170.0 million of secured incremental term loans and (iii) paid a dividend of approximately $267.0 million to Carib Holdings. For additional information regarding these recent events, see Note 15 of the Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Overview of Results of Operations

The following briefly describes the components of revenues and expenses as presented in the unaudited consolidated statements of income and comprehensive income. Descriptions of the revenue recognition policies are detailed in Note 1 of the Audited Financial Statements included in our Annual Report on Form 10-K.

 

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Transaction processing. Transaction processing revenues are comprised of revenues related to providing access to the ATH network and other card networks to financial institutions, including related services such as authorization, processing, management and recording of ATM and POS transactions, ATM management and monitoring. Transaction processing revenues also include revenues from card processing services (such as credit and debit card processing, authorization and settlement and fraud monitoring and control to debit or credit issuers), payment processing services (such as payment and billing products for merchants, businesses and financial institutions) and electronic benefits transfer (which principally consist of services to the Puerto Rico government for the delivery of government benefits to participants).

Merchant acquiring, net. Merchant acquiring revenues consist of revenues from services that allow merchants to accept electronic methods of payment. In the merchant acquiring segment, revenues include a discount fee and membership fees charged to merchants, debit network fees and rental income from POS devices and other equipment, net of credit card interchange and assessment fees charged by credit cards associations (such as VISA or MasterCard) or payment networks. The discount fee is generally a percentage of the transaction value. We also charge merchants for other services that are unrelated to the number of transactions or the transaction value.

Business solutions. Business solutions revenues consist of revenues from a full suite of business process management solutions in various product areas such as core bank processing, network hosting and management, information technology professional services, business process outsourcing, item processing, cash processing, and fulfillment.

Cost of revenues. Cost of revenues includes the costs directly associated with providing services to customers and product and software sales, including software licensing and maintenance costs, telecommunications costs, personnel and infrastructure costs to develop and maintain applications, operate computer networks and provide associated customer support, and other operating expenses.

Selling, general and administrative. Selling, general and administrative expenses (“SG&A”) primarily consists of salaries, wages and related expenses paid to sales personnel, administrative employees and management, advertising and promotional costs, audit and legal fees, and other selling expenses.

Results of Operations

Comparison of the three months ended March 31, 2012 to March 31, 2011

The following tables present the components of our unaudited consolidated statements of income and comprehensive income by business segment and the change in those amounts for the three months ended March 31, 2012 and 2011.

Revenues

 

     Three months ended
March 31,
     Variance  
(Dollar amounts in thousands)    2012      2011     

Transaction processing

   $ 22,899       $ 20,271       $ 2,628         13

Merchant acquiring, net

     17,661         14,748         2,913         20

Business solutions

     41,928         40,771         1,157         3
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 82,488       $ 75,790       $ 6,698         9
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenue growth across our three reportable segments was primarily attributable to higher sales volume and transactions in both our local and international markets and the increased penetration of our products and services in the markets we serve.

Reconciliation of Total Revenues to Gross Revenues

We define “gross revenues” as total revenues including interchange fees (related to our Merchant Acquiring business) from our merchant customers that we collect on behalf of, and remit entirely to, the cards associations whose transactions we process. Total revenues is calculated and presented in EVERTEC’s financial statements net of these fees. Therefore, gross revenues is a

 

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supplemental measure of our performance that is not in accordance with GAAP. We caution investors that amounts presented in accordance with our definition of gross revenues may not be comparable to similar measures disclosed by other issuers, because not all issuers and analysts calculate gross revenues in the same manner. We present gross revenues because we consider it an important supplemental measure of our performance to compare ourselves to competitors and the industry and to monitor margins. We also believe it is frequently used by securities analysts, investors, and other interested parties in the evaluation of companies in our industry.

A reconciliation of total revenues to gross revenues of the continuing operations is provided below.

 

     Three months ended
March 31,
              
(Dollar amounts in thousands)    2012      2011      Variance  

Total revenues

   $ 82,488       $ 75,790       $ 6,698        9

Plus: Interchange fees and assessments in Merchant acquiring

     21,128         23,866         (2,738     -11
  

 

 

    

 

 

    

 

 

   

 

 

 

Total gross revenues

   $ 103,616       $ 99,656       $ 3,960        4
  

 

 

    

 

 

    

 

 

   

 

 

 

Gross revenues

          

Transaction processing

     22,899         20,271         2,628        13

Merchant acquiring

     38,789         38,614         175        0

Business solutions

     41,928         40,771         1,157        3
  

 

 

    

 

 

    

 

 

   

 

 

 

Total gross revenues

   $ 103,616       $ 99,656       $ 3,960        4
  

 

 

    

 

 

    

 

 

   

 

 

 

Operating costs and expenses

 

     Three months ended
March 31,
               
(Dollar amounts in thousands)    2012      2011      Variance  

Cost of revenues

   $ 37,741       $ 37,504       $ 237         1

Selling, general and administrative expenses

     8,987         8,495         492         6

Depreciation and amortization

     17,922         17,372         550         3
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating costs and expenses

   $ 64,650       $ 63,371       $ 1,279         2
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating costs and expenses, excluding depreciation and amortization, were $46.7 million for the three months ended March 31, 2012, an increase of $0.7 million, or 2%, from $46.0 million for the three months ended March 31, 2011.

Cost of revenues were flat when compared to the same period in 2011. Gross margin percentage for the three months ended March 31, 2012 improved to 54.3% from 50.5% for the corresponding 2011 period. The improvement in margin was mainly driven by our ability to support incremental business volume with lower incremental costs due to our highly scalable technology platform and to cost control initiatives.

Selling, general and administrative expenses for the three months ended March 31, 2012 increased by $0.5 million, or 6%, when compared to the same period in 2011. The increase was mainly related to one-time, non-recurring expenses associated with changes in management.

Depreciation and amortization expense for the three months ended March 31, 2012 increased by $0.6 million, or 3%, mostly related to certain software licenses transferred to the Company as part of a reimbursement agreement with Popular.

 

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Income from operations

The following table presents income from operations by reportable segments.

 

     Three months ended
March 31,
              
(Dollar amounts in thousands)    2012     2011     Variance  

Segment income from operations

         

Transaction processing

   $ 12,309      $ 10,886      $ 1,423         13

Merchant acquiring

     8,541        7,369        1,172         16

Business Solutions

     9,080        7,411        1,669         23
  

 

 

   

 

 

   

 

 

    

 

 

 

Income from operations before non-recurring costs and depreciation and amortization

     29,930        25,666        4,264         17

Other(1)

     (12,092     (13,247     1,155         -9
  

 

 

   

 

 

   

 

 

    

 

 

 

Income from operations

   $ 17,838      $ 12,419      $ 5,419         44
  

 

 

   

 

 

   

 

 

    

 

 

 

 

(1) 

Represents non-recurring compensation and benefits, professional fees, transaction and/or transition costs, and incremental depreciation and amortization from purchase accounting adjustments and other miscellaneous intersegment revenues.

Income from operations for the three months ended March 31, 2012, excluding non-recurring costs and depreciation and amortization, was $29.9 million, which is an increase of $4.2 million from the $25.7 million for the corresponding 2011 period.

Income from operations for the first quarter of 2012 increased in each of our reportable segments as compared to the corresponding 2011 period due to higher revenues partially offset by incremented costs related to business growth. The increase in revenues was driven by transaction and dollar volume growth in our Transaction Processing and Merchant Acquiring businesses. In our Business Solutions segment, revenue growth resulted from an increase in volume, new sales and clients and incremental services to existing clients.

See Note 13 of the Unaudited Consolidated Financial Statements for additional information on the Company’s reportable segments and for a reconciliation of the income from operations of the segments to the unaudited consolidated net income.

Non-operating expenses

 

     Three months ended
March 31,
             
(Dollar amounts in thousands)    2012     2011     Variance  

Non-operating expenses

        

Interest income

   $ 117      $ 314      $ (197     -63

Interest expense

     (11,176     (14,122     2,946        -21

Earnings of equity method investments

     66        —          66        0

Other expense

     (2,260     (3,886     1,626        -42
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-operating expenses

   $ (13,253   $ (17,694   $ 4,441        -25
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Non-operating expenses for the three months ended March 31, 2012 decreased as a result of a reduction in interest expense of $2.9 million due to lower outstanding debt attributed to prepayments and the refinancing completed during the first quarter of 2011 and to a reduction of $1.6 million in other expenses. Other expenses for the quarter ended March 31, 2012 are mainly due to a one-time payment of $2.2 million as a result of changes in personnel. Other expenses for the corresponding period in 2011 were due to a one-time, non-recurring $2.2 million expense related to the refinancing of our senior secured credit facilities and a loss of $1.2 million from the settlement of the derivative related to our acquisition of an equity interest in CONTADO from Popular.

Income tax expense (benefit)

 

     Three months ended
March 31,
              
(Dollar amounts in thousands)    2012      2011     Variance  

Income tax expense (benefit)

   $ 1,054       $ (29,146   $ 30,200         -104
  

 

 

    

 

 

   

 

 

    

 

 

 

Income-tax expense for the three months ended March 31, 2012 was $1.1 million, compared to an income-tax benefit of $29.1 million for the corresponding 2011 period. Income tax benefit for the three months ended March 31, 2011 was driven by a reduction in the marginal corporate income-tax rate from 39% to 30%, as a result of the tax reform enacted in Puerto Rico on January 31, 2011. The change in tax rates caused a reduction in current tax expense and in the Company’s deferred tax liability.

Net Income

Net income for the three months ended March 31, 2012 was $3.5 million, compared to net income of $23.9 million for the corresponding 2011 period. The change in net income mainly reflects the income tax benefit for the three months ended March 31, 2011 of $29.1 million. Income before income taxes for the three months ended March 31, 2012 was $4.6 million compared to a loss before income taxes of $5.3 million for the corresponding 2011 period.

Liquidity and Capital Resources

Our principal source of liquidity is cash generated from operations, while our primary liquidity requirements are the funding of capital expenditures and working capital needs. We also has available a revolving credit facility of $50.0 million that as of March 31, 2012 was undrawn. Our primary use of cash is for operating expenses, working capital requirements, capital expenditures and debt service obligations as they become due. Also, we may pay dividends to the holders of our equity interests if approved by our board of managers at its sole discretion and in compliance with our debt covenants. In May 2012, among other things, we paid a dividend of approximately $267.0 million to Carib Holdings. For additional information, see Note 15 of the Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Based on our current level of operations, we believe our cash flows from operations and available senior secured revolving credit facility will be adequate to meet our liquidity needs for the next twelve months. However, our ability to fund future operating expenses and capital expenditures and our ability to make scheduled payments of interest, to pay principal or refinance our indebtedness and to satisfy any other of our present or future debt obligations will depend on our future operating performance, which will be affected by general economic, financial and other factors beyond our control. The following table presents our cash flows from operations.

 

     Three months ended
March 31,
 
(Dollar amounts in thousands)    2012     2011  

Cash provided by operating activities

   $ 30,718      $ 21,694   

Cash used in investing activities

     (3,883     (15,817

Cash used in financing activities

     —          (888
  

 

 

   

 

 

 

Increase in cash

   $ 26,835      $ 4,989   
  

 

 

   

 

 

 

Cash provided by operating activities for the three months ended March 31, 2012 increased by $9.0 million when compared to the corresponding period in 2011. Lower cash provided by operating activities for 2011 resulted from a net loss before income taxes of $5.2 million and a prepayment penalty related to the Company’s debt refinancing in the amount of $3.4 million.

 

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Cash used in investing activities for the three months ended March 31, 2012 decreased by $12.0 million when compared to the corresponding 2011 period. Prior period results were primarily driven by the acquisition of an equity interest in CONTADO for $9.2 million and to $3.3 million in higher acquisition of intangibles when compared to the corresponding 2012 period.

Cash used in financing activities for the three months ended March 31, 2011 consisted of a repayment of $0.9 million of our senior secured term loan. No repayments were made for the three months ended March 31, 2012.

Capital Resources

Our principal capital expenditures are related to computer software (purchased and internally developed) and additions to property and equipment. We invested approximately $3.6 million and $7.2 million for the three months ended March 31, 2012 and 2011, respectively. Capital expenditures are expected to be funded by cash flows from operations and, if necessary, borrowings under our revolving credit facility.

Financial Obligations

Senior Secured Credit Facilities

In connection with the Merger, on September 30, 2010 we entered into senior secured credit facilities consisting of (1) a $355.0 million six-year term loan facility and (2) a $50.0 million five-year revolving credit facility. The term loan facility was subject to quarterly amortization payments totaling 1% per annum of the original principal amount of the facility, with the balance payable on the final maturity date. As a result of a voluntary repayment made on May 4, 2011, we have no scheduled quarterly amortization payment obligation until the final lump-sum payment at the maturity date. However, from time to time we may make voluntary payments at our discretion. The senior secured credit facilities allow us to obtain, on an uncommitted basis at the sole discretion of participating lenders, an incremental amount of term loan and/or revolving credit facility commitments not to exceed the greater of $125.0 million and the maximum principal amount of debt that would not cause our senior secured leverage ratio to exceed 3.25 to 1.00.

The senior secured revolving credit facility is available for general corporate purposes and includes borrowing capacity available for letters of credit and for short-term borrowings referred to as swing line borrowings. All obligations under the senior secured credit facilities are unconditionally guaranteed by Carib Holdings and, subject to certain exceptions, each of our existing and future wholly-owned subsidiaries. All obligations under the senior secured credit facilities, and the guarantees of those obligations, are secured by substantially all of our assets and the assets of the guarantors, subject to certain exceptions. Borrowings under the senior secured term loan facility and the revolving credit facility bear interest, at our option, at a rate equal to a margin over either (a) a base rate as defined in the credit agreement or (b) a LIBOR rate. The senior secured credit facilities are subject to amortization and prepayment requirements and contain customary representations and warranties, covenants, events of default and other provisions.

On May 9, 2012, we increased the size of our incremental term loan B and incurred an additional $170.0 million principal amount of borrowings thereunder. See Note 15 of the Notes to the Unaudited Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for additional information.

Senior Notes

In connection with the Merger on September 30, 2010, we issued $220.0 million of senior unsecured notes, of which $210.5 million principal amount was outstanding as of March 31, 2012. Our existing wholly-owned subsidiaries that guarantee our obligations under the senior secured credit facilities also guarantee the senior notes. The senior notes bear interest at a fixed rate of 11.0% per annum and mature on October 1, 2018. The senior notes are not subject to any mandatory or sinking fund payments. However, under certain circumstances related to change of control or asset sales, we may be required to offer to purchase senior notes.

On May 7, 2012, we and EVERTEC Finance, as co-issuers, issued $40.0 million aggregate principal amount of 11% Senior Notes due 2018 (the “New Notes”). The New Notes constitute “Additional Notes” under the Indenture pursuant to which the existing senior notes were originally issued on September 30, 2010. In addition, we obtained a consent from the holders of the senior notes as of the record date of April 27, 2012 to amend the limitation on restricted payments covenant in the indenture governing the senior notes (as amended, the “Indenture”) in order to allow additional dividend or distribution payments by us in an aggregate amount not to exceed $270.0 million. See Note 15 of the Notes to the Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for additional information.

 

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Covenant Compliance

Our senior secured credit facilities and the Indenture contain various restrictive covenants. Our secured credit facilities require us to maintain on a quarterly basis a specified maximum senior secured leverage ratio. The senior secured leverage ratio as defined in our credit facility (total first lien senior secured debt minus available cash, up to a maximum of $50.0 million, as defined, to Adjusted EBITDA) must be less than 3.60 to 1.0 at March 31, 2012. In addition, our senior secured credit facilities, among other things, restrict our ability to incur indebtedness or liens, make investments, declare or pay any dividends to our parent and prepay indebtedness that is junior to such debt. The Indenture, among other things: (a) limit our ability and the ability of our subsidiaries to incur additional indebtedness, issue certain preferred shares, incur liens, pay dividends or make certain other restricted payments and enter into certain transactions with affiliates; (b) limits our ability to enter into agreements that would restrict the ability of our subsidiaries to pay dividends or make certain payments to us; and (c) places restrictions on our ability and the ability of our subsidiaries to merge or consolidate with any other person or sell, assign, transfer, convey or otherwise dispose of all or substantially all of our assets. However, all of the covenants in these agreements are subject to significant exceptions. As of March 31, 2012, the Company was in compliance with the applicable restrictive covenants under its debt agreements.

We have the ability to incur additional debt, subject to limitations imposed by our senior secured credit facilities and the Indenture. Under the Indenture, in addition to specified permitted indebtedness, we will be able to incur additional indebtedness as long as on a pro forma basis our fixed charge coverage ratio (the ratio of Adjusted EBITDA to fixed charges, as defined) is at least 2.0 to 1.0. In this Report, we refer to the term “Adjusted EBITDA” to mean EBITDA as so defined and calculated for purposes of determining compliance with the senior secured leverage ratio based on the financial information for the last twelve months at the end of each quarter.

Net Income Reconciliation to EBITDA and Adjusted EBITDA

We define “EBITDA” as earnings before interest, taxes, depreciation and amortization. We define “Adjusted EBITDA” as EBITDA as further adjusted to exclude unusual items and other adjustments described below. We present EBITDA and Adjusted EBITDA because we consider them important supplemental measures of our performance and believe they are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. In addition, our presentation of Adjusted EBITDA is consistent with the equivalent measurements that are contained in our senior secured credit facilities and the indenture governing the notes in testing our compliance with covenants therein such as the senior secured leverage ratio and the fixed charge coverage ratio. In addition, in evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we may incur expenses such as those excluded in calculating them. Further, our presentation of these measures should not be construed as an inference that our future operating results will not be affected by unusual or nonrecurring items.

Some of the limitations of EBITDA and Adjusted EBITDA are as follows:

 

   

they do not reflect cash outlays for capital expenditures or future contractual commitments;

 

   

they do not reflect changes in, or cash requirements for, working capital;

 

   

they do not reflect interest expense, or the cash requirements necessary to service interest, or principal payments, on indebtedness;

 

   

they do not reflect income tax expense or the cash necessary to pay income taxes;

 

   

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash requirements for such replacements; and

 

   

other companies, including other companies in our industry, may not use EBITDA and Adjusted EBITDA or may calculate EBITDA and Adjusted EBITDA differently than as presented in this Report, limiting their usefulness as a comparative measure.

Adjusted EBITDA is not a measurement of liquidity or financial performance under GAAP. You should not consider Adjusted EBITDA as an alternative to cash flows from operating activities determined in accordance with GAAP, as an indicator of cash flows, as a measure of liquidity or as an alternative to operating or net income determined in accordance with GAAP.

 

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A reconciliation of net income to EBITDA and Adjusted EBITDA is provided below:

 

(Dollar amounts in thousands)    Three months ended
March 31, 2012
    Twelve months ended
March 31, 2012
 

Net income

   $ 3,531      $ 7,664   

Income tax expense

     1,054        (2,854

Interest expense

     11,059        47,448   

Depreciation and amortization

     17,922        70,441   
  

 

 

   

 

 

 

EBITDA

     33,566        122,699   

Software maintenance reimbursement and other costs (1)

     640        2,963   

Equity income (2)

     (66     569   

Compensation and benefits (3)

     2,507        18,376   

Pro forma VRP benefits (4)

     —          3,168   

Transaction and other non-recurring fees (5)

     1,257        5,088   

Management fees (6)

     745        2,653   

Purchase accounting (7)

     (143     (1,584
  

 

 

   

 

 

 

Adjusted EBITDA

   $ 38,506      $ 153,932   
  

 

 

   

 

 

 

 

(1) 

Primarily represents reimbursements received for certain software maintenance expenses as part of the Merger.

(2)

Represents CONTADO’s non-cash equity income. In addition, for the last twelve months period includes cash dividends received during 2011.

(3)

For the three months ended March 31, 2012, mainly represents a one-time payment of $2.2 million as a result of the former CEO’s employment modification agreement. For the last twelve months period, also includes a one-time cost related to the Voluntary Retirement Program (“VRP”). Both periods include other adjustments related to non-cash equity based compensation.

(4)

Adjustment represents the pro forma effect of the expected net savings in compensation and benefits related to employees that participated in the VRP offered by the Company during the third quarter of 2011.

(5)

Primarily relates to non-recurring fees to support additional requirements of a stand-alone entity and to certain other adjustments permitted under the credit facility and indenture agreements.

(6)

Represents the management fee payable to the equity sponsors which commenced in January 2011.

(7)

Primarily represents the elimination of the effects of purchase accounting in connection with certain customer service and software related arrangements where EVERTEC receives reimbursements from Popular.

Contractual Obligations

Our contractual obligations have not changed materially from those reported at December 31, 2011 in the Annual Report on Form 10-K, except as described in “Financial Obligations” above.

Off Balance Sheet Arrangements

Currently, we do not have any off balance sheet arrangements.

Debt Repurchases

We have in the past purchased and we or our affiliates in the future may, from time to time, purchase our senior notes. Any such future purchase may be made through open market or privately negotiated transactions with third parties (who may be our affiliates) or pursuant to one or more tender or exchange offers or otherwise, upon such terms and at such prices as we or any such affiliates may determine. See Note 6 of the Notes to Unaudited Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for additional information regarding our past purchases of senior notes.

Seasonality

EVERTEC’s business generally experiences increased activity during the traditional holiday shopping periods and around other nationally recognized holidays.

Effect of Inflation

While inflationary increases in certain inputs costs, such as occupancy, labor and benefits, and general administrative costs, have an impact on our operating results, inflation has had minimal net impact on our operating results during the last three years as overall inflation has been offset by increased selling process and cost reduction actions. We cannot assure you, however, that we will not be affected by general inflation in the future.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risks arising from our normal business activities. These market risks principally involve the possibility of changes in interest rates that will adversely affect the value of our financial assets and liabilities or future cash flows and earnings. Market risk is the potential loss arising from adverse changes in market rates and prices.

Interest rate risk

We issued fixed and floating-rate debt which is subject to the fluctuations in interest rates in respect of our floating-rate debt. Borrowings under our senior secured credit facilities accrue interest at variable rates but are subject to floors or minimum rates. A 100 basis points increase in the applicable margins over our floor(s) on our debt balances outstanding as of March 31, 2012, under our senior secured credit facilities would increase our annual interest expense by approximately $3.3 million.

Foreign exchange risk

We conduct business in certain countries in Latin America. Some of this business is conducted in the countries’ local currencies. The resulting foreign currency translation adjustments, from operations for which the functional currency is other than the U.S. dollar, are reported in accumulated other comprehensive income (loss) in the consolidated balance sheet, except for highly inflationary environments in which the effects would be included in other operating income in the consolidated statements of income and comprehensive income. At March 31, 2012 and December 31, 2011, the Company had $0.2 million and $1.3 million, respectively, in an unfavorable foreign currency translation adjustment as part of accumulated other comprehensive loss.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. The Company, under the direction of the Chief Executive Officer and the Chief Financial Officer, has established disclosure controls and procedures as defined in Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Notwithstanding the foregoing, our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives.

As of March 31, 2012, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 15d-15 under the Securities Exchange Act of 1934. Based upon their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of March 31, 2012, the Company’s disclosure controls and procedures are effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

From time to time, we are subject to litigation and arbitration in the ordinary course of business. We are not party to any material litigation or arbitration and are not currently aware of any pending or threatened material litigation at this time.

 

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in the Annual Report on Form 10-K.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

Item 5. Other Information

None.

 

Item 6. Exhibits

 

Exhibit

Number

  

Description

  10.1*    Employment Agreement, dated as of February 22, 2012, by and between EVERTEC, Inc. and Peter Harrington.
  10.2*    Subscription Agreement, dated as of February 22, 2012, by and between Carib Holdings, Inc. and Peter Harrington.
  10.3*    Confidential Modification Agreement and General Release, dated as of February 24, 2012, by and between EVERTEC, Inc., Carib Holdings, Inc., Felix M. Villamil Pagani and Lourdes Duran.
  10.4*    Carib Latam Holdings, Inc. Amended and Restated Stock Option Agreement, dated as of May 9, 2012, by and between Carib Latam Holdings, Inc. and Peter Harrington.
  10.5*    Carib Latam Holdings, Inc. Amended and Restated Stock Option Agreement, dated as of May 9, 2012, by and between Carib Latam Holdings, Inc. and Felix M. Villamil Pagani.
  10.6*    Carib Latam Holdings, Inc. Amended and Restated Stock Option Agreement, dated as of May 9, 2012, by and between Carib Latam Holdings, Inc. and Juan Jose Roman-Jimenez.
  10.7*    Carib Latam Holdings, Inc. Amended and Restated Stock Option Agreement, dated as of May 9, 2012, by and between Carib Latam Holdings, Inc. and Carlos J. Ramirez.
  10.8*    Carib Latam Holdings, Inc. Amended and Restated Stock Option Agreement, dated as of May 9, 2012, by and between Carib Latam Holdings, Inc. and Luis G. Alvarado.
  10.9*    Carib Latam Holdings, Inc. Amended and Restated Stock Option Agreement, dated as of May 9, 2012, by and between Carib Latam Holdings, Inc. and Miguel Vizcarrondo.
  10.10*    Carib Latam Holdings, Inc. Amended and Restated Stock Option Agreement, dated as of May 9, 2012, by and between Carib Latam Holdings, Inc. and Miguel Vizcarrondo.
  10.11*    Carib Latam Holdings, Inc. Amended and Restated Stock Option Agreement, dated as of May 9, 2012, by and between Carib Latam Holdings, Inc. and Nathaniel Lipman.
  10.12*    Carib Latam Holdings, Inc. Amended and Restated Stock Option Agreement, dated as of May 9, 2012, by and between Carib Latam Holdings, Inc. and Thomas M. White 2006 Trust.
  31.1*    Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a)
  31.2*    Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a)

 

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Exhibit

Number

 

Description

  32.1**   Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
  32.2**   Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
101.INS XBRL***   Instance document
101.SCH XBRL***   Taxonomy Extension Schema
101.CAL XBRL***   Taxonomy Extension Calculation Linkbase
101.DEF XBRL***   Taxonomy Extension Definition Linkbase
101.LAB XBRL***   Taxonomy Extension Label Linkbase
101.PRE XBRL***   Taxonomy Extension Presentation Linkbase

 

* Filed herewith.
** Furnished herewith.
*** Pursuant to applicable securities laws and regulations, the Company is deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and is not subject to liability under any anti-fraud provisions of the federal securities laws as long as the Company has made a good faith attempt to comply with the submission requirements and promptly amends the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

   

EVERTEC, LLC

(Registrant)

Date: May 15, 2012

    By:   /s/ Peter Harrington
     

Peter Harrington

Chief Executive Officer

Date: May 15, 2012

    By:   /s/ Juan J. Román
     

Juan J. Román

Chief Financial Officer

 

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