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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 June 30, 2012

¨	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).

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 August 10, 2012, there were 100 outstanding Limited Liability Company Membership Units of EVERTEC, LLC.

TABLE OF CONTENTS


		Page

Part I. FINANCIAL INFORMATION			1

Item 1.	Financial Statements		1

	Unaudited Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011		1

	Unaudited Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2012 and 2011		2

	Unaudited Consolidated Statement of Changes in Member’s Equity for the six months ended June 30, 2012		3

	Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 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		26

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		36

Item 4.	Controls and Procedures		36

Part II. OTHER INFORMATION			37

Item 1.	Legal Proceedings		37

Item 1A.	Risk Factors		37

Item 2.	Unregistered Sales of Equity in Securities and Use of Proceeds		37

Item 3.	Defaults Upon Senior Securities		37

Item 4.	Mine Safety Disclosures		37

Item 5.	Other Information		37

Item 6.	Exhibits		38

SIGNATURES			S-1

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.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

EVERTEC, LLC (Unaudited) Consolidated Balance Sheets

(Dollar amounts in thousands)


	June 30, 2012			December 31, 2011
Assets
Current Assets:
Cash	$	25,735		$	53,523
Restricted cash		5,521			5,288
Accounts receivable, net		58,289			60,930
Prepaid expenses and other assets		15,725			21,526

Total current assets		105,270			141,267
Investments in equity investees		10,604			12,267
Property and equipment, net		33,743			36,685
Goodwill		373,218			371,712
Other intangible assets, net		425,518			448,914
Other long-term assets		22,733			22,894

Total assets	$	971,086		$	1,033,739

Liabilities and member’s equity
Current Liabilities:
Accrued liabilities	$	33,418		$	29,581
Accounts payable		17,517			21,786
Unearned income		776			900
Income tax payable		2,091			3,383
Deferred tax liability, net		891			9,321

Total current liabilities		54,693			64,971
Long-term debt		735,638			523,833
Long-term deferred tax liability, net		7,100			91,431
Other long-term liabilities		449			449

Total liabilities		797,880			680,684

Commitments and contingencies (Note 11)
Member’s equity
Member’s units (100 units issued and outstanding)		—			—
Contributed capital		174,904			326,367
Accumulated (losses) earnings		(2,716	)		28,006
Accumulated other comprehensive income (loss), net of tax of $0 and $13		1,018			(1,318	)

Total member’s equity		173,206			353,055

Total liabilities and member’s equity	$	971,086		$	1,033,739

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

EVERTEC, LLC (Unaudited) Consolidated Statements of Income and Comprehensive Income

(Dollar amounts in thousands)


	Three months ended June 30,						Six months ended June 30,
	2012			2011			2012			2011
Revenues
Transaction processing (from affiliates: $7,708, $7,204, $14,835 and $13,278)	$	23,803		$	20,765		$	46,702		$	41,036
Merchant acquiring, net (from affiliates: $1,308, $2,224, $3,237 and $4,450)		17,028			14,719			34,689			29,467
Business solutions (from affiliates: $30,898, $30,364, $61,045 and $61,015)		43,541			43,253			85,469			84,024

Total revenues		84,372			78,737			166,860			154,527

Operating costs and expenses
Cost of revenues, exclusive of depreciation and amortization shown below		39,831			37,655			77,572			75,159
Selling, general and administrative expenses		8,477			8,962			17,464			17,457
Depreciation and amortization		17,830			17,092			35,752			34,464

Total operating costs and expenses		66,138			63,709			130,788			127,080

Income from operations		18,234			15,028			36,072			27,447

Non-operating (expenses) income
Interest income		75			145			192			459
Interest expense		(13,254	)		(13,754	)		(24,430	)		(27,876	)
Earnings of equity method investments		509			256			575			256
Other expenses		(8,397	)		(93	)		(10,657	)		(3,979	)

Total non-operating (expenses) income		(21,067	)		(13,446	)		(34,320	)		(31,140	)

(Loss) income before income taxes		(2,833	)		1,582			1,752			(3,693	)
Income tax benefit		(88,526	)		(391	)		(87,472	)		(29,537	)

Net income		85,693			1,973			89,224			25,844
Other comprehensive income, net of income tax expense of $19, $0, $13 and $0
Foreign currency translation adjustments		1,230			970			2,336			1,414

Total comprehensive income	$	86,923		$	2,943		$	91,560		$	27,258

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

EVERTEC, LLC (Unaudited) Consolidated Statement of Changes in Member’s Equity

(Dollar amounts in thousands)


	Member’s Units		Contributed Capital			Undistributed Earnings			Accumulated Other Comprehensive (Loss) Income			Total Member’s Equity
Balance at December 31, 2011		100	$	326,367		$	28,006		$	(1,318	)	$	353,055
Share-based compensation recognized				557									557
Distribution to member				(147,204	)		(119,946	)					(267,150	)
Transfer of prepaid income taxes to member				(4,816	)								(4,816	)
Net income							89,224						89,224
Other comprehensive income, net of income tax expense of $13										2,336			2,336

Balance at June 30, 2012		100	$	174,904		$	(2,716	)	$	1,018		$	173,206

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

EVERTEC, LLC (Unaudited) Consolidated Statements of Cash Flows

(Dollar amounts in thousands)


	Six months ended June 30,
	2012			2011
Cash flows from operating activities
Net income	$	89,224		$	25,844
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		35,752			34,464
Amortization of debt issue costs and premium and accretion of discount		2,427			5,340
Provision for doubtful accounts and sundry losses		1,173			511
Deferred tax benefit		(92,943	)		(30,928	)
Share-based compensation		557			414
Realized loss on derivative		—			1,399
Unrealized loss of indemnification assets		216			761
Amortization of a contract liability		(703	)		(3,384	)
Loss on disposition of property and equipment		47			35
Earnings from equity investee		(575	)		(256	)
Dividend received from equity investee		728			738
Prepayment penalty related to debt refinancing		—			(3,387	)
Premium on issuance of long-term debt		2,000			—
(Increase) decrease in assets:
Accounts receivable, net		4,247			9,704
Prepaid expenses and other assets		994			(5,220	)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities		151			(10,779	)
Income tax payable		(1,292	)		210
Unearned income		(124	)		1,138
Other long-term liabilities		—			(225	)

Total adjustments		(47,345	)		535

Net cash provided by operating activities		41,879			26,379

Cash flows from investing activities
Net (increase) decrease in restricted cash		(233	)		545
Intangible assets acquired		(3,712	)		(8,943	)
Property and equipment acquired		(5,166	)		(4,739	)
Proceeds from sales of property and equipment		43			106
Acquisition of an equity method investment		—			(9,244	)

Net cash used in investing activities		(9,068	)		(22,275	)

Cash flows from financing activities
Proceeds from issuance of long-term debt		208,725			—
Debt issuance costs		(2,174	)		—
Distribution to member		(267,150	)		—
Repayment and repurchase of long-term debt and other liabilities		—			(28,125	)

Net cash used in financing activities		(60,599	)		(28,125	)

Net decrease in cash		(27,788	)		(24,021	)
Cash at beginning of the period		53,523			55,199

Cash at end of the period	$	25,735		$	31,178

Supplemental disclosure of non-cash activities:
Foreign currency translation adjustments	$	2,336		$	1,414
Transfer of prepaid income taxes to member		4,816			—
Dividend declared not received from equity investee		1,457			—

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

Notes to Unaudited Consolidated Financial Statements



Note 1 – The Company and Summary of Significant Accounting Policies		6

Note 2 – Recent Accounting Pronouncements		7

Note 3 – Business Combination		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		13

Note 10 – Income Tax		13

Note 11 – Commitments and Contingencies		15

Note 12 – Related Party Transactions		16

Note 13 – Segment Information		16

Note 14 – Guarantor of the Senior Notes and Non-Guarantor Consolidated Financial Information		18

Note 15 – Subsequent Events		25

EVERTEC, LLC Notes to Unaudited Consolidated Financial Statements

Note 1 – The Company and Summary of Significant Accounting Policies

The Company

EVERTEC, LLC 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 (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, LLC (formerly known as Carib Holdings, Inc., “Carib Holdings”), which is EVERTEC’s direct parent (“member”), 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.

Except as otherwise indicated or unless the context otherwise requires, (a) the terms “EVERTEC, LLC,” “EVERTEC,” “we,” “us,” “the Company,” “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 and six months ended June 30, 2012 are not necessarily indicative of the results of operations for the full year or any future period.

The 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 June 30, 2011 unaudited consolidated financial statements and related notes to conform with the presentation in 2012. Also, as a result of the Conversion, the owner of EVERTEC’s limited liability company membership units is referred to as the “member” and the equity presentations included as part of the unaudited consolidated financial statements and related notes are referred to as “member’s equity.” This presentation is used for periods on and after the Conversion to EVERTEC, LLC and for periods prior to the Conversion.

EVERTEC, LLC Notes to Unaudited Consolidated Financial Statements

Summary of Significant Accounting Policy

JOBS Act

EVERTEC qualifies as an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”), which was signed into law on April 5, 2012. As an “emerging growth company” under the JOBS Act, EVERTEC is permitted to, and intends to, rely on exemptions from certain reporting and disclosure requirements. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards until those standards would otherwise apply to private companies. However, EVERTEC has chosen to “opt out” of such extended transition period, and as a result, EVERTEC will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. The decision to opt out of the extended transition period is irrevocable.

Note 2 – Recent Accounting Pronouncements

Accounting Standard Update (“ASU”) No. 2012-02- Intangibles-Goodwill and Other (Topic 350). In July 2012 , the Financial Accounting Standard Board issued ASU No. 2012-02 to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. In accordance with the amendments in this Update, an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Subtopic 350-30.

An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period.

In conducting a qualitative assessment, an entity should consider the extent to which relevant events and circumstances, both individually and in the aggregate, could have affected the significant inputs used to determine the fair value of the indefinite-lived intangible asset since the last assessment. An entity also should consider whether there have been changes to the carrying amount of the indefinite-lived intangible asset when evaluating whether it is more likely than not that the indefinite-lived intangible asset is impaired. An entity should consider positive and mitigating events and circumstances that could affect its determination of whether it is more likely than not that the indefinite-lived intangible asset is impaired. An entity should refer to the examples in ASU No. 2012-02 for guidance about the types of events and circumstances that it should consider in evaluating whether it is more likely than not that an indefinite-lived intangible asset is impaired. If an entity has made a recent fair value calculation that indicated a difference between the fair value and the then carrying amount of an indefinite-lived intangible asset, that difference also should be included as a factor in considering whether it is more likely than not that the indefinite-lived intangible asset is impaired.

The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. Management is evaluating the effect of this Update on our financial statements.

Note 3 – Business Combination

The Merger

On September 30, 2010, EVERTEC, through a merger transaction (the “Merger”), became a wholly-owned subsidiary of Carib Holdings with AP Carib Holdings, Ltd., a subsidiary of a fund managed by Apollo Global Management, LLC (“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.

EVERTEC, LLC Notes to Unaudited Consolidated Financial Statements

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.


	Three months ended						Six months ended
(Dollar amounts in thousands)	June 30, 2011, as adjusted			June 30, 2011, as reported			June 30, 2011, as adjusted			June 30, 2011, as reported
Income (loss) before income taxes	$	1,582		$	1,582		$	(3,693	)	$	(3,693	)
Income tax benefit		(391	)		(477	)		(29,537	)		(29,523	)

Net income	$	1,973		$	2,059		$	25,844		$	25,830

Note 4 – Property and Equipment, net

Property and equipment, net consists of the following:


(Dollar amounts in thousands)	Useful life in years	June 30, 2012			December 31, 2011
Buildings	30	$	2,127		$	2,091
Data processing equipment	3 -5		50,831			45,883
Furniture and equipment	3 -10		6,048			5,912
Leasehold improvements	5 -10		658			610

			59,664			54,496
Less—accumulated depreciation and amortization			(27,448	)		(19,316	)

Depreciable assets, net			32,216			35,180
Land			1,527			1,505

		$	33,743		$	36,685

Depreciation and amortization expense related to property and equipment was $4.1 million and $8.1 million for the three and six months ended June 30, 2012, respectively, and $3.7 million and $7.5 million for the corresponding 2011 periods.

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		1,188		—		318		1,506

Balance at June 30, 2012	$	200,933	$	166,959	$	5,326	$	373,218

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.

EVERTEC, LLC Notes to Unaudited Consolidated Financial Statements

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.

The carrying amount of other intangible assets for the six months ended June 30, 2012 and the year ended December 31, 2011 consisted of the following:


		June 30, 2012
(Dollar amounts in thousands)	Useful life in years	Gross amount		Accumulated amortization			Net carrying amount
Customer Relationships	14	$	314,087	$	(39,565	)	$	274,522
Trademark	10-14		39,950		(6,062	)		33,888
Software packages	3-5		110,562		(43,397	)		67,165
Non-Compete Agreement	15		56,539		(6,596	)		49,943

		$	521,138	$	(95,620	)	$	425,518


		December 31, 2011
(Dollar amounts in thousands)	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 and six months ended June 30, 2012, the Company recorded amortization expense related to other intangibles of $13.7 million and $27.6 million, respectively, compared to $13.4 million and $27.0 million for the corresponding 2011 periods.

Note 6 – Debt

Net debt as of June 30, 2012 and December 31, 2011 was as follows:


(Dollar amounts in thousands)	June 30, 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⁾)	$	483,172	$	313,333
Senior Notes due on October 1, 2018, paying interest semi-annually at a rate of 11% per annum		252,465		210,500

⁽¹⁾	Subject to a minimum rate (“LIBOR floor”) of 1.50% at June 30, 2012 and December 31, 2011.

EVERTEC, LLC Notes to Unaudited Consolidated Financial Statements

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”) 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 December 31, 2011 (the “Existing Notes”). The New Notes were issued pursuant to Supplemental Indenture No. 2 to the indenture and were treated as a single class under the indenture with the Existing Notes.

On May 4, 2012, EVERTEC 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 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. The incremental term loan also matures on September 30, 2016.

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 $267.2 million to its direct parent.

The Company incurred $11.4 million in fees in connection with the issuance of the New Notes and the incremental term loan, of which $2.2 million was capitalized and will be amortized over the remaining term of the debt.

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.

EVERTEC, LLC Notes to Unaudited Consolidated Financial Statements

The following table summarizes fair value measurements by level at June 30, 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
June 30, 2012
Financial assets:
Indemnification assets:
Software cost reimbursement	$	—	$	—	$	6,120	$	6,120

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 were entered into in connection with the Merger, and have termination dates up to 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 June 30, 2012, therefore resulting in a net unrealized loss of approximately $41,000 and $0.2 million for the three and six months ended June 30, 2012, respectively, and of $0.3 million and $0.8 million for the corresponding 2011 periods, which are 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.

The unobservable inputs related to the Company’s indemnification assets as of June 30, 2012 using the discounted cash flow model include the discount rate of 7.35% and the projected cash flows of $6.2 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.

EVERTEC, LLC Notes to Unaudited Consolidated Financial Statements

The following table presents the carrying value, as applicable, and estimated fair values for financial instruments at June 30, 2012 and December 31, 2011:


	June 30, 2012				December 31, 2011
	Carrying		Fair		Carrying		Fair
(Dollar amounts in thousands)	Amount		Value		Amount		Value
Financial assets:
Indemnification assets:
Software cost reimbursement	$	6,120	$	6,120	$	7,113	$	7,113
Expected reimbursements		—		—		351		351
Financial liabilities:
Senior secured term loan	$	483,173	$	492,859	$	313,333	$	317,979
Senior notes		252,465		262,086		210,500		213,921

The senior secured term loan and the senior notes prices at June 30, 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. Also, the pricing may include the use of an algorithm that could take into account movement in the general high yield market, among other variants.

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.

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


	Three months ended June 30,						Six months ended June 30,
(Dollar amounts in thousands)	2012			2011			2012			2011
Indemnification assets:
Beginning balance	$	6,580		$	12,537		$	7,464		$	14,836
Payments received		(419	)		(1,160	)		(1,128	)		(2,983	)
Unrealized loss recognized in other expenses		(41	)		(285	)		(216	)		(761	)

Ending balance	$	6,120		$	11,092		$	6,120		$	11,092

Derivatives assets:
Beginning balance	$	—		$	—		$	—		$	4,960
Net settlement of derivative		—			—			—			(3,561	)
Realized loss on derivative recognized in other expenses		—			—			—			(1,399	)

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 $20.3 million and $41.5 million for the three and six months ended June 30, 2012, respectively, compared to $25.5 million and $49.4 million for the corresponding 2011 periods.

EVERTEC, LLC Notes to Unaudited Consolidated Financial Statements

Note 9 – Share-based Compensation

The following table summarizes the nonvested stock options activity for the six months ended June 30, 2012:


Nonvested stock options	Shares			Weighted- average exercise prices
Nonvested at December 31, 2011		2,530,987		$	2.59
Granted		398,955			8.97
Forfeitures		(654,438	)		2.59
Vested		(22,500	)		2.59

Nonvested at June 30, 2012		2,253,004		$	3.72

On May 9, 2012, the Company used the net proceeds from the incremental term loan and the New Notes (as described in Note 6), together with cash on hand, to pay a cash distribution of $267.2 million to its direct parent. As a result of the distribution, on May 9, 2012, the board of directors of Carib Inc. approved an equitable adjustment to stock options previously granted pursuant to its Amended and Restated 2010 Equity Incentive Plan (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. This adjustment to the exercise price did not impact the compensation expense recognized by the Company for the six months ended June 30, 2012 or the maximum unrecognized cost.

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 Plan and the Monte Carlo simulation analysis for “Tranche B” and “Tranche C” options granted under the Plan.

The following table summarizes the nonvested restricted shares activity for the six months ended June 30, 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		(19,435	)		10.00

Nonvested at June 30, 2012		58,269		$	11.78

Share-based compensation recognized was as follows:


	Three months ended June 30,				Six months ended June 30,
(Dollar amounts in thousands)	2012		2011		2012		2011
Share-based compensation recognized, net
Stock options, net of income tax expense of $15, $71, $62 and $103	$	134	$	238	$	291	$	344
Restricted shares, net of income tax expense of $16, $16, $47 and $21		163		54		266		70

The maximum unrecognized cost for stock options was $6.7 million as of June 30, 2012, which includes $2.0 million, $2.4 million and $2.3 million related to Tranche A, Tranche B and Tranche C options, respectively.

The maximum unrecognized compensation cost for restricted stock was $0.6 million as of June 30, 2012.

Note 10 – Income Tax

On April 17, 2012, as explained 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. The Company, Carib Holdings and Carib Inc. entered into a Tax Payment Agreement pursuant to which the Company is obligated to make certain payments to Carib Holdings or Carib Inc. for taxable periods or portions thereof occurring on or after April 17, 2012 (the “Effective Date”).

EVERTEC, LLC Notes to Unaudited Consolidated Financial Statements

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.

As a result of the Conversion, EVERTEC’s taxable income from its Puerto Rico operations flows through to its direct parent company. Accordingly, differences between financial statements carrying amounts and tax bases of assets and liabilities are not temporary differences because there are no future tax consequences to EVERTEC. As a result of this transaction, prepaid income taxes of $4.8 million were transferred and a deferred tax liability of $89.2 million was eliminated as of the date of the Conversion.

The components of income tax benefit for the three and six months ended June 30, 2012 and 2011 consisted of the following:


	Three months ended June 30,						Six months ended June 30,
(Dollar amounts in thousands)	2012			2011			2012			2011
Current tax provision	$	3,455		$	1,203		$	5,471		$	1,391
Deferred tax benefit		(91,981	)		(1,594	)		(92,943	)		(30,928	)

	$	(88,526	)	$	(391	)	$	(87,472	)	$	(29,537	)

For the six months ended June 30, 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, as a result of the approval in January 2011 of a new Internal Revenue Code, which provides for a maximum corporate income tax rate of 30%, as well as additional tax credits and deductions, among other tax reliefs and changes.

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 components of income tax expense (benefit) for the three and six months ended June 30, 2012 and 2011 and its segregation based on location of operations:


	Three months ended June 30,						Six months ended June 30,
(Dollar amounts in thousands)	2012			2011			2012			2011
Current tax provision
Puerto Rico	$	3,043		$	731		$	4,951		$	345
United States		159			139			343			262
Foreign countries		253			333			177			784

	$	3,455		$	1,203		$	5,471		$	1,391

Deferred tax benefit
Puerto Rico	$	(91,827	)	$	(1,425	)	$	(92,636	)	$	(30,603	)
Foreign countries		(154	)		(169	)		(307	)		(325	)

	$	(91,981	)	$	(1,594	)	$	(92,943	)	$	(30,928	)

Taxes payable to foreign countries by EVERTEC’s subsidiaries will be paid by such subsidiary and the corresponding liability and expense will be presented in EVERTEC’s consolidated financial statements.

EVERTEC, LLC 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)	June 30, 2012			December 31, 2011
Deferred tax assets
Allowance for doubtful accounts	$	50		$	540
Unfavorable contract liability		—			211
Other temporary assets		20			909

Total gross deferred tax assets		70			1,660

Deferred tax liabilities (“DTL”)
Deferred compensation	$	—		$	2,915
Difference between the assigned values and the tax basis of assets and liabilities recognized in purchase		7,892			90,766
Debt issue cost		—			8,513
Other temporary liabilities		169			218

Total gross deferred tax liabilities		8,061			102,412

Deferred tax liability, net	$	(7,991	)	$	(100,752	)

The income tax 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:


	Three months ended June 30,						Six months ended June 30,
(Dollar amounts in thousands)	2012			2011			2012			2011
Computed income tax at statutory rates	$	(850	)	$	416		$	526		$	(1,166	)
Benefit of net tax-exempt interest income		(2	)		(6	)		(4	)		(7	)
Derecognition of deferred tax liability		(89,219	)		—			(89,219	)		—
Income tax pass-through to parent company		1,490			—			1,490			—
Tax benefit (expense) due to a change in estimate		—			85			—			(591	)
Differences in tax rates due to multiple jurisdictions		99			182			251			283
Effect of income subject to tax-exemption grant		(479	)		(266	)		(605	)		(480	)
Adjustment to DTL due to changes in enacted tax rate		—			—			—			(27,629	)
Reversal of tax uncertainties reserve		—			—			(640	)		—
Other		435			(802	)		729			53

Income tax benefit	$	(88,526	)	$	(391	)	$	(87,472	)	$	(29,537	)

Note 11 – Commitments and Contingencies

Certain lease agreements 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 June 30, 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 and six months ended June 30, 2012 amounted to $1.9 million and $3.9 million, respectively, compared to $2.0 million and $4.1 million for the corresponding 2011 periods. Also, rent expense for telecommunications and other equipment for the three and six months ended June 30, 2012 amounted to $1.9 million and $3.7 million, respectively, compared to $1.9 million and $3.9 million for the corresponding 2011 periods.

EVERTEC is a defendant 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. 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.

EVERTEC, LLC Notes to Unaudited Consolidated Financial Statements

Note 12 – Related Party Transactions

The following table presents the Company’s transactions with related parties for the three and six months ended June 30, 2012 and 2011:


	Three months ended June 30,				Six months ended June 30,
(Dollar amounts in thousands)	2012		2011		2012		2011
Total revenues⁽¹⁾⁽²⁾	$	39,914	$	39,792	$	79,117	$	78,743

Selling, general and administrative expenses
Rent and other fees⁽³⁾	$	2,663	$	2,931	$	5,822	$	5,898

Interest earned from and charged by affiliate
Interest income	$	57	$	107	$	150	$	402

Interest expense⁽⁴⁾	$	1,858	$	2,280	$	3,743	$	4,589

⁽¹⁾	Total revenues from Popular represent 46%, 49%, 46% and 50% of total revenues for each of the periods presented above.

⁽²⁾	Includes revenues generated from investees accounted for under the equity method (CONTADO) for the three and six months ended June 30, 2012 of $0.9 million and $1.7 million, respectively, compared to $0.9 million for the corresponding 2011 periods.

⁽³⁾	Includes management fees paid to equity sponsors amounting to $0.7 million and $2.0 million for the three and six months ended June 30, 2012, respectively, compared to $0.8 million and $1.5 million for the corresponding 2011 periods.

⁽⁴⁾	Interest expense relates to interest accrued on the senior secured term loan and senior notes held by Popular.

At June 30, 2012 and December 31, 2011, EVERTEC had the following balances arising from transactions with related parties:


(Dollar amounts in thousands)	June 30, 2012		December 31, 2011
Cash and restricted cash deposits in affiliated bank	$	27,514	$	52,613

Indemnification assets from Popular reimbursement⁽¹⁾
Accounts receivable	$	1,896	$	2,553

Other long-term assets	$	4,224	$	5,212

Liability related to contract with Popular⁽²⁾
Accounts payable	$	—	$	703

Other due/to from affiliate
Accounts receivable	$	17,564	$	21,077

Accounts payable	$	3,068	$	3,036

Long-term debt	$	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 costs. For the six months ended June 30, 2012 and the year ended December 31, 2011, the Company received $1.1 million and $7.1 million, respectively, related to these reimbursements.

⁽²⁾	Represented a contract liability to provide certain services to a customer of Popular that expired on February 2012.

At June 30, 2012, ATH CR has a credit facility with Popular for $2.9 million, under which a letter of credit of a similar amount was issued in favor of Visa International. 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.

EVERTEC, LLC Notes to Unaudited Consolidated Financial Statements

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 June 30, 2012

Revenues	$	29,019	$	17,028	$	43,541	$	(5,216	)⁽¹⁾	$	84,372

Income from operations		12,756		7,970		8,870		(11,362	)⁽²⁾		18,234

Three months ended June 30, 2011

Revenues		25,542		14,719		43,253		(4,777	)⁽¹⁾		78,737

Income from operations		10,502		6,777		9,865		(12,116	)⁽²⁾		15,028

⁽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.


(Dollar amounts in thousands)	Transaction processing		Merchant acquiring, net		Business solutions		Other			Total
Six months ended June 30, 2012

Revenues	$	57,248	$	34,689	$	85,469	$	(10,546	)⁽¹⁾	$	166,860

Income from operations		25,065		16,511		17,950		(23,454	)⁽²⁾		36,072

Six months ended June 30, 2011

Revenues		50,385		29,467		84,024		(9,349	)⁽¹⁾		154,527

Income from operations		21,388		14,146		17,276		(25,363	)⁽²⁾		27,447

⁽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.

EVERTEC, LLC Notes to Unaudited Consolidated Financial Statements

The reconciliation of income from operations to consolidated net income for the three and six months ended June 30, 2012 and 2011 is as follows:


	Three months ended June 30,						Six months ended June 30,
(Dollar amounts in thousands)	2012			2011			2012			2011
Segment income from operations
Transaction processing	$	12,756		$	10,502		$	25,065		$	21,388
Merchant acquiring		7,970			6,777			16,511			14,146
Business solutions		8,870			9,865			17,950			17,276
Other⁽¹⁾		(11,362	)		(12,116	)		(23,454	)		(25,363	)

Income from operations	$	18,234		$	15,028		$	36,072		$	27,447

Interest expense, net		(13,179	)		(13,609	)		(24,238	)		(27,417	)
Earnings of equity method investments		509			256			575			256
Other expenses		(8,397	)		(93	)		(10,657	)		(3,979	)
Income tax benefit		88,526			391			87,472			29,537

Net income	$	85,693		$	1,973		$	89,224		$	25,844

⁽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

The Company issued senior notes on September 30, 2010 in a principal amount of $220.0 million and on May 7, 2012 in a principal amount of $40.0 million, all of which were co-issued by the Company’s 100% owned subsidiary, EVERTEC Finance Corp., and guaranteed by the Company’s other 100% owned subsidiaries (see Note 6). The following financial information presents the balance sheets as of June 30, 2012 and December 31, 2011, the statements of income and comprehensive income for the three and six months ended June 30, 2012 and 2011 and the statements of cash flows for the six months ended June 30, 2012 and 2011of (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.

EVERTEC, LLC Notes to Unaudited Consolidated Financial Statements


	Consolidated Balance Sheet as of June 30, 2012
(Dollar amounts in thousands)	EVERTEC (Parent Only)			Guarantor Subsidiaries		Non-Guarantor Subsidiary		Eliminations			EVERTEC (Consolidated)
Assets
Current Assets:
Cash	$	14,882		$	9,251	$	1,602	$	—		$	25,735
Restricted cash		5,521			—		—		—			5,521
Short-term note due from affiliate		—			8,200		—		(8,200	)		—
Accounts receivable, net		40,351			2,733		15,205		—			58,289
Prepaid expenses and other assets		14,662			588		585		(110	)		15,725

Total current assets		75,416			20,772		17,392		(8,310	)		105,270
Investment in subsidiaries, at equity		138,845			—		—		(128,241	)		10,604
Property and equipment, net		28,170			715		4,858		—			33,743
Goodwill		296,979			44,082		32,157		—			373,218
Other intangible assets, net		397,130			16,662		11,726		—			425,518
Other long-term assets		22,733			—		—		—			22,733

Total assets	$	959,273		$	82,231	$	66,133	$	(136,551	)	$	971,086

Liabilities and member’s equity
Current Liabilities:
Accrued liabilities	$	31,952		$	640	$	826	$	—		$	33,418
Accounts payable		9,396			603		7,518		—			17,517
Unearned income		432			344		—		—			776
Income tax payable		—			1,521		570		—			2,091
Short-term note due to affiliate		8,200			—		—		(8,200	)		—
Deferred tax liability, net		—			457		434		—			891

Total current liabilities		49,980			3,565		9,348		(8,200	)		54,693
Long-term debt		735,638			—		—		—			735,638
Long-term deferred tax liability, net		—			3,918		3,182		—			7,100
Other long-term liabilities		449			—		—		—			449

Total liabilities		786,067			7,483		12,530		(8,200	)		797,880

Member’s equity
Member’s units		—			55		998		(1,053	)		—
Contributed capital		174,904			69,676		50,851		(120,527	)		174,904
Accumulated (losses) earnings		(2,716	)		4,898		713		(5,611	)		(2,716	)
Accumulated other comprehensive income		1,018			119		1,041		(1,160	)		1,018

Total member’s equity		173,206			74,748		53,603		(128,351	)		173,206

Total liabilities and member’s equity	$	959,273		$	82,231	$	66,133	$	(136,551	)	$	971,086

EVERTEC, LLC Notes to Unaudited Consolidated Financial Statements



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

Member’s equity
Member’s units		—			55			998			(1,053	)		—
Contributed capital		326,367			69,358			50,851			(120,209	)		326,367
Undistributed earnings		28,006			2,827			357			(3,184	)		28,006
Accumulated other comprehensive loss, net of tax of $13, $0, $0, $0 and $13		(1,318	)		(960	)		(282	)		1,242			(1,318	)

Total member’s equity		353,055			71,280			51,924			(123,204	)		353,055

Total liabilties and member’s equity	$	1,010,149		$	80,018		$	66,839		$	(123,267	)	$	1,033,739

EVERTEC, LLC Notes to Unaudited Consolidated Financial Statements



	Consolidated Statement of Income (Loss) and Comprehensive Income
	for the three months ended June 30, 2012
(Dollar amounts in thousands)	EVERTEC (Parent Only)			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations			EVERTEC (Consolidated)
Revenues
Transaction processing	$	17,411		$	2,787		$	3,616		$	(11	)	$	23,803
Merchant acquiring, net		17,028			—			—			—			17,028
Business solutions		41,922			1,704			63			(148	)		43,541

Total revenues		76,361			4,491			3,679			(159	)		84,372

Operating costs and expenses
Cost of revenues, exclusive of depreciation and amortization shown below		34,855			2,607			2,619			(250	)		39,831
Selling, general and administrative expenses		7,795			417			700			(435	)		8,477
Depreciation and amortization		16,835			439			556			—			17,830

Total operating costs and expenses		59,485			3,463			3,875			(685	)		66,138

Income from operations		16,876			1,028			(196	)		526			18,234

Non-operating (expenses) income
Interest income		56			66			7			(54	)		75
Interest expense		(13,308	)		—			—			54			(13,254	)
Earnings of equity method investments		1,323			—			—			(814	)		509
Other (expenses) income		(7,979	)		(177	)		192			(433	)		(8,397	)

Total non-operating (expenses) income		(19,908	)		(111	)		199			(1,247	)		(21,067	)

(Loss) income before income taxes		(3,032	)		917			3			(721	)		(2,833	)
Income tax (benefit) expense		(88,725	)		116			16			67			(88,526	)

Net income (loss)		85,693			801			(13	)		(788	)		85,693
Other comprehensive income, net of a tax expense of $19, $0, $0, $0 and $19
Foreign currency translation adjustments		1,230			219			1,043			(1,262	)		1,230

Total comprehensive income	$	86,923		$	1,020		$	1,030		$	(2,050	)	$	86,923

EVERTEC, LLC Notes to Unaudited Consolidated Financial Statements


	Consolidated Statement of Income and Comprehensive Income
	for the three months ended June 30, 2011
(Dollar amounts in thousands)	EVERTEC (Parent Only)			Guarantor Subsidiaries		Non-Guarantor Subsidiary		Eliminations			EVERTEC (Consolidated)
Revenues
Transaction processing	$	15,111		$	2,292	$	3,370	$	(8	)	$	20,765
Merchant acquiring, net		14,719			—		—		—			14,719
Business solutions		42,397			895		57		(96	)		43,253

Total revenues		72,227			3,187		3,427		(104	)		78,737

Operating costs and expenses
Cost of revenues, exclusive of depreciation and amortization shown below		33,397			2,053		2,296		(91	)		37,655
Selling, general and administrative expenses		8,231			211		520		—			8,962
Depreciation and amortization		16,184			334		574		—			17,092

Total operating costs and expenses		57,812			2,598		3,390		(91	)		63,709

Income from operations		14,415			589		37		(13	)		15,028

Non-operating (expenses) income
Interest income		106			24		15		—			145
Interest expense		(13,754	)		—		—		—			(13,754	)
Earnings of equity method investments		1,128			—		—		(872	)		256
Other (expenses) income		(465	)		250		122		—			(93	)

Total non-operating (expenses) income		(12,985	)		274		137		(872	)		(13,446	)

Income before income taxes		1,430			863		174		(885	)		1,582
Income tax (benefit) expense		(543	)		149		5		(2	)		(391	)

Net income		1,973			714		169		(883	)		1,973
Other comprehensive income
Foreign currency translation adjustments		970			717		253		(970	)		970

Total comprehensive income	$	2,943		$	1,431	$	422	$	(1,853	)	$	2,943

EVERTEC, LLC Notes to Unaudited Consolidated Financial Statements



	Consolidated Statement of Income and Comprehensive Income
	for the six months ended June 30, 2012
(Dollar amounts in thousands)	EVERTEC (Parent Only)			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations			EVERTEC (Consolidated)
Revenues
Transaction processing	$	33,866		$	5,668		$	7,188		$	(20	)	$	46,702
Merchant acquiring, net		34,689			—			—			—			34,689
Business solutions		82,234			3,361			125			(251	)		85,469

Total revenues		150,789			9,029			7,313			(271	)		166,860

Operating costs and expenses
Cost of revenues, exclusive of depreciation and amortization shown below		67,748			5,268			4,856			(300	)		77,572
Selling, general and administrative expenses		16,139			860			1,332			(867	)		17,464
Depreciation and amortization		33,746			869			1,137			—			35,752

Total operating costs and expenses		117,633			6,997			7,325			(1,167	)		130,788

Income from operations		33,156			2,032			(12	)		896			36,072

Non-operating (expenses) income
Interest income		148			85			13			(54	)		192
Interest expense		(24,484	)		—			—			54			(24,430	)
Earnings of equity method investments		2,978			—			—			(2,403	)		575
Other (expenses) income		(10,032	)		(306	)		547			(866	)		(10,657	)

Total non-operating (expenses) income		(31,390	)		(221	)		560			(3,269	)		(34,320	)

Income before income taxes		1,766			1,811			548			(2,373	)		1,752
Income tax (benefit) expense		(87,458	)		(262	)		193			55			(87,472	)

Net income		89,224			2,073			355			(2,428	)		89,224
Other comprehensive income, net of tax expense of $13, $0, $0, $0 and $13
Foreign currency translation adjustments		2,336			1,079			1,323			(2,402	)		2,336

Total comprehensive income	$	91,560		$	3,152		$	1,678		$	(4,830	)	$	91,560

EVERTEC, LLC Notes to Unaudited Consolidated Financial Statements


	Consolidated Statement of Income and Comprehensive Income
	for the six months ended June 30, 2011
(Dollar amounts in thousands)	EVERTEC (Parent Only)			Guarantor Subsidiaries		Non-Guarantor Subsidiary		Eliminations			EVERTEC (Consolidated)
Revenues
Transaction processing	$	29,941		$	4,433	$	6,670	$	(8	)	$	41,036
Merchant acquiring, net		29,467			—		—		—			29,467
Business solutions		81,597			2,484		110		(167	)		84,024

Total revenues		141,005			6,917		6,780		(175	)		154,527

Operating costs and expenses
Cost of revenues, exclusive of depreciation and amortization shown below		65,796			4,667		4,833		(137	)		75,159
Selling, general and administrative expenses		16,324			348		785		—			17,457
Depreciation and amortization		32,438			882		1,144		—			34,464

Total operating costs and expenses		114,558			5,897		6,762		(137	)		127,080

Income from operations		26,447			1,020		18		(38	)		27,447

Non-operating (expenses) income
Interest income		399			33		27		—			459
Interest expense		(27,876	)		—		—		—			(27,876	)
Earnings of equity method investments		1,466			—		—		(1,210	)		256
Other (expenses) income		(4,352	)		251		122		—			(3,979	)

Total non-operating (expenses) income		(30,363	)		284		149		(1,210	)		(31,140	)

(Loss) income before income taxes		(3,916	)		1,304		167		(1,248	)		(3,693	)
Income tax (benefit) expense		(29,760	)		184		57		(18	)		(29,537	)

Net income		25,844			1,120		110		(1,230	)		25,844
Other comprehensive income
Foreign currency translation adjustments		1,414			924		490		(1,414	)		1,414

Total comprehensive income	$	27,258		$	2,044	$	600	$	(2,644	)	$	27,258

EVERTEC, LLC Notes to Unaudited Consolidated Financial Statements


	Consolidated Statement of Cash Flows
	for the six months ended June 30, 2012
	EVERTEC			Guarantor			Non-Guarantor					EVERTEC
(Dollar amounts in thousands)	(Parent Only)			Subsidiaries			Subsidiary			Eliminations		(Consolidated)
Cash flows from operating activities	$	39,112		$	6,415		$	(3,648	)	$	—	$	41,879

Cash flows from investing activities
Net increase in restricted cash		(233	)		—			—			—		(233	)
Intangible assets acquired		(3,658	)		(38	)		(16	)		—		(3,712	)
Property and equipment acquired		(4,851	)		(105	)		(210	)		—		(5,166	)
Proceeds from sales of property and equipment		43			—			—			—		43

Net cash used in investing activities		(8,699	)		(143	)		(226	)		—		(9,068	)

Cash flows from financing activities
Proceeds from issuance of long-term debt		208,725			—			—			—		208,725
Debt issuance costs		(2,174	)		—			—			—		(2,174	)
Distribution to member		(267,150	)		—			—			—		(267,150	)
Short-term note due to (from) affiliates		8,200			(8,200	)		—			—		—

Net cash used in financing activities		(52,399	)		(8,200	)		—			—		(60,599	)

Net decrease in cash		(21,986	)		(1,928	)		(3,874	)		—		(27,788	)
Cash at beginning of the period		36,868			11,179			5,476			—		53,523

Cash at end of the period	$	14,882		$	9,251		$	1,602		$	—	$	25,735


	Consolidated Statement of Cash Flows
	for the six months ended June 30, 2011
	EVERTEC			Guarantor			Non-Guarantor					EVERTEC
(Dollar amounts in thousands)	(Parent Only)			Subsidiaries			Subsidiary			Eliminations		(Consolidated)
Cash flows from operating activities	$	22,755		$	2,282		$	1,342		$	—	$	26,379

Cash flows from investing activities
Net decrease in restricted cash		545			—			—			—		545
Intangible assets acquired		(8,913	)		(30	)					—		(8,943	)
Property and equipment acquired		(4,546	)		(140	)		(53	)		—		(4,739	)
Proceeds from sale of property and equipment		74			—			32			—		106
Acquisition of an equity method investment		(9,244	)		—			—			—		(9,244	)

Net cash used in investing activities		(22,084	)		(170	)		(21	)		—		(22,275	)

Cash flows from financing activities
Repayment and purchase of long-term debt and other liabilities		(28,125	)		—			—			—		(28,125	)

Net cash used in financing activities		(28,125	)		—			—			—		(28,125	)

Net (decrease) increase in cash		(27,454	)		2,112			1,321			—		(24,021	)
Cash at beginning of the period		45,551			5,739			3,909			—		55,199

Cash at end of the period	$	18,097		$	7,851		$	5,230		$	—	$	31,178

Note 15 – Subsequent Events

The Company evaluated subsequent events through the date that these unaudited consolidated financial statements were issued. There were no subsequent events requiring disclosure.

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 and six months ended June 30, 2012 and 2011, respectively; and (ii) the financial condition as of June 30, 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.

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 Notes to Consolidated (Successor) and Combined (Predecessor) Financial Statements included in our Annual Report on Form 10-K.

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 point-of-sale (“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 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 June 30, 2012 to June 30, 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 June 30, 2012 and 2011.

Revenues


	Three months ended June 30,
(Dollar amounts in thousands)	2012		2011		Variance
Transaction processing	$	23,803	$	20,765	$	3,038	15	%
Merchant acquiring, net		17,028		14,719		2,309	16	%
Business solutions		43,541		43,253		288	1	%

Total revenues	$	84,372	$	78,737	$	5,635	7	%

Revenues across our three reportable segments increased when compared to the corresponding 2011 period. Revenue growth in the Transaction Processing and Business Solutions segments was primarily attributable to an increase in transactions and further penetration of our products and services in the markets we serve. The increase in Merchant Acquiring segment net revenues was driven primarily by higher sales volumes and higher realized net margin.

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 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 is provided below.


	Three months ended June 30,
(Dollar amounts in thousands)	2012		2011		Variance
Total revenues	$	84,372	$	78,737	$	5,635		7	%
Plus: Interchange fees and assessments in Merchant acquiring		20,346		25,507		(5,161	)	-20	%

Total gross revenues	$	104,718	$	104,244	$	474		0	%

Gross revenues
Transaction processing	$	23,803	$	20,765	$	3,038		15	%
Merchant acquiring		37,374		40,226		(2,852	)	-7	%
Business solutions		43,541		43,253		288		1	%

Total gross revenues	$	104,718	$	104,244	$	474		0	%

Operating costs and expenses


	Three months ended June 30,
(Dollar amounts in thousands)	2012		2011		Variance
Cost of revenues	$	39,831	$	37,655	$	2,176		6	%
Selling, general and administrative expenses		8,477		8,962		(485	)	-5	%
Depreciation and amortization		17,830		17,092		738		4	%

Total operating costs and expenses	$	66,138	$	63,709	$	2,429		4	%

Cost of revenues increased by $2.2 million, or 6%, when compared to the same period in 2011. The results for 2012 were driven by higher equipment expenses and professional services to support business growth, partially offset by a decrease in personnel expenses from cost control initiatives implemented in late 2011. Gross margin percentage for the three months ended June 30, 2012 improved by approximately 61 basis point to 52.8% from 52.2% for the corresponding 2011 period. The improvement in our gross margin was primarily driven by the operating leverage inherent in our highly scalable, leading technology platform and productivity enhancements.

Selling, general and administrative expenses for the three months ended June 30, 2012 decreased by $0.5 million, or 5%, when compared to the same period in 2011. The decrease was primarily attributable to a reduction in personnel expenses resulting from cost control initiatives.

Depreciation and amortization expense for the three months ended June 30, 2012 increased by $0.7 million, or 4%, mostly related to data processing equipment and amortization of software packages associated with certain new projects.

Income from operations

The following table presents income from operations by reportable segments.


	Three months ended June 30,
(Dollar amounts in thousands)	2012			2011			Variance
Segment income from operations
Transaction processing	$	12,756		$	10,502		$	2,254		21	%
Merchant acquiring		7,970			6,777			1,193		18	%
Business solutions		8,870			9,865			(995	)	-10	%

Income from operations before non-recurring costs and depreciation and amortization		29,596			27,144			2,452		9	%
Other⁽¹⁾		(11,362	)		(12,116	)		754		-6	%

Income from operations	$	18,234		$	15,028		$	3,206		21	%

⁽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 June 30, 2012 increased in both Transaction Processing and Merchant Acquiring segments as compared to the corresponding 2011 period as a result of an increase in transaction volumes, higher net realized margin and our ability to maintain lower incremental costs. The decrease in income from operations in our Business Solutions segment resulted from a slight increase in revenues offset by an increase in operational expenses mainly driven by lower capitalized salaries when compared to the same period in 2011.

See Note 13 of the Notes to 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 income (expenses)


	Three months ended June 30,
(Dollar amounts in thousands)	2012			2011			Variance
Interest income	$	75		$	145		$	(70	)	-48	%
Interest expense		(13,254	)		(13,754	)		500		-4	%
Earnings of equity method investments		509			256			253		99	%
Other expense		(8,397	)		(93	)		(8,304	)	n/m

Total non-operating income (expenses)	$	(21,067	)	$	(13,446	)	$	(7,621	)	57	%

Non-operating expenses for the three months ended June 30, 2012 increased by $7.6 million, or 57%, primarily as a result of higher expenses of $8.3 million associated with the issuance of additional debt, partially offset by a decrease of $0.5 million in interest expense. Variance in interest expense is due to the net effect of a one-time charge of $1.8 million associated with a prepayment made during the second quarter of 2011 and a lower interest rate in 2012, partially offset by higher outstanding balance as a result of the issuance of additional debt in May 2012.

Income tax benefit

Income tax benefit for the three months ended June 30, 2012 amounted to $88.5 million compared to $0.4 million for the corresponding 2011 period. The income tax benefit for the three months ended June 30, 2012 was driven by the elimination of EVERTEC’s deferred tax liability balance amounting to $89.2 million related to its operations in Puerto Rico following the Conversion. See Note 10 of the Notes to Unaudited Consolidated Financial Statements for additional information regarding this transaction.

Net Income

Net income for the three months ended June 30, 2012 was $85.7 million, compared to net income of $2.0 million for the corresponding 2011 period. The net income results for the three months ended June 30, 2012 mainly reflects the elimination of EVERTEC’s deferred tax liability balance amounting to $89.2 million related to its operations in Puerto Rico following the Conversion. Income before income taxes for the three months ended June 30, 2012 was $2.8 million compared to $1.6 million for the corresponding 2011 period.

Comparison of the six months ended June 30, 2012 to June 30, 2011

Revenues


	Six months ended June 30,
(Dollar amounts in thousands)	2012		2011		Variance
Transaction processing	$	46,702	$	41,036	$	5,666	14	%
Merchant acquiring, net		34,689		29,467		5,222	18	%
Business solutions		85,469		84,024		1,445	2	%

Total revenues	$	166,860	$	154,527	$	12,333	8	%

Revenue increases across all three reportable segments during the six months ended June 30, 2012 were primarily driven by the aforementioned factors impacting their performance during the three months ended June 30, 2012 as we continue to experience higher net realized margin and growth in transactions and sales volumes in our local and international markets.

Reconciliation of Total Revenues to Gross Revenues

A reconciliation of total revenues to gross revenues is provided below.


	Six months ended June 30,
(Dollar amounts in thousands)	2012		2011		Variance
Total revenues	$	166,860	$	154,527	$	12,333		8	%
Plus: Interchange fees and assessments in Merchant acquiring		41,474		49,373		(7,899	)	-16	%

Total gross revenues	$	208,334	$	203,900	$	4,434		2	%

Gross revenues
Transaction processing	$	46,702	$	41,036	$	5,666		14	%
Merchant acquiring		76,163		78,840		(2,677	)	-3	%
Business solutions		85,469		84,024		1,445		2	%

Total gross revenues	$	208,334	$	203,900	$	4,434		2	%

Operating costs and expenses


	Six months ended June 30,
(Dollar amounts in thousands)	2012		2011		Variance
Cost of revenues	$	77,572	$	75,159	$	2,413	3	%
Selling, general and administrative expenses		17,464		17,457		7	0	%
Depreciation and amortization		35,752		34,464		1,288	4	%

Total operating costs and expenses	$	130,788	$	127,080	$	3,708	3	%

Cost of revenues increased by $2.4 million, or 3%, when compared to the same period in 2011. The results for the first half of 2012 were driven by higher equipment expense and professional services fees to support business growth, partially offset by a decrease in personnel expenses from cost control initiatives implemented in 2011. Gross margin percentage for the six months ended June 30, 2012 improved to 53.5% from 51.3% 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 higly scalable technology platform and such cost control initiatives.

Selling, general and administrative expenses for the six months ended June 30, 2012 remained flat when compared to the corresponding 2011 period as a result of the Company’s continuous cost control efforts. We were able to increase our revenues for the period while controlling expenses due to the successful implementation of cost control initiatives.

Depreciation and amortization expense for the six months ended June 30, 2012 increased by $1.3 million, or 4%, mostly related to data processing equipment and amortization of software packages associated with certain new projects.

Income from operations

The following table presents income from operations by reportable segments.


	Six months ended June 30,
(Dollar amounts in thousands)	2012			2011			Variance
Segment income from operations
Transaction processing	$	25,065		$	21,388		$	3,677	17	%
Merchant acquiring		16,511			14,146			2,365	17	%
Business Solutions		17,950			17,276			674	4	%

Income from operations before non-recurring costs and depreciation and amortization		59,526			52,810			6,716	13	%
Other⁽¹⁾		(23,454	)		(25,363	)		1,909	-8	%

Income from operations	$	36,072		$	27,447		$	8,625	31	%

⁽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 in each of our three reportable segments increased when compared to the corresponding 2011 period, due to higher revenues partially offset by incremental costs related to business growth. The increase in revenues was driven by an increase in volumes within our Transaction Processing business, and higher sales volumes and realized net margin in our Merchant Acquiring business. In our Business Solutions segment, revenue growth resulted from an increase in volumes, new sales and incremental services to existing clients.

Non-operating income (expenses)


	Six months ended June 30,
(Dollar amounts in thousands)	2012			2011			Variance
Interest income	$	192		$	459		$	(267	)	-58	%
Interest expense		(24,430	)		(27,876	)		3,446		-12	%
Earnings of equity method investments		575			256			319		125	%
Other expense		(10,657	)		(3,979	)		(6,678	)	168	%

Total non-operating income (expenses)	$	(34,320	)	$	(31,140	)	$	(3,180	)	10	%

The increase in non-operating expenses was driven by higher other expenses of $6.7 million, partially offset by a reduction in interest expense of $3.4 million. Other expenses for the six months ended June 30, 2012 were primarily comprised of one-time costs of $8.8 million associated with the issuance of additional debt and $2.2 million as a result of changes in personnel. For the corresponding 2011 period, other expenses were primarily comprised of $2.2 million related to the refinancing of our senior secured credit facilities and $1.2 million from the settlement of a derivative related to our acquisition of an equity interest in CONTADO from Popular. The positive year-over-year interest expense variance of $3.4 million was largely a result of one-time charges incurred during the six months ended June 30, 2011 of $2.9 million associated with a refinancing and prepayments, and a lower interest rate in 2012, partially offset by higher outstanding debt balance.

Income tax benefit

Income tax benefit for the six months ended June 30, 2012 amounted to $87.5 million compared to $29.5 million for the corresponding 2011 period. The income tax benefit for the first half of 2012 was primarily driven by the elimination of EVERTEC’s deferred tax liability balance of $89.2 million related to Puerto Rico operations following the Conversion. See Note 10 of the Notes to Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information regarding income taxes.

The income tax benefit for the corresponding 2011 period was mainly due to 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.

Net Income

Net income for the six months ended June 30, 2012 was $89.2 million, compared to net income of $25.8 million for the corresponding 2011 period. The net income results for 2012 mainly reflect the elimination of the deferred tax liability balance of $89.2 million related to Puerto Rico operations of EVERTEC following the Conversion. Income before income taxes for the six months ended June 30, 2012 was $1.8 million compared to a loss before income taxes of $3.7 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 have available a revolving credit facility of $50.0 million of which $49.3 million was available as of June 30, 2012 (after giving effect to a $0.7 million letter of credit on behalf of ATH Costa Rica, S.A (“ATH CR”) with Bank of America). In addition, ATH CR has a credit facility with Banco Popular for approximately $2.9 million, under which a letter of credit of a similar amount was issued in favor of Visa International. Our Costa Rican subsidiaries have local lines of credit with Banco Lafise of approximately $0.9 million in aggregate.

Our primary use of cash is for operating expenses, working capital requirements, capital expenditures and debt service obligations as they become due. Interest expense may increase as a result of the additional debt issued during the second quarter of 2012. 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. On May 9, 2012, we made a cash distribution of $267.2 million to EVERTEC’s direct parent, Carib Holdings. For additional information, see Note 6 of the Notes to 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.


	Six months ended June 30,
(Dollar amounts in thousands)	2012			2011
Cash provided by operating activities	$	41,879		$	26,379
Cash used in investing activities		(9,068	)		(22,275	)
Cash used in financing activities		(60,599	)		(28,125	)

Decrease in cash	$	(27,788	)	$	(24,021	)

Cash provided by operating activities for the six months ended June 30, 2012 increased by $15.5 million when compared to the corresponding period in 2011. Higher cash provided by operating activities in 2012 resulted from an increase in income from operations of $8.6 million and $2.0 million from a premium received from the issuance of additional debt. Cash provided by operating activities for 2011 included a $3.4 million prepayment penalty related to the Company’s debt refinancing.

Cash used in investing activities for the six months ended June 30, 2012 decreased by $13.2 million when compared to the corresponding 2011 period. In the prior period we acquired an equity interest in CONTADO for $9.2 million and had higher acquisition of intangibles amounting to $4.8 million when compared to the corresponding 2012 period.

Cash used in financing activities for the six months ended June 30, 2012 consisted of $208.7 million in proceeds from the issuance of additional debt, offset by $2.2 million in debt issuance cost associated with the additional debt and $267.2 million distribution made to our parent company. Cash used in financing activities for the six months ended June 30, 2011 consisted of a repayment of $28.1 million of our senior secured term loan.

Capital Resources

Our principal capital expenditures are related to computer software (purchased and internally developed) and additions to property and equipment. We invested approximately $5.2 million and $8.9 million for the three and six months ended June 30, 2012 compared to $6.5 million and $13.7 million for the three and six months ended June 30, 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, our senior secured credit agreement contains certain provisions that may require prepayments as a result of increases in the senior secured leverage ratio. The incremental term loan and the reduction of cash, as a result of the distribution made to our member, are factors impacting our senior secured leverage ratio. At June 30, 2012, the senior secured leverage ratio was 2.98. If the senior secured leverage ratio at year end is equal to or greater than 2.50x, a 50% prepayment of the excess cash flow generated must be made. If the senior secured leverage ratio is less than or equal to 2.50x and greater than 2.00x, a 25% prepayment is required. If the senior secured leverage ratio is less than or equal to 2.00x no prepayments are necessary.

On May 9, 2012, we entered into an amendment to the agreement governing our 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, we borrowed an additional $170.0 million under a secured incremental term loan. As of June 30, 2012, the outstanding balance under the senior secured credit facilities amounted to $483.2 million.

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 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.

See Note 6 of the Notes to Unaudited Consolidated Financial Statements included 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. 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. 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. As of June 30, 2012, the principal outstanding balance of the senior notes was $250.5 million.

On May 7, 2012, 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 in order to allow additional dividend or distribution payments by us in an aggregate amount not to exceed $270.0 million. See Note 6 of the Notes to Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information.

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 3.85 to 1.0 at June 30, 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) limits 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 t

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EVERTEC, LLC 10-Q