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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 September 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 Group, 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 x No ¨

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 November 9, 2012, there were 100 outstanding Limited Liability Company Membership Units of EVERTEC Group, LLC.

TABLE OF CONTENTS


		Page

Part I. FINANCIAL INFORMATION			1

Item 1.	Financial Statements		1

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

	Unaudited Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the three and nine months ended September 30, 2012 and 2011		2

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

	Unaudited Consolidated Statements of Cash Flows for the nine months ended September 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		25

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		35

Item 4.	Controls and Procedures		35

Part II. OTHER INFORMATION			36

Item 1.	Legal Proceedings		36

Item 1A.	Risk Factors		36

Item 2.	Unregistered Sales of Equity in Securities and Use of Proceeds		36

Item 3.	Defaults Upon Senior Securities		36

Item 4.	Mine Safety Disclosures		37

Item 5.	Other Information		37

Item 6.	Exhibits		37

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 Group, LLC (Unaudited) Consolidated Balance Sheets

(Dollar amounts in thousands)


	September 30, 2012		December 31, 2011
Assets
Current Assets:
Cash	$	49,491	$	53,523
Restricted cash		4,706		5,288
Accounts receivable, net		67,475		60,930
Prepaid expenses and other assets		14,264		21,526

Total current assets		135,936		141,267
Investment in equity investee		10,131		12,267
Property and equipment, net		32,103		36,685
Goodwill		373,472		371,712
Other intangible assets, net		413,506		448,914
Other long-term assets		21,505		22,894

Total assets	$	986,653	$	1,033,739

Liabilities and member’s equity
Current Liabilities:
Accrued liabilities	$	44,351	$	29,581
Accounts payable		17,738		21,786
Unearned income		935		900
Income tax payable		2,182		3,383
Deferred tax liability, net		870		9,321

Total current liabilities		66,076		64,971
Long-term debt		736,197		523,833
Long-term deferred tax liability, net		6,976		91,431
Other long-term liabilities		337		449

Total liabilities		809,586		680,684

Commitments and contingencies (Note 9)
Member’s equity
Member’s units (100 units issued and outstanding)		—		—
Contributed capital		175,169		326,367
Accumulated earnings		665		28,006
Accumulated other comprehensive income (loss), net of tax of $0 and $13		1,233		(1,318	)

Total member’s equity		177,067		353,055

Total liabilities and member’s equity	$	986,653	$	1,033,739

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

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

(Dollar amounts in thousands)


	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Revenues
Merchant acquiring, net	$	16,810		$	14,576		$	51,499		$	44,043
Payment processing (from affiliates: $7,203, $6,895, $22,005 and $20,173)		23,284			22,199			69,986			63,235
Business solutions (from affiliates: $29,822, $30,417, $90,866 and $91,432)		43,745			44,249			129,214			128,273

Total revenues		83,839			81,024			250,699			235,551

Operating costs and expenses
Cost of revenues, exclusive of depreciation and amortization shown below		40,897			39,673			118,469			114,832
Selling, general and administrative expenses		6,921			8,548			24,385			26,005
Depreciation and amortization		17,765			17,513			53,517			51,977

Total operating costs and expenses		65,583			65,734			196,371			192,814

Income from operations		18,256			15,290			54,328			42,737

Non-operating (expenses) income
Interest income		38			178			230			637
Interest expense		(14,784	)		(11,396	)		(39,214	)		(39,272	)
(Losses) earnings of equity method investment		(472	)		429			103			685
Other expenses (income):
Voluntary Retirement Program (“VRP”) expense		—			(14,197	)		—			(14,197	)
Other income (expense)		855			1,888			(9,802	)		(2,091	)

Total other income (expenses)		855			(12,309	)		(9,802	)		(16,288	)

Total non-operating (expenses) income		(14,363	)		(23,098	)		(48,683	)		(54,238	)

Income (loss) before income taxes		3,893			(7,808	)		5,645			(11,501	)
Income tax expense (benefit)		512			(5,132	)		(86,960	)		(34,669	)

Net income (loss)		3,381			(2,676	)		92,605			23,168
Other comprehensive income (loss), net of income tax expense of $0, $8, $13 and $8 Foreign currency translation adjustments		215			(3,004	)		2,551			(1,590	)

Total comprehensive income (loss)	$	3,596		$	(5,680	)	$	95,156		$	21,578

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

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

(Dollar amounts in thousands)


	Member’s Units		Contributed Capital			Accumulated 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				889									889
Distribution to member				(147,204	)		(119,946	)					(267,150	)
Transfer of prepaid income taxes to member				(4,883	)								(4,883	)
Net income							92,605						92,605
Other comprehensive income, net of income tax expense of $13										2,551			2,551

Balance at September 30, 2012		100	$	175,169		$	665		$	1,233		$	177,067

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

EVERTEC Group, LLC (Unaudited) Consolidated Statements of Cash Flows

(Dollar amounts in thousands)


	Nine months ended September 30,
	2012			2011
Cash flows from operating activities
Net income	$	92,605		$	23,168
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		53,517			51,977
Amortization of debt issue costs and premium and accretion of discount		3,748			6,499
Provision for doubtful accounts and sundry losses		1,291			918
Deferred tax benefit		(93,140	)		(24,400	)
Share-based compensation		889			684
Realized loss on derivative		—			1,399
Unrealized gain of indemnification assets		(334	)		(676	)
Amortization of a contract liability		(703	)		(5,151	)
Loss on disposition of property and equipment		62			56
Earnings from equity investee		(103	)		(685	)
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		(3,831	)		12,189
Prepaid expenses and other assets		2,433			(13,507	)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities		10,991			9,813
Income tax payable		(1,201	)		553
Unearned income		35			84
Other long-term liabilities		—			(449	)

Total adjustments		(23,618	)		36,655

Net cash provided by operating activities		68,987			59,823

Cash flows from investing activities
Net decrease (increase) in restricted cash		582			(1,572	)
Intangible assets acquired		(5,430	)		(12,186	)
Property and equipment acquired		(7,540	)		(6,412	)
Proceeds from sales of property and equipment		80			106
Acquisition of an equity method investment		—			(9,244	)

Net cash used in investing activities		(12,308	)		(29,308	)

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		(112	)		(29,090	)

Net cash used in financing activities		(60,711	)		(29,090	)

Net (decrease) increase in cash		(4,032	)		1,425
Cash at beginning of the period		53,523			55,199

Cash at end of the period	$	49,491		$	56,624

Supplemental disclosure of non-cash activities:
Foreign currency translation adjustments	$	2,551		$	1,590
Transfer of prepaid income taxes to member		4,883			—
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 – Property and Equipment, net			7

Note 3 – Goodwill and Other Intangible Assets			8

Note 4 – Debt			9

Note 5 – Financial Instruments and Fair Value Measurements			9

Note 6 – Merchant Acquiring Revenues			11

Note 7 – Share-based Compensation			12

Note 8 – Income Tax			12

Note 9 – Commitments and Contingencies			14

Note 10 – Related Party Transactions			15

Note 11 – Segment Information			15

Note 12 – Guarantor of the Senior Notes and Non-Guarantor Consolidated Financial Information			17

Note 13 – Subsequent Events			23

EVERTEC Group, LLC Notes to Unaudited Consolidated Financial Statements

Note 1 – The Company and Summary of Significant Accounting Policies

The Company

EVERTEC Group, LLC (“EVERTEC Group”) (formerly known as EVERTEC, LLC) and its subsidiaries (collectively the “Company,” “EVERTEC,” “we,” “us,” or “our”) is the leading, full-service transaction processing business in Latin America and the Caribbean. We are based in Puerto Rico and provide a broad range of merchant acquiring, payment processing and business process management services across 19 countries in the region. We are the largest merchant acquirer in the Caribbean and Central America and the sixth largest in Latin America. We own and operate the ATH network, one of the leading automated teller machine (“ATM”) and personal identification number debit networks and financial services brands in Latin America. In addition, we provide a comprehensive suite of software and services for core bank processing, cash processing and technology outsourcing in the regions we serve. We serve a broad and diversified customer base of leading financial institutions, merchants, corporations and government agencies with mission critical technology solutions. EVERTEC Group’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. (“EVERTEC Finance”) and T.I.I. Smart Solutions, Inc.

In September 2012, EVERTEC, LLC amended its Certificate of Formation to change its name to EVERTEC Group, LLC. On April 17, 2012, EVERTEC Group was converted from a Puerto Rico corporation to a Puerto Rico limited liability company (the “Conversion”) for the purpose of improving its consolidated tax efficiency 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, EVERTEC Intermediate Holdings, LLC (“Holdings”) (formerly known as Carib Holdings, LLC and Carib Holdings, Inc.), which is our direct parent (“member”), was also converted from a Puerto Rico corporation to a Puerto Rico limited liability company. Prior to these conversions, EVERTEC, Inc. (formerly known as Carib Latam Holdings, Inc.) was formed in order to act as the new parent company of Holdings and its subsidiaries, including EVERTEC Group. In addition, in connection with the Conversion, EVERTEC Group formed a new wholly owned subsidiary, EVERTEC Finance, a corporation organized under the laws of the Commonwealth of Puerto Rico, to act as co-issuer of the 11% senior notes due 2018.

Prior to the merger transaction (the “Merger”) on September 30, 2010, EVERTEC Group was 100% owned by Popular, the largest financial institution based in Puerto Rico, and operated substantially as an independent entity within Popular. After the consummation of the Merger, Popular retained an approximately 49% indirect ownership interest in EVERTEC Group and is our largest customer.

Basis of Presentation

The unaudited consolidated financial statements include the accounts of EVERTEC. 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 nine months ended September 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 September 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 and for periods prior to the Conversion.

EVERTEC Group, LLC Notes to Unaudited Consolidated Financial Statements

Summary of Significant Accounting Policies

Goodwill

Goodwill represents the excess of the purchase price and related costs over the value assigned to net assets acquired. Goodwill is not amortized, but is tested for impairment at least annually. Last year, the goodwill impairment test used was a two-step process at each reporting unit level. The first step used to identify potential impairment, compared the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeded its carrying amount, goodwill of the reporting unit was not considered impaired and the second step of the impairment test was unnecessary. If needed, the second step consisted of comparing the implied fair value of the reporting unit with the carrying amount of that goodwill.

For 2012, the Company used a “qualitative assessment” option or “step zero” for the goodwill impairment test for all of its reporting units. With this process, the Company first assesses whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount. If the answer is no, then the fair value of the reporting unit does not need to be measured, and step one and step two are bypassed. In assessing the fair value of a reporting unit, which is based on the nature of the business and reporting unit’s current and expected financial performance, the Company uses a combination of factors such as general macroeconomic conditions, industry and market conditions, overall financial performance and the entity and reporting unit specific events.

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 – Property and Equipment, net

Property and equipment, net consists of the following:


(Dollar amounts in thousands)	Useful life in years	September 30, 2012			December 31, 2011
Buildings	30	$	2,127		$	2,091
Data processing equipment	3 - 5		52,480			45,883
Furniture and equipment	3 - 10		6,045			5,912
Leasehold improvements	5 - 10		1,290			610

			61,942			54,496
Less – accumulated depreciation and amortization			(31,366	)		(19,316	)

Depreciable assets, net			30,576			35,180
Land			1,527			1,505

Property and equipment, net		$	32,103		$	36,685

Depreciation and amortization expense related to property and equipment was $4.0 million and $12.1 million for the three and nine months ended September 30, 2012, respectively, and $3.9 million and $11.4 million for the corresponding 2011 periods.

EVERTEC Group, LLC Notes to Unaudited Consolidated Financial Statements

Note 3 – Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill, allocated by reportable segments, were as follows (See Note 11):


(Dollar amounts in thousands)	Merchant acquiring, net		Payment processing		Business solutions		Total
Balance at December 31, 2011	$	166,959	$	199,745	$	5,008	$	371,712
Foreign currency translation adjustments		—		1,447		313		1,760

Balance at September 30, 2012	$	166,959	$	201,192	$	5,321	$	373,472

Goodwill is tested for impairment at least annually. This year the Company used the qualitative assessment option or step zero process for this annual test. Using this process, the Company first assesses whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount.

During the third quarter of 2012, the Company conducted a qualitative assessment of each reporting unit’s fair value as of August 31, 2012. As a starting point, the Company considered the results for our 2011 impairment test, which indicated that the fair value of each reporting unit was in excess of 30% of its carrying amount. The Company also considered financial projections, current market conditions, and any changes in the carrying amount of the reporting units. Based on the results of this qualitative assessment, the Company believes the fair value of goodwill of each of the Company’s reporting units continue to exceed their respective carrying amounts and concluded that it was not necessary to conduct the two-step goodwill impairment test. No impairment losses for the period were recognized.

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


(Dollar amounts in thousands)		September 30, 2012
	Useful life in years	Gross amount		Accumulated amortization			Net carrying amount
Customer Relationships	14	$	314,138	$	(45,167	)	$	268,971
Trademark	10-14		39,950		(6,928	)		33,022
Software packages	3-5		112,275		(49,762	)		62,513
Non-Compete Agreement	15		56,539		(7,539	)		49,000

Other intangible assets, net		$	522,902	$	(109,396	)	$	413,506


(Dollar amounts in thousands)			December 31, 2011
	Useful life in years	Gross amount		Accumulated amortization			Net carrying amount
Customer Relationships	14	$	313,543	$	(28,372	)	$	285,171
Trademark	10-14		39,950		(4,330	)		35,620
Software packages	3-5		106,865		(30,569	)		76,296
Non-Compete Agreement	15		56,539		(4,712	)		51,827

Other intangible assets, net		$	516,897	$	(67,983	)	$	448,914

For the three and nine months ended September 30, 2012, the Company recorded amortization expense related to other intangibles of $13.8 million and $41.4 million, respectively, compared to $13.6 million and $40.6 million for the corresponding 2011 periods.

EVERTEC Group, LLC Notes to Unaudited Consolidated Financial Statements

Note 4 – Debt

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


(Dollar amounts in thousands)	September 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⁾)	$	483,790	$	313,333
Senior Notes due on October 1, 2018, paying interest semi-annually at a rate of 11% per annum		252,407		210,500

Total net debt	$	736,197	$	523,833

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

On May 7, 2012, EVERTEC Group 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 Group 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 5 – 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.

EVERTEC Group, LLC Notes to Unaudited Consolidated Financial Statements

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

The following table summarizes fair value measurements by level at September 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
September 30, 2012
Financial assets:
Indemnification assets:
Software cost reimbursement	$	—	$	—	$	5,653	$	5,653

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 have termination dates up to September 2015 and were entered into in connection with the Merger. 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 September 30, 2012, therefore resulting in a net unrealized loss of approximately $0.6 million and $0.3 million for the three and nine months ended September 30, 2012, respectively, and an unrealized gain of approximately $1.4 million and $0.7 million for the corresponding 2011 periods, which are reflected within the other income (expense) caption in the unaudited consolidated statements of income (loss) and comprehensive income (loss). 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 September 30, 2012 using the discounted cash flow model include the discount rate of 7.35% and the projected cash flows of $5.7 million.

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

EVERTEC Group, LLC Notes to Unaudited Consolidated Financial Statements

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


	September 30, 2012				December 31, 2011
(Dollar amounts in thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Indemnification assets:
Software cost reimbursement	$	5,653	$	5,653	$	7,113	$	7,113
Expected reimbursements		—		—		351		351
Financial liabilities:
Senior secured term loan	$	483,790	$	494,716	$	313,333	$	317,979
Senior notes		252,407		266,469		210,500		213,921

The senior secured term loan and the senior notes prices at September 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 September 30,						Nine months ended September 30,
(Dollar amounts in thousands)	2012			2011			2012			2011
Indemnification assets:
Beginning balance	$	6,120		$	11,092		$	7,464		$	14,836
Payments received		(1,017	)		(3,099	)		(2,145	)		(6,082	)
Unrealized gain recognized in other income (expenses)		550			1,437			334			676

Ending balance	$	5,653		$	9,430		$	5,653		$	9,430

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 6 – Merchant Acquiring Revenues

Merchant Acquiring revenues are presented net of interchange fees and assessments charged by credit and debit card associations. Interchange fees and assessments charged by credit and debit card associations to the Company amounted to $19.5 million and $61.0 million for the three and nine months ended September 30, 2012, respectively, compared to $24.6 million and $74.0 million for the corresponding 2011 periods.

EVERTEC Group, LLC Notes to Unaudited Consolidated Financial Statements

Note 7 – Share-based Compensation

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


Nonvested stock options	Shares			Weighted-average exercise prices
Nonvested at December 31, 2011		2,530,987		$	2.59
Granted		548,955			9.82
Forfeitures		(654,438	)		2.59
Vested		(139,041	)		2.59

Nonvested at September 30, 2012		2,286,463		$	4.33

On May 9, 2012, the Company used the net proceeds from the incremental term loan and the New Notes (as described in Note 4), 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 EVERTEC, 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 nine months ended September 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 nine months ended September 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		(32,158	)		10.00

Nonvested at September 30, 2012		45,546		$	12.27

Share-based compensation recognized was as follows:


	Three months ended September 30,				Nine months ended September 30,
(Dollar amounts in thousands)	2012		2011		2012		2011
Share-based compensation recognized, net
Stock options, net of income tax expense of $0, $65, $62 and $168	$	151	$	217	$	442	$	561
Restricted shares, net of income tax expense of $0, $16, $47 and $37		181		53		447		123

The maximum unrecognized cost for stock options was $6.9 million as of September 30, 2012, which includes $2.0 million, $2.5 million and $2.4 million related to Tranche A, Tranche B and Tranche C options, respectively.

The maximum unrecognized compensation cost for restricted stock was $0.4 million as of September 30, 2012.

Note 8 – 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, Holdings and EVERTEC, Inc. entered into a Tax Payment Agreement pursuant to which the Company is obligated to make certain payments to Holdings or EVERTEC, Inc. for taxable periods or portions thereof occurring on or after April 17, 2012 (the “Effective Date”).

EVERTEC Group, 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 Holdings or EVERTEC, Inc. that reduce Holdings’ or EVERTEC, Inc.’s taxes in such period. The Tax Payment Agreement provides that the payments thereunder shall not exceed the net amount of Taxes that Holdings and EVERTEC, Inc. actually owe to the appropriate taxing authority for a taxable period. Further, the Tax Payment Agreement provides that if Holdings or EVERTEC, Inc. receives a tax refund attributable to any taxable period or portion thereof occurring on or after the Effective Date, EVERTEC, Inc. shall be required to recalculate the payment for such period required to be made by the Company to Holdings or EVERTEC, Inc. If the payment, as recalculated, is less than the amount of the payment the Company already made to Holdings or EVERTEC, Inc. in respect of such period, Holdings or EVERTEC, Inc. shall promptly make a payment to the Company in the amount of such difference.

As a result of the Conversion, EVERTEC Group’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 expense (benefit) for the three and nine months ended September 30, 2012 and 2011 consisted of the following:


	Three months ended September 30,						Nine months ended September 30,
(Dollar amounts in thousands)	2012			2011			2012			2011
Current tax provision (benefit)	$	709		$	(11,660	)	$	6,180		$	(10,269	)
Deferred tax (benefit) expense		(197	)		6,528			(93,140	)		(24,400	)

Income tax expense (benefit)	$	512		$	(5,132	)	$	(86,960	)	$	(34,669	)

For the nine months ended September 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 nine months ended September 30, 2012 and 2011 and its segregation based on location of operations:


	Three months ended September 30,						Nine months ended September 30,
(Dollar amounts in thousands)	2012			2011			2012			2011
Current tax provision (benefit)
Puerto Rico	$	15		$	(12,602	)	$	4,966		$	(12,257	)
United States		138			67			481			329
Foreign countries		556			875			733			1,659

Total current tax provision (benefit)	$	709		$	(11,660	)	$	6,180		$	(10,269	)

Deferred tax (benefit) expense
Puerto Rico	$	(8	)	$	6,657		$	(92,644	)	$	(23,946	)
United States		(34	)		—			(34	)		—
Foreign countries		(155	)		(129	)		(462	)		(454	)

Total deferred tax (benefit) expense	$	(197	)	$	6,528		$	(93,140	)	$	(24,400	)

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 Group, 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)	September 30, 2012			December 31, 2011
Deferred tax assets
Allowance for doubtful accounts	$	51		$	540
Unfavorable contract liability		—			211
Other temporary assets		51			909

Total gross deferred tax assets		102			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		7,728			90,766
Debt issue cost		—			8,513
Other temporary liabilities		187			218

Total gross deferred tax liabilities		7,915			102,412

Deferred tax liability, net	$	(7,813	)	$	(100,752	)

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


	Three months ended September 30,						Nine months ended September 30,
(Dollar amounts in thousands)	2012			2011			2012			2011
Computed income tax at statutory rates	$	1,168		$	(2,284	)	$	1,694		$	(3,450	)
Benefit of net tax-exempt interest income		(4	)		(10	)		(8	)		(17	)
Benefit of net tax-exempt dividend income		—			(620	)		—			(620	)
Non taxable loss on settlement of derivative asset		—			420			—			420
Derecognition of deferred tax liability		—			—			(89,219	)		—
Income tax (benefit) expense pass-through to parent company		(842	)		—			648			—
Tax benefit due to a change in estimate		—			(1,939	)		—			(2,530	)
Differences in tax rates due to multiple jurisdictions		29			—			280			283
Effect of income subject to tax-exemption grant		—			(761	)		(605	)		(1,241	)
Adjustment to DTL due to changes in enacted tax rate		—			—			—			(27,629	)
Reversal of tax uncertainties reserve		—			—			(640	)		—
Other		161			62			890			115

Income tax expense (benefit)	$	512		$	(5,132	)	$	(86,960	)	$	(34,669	)

Note 9 – 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 September 30, 2012 and December 31, 2011 amounted to $0.3 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 nine months ended September 30, 2012 amounted to $1.9 million and $5.8 million, respectively, compared to $1.9 million and $6.0 million for the corresponding 2011 periods. Also, rent expense for telecommunications and other equipment for the three and nine months ended September 30, 2012 amounted to $1.7 million and $5.4 million, respectively, compared to $2.0 million and $5.9 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 in which we may 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 Group, LLC Notes to Unaudited Consolidated Financial Statements

Note 10 – Related Party Transactions

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


	Three months ended September 30,				Nine months ended September 30,
(Dollar amounts in thousands)	2012		2011		2012		2011
Total revenues⁽¹⁾⁽²⁾	$	37,025	$	37,312	$	112,871	$	111,605

Selling, general and administrative expenses
Rent and other fees⁽³⁾	$	2,725	$	3,157	$	8,547	$	9,055

Interest earned from and charged by affiliate
Interest income	$	22	$	136	$	172	$	538

Interest expense⁽⁴⁾	$	1,857	$	1,892	$	5,600	$	6,481

⁽¹⁾	Total revenues from Popular represent 43%, 45%, 44% and 47% of total revenues for each of the periods presented above.

⁽²⁾	Includes revenues generated from investees accounted for under the equity method for the three and nine months ended September 30, 2012 of $0.8 million and $2.6 million, respectively, compared to $0.8 million and $1.7 million for the corresponding 2011 periods.

⁽³⁾	Includes management fees paid to equity sponsors amounting to $0.9 million and $2.9 million for the three and nine months ended September 30, 2012, respectively, compared to $0.9 million and $2.4 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 September 30, 2012 and December 31, 2011, EVERTEC had the following balances arising from transactions with related parties:


(Dollar amounts in thousands)	September 30, 2012		December 31, 2011
Cash and restricted cash deposits in affiliated bank	$	49,782	$	52,613

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

Other long-term assets	$	3,757	$	5,212

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

Other due to/from affiliate
Accounts receivable	$	16,585	$	16,375

Accounts payable	$	2,652	$	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 for the 2011 period and (b) reimbursement from Popular regarding certain software license costs. For the nine months ended September 30, 2012 and the year ended December 31, 2011, the Company received $2.1 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 September 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. 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 11 – Segment Information

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

EVERTEC Group, LLC Notes to Unaudited Consolidated Financial Statements

The merchant acquiring segment consists 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 point-of-sale (“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.

The payment processing segment revenues are comprised of revenues related to providing access to the ATH network and other card networks to financial institutions, including related services such as authorization, processing, management and recording of ATM and POS transactions, and ATM management and monitoring. Payment 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 benefit transfer (“EBT”) (which principally consist of services to the Puerto Rico government for the delivery of government benefits to participants).

For ATH network and processing services, revenues are primarily driven by the number of transactions processed. Revenues are derived primarily from network fees, transaction switching and processing fees, and the selling and leasing POS devices. For card issuer processing, revenues are primarily dependent upon the number of cardholder accounts on file, transactions and authorizations processed, the number of cards embossed and other processing services. For EBT services, revenues are primarily derived from the number of beneficiaries on file.

In September 2012, the Company renamed the transaction processing segment to payment processing segment. The change of name does not constitute a change in the segment composition.

The business solutions segment 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, IT professional services, business process outsourcing, item processing, cash processing, and fulfillment. Core bank processing and network services revenues are derived in part from a recurrent fee and from fees based on the number of accounts on file (i.e. savings or checking accounts, loans, etc) or computer resources utilized. Revenues from other processing services within the business solutions segment are generally volume-based and depend on factors such as the number of accounts processed.

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)	Merchant acquiring, net		Payment processing		Business solutions		Other			Total
Three months ended September 30, 2012
Revenues	$	16,810	$	28,463	$	43,745	$	(5,179	)⁽¹⁾	$	83,839
Income from operations		8,225		13,587		7,801		(11,357	)⁽²⁾		18,256
Three months ended September 30, 2011
Revenues		14,576		27,373		44,249		(5,174	)⁽¹⁾		81,024
Income from operations		6,517		12,631		8,991		(12,849	)⁽²⁾		15,290

⁽¹⁾	Represents the elimination of intersegment revenues for services provided by the payment 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)	Merchant acquiring, net		Payment processing		Business solutions		Other			Total
Nine months ended September 30, 2012
Revenues	$	51,499	$	85,711	$	129,214	$	(15,725	)⁽¹⁾	$	250,699
Income from operations		24,736		38,652		25,751		(34,811	)⁽²⁾		54,328
Nine months ended September 30, 2011
Revenues		44,043		77,758		128,273		(14,523	)⁽¹⁾		235,551
Income from operations		20,663		34,019		26,267		(38,212	)⁽²⁾		42,737

⁽¹⁾	Represents the elimination of intersegment revenues for services provided by the payment 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 Group, LLC Notes to Unaudited Consolidated Financial Statements

The reconciliation of income from operations to consolidated net income (loss) for the three and nine months ended September 30, 2012 and 2011 is as follows:


	Three months ended September 30,						Nine months ended September 30,
(Dollar amounts in thousands)	2012			2011			2012			2011
Segment income from operations
Merchant acquiring	$	8,225		$	6,517		$	24,736		$	20,663
Payment processing		13,587			12,631			38,652			34,019
Business solutions		7,801			8,991			25,751			26,267

Total segment income from operations		29,613			28,139			89,139			80,949
Merger related depreciation and amortization and other unallocated expenses⁽¹⁾		(11,357	)		(12,849	)		(34,811	)		(38,212	)

Income from operations	$	18,256		$	15,290		$	54,328		$	42,737

Interest expense, net		(14,746	)		(11,218	)		(38,984	)		(38,635	)
(Losses) earnings of equity method investment		(472	)		429			103			685
Other income (expenses)		855			(12,309	)		(9,802	)		(16,288	)
Income tax (expense) benefit		(512	)		5,132			86,960			34,669

Net income (loss)	$	3,381		$	(2,676	)	$	92,605		$	23,168

⁽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 12 – 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, and guaranteed by the Company’s other 100% owned subsidiaries (see Note 4). The following financial information presents the balance sheets as of September 30, 2012 and December 31, 2011, the statements of income and comprehensive income for the three and nine months ended September 30, 2012 and 2011 and the statements of cash flows for the nine months ended September 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 Group, LLC Notes to Unaudited Consolidated Financial Statements


	Consolidated Balance Sheet as of September 30, 2012
(Dollar amounts in thousands)	EVERTEC (Parent Only)		Guarantor Subsidiaries		Non-Guarantor Subsidiary		Eliminations			EVERTEC (Consolidated)
Assets
Current Assets:
Cash	$	37,732	$	7,626	$	4,133	$	—		$	49,491
Restricted cash		4,706		—		—		—			4,706
Short-term note due from affiliate		—		8,200		—		(8,200	)		—
Accounts receivable, net		46,025		5,491		15,959		—			67,475
Prepaid expenses and other assets		13,291		622		461		(110	)		14,264

Total current assets		101,754		21,939		20,553		(8,310	)		135,936
Investment in equity investee and subsidiaries at equity		139,715		—		—		(129,584	)		10,131
Property and equipment, net		26,371		797		4,935		—			32,103
Goodwill		296,980		44,330		32,162		—			373,472
Other intangible assets, net		385,713		16,346		11,447		—			413,506
Other long-term assets		21,505		—		—		—			21,505

Total assets	$	972,038	$	83,412	$	69,097	$	(137,894	)	$	986,653

Liabilities and member’s equity
Current Liabilities:
Accrued liabilities	$	42,690	$	606	$	1,055	$	—		$	44,351
Accounts payable		7,091		683		9,964		—			17,738
Unearned income		456		479		—		—			935
Income tax payable		—		1,442		740		—			2,182
Short-term note due to affiliate		8,200		—		—		(8,200	)		—
Deferred tax liability, net		—		456		414		—			870

Total current liabilities		58,437		3,666		12,173		(8,200	)		66,076
Long-term debt		736,197		—		—		—			736,197
Long-term deferred tax liability, net		—		3,846		3,130		—			6,976
Other long-term liabilities		337		—		—		—			337

Total liabilities		794,971		7,512		15,303		(8,200	)		809,586

Member’s equity
Member’s units		—		55		998		(1,053	)		—
Contributed capital		175,169		69,677		50,851		(120,528	)		175,169
Accumulated earnings		665		5,843		895		(6,738	)		665
Accumulated other comprehensive income		1,233		325		1,050		(1,375	)		1,233

Total member’s equity		177,067		75,900		53,794		(129,694	)		177,067

Total liabilities and member’s equity	$	972,038	$	83,412	$	69,097	$	(137,894	)	$	986,653

EVERTEC Group, 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 equity investee and 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
Accumulated 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 liabilities and member’s equity	$	1,010,149		$	80,018		$	66,839		$	(123,267	)	$	1,033,739

EVERTEC Group, LLC Notes to Unaudited Consolidated Financial Statements


	Consolidated Statement of Income and Comprehensive Income for the three months ended September 30, 2012
(Dollar amounts in thousands)	EVERTEC (Parent Only)			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations			EVERTEC (Consolidated)
Revenues
Merchant acquiring, net	$	16,810		$	—		$	—		$	—		$	16,810
Payment processing		16,812			2,870			3,662			(60	)		23,284
Business solutions		41,448			2,751			63			(517	)		43,745

Total revenues		75,070			5,621			3,725			(577	)		83,839

Operating costs and expenses
Cost of revenues, exclusive of depreciation and amortization shown below		35,327			3,620			2,525			(575	)		40,897
Selling, general and administrative expenses		6,274			417			664			(434	)		6,921
Depreciation and amortization		16,768			435			562			—			17,765

Total operating costs and expenses		58,369			4,472			3,751			(1,009	)		65,583

Income (loss) from operations		16,701			1,149			(26	)		432			18,256
Non-operating (expenses) income
Interest income		22			103			6			(93	)		38
Interest expense		(14,877	)		—			—			93			(14,784	)
Earnings (losses) of equity method investment		655			—			—			(1,127	)		(472	)
Other income (expenses)		985			(17	)		320			(433	)		855

Total non-operating (expenses) income		(13,215	)		86			326			(1,560	)		(14,363	)
Income before income taxes		3,486			1,235			300			(1,128	)		3,893
Income tax expense		105			289			118			—			512

Net income		3,381			946			182			(1,128	)		3,381
Other comprehensive income
Foreign currency translation adjustments		215			206			9			(215	)		215

Total comprehensive income	$	3,596		$	1,152		$	191		$	(1,343	)	$	3,596

EVERTEC Group, LLC Notes to Unaudited Consolidated Financial Statements


	Consolidated Statement of (Loss) Income and Comprehensive Loss for the three months ended September 30, 2011
(Dollar amounts in thousands)	EVERTEC (Parent Only)			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations			EVERTEC (Consolidated)
Revenues
Merchant acquiring, net	$	14,576		$	—		$	—		$	—		$	14,576
Payment processing		16,406			2,541			3,265			(13	)		22,199
Business solutions		42,729			1,490			62			(32	)		44,249

Total revenues		73,711			4,031			3,327			(45	)		81,024

Operating costs and expenses
Cost of revenues, exclusive of depreciation and amortization shown below		35,356			2,450			1,910			(43	)		39,673
Selling, general and administrative expenses		7,681			171			696			—			8,548
Depreciation and amortization		16,475			456			582			—			17,513

Total operating costs and expenses		59,512			3,077			3,188			(43	)		65,734

Income from operations		14,199			954			139			(2	)		15,290

Non-operating (expenses) income
Interest income		135			33			10			—			178
Interest expense		(11,396	)		—			—			—			(11,396	)
Earnings of equity method investment		1,262			—			—			(833	)		429
Other (expenses) income		(12,743	)		296			138			—			(12,309	)

Total non-operating (expenses) income		(22,742	)		329			148			(833	)		(23,098	)
(Loss) income before income taxes		(8,543	)		1,283			287			(835	)		(7,808	)
Income tax (benefit) expense		(5,867	)		648			87			—			(5,132	)

Net (loss) income		(2,676	)		635			200			(835	)		(2,676	)
Other comprehensive loss, net of tax of $8, $0, $0, $0 and $8
Foreign currency translation adjustments		(3,004	)		(1,974	)		(986	)		2,960			(3,004	)

Total comprehensive loss	$	(5,680	)	$	(1,339	)	$	(786	)	$	2,125		$	(5,680	)

EVERTEC Group, LLC Notes to Unaudited Consolidated Financial Statements


	Consolidated Statement of Income and Comprehensive Income for the nine months ended September 30, 2012
(Dollar amounts in thousands)	EVERTEC (Parent Only)			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations			EVERTEC (Consolidated)
Revenues
Merchant acquiring, net	$	51,499		$	—		$	—		$	—		$	51,499
Payment processing		50,678			8,538			10,849			(79	)		69,986
Business solutions		123,682			6,209			188			(865	)		129,214

Total revenues		225,859			14,747			11,037			(944	)		250,699

Operating costs and expenses
Cost of revenues, exclusive of depreciation and amortization shown below		103,076			8,987			7,380			(974	)		118,469
Selling, general and administrative expenses		22,414			1,276			1,996			(1,301	)		24,385
Depreciation and amortization		50,514			1,304			1,699			—			53,517

Total operating costs and expenses		176,004			11,567			11,075			(2,275	)		196,371

Income (loss) from operations		49,855			3,180			(38	)		1,331			54,328
Non-operating (expenses) income
Interest income		170			188			20			(148	)		230
Interest expense		(39,362	)		—			—			148			(39,214	)
Earnings of equity method investment		3,633			—			—			(3,530	)		103
Other (expenses) income		(9,046	)		(324	)		867			(1,299	)		(9,802	)

Total non-operating (expenses) income		(44,605	)		(136	)		887			(4,829	)		(48,683	)
Income before income taxes		5,250			3,044			849			(3,498	)		5,645
Income tax (benefit) expense		(87,354	)		28			311			55			(86,960	)

Net income		92,604			3,016			538			(3,553	)		92,605
Other comprehensive income, net of tax expense of $13, $0, $0, $0 and $13
Foreign currency translation adjustments		2,551			1,285			1,332			(2,617	)		2,551

Total comprehensive income	$	95,155		$	4,301		$	1,870		$	(6,170	)	$	95,156


	Consolidated Statement of Income and Comprehensive Income (Loss) for the nine months ended September 30, 2011
(Dollar amounts in thousands)	EVERTEC (Parent Only)			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations			EVERTEC (Consolidated)
Revenues
Merchant acquiring, net	$	44,043		$	—		$	—		$	—		$	44,043
Payment processing		46,346			6,975			9,935			(21	)		63,235
Business solutions		124,326			3,974			172			(199	)		128,273

Total revenues		214,715			10,949			10,107			(220	)		235,551

Operating costs and expenses
Cost of revenues, exclusive of depreciation and amortization shown below		101,151			7,117			6,744			(180	)		114,832
Selling, general and administrative expenses		24,005			519			1,481			—			26,005
Depreciation and amortization		48,913			1,338			1,726			—			51,977

Total operating costs and expenses		174,069			8,974			9,951			(180	)		192,814

Income from operations		40,646			1,975			156			(40	)		42,737

Non-operating (expenses) income
Interest income		534			66			37			—			637
Interest expense		(39,272	)		—			—			—			(39,272	)
Earnings of equity method investment		2,728			—			—			(2,043	)		685
Other (expenses) income		(17,096	)		547			261			—			(16,288	)

Total non-operating (expenses) income		(53,106	)		613			298			(2,043	)		(54,238	)
(Loss) income before income taxes		(12,460	)		2,588			454			(2,083	)		(11,501	)
Income tax (benefit) expense		(35,628	)		832			144			(17	)		(34,669	)

Net income		23,168			1,756			310			(2,066	)		23,168
Other comprehensive income (loss), net of a tax expense of $8, $0, $0, $0 and $8
Foreign currency translation adjustments		(1,590	)		(1,050	)		(496	)		1,546			(1,590	)

Total comprehensive income (loss)	$	21,578		$	706		$	(186	)	$	(520	)	$	21,578

EVERTEC Group, LLC Notes to Unaudited Consolidated Financial Statements


	Consolidated Statement of Cash Flows for the nine months ended September 30, 2012
	EVERTEC			Guarantor			Non-Guarantor					EVERTEC
(Dollar amounts in thousands)	(Parent Only)			Subsidiaries			Subsidiary			Eliminations		(Consolidated)
Cash flows from operating activities	$	64,838		$	4,927		$	(778	)	$	—	$	68,987

Cash flows from investing activities
Net decrease in restricted cash		582			—			—			—		582
Intangible assets acquired		(5,366	)		(37	)		(27	)		—		(5,430	)
Property and equipment acquired		(6,759	)		(243	)		(538	)		—		(7,540	)
Proceeds from sales of property and equipment		80			—			—			—		80

Net cash used in investing activities		(11,463	)		(280	)		(565	)		—		(12,308	)

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	)
Repayment of other liabilities		(112	)		—			—			—		(112	)
Short-term note due to (from) affiliates		8,200			(8,200	)		—			—		—

Net cash used in financing activities		(52,511	)		(8,200	)		—			—		(60,711	)

Net increase (decrease) in cash		864			(3,553	)		(1,343	)		—		(4,032	)
Cash at beginning of the period		36,868			11,179			5,476			—		53,523

Cash at end of the period	$	37,732		$	7,626		$	4,133		$	—	$	49,491


	Consolidated Statement of Cash Flows for the nine months ended September 30, 2011
(Dollar amounts in thousands)	EVERTEC (Parent Only)			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations		EVERTEC (Consolidated)
Cash flows from operating activities	$	54,118		$	4,069		$	1,636		$	—	$	59,823

Cash flows from investing activities
Net increase in restricted cash		(1,572	)		—			—			—		(1,572	)
Intangible assets acquired		(12,133	)		(31	)		(22	)		—		(12,186	)
Property and equipment acquired		(6,215	)		(139	)		(58	)		—		(6,412	)
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		(29,090	)		(170	)		(48	)		—		(29,308	)

Cash flows from financing activities
Repayment of long-term debt		(29,090	)		—			—			—		(29,090	)

Net cash used in financing activities		(29,090	)		—			—			—		(29,090	)

Net (decrease) increase in cash		(4,062	)		3,899			1,588			—		1,425
Cash at beginning of the period		45,551			5,739			3,909			—		55,199

Cash at end of the period	$	41,489		$	9,638		$	5,497		$	—	$	56,624

Note 13 – 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 other than those disclosed below.

EVERTEC Group, LLC Notes to Unaudited Consolidated Financial Statements

On October 19, 2012, EVERTEC Group was granted a tax exemption under the Tax Incentive Act No. 73 of 2008. Under this grant, EVERTEC Group will benefit from a preferential income tax rate on industrial development income, as well as from tax exemptions with respect to its municipal and property tax obligations for certain activities derived from its data processing operations in Puerto Rico. The grant has a term of 15 years effective as of January 1, 2012 with respect to income tax obligations and January 1, 2013 with respect to municipal and property tax obligations. The accounting impact of this grant will be recognized prospectively.

The grant establishes a base taxable income amount with respect to EVERTEC Group’s industrial development income, which amount will continue to be subject to the ordinary income tax rate under existing law. Applicable taxable income in excess of the established base taxable income amount will be subject to a preferential rate of 4%. The base taxable income amount will be ratably reduced over a four year period until such amount equals zero at which point all of EVERTEC Group’s applicable industrial development income will be taxed at the preferential rate of 4% for the remaining period of the grant. The grant also establishes a 90% exemption on certain real and property taxes and a 60% exemption on municipal taxes, in each case imposed on EVERTEC Group. In addition, distributions to stockholders by EVERTEC, Inc. of the industrial development income will not be subject to Puerto Rico tollgate taxes.

The grant contains customary commitments, conditions and representations that EVERTEC Group will be required to comply with in order to maintain the grant. The more significant commitments include: (i) maintaining at least 750 employees in EVERTEC Group’s Puerto Rico data processing operations during 2012 and at least 700 employees for the remaining years of the grant; and (ii) investing at least $200.0 million in building, machinery, equipment or computer programs to be used in Puerto Rico during the effective term of the grant (to be made in $50.0 million increments over four year capital investment cycles). Failure to meet the requirements could result, among other things, in reductions in the benefits of the grant or revocation of the grant in its entirety, which could result in EVERTEC, Inc. paying additional taxes or other payments relative to what such parties would be required to pay if the full benefits of the grant are available. In addition, the protection from Puerto Rican tollgate taxes on distributions to stockholders may be lost.

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 nine months ended September 30, 2012 and 2011, respectively; and (ii) the financial condition as of September 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

EVERTEC Group, LLC (“EVERTEC Group”) (formerly known as EVERTEC, LLC) and its subsidiaries (collectively the “Company,” “EVERTEC,” “we,” “us,” or “our”) is the leading, full-service transaction processing business in Latin America and the Caribbean. We are based in Puerto Rico and provide broad range of merchant acquiring, payment processing and business process management services across 19 countries in the region. We process over 1.2 billion transactions annually, and manage the electronic payment network for over 4,900 automated teller machines (“ATM”) and over 107,000 point-of-sale (“POS”) payment terminals. According to the Nilson Report, we are the largest merchant acquirer in the Caribbean and Central America and the sixth largest in Latin America. We own and operate the ATH network, one of the leading ATM and personal identification number debit networks and financial services brands in Latin America. In addition, we provide a comprehensive suite of software and services for core bank processing, cash processing and technology outsourcing in the regions we serve. We serve a broad and diversified customer base of leading financial institutions, merchants, corporations and government agencies with mission critical technology solutions and we believe that our business is well positioned to continue to expand across the fast growing Latin American region.

We are differentiated, in part, by our diversified business model, which enables us to provide our varied customer base with a broad range of transaction processing services from a single source across numerous channels and geographic markets. We believe this single source capability provides several competitive advantages which will enable us to continue to penetrate our existing customer base with new, complementary services, win new customers, develop new sales channels and enter new markets. We believe these competitive advantages include:

•

Our ability to package and provide a range of services across our customers’ business that often need to be sourced from different vendors

•

Our ability to serve customers with disparate operations in several geographies with a single integrated technology solution that enables them to manage their business as one enterprise

•

Our ability to capture and analyze data across the transaction processing value chain to provide value-added services that are differentiated from those offered by pure-play vendors

Our broad suite of services span the entire transaction processing value chain and include a range of front-end customer facing solutions as well as back-end support services. These include: (i) merchant acquiring services, which enable POS and e-commerce merchants to accept and process card-based payments; (ii) payment processing services, which enable financial institutions and other issuers to manage, support and facilitate the processing for credit, debit, prepaid, ATM and electronic benefits transfer (“EBT”) card programs; and (iii) business process management solutions, which provide mission critical technology, core bank processing, information technology (“IT”) outsourcing and cash management solutions to financial institutions, enterprises and governments. We provide these services through a highly scalable, proprietary technology platform that we manage and operate in-house. Our platform provides us with the broad range of capabilities, flexibility and operating leverage that enable us to innovate and develop new services, differentiate ourselves in the marketplace and generate significant operating efficiencies to continue to maximize profitability.

We sell and distribute our services primarily through a proprietary direct sales force with strong customer relationships. We are also increasingly building a variety of indirect sales channels which enable us to leverage the distribution capabilities of partners in adjacent markets, including value-added resellers, joint ventures and merchant acquiring alliances. Given our breadth across the transaction processing value chain, our customer base is highly diversified by size, type and geographic footprint.

We benefit from an attractive business model, which is characterized by recurring revenue, significant operating margins and low capital expenditure requirements. Our revenue is recurring in nature because of the mission-critical and embedded nature of the services we provide, the high switching costs associated with these services and the multi-year contracts we negotiate with our customers. Our scalable business model creates significant operating efficiencies. In addition, our business model enables us to continue to grow our business organically without significant additional capital expenditures.

On April 17, 2012, EVERTEC Group 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 the Company by taking advantage of recent changes to the Puerto Rico Internal Revenue Code, as amended, that permit limited liability companies to be treated as partnerships that are pass-through entities for Puerto Rico tax purposes.

In September 2012, EVERTEC, LLC amended its Certificate of Formation to change its name to EVERTEC Group, LLC. See Note 1 of the Notes to Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information regarding this transaction.

Separation from and Key Relationship with Popular

Prior to the merger transaction (“Merger”) on September 30, 2010, EVERTEC, LLC was 100% owned by Popular, the largest financial institution based in Puerto Rico, and operated substantially as an independent entity within Popular. After the consummation of the Merger, Popular retained an approximately 49% indirect ownership interest in EVERTEC Group and is our largest customer. In connection with, and upon consummation of, the Merger, EVERTEC Group entered into a 15-year Master Services Agreement, as well as several other related agreements, with Popular. Under the terms of the Master Services Agreement, Popular agreed to continue to utilize our services on an ongoing exclusive basis, for the duration of the agreement, on commercial terms consistent with the terms of our historical relationship. Additionally, Popular granted us a right of first refusal on the development of certain new financial technology products and services for the duration of the Master Services Agreement. See Note 22 of the Notes to Audited Consolidated (Successor) and Combined (Predecessor) Financial Statements of the Annual Report on Form 10-K for additional information.

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.

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.

Payment processing. Payment processing revenues are comprised of revenues related to providing access to the ATH network and other card networks to financial institutions, including related services such as authorization, processing, management and recording of ATM and POS transactions, and ATM management and monitoring. Payment 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 EBT (which principally consist of services to the Puerto Rico government for the delivery of government benefits to participants).

For ATH network and processing services, revenues are primarily driven by the number of transactions processed. Revenues are derived primarily from network fees, transaction switching and processing fees, and the selling and leasing of POS devices. For card issuer processing, revenues are primarily dependent upon the number of cardholder accounts on file, transactions and authorizations processed, the number of cards embossed and other processing services. For EBT services, revenues are primarily derived from the number of beneficiaries on file.

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, IT professional services, business process outsourcing, item processing, cash processing, and fulfillment. Core bank processing and network services revenues are derived in part from a recurrent fee and from fees based on the number of accounts on file (i.e. savings or checking accounts, loans, etc) or computer resources utilized. Revenues from other processing services within the business solutions segment are generally volume-based and depend on factors such as the number of accounts processed.

Cost of revenues. This caption 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. This caption 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 September 30, 2012 to September 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 September 30, 2012 and 2011.

Revenues


	Three months ended September 30,
(Dollar amounts in thousands)	2012		2011		Variance
Merchant acquiring, net	$	16,810	$	14,576	$	2,234		15	%
Payment processing		23,284		22,199		1,085		5	%
Business solutions		43,745		44,249		(504	)	-1	%

Total revenues	$	83,839	$	81,024	$	2,815		3	%

Revenue growth in the Merchant Acquiring segment was principally related to higher realized net margin, while Payment Processing segment revenues were primarily driven by an increase in volume and accounts on file. Decrease in revenues in the Business Solutions segment was primarily attributable to lower demand for certain IT consulting services.

Operating costs and expenses


	Three months ended September 30,
(Dollar amounts in thousands)	2012		2011		Variance
Cost of revenues, exclusive of depreciation and amortization shown below	$	40,897	$	39,673	$	1,224		3	%
Selling, general and administrative expenses		6,921		8,548		(1,627	)	-19	%
Depreciation and amortization		17,765		17,513		252		1	%

Total operating costs and expenses	$	65,583	$	65,734	$	(151	)	0	%

Cost of revenues increased by $1.2 million, or 3%, when compared to the same period in 2011. The results for 2012 were driven by higher costs of sales associated with the increase in revenues from sales of products and by professional services to support business growth, partially offset by a decrease in equipment expenses as a result of lower amortization of software maintenance expense. Gross margin percentage for the three months ended September 30, 2012 improved by approximately 18 basis points to 51.2% from 51.0% 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 September 30, 2012 decreased by $1.6 million, or 19%, when compared to the same period in 2011 primarily as a result of the Company’s continuous cost control efforts. Depreciation and amortization expense for the three months ended September 30, 2012 increased by $0.3 million, or 1%, mostly related to 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 September 30,
(Dollar amounts in thousands)	2012			2011			Variance
Segment income from operations
Merchant acquiring, net	$	8,225		$	6,517		$	1,708		26	%
Payment processing		13,587			12,631			956		8	%
Business solutions		7,801			8,991			(1,190	)	-13	%

Total segment income from operations		29,613			28,139			1,474		5	%
Merger related depreciation and amortization and other unallocated expenses⁽¹⁾		(11,357	)		(12,849	)		1,492		-12	%

Income from operations	$	18,256		$	15,290		$	2,966		19	%

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

See Note 11 of the Notes to Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information on the Company’s reportable segments and for a reconciliation of the income from operations of the segments to the unaudited consolidated net income.

Non-operating (expenses) income


	Three months ended September 30,
(Dollar amounts in thousands)	2012			2011			Variance
Non-operating (expenses) income
Interest income	$	38		$	178		$	(140	)	-78	%
Interest expense		(14,784	)		(11,396	)		(3,388	)	30	%
(Losses) earnings of equity method investment		(472	)		429			(901	)	-210	%
Other income (expense)		855			(12,309	)		13,164		-107	%

Total non-operating (expenses) income	$	(14,363	)	$	(23,098	)	$	8,735		-38	%

Non-operating expenses for the three months ended September 30, 2012 decreased by $8.7 million, or 38%, when compared to the 2011 period primarily as a result of a $13.2 million reduction in other expenses, partially offset by an increase of $3.4 million in interest expense. The variance in other income (expense) was primarily driven by a $14.2 million non-recurring expense related to the voluntary retirement program (“VRP”) in 2011. The higher interest expense was the result of the issuance of additional debt in May 2012.

Income tax expense (benefit)

Income tax expense for the three months ended September 30, 2012 amounted to $0.5 million compared to an income tax benefit of $5.1 million for the corresponding 2011 period. The income tax expense for the three months ended September 30, 2012 was related to income before taxes generated by our international operations. The income tax benefit for the 2011 period was the result of a loss before income taxes primarily associated with the VRP expense. See Note 8 of the Notes to Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information regarding this transaction.

Net Income (Loss)

Net income for the three months ended September 30, 2012 was $3.4 million, compared to a net loss of $2.7 million for the corresponding 2011 period. The net income results for the three months ended September 30, 2012 were driven by income from operations of $18.3 million, partially offset by total non-operating expenses amounting to $14.4 million. Net loss for the 2011 period was primarily driven by higher non-operating expenses as a result of the VRP expense of $14.2 million.

Comparison of the nine months ended September 30, 2012 to September 30, 2011

Revenues


	Nine months ended September 30,
(Dollar amounts in thousands)	2012		2011		Variance
Merchant acquiring, net	$	51,499	$	44,043	$	7,456	17	%
Payment processing		69,986		63,235		6,751	11	%
Business solutions		129,214		128,273		941	1	%

Total revenues	$	250,699	$	235,551	$	15,148	6	%

Revenue increases in our Merchant Acquiring and Payment Processing segments for the nine months ended September 30, 2012 were primarily driven by the aforementioned factors impacting their performance during the three months ended September 30, 2012. The results in the Business Solutions segment were driven by higher demand for certain network services, partially offset by lower demand for certain IT consulting services.

Operating costs and expenses


	Nine months ended September 30,
(Dollar amounts in thousands)	2012		2011		Variance
Cost of revenues, exclusive of depreciation and amortization shown below	$	118,469	$	114,832	$	3,637		3	%
Selling, general and administrative expenses		24,385		26,005		(1,620	)	-6	%
Depreciation and amortization		53,517		51,977		1,540		3	%

Total operating costs and expenses	$	196,371	$	192,814	$	3,557		2	%

Cost of revenues increased by $3.6 million, or 3%, when compared to the same period in 2011. The results for 2012 were driven by higher professional fees, equipment and costs of sales, partially offset by a decrease in personnel expenses from cost control initiatives implemented in late 2011. Gross margin percentage for the nine months ended September 30, 2012 improved to 52.7% from 51.3% for the corresponding 2011 period. The improvement in our gross margin was mainly driven by our ability to support incremental business volume with lower incremental costs due to our highly scalable technology platform and cost control initiatives.

Selling, general and administrative expenses for the nine months ended September 30, 2012 decreased by $1.6 million, or 6%, when compared to the corresponding 2011 period as a result of the Company’s continuous cost control initiatives.

Depreciation and amortization expense for the nine months ended September 30, 2012 increased by $1.5 million, or 3%, as a result of higher electronic equipment and amortization of software packages associated with certain new projects.

Income from operations

The following table presents income from operations by reportable segments.


	Nine months ended September 30,
(Dollar amounts in thousands)	2012			2011			Variance
Segment income from operations
Merchant acquiring, net	$	24,736		$	20,663		$	4,073		20	%
Payment processing		38,652			34,019			4,633		14	%
Business solutions		25,751			26,267			(516	)	-2	%

Total segment income from operations		89,139			80,949			8,190		10	%
Merger related depreciation and amortization and other unallocated expenses⁽¹⁾		(34,811	)		(38,212	)		3,401		-9	%

Income from operations	$	54,328		$	42,737		$	11,591		27	%

⁽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 our Merchant Acquiring and Payment Processing 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 higher realized net margin in our Merchant Acquiring business, and an increase in volume and accounts on file within our Payment Processing business. The results in our Business Solutions segment were driven by lower demand for certain IT consulting services and higher realized sales of products.

Non-operating (expenses) income


	Nine months ended September 30,
(Dollar amounts in thousands)	2012			2011			Variance
Non-operating (expenses) income
Interest income	$	230		$	637		$	(407	)	-64	%
Interest expense		(39,214	)		(39,272	)		58		0	%
Earnings of equity method investment		103			685			(582	)	-85	%
Other expense		(9,802	)		(16,288	)		6,486		-40	%

Total non-operating (expenses) income	$	(48,683	)	$	(54,238	)	$	5,555		-10	%

The decrease in non-operating expenses was primarily driven by lower other expenses of $6.5 million. Other expenses for the nine months ended September 30, 2012 were primarily comprised of debt issuance costs of $8.8 million and personnel related charges of $2.2 million, partially offset by an unrealized gain of $0.3 million related to the fair value adjustment of certain assets and $0.5 million of a foreign currency translation gain. For the corresponding 2011 period, other expenses were primarily comprised of a non-recurring cost of the $14.2 million VRP expense, debt issuance costs of $2.2 million and $1.2 million from the settlement of a derivative related to our acquisition of an equity interest in CONTADO from Popular, partially offset by an unrealized gain of $0.9 million related to the fair value adjustment of certain assets.

Income tax benefit

Income tax benefit for the nine months ended September 30, 2012 amounted to $87.0 million compared to $34.7 million for the corresponding 2011 period. The income tax benefit for 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.

The income tax benefit for the corresponding 2011 period was mainly due to a reduction in deferred tax liability of $27.6 million as a result of a reduction in the Puerto Rico marginal corporate income-tax rate from 39% to 30%, and a taxable loss for the nine months ended September 30, 2011. See Note 8 of the Notes to Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information regarding income taxes.

Net Income

Net income for the nine months ended September 30, 2012 was $92.6 million, compared to net income of $23.2 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, while the net income for the prior period was driven by the income tax benefit of $34.7 million as explained above. Income before income taxes for the nine months ended September 30, 2012 was $5.6 million compared to a loss before income taxes of $11.5 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 senior secured revolving credit facility of $50.0 million of which $49.3 million was available as of September 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 and 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. Also, we may make distributions 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 Group’s direct parent, Holdings. For additional information, see Note 4 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.


	Nine months ended September 30,
(Dollar amounts in thousands)	2012			2011
Cash provided by operating activities	$	68,987		$	59,823
Cash used in investing activities		(12,308	)		(29,308	)
Cash used in financing activities		(60,711	)		(29,090	)

(Decrease) increase in cash	$	(4,032	)	$	1,425

Cash provided by operating activities for the nine months ended September 30, 2012 increased by $9.2 million when compared to the corresponding 2011 period. Higher cash provided by operating activities in 2012 resulted from an increase in income from operations of $11.6 million and $2.0 million from a premium received related to the issuance of additional debt. The results were impacted by higher other expenses of $6.5 million, partially offset by a prepayment penalty of $3.4 million related to the Company’s debt refinancing.

Cash used in investing activities for the nine months ended September 30, 2012 decreased by $17.0 million when compared to the corresponding 2011 period. The decrease was due to the acquisition of an equity interest in CONTADO for $9.2 million and higher acquisition of intangibles of $6.8 million in 2011 when compared to the corresponding 2012 period.

Cash used in financing activities for the nine months ended September 30, 2012 consisted of $208.7 million in proceeds from the issuance of additional debt, offset by a $267.2 million distribution made to our parent company and $2.2 million in debt issuance costs associated with the additional debt. Cash used in financing activities for the nine months ended September 30, 2011 consisted of a repayment of $29.1 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 $4.1 million and $13.0 million for the three and nine months ended September 30, 2012 compared to $4.9 million and $18.6 million for the three and nine months ended September 30, 2011, respectively. Capital expenditures are expected to be funded by cash flows from operations and, if necessary, borrowings under our senior secured 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, the agreement governing our senior secured credit facilities 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 September 30, 2012, the senior secured leverage ratio was 2.82. 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, as defined in the agreement governing our senior secured credit facilities, 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 September 30, 2012, the outstanding balance under the senior secured credit facilities amounted to $483.8 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 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 agreement governing our senior secured credit facilities 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 4 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 September 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 4 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 September 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 these agreements are subject to significant exceptions. As of September 30, 2012, we were in compliance with the applicable restrictive covenants under our debt agreements.

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

Net Income Reconciliation to EBITDA and Adjusted EBITDA

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

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

•

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

•

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

•

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

•

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

•

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

•

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

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

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


(Dollar amounts in thousands)	Three months ended September 30, 2012			Nine months ended September 30, 2012			Twelve months ended September 30, 2012
Net income	$	3,381		$	92,605		$	97,441
Income tax expense (benefit)		512			(86,960	)		(85,345	)
Interest expense, net		14,746			38,984			50,546
Depreciation and amortization		17,765			53,517			71,431

EBITDA		36,404			98,146			134,073
Software maintenance reimbursement and other costs⁽¹⁾		615			1,922			2,642
Equity income⁽²⁾		472			625			1,207
Compensation and benefits⁽³⁾		380			3,480			4,088
Transaction and other non-recurring fees⁽⁴⁾		337			12,071			12,786
Management fees⁽⁵⁾		746			2,237			2,873
Purchase accounting⁽⁶⁾		(550	)		(652	)		368

Adjusted EBITDA	$	38,404		$	117,829		$	158,037

⁽¹⁾	Primarily represents reimbursements received for certain software maintenance expenses as part of the Merger.

⁽²⁾	Represents CONTADO’s non-cash equity income net of cash dividends received.

⁽³⁾

For the nine months ended September 30, 2012, mainly represents a one-time payment of $2.2 million as a result of the former CEO’s employment modification agreement. For the last twelve months period, also includes a one-time cost related to the VRP. All periods include other adjustments related to non-cash equity based compensation.

⁽⁴⁾

Primarily relates to non-recurring fees associated with the issuance of additional debt during the second quarter of 2012 and the distribution made to our direct parent company. Also, includes adjustments to support additional requirements of a stand-alone entity and to certain other adjustments permitted under the senior secured credit facility and indenture agreements.

⁽⁵⁾	Represents the management fee payable to the equity sponsors.

⁽⁶⁾	Primarily represents the elimination of the effects of purchase accounting in connection with certain customer s

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EVERTEC Group, LLC 10-Q