Note 1—Restatement of previously issued consolidated financial statements

This Note 1 to the consolidated financial statements discloses the nature of the restatement matters and adjustments and shows the impact of the restatement for the years ended December 31, 2014 and 2013 as well as the restated unaudited condensed consolidated financial information for the interim periods in 2015 and 2014 (see Note 23), which is referred to as the Restatement.

The Restatement corrects material errors involved with the accounting for tax positions taken in the 2010 tax year. The Restatement corrects an error in the recognition of a deferred tax asset originating from 2010 tax deductions and the corresponding net operating loss for transaction costs that were based on an uncertain tax position and corrects an error related to the accounting for 2010 debt issuance cost tax deductions based on an uncertain tax position that affected book tax temporary differences and differences in the applicable tax rates over the affected period. These differences impacted deferred tax liability calculations over the affected period. The Restatement also establishes a liability for potential tax liabilities including penalties and interest related to these uncertain tax positions. In the third quarter of 2015, the liability for exposure to potential tax, interest and penalties with respect to the referenced 2010 debt issuance cost deductions was reversed in full as the related statute of limitations expired in such period. This tax liability reversal triggered recognition of a tax benefit of $11.8 million in the third quarter of 2015.

The Restatement presents the effect of an adjustment to opening retained earnings as of January 1, 2013, which adjustment reflects the impact of the Restatement on periods prior to 2013. The cumulative effect of those adjustments decreased previously reported accumulated earnings by $20.9 million as of December 31, 2012.

The Restatement also corrects other miscellaneous insignificant accounting errors. These errors, individually and in the aggregate, would not have required a restatement.

Restatement Background—Restatement adjustments needed to correct errors in accounting for 2010 uncertain tax positions

During the preparation of the consolidated financial statements for the year ended December 31, 2015, Management became aware of a potential misapplication of Accounting Standards Codification Topic 740—Income Taxes (“ASC 740”) in relation to the accounting for the tax benefit of certain 2010 transaction costs associated with the acquisition in September 2010 by Apollo of a 51% indirect ownership interest in EVERTEC as part of a merger (the “Merger”). Certain transaction costs were deducted for tax purposes, increasing the Company’s net operating loss and a corresponding deferred tax asset (“DTA”) by $14.3 million at December 31, 2010. In accordance with ASC 740 if a tax deduction is not more likely than not of being sustained upon examination by the tax authority, based on its technical merits, a liability must be recognized to reflect the potential obligation to the taxing authority, including penalties and interest. Upon review, Management determined that its original conclusion that the tax benefit of the 2010 transaction cost tax deductions was not an uncertain tax position was incorrect. This erroneous conclusion created a material error requiring a restatement of prior periods.

As part of its restatement preparation and diligence, Management reviewed the accounting for tax positions taken with respect to the amount and timing of tax deductions for 2010 debt issuance costs. Those costs were deducted entirely in 2010. Upon review, Management concluded that the immediate deduction of these costs represented an uncertain tax position. As the deduction was not accounted for as an uncertain tax position, Management concluded there was an error that required correction. In order to correct this error, Management determined the portion of the debt issuance costs that were more likely than not of being allowed as a deduction in 2010 and calculated the resulting liability for unrecognized tax benefits as of December 31, 2010 and subsequent periods. A liability was established for potential tax liabilities including penalties and interest related to the uncertain tax position over the period of exposure. In the third quarter of 2015, the liability for exposure to potential tax, interest and penalties with respect to the 2010 debt issuance cost deduction was reversed in full as the related statute of limitations expired in such period. This tax liability reversal triggered recognition of a tax benefit of $11.8 million in the third quarter of 2015.

The Restatement reflects the accounting for the referenced 2010 tax deductions as uncertain tax positions following ASC 740 and its impact on the affected years through 2014.

Other insignificant corrective adjustments

In addition to the above restatement adjustments, Management elected to correct previously uncorrected misstatements included within Management’s Staff Accounting Bulletin No. 99 (“SAB 99”) analysis wherein individual insignificant adjustments are tracked, aggregated and measured for purposes of determining whether in the aggregate such errors are material for the years ended December 31, 2014 and 2013 and for adjustments that affect the beginning balance as of January 1, 2013.

A brief summary of the restatement adjustments and the referenced SAB 99 corrective adjustments and other insignificant miscellaneous adjustments is described below and reflected and quantified, as applicable, in the tables below. The adjustments are cross-referenced to the tables below.

Restatement Adjustments (a)

Accounting for uncertain tax positions related to 2010 tax deductions – The Company corrected an error to reflect an uncertain tax position with respect to a 2010 tax deduction for certain transaction costs that increased the net operating loss and related DTA. The tax position created a $14.3 million increase to the deferred tax asset as of December 31, 2010. The deferred tax asset was based on a tax position that did not meet the required recognition threshold under ASC 740 of more likely than not of being sustained upon examination. Thus, the Company has derecognized the deferred tax asset in accordance with ASC 740 and, in addition, established a reserve for the exposure to potential penalties and interest. The Company corrected an error pertaining to the accounting for a 2010 tax deduction for debt issuance costs, the timing of which constituted an uncertain tax position. To correct the error over the restatement period, the Company established a reserve for potential penalties and interest due to the premature deduction of the costs. This reserve was reversed in the third quarter of 2015 as the statute of limitations lapsed in such period. In addition the Company calculated the tax impact of the other corrective adjustments related to revenue and expenses detailed below.

Other insignificant corrective adjustments

1.	Revenue recognition—The Company corrected errors related to revenue recognition of certain multiple element arrangements, by deferring certain revenues and recognizing such revenues over the expected customer life in accordance with ASC 605-25, Revenue Recognition-Multiple Element Arrangements.

2.	Interest expense and accrued interest payable—The Company corrected its interest accrual to properly recognize a daily methodology.

3.	Cost of revenues and intangible assets—The Company corrected certain errors related to the timing of capitalization of internally developed software.

4.	Cost of revenues and deferred costs—The Company corrected the timing of expense recognition pertaining to certain completed projects for which costs had been previously deferred and not timely recognized on the income statement at completion.

5.	Card Network Interchange fees—The Company corrected errors related to the timing and amounts recovered from clients for the settlement of card network fees related to payment processing.

6.	Tax expense adjustment—The Company corrected an error related to the deferred tax expense measurement analysis for a subsidiary.

Classification corrections:

7.	Cash, Accounts Receivable and Accounts Payable—The Company corrected classification errors to properly account for settlement related activities related to its automatic teller machine and ATH operations.

8.	Restricted cash—The Company corrected classification errors for identified cash amounts with restrictions in excess of 12 months that had been improperly classified as a current asset.

9.	Prepaid assets, Accounts Receivable and Accounts Payable—The Company corrected classification errors involving prepaid expense and accounts payable where amounts had been incorrectly reported on a net basis.

10.	Investing activities Cash Flow Statement—The Company corrected classification errors for non-cash capital expenditures for the purchase of software.

11.	Payment Processing and Business Solutions—The Company corrected classification errors for contracts classified as income from our Payment Processing business to Business Solutions.

12.	Unearned Income—The Company corrected classification errors for identified unearned income amounts related to revenue that will be earned more than 12 months that had been improperly classified as a current liability and reclassified such amounts to long-term.

13.	Prepaid expenses, Property and Equipment and Intangible assets—The Company corrected classification errors involving maintenance contracts incorrectly recorded as intangible assets and property and equipment.

14.	Accounts receivable and accounts payable—The Company corrected amounts related to settlement assets from LATAM operations incorrectly recorded as accounts receivable and accounts payable on the balance sheet.

Intra-period corrections with no effect on year-end balances (Unaudited):

15.	Compensation expense—The Company corrected an error related to the timing of recognition of certain termination agreements with former employees.

16.	Selling, general and administrative expenses and Cost of revenues—The Company corrected the timing of recognition of certain adjustments to loss exposure for medical insurance.

The table below summarizes the effects of the cumulative Restatement adjustments recorded to all periods prior to January 1, 2013 on previously reported accumulated earnings balance:


	December 31, 2012
	As previously reported		Restatement Adjustment			Other insignificant corrective adjustments			As Restated		Reference
	(in thousands)
Accumulated earnings	$	70,414	$	(17,503	)	$	(3,359	)	$	49,552		a, 1, 2, 5

The tables below summarize the impact of the restatement adjustments and correcting classification adjustments on the Consolidated Statements of Income (Loss) for the years ended December 31, 2014 and 2013:


	Year ended December 31, 2014
(in thousands)	As previously reported			Restatement Adjustment			Other insignificant corrective adjustments			As Restated			Reference
Revenues
Merchant Acquiring, net	$	79,136		$	—		$	—		$	79,136
Payment Processing		105,423			—			(710	)		104,713		11
Business Solutions		176,570			—			1,369			177,939		1, 11

Total revenues		361,129			—			659			361,788

Operating costs and expenses
Cost of revenues, exclusive of depreciation and amortization shown below		156,517			—			1,020			157,537		3, 4, 5
Selling, general and administrative expenses		41,276			—			—			41,276
Depreciation and amortization		65,988			—			—			65,988

Total operating costs and expenses		263,781			—			1,020			264,801

Income from operations		97,348			—			(361	)		96,987

Non-operating income (expenses)
Interest income		328			—			—			328
Interest expense		(26,081	)		—			309			(25,772	)	2
Earnings of equity method investment		1,140			—			—			1,140
Other income		2,375			—			—			2,375

Total non-operating expenses		(22,238	)		—			309			(21,929	)

Income before income taxes		75,110			—			(52	)		75,058
Income tax expense		7,578			2,135			(812	)		8,901		a, 6

Net income		67,532			(2,135	)		760			66,157
Other comprehensive loss, net of tax
Foreign currency translation adjustments		(6,948	)		—			—			(6,948	)

Total comprehensive income	$	60,584		$	(2,135	)	$	760		$	59,209

Net income per common share—basic	$	0.86		$	(0.02	)	$	—		$	0.84

Net income per common share—diluted	$	0.86		$	(0.02	)	$	—		$	0.84


	Year ended December 31, 2013
(in thousands)	As previously reported			Restatement Adjustment			Other insignificant corrective adjustments			As Restated			Reference
Revenues
Merchant Acquiring, net	$	73,616		$	—		$	—		$	73,616
Payment Processing		100,104			—			—			100,104
Business Solutions		184,297			—			385			184,682		1

Total revenues		358,017			—			385			358,402

Operating costs and expenses
Cost of revenues, exclusive of depreciation and amortization shown below		163,080			—			(100	)		162,980		4, 5
Selling, general and administrative expenses		38,810			—			—			38,810
Depreciation and amortization		70,366			—			—			70,366

Total operating costs and expenses		272,256			—			(100	)		272,156

Income from operations		85,761			—			485			86,246

Non-operating income (expenses)
Interest income		236			—			—			236
Interest expense		(37,861	)		—			444			(37,417	)	2
Earnings of equity method investment		935			—			—			935
Other expenses		(75,682	)		—			—			(75,682	)

Total non-operating expenses		(112,372	)		—			444			(111,928	)

Loss before income taxes		(26,611	)		—			929			(25,682	)
Income tax (benefit) expense		(1,990	)		3,425			—			1,435		a

Net loss		(24,621	)		(3,425	)		929			(27,117	)
Other comprehensive income, net of tax
Foreign currency translation adjustments		1,268			—			—			1,268

Total comprehensive loss	$	(23,353	)	$	(3,425	)	$	929		$	(25,849	)

Net loss per common share—basic	$	(0.31	)	$	(0.03	)	$	—		$	(0.34	)

Net loss per common share—diluted	$	(0.31	)	$	(0.03	)	$	—		$	(0.34	)

The following tables summarize the impact of the restatement adjustments and correcting classifications adjustments on the Consolidated Balance Sheet for the year ended December 31, 2014:


	December 31, 2014
	As previously reported			Restatement Adjustment			Other insignificant corrective adjustments			As Restated			Reference
	(in thousands)
Assets
Current Assets:
Cash	$	32,114		$	—		$	—		$	32,114
Restricted cash		5,718			—			(500	)		5,218		8
Accounts receivable, net		75,810			—			(5,126	)		70,684		14
Deferred tax asset		399			755			(101	)		1,053		a, 6
Prepaid expenses and other assets		20,565			259			(746	)		20,078		a, 4

Total current assets		134,606			1,014			(6,473	)		129,147
Investment in equity investee		11,756			—			—			11,756
Property and equipment, net		29,535			—			—			29,535
Goodwill		368,837			—			—			368,837
Other intangible assets, net		334,584			—			44			334,628		3
Other long-term assets		10,917			—			501			11,418		8

Total assets	$	890,235		$	1,014		$	(5,928	)	$	885,321

Liabilities and stockholders’ equity
Current Liabilities:
Accrued liabilities	$	26,052		$	—		$	—		$	26,052
Accounts payable		22,879			—			(5,126	)		17,753		14
Unearned income		9,825			—			(6,529	)		3,296		1, 12
Income tax payable		1,956			—			—			1,956
Current portion of long-term debt		19,000			—			—			19,000
Short-term borrowings		23,000			—			—			23,000
Deferred tax liability		1,799			(886	)		(913	)		—		a, 6

Total current liabilities		104,511			(886	)		(12,568	)		91,057
Long-term debt		647,579			—			—			647,579
Long-term deferred tax liability, net		15,674			7,398			—			23,072		a
Unearned income—long-term		—			—			8,312			8,312		12
Other long-term liabilities		2,898			17,563			—			20,461		a

Total liabilities		770,662			24,075			(4,256	)		790,481

Commitments and contingencies
Stockholders’ equity
Preferred stock		—			—			—			—
Common Stock		779			—			—			779
Additional paid-in capital		59,740			—			—			59,740
Accumulated earnings		65,576			(23,061	)		(1,672	)		40,843
Accumulated other comprehensive loss, net of tax		(6,522	)		—			—			(6,522	)

Total stockholders’ equity		119,573			(23,061	)		(1,672	)		94,840

Total liabilities and stockholders’ equity	$	890,235		$	1,014		$	(5,928	)	$	885,321

The table below summarizes the effects of the Restatement adjustments and correcting classification adjustments on the Consolidated Statement of Cash Flows for the years ended December 31, 2014 and 2013:


	Year ended December 31, 2014
	As previously reported			Restatement Adjustment			Other insignificant corrective adjustments			As Restated			Reference
Cash flows from operating activities
Net income	$	67,532		$	(2,135	)	$	760		$	66,157
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		65,988			—			—			65,988
Amortization of debt issue costs and accretion of discount		3,094			—			—			3,094
Provision for doubtful accounts and sundry losses		1,360			—			—			1,360
Deferred tax benefit		(1,713	)		(1,176	)		(812	)		(3,701	)	a, 6
Share-based compensation		4,587			—			—			4,587
Unrealized loss of indemnification assets		446			—			—			446
Loss on disposition of property and equipment and other intangibles		734			—			—			734
Earnings of equity method investment		(1,140	)		—			—			(1,140	)
Dividend received from equity method investment		326			—			—			326
(Increase) decrease in assets:
Accounts receivable, net		(6,608	)		—			1,021			(5,587	)	7, 9, 14
Prepaid expenses and other assets		(1,067	)		83			603			(381	)	a, 9
Other long-term assets		3,365			—			—			3,365
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities		(2,883	)		3,228			(1,042	)		(697	)	a, 2, 7, 9, 10, 14
Income tax payable		1,697			—			—			1,697
Unearned income		4,230			—			(659	)		3,571		1

Total adjustments		72,416			2,135			(889	)		73,662

Net cash provided by operating activities		139,948			—			(129	)		139,819

Cash flows from investing activities
Net increase in restricted cash		(285	)		—			—			(285	)
Additions to software		(15,046	)		—			339			(14,707	)	3, 10
Property and equipment acquired		(10,898	)		—			—			(10,898	)
Proceeds from sales of property and equipment		59			—			—			59

Net cash used in investing activities		(26,170	)		—			339			(25,831	)


Cash flows from financing activities
Net decrease in short-term borrowings		(27,000	)		—			—			(27,000	)
Repayments of borrowing for purchase of equipment		(1,200	)		—			—			(1,200	)
Dividends paid		(31,359	)		—			—			(31,359	)
Statutory minimum withholding taxes paid on share-based compensation		(2,001	)		—			—			(2,001	)
Tax windfall benefits on share-based compensation		3,669			—			—			3,669
Issuance of common stock		543			—			—			543
Repurchase of common stock		(26,197	)		—			—			(26,197	)
Settlement of stock options		(1,604	)		—			—			(1,604	)
Repayment and repurchase of long-term debt		(19,000	)		—			—			(19,000	)

Net cash used in financing activities		(104,149	)		—			—			(104,149	)

Net increase in cash		9,629			—			210			9,839
Cash at beginning of the period		22,485			—			(210	)		22,275

Cash at end of the period	$	32,114		$	—		$	—		$	32,114


	Year ended December 31, 2013
	As previously reported			Restatement Adjustment			Other insignificant corrective adjustments			As Restated			Reference
Cash flows from operating activities
Net loss	$	(24,621	)	$	(3,425	)	$	929		$	(27,117	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		70,366			—			—			70,366
Amortization of debt issue costs and accretion of discount		3,905			—			—			3,905
Write-off of debt issue costs, premium and discount accounted as loss on extinguishment of debt		16,555			—			—			16,555
Provision for doubtful accounts and sundry losses		673			—			—			673
Deferred tax benefit		(5,702	)		2,283			—			(3,419	)	a
Share-based compensation		6,179			—			—			6,179
Unrealized loss of indemnification assets		383			—			—			383
Loss on disposition of property and equipment and other intangibles		538			—			—			538
Earnings of equity method investment		(935	)		—			—			(935	)
Dividend received from equity method investment		984			—			—			984
(Increase) decrease in assets:					—			—
Accounts receivable, net		9,243			—			4,403			13,646		7, 9, 14
Prepaid expenses and other assets		1,685			(26	)		(1,212	)		447		a, 9
Other long-term assets		(1,381	)		—			—			(1,381	)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities		(16,734	)		1,168			(3,914	)		(19,480	)	a, 2, 7, 9, 14
Income tax payable		(2,700	)		—			—			(2,700	)
Unearned income		4,429			—			(463	)		3,966		1

Total adjustments		87,488			3,425			(1,186	)		89,727

Net cash provided by operating activities		62,867			—			(257	)		62,610

Cash flows from investing activities
Net increase in restricted cash		(494	)		—			—			(494	)
Additions to software and purchase of customer relationship		(16,980	)		—			253			(16,727	)	13
Property and equipment acquired		(11,486	)		—			(206	)		(11,692	)	13
Proceeds from sales of property and equipment		16			—			—			16

Net cash used in investing activities		(28,944	)		—			47			(28,897	)

Cash flows from financing activities
Proceeds from initial public offering, net of offering costs of $12,567		112,432			—			—			112,432
Proceeds from issuance of long-term debt		700,000			—			—			700,000
Debt issuance costs		(12,077	)		—			—			(12,077	)
Net increase in short-term borrowings		36,000			—			—			36,000
Proceeds from new short-term borrowing for purchase of equipment		1,800			—			—			1,800
Repayments of borrowing for purchase of equipment		(13,596	)		—			—			(13,596	)
Dividends paid		(16,390	)		—			—			(16,390	)
Statutory minimum withholding taxes paid on share-based compensation		(16,851	)		—			—			(16,851	)
Tax windfall benefits on share-based compensation		1,829			—			—			1,829
Issuance of common stock		29			—			—			29
Repurchase of common stock		(75,000	)		—			—			(75,000	)
Repayment and repurchase of long-term debt		(755,024	)		—			—			(755,024	)
Repayment of other financing agreement		(224	)		—			—			(224	)

Net cash used in financing activities		(37,072	)		—			—			(37,072	)

Net decrease in cash		(3,149	)		—			(210	)		(3,359	)
Cash at beginning of the period		25,634			—			—			25,634

Cash at end of the period	$	22,485		$	—		$	(210	)	$	22,275

The Restatement adjustments affecting the consolidated statement of cash flows for the years ended December 31, 2014 and 2013 are predominantly included in the Company’s net income (loss) from operations, offset by non-cash adjustments to net income (loss) and changes in operating assets and liabilities. The significant non-cash adjustments include adjustments to deferred taxes and the classification corrections described above. There were no significant adjustments, other than those described above, related to cash used in investing and financing activities.