Note 14—Share-based Compensation

Equity Incentive Plans

On September 30, 2010, the Holdings Board of Directors adopted the Carib Holdings, Inc. 2010 Equity Incentive Plan (the “2010 Plan”) to grant stock options, rights to purchase shares, restricted stock units and other stock-based rights to employees, directors, consultants and advisors. On April 17, 2012, in connection with the Reorganization, EVERTEC, Inc. assumed the 2010 Plan and all of the outstanding equity awards issued thereunder or subject thereto. EVERTEC, Inc. reserved 5,843,208 shares of its common stock for issuance upon exercise and grants of stock options, restricted stock and other equity awards under the 2010 Plan.

In connection with the Company’s initial public offering, the Company adopted the EVERTEC, Inc. 2013 Equity Incentive Plan (the “2013 Plan” and, together with the 2010 Plan, the “Equity Incentive Plans”). Under the 2013 Plan, 5,956,882 shares of its common stock are reserved for issuance upon exercise and grants of stock options, restricted stocks and other equity awards. In connection with the adoption of the 2013 Plan, the 2010 Plan remains in effect. However, no new awards will be granted under the 2010 Plan. The Equity Incentive Plans have a contractual term of ten years.

The following table summarizes the stock options activity for the years ended December 31, 2013, 2012 and 2011:


	Shares			Weighted-average exercise prices ⁽¹⁾
Outstanding at December 31, 2010		—		$	—
Granted⁽²⁾		5,739,140			1.30
Forfeitures		(350,592	)		1.30

Outstanding at December 31, 2011		5,388,548		$	1.30
Granted		1,020,000			4.95
Forfeitures		(1,230,966	)		1.30

Outstanding at December 31, 2012		5,177,582		$	2.06
Granted⁽³⁾		150,000			23.36
Exercised⁽⁴⁾		(4,042,046	)		1.99

Outstanding at December 31, 2013		1,285,536		$	4.77

Exercisable at December 31, 2013^{(5) (6)}		321,377		$	1.61

⁽¹⁾	Exercise price was retroactively adjusted to reflect the equitable adjustment of $3.71 per share as discussed below.

⁽²⁾	Includes 100,000 of stock options that were not granted under the Equity Incentive Plans, but are subject to certain terms of the 2010 Plan.

⁽³⁾	On November 6, 2013, the Company granted 150,000 stock options to an Officer of the Company under the 2013 Plan.

⁽⁴⁾	At December 31, 2013, the total intrinsic value of options exercised during the year amounted to $91.6 million.

⁽⁵⁾	The weighted average remaining contractual term of exercisable options at December 31, 2013 is 6.79 years. Vested stock options became exercisable as a result of the Company’s initial public offering in April 2013.

⁽⁶⁾	The aggregate intrinsic value of options exercisable at December 31, 2013 amounted to $7.4 million.

In connection with the cash dividend declared on December 18, 2012, the Board of Directors of EVERTEC, Inc. approved an equitable adjustment to stock options previously granted as required by the 2010 Plan payable in form of a one-time cash bonus to holders of vested options for shares of common stock in the amount of $0.69 per share, which in the case of vested options was on December 21, 2012 and in the case of unvested options will be paid in the future as the options vest, subject to certain conditions. Accordingly, $2.8 million was recognized as other long-term liabilities related the accrual of the unvested portion of the stock options as of December 31, 2012. As of December 31, 2013, the accrual of the unvested portion of stock options related to this equitable adjustment amounted to $0.6 million.

As a result of the cash dividend, on May 9, 2012, the Board of Directors of EVERTEC, Inc. approved an equitable adjustment to stock options previously granted as required by its 2010 Plan in order to reduce the exercise price of the outstanding options granted under or subject to the terms of the 2010 Plan by $3.71 per share. This adjustment to the exercise price did not impact the compensation expense recognized by the Company for the year ended December 31, 2012 or the maximum unrecognized cost.

The following table presents information about fully vested stock options for the years ended December 31, 2013, 2012 and 2011:


	Years ended December 31,
	2013				2012				2011
	Shares		Weighted average exercise price		Shares		Weighted average exercise price		Shares		Weighted average exercise price
Vested stock options^(1)(2)(3)		3,757,099	$	2.07		279,750	$	1.30		326,574	$	1.30

⁽¹⁾	At December 31, 2013, 2012 and 2011, the aggregate intrinsic value amounted to $84.9 million, $1.6 million and $1.2 million, respectively.

⁽²⁾	The weighted average contractual term of fully vested options is 7.04 years, 7.85 years and 8.75 years as of December 31, 2013, 2012 and 2011, respectively.

⁽³⁾	The fair value of vested stock options at December 31, 2013, 2012 and 2011 amounted to $92.7 million, $2.0 million and $2.8 million, respectively.

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 stock options granted during 2013 was estimated using the Black-Scholes-Merton (“BSM”) option pricing model. The fair value of the stock options granted during 2011 and 2012 was estimated using the BSM option pricing model for Tranche A options granted under the 2010 Plan and the Monte Carlo simulation analysis for Tranche B and Tranche C options, with the following assumptions:


	Years ended December 31,
	2013			2012			2011
	Stock options granted under the 2013 Plan			Stock options granted under the 2010 Plan			Stock options granted under the 2010 Plan			Stock options not granted under the 2010 Plan
Stock Price⁽¹⁾	$	23.36 per share		$	5.19 per share		$	1.30 per share		$	1.30 per share
Risk-free rate		1.68	%		0.59	%		2.14	%		2.06	%
Expected volatility		36.56	%		31.12	%		35.00	%		35.00	%
Expected annual dividend yield		1.71	%		0.00	%		0.00	%		0.00	%
Expected term		6 years			3.87 years			4.60 years			4.49 years

⁽¹⁾	As discussed above, on May 9, 2012 an equitable adjustment to stock options was approved with caused a reduction of $3.71 per share of the exercise price of the outstanding options. Accordingly, the stock price presented above reflects this equitable adjustment for the periods of 2012 and 2011.

The risk-free rate is based on the U.S. Constant Maturities Treasury Interest Rate as of the grant date. The expected volatility is based on a combination of historical volatility and implied volatility from public trade companies in the Company’s industry. The expected annual dividend yield is based on management’s expectations of future dividends as of the grant date. The expected term for stock options granted under the 2010 Plan was based on the vesting time of the options. For the stock options granted under the 2013 Plan, the simplified method was used to estimate the expected term.

The following table summarizes the nonvested restricted shares activity for the years ended December 31, 2013, 2012 and 2011:


Nonvested restricted shares	Shares			Weighted-average grant date fair value
Nonvested at December 31, 2010		—		$	—
Granted		160,000			5.00
Vested		(33,884	)		5.00

Nonvested at December 31, 2011		126,116		$	5.00
Granted		29,292			8.54
Vested		(39,988	)		5.00

Nonvested at December 31, 2012		115,420		$	5.90
Granted		9,133			24.64
Vested		(115,420	)		5.90

Nonvested at December 31, 2013		9,133		$	24.64

During the third quarter of 2013, the Company granted to three of its directors restricted stock units under the 2013 Plan.

Share-based compensation recognized was as follows:


	Years ended December 31,
(Dollar amounts in thousands)	2013		2012		2011
Share-based compensation recognized, net
Stock options	$	5,820	$	595	$	714
Restricted shares		359		609		170

Pursuant to the terms of the 2010 Plan, Tranche A stock options will generally vest in five equal installments, except for some grants as specified in the stock agreement, Tranche B options granted to employees and certain directors would vest at such time as the Investor Internal Rate of Return (“IRR”) equals or exceeds 25%, except for one grant that vests upon a 20% IRR, based on cash proceeds received by Apollo Investment Fund VII, L.P. (the “Investor”), and Tranche C options would vest at such time as the IRR equals or exceeds 30% based on cash proceeds received by the Investor.

As a result of the Initial Public Offering, the IRR required by the Tranche B and C options was achieved and accordingly, all Tranche B and C options became vested. As a result, the Company recognized a share-based compensation expense of $4.9 million in April 2013.

The maximum unrecognized cost for stock options was $2.0 million as of December 31, 2013 related to Tranche A time vesting options and options granted under the 2013 Plan. As discussed above, the share-based compensation expense related to all Tranche A options amounted to $1.0 million is expected to be recognized over a weighted average period of 1.64 years, while the cost related to the stock options granted under the 2013 Plan amounting to $1.0 million is expected to be recognized over a weighted average period of 2.83 years.

The maximum unrecognized cost for restricted stock units was $0.1 million as of December 31, 2013. The cost is expected to be recognized over a weighted average period of 0.67 year.