STOCKHOLDERS' EQUITY AND SHARE-BASED COMPENSATION

12 Months Ended

Dec. 31, 2012

STOCKHOLDERS' EQUITY AND SHARE-BASED COMPENSATION

STOCKHOLDERS' EQUITY AND SHARE-BASED COMPENSATION

14.  STOCKHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION

Common Stock

Our Board of Directors has the power to issue shares of authorized but unissued common stock without further shareholder action subject to the requirements of applicable laws and stock exchanges.  At December 31, 2012, we had 100.0 million shares authorized. At December 31, 2012, we had 23.4 million shares of common stock outstanding. The holders of shares of Altisource common stock are entitled to one vote for each share on all matters voted on by shareholders, and the holders of such shares will possess all voting power.

Stock Repurchase Plan

In May 2012, our shareholders approved a new stock repurchase program, which replaced the previous stock repurchase program. Under the new plan, we are authorized to purchase up to 3.5 million shares of our common stock in the open market in addition to amounts previously purchased under the prior plan. From authorization of the prior plan in May 2010 through December 31, 2012, we purchased approximately 2.5 million shares of our common stock in the open market at an average price of $37.49 per share. During the year ended December 31, 2012, we purchased 0.3 million shares of common stock at an average price of $63.25 per share. Since no common stock has been repurchased following the new plan was approved, 3.5 million shares of common stock remain available for repurchase under the plan. Luxembourg law limits share repurchases to approximately the balance of Altisource Portfolio Solutions S.A.’s retained earnings less treasury shares. The distribution of Residential and AAMC to our shareholders reduced our retained earnings which will limit our ability to repurchase shares for a period of time. Our debt agreement also contains limits on our ability to repurchase our common stock which will limit the amount we can spend on share repurchases in any year and may prevent repurchases in certain circumstances.

Equity Incentive Plan

Our 2009 Equity Incentive Plan (the “Plan”) provides for various types of equity awards, including stock options, stock appreciation rights, stock purchase rights, restricted shares and other awards, or a combination of any of the above. Under the Plan, we may grant up to 6.7 million Altisource share-based awards to officers, directors, key employees and to employees of our affiliates. As of December 31, 2012, 2.6 million share-based awards were available for future grant under the Plan. The shares will be issued from authorized and unissued shares of our common stock. Expired and forfeited awards are available for re-issuance. Vesting and exercise of share-based awards are generally contingent on continued employment.

Share-Based Compensation

We issue share-based awards in the form of stock options for certain employees and officers. We recorded share-based compensation expense of $3.7 million, $4.0 million and $3.1 million for the years ended December 31, 2012, 2011 and 2010, respectively. The amount in 2012 includes the reversal of $0.8 million of share-based compensation expense in the first quarter related to the departure of an executive officer in March 2012.  The total compensation expense for 2012, 2011 and 2010 includes $2.9 million, $3.0 million and $0.5 million, respectively, related to performance awards that vested in 2012, 2011 and 2010.

Outstanding share-based compensation primarily consists of stock option grants that are a combination of service-based and market-based options:

Service-based Options.  These options are granted at fair value on the date of grant. The options generally vest over four years with equal annual cliff-vesting and expire on the earlier of 10 years after the date of grant or following termination of service. A total of 0.9 million service-based awards were outstanding at December 31, 2012.

Market-based Options.  These option grants have two components each of which vest only upon the achievement of certain criteria. The first component, which we refer to internally as “ordinary performance” grants, consists of two-thirds of the market-based grant and begins to vest if the stock price realizes a compounded annual gain of at least 20% over the exercise price, so long as the stock price is at least double the exercise price. The remaining third of the market-based options, which we refer to internally as “extraordinary performance” grants, begins to vest if the stock price realizes a compounded annual gain of at least 25% over the exercise price, so long as it is at least triple the exercise price. The vesting schedule for all market-based awards is 25% upon achievement of the criteria and the remaining 75% in three equal annual installments. A total of 2.2 million market-based awards were outstanding at December 31, 2012.

The Company granted 0.3 million stock options (at a weighted average exercise price of $69.48 per share), 0.2 million stock options (at a weighted average exercise price of $33.15 per share) and 0.9 million stock options (at an exercise price of $23.58 per share) during the years ended December 31, 2012, 2011 and 2010, respectively.

The fair value of the service-based options was determined using the Black-Scholes options pricing model while a lattice (binomial) model was used to determine the fair value of the market-based options using the following weighted average assumptions as of the grant date for the years ended December 31:

	2012		2011		2010
	Black-Scholes	Binomial	Black- Scholes	Binomial	Black-Scholes	Binomial
Risk-free interest rate (%)	0.87 – 1.17	0.08 – 2.04	1.69 – 1.93	0.04 – 3.03	1.50 – 3.20	0.02 – 3.66
Expected stock price volatility (%)	34.22 – 34.65	34.20 – 34.60	48.00	55.70 – 55.80	47.00 – 50.00	51.00 – 52.00
Expected dividend yield	—	—	—	—	—	—
Expected option life (in years)	6.25	—	6.25	—	6.25 – 7.00	—
Contractual life (in years)	—	14	—	14	—	13
Fair value	$19.25 – $29.80	$9.98 - $22.76	$16.33 – $17.85	$16.91 - $20.39	$11.95 – $13.24	$10.05 - $12.42

The following table summarizes the weighted-average fair value of stock options granted, and the total intrinsic value of stock options exercised for the years ended December 31:

		2012		2011		2010
Weighted-average fair value at date of grant		$	20.77	$	17.66	$	18.18
Intrinsic value of options exercised	(in thousands)	17,598		4,966		7,530
Fair value of options vested	(in thousands)	2,790		3,536		926

Stock-based compensation expense is recorded net of estimated forfeiture rates ranging from 1% to 10%.

As of December 31, 2012, estimated unrecognized compensation costs related to share-based payments amounted to $4.7 million which we expect to recognize over a weighted-average remaining requisite service period of approximately 2.48 years.

The following table summarizes activity of our stock options:

	Number of options		Weighted average exercise price		Weighted average contractual term (in years)	Aggregate intrinsic value (in thousands)
Outstanding at December 31, 2011	3,243,958		$	14.19	6.7	$	116,755
Granted	278,500		69.48
Exercised	(285,054	)	12.19
Forfeited	(179,095	)	28.35
Outstanding at December 31, 2012	3,058,309		17.69		6.11	$	211,072
Exercisable at December 31, 2012	2,235,923		$	11.59	5.52	$	167,885

See Note 3 for information regarding the effect of the Separation of the Residential Asset Businesses on our share-based compensation plans.

The following table summarizes information about stock options outstanding and exercisable at December 31, 2012:

	Options outstanding				Options exercisable
Exercise price range	Number	Weighted average remaining contractual life	Weighted average exercise price		Number	Weighted average remaining contractual life	Weighted average exercise price
$0.00 – $10.00(a)	1,901,386	5.43	$	9.13	1,771,805	5.42	$	9.13
$10.01 – $20.00(a)	187,912	3.55	12.50		177,912	3.37	12.44
$20.01 – $30.00(a)	611,561	7.29	22.94		247,814	7.28	22.87
$30.01 – $40.00(a)	108,950	8.54	34.16		17,329	8.53	33.48
$50.01 – $60.00(a)	10,000	9.37	53.15		1,250	9.37	53.00
$60.01 – $70.00(a)	158,500	9.19	60.66		19,813	9.19	60.66
$80.01 – $90.00(a)	80,000	9.62	80.89		—	—	—
	3,058,309				2,235,923

(a)             These options contain market-based components as described above.  All other options are time-based awards.

The following table summarizes the market prices necessary in order for the market performance options to begin to vest:

	Market Based Options
(in thousands, except share prices) Vesting price	Ordinary performance		Extraordinary performance
$150.00 – $160.00	—		3
$160.01 – $170.00	3		—
$180.01 – $190.00	—		45
Over $190.01	—		1
	3		49
Weighted average share price	$	80.89	$	61.00

Restricted Shares in AAMC

Prior to the separation of AAMC, certain Altisource employees were granted 0.1 million restricted AAMC shares. The restricted shares will vest in three tranches, subject to the achievement of the following performance hurdles:

· Twenty-five percent (25%) of the grant will vest in accordance with the vesting schedule set forth below if the market value of AAMC common stock meets all three of the following conditions: (i) the market value is at least equal to $250 million; (ii) the market value has realized a compounded annual gain of at least twenty percent (20%) over the market value on the date of the grant; and (iii) the market value is at least double the market value on the date of the grant;

· Fifty percent (50%) of the grant will vest in accordance with the vesting schedule set forth below if the market value of AAMC common stock meets all three of the following conditions: (i) the market value is at least equal to $500 million; (ii) the market value has realized a compounded annual gain of at least twentytwo and a half percent (22.5%) over the market value on the date of the grant; and (iii) the market value is at least triple the market value on the date of the grant and

· Twenty-five percent (25%) of the grant will vest in accordance with the vesting schedule set forth below if the market value of AAMC common stock meets all three of the following conditions: (i) the market value is at least equal to $750 million; (ii) the market value has realized a compounded annual gain of at least twenty-five percent (25%) over the market value on the date of the grant; and (iii) the market value is at least quadruple the market value on the date of the grant.

After the performance hurdles for a tranche have been achieved, 25% of the restricted shares in that tranche will vest on each of the first four anniversaries of the date that the performance hurdles for that tranche were met.

If an award recipient’s service with Altisource is terminated prior to full vesting of the restricted shares, then the award recipient will forfeit all unvested restricted shares except that if (i) an award recipient’s service is terminated without cause or due to death or disability and (ii) the performance hurdles for a tranche have already been achieved or are achieved within 90 days of termination, unvested stock for the corresponding tranche will continue to vest according to the above vesting schedule.

Expense related to these restricted shares for the year ended December 31, 2012 was immaterial.