SEPARATION OF RESIDENTIAL ASSET BUSINESSES

12 Months Ended

Dec. 31, 2012

SEPARATION OF RESIDENTIAL ASSET BUSINESSES

SEPARATION OF RESIDENTIAL ASSET BUSINESSES

3.  SEPARATION OF RESIDENTIAL ASSET BUSINESSES

On December 21, 2012, we completed the spin-offs of two wholly-owned subsidiaries, Residential and AAMC, into separate publicly-traded companies (the “Separation of the Residential Asset Businesses”).

Altisource shareholders of record as of December 17, 2012 received a pro rata distribution of:

· one share of Residential common stock for every three shares of Altisource common stock held;

· one share of AAMC common stock for every ten shares of Altisource common stock held and

· received cash in lieu of Residential and AAMC fractional shares.

We eliminated the assets and liabilities of Residential and AAMC from our consolidated balance sheet effective at the close of business on December 21, 2012. As Residential and AAMC are development stage companies and have not commenced operations, these entities had no historical results of operations.

The carrying value of the net assets transferred by Altisource was as follows:

(in thousands)	Residential		AAMC		Total
Cash	$	100,000	$	5,000	$	105,000
Reduction in Altisource retained earnings	$	100,000	$	5,000	$	105,000

We incurred $2.7 million of expenses in 2012 representing salaries of certain employees who became employees of AAMC after the separation (included in cost of revenue) and advisory expenses (included in selling, general and administrative expenses) incurred in connection with the Separation of the Residential Asset Businesses. These expenses are included in our Mortgage Services segment.

Impact on Share-based Compensation

The exercise price of each outstanding stock option of Altisource was adjusted to reflect the value of Residential and AAMC common stock distributed to Altisource shareholders. On the separation date, all holders of Altisource stock options received the following:

· stock options (issued by Residential and AAMC) to acquire the number of shares of Residential or AAMC common stock equal to the product of (a) the number of Altisource stock options held on the separation date and (b) the distribution ratio of 1 share of Residential common stock for every 3 shares of Altisource common stock and 1 share of AAMC stock for every 10 shares of Altisource common stock and

· an adjusted Altisource stock option, with a reduced exercise price per stock option.

We determined the exercise price of the new Residential and AAMC stock option and the adjusted Altisource stock option in a manner so that the fair value of the adjusted Altisource stock award and the new Residential and AAMC stock options immediately following the Separation of the Residential Asset Businesses was equivalent to the fair value of such Altisource stock award immediately prior to the Separation of the Residential Asset Businesses. No incremental share-based compensation was recognized as a result of this adjustment.

As of December 31, 2012, AAMC employees held less than 0.1 million options to purchase Altisource common stock. As of December 31, 2012, our current employees held 0.5 million options to purchase Residential common stock and 0.2 million options to purchase AAMC common stock. In addition, our Chairman held 0.3 million options to purchase Residential common stock and 0.1 million options to purchase AAMC common stock.

We are responsible for fulfilling all stock options related to Altisource common stock, and Residential and AAMC are responsible for fulfilling all stock options related to their respective common stock, regardless of whether such stock options are held by our or AAMC’s employees. Notwithstanding the foregoing, our stock-based compensation expense, resulting from awards outstanding at the date of Separation of the Residential Asset Businesses, is based on the stock options held by our employees regardless of whether such awards were issued by Altisource, Residential or AAMC. Accordingly, stock-based compensation that we recognize as expense with respect to Residential and AAMC stock options is included in additional paid-in capital on our consolidated balance sheet. See Note 14 for additional information regarding our employee share-based compensation plans.