3. SEPARATION OF RESIDENTIAL ASSET BUSINESSES

On December 21, 2012, we completed the spin-offs of two wholly-owned subsidiaries, AAMC and Residential, 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 were development stage companies and had not commenced operations at the date of separation, 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 for the year ended December 31, 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.