| Table of Contents ALTISOURCE PORTFOLIO SOLUTIONS S.A. FORM 10-Q | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Row 1
(2..3) [1..1] (stub): 'Page'
Row 2
[0..0) [0..0] (stub): 'PART I Financial Information'
Row 3
[0..0) [0..0] (stub): 'Item 1 Interim Condensed Consolidated Financial Statements'
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Row 4
[0..0) [0..0] (stub): 'Condensed Consolidated Balance Sheets'
(3..3] [1..1] ( num): '3'
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[0..0) [0..0] (stub): 'Condensed Consolidated Statements of Operations'
(3..3] [1..1] ( num): '4'
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Row 6
[0..0) [0..0] (stub): 'Condensed Consolidated Statement of Equity'
(3..3] [1..1] ( num): '5'
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[0..0) [0..0] (stub): 'Condensed Consolidated Statements of Cash Flows'
(3..3] [1..1] ( num): '6'
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Row 9
[0..0) [0..0] (stub): 'Notes to Condensed Consolidated Financial Statements'
Row 10
[0..0) [0..0] (stub): 'Note 1 Organization and Basis of Presentation'
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(3..3] [1..1] ( num): '7'
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Row 11
[0..0) [0..0] (stub): 'Note 2 Transactions with Related Parties'
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(3..3] [1..1] ( num): '9'
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Row 12
[0..0) [0..0] (stub): 'Note 3 Acquisition of MPA'
Attributes: num=>3 [0..0]
(3..3] [1..1] ( num): '10'
Attributes: num=>10 [1..1]
Row 13
[0..0) [0..0] (stub): 'Note 4 Accounts Receivable, Net'
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(3..3] [1..1] ( num): '12'
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Row 14
[0..0) [0..0] (stub): 'Note 5 Prepaid Expenses and Other Current Assets'
Attributes: num=>5 [0..0]
(3..3] [1..1] ( num): '13'
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Row 15
[0..0) [0..0] (stub): 'Note 6 Premises and Equipment, net'
Attributes: num=>6 [0..0]
(3..3] [1..1] ( num): '13'
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Row 16
[0..0) [0..0] (stub): 'Note 7 Goodwill and Intangible, net'
Attributes: num=>7 [0..0]
(3..3] [1..1] ( num): '13'
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Row 17
[0..0) [0..0] (stub): 'Note 8 Accounts Payable, Accrued Expenses and Other Current Liabilities'
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(3..3] [1..1] ( num): '14'
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Row 18
[0..0) [0..0] (stub): 'Note 9 Equity Based Compensation'
Attributes: num=>9 [0..0]
(3..3] [1..1] ( num): '15'
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Row 19
[0..0) [0..0] (stub): 'Note 10 Cost of Revenue'
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(3..3] [1..1] ( num): '16'
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Row 20
[0..0) [0..0] (stub): 'Note 11 Selling, General and Administrative Expenses'
Attributes: num=>11 [0..0]
(3..3] [1..1] ( num): '17'
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Row 21
[0..0) [0..0] (stub): 'Note 12 Other Income (Expense), Net Cost of Revenue'
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(3..3] [1..1] ( num): '17'
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Row 22
[0..0) [0..0] (stub): 'Note 13 Income Taxes'
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(3..3] [1..1] ( num): '17'
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Row 23
[0..0) [0..0] (stub): 'Note 14 Earnings Per Share'
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(3..3] [1..1] ( num): '18'
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[0..0) [0..0] (stub): 'Note 15 Segment Reporting'
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(3..3] [1..1] ( num): '18'
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Row 25
[0..0) [0..0] (stub): 'Note 16 Commitments and Contingencies'
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(3..3] [1..1] ( num): '21'
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[0..0) [0..0] (stub): 'Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations'
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(3..3] [1..1] ( num): '22'
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Row 28
[0..0) [0..0] (stub): '(see Table of Contents at front of section)'
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[0..0) [0..0] (stub): 'Item 3 Quantitative and Qualitative Disclosures about Market Risk'
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(3..3] [1..1] ( num): '44'
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[0..0) [0..0] (stub): 'Item 4 Controls and Procedures'
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(3..3] [1..1] ( num): '44'
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[0..0) [0..0] (stub): 'PART II Other Information'
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[0..0) [0..0] (stub): 'Item 1 Legal Proceedings'
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(3..3] [1..1] ( num): '45'
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[0..0) [0..0] (stub): 'Item 1A Risk Factors'
(3..3] [1..1] ( num): '45'
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[0..0) [0..0] (stub): 'Item 2 Unregistered Sales of Equity Securities and Use of Proceeds'
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(3..3] [1..1] ( num): '45'
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[0..0) [0..0] (stub): 'Item 3 Defaults Upon Senior Securities'
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(3..3] [1..1] ( num): '45'
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[0..0) [0..0] (stub): 'Item 4 (Removed and Reserved)'
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(3..3] [1..1] ( num): '45'
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[0..0) [0..0] (stub): 'Item 5 Other Information'
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(3..3] [1..1] ( num): '45'
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[0..0) [0..0] (stub): 'Item 6 Exhibits'
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(3..3] [1..1] ( num): '45'
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Row 50
[0..0) [0..0] (stub): 'SIGNATURES'
(3..3] [1..1] ( num): '46'
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[0..8) [0..1] (stub): 'EX-31.1'
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Table attributes: balancesheet,assets,liabilities,incomestatement,cash
| Item 1. Interim Condensed Consolidated Financial Statements (Unaudited) ALTISOURCE PORTFOLIO SOLUTIONS S.A. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| ALTISOURCE PORTFOLIO SOLUTIONS S.A. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Assumptions Risk-free Interest Rate 0.31% 1.605% Expected Stock Price Volatility 47% 61 % Expected Dividend Yield Expected Option Life (in years) 14 Contractual Life (in years) Fair Value $ 0.75 $4.34 The put option agreement is a written derivative valued similar to stock options and is included within Other Non-current Liabilities on the Condensed Consolidated Balance Sheet. The fair value of the put option agreements will be determined each quarter until such puts are either exercised or forfeited with any changes in value included as a component of Other Income (Expense), net in the Condensed Consolidated Statements of Operations. NOTE 2 TRANSACTIONS WITH RELATED PARTIES Ocwen remains our largest customer. Following the Separation, Ocwen is contractually obligated to purchase certain Mortgage Services and Technology Products from us under service agreements. These agreements extend for eight years from the Separation Date subject to termination under certain provisions. Ocwen is not restricted from redeveloping these services. We have agreed with Ocwen to settle intercompany amounts on a weekly basis beginning in 2010. We consider certain services to be derived from Ocwens loan servicing portfolio rather than provided to Ocwen because such services are charged to the mortgagee and/or the investor and are not expenses to Ocwen. Ocwen, or services derived from Ocwens loan servicing portfolio, as a percentage of each of our segment revenues and as a percentage of consolidated revenues was as follows for the three and six months ended June 30: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| ALTISOURCE PORTFOLIO SOLUTIONS S.A. Notes to Condensed Consolidated Financial Statements (continued) included primarily in Selling, General and Administrative Expenses in the Condensed Consolidated Statements of Operations. However, these amounts may not be representative of the costs necessary for the Company to operate as a separate standalone company. In addition, prior to the Separation, Ocwen had allocated interest expense to us based upon our portion of assets to Ocwens total assets which is included in Other Income (Expense) Net in the Condensed Consolidated Statements of Operations. Transition Services In connection with the Separation, Altisource and Ocwen entered into a transition services agreement that provides to each other services in such areas as human resources, vendor management, corporate services, six sigma, quality assurance, quantitative analytics, treasury, accounting, risk management, legal, strategic planning, compliance and other areas where we, and Ocwen, may need transitional assistance and support following the Separation. For the six months ended June 30, 2010, Altisource billed Ocwen $0.8 million ($0.4 million for the second quarter), and Ocwen billed Altisource $0.6 million ($0.3 million for the second quarter) for services provided under this agreement. These amounts are reflected as a component of Selling, General and Administrative expenses in the Condensed Consolidated Statements of Operations. NOTE 3 ACQUISITION OF MPA In February 2010, we acquired all of the outstanding membership interests of MPA pursuant to a Purchase and Sale Agreement. MPA serves as the manager of Lenders One, a national alliance of independent mortgage bankers. The alliance was established in 2000 and as of June 30, 2010 consisted of more than 170 members. Consideration for the transaction consisted of cash, common stock and put option agreements: | ||||||||||||||||||||||||||||||||||||||||||||||||||
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Row 1
[0..0) [0..0] (stub): '(in thousands)'
(2..3) [1..1] (stub): 'Consideration'
Row 2
[0..0) [0..0] (stub): 'Cash'
[2..3] [1..1] ( num): '$29,000'
Attributes: num=>000 [1..1]
Row 3
[0..0) [0..0] (stub): 'Common Stock'
(3..3] [1..1] ( num): '23,900'
Attributes: num=>23 [1..1] num=>900 [1..1]
Row 4
[0..0) [0..0] (stub): 'Put Option Agreements at Fair Value'
(3..3] [1..1] ( num): '1,289'
Attributes: num=>1 [1..1] num=>289 [1..1]
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[0..0) [0..0] (stub): 'Working Capital Adjustment'
(3..3] [1..1] ( num): '820'
Attributes: num=>820 [1..1]
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[0..0) [0..0] (stub): 'Total Consideration'
[2..3] [1..1] ( num): '$55,009'
Attributes: num=>009 [1..1]
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Table attributes: assets,date,cash,incomestatement
| Estimated Life (in Years) Premises and Equipment 2 5 Management Agreement 15 Trademarks 15 Non-compete 4 Goodwill Indefinite The goodwill arising from the acquisition, which was assigned to our Mortgage Services segment, consists of various components primarily including in-place workforce and anticipated revenue synergies given MPAs market presence and future enhancements to our services including the development of origination services. All goodwill and intangible assets related to the acquisition of MPA are expected to be amortizable and deductible for income tax purposes. We entered into employee agreements with certain key employees of MPA who also received the majority of our shares issued in connection with the acquisition. Revenue and Net Income Attributable to Altisource from the date of acquisition through June 30, 2010, included in the Companys Condensed Consolidated Statements of Operations, are as follows. | |||||||||||||||||||||||||||||||||||||||||||||
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| June 30, December 31, (in thousands) 2010 2009 Computer Hardware and Software $ 27,119 $ 23,591 Office Equipment and Other 9,048 9,203 Furniture and Fixtures 2,080 2,663 Leasehold Improvements 3,160 3,441 $ 41,407 $ 38,898 Less: Accumulated Depreciation and Amortization (27,958 ) (27,490 ) Total $ 13,449 $ 11,408 Depreciation and amortization expense, inclusive of capital lease obligations, amounted to $3.2 million and $2.8 million for the six months ended June 30, 2010 and 2009 respectively ($1.7 million and $1.4 million for the second quarter of 2010 and 2009 respectively), and is included in Cost of Revenue for operating assets and in Selling, General and Administrative expense for non-operating assets in the accompanying Condensed Consolidated Statements of Operations. NOTE 7 GOODWILL AND INTANGIBLE ASSETS, NET Goodwill Changes in Goodwill during the year ended June 30, 2010 and December 31, 2009 are summarized below: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| ALTISOURCE PORTFOLIO SOLUTIONS S.A. Notes to Condensed Consolidated Financial Statements (continued) Facility Closure Costs During 2009, we accrued facility closure costs (included in other current and other non-current liabilities in the Condensed Consolidated Balance Sheet) primarily consisting of lease exit costs (expected to be paid through 2014) and severance for the closure of two facilities. The following table summarizes the activity, all recorded in our Financial Services segment, for the six months ended June 30, 2010: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| (in thousands) Lease Costs Balance, December 31, 2009 $ 916 Payments (146 ) Balance, June 30, 2010 770 Less: Long-Term Portion 557 Facility Closure Cost Accrual, Current Portion $ 213 We do not expect additional significant costs related to the closure of these facilities. NOTE 9 EQUITY BASED COMPENSATION We provide stock-based awards as a form of compensation for certain employees and officers. We have issued stock-based awards in the form of stock options and restricted stock units. We recorded total stock compensation expense of $1.0 million for the six months ended June 30, 2010 ($0.7 million for the quarter). The compensation expense is included in Selling, General and Administrative Expenses in the accompany Condensed Consolidated Statements of Operations. During the second quarter of 2010, we issued 1,039 shares to each of our four Board of Directors and recorded a compensation charge of $0.2 million associated with the issuance. During the six months ended June 30, 2010, the Company granted 0.9 million stock options with an exercise prices ranging between $22.00 and $25.00 per share depending on the grant date. The vesting schedule for the options has a time-based component, in which 25% of the options vest in equal increments over four years, and a market-based component, in which up to 75% of the options could vest in equal increments over four years commencing upon the achievement of certain performance criteria related to our stock price and the annualized rate of return to investors. Two-thirds of the market-based options would begin to vest over three years 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 would begin to vest over three years if the stock price realizes a 25% gain, so long as the stock price is at least triple the exercise price. The fair value of the time-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 assumptions as of the grant date: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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(2..3) [1..1] (stub): 'Black-Scholes'
(6..7) (stub): 'Binomial'
Row 2
[0..0) [0..0] (stub): 'Risk-free Interest Rate'
(3..3] [1..1] (stub): '1.61% 1.90'
Attributes: num=>1 [1..1] num=>1 [1..1] num=>90 [1..1]
[4..4) (stub): '%'
(7..7] (stub): '0.02% 3.66'
Attributes: num=>0 [..1] num=>3 [..1] num=>66 [..1]
[8..8) (stub): '%'
Row 3
[0..0) [0..0] (stub): 'Expected Stock Price Volatility'
(3..3] [1..1] (stub): '36% 40'
Attributes: num=>40 [1..1]
[4..4) (stub): '%'
(7..7] (stub): '24% 42'
Attributes: num=>42 [..1]
[8..8) (stub): '%'
Row 4
[0..0) [0..0] (stub): 'Expected Dividend Yield'
Row 5
[0..0) [0..0] (stub): 'Expected Option Life (in years)'
(3..3] [1..1] ( num): '5'
Attributes: num=>5 [1..1]
Row 6
[0..0) [0..0] (stub): 'Contractual Life (in years)'
(7..7] ( num): '10'
Attributes: num=>10 [..1]
Row 7
[0..0) [0..0] (stub): 'Fair Value'
[2..2) [0..1] (stub): '$'
(3..3] [1..1] (stub): '6.80 $8.35'
Attributes: num=>6 [1..1] num=>80 [1..1] num=>35 [1..1]
(6..7) (stub): '$7.35 and $10.04'
Attributes: num=>35 [..1] num=>04 [..1]
Prototype ranges:
Row 5
[0..0) [0..0] (stub): ''
(3..3] [1..1] ( num): ''
Row 6
[0..0) (stub): ''
(7..7] ( num): ''
Row 7
[0..0) (stub): ''
[2..2) (stub): ''
(3..3] (stub): ''
(6..7) (stub): ''
Best data column prototype:
Row 5
[0..0) [0..0] (stub): ''
(3..3] [1..1] ( num): ''
Table attributes: date,incomestatement
| Managements Discussion and Analysis of Financial Condition and Results of Operations (continued) SECTION 1 OVERVIEW Altisource is a provider of services focused on high value, knowledge-based functions principally related to real estate and mortgage portfolio management, asset recovery and customer relationship management. Utilizing integrated technology that includes decision models and behavioral based scripting engines, we provide solutions that improve clients performance and maximize their returns. Our objective is to become a global knowledge process provider initially focused on the entire mortgage services lifecycle and credit to cash lifecycle management spaces. We intend to achieve this objective by executing on our strategies of penetrating existing customers, acquiring new customers, increasing quality and reducing costs and investing in new service offerings. A. Separation On August 10, 2009, Altisource became a stand-alone public company in connection with our Separation from Ocwen. In connection with the Separation, Altisource and Ocwen entered into Agreements that address the allocation of assets and liabilities between them and that define their relationship after the Separation. Additional information may be found in Note 1 to the condensed consolidated financial statements. B. Basis of Presentation The accompanying condensed consolidated financial statements present the historical results of operations, assets and liabilities attributable to the Altisource businesses. For periods prior to the Separation Date, these condensed consolidated financial statements include allocations of expenses from Ocwen for certain corporate functions. Total corporate costs allocated to the Company were $3.8 million for the six months ended June 30, 2009 ($1.8 million for the second quarter). The charges for these functions are included primarily in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. In addition, Ocwen had allocated interest expense to us based upon our portion of assets to Ocwens total assets which is reflected as Interest expense in the Condensed Consolidated Statements of Operations. Other than transition services, there have been no allocations of Ocwen expenses charged to us since the Separation Date. In February 2010, we acquired all of the outstanding membership interests of MPA. MPA was formed as a Delaware limited liability company with the purpose of managing BPMC which operates as Lenders One. Lenders One is a national alliance of independent mortgage bankers that provides its Members with education and training along with revenue enhancing, cost reducing and market share expanding opportunities. The results of operations of BPMC are consolidated under the variable interest model since the acquisition date. The condensed consolidated financial statements also do not necessarily reflect what the Companys consolidated results of operations, financial position and cash flows would have been had the Company operated as an independent company during the entirety of the periods presented. For instance, as an independent public company, Altisource incurs costs in excess of those previously allocated by Ocwen for maintaining a separate Board of Directors, obtaining a separate audit, relocating certain executive management and hiring additional personnel. Factors Affecting Comparability In addition to the items noted within the Basis of Presentation section presented above, the following additional item may impact the comparability of our results: | ||||
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| Managements Discussion and Analysis of Financial Condition and Results of Operations (continued) Management is not aware of any other trends or events, commitments or uncertainties which have not otherwise been disclosed that will or are likely to impact liquidity in a material way. Capital Resources Given our ability to generate cash flow which is sufficient to fund both current operations as well as expansion activities, we require very limited capital. Were we to need additional capital, we believe we have adequate access to both debt and equity capital markets. Commitments and Contingencies For details of these transactions, see Note 16 to the condensed consolidated financial statements. SECTION 5 CRITICAL ACCOUNTING POLICIES AND ESTIMATES We prepare our condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States. In applying many of these accounting principles, we need to make assumptions, estimates and/or judgments that affect the reported amounts of assets, liabilities, revenues and expenses in our condensed consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions, estimates and/or judgments, however, are often subjective. Actual results may be affected negatively based on changing circumstances. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts become known. Our critical accounting policies are described in the MDA section in our 2009 Form 10-K. Such policies have not changed during 2010. SECTION 6 OTHER MATTERS Related Party Ocwen For the six months ended June 30, 2010, approximately $56.0 million of the Mortgage Services, $0.1 million of the Financial Services and $9.0 million of the Technology Products segment revenues were from services provided to Ocwen or sales derived from Ocwens loan servicing portfolio. Services provided to Ocwen included residential property valuation, real estate asset management and sales, trustee management services, property inspection and preservation, closing and title services, charge-off second mortgage collections, core technology back office support and multiple business technologies including our REALSuite of products. We provided all services at rates we believe to be comparable to market rates. In connection with the Separation, Altisource and Ocwen entered into various agreements that address the allocation of assets and liabilities between them and that define their relationship after the Separation including a Separation Agreement, a Tax Matters Agreement, an Employee Matters Agreement, an Intellectual Property Agreement, a Data Center and Disaster Recovery Agreement, a Technology Products Services Agreement, a Transition Services Agreement and certain long-term servicing contracts (collectively, the Agreements) (see Note 4 to our 2009 Form 10-K). For the six months ended June 30, 2010, Altisource billed Ocwen $0.8 million ($0.4 million for the second quarter) and Ocwen billed Altisource $0.6 million ($0.3 million for the second quarter) for services provided under the Transition Services Agreement. These amounts are reflected as a component of Selling, General and Administrative expenses in the accompanying Condensed Consolidated Statements of Operations. SECTION 7 FORWARD LOOKING STATEMENTS This Quarterly Report contains forward-looking statements that relate to, among other things, our future financial and operating results. In many cases, you can identify forward-looking statements by terminology such as may, will, should, expect, intend, plan, anticipate, believe, estimate, predict, potential or continue or the negative of these terms and other comparable terminology including, but not limited to, the following: | ||||||||||||||
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First numeric data row: 0
First row with column header attributes:
Last row with column header attributes:
Row 0
[3..3) [0..0] (stub): 'assumptions related to the sources of liquidity and the adequacy of financial resources;'
Row 1
Row 2
[3..3) [0..0] (stub): 'assumptions about our ability to grow our business;'
Row 3
Row 4
[3..3) [0..0] (stub): 'assumptions about our ability to reduce our cost structure;'
Prototype ranges:
Row 4
[3..3) [0..0] (stub): ''
Best data column prototype:
Row 4
[3..3) [0..0] (stub): ''
Table attributes: assets,revenues,date,liabilities,incomestatement,cash
Original filing from SEC EDGAR system.