UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
FORM 10-K
(Mark One)
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| þ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| | FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009 |
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2010OR
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| o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| | FOR THE TRANSITION PERIOD FROM TO |
FOR THE TRANSITION PERIOD FROMTOCommission File Number: 001-34354
Altisource Portfolio Solutions S.A.
(Exact name of Registrantregistrant as specified in its charter)
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Luxembourg
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(State or other jurisdiction of
incorporation or organization) | | Not Applicable
(I.R.S. Employer
Identification No.) |
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2, rue Jean Bertholet291, Route d’Arlon
L-1233L-1150 Luxembourg
Grand Duchy of Luxembourg
(Address of principal executive offices)(Zip Code)
(352) 24 69 79 00
(Registrant’sAddress and telephone number, including area code)code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | | Name of each exchange on which registered |
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| Common Stock, $1.00 par value | | The NASDAQ StockGlobal Select Market |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yeso Noþ
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yeso Noþ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesþ Noo
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)
.Yeso Noo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein and will not be contained, to the best of the Registrant’s knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K.o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filero | | Accelerated filerþ | | Non-accelerated filero | Non-accelerated filer þ
(doDo not check if a smaller reporting company) | | Smaller reporting companyo |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yeso Noþ
The aggregate market value of the voting and non-voting common equitystock held by non-affiliates computed by reference tononaffiliates of the price at which the common equityregistrant as of June 30, 2010 was last sold (based$462,059,307 based on the closing share price as quoted on the NASDAQ Global Market) asMarket on that day and the assumption that all directors and executive officers of the last business dayCompany, and their families, are affiliates. This determination of the registrant’s most recently completed second fiscal quarter wasaffiliate status is not available because the Registrant’s common equity did not begin trading on the NASDAQ Global Market until August 10, 2009.necessarily a conclusive determination for any other purpose.
The number of the Registrant’s common shares outstanding as of February 26, 2010January 31, 2011 was 24,199,836.24,880,951.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement to be filed subsequent to the date hereof with the Commission pursuant to Regulation 14A in connection with the registrant’s 20092011 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the conclusion of the registrant’s fiscal year ended December 31, 2009.2010.
Forward-Looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which reflect our current views with respect to, among other things, our operations, market expectations and financial performance. You can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include but are not limited to those described under section entitled “Risk Factors” in this report, as such factors may be updated from time to time in our periodic filings with the Securities and Exchange Commission (“SEC”), which are accessible on the SEC’s website at www.sec.gov. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report and in our other periodic filings. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
Except as otherwise indicated or unless the context otherwise requires, “Altisource,” “we,” “us,” “our” and the “Company” refer to Altisource Portfolio Solutions S.A., a Luxembourg société anonyme, or public limited company, and its subsidiaries.
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PART I
This Annual Report onForm 10-K and the documents incorporated herein by reference contain forward-looking statements based on expectations, estimate, and projections based on the date of this filing. Actual results may differ materially from those expressed in forward-looking statements. See Item 1A of Part 1 “Risk Factors”.
Overview
Altisource Portfolio Solutions S.A., together with its subsidiaries, 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.
Except as otherwise indicated or unless the context otherwise requires, “Altisource,” “we,” “us,” “our” and the “Company” refer to Altisource Portfolio Solutions S.A., a Luxembourg société anonyme, or public limited company, and its subsidiaries.
We are a technology enabled global knowledge process provider initially focused on the entire mortgage services lifecycle and credit to cash lifecycle management spaces. During 2010, our first full calendar year as a separate entity, we achieved several milestones:
Recognized revenue of $301.4 million, representing a 49% increase over the year-ended December 31, 2009.
Recognized diluted earnings per share of $1.88 representing a 76% increase over the year-ended December 31, 2009.
Generated $52.8 million of operating cash flow representing on average $0.21 for every dollar of Service Revenue generated.
In addition, we sought to strategically deploy cash generated during 2010 to either facilitate long-term growth or return such cash to shareholders:
Acquired The Mortgage Partnership of America, LLC (“MPA”), manager of Best Partners Mortgage Cooperative, Inc. (“BPMC”) doing business as Lenders One Mortgage Cooperative (“Lenders One”). Lenders One is a national alliance of independent mortgage bankers.
Returned $17.8 million to shareholders through the repurchase of 0.7 million shares.
Expended $11.6 million on capital projects to facilitate the growth of operations, primarily as a result of the growth of the residential loan portfolio of our largest customer Ocwen Financial Corporation (“Ocwen”).
We are publicly traded on the NASDAQ Global Select market under the symbol ASPS. We were incorporated under the laws of Luxembourg on November 4, 1999 as Ocwen Luxembourg S.à r.l., renamed Altisource Portfolio Solutions S.à r.l. on May 12, 2009 and converted into Altisource Portfolio Solutions S.A. on June 5, 2009.
On August 10, 2009 (the “Separation Date”), we became a stand-alone public company in connection with our separation from Ocwen Financial Corporation (“Ocwen”) (the “Separation”). Prior to the Separation, weour businesses were a wholly-owned subsidiarysubsidiaries of Ocwen. On the Separation Date, Ocwen distributed all of the Altisource common stock to Ocwen’s shareholders (the “Distribution”). Ocwen’s stockholders received one share of Altisource common stock for every three shares of Ocwen common stock held as of August 4, 2009 (the “Record Date”). In addition, holders of Ocwen’s 3.25% Contingent Convertible Unsecured Senior Notes due 2024 received one share of Altisource common stock deemed held on an as if converted basis. For such notes,
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In connection with the conversion ratio of 82.1693 shares ofSeparation, we entered into various agreements with Ocwen common stock for every $1,000 in aggregate principal amount of notes held onthat define our relationship after the Record Date was calculated first,Separation including a Separation Agreement, a Tax Matters Agreement, an Employee Matters Agreement, an Intellectual Property Agreement, a Data Center and then we appliedDisaster Recovery Agreement, a Technology Products Services Agreement, a Transition Services Agreement and certain long-term servicing contracts (collectively, the distribution ratio of one share of Altisource common stock for every three shares of Ocwen common stock on an as converted basis to determine the number of shares each note holder received.“Agreements”).
Reportable Segments
We classify our businesses into three reportable segments.Mortgage Servicesconsists of mortgage portfolio management services that span the mortgage lifecycle.Financial Services principally consists of unsecured asset recovery and customer relationship management.Technology ProductsServices (formerly Technology Products) consists of modular, comprehensive integrated technological solutions for loan servicing, vendor management and invoice presentment.presentment and payment as well as providing infrastructure support.
We conduct portions of our operations in all 50 states and in three countries outside of the United States.
Mortgage Services
Mortgage Services provides residential mortgage originationthe services that loan originators and defaultloan servicers typically outsource to third parties. These services that extend across the lifecycle of a mortgage loan.
Our Mortgage Services segment generates revenue principally by providing outsourced services for Ocwen or with respect to the residential loan portfolio serviced by Ocwen. During 2010, we achieved significant growth in our Mortgage Services segment primarily driven by the development and execution of default oriented mortgage services over an expanding national platform. In addition, during 2010 Ocwen successfully grew its residential loan portfolio primarily as a result of the acquisitions of a $6.9 billion servicing portfolio from Saxon Mortgage Services (“Saxon”) in May, 2010 and a $22.4 billion portfolio from HomEq Servicing, the United States mortgage servicing business from Barclays Bank, (“HomEq”) in September, 2010. As our largest customer, this growth in Ocwen’s residential portfolio should facilitate significant growth for us during 2011.
In addition, we are committed to developing into a full service provider in the mortgage services vertical including the provision of our services to mortgage originators. Through our acquisition of MPA in February 2010 we have preferred access to financial institutions which we believe constitutes 6% of the total residential mortgage origination market. In addition, we signed an agreement with Members United Corporate Federal Credit Union (“Members United”) which gives us access to over 2,000 diverse financial institutions.
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The table below presents revenues for our Mortgage Services segment for the past three annual periods:
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| | | For the Years Ended December 31, | | For the Years Ended December 31, | |
| (in thousands) | | 2009 | | 2008 | | 2007 | | 2010 | | 2009 | | 2008 | |
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| Revenue: | | |
| Asset Management Services | | | $ | 78,999 | | $ | 30,464 | | $ | 1,167 | |
| Component Services and Other | | | 40,473 | | 19,196 | | 11,683 | |
| Residential Property Valuation | | $ | 26,800 | | $ | 28,882 | | $ | 38,998 | | | 33,502 | | 26,800 | | 28,882 | |
| Closing and Title Services | | 17,444 | | 13,173 | | 14,042 | | | 28,056 | | 17,444 | | 13,173 | |
| Default Management Services | | 9,194 | | 51 | | — | | | 23,741 | | 9,194 | | 51 | |
| Asset Management Services | | 30,464 | | 1,167 | | — | | |
| Component Services | | 19,196 | | 11,683 | | 11,220 | | |
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| Total Revenue | | $ | 103,098 | | $ | 54,956 | | $ | 64,260 | | | $ | 204,771 | | $ | 103,098 | | $ | 54,956 | |
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| Transactions with Related Parties: | | |
| Asset Management Services | | | $ | 78,999 | | $ | 30,464 | | $ | 1,161 | |
| Residential Property Valuation | | $ | 25,762 | | $ | 27,301 | | $ | 26,604 | | | 32,525 | | 25,762 | | 27,301 | |
| Closing and Title Services | | 13,496 | | 13,173 | | 14,042 | | | 17,379 | | 13,496 | | 13,173 | |
| Default Management Services | | 4,367 | | — | | — | | | 6,752 | | 4,367 | | — | |
| Asset Management Services | | 30,464 | | 1,161 | | — | | |
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| Total | | $ | 74,089 | | $ | 41,635 | | $ | 40,646 | | | $ | 135,655 | | $ | 74,089 | | $ | 41,635 | |
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Reimbursable Expenses (included in Revenue)(1): | | |
| Asset Management Services | | | $ | 41,920 | | $ | 14,308 | | $ | — | |
| Default Management Services | | | 2,328 | | 1,769 | | — | |
| Closing and Title Services | | | 302 | | — | | — | |
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| Total | | | $ | 44,550 | | $ | 16,077 | | $ | — | |
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| | | For the Years Ended December 31, |
| (in thousands) | | 2009 | | 2008 | | 2007 |
| Expense Reimbursements (included in Revenue): | | | | | | | | | | | | |
| Default Management Services | | $ | 1,770 | | | $ | — | | | $ | — | |
| Asset Management Services | | | 14,308 | | | | — | | | | — | |
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| Total | | $ | 16,078 | | | $ | — | | | $ | — | |
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| (1) | | Reimbursable Expenses include costs we incur that we are able to pass through to our customers without any mark-up. |
Residential Property Valuation.We provide our customers with a broad range of traditional appraisal and other valuation services, including broker price opinions, delivered through our network of experienced valuation experts with proven track records. Our customers have the ability to outsource their appraisal management functions to us taking advantage of our national vendor network and enhanced quality reviews.
Closing and Title Services. We provide our customers a centralized titlean array of closing services (e.g., document preparation) and closing service. In 2009, we began to add a broad range of title services (e.g., pre-foreclosure title search, title insurance) applicable to the residential foreclosure process and will continue to roll out our title agency services nationally during 2010.
Default Management Services. We principally provide non-legal administrative or back-office services to attorney customers tothe sale of residential property. Historically, we have focused on closing support foreclosure, bankruptcy and eviction functions including new file preparation, notifications and advisories, marketing properties for foreclosure sale, document preparation and communications on behalf of the client and billing services.
Asset Management. We provide our customers with property inspection and preservation services and a multi-channel real-estate marketplace for the disposition ofun-insured title searches principally around Real Estate Owned (“REO”) properties.sale transactions. During 2010, we began building out our title agency operations nationally in order to be able to expand our title search and insurance footprint.
Default Management Services.We provide non-legal back-office support for foreclosure, bankruptcy and eviction attorneys as well as non-judicial foreclosure services in California and Nevada. We do not execute or notarize foreclosure affidavits of debt or lost note affidavits.
Asset Management. Asset management services principally include property preservation, property inspection, REO asset management and REO brokerage. In the first quarter of 2010, we completed our national network for property preservation and REO disposition including our real estate broker referral network.
Component Services and Other. We provide our customers with loan underwriting, quality control, insurance and claims processing, call center services and analytical support.
Expense reimbursements include costs In addition, since February 2010, we incur that we are able to pass through to our customers without any mark-up.have included the operations of MPA within Component Services and Other.
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Financial Services
ThisOur Financial Services segment comprises our asset recoveryprovides collection and customer relationship management businesses. services primarily to debt originators (e.g., credit card, auto loans, retail credit) and the utility industry.
We generate the majority of our revenue in Financial Services from contingent collection activity on behalf of third parties. For this segment, we are focused on expansion of our global delivery platform, development of an enhanced technology platform and reduced cost structure.
The following table represents revenues for our Financial Services segment for the past three annual periods:
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| | | For the Years Ended December 31, | | For the Years Ended December 31, | |
| (in thousands) | | 2009 | | 2008 | | 2007 | | 2010 | | 2009 | | 2008 | |
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| Revenue: | | |
| Asset Recovery Management | | $ | 51,019 | | $ | 62,771 | | $ | 36,802 | | | $ | 48,050 | | $ | 51,019 | | $ | 62,771 | |
| Customer Relationship Management | | 13,415 | | 11,064 | | 4,491 | | | 11,929 | | 13,415 | | 11,064 | |
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| Total Revenue | | $ | 64,434 | | $ | 73,835 | | $ | 41,293 | | | $ | 59,979 | | $ | 64,434 | | $ | 73,835 | |
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| Transactions with Related Parties: | | |
| Asset Recovery Management | | $ | 98 | | $ | 1,181 | | $ | 1,044 | | | $ | 166 | | $ | 98 | | $ | 1,181 | |
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Reimbursable Expenses (included in Revenue)(1): | | |
| Asset Recovery Management | | | $ | 2,899 | | $ | — | | $ | — | |
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| (1) | | Reimbursable Expenses include costs we incur that we are able to pass through to our customers without any mark-up. |
Asset Recovery ManagementManagement.. We provide post-charge-off consumer debt collection (e.g., credit cards, auto loans, second mortgages) on a contingent fee basis aswhere we are paid a percentage of the cash collected.
Customer Relationship ManagementManagement.. We provide customer care (e.g., connects/disconnects for utilities) and early stage collections services for which we are generally compensated on a per-call, per-person or per-minute basis.
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Technology ProductsServices
Technology ProductsServices comprises our REALSuite of applications as well as our IT infrastructure services. We only provide our IT infrastructure services to Ocwen and internally. ourselves.
Our Technology Services segment is focused on (i) supporting the growth of Mortgage Services, Financial Services and Ocwen, (ii) developing technology solutions to facilitate delivery of services for Lenders One and Members United and (iii) commercializing our service offerings to expand their applicability.
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The following table presents revenues for our Technology ProductsServices segment for the past three annual periods:
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| | | For the Years Ended December 31, | | For the Years Ended December 31, | |
| (in thousands) | | 2009 | | 2008 | | 2007 | | 2010 | | 2009 | | 2008 | |
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| Revenue: | | |
| REALSuite | | $ | 25,784 | | $ | 20,463 | | $ | 18,328 | | | $ | 31,214 | | $ | 25,784 | | $ | 20,463 | |
| IT Infrastructure Services | | 21,669 | | 24,820 | | 17,907 | | | 20,799 | | 21,669 | | 24,820 | |
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| Total Revenue | | $ | 47,453 | | $ | 45,283 | | $ | 36,235 | | | $ | 52,013 | | $ | 47,453 | | $ | 45,283 | |
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Transactions with Related Parties(1): | | |
| REALSuite | | $ | 9,899 | | $ | 9,134 | | $ | 7,800 | | | $ | 11,226 | | $ | 9,899 | | $ | 9,134 | |
| IT Infrastructure Services | | 10,811 | | 26,012 | | 16,742 | | | 7,941 | | 10,811 | | 26,012 | |
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| Total | | $ | 20,710 | | $ | 35,146 | | $ | 24,542 | | | $ | 19,167 | | $ | 20,710 | | $ | 35,146 | |
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| (1) | | Includes revenue earned from other segments related to RealSuite and IT infrastrutureinfrastructure services of $1.8 million and $13.7 million, respectively in 2008 and $1.5 million and $6.9 million, respectively in 2007.2008. |
The REALSuite platform consists ofincludes a comprehensive, modular based technology suite that primarily consists of commercial and residential servicing platforms, a vendor management system and an invoice presentment and payment system. A brief description of key offerings within our REALSuite is provided below:
REALServicing® — an enterprise residential mortgage loan servicing product that offers an efficient and effective platform for loan servicing including default administration. TheThis technology solution features automated workflows, scripting and robust reporting capabilities. The productsolution spans the loan administration cycle from loan boarding to satisfaction including all collections, payment processing and reporting. We also offer REALSynergy® for, an enterprise commercial real estate loan servicing.servicing system.
REALTrans® — ana patented electronic business-to-business exchange that automates and simplifies the ordering, tracking and fulfilling of mortgage and other services. TheThis technology solution, whether web-based or integrated into a servicing system, connects multiple service providers through a single platform and forms an efficient method for managing a large scale network of vendors.
REALRemit® — a patented electronic invoice presentment and payment system that provides vendors with the ability to submit invoices electronically for payment and to have invoice payments deposited directly to their respective bank accounts.
IT Infrastructure ServicesServices.. We provide a full suite of IT services (e.g., desktop applications, network management, telephony, help desk) through which we perform remote management of IT functions internally and for Ocwen.
Corporate Items and Eliminations
Corporate items principally includes expenditures related to corporate support functions such as finance, legal, human resources, risk management and consumer behavior. Prior to the Separation Date, this segment includesincluded eliminations of transactions between the reporting segments as well as expenditures recognized by us related to the Separation. Subsequent to the Separation Date, in addition to the previously mentioned items, this segment also includes costs recognized by us related to corporate support functions, such as finance, law department and human resources.
Customers
As of year-end, our active client base included companies primarily in the financial services, consumer products and services, telecommunications, utilities, government, and real estate services and mortgage servicing sectors.
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Our 3three largest customers in 20092010 accounted for 75%68% of our total revenue. Our largest customers include Ocwen, American Express Company (“American Express”) and Assurant, Inc (“Assurant”) which accounted for 47%51%, 16%8% and 12%9%, respectively, of Altisource’s total revenue. In determiningrevenue in 2010.
Ocwen remains our largest customer. Following the Separation, Ocwen is contractually obligated to purchase certain Mortgage Services and Technology Services from us under service agreements. These agreements extend until August 2017 subject to termination under certain provisions. Ocwen is not restricted from redeveloping these services. We settle amounts fromwith Ocwen we include amounts directly paid for by Ocwen (e.g.,RealServicingfees) as well as revenueson a daily, weekly or monthly basis based upon the nature of the services and when the service is completed.
We consider certain services to be derived from theOcwen’s loan portfolios serviced byservicing portfolio rather than provided to Ocwen althoughbecause such services are charged to the mortgagee and/or the investor and are not expenses to Ocwen. Ocwen, is contractually obligatedor services derived from Ocwen’s loan servicing portfolio, as a percentage of each of our segment revenues and as a percentage of consolidated revenues was as follows for the year ended December 31:
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| | | For the Years Ended December 31, | |
| | | 2010 | | | 2009 | |
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| Mortgage Services | | | 66 | % | | | 72 | % |
| Technology Services | | | 37 | | | | 44 | |
| Financial Services | | | < 1 | | | | < 1 | |
| Consolidated Revenues | | | 51 | % | | | 47 | % |
We record revenues we earn from Ocwen under the various long-term servicing contracts at rates we believe to purchase services from us; however,be market rates as they are consistent with one or more of the following: the fees we charge to other customers for comparable services; the rates Ocwen is not restricted from redeveloping these services. Since we intendpays to continue to expand revenues fromother service providers; fees commensurate with market surveys prepared by unaffiliated firms; or prices being charged by our existing customer base, including Ocwen, we expect our revenues will become more concentrated with certain key customers during 2010.competitors.
Sales and Marketing
We have developed a team of experienced sales personnel with subject matter expertise for each of our primary services. These individuals maintain relationships throughout the industry verticalssectors we serve and play an important role in generating new client leads as well as identifying opportunities to expand our services with existing clients. Additional leads are also generated through request for proposal processes from key industry participants. Our sales team works collaboratively and is compensated principally with a base salary and commission for sales generated.
From a sales and marketing perspective, our primary focus is supporting the growth of our largest customer, Ocwen, and on expanding relationships with existing customers and targeting new customers that could have a material positive impact on our results of operations. Given the highly concentrated nature of the industries in whichthat we serve, the time and effort spent in expanding relationships or winning new relationships is significant.
Intellectual Property
We rely on a combination of contractual restrictions, internal security practices, patents, trademarks, copyrights, trade secrets and other intellectual property to establish and protect our software, technology and expertise. We also own or, as necessary and appropriate, have obtained licenses from third parties to intellectual property relating to our products,services, processes and business. These intellectual property rights are important factors in the success of our businesses. We actively protect our rights and intend to continue our policy of taking all measures we deem reasonable and necessary to develop and protect our patents, copyrights, trade secrets, trademarks and other intellectual property rights.
As of December 31, 2009,2010, we held a patenttwo patents that expiresexpire in 20232024 and had 18 pending patent applications with projected expiration dates from 2020 to 2030.2025, respectively. In addition, Altisource has registered trademarks or recently filed applications for registration of trademarks in a number of countries or groups of countries including 17 separate trademarks in the United States and up to twelve filings for the same marks in the European Community, India and in ninetwelve other countries or groups of countries. These trademarks generally can be renewed indefinitely.
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Competition
The industry verticals in which we engage are highly competitive and generally consist of a few national vendors as well as a large number of regional or in-house providers resulting in a fragmented market with disparate service offerings. From an overall perspective, we compete with the global business process outsourcing firms such as Genpact Limited, WNS (Holdings) Limited and ExlService Holdings, Inc. In ourOur Mortgage Services segment we competecompetes with national and regional third party service providers and in-house servicing operations of large mortgage lenders and servicers. Our Financial Services segment competes with other large receivables management companies as well as smaller companies and law firms focused on collections. Our Technology ProductsServices segment competes with third party data processing orand software development companies.
Given the diverse nature of services that we and our competitors offer, we cannot determine our position in the market with accuracy,certainty, but we believe that we represent only a small portion of very large sized markets. Given our size, some of our competitors may offer more diversified services, operate in broader geographic markets or have greater financial resources than we do. In addition, some of our larger customers retain multiple providers resulting in continuous evaluationand continuously evaluate of our performance against our competitors.
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Competitive factors in our Mortgage Services business include the quality and timeliness of our services, the size and competence of our network of vendors and the breadth of the services we offer. For Financial Services, competitive factors include the ability to achieve a collection rate comparable to our competitors; the quality and personal nature of the service; the consistency and professionalism of the service and the recruitment, training and retention of our workforce. Competitive factors in our Technology ProductsServices business include the quality of the technology-based application or service; application features and functions; ease of delivery and integration; our ability to maintain, enhance and support the applications or services and costs. We believe thatcosts and enforceability of our national platform, integrated technology and global delivery model in our three reportable segments provide us with a competitive advantage in each of these categories.patents.
Employees
As of December 31, 2009,2010, we had the following number of employees:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Consolidated | | Consolidated | |
| | | United States | | India | | Other | | Altisource | | United States | | India | | Other | | Altisource | |
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| Mortgage Services | | 70 | | 1,089 | | — | | 1,159 | | | 92 | | 1,832 | | 29 | | 1,953 | |
Financial Services(1) | | 757 | | 350 | | 2 | | 1,109 | | | 655 | | 463 | | — | | 1,118 | |
| Technology Products | | 11 | | 411 | | — | | 422 | | |
| Technology Services | | | 19 | | 506 | | — | | 525 | |
| Corporate | | 28 | | 104 | | 25 | | 157 | | | 23 | | 210 | | 35 | | 268 | |
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| Total Employees | | 866 | | 1,954 | | 27 | | 2,847 | | | 789 | | 3,011 | | 64 | | 3,864 | |
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| (1) | | We also have approximately 700 employees in India utilized via an outsource agreement with an unrelated third-party.third-party that has approximately 625 employees in India supporting the assignment. |
We have not experienced any work stoppages, and we consider our relations with employees to be good. We believe that our future success will depend, in part, on our ability to continue to attract, hire and retain skilled and experienced personnel.
Seasonality
Our revenues are seasonal. More specifically, Financial Services business is subjectrevenue tends to seasonality with collections revenue typicallybe higher in the first calendarhalf of the year, particularly the first quarter, of each year because consumersas borrowers may use incomeutilize tax refunds to make payments on debts and lower in the fourth quarter because of spending during holiday season. Ourpay debts. Mortgage Services business typically has higher revenue during warmer months generally beginning in March and continuing through October as home buying activity tendsis impacted by property sales which tend to be reducedat their lowest level during winter months and as a result of the holiday season.highest during summer months.
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Government Regulation
Our business is subject to extensive regulation by federal, state and local governmental authorities including the Federal Trade Commission and the state agencies that license our mortgage services and collection entities. We also must comply with a number of federal, state and local consumer protection laws including, among others, the Dodd-Frank Act Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), the Gramm-Leach-Bliley Act, the Fair Debt Collection Practices Act, the Real Estate Settlement Procedures Act, the Truth in Lending Act, the Fair Credit Reporting Act, and the Homeowners Protection Act. These statutes apply to debt collection, foreclosureAct and claims handling. In some instances, the regulators mandate certain disclosures and notices to borrowers.SAFE Act. These requirements can and do change as statutes and regulations are enacted, promulgated or amended.
We are subject to certain federal, state and local consumer protection provisions. We are also subject to licensing and regulation as a mortgage service provider and/or debt collector in a number of states. We are subject to audits and examinations that are conducted by the states. Our employees who sell title insurance products and real estate services may be required to be licensed by various state commissions for the particular type of product sold
7
service delivered and to participate in regular continuing education programs. From time to time, we receive requests from state and other agencies for records, documents and information regarding our policies, procedures and practices regarding our mortgage services and debt collection business activities. We incur ongoing costs to comply with governmental regulations.
Available Information
We file annual, quarterly and current reports and other information with the SEC.Securities and Exchange Commission (“SEC”). These filings are available to the public over the Internet at the SEC’s web site athttp://www.sec.gov.www.sec.gov. You may also read and copy any document we file at the SEC’s public reference room located at 100 F Street, N.E., Washington, DC 20549. Please call the SEC at 1 800-SEC-0330 for further information on the public reference room.
Our principal Internet address is www.altisource.com.www.altisource.com and we encourage investors to use it as a way of easily finding information about us. We promptly make available on this website, free of charge, on or through www.altisource.com our annualthe reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable afterthat we electronically file such material with, or furnish it to,with the SEC.SEC, corporate governance information (including our Code of Business Conduct and Ethics) and select press releases. The contents of our website are not, however, a part of this report.
8
The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. If any of the following risks actually occur, our business, operating results and financial condition could be materially adversely affected.
RISKS RELATED TO OUR BUSINESS IN GENERAL:
Our businessability to grow is dependent onaffected by our ability to grow,retain and an inabilityexpand our existing client relationships and our ability to attract new customers could adversely affect us.customers.
Our business is dependent on our ability to grow which is affected by our ability to retain and expand our existing client relationships and our ability to attract new customers. Our ability to retain existing customers and expand those relationships is subject to a number of risks including the risk that we do not:
• | | maintain or improve the quality of services that we provide to our customers; |
|
• | | maintain or improve the level of attention expected by our customers; and |
|
• | | successfully leverage our existing client relationships to sell additional services. |
maintain or improve the quality of services that we provide to our customers;
maintain or improve the level of attention expected by our customers; and
successfully leverage our existing client relationships to sell additional services.
If our efforts to retain and expand our client relationships and to attract new customers do not prove effective, it could have a material adverse effect on our business and results of operations and financial condition.operations.
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Our continuing relationship with Ocwen may inhibit our ability to obtain and retain other customers that compete with Ocwen.
As of December 31, 2009,2010, our chairman owns or controls 18%more than 15% of Ocwen’s common stock and 24%25% of our common stock. We derived 47%51% of our revenues in 20092010 from Ocwen or the loan servicing portfolio managed by Ocwen. Given this close and continuing relationship with Ocwen, we may encounter difficulties in obtaining and retaining other customers who compete with Ocwen. Should these and other potential customers continue to view Altisource as part of Ocwen or as too closely related to or dependent upon Ocwen, they may be unwilling to utilize our services, and our growth could be inhibited as a result.
We are dependent on certain key customer relationships, the loss of or their inability to pay could reduce our revenues.
We currently generate approximately 47%51% of our revenue from Ocwen, including 72% and 44% of our Mortgage Services and Technology Products segments revenue, respectively.Ocwen. Following the Separation, Ocwen is contractually obligated to purchase certain Mortgage Services and Technology ProductsServices from us under service agreements that extend for eight years from the Separation Date subject to termination under certain provisions.
Our most significantlargest Financial Services customer is American Express which accounted for 16%8% of our total 2009consolidated 2010 revenues. Our relationship with American Express is governed by an agreement that generally sets out the guidelines on which we will provide services although each assignment from American Express is separately agreed to by American Express. American Express is not contractually obligated to continue to use our services at historical levels or at all, and the relationship is terminable by American Express by giving 30 days prior written notice to us.
Assurant accounted for 12%9% of our 20092010 revenue contributing to both our Mortgage Services and Technology Services segments. Our relationship with Assurant is governed by five year agreements that establish minimum service and pricing levels and generally are not terminable except in certain circumstances.
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While no other individual client represents more than 10% of our consolidated revenues, we are exposed to customer concentration. Most of our customers are not contractually obligated to continue to use our services at historical levels or at all. The loss of any of these key customers or their failure to pay us could reduce our revenues and adversely affect results of operations.
If we do not adapt our services to changes in technology or in the marketplace, or if our ongoing efforts to upgrade our technology are not successful, we could lose customers and have difficulty attracting new customers for our services.
The markets for our services are characterized by constant technological changes,change, frequent introductionsintroduction of new services and evolving industry standards. Our future success will be significantly affected by our ability to enhance, primarily through use of automation, econometrics and behavioral science principles, our current services and develop and introduce new services that address the increasingly sophisticated needs of our customers and their customers. These initiatives carry the risks associated with any new service development effort including cost overruns, delays in delivery and performance monitoring.effectiveness. There can be no assurance that we will be successful in developing, marketing and selling new services that meet these changing demands. In addition, we may experience difficulties that could delay or prevent the successful development, introduction and marketing of these services. Finally, our services and their enhancements may not adequately meet the demands of the marketplace and achieve market acceptance. Any of these results would have a negative impact on our financial condition and results of operations.
The Company’s growth objectives are dependent on the timing and market acceptance of our new service offerings.
Our ability to grow may be adversely affected by difficulties or delays in service development or the inability to gain market acceptance of new services to existing and new customers. There are no guarantees that new services will prove to be commercially successful.
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Our intellectual property rights are valuable and any inability to protect them could reduce the value of our services.
Our patents, trademarks, trade secrets, copyrights and other intellectual property rights are important assets. The efforts we have taken to protect these proprietary rights may not be sufficient or effective. The unauthorized use of our intellectual property or significant impairment of our intellectual property rights could harm our business, make it more expensive to do business or hurt our ability to compete. Protecting our intellectual property rights is costly and time consuming.
Although we seek to obtain patent protection for our innovations, it is possible we may not be able to protect some of these innovations. Changes in patent law, such as changes in the law regarding patentable subject matter, can also impact our ability to obtain patent protection for our innovations. In addition, given the costs of obtaining patent protection, we may choose not to protect certain innovations that later turn out to be important. Furthermore, there is always the possibility, despite our efforts, that the scope of the protection gained will be insufficient or that an issued patent may be deemed invalid or unenforceable.
Technology failures could damage our business operations and increase our costs.
The industries in which we operate are characterized by rapidly changing technologies, and systemSystem disruptions or failures may interrupt or delay our ability to provide services to our customers. Any sustained and repeated disruptions in these services may have an adverse impact on our results of operations.
The secure transmission of confidential information over the Internet is essential to maintaining consumer confidence. Security breaches and acts of vandalism could result in a compromise or breach of the technology that we use to protect our customers’ personal information and transaction data. Consumers generally are concerned with security breachesdata and privacy oncould result in the Internet, andassessment of penalties. Furthermore, Congress or individual states could enact new laws regulating the electronic commerce market that could adversely affect us and our results of operations.
We may be subject to claims of legal violations or wrongful conduct which may cause us to pay unexpected litigation costs or damages or modify our products or processes.
From time to time, we may be subject to costly and time-consuming legal proceedings that claim legal violations or wrongful conduct. These lawsuits may involve clients, vendors, competitors and / or other large groups of plaintiffs and, if resulting in findings of violations, could result in substantial damages. SinceAlternatively, the interpretation of some laws governing our business is prone to ambiguity, the companyCompany may be forced to settle some claims out of court and change existing company practices, productsservices and processes that are currently revenue generating. This could lead to unexpected costs or a loss of revenue.
If we fail to comply with privacy regulations imposed on providers of services to financial institutions, our business could be harmed.
As a provider of services to financial institutions, we are bound by the same limitations on disclosure of the information we receive from their customers that apply to the financial institutions themselves. If we fail to comply with these regulations, we could be exposed to suitslawsuits or to governmental proceedings; our customer relationships and reputation could be harmed; and we could be inhibited in our ability to obtain new customers. In addition, the adoption of more restrictive privacy laws or rules in the future on the federal or state level could have an adverse impact on us.
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Our business is subject to extensive regulation, and failure to comply with existing or new regulations may adversely impact us.
Our business is subject to extensive regulation by federal, state and local governmental authorities including the Federal Trade Commission and the state agencies that license certain of our mortgage related services and collection services. We also must comply with a number of federal, state and local consumer protection laws including, among others, the Dodd-Frank Act, the Gramm-Leach-Bliley Act, the Fair Debt Collection Practices Act, the Real Estate Settlement Procedures Act, the Truth in Lending Act, the Fair Credit Reporting Act, and the Homeowners Protection Act. These statutes apply to debt collection, foreclosure, real estate, settlement servicesAct and claims handling, and they mandate certain disclosures and notices to borrowers.the SAFE Act. These requirements can and do change as statutes and regulations are enacted, promulgated or amended.
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We are subject to certain federal, state and local consumer protection provisions. We also are subject to licensing and regulation as a mortgage service provider, title insurance agency, real estate broker and/or debt collector in a number of states. We are subject to audits and examinations that are conducted by the states in which we do business. Our employees and businesses that sell title insurance products and real estate servicessubsidiaries may be required to be licensed by various state commissions for the particular type of productservice sold and to participate in regular continuing education programs. From time to time, we receive requests from state and other agencies for records, documents and information regarding our policies, procedures and practices regardingfor our mortgage services and debt collection business activities. We incur significant ongoing costs to comply with governmental regulations.
The volume of new or modified laws and regulations has increased in recent years and, in addition, some individual municipalities have begun to enact laws that restrict mortgage serviceservices activities. If our regulators impose new or more restrictive requirements, we may incur significant additional significant costs to comply with such requirements which could further adversely affect our results of operations or financial condition. In addition, our failure to comply with these laws and regulations can possibly lead to civil and criminal liability; loss of licensure; damage to our reputation in the industry; fines and penalties,penalties; and litigation, including class action lawsuits or administrative enforcement actions. Any of these outcomes could harm our results of operations or financial condition.
Altisource is a Luxembourg company, and it may be difficult to enforce judgments against it or its directors and executive officers.
Altisource is a public limited company organized under the laws of Luxembourg. As a result, Luxembourg law and the articles of incorporation govern the rights of shareholders. The rights of shareholders under Luxembourg law may differ from the rights of shareholders of companies incorporated in other jurisdictions. A significant portion of the assets of Altisource are located outside the United States. It may be difficult for investors to enforce, in the United States, judgments obtained in U.S. courts against Altisource or its directors based on the civil liability provisions of the U.S. securities laws or to enforce, in Luxembourg, judgments obtained in other jurisdictions including the United States.
If the Distribution does not qualify as a tax-free transaction, taxes could be imposed on Ocwen, Altisource and our shareholders. We have agreed to indemnify Ocwen for payment of taxes and tax-related losses and agreed to certain restrictions.
Altisource has agreed to indemnify Ocwen for certain tax liabilities that, if triggered, could have a material adverse effect on Altisource’s financial condition and results of operations. Ocwen is subject to tax on certain of the asset transfers within Ocwen that were made in the pre-Distribution Restructuring, and under the applicable Treasury regulations, each member of Ocwen’s consolidated group at the time of the Separation (including several Altisource subsidiaries) would be severally liable for such tax liability. If the Distribution does not qualify as a tax-free transaction for United States income tax purposes, Ocwen shareholders generally would be treated as if they received a distribution equal to the full fair market value of the Altisource common stock on the date of the Separation.
Even if the Distribution were to otherwise qualify for tax-free treatment, it would become taxable to Ocwen if stock representing a 50% or greater interest in Ocwen or Altisource were acquired by one or more persons, directly or indirectly, as part of a plan or series of related transactions that included the Distribution.
In order to help preserve the tax-free treatment of the Distribution, we have agreed not to take certain actions without first securing the consent of certain Ocwen officers or securing an opinion from a nationally
11
recognized law firm or accounting firm that such action will not cause the Distribution to be taxable. In general, such actions will include (i) for a period of two years after the Separation, engaging in certain transactions involving (a) the acquisition of our stock or (b) the issuance of shares of our stock.
The covenants in, and our indemnity obligations under, the Tax Matters Agreement may limit our ability to pursue strategic transactions or engage in new business or other transactions that may maximize the value of our business. These covenants and indemnity obligations might discourage, delay or prevent a change of control that could be favorable to our common shareholders.
See “Certain Relationships and Related Party Transactions — Agreements with Ocwen — Tax Matters Agreement.”
| | |
| ITEM 1B. | | UNRESOLVED STAFF COMMENTS |
Not applicable.
OurAs of December 31, 2010, our principal executive offices are located in leased office space in Luxembourg, Grand Duchy of Luxembourg. We also lease other office space in to conduct our operations in:
the United States, (Arizona,principally Arizona, New York (used primarily by the Financial Services segment), California (used primarily by the Mortgage Services and Financial Services segments), Missouri (used primarily by the Mortgage Services segment) and Georgia (used by all segments);
India, principally Bangalore (used by all segments), Goa (used primarily by the Financial Services segment) and New York), India (Bangalore, GoaMumbai (used primarily by the Mortgage Services and Mumbai)Financial Services segments); and
Montevideo, Uruguay (Montevideo) to conduct our operations. (used primarily by the Corporate segment).
We do not own any real property. We consider these facilities to be suitable and adequate for the management and operations of our business.
| | |
| ITEM 3. | | LEGAL PROCEEDINGS |
We may from time to time be involved in litigation and claims incidental to the conduct of our business. Our businesses are also subject to extensive regulation which may result in regulatory proceedings against us. See “Item 1A. Risk Factors” above. Certain legal proceedings in which we are involved are discussed in Note 14 to our consolidated financial statements.
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| | |
| ITEM 4. | | (Removed and Reserved) |
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PART II
| | |
| ITEM 5. | | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
Our common stock began trading on the NASDAQ Global Select Market under the symbol of “ASPS” on August 10, 2009. The following table sets forth the high and low close of day sales prices for our common stock, for the periods indicated, as reported by the NASDAQ Global Select Market since the stock was first traded.traded:
| | | | | | | | | | | | | | | | | |
| | | 2009 | | 2010 | |
| Quarter Ended | | Low | | High | | Low | | High | |
| | | |
| March 31 | | | $ | 21.13 | | $ | 27.02 | |
| June 30 | | | 21.84 | | 28.19 | |
| September 30 | | $ | 10.10 | | | $ | 14.51 | | | 24.29 | | 31.14 | |
| December 31 | | $ | 14.41 | | | $ | 21.21 | | | 24.40 | | 30.64 | |
| | | | | | | | | |
| | | 2009 | |
| Quarter Ended | | Low | | | High | |
| | | | | | | | | |
| September 30 | | $ | 10.10 | | | $ | 14.51 | |
| December 31 | | | 14.41 | | | | 21.21 | |
The number of holders of record of our common stock as of March 1, 2010January 31, 2011 was 111.110. The number of beneficial stockholders is substantially greater than the number of holders as a large portion of our common stock is held through brokerage firms.
Dividends
We did not payhave never declared or paid cash dividends on our common stock, during the year ended December 31, 2009, and we do not intend to pay dividends in the foreseeable future.
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Securities Authorized for Issuance underIssuer Purchases of Equity Compensation PlansSecurities
On May 19, 2010, our shareholders authorized us to purchase up to 3.8 million shares of our common stock in the open market. The following table presents information required by this item is incorporated herein by referencerelated to our definitive proxy statement to be filed pursuant to Regulation 14A underrepurchases of our equity securities during the Exchange Act.three months ended December 31, 2010:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Maximum | |
| | | | | | | | | | | Total number | | | number | |
| | | | | | | | | | | of shares | | | of shares that | |
| | | | | | | | | | | purchased as | | | may | |
| | | | | | | | | | | part of | | | yet be | |
| | | Total | | | Weighted | | | publicly | | | purchased | |
| | | number of | | | average | | | announced | | | under the | |
| | | shares | | | price paid | | | plans | | | plans or | |
| Period | | purchased | | | per share | | | or programs | | | programs | |
| | | | | | | | | | | | | | | | | |
| Common shares: | | | | | | | | | | | | | | | | |
| October 1 – 31, 2010 | | | 65,317 | | | $ | 25.86 | | | | 65,317 | | | | 3,633,203 | |
| November 1 – 30, 2010 | | | 435,607 | | | | 27.31 | | | | 435,607 | | | | 3,197,596 | |
| December 1 – 31, 2010 | | | 69,093 | | | | 27.37 | | | | 69,093 | | | | 3,128,503 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Total common shares | | | 570,017 | | | $ | 27.15 | | | | 570,017 | | | | 3,128,503 | |
| | | | | | | | | | | | | | |
Stock Performance Graph
The information contained in Altisource Common Stock Comparative Performance Graph section shall not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that we specifically request that it be treated as soliciting material or incorporate it by reference into a document filed under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
The graph below compares the cumulative total stockholder return on our common stock with the cumulative total return on the S&P’s 500 Index for the period commencing on August 10, 2009, the first trading day of our common stock, and ending on December 31, 2009,2010, the last trading day of fiscal year 2009.2010. The graph assumes an investment of $100 at the beginning of such period. The comparisons in the graphs below are based upon historical data and are not indicative of, nor intended to forecast, future performance of our common stock.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
| |
| | | | | 8/10/09 | | | 8/31/09 | | | 9/30/09 | | | 10/31/09 | | | 11/30/09 | | | 12/31/09 | |
| |
| | Altisource | | | $ | 100.00 | | | | $ | 117.62 | | | | $ | 118.36 | | | | $ | 125.00 | | | | $ | 132.30 | | | | $ | 172.05 | | |
| | S&P 500 | | | | 100.00 | | | | | 101.34 | | | | | 104.96 | | | | | 102.89 | | | | | 108.79 | | | | | 110.72 | | |
| | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 8/10/2009 | | | 9/30/2009 | | | 12/31/2009 | | | 03/31/10 | | | 06/30/10 | | | 09/30/10 | | | 12/31/10 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Altisource | | $ | 100.00 | | | $ | 118.36 | | | $ | 172.05 | | | $ | 183.61 | | | $ | 202.79 | | | $ | 255.25 | | | $ | 235.33 | |
| S&P 500 | | | 100.00 | | | | 104.54 | | | | 110.72 | | | | 115.65 | | | | 101.94 | | | | 112.86 | | | | 124.38 | |
| NASDAQ Composite | | | 100.00 | | | | 106.53 | | | | 113.90 | | | | 120.37 | | | | 105.87 | | | | 118.89 | | | | 133.16 | |
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| | |
| ITEM 6. | | SELECTED CONSOLIDATED FINANCIAL DATA |
The consolidated financial statements as of operations dataand for the years ended December 31, 2009, 20082010 and 20072009 and the balance sheet data ascombined consolidated statement of operations for the year ended December 31, 2009 and 2008 were derived from our audited consolidated financial statements that are included elsewhere in this filing. The combined consolidated statement of operations for the year ended December 31, 2007 and the combined consolidated balance sheet as of December 31, 2008 is derived from our audited financial statements not included in this report. The combined statement of operations data for the year ended December 31, 2006 and the combined balance sheet data as of December 31, 2007 and 2006 are derived from unaudited financial statements not included in this report. The unaudited financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of our management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information set forth in this report.
The historical results presented below may not be indicative of our future performance and doesdo not necessarily reflect what our financial position and results of operations would have been had we operated as a separate, stand-alone entity for periods ending prior to August 9, 2009 that are presented (as discussed in Note 1 to the consolidated financial statements).
The unaudited statements of operations data for the years ended December 31, 2006 and 2005 and the unaudited balance sheet data at December 31, 2006 and 2005 are derived from Altisource’s accounting records for those periods and have been prepared on a basis consistent with Altisource audited combined consolidated financial statements.
The selected consolidated financial data should be read in conjunction with “Item 7. Management’sthe information contained in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewherethereto in this Form 10-K.Item 8 of Part II, “Financial Statements and Supplementary Data”.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | | Years Ended December 31, | |
| (in thousands, except per share data) | | 2009 | | 2008 | | 2007 | | 2006 | | 2005 | | | 2010(1) | | 2009 | | 2008 | | 2007(2) | | 2006 | |
| | | |
Revenue(1) | | $ | 202,812 | | $ | 160,363 | | $ | 134,906 | | $ | 96,603 | | $ | 89,915 | | | $ | 301,378 | | $ | 202,812 | | $ | 160,363 | | $ | 134,906 | | $ | 96,603 | |
Cost of Revenue(1) | | 126,797 | | 115,048 | | 96,954 | | 72,163 | | 75,675 | | | 189,059 | | 126,797 | | 115,048 | | 96,954 | | 72,163 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Gross Profit | | 76,015 | | 45,315 | | 37,952 | | 24,440 | | 14,240 | | | 112,319 | | 76,015 | | 45,315 | | 37,952 | | 24,440 | |
Selling, General and Administrative Expenses(1) | | 39,473 | | 28,088 | | 27,930 | | 17,622 | | 17,953 | | | 57,352 | | 39,473 | | 28,088 | | 27,930 | | 17,622 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Income (Loss) from Operations | | 36,542 | | 17,227 | | 10,022 | | 6,818 | | | (3,713 | ) | |
| Other (Expense) Income, net | | 1,034 | | | (2,626 | ) | | | (1,743 | ) | | 205 | | | (192 | ) | |
| Income from Operations | | | 54,967 | | 36,542 | | 17,227 | | 10,022 | | 6,818 | |
| Other Income (Expense), net | | | 804 | | 1,034 | | | (2,626 | ) | | | (1,743 | ) | | 205 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Income (Loss) before Income Taxes | | 37,576 | | 14,601 | | 8,279 | | 7,023 | | | (3,905 | ) | |
| Income Tax Provision | | | (11,605 | ) | | | (5,382 | ) | | | (1,564 | ) | | | (1,616 | ) | | 2,401 | | |
| Income before Income Taxes | | | 55,771 | | 37,576 | | 14,601 | | 8,279 | | 7,023 | |
| Income Tax Benefit (Provision) | | | 403 | | | (11,605 | ) | | | (5,382 | ) | | | (1,564 | ) | | | (1,616 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Net Income (Loss) | | $ | 25,971 | | $ | 9,219 | | $ | 6,715 | | $ | 5,407 | | $ | (1,504 | ) | |
| Net Income | | | 56,174 | | 25,971 | | 9,219 | | 6,715 | | 5,407 | |
| Net Income Attributable to Non Controlling Interests | | | | (6,903 | ) | | — | | — | | — | | — | |
| | | | | | | | | | | | | |
| Net Income Attributable to Altisource | | | $ | 49,271 | | $ | 25,971 | | $ | 9,219 | | $ | 6,715 | | $ | 5,407 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| Net Income per share | | |
Net Income per Share(3) | | |
| Basic | | $ | 1.09 | | $ | 0.38 | | $ | 0.28 | | $ | 0.22 | | $ | (0.06 | ) | | $ | 1.96 | | $ | 1.08 | | $ | 0.38 | | $ | 0.28 | | $ | 0.22 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Diluted | | $ | 1.08 | | $ | 0.38 | | $ | 0.28 | | $ | 0.22 | | $ | (0.06 | ) | | $ | 1.88 | | $ | 1.07 | | $ | 0.38 | | $ | 0.28 | | $ | 0.22 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| Transactions with related parties included above: | | |
| Transactions with Related Parties included above: | | |
| Revenue | | $ | 94,897 | | $ | 64,251 | | $ | 59,350 | | $ | 51,971 | | $ | 41,312 | | | $ | 154,988 | | $ | 94,897 | | $ | 64,251 | | $ | 59,350 | | $ | 51,971 | |
| | | | | | | | | | | | | |
| Selling, General and Administrative Expenses | | $ | 4,308 | | $ | 6,208 | | $ | 8,864 | | $ | 9,103 | | $ | 9,049 | | | 1,056 | | 4,308 | | 6,208 | | 8,864 | | 9,103 | |
| | | | | | | | | | | | | |
| Interest Expense | | $ | 1,290 | | $ | 2,269 | | $ | 965 | | $ | 503 | | $ | 679 | | | — | | 1,290 | | 2,269 | | 965 | | 503 | |
| | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, | | As of December 31, | |
| (in thousands) | | 2009 | | 2008 | | 2007 | | 2006 | | 2005 | | 2010(1) | | 2009 | | 2008 | | 2007(2) | | 2006 | |
| | | |
| Cash | | $ | 30,456 | | $ | 6,988 | | $ | 5,688 | | $ | — | | $ | — | | |
| Cash and Cash Equivalents | | | $ | 22,134 | | $ | 30,456 | | $ | 6,988 | | $ | 5,688 | | $ | — | |
| Accounts Receivable, net | | 30,497 | | 9,077 | | 16,770 | | 7,925 | | 10,403 | | | 53,495 | | 30,497 | | 9,077 | | 16,770 | | 7,925 | |
Goodwill(1) | | 9,324 | | 11,540 | | 14,797 | | 1,618 | | 1,618 | | |
| Premises and Equipment, net | | | 17,493 | | 11,408 | | 9,304 | | 12,173 | | 9,826 | |
Intangible Assets, net(1) | | 33,719 | | 36,391 | | 38,945 | | — | | — | | | 72,428 | | 33,719 | | 36,391 | | 38,945 | | — | |
| Premises and Equipment, net | | 11,408 | | 9,304 | | 12,173 | | 9,826 | | 11,242 | | |
| Goodwill | | | 11,836 | | 9,324 | | 11,540 | | 14,797 | | 1,618 | |
| Total Assets | | 120,556 | | 76,675 | | 92,845 | | 22,205 | | 24,706 | | | 197,800 | | 120,556 | | 76,675 | | 92,845 | | 22,205 | |
| Lines of Credit and Other Secured Borrowings | | — | | 1,123 | | 147 | | — | | — | | | — | | — | | 1,123 | | 147 | | — | |
| Capital Lease Obligations | | 664 | | 1,356 | | 3,631 | | 3,219 | | 2,603 | | | 1,532 | | 664 | | 1,356 | | 3,631 | | 3,219 | |
| Total Liabilities | | 34,208 | | 16,129 | | 17,171 | | 7,357 | | 8,471 | | | 45,902 | | 34,208 | | 16,129 | | 17,171 | | 7,357 | |
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| (1) | | The operations of MPA are included in our financial statements effective February 12, 2010, the date of acquisition (see Note 4 to the consolidated financial statements). Total goodwill and intangibles were $51.6 million at December 31, 2010. MPA and its consolidated subsidiary contributed $18.0 million of revenue, including $6.9 million attributable to non-controlling interests, for the year ended December 31, 2010. Operating expenses (including both Cost of Revenue and Selling, General and Administrative Expenses) were $4.9 million for the year ended December 31, 2010. |
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| (2) | | The operations of NCI are included in our financial statements effective June 6, 2007, the date of acquisition. NCI is a receivables management company specializing in contingency collections and customer relationship management for credit card issuers and other consumer credit providers. Total goodwill and intangibles were $31.1 million, $41.4 million $46.3 million and $52.1$46.3 million, at December 31, 2010, 2009 2008 and 2007,2008, respectively. NCI revenues were $60.0 million, $63.1 million $69.6 million and $36.0$69.6 million for the years ended December 31, 2010, 2009 2008 and 2007,2008, respectively. NCI operating expenses (including both costCost of Revenue and revenueSelling, General and selling, general and administrative expenses)Administrative Expenses) were $62.9 million, $69.0 million $74.8 million and $38.4$74.8 million for the years ended December 31, 2010, 2009 2008 and 2007,2008, respectively. |
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| (3) | | For all periods prior to the Separation, the number of shares issued in the capitalization (24.1 million) is being used for diluted earnings per share (“EPS”) as for basic EPS as no common stock of Altisource was traded prior to August 10, 2009 and no Altisource equity awards were outstanding prior to that date. |
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| ITEM 7. | | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The followingManagement’s discussion and analysis of results of operations and financial condition (“MD&A”) is a supplement to the accompanying consolidated financial statements and provides additional information on our businesses, current developments, financial condition, cash flows and results of operations. MD&A is organized as follows:
| • | | Overview.This section, beginning on page 19, provides a description of recent developments we believe are important in understanding the results of operations and financial condition or in understanding anticipated future trends. |
| • | | Consolidated Results of Operations.This section, beginning on page 22, provides an analysis of our consolidated results of operations for the three years ended December 31, 2010. In addition, a brief description is provided of significant transactions and events that affect the comparability of results being analyzed. |
| • | | Segment Results of Operations.This section, beginning on page 28, provides an analysis of each business segment for the three years ended December 31, 2010 as well as our Corporate segment. In addition, we discuss significant transactions, events and trends that may affect the comparability of the results being analyzed. |
| • | | Liquidity and Capital Resources.This section, beginning on page 41, provides an analysis of our cash flows for the three years ended December 31, 2010. We also discuss restrictions on cash movements, future commitments and capital resources. |
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| • | | Critical Accounting Judgments.This section, beginning on page 43, identifies those accounting principles we believe are most important to our financial results and that require significant judgment and estimates on the part of management in application. We provide all of our significant accounting policies in Note 2 to the accompanying consolidated financial statements. |
| • | | Other Matters.This section, beginning on page 44, provides a discussion of off-balance sheet arrangements to the extent they exist. In addition, we provide a tabular discussion of contractual obligations and discuss any significant commitments or contingencies. |
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding guidance, industry prospects or future results of operations of financial position, made in this Annual Report on Form 10-K are forward looking. You can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include but are not limited to those described under section entitled “Risk Factors” in this report, as such factors may be updated from time to time in our periodic filings with the Securities and Exchange Commission (“SEC”), which are accessible on the SEC’s website atwww.sec.gov. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report and in our consolidated financial statements and the related notes included within this Annual Report on Form 10-K.
Significant componentsother periodic filings. We undertake no obligation to publicly update or review any forward-looking statement whether as a result of the MD&A section include:
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The overview section provides a summary of Altisource and our reportable business segments. We also include a discussion of factors affecting our consolidated results of operations as well as items specific to each business group. In addition, we provide a brief description of our basis of presentation for our financial results. | | | | |
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The consolidated results of operations section provides an analysis of our results on a consolidated basis for the years ending December 31, 2009, 2008 and 2007. Significant subsections within this section are as follows: | | | | |
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The segment results of operations section provides an analysis of our results on a reportable operating segment basis for the years ended December 31, 2009, 2008 and 2007. We discuss known trends and uncertainties. Significant subsections within this section are as follows: | | | | |
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The liquidity and capital resources section provides discussion of our ability to generate adequate amounts of cash to meet our current and future needs. Significant subsections within this section are as follows: | | | | |
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The other matters section provides a discussion of related party transactions and provisions of the various separation related agreements with Ocwen. | | | | |
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new information, future developments or otherwise. SECTION 1 — OVERVIEW
Our Business
Altisource isWe are 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.
During 2009, we were a knowledge process provider primarily focused on the receivables management and default mortgage services vertical. Further discussion regarding our business may be found under Part I, Item 1, “Business”.
Strategic Update
Our objective isfor 2010 was to becomemore fully develop into a global knowledge process provider initially focused on the entire mortgage services lifecycle and credit to cash lifecycle management space. We will achievespaces. To accomplish this objective, by executingwe focused on our strategies of penetrating existing customers, acquiring new customers, continuing to focus on increasing quality and reducing costs while investing in new service offerings.four strategic initiatives:
Existing Customer Penetration. Within our Mortgage Services segment, we significantly expanded oursought to expand the revenues derived from the currentOcwen’s loan portfolio servicedprincipally by Ocwen. Although most of our Mortgage Service offerings were launched in late 2008 or during 2009, we estimate that as of December 31, 2009 we were able to capture approximately 30 — 35% of the available referrals given Ocwen’s existing loan portfolio. After considering the composition of the loan portfolio serviced by Ocwen, including consideration of amounts serviced for Government Sponsored Entities (“GSEs”), our current and expected service offerings and the expected mix of direct services provided versus those referred, we anticipate that we can capture approximately 50 — 55% of revenue, or $200 — $210 million, from Ocwen’s existing loan portfolio. Assuming we are able to continue to deliver high-quality services in a timely manner, our ability to capture this revenue is primarily a function of our ability to execute onexecuting our national rollout plans. During 2010, we generated $135.7 million of revenue, an 83% increase over the prior year, from Ocwen’s portfolio. This growth was principally due to the successful rollout of services including asset management services nationally and default management services to 26 states during the year. In 2011, we intend to rollout our title insurance services to key states including California for which we obtained our agency licenses in December 2010. In addition, we plan to continue to add states for existing and new services where the business volume supports the expansion.
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We expectalso sought to completeexpand relationships with key customers in our national rollout in the fourth quarter of 2010. Since revenue recognition generally occurs 1 — 6 months from date of referral, we would expect to be at a normalized run rate in mid 2011.
With respect to Financial Services segment. During 2010, we provide contingency collection services to seven of the most recognizablehad mixed results. Although we saw increases in revenues from a key credit card issuerscustomer and a key first party customer, these were generally offset by declines in the industry. Four of these clients were acquired in the past couple of years. Currently, we capture a negligible amount spent by these credit card issuers on contingency collection with the exception ofrevenues from American Express where we continue to be one of their largest service providers. Although we will continue to provide the best service possible to American Express and expand this relationship when opportunities arise, we also intend on expanding our relationship with other key existing customers.Express.
New Customer Acquisition.AcquisitionAlthough expanding. We expanded and diversified our customer base is not a significant focus for 2010, we have or expect to take certain steps this year that will facilitate broadeningprincipally via our customer base in 2011 and beyond. This includes the development of a sales and marketing team and the acquisition of The Mortgage PartnershipMPA, which gives us access to what we believe represents approximately 6% of America, L.L.C. (“MPA”) in February 2010. Given the concentrated client base and nature of our services, the sales cycle can take 6 — 18 months or longer.total origination market.
Invest in New Service Offerings.OfferingsWe intend on continuing to invest: While we made significant investments in the roll-out of our default oriented services, complementary to our existingwe also invested in several new service offerings in order to prepareofferings. This included the GoHoming.com real estate portal, the launch of REALRemit for continued growth. This includes expansion into origination appraisalsuse by external customers other than Ocwen and the expansionlaunch of our title agencyinsurance services. We will also continue to develop our multi-channel real estate marketplace principally around our recently launched website www.gohoming.com. Another longer-term service offering will be the commercialization of our REALSuite technology which could increase Technology Products revenue and/or facilitate higher adoption of our Mortgage Service offerings particularly by key clients. Finally, we intend to develop additional services within the credit to cash lifecycle management vertical which may be based upon our patented invoice presentment system.
Highest Quality at Lowest Operating Costs.CostsWe firmly. Our global workforce and robust quality assurance program have allowed us to develop and deliver high quality, new services at a low cost. In 2011, we are focused on improving our delivery model by enhancing our proprietary technologies to further drive quality and margin improvements for these services.
Our 2011 strategic initiatives recognize that our primary objective is to create shareholder value while we become a premier global, technology-enabled knowledge based outsource provider that delivers superior results for our customers:
Improve operating effectiveness.By improving operating effectiveness we intend to deliver high quality services that meet or exceed customers’ performance expectations, ultimately driving higher revenues and margins for our customers. For example, in our Mortgage Services segment, we are principally focused on assisting our customers in reducing foreclosure and REO disposition timelines while maintaining high quality work. In our Financial Services segment, we have recommitted ourselves to perform in the top quartile for all key customers. Finally, in our Technology Services segment, we are focused on many initiatives including the development and deployment of business process management solutions to effectively manage our growing portfolio.
Expand Service Offerings.In 2011, we will primarily sell our expanded services offerings to Ocwen and the members of Lenders One. For Ocwen, we are primarily focused on expanding title agency services. For Lenders One, we are developing origination oriented services including valuation, title and fulfillment services that we intend to deliver over an enhanced technology platform that recognizes the unique requirements of the customers.
Balance Service Offerings.By developing a more balanced portfolio of service offerings, we believe thatwe will be able to generate long-term consistent revenue and earnings growth. In our Mortgage Services segment a significant facet of this is building out the previously mentioned origination services whether as a direct provider, reseller, vendor manager or lead generator. In addition, we plan to invest in Correspondent One (formerly called Lend One) to facilitate the sale of mortgages by integrating six-sigma, econometrics and consumer behavioral principles intomembers of Lenders One while at the deliverysame time driving the adoption of our origination services by the members. In our Technology Services segment, we are focused on supporting the rollout of origination services through the development of an origination vendor portal.
Bring Financial Services to Profitability. We remain committed to improving the financial performance of our Financial Services segment principally through excellent performance for our customers. This includes initiatives such as the development of optimal resolution models deployed through dynamic scripts and ensuring that we perform in the top quartile for our key accounts. In addition, we intend to grow our global delivery platform across the services we areoffer in this segment.
Enhance Leadership Team. Our accelerated growth, entry into new services and expanding regulatory requirements requires us to continue to add additional talent in key areas.
We believe we will be able to significantly improveaccomplish these objectives during 2011 via the quality of services delivered while reducing overall operating costs.free cash flow generated from our current operations and will not require additional capital.
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Given the natureBasis of our services (i.e. high margins and limited capital requirements) our free cash flow increases as we grow the business. This also allows us to maintain a simple, debt free balance sheet.Presentation
Separation
On August 10, 2009, Altisource became a stand-alone public company in connection withWe have prepared our Separation from Ocwen. 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 Transition Services Agreement and certain long-term services contracts (collectively, the “Agreements”). Additional information may be found in Note 4 to the consolidated financial statements.
Basisstatements in accordance with accounting principles generally accepted in the United States of Presentation
The accompanying financial statements present the historical results of operations, assets and liabilities attributable to the Altisource businesses.America (“GAAP”). For periods prior to the Separation, Date, these financial statementsour results include revenues and expenses directly attributable to our operations and allocations of expensesexpense from Ocwen for certain corporate functions including insurance, employee benefit plan expense and allocations for certain centralized administration costs for executive management, treasury, real estate, accounting, auditing, tax, risk management, law department, internal audit, human resources and benefits administration. We determined these allocations using proportional cost allocation methods including the use of relevant operating profit, fixed assets, sales and payroll measurements. Management believes such allocations are reasonable; however, theywhich may not be indicative of the actual expense that would have been incurred had the Company been operating as an independent company for the periods presented. Total corporate costs allocated to the Company, excluding Separation costs, were $4.3 million for the period ended August 10, 2009. The charges for these functions are included primarily in “Selling, General and Administrative Expenses” in the Consolidated Statements of Operations. In addition, Ocwen had allocated interest expense to us based upon our portion of assets to Ocwen’s total assets which is included in “Interest Expense” in the Consolidated Statements of Operations. There have been no allocations of expenses from Ocwen charged to us since the Separation Date.
The financial statements also do not necessarily reflect what the Company’sour consolidated results of operations, financial position and cash flows would have been had the Companywe operated as an independent company during that entire period.
Acquisition of MPA
MPA and its consolidated subsidiary contributed $18.0 million of revenue, including $6.9 million attributable to non-controlling interests, and $9.2 million of EBITDA since the entire periods presented. For instance, asFebruary 2010 acquisition date. This revenue and EBITDA was substantially in line with our internal projections. Through December 31, 2010, MPA has 179 Members.
Stock Repurchase Plan
We intend to limit dilution caused by option exercises, including anticipated exercises, and acquisitions by repurchasing shares on the open market. On May 19, 2010, our shareholders authorized us to purchase 15% of our outstanding share capital, or 3.8 million shares of our common stock, in the open market. Through December 31, 2010, we purchased 0.7 million shares of our common stock on the open market at an independent public company, Altisource incurs costs in excessaverage price of those allocated by Ocwen$27.11, leaving 3.1 million shares still available for maintaining a separate Board of Directors, obtaining a separate audit, relocating certain executive management and hiring additional personnel.purchase.
Factors Affecting Comparability
In addition toThe following items noted within theBasis of Presentationsection presented above, the following additional items, all of which were incurred in 2009, may impact the comparability of our results:
| • | | $3.4 million of one-time costs associated with the Separation; |
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| • | | $1.9 million of facility closure costs recognized within the Financial Services segment associated with the closure of two collection facilities; |
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| • | | $2.3 million of settlement gain recognized within the Financial Services segment; and |
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| • | | $1.4 million of settlement losses recognized in the fourth quarter in the Financial Services segment with respect to the Noble dialer arbitration. |
In February 2010, we acquired all of the outstanding membership interests of MPA. MPA was formed 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 have been consolidated under the variable interest model since the acquisition date;
During 2010, to further align the interests of management with shareholders, we expanded our use of equity compensation. For the year ended December 31, 2010, we have recognized $3.1 million of equity compensation expense as compared to $0.3 million for the full year ending December 31, 2009. Contributing to the increase was the attainment of certain market performance criteria which triggered vesting of a portion of the awards and acceleration in the expense recognition of these grants;
In the fourth quarter of 2010, we recognized $2.8 million of goodwill impairment related to the Financial Services segment;
During the year ended December 31, 2009, we recognized $3.4 million of one-time costs in our Corporate segment in anticipation of the Separation from Ocwen; and
During the year ended December 31, 2009, we recognized $1.9 million of facility closure costs, $1.4 million of litigation settlement losses (both recognized in Selling, General and Administrative Expenses) and a $2.3 million litigation settlement gain in Other Income in our Financial Services segment.
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SECTION 2 — CONSOLIDATED RESULTS OF OPERATIONS
Summary Consolidated Results
Following is a discussion of our consolidated results of operations for each of the years in the three year period ended December 31, 2009.2010. For a more detailed discussion of the factors that affected the results of our business segments in these periods, see “SECTION 3 — SEGMENT“SEGMENT RESULTS OF OPERATIONS”OPERATIONS” below.
The following table sets forth information regarding our results of operations for the years ended December 31, 2010, 2009, 2008, and 2007.2008.
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| | | Years Ended December 31, | | Variance 2009 vs. 2008 | | Variance 2008 vs. 2007 | | | Years Ended December 31, | |
| (dollars in thousands) | | 2009 | | 2008 | | 2007 | | $ | | % | | $ | | % | | | 2010 | | (*) | | 2009 | | (*) | | 2008 | |
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| Revenue | | $ | 202,812 | | $ | 160,363 | | $ | 134,906 | | $ | 42,449 | | | 26 | % | | $ | 25,457 | | | 19 | % | |
| Service Revenue | | | $ | 247,026 | | | 32 | % | | $ | 186,735 | | | 16 | % | | $ | 160,363 | |
| Reimbursable Expenses | | | 47,449 | | 195 | | 16,077 | | 100 | | — | |
| Cooperative Non-controlling Interests | | | 6,903 | | 100 | | — | | — | | — | |
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| Total Revenue | | | 301,378 | | 49 | | 202,812 | | 26 | | 160,363 | |
| Cost of Revenue | | 126,797 | | 115,048 | | 96,954 | | 11,749 | | 10 | | 18,094 | | 19 | | | 189,059 | | | (49 | ) | | 126,797 | | | (10 | ) | | 115,048 | |
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| Gross Profit | | 76,015 | | 45,315 | | 37,952 | | 30,700 | | 68 | | 7,363 | | 19 | | | 112,319 | | 48 | | 76,015 | | 68 | | 45,315 | |
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| Gross Profit/Service Revenue | | | | 45 | % | | | 41 | % | | | 28 | % |
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| Selling, General and Administrative Expenses | | 39,473 | | 28,088 | | 27,930 | | 11,385 | | 41 | | 158 | | 1 | | | 57,352 | | | (45 | ) | | 39,473 | | | (41 | ) | | 28,088 | |
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| Income from Operations | | 36,542 | | 17,227 | | 10,022 | | 19,315 | | 112 | | 7,205 | | 72 | | | 54,967 | | 50 | | 36,542 | | 112 | | 17,227 | |
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| Income from Operations/Service Revenue | | | | 22 | % | | | 20 | % | | | 11 | % |
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| Other Income (Expense), net | | 1,034 | | | (2,626 | ) | | | (1,743 | ) | | 3,660 | | 139 | | | (883 | ) | | | (51 | ) | | 804 | | | (22 | ) | | 1,034 | | 139 | | | (2,626 | ) |
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| Income Before Income Taxes | | 37,576 | | 14,601 | | 8,279 | | 22,975 | | 157 | | 6,322 | | 76 | | | 55,771 | | 48 | | 37,576 | | 157 | | 14,601 | |
| Income Tax Provision | | | (11,605 | ) | | | (5,382 | ) | | | (1,564 | ) | | | (6,223 | ) | | | (116 | ) | | | (3,818 | ) | | | (244 | ) | |
| Income Tax Benefit (Provision) | | | 403 | | 104 | | | (11,605 | ) | | | (116 | ) | | | (5,382 | ) |
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| Net Income | | $ | 25,971 | | $ | 9,219 | | $ | 6,715 | | $ | 16,752 | | | 182 | % | | $ | 2,504 | | | 37 | % | | 56,174 | | 116 | | 25,971 | | 182 | | 9,219 | |
| Net Income Attributable to Non-controlling Interests | | | | (6,903 | ) | | | (100 | ) | | — | | — | | — | |
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| Net Income Attributable to Altisource | | | $ | 49,271 | | | 90 | % | | $ | 25,971 | | | 182 | % | | $ | 9,219 | |
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| Transactions with Related Parties: | | |
| Revenue | | $ | 94,897 | | $ | 64,251 | | $ | 59,350 | | $ | 30,646 | | | 48 | % | | $ | 4,901 | | | 8 | % | | $ | 154,988 | | $ | 94,897 | | $ | 64,251 | |
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| Selling, General and Administrative Expenses | | $ | 4,308 | | $ | 6,208 | | $ | 8,864 | | $ | (1,900 | ) | | | (31 | )% | | $ | (2,656 | ) | | | (30 | )% | | 1,056 | | 4,308 | | 6,208 | |
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| Interest Expense | | $ | 1,290 | | $ | 2,269 | | $ | 965 | | $ | (979 | ) | | | (43 | )% | | $ | 1,304 | | | 135 | % | | — | | 1,290 | | 2,269 | |
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Revenue
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| | | Years Ended December 31, | | | Variance 2009 vs. 2008 | | | Variance 2008 vs. 2007 | |
| (dollars in thousands) | | 2009 | | | 2008 | | | 2007 | | | $ | | | % | | | $ | | | % | |
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| Mortgage Services | | $ | 103,098 | | | $ | 54,956 | | | $ | 64,260 | | | $ | 48,142 | | | | 88 | % | | $ | (9,304 | ) | | | (14 | )% |
| Financial Services | | | 64,434 | | | | 73,835 | | | | 41,293 | | | | (9,401 | ) | | | (13 | ) | | | 32,542 | | | | 79 | |
| Technology Products | | | 47,453 | | | | 45,283 | | | | 36,235 | | | | 2,170 | | | | 5 | | | | 9,048 | | | | 25 | |
| Corporate and Eliminations | | | (12,173 | ) | | | (13,711 | ) | | | (6,882 | ) | | | 1,538 | | | | 11 | | | | (6,829 | ) | | | (99 | ) |
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| Total Revenue | | $ | 202,812 | | | $ | 160,363 | | | $ | 134,906 | | | $ | 42,449 | | | | 26 | % | | $ | 25,457 | | | | 19 | % |
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| Transactions with Related Parties: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage Services | | $ | 74,089 | | | $ | 41,635 | | | $ | 40,646 | | | $ | 32,454 | | | | 78 | % | | $ | 989 | | | | 2 | % |
| Financial Services | | | 98 | | | | 1,181 | | | | 1,044 | | | | (1,083 | ) | | | (92 | ) | | | 137 | | | | 13 | |
Technology Products(1) | | | 20,710 | | | | 35,416 | | | | 24,542 | | | | (14,436 | ) | | | (41 | ) | | | 10,604 | | | | 43 | |
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| (*) | | Represents percentage change (better/(worse)) from prior period. |
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Revenue
The following table presents our revenues for the years ended December 31, 2010, 2009 and 2008:
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| | | Years Ended December 31, | |
| (dollars in thousands) | | 2010 | | | (*) | | | 2009 | | | (*) | | | 2008 | |
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| Mortgage Services: | | | | | | | | | | | | | | | | | | | | |
| Service Revenue | | $ | 153,318 | | | | 76 | % | | $ | 87,021 | | | | 58 | % | | $ | 54,956 | |
| Reimbursable Expenses | | | 44,550 | | | | 177 | | | | 16,077 | | | | 100 | | | | — | |
| Cooperative Non-controlling Interest | | | 6,903 | | | | 100 | | | | — | | | | — | | | | — | |
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| Mortgage Services — Total Revenue | | | 204,771 | | | | 99 | | | | 103,098 | | | | 88 | | | | 54,956 | |
| | | | | | | | | | | | | | | | | | | | | |
| Financial Services: | | | | | | | | | | | | | | | | | | | | |
| Service Revenue | | | 57,080 | | | | (11 | ) | | | 64,434 | | | | (13 | ) | | | 73,835 | |
| Reimbursable Expenses | | | 2,899 | | | | 100 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | |
| Financial Services — Total Revenue | | | 59,979 | | | | (7 | ) | | | 64,434 | | | | (13 | ) | | | 73,835 | |
| | | | | | | | | | | | | | | | | | | | | |
| Technology Services | | | 52,013 | | | | 10 | | | | 47,453 | | | | 5 | | | | 45,283 | |
| | | | | | | | | | | | | | | | | | | | | |
| Eliminations | | | (15,385 | ) | | | (26 | ) | | | (12,173 | ) | | | 11 | | | | (13,711 | ) |
| | | | | | | | | | | | | | | | | | |
| Total Revenue | | $ | 301,378 | | | | 49 | % | | $ | 202,812 | | | | 26 | % | | $ | 160,363 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Transactions with Related Parties: | | | | | | | | | | | | | | | | | | | | |
| Mortgage Services | | $ | 135,655 | | | | | | | $ | 74,089 | | | | | | | $ | 41,635 | |
| Financial Services | | | 166 | | | | | | | | 98 | | | | | | | | 1,181 | |
Technology Services(1) | | | 19,167 | | | | | | | | 20,710 | | | | | | | | 35,146 | |
| | |
| (1) | | Includes revenue earned from other segments related to RealSuiteREALSuite and IT infrastrutureinfrastructure services of $1.8 million and $13.7 million, respectively in 2008 and $1.5 million and $6.9 million, respectively in 2007.2008. |
|
| (*) | | Represents percentage change (better/(worse)) from prior period. |
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Service Revenue consists of amounts attributable to our fee based services. Reimbursable Expenses consists of amounts that we incur on behalf of our customers in performing our fee based services, but we pass such costs directly on to our customers without any additional markup. Cooperative Non-controlling Interests is attributable to the Members of Lenders One. In evaluating our performance, we utilize Service Revenue to neutralize the impact of amounts for which we earn no margin.
The growth in Total Revenues was principally driven by our Mortgage Services segment. This growth in fee based Mortgage Services was the result of the development and execution of default oriented mortgage services over an expanding national platform and the expansion of Ocwen’s residential loan portfolio primarily as a result of the acquisitions of a $6.9 billion servicing portfolio from Saxon in May, 2010 and a $22.4 billion portfolio from HomEq in September, 2010. The expansion of Ocwen’s platform was also the primary contributor to growth with respect to Technology Services revenues. In addition, from a Total Revenues perspective, the expansion of our asset management and default services businesses was the primary contributor to the increase in Reimbursable Expenses. Finally, our acquisition of MPA contributed to the overall increase in Total Revenues and to the inclusion of Cooperative Non-controlling Interests.
Partially offsetting our growth in Service Revenue in Mortgage Services and Technology Services was a decline in the Financial Services segment. Contributing factors to the general decline in revenues include reduced placements from our largest customer in this segment partially offset by placements from other customers. In addition, we continue to build out a global delivery platform for collections which sometimes results in lower revenues per account although at higher margins.
The principal driver of the increase in revenue during 2009 compared to 2008 was our development and rollout of residential default oriented services which facilitated our expanded relationship with Ocwen. The increase was primarily in default management, asset management and closing and title services. We expect to complete the national rollout of our default services during 2010 which will facilitate greater penetration of Ocwen’s loan servicing portfolio and should facilitate sales efforts to other customers. Our Technology ProductsServices segment also ended the year with an increase in revenue as decreases in infrastructure support revenue were offset by increases in REALServicing principally with
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one third-party customer. Finally, Financial Services revenues continued to be negatively impacted by the overall economic conditions resulting in a decrease in revenues for this segment.
When comparing 2008Our revenues are seasonal. More specifically, Financial Services revenue tends to 2007,be higher in the primary increase in revenues was the resultfirst half of the acquisition of NCI. We acquired NCI in June 2007 and included revenues only from the date of acquisition. Technology products revenue increase was primarily dueyear as borrowers may utilize tax refunds to providing support services to NCI since the date of acquisition and from a change in our billings to Ocwen to move from a cost-based method to market-based method in the second quarter of 2008. Mortgage services revenues declined primarily as revenues from valuation, title search and mortgage due diligence reduced consistent with the reduction in loan originations as a result of the mortgage crisis. Our default services were mostly in development with limited revenue.
During 2010, we expect that we will be able to significantly grow our revenues when compared to prior periods as we execute upon the following initiatives:
| • | | Completion of our national platform for default services which will allow us to capture a greater share of revenues related to loans serviced by Ocwen; |
|
| • | | Rollout nationally our Title Agency business; |
|
| • | | Inclusion of MPA since the February 2010 acquisition date; and |
|
| • | | Greater penetration of existing Financial Services clients. |
Our revenues forpay debts. Mortgage Services revenue is impacted by Real Estate Owned (“REO”) sales which tend to be at their lowest level during winter months and Technology Products will also benefit to the extent that Ocwen acquires new residential portfolios.highest during summer months.
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Cost of Revenue
Cost of Revenuerevenue principally includes payroll and employee benefits associated with personnel employed in customer service roles;and operations roles, fees paid to external providers including printing and mailing costs for correspondence with debtors;related to provision of services, reimbursable expenses, technology and telephony expenses as well as depreciation and amortization of operating assets; and reimbursable expenses.assets. The components of Cost of Revenue were as follows for the years ended December 31, 2010, 2009 2008 and 2007:2008:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | Variance 2009 vs. 2008 | | Variance 2008 vs. 2007 | | | Years Ended December 31, | |
| (dollars in thousands) | | 2009 | | 2008 | | 2007 | | $ | | % | | $ | | % | | | 2010 | | (*) | | 2009 | | (*) | | 2008 | |
| | | |
| Compensation and Benefits | | $ | 51,251 | | $ | 59,311 | | $ | 44,886 | | $ | (8,060 | ) | | | (14 | )% | | $ | 14,425 | | | 32 | % | | $ | 62,791 | | | (23 | )% | | $ | 51,251 | | | 14 | % | | $ | 59,311 | |
| Outside Fees and Services | | 59,103 | | 35,825 | | 32,830 | | 23,278 | | 65 | | 2,995 | | 9 | | | 60,583 | | | (41 | ) | | 43,026 | | | (20 | ) | | 35,825 | |
| Reimbursable Expenses | | | 47,449 | | | (195 | ) | | 16,077 | | | (100 | ) | | — | |
| Technology and Communication | | 16,443 | | 19,912 | | 19,238 | | | (3,469 | ) | | | (17 | ) | | 674 | | 4 | | | 18,236 | | | (11 | ) | | 16,443 | | 17 | | 19,912 | |
| | | | | | | | | | | | | | | | | | | |
| Total Cost of Revenue | | $ | 126,797 | | $ | 115,048 | | $ | 96,954 | | $ | 11,749 | | | 10 | % | | $ | 18,094 | | | 19 | % | |
| Cost of Revenue | | | $ | 189,059 | | | (49 | )% | | $ | 126,797 | | | (10 | )% | | $ | 115,048 | |
| | | | | | | | | | | | | | | | | | | |
| | | |
| Gross Margin Percentage | | | 37 | % | | | 28 | % | | | 28 | % | | |
| Gross Profit Percentage | | |
| Gross Profit/Service Revenue | | | | 45 | % | | | 41 | % | | | 28 | % |
| | | | | | | | | | | | | | | |
| | |
| (*) | | Represents percentage change (better/(worse)) from prior period. |
On a consolidated basis, our gross margins based on Service Revenue for the year ended December 31, 2010 increased as a result of the composition of revenues being more weighted towards the higher margin Mortgage Services segment, the acquisition of MPA in 2010 and our ability to efficiently scale our operations as our referral base grows. Our gross marginprofit percentage increased to 37% in 2009 from 28% in 2008. The increase in gross margin reflectscompared to 2008 reflecting the composition of revenues being more weighted towards Mortgage Services which have higher margins.Services. In addition, we aggressively reduced our compensation cost within our Financial Services segment both by reducing the overall number of collectors as well as redistributing collectors to less expensive locations.
Compensation and Benefits costs grew in 2010 to support the national rollout of services and the growth in Ocwen’s residential loan portfolio. In addition, for periods subsequent to the Separation Date, we treat compensation costs associated with segment executive management and segment marketing activities as a component of Selling, General and Administrative Expenses. The decrease in 2009 compared to 2008 was related to the decreased compensation costs in our Financial Services segment as discussed above.
In 2010 and 2009, Outside Fees and Services primarily increased in our Mortgage Services segment consistent with greater revenues. We include in this line expense reimbursements, or pass through costs, associated with property preservation and default management servicesthe expansion of $16.1 million.our services. Outside Fees and Services in 2010 also increased when compared to the prior year in our Financial Services segment as a result of an increase in placements we service using external collectors.
During 2009, Outside Fees and Services increased compared to 2008 in our Financial Services segment as we attempted to collect on more accounts in 2009 than in 2008 and, therefore, incurred greater costs. Our Financial Services segment also increased its use of external collectors resulting in a shift in cost from Compensation and Benefits to Outside Fees and Services.
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As noted above in our discussion of Total Revenue, the expansion of our asset management and default services was the primary contributor to the increase in Reimbursable Expenses which are reflected as a component of Cost of Revenues.
The increase in Technology and Communication Costs in 2010 is primarily related to costs associated with the new data center. In addition, costs increased as a result of the addition of new facilities and the expansion of bandwidth and server capacity to handle the increased demands experienced due to growth in Ocwen’s portfolio and our services.
In 2009, Technology and Communications decreased compared to 2008 in part due to the reduction of telephony costs, as well as lower overall technology costs due to fewer collectors in the Financial Services segment. Finally, we incurred lower depreciation in 2009 as several assets became fully depreciated late in 2008. This included the acceleration of depreciation of somecertain obsolete technology that impacted the 2008 periods but not those in 2009.
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The increase in Cost of Revenue for 2008 when compared to 2007 consists of $30.0 million incremental cost related to our inclusion of the NCI results for a full year in 2008 compared to a partial year in 2007, partially offset by decreases in Cost of Revenue in our Mortgage Services segment. The cost reductions resulted from leveraging our workforce, our proprietary processes and our technology. These cost reductions, as well as the change to a market-based rate card in our Technology Products segment enabled us to improve our gross profit by $7.4 million from 2007 to 2008 despite a decline in revenues when adjusting for the impact of NCI.
Selling, General and Administrative Expenses
Selling, General and Administrative Expenses include payroll, employee benefits, occupancy and other costs associated with personnel employed in executive, sales, marketing, human resources, consumer behavior, internal audit and finance roles. Selling, General and Administrative ExpensesThis category also includes professional fees, depreciation and amortization on non-operating assets and amortization of Intangible Assets with definite lives.assets. The components of Selling, General and Administrative Expenses were as follows for the years ended December 31, 2010, 2009 2008 and 2007:2008:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | Variance 2009 vs. 2008 | | Variance 2008 vs. 2007 | | | Years Ended December 31, | |
| (dollars in thousands) | | 2009 | | 2008 | | 2007 | | $ | | % | | $ | | % | | | 2010 | | (*) | | 2009 | | (*) | | 2008 | |
| | | |
| Occupancy and Equipment | | $ | 8,456 | | $ | 8,125 | | $ | 7,999 | | $ | 331 | | | 4 | % | | $ | 126 | | | 2 | % | |
| Corporate Allocations | | 4,096 | | 6,208 | | 8,864 | | | (2,112 | ) | | | (34 | ) | | | (2,656 | ) | | | (30 | ) | |
| Compensation and Benefits | | | $ | 19,116 | | N/M | | $ | 4,096 | | | 34 | % | | $ | 6,208 | |
| Professional Services | | 10,252 | | 3,270 | | 3,121 | | 6,982 | | 214 | | 149 | | 5 | | | 8,026 | | | 22 | % | | 10,252 | | | (214 | ) | | 3,270 | |
| Occupancy Related Costs | | | 12,154 | | | (44 | ) | | 8,456 | | | (4 | ) | | 8,125 | |
| Amortization of Intangible Assets | | | 4,891 | | | (83 | ) | | 2,672 | | | (5 | ) | | 2,554 | |
| Goodwill Impairment | | | 2,816 | | | (100 | ) | | — | | — | |
| Other | | 16,669 | | 10,485 | | 7,946 | | 6,184 | | 59 | | 2,539 | | 32 | | | 10,349 | | 26 | | 13,997 | | | (77 | ) | | 7,931 | |
| | | | | | | | | | | | | | | | | | | |
| Total Selling, General and Administrative Expenses | | $ | 39,473 | | $ | 28,088 | | $ | 27,930 | | $ | 11,385 | | | 41 | % | | $ | 158 | | | 1 | % | | $ | 57,352 | | | (45 | )% | | $ | 39,473 | | | (41 | )% | | $ | 28,088 | |
| | | | | | | | | | | | | | | | | | | |
| | | |
| Operating Margin Percentage | | | 18 | % | | | 11 | % | | | 7 | % | | |
| Income from Operations/Service Revenue | | | | 22 | % | | | 20 | % | | | 11 | % |
| | | | | | | | | | | | | | | |
Our operating margin | | |
| N/M — Not meaningful. |
|
| (*) | | Represents percentage change (better/(worse)) from prior period. |
Compensation and Benefits increased to 18% in 2009 from 11% in 2008. The increase in operating margin is the2010 primarily as a result of our increasethe cost of being a separate public company for a full year; the need to have separate support functions such as accounting, legal and human resources; the previously mentioned reclassification of certain executive and marketing related compensation costs from Cost of Revenues; and increased equity compensation for senior executives. Compensation and Benefits in gross margins as discussed above partially offset by an increase to our Selling, General and Administrative Expenses2008 primarily related to costs incurred as part of our Separation as well as facility closure costs as discussed below.
Corporate allocations represent expenses allocated from Ocwen through the Separation Date for certain corporate functions as discussed more fully in “SECTION 1 — OVERVIEW, Separation”above. Subsequent to the Separation Date, these types of expenses (although no longer allocated from Ocwen) are included in all of the Other Selling, General and Administrative Expense categories above. As a result, the decrease in 2009 is the result of allocations from Ocwen only representing a partial period compared to a full year of allocations from Ocwen in the 2008.
Costs associated with Professional servicesServices have increased $7.0 millionin 2010 after we consider the impact of 2009 one-time costs. The increase in Professional Services is primarily attributable to costs associated with being a separate public company for a full year including increased audit and legal fees as well as insurance. Professional Services increased in 2009 compared to 2008 primarily due to $3.4 million of one-time separation related expenses, $1.4 million increase in legal expense primarily due to recent caseslitigation (see Note 1417 to the consolidated financial statements) and an increase in costs associated with being a public company such as audit fees along with directorDirector and officerOfficer insurance.
Occupancy Related Costs increased in 2010 primarily as a result of our expansion of services which led to new leased facilities in India and the United States. The increase was partially offset by decreases associated with lease facility closures in the Financial Services segment in 2009.
Amortization of Intangible Assets increased in 2010 as a result of the intangibles acquired in connection with the acquisition of MPA (see Notes 4 and 8 to the consolidated financial statements). In addition, we impaired the remaining $2.8 million of goodwill in 2010 related to the Financial Services segment.
Other Selling, General and Administrative Expenses increased in 2010 was comparable to 2009 compared to 2008 primarily due to $2.3when adjusting for the $1.9 million in facility closure costs recordedrecognized in the third quarter2009 consisting of lease exit costs and severance for closure of facilities in Miramar, Florida and Victoria, British Columbia, Canada. We expect theseThese facility closures will reduce our occupancyclosure costs in future periods. Subsequentalso led to the third quarter, we reversed $0.4 million of this reserve for assets which will be utilizedincrease in other locations. In addition, 2009 includes $1.4 million of settlement losses recognized in the Financial Services segment with respectas compared to the Noble dialer arbitration.2008.
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The increase in Selling, General and Administrative Expenses in 2008 as compared to 2007 was due to $6.4 million of additional expenses in NCI due to our including their operating results for a full year in 2008 partially offset by net decreases of $6.2 million from our remaining operations. We generated these net decreases primarily by reducing the number and cost of our personnel supporting our Mortgage Services operations. By increasing the utilization of our technology, maximizing the benefits of our diverse workforce and limiting the use of external professional services, we reduced our costs.
EBITDA
We believeAltisource evaluates performance based on several factors of which a primary financial measure is income before interest, tax, depreciation and amortization (“EBITDA”), a. In addition, we adjusted EBITDA for goodwill impairment and Net Income Attributable to Non-controlling Interests. We believe that this non-GAAP financial measure is useful to investors and analysts in analyzing and assessing our overall business performance since we utilize this information for making operating decisions, for compensation decisions and for forecasting and planning future periods. While the Company uses non-GAAP financial measures as a tool to enhance its understanding of certain aspects of its financial performance and to provide incremental insight into the underlying factors and trends affecting both the Company’s performance and its cash-generating potential, the Company does not consider these measures to be a substitute for, or superior to, the information provided by GAAP financial measures. Consistent with this approach, the Company believes that disclosing non-GAAP financial measures to the readers of its financial statements provides such readers with useful supplemental data that, while not a substitute for GAAP financial measures, allows for greater transparency in the review of its financial and operational performance and enables investors to more fully understand trends in its current and future performance.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | | Variance 2009 vs. 2008 | | Variance 2008 vs. 2007 | | | Years Ended December 31, | |
| (dollars in thousands) | | 2009 | | 2008 | | 2007 | | $ | | % | | $ | | % | | | 2010 | | (*) | | 2009 | | (*) | | 2008 | |
| | | |
| Income Before Income Taxes | | $ | 37,576 | | $ | 14,601 | | $ | 8,279 | | $ | 22,975 | | | 157 | % | | $ | 6,322 | | | 76 | % | | $ | 55,771 | | | 48 | % | | $ | 37,576 | | | 157 | % | | $ | 14,601 | |
| Interest, net | | 1,644 | | 2,655 | | 1,926 | | | (1,011 | ) | | | (38 | ) | | 729 | | 38 | | | 87 | | 95 | | 1,644 | | 38 | | 2,655 | |
| Depreciation and Amortization | | 5,432 | | 7,836 | | 6,979 | | | (2,404 | ) | | | (31 | ) | | 857 | | 12 | | | 7,158 | | | (32 | ) | | 5,432 | | 31 | | 7,836 | |
| Amortization of Intangibles | | 2,672 | | 2,554 | | 1,555 | | 118 | | 5 | | 999 | | 64 | | | 4,891 | | | (83 | ) | | 2,672 | | | (5 | ) | | 2,554 | |
| Goodwill Impairment | | | 2,816 | | — | | — | |
| Net Income attributable to Non-controlling Interests | | | | (6,903 | ) | | | (100 | ) | | — | | — | | — | |
| | | | | | | | | | | | | | | | | | | |
| EBITDA | | $ | 47,324 | | $ | 27,646 | | $ | 18,739 | | $ | 19,678 | | | 71 | % | | $ | 8,907 | | | 48 | % | | $ | 63,820 | | | 35 | % | | $ | 47,324 | | | 71 | % | | $ | 27,646 | |
| | | | | | | | | | | | | | | | | | | |
| | | |
| EBITDA Margin: | | |
| EBITDA/Service Revenue | | | | 26 | % | | | 25 | % | | | 17 | % |
| | | | | | | | | |
| | |
| (*) | | Represents percentage change (better/(worse)) from prior period. |
|
| (1) | | See “SECTION 3 — SEGMENT RESULTS OF OPERATIONS” below for a reconciliation of the most directly comparable GAAP measure to EBITDA. |
EBITDA margins based on Service Revenue increased only slightly in 2010 as a result of the revenue and expenses changes discussed above as continued reinvestment in our business, particularly to support the national rollout of default oriented services and the growth in Ocwen’s residential loan portfolio.
For 2011, we will continue to invest in our service offerings. Significant investments in 2011 are expected to include the development and national rollout of title insurance and origination services in our Mortgage Services segment and our REALSuite of services within our Technology Services segment. These investments are important for our growth in future periods, but will continue to minimize expansion of EBITDA margins against Service Revenue.
In addition to the changes in 2009 as compared to 2008 in revenue and expenses discussed above, the increase in EBITDA also benefited from $2.3 million of Other Income recorded in 2009 relating to a litigation settlement (see Note 1417 to the consolidated financial statements).
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With respect to 2008, the increase in EBITDA was primarily the result of the factors discussed above.
Income Taxes
IncomeOur income tax (benefit) / provision was $(0.4) million, $11.6 million and $5.4 million in 2010, 2009 and $1.6 million in 2009, 2008, and 2007, respectively. Our effective tax rate was 30.9%(0.8)%, 30.9% and 36.9% for 2010, 2009 and 18.9%2008, respectively. Our consolidated effective income tax rate for financial reporting purposes may change periodically due to changes in enacted tax rates, fluctuations in the mix of income earned from our domestic and international operations which may be subject to differing tax rates, and based on our ability to utilize net operating loss and tax credit carryforwards.
The primary reason for the recognition of a benefit in 2010 was due to the receipt of a favorable ruling in June 2010 regarding the treatment of certain intangibles that exist for purposes of determining the Company’s taxable income. The ruling is retroactive to the Separation Date. As a result of the ruling, the Company recognized a $3.4 million credit attributable to 2009 2008 and 2007, respectively. Incomein the second quarter 2010. This ruling did not have a material impact on our deferred tax assets or liabilities. In addition, the change in the mix of income in various taxing jurisdictions also worked to reduce our rate, including a decline in the performance of our Financial Services segment which served to reduce our taxes in the United States. Our income tax provision on Income Before Income Tax differs from amounts that would be computed by applying the Luxembourg corporate incomestatutory tax rate of 28.6% differs from our effective tax rate primarily because of the effect of differingthe favorable tax ruling as well as the varying tax rates outside of Luxembourg, indefinite deferral on earnings of non-Luxembourg affiliates, additional foreign income taxes and changes in the valuation allowance.multiple taxing jurisdictions.
The principal contributing factor to the reduction in rate during 2009 is the composition of Pre-Tax Income by jurisdiction when compared to prior periods. During 2010,
For periods prior to the Separation Date, we intendare included in Ocwen’s tax returns. Our responsibility with respect to utilize our international structure more efficientlythese periods is governed by a tax sharing agreement. In accordance with this agreement, U.S. income taxes were allocated as if they had been calculated on a separate company basis except that benefits for any net operating losses will be provided to identify waysthe extent such loss is utilized in the consolidated U.S. federal tax return. The provision for income taxes prior to lower our overall effective tax rate. Based upon our discussions with advisors to date, we believe thatthe Separation Date has been determined on a pro-forma basis as if we are successful inhad filed separate income taxes under our negotiations with various governmental authorities, we should be able to reducecurrent structure for the rate materially from current levels.
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The principal contributing factor to the increased effective tax rate for 2008 was an increase in valuation allowance particularly related to certain states and the impact of foreign tax positions including related deferrals.periods presented.
See Note 11 to our consolidated financial statements for a reconciliation of taxes at the statutory rate to actual income tax provision.
Recent Accounting Pronouncements
For a discussion of the recentThere are no pending accounting pronouncements see Note 3that are expected to the consolidated financial statements.
have a material impact upon adoption. SECTION 3 — SEGMENT RESULTS OF OPERATIONS
The following section provides a discussion of pre-tax results of operations of our business segments for the years ended December 31, 2010, 2009 2008 and 2007.2008. Transactions between segments are accounted for as third-party arrangements for purposes of presenting Segment Results of Operations. Intercompany transactions primarily consist of information technology infrastructure services and charges for the use of certain REAL productsservices from our Technology ProductsServices segment to our other two segments. Generally, we reflect these charges within Technology and Communication in the segment receiving the services except for consulting services which we reflect in professional services.
| | | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, 2009 |
| | | | | | | | | | | | | | | Corporate Items and | | Consolidated |
| (in thousands) | | Mortgage Services | | Financial Services | | Technology Products | | Eliminations(1) | | Altisource |
| | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 103,098 | | | $ | 64,434 | | | $ | 47,453 | | | $ | (12,173 | ) | | $ | 202,812 | |
| Cost of Revenue | | | 60,735 | | | | 52,871 | | | | 24,477 | | | | (11,286 | ) | | | 126,797 | |
| | | |
| Gross Profit | | | 42,363 | | | | 11,563 | | | | 22,976 | | | | (887 | ) | | | 76,015 | |
| Selling, General and Administrative Expenses | | | 5,625 | | | | 19,267 | | | | 4,731 | | | | 9,850 | | | | 39,473 | |
| | | |
| Income (Loss) from Operations | | | 36,738 | | | | (7,704 | ) | | | 18,245 | | | | (10,737 | ) | | | 36,542 | |
| Other income (expense), net | | | 31 | | | | 1,324 | | | | (319 | ) | | | (2 | ) | | | 1,034 | |
| | | |
| Income (Loss) Before Income Taxes | | $ | 36,769 | | | $ | (6,380 | ) | | $ | 17,926 | | | $ | (10,739 | ) | | $ | 37,576 | |
| | | |
| | | | | | | | | | | | | | | | | | | | | |
| Reconciliation to EBITDA | | | | | | | | | | | | | | | | | | | | |
| Income (Loss) Before Income Taxes | | $ | 36,769 | | | $ | (6,380 | ) | | $ | 17,926 | | | $ | (10,739 | ) | | $ | 37,576 | |
| Interest, net | | | 28 | | | | 1,314 | | | | 318 | | | | (16 | ) | | | 1,644 | |
Depreciation(2) | | | 48 | | | | 2,402 | | | | 2,906 | | | | 76 | | | | 5,432 | |
| Amortization of Intangibles | | | — | | | | 2,672 | | | | — | | | | — | | | | 2,672 | |
| | | |
| EBITDA | | $ | 36,845 | | | $ | 8 | | | $ | 21,150 | | | $ | (10,679 | ) | | $ | 47,324 | |
| | | |
| | | | | | | | | | | | | | | | | | | | | |
| Transactions with Related Parties Included Above: | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 74,089 | | | $ | 98 | | | $ | 20,710 | | | $ | — | | | $ | 94,897 | |
| | | |
| Selling, General and Administrative Expenses | | $ | 2,712 | | | $ | 467 | | | $ | 1,517 | | | $ | (388 | ) | | $ | 4,308 | |
| | | |
| Interest Expense | | $ | 30 | | | $ | 1,029 | | | $ | 231 | | | $ | — | | | $ | 1,290 | |
| | | |
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| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | For the Year Ended December 31, 2010 | |
| | | For the Year Ended December 31, 2008 | | Corporate | | | |
| | | Corporate Items and | | Consolidated | | Mortgage | | Financial | | Technology | | Items and | | Consolidated | |
| (in thousands) | | Mortgage Services | | Financial Services | | Technology Products | | Eliminations(1) | | Altisource | | Services | | Services | | Services | | Eliminations | | Altisource | |
| | | |
| Revenue | | $ | 54,956 | | $ | 73,835 | | $ | 45,283 | | $ | (13,711 | ) | | $ | 160,363 | | | $ | 204,771 | | $ | 59,979 | | $ | 52,013 | | $ | (15,385 | ) | | $ | 301,378 | |
| Cost of Revenue | | 36,392 | | 62,590 | | 29,777 | | | (13,711 | ) | | 115,048 | | | 124,485 | | 49,781 | | 28,909 | | | (14,116 | ) | | 189,059 | |
| | | | | | | | | | | | | | |
| Gross Profit | | 18,564 | | 11,245 | | 15,506 | | — | | 45,315 | | | 80,286 | | 10,198 | | 23,104 | | | (1,269 | ) | | 112,319 | |
| Selling, General and Administrative Expenses | | 5,027 | | 17,168 | | 6,118 | | | (225 | ) | | 28,088 | | | 14,890 | | 19,567 | | 4,985 | | 17,910 | | 57,352 | |
| | | | | | | | | | | | | | |
| Income (Loss) from Operations | | 13,537 | | | (5,923 | ) | | 9,388 | | 225 | | 17,227 | | | 65,396 | | | (9,369 | ) | | 18,119 | | | (19,179 | ) | | 54,967 | |
| Other income (expense), net | | | (58 | ) | | | (1,952 | ) | | | (391 | ) | | | (225 | ) | | | (2,626 | ) | | 781 | | | (50 | ) | | | (60 | ) | | 133 | | 804 | |
| | | | | | | | | | | | | | |
| Income (Loss) Before Income Taxes | | $ | 13,479 | | $ | (7,875 | ) | | $ | 8,997 | | $ | — | | $ | 14,601 | | | $ | 66,177 | | $ | (9,419 | ) | | $ | 18,059 | | $ | (19,046 | ) | | $ | 55,771 | |
| | | | | | | | | | | | | | |
| | | |
| Reconciliation to EBITDA | | |
| Income (Loss) Before Income Taxes | | $ | 13,479 | | $ | (7,875 | ) | | $ | 8,997 | | $ | — | | $ | 14,601 | | | $ | 66,177 | | $ | (9,419 | ) | | $ | 18,059 | | $ | (19,046 | ) | | $ | 55,771 | |
| Interest, net | | 58 | | 2,025 | | 572 | | — | | 2,655 | | | | (11 | ) | | 55 | | 64 | | | (21 | ) | | 87 | |
Depreciation(2) | | 34 | | 3,202 | | 4,600 | | — | | 7,836 | | |
Depreciation(1) | | | 268 | | 1,972 | | 4,499 | | 419 | | 7,158 | |
| Amortization of Intangibles | | — | | 2,554 | | — | | — | | 2,554 | | | 2,218 | | 2,673 | | — | | — | | 4,891 | |
| Goodwill Impairment | | | — | | 2,816 | | — | | — | | 2,816 | |
| Net Income attributable to Non controlling interests | | | | (6,903 | ) | | — | | — | | — | | | (6,903 | ) |
| | | | | | | | | | | | | | |
| EBITDA | | $ | 13,571 | | $ | (94 | ) | | $ | 14,169 | | $ | — | | $ | 27,646 | | | $ | 61,749 | | $ | (1,903 | ) | | $ | 22,622 | | $ | (18,648 | ) | | $ | 63,820 | |
| | | | | | | | | | | | | | |
| | | |
| Transactions with Related Parties Included Above: | | |
| Revenue | | $ | 41,635 | | $ | 1,181 | | $ | 35,146 | | $ | (13,711 | ) | | $ | 64,251 | | | $ | 135,655 | | $ | 166 | | $ | 19,167 | | $ | — | | $ | 154,988 | |
| | | | |
| Selling, General and Administrative Expenses | | $ | 3,633 | | $ | 595 | | $ | 1,980 | | $ | — | | $ | 6,208 | | | — | | — | | — | | 1,056 | | 1,056 | |
| | | | |
| Interest Expense | | $ | 58 | | $ | 1,833 | | $ | 378 | | $ | — | | $ | 2,269 | | | — | | — | | — | | — | | — | |
| | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, 2009 | |
| | | | | | | | | | | | | | | Corporate | | | | |
| | | Mortgage | | | Financial | | | Technology | | | Items and | | | Consolidated | |
| (in thousands) | | Services | | | Services | | | Services | | | Eliminations | | | Altisource | |
| | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 103,098 | | | $ | 64,434 | | | $ | 47,453 | | | $ | (12,173 | ) | | $ | 202,812 | |
| Cost of Revenue | | | 60,735 | | | | 52,871 | | | | 24,477 | | | | (11,286 | ) | | | 126,797 | |
| | | | | | | | | | | | | | | | |
| Gross Profit | | | 42,363 | | | | 11,563 | | | | 22,976 | | | | (887 | ) | | | 76,015 | |
| Selling, General and Administrative Expenses | | | 5,625 | | | | 19,267 | | | | 4,731 | | | | 9,850 | | | | 39,473 | |
| | | | | | | | | | | | | | | | |
| Income (Loss) from Operations | | | 36,738 | | | | (7,704 | ) | | | 18,245 | | | | (10,737 | ) | | | 36,542 | |
| Other income (expense), net | | | 31 | | | | 1,324 | | | | (319 | ) | | | (2 | ) | | | 1,034 | |
| | | | | | | | | | | | | | | | |
| Income (Loss) Before Income Taxes | | $ | 36,769 | | | $ | (6,380 | ) | | $ | 17,926 | | | $ | (10,739 | ) | | $ | 37,576 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Reconciliation to EBITDA | | | | | | | | | | | | | | | | | | | | |
| Income (Loss) Before Income Taxes | | $ | 36,769 | | | $ | (6,380 | ) | | $ | 17,926 | | | $ | (10,739 | ) | | $ | 37,576 | |
| Interest, net | | | 28 | | | | 1,314 | | | | 318 | | | | (16 | ) | | | 1,644 | |
Depreciation(1) | | | 48 | | | | 2,402 | | | | 2,906 | | | | 76 | | | | 5,432 | |
| Amortization of Intangibles | | | — | | | | 2,672 | | | | — | | | | — | | | | 2,672 | |
| | | | | | | | | | | | | | | | |
| EBITDA | | $ | 36,845 | | | $ | 8 | | | $ | 21,150 | | | $ | (10,679 | ) | | $ | 47,324 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Transactions with Related Parties Included Above: | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 74,089 | | | $ | 98 | | | $ | 20,710 | | | $ | — | | | $ | 94,897 | |
| Selling, General and Administrative Expenses | | | 2,712 | | | | 467 | | | | 1,517 | | | | (388 | ) | | | 4,308 | |
| Interest Expense | | | 30 | | | | 1,029 | | | | 231 | | | | — | | | | 1,290 | |
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| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | For the Year Ended December 31, 2008 | |
| | | For the Year Ended December 31, 2007 | | Corporate | | | |
| | | Corporate Items and | | Consolidated | | Mortgage | | Financial | | Technology | | Items and | | Consolidated | |
| (in thousands) | | Mortgage Services | | Financial Services | | Technology Products | | Eliminations(1) | | Altisource | | Services | | Services | | Services | | Eliminations | | Altisource | |
| | | |
| Revenue | | $ | 64,260 | | $ | 41,293 | | $ | 36,235 | | $ | (6,882 | ) | | $ | 134,906 | | | $ | 54,956 | | $ | 73,835 | | $ | 45,283 | | $ | (13,711 | ) | | $ | 160,363 | |
| Cost of Revenue | | 44,158 | | 32,324 | | 27,354 | | | (6,882 | ) | | 96,954 | | | 36,392 | | 62,590 | | 29,777 | | | (13,711 | ) | | 115,048 | |
| | | | | | | | | | | | | | |
| Gross Profit | | 20,102 | | 8,969 | | 8,881 | | — | | 37,952 | | | 18,564 | | 11,245 | | 15,506 | | — | | 45,315 | |
| Selling, General and Administrative Expenses | | 7,876 | | 14,787 | | 6,359 | | | (1,092 | ) | | 27,930 | | | 5,027 | | 17,168 | | 6,118 | | | (225 | ) | | 28,088 | |
| | | | | | | | | | | | | | |
| Income (Loss) from Operations | | 12,226 | | | (5,818 | ) | | 2,522 | | 1,092 | | 10,022 | | | 13,537 | | | (5,923 | ) | | 9,388 | | 225 | | 17,227 | |
| Other income (expense), net | | | (90 | ) | | | (1,269 | ) | | 708 | | | (1,092 | ) | | | (1,743 | ) | | | (58 | ) | | | (1,952 | ) | | | (391 | ) | | | (225 | ) | | | (2,626 | ) |
| | | | | | | | | | | | | | |
| Income (Loss) Before Income Taxes | | $ | 12,136 | | $ | (7,087 | ) | | $ | 3,230 | | $ | — | | $ | 8,279 | | | $ | 13,479 | | $ | (7,875 | ) | | $ | 8,997 | | $ | — | | $ | 14,601 | |
| | | | | | | | | | | | | | |
| | | |
| Reconciliation to EBITDA | | |
| Income (Loss) Before Income Taxes | | $ | 12,136 | | $ | (7,087 | ) | | $ | 3,230 | | $ | — | | $ | 8,279 | | | $ | 13,479 | | $ | (7,875 | ) | | $ | 8,997 | | $ | — | | $ | 14,601 | |
| Interest, net | | 90 | | 1,300 | | 536 | | — | | 1,926 | | | 58 | | 2,025 | | 572 | | — | | 2,655 | |
Depreciation(2) | | 292 | | 980 | | 5,707 | | — | | 6,979 | | |
Depreciation(1) | | | 34 | | 3,202 | | 4,600 | | — | | 7,836 | |
| Amortization of Intangibles | | — | | 1,555 | | — | | — | | 1,555 | | | — | | 2,554 | | — | | — | | 2,554 | |
| | | | | | | | | | | | | | |
| EBITDA | | $ | 12,518 | | $ | (3,252 | ) | | $ | 9,473 | | $ | — | | $ | 18,739 | | | $ | 13,571 | | $ | (94 | ) | | $ | 14,169 | | $ | — | | $ | 27,646 | |
| | | | | | | | | | | | | | |
| | | |
| Transactions with Related Parties Included Above: | | |
| Revenue | | $ | 40,646 | | $ | 1,044 | | $ | 24,542 | | $ | (6,882 | ) | | $ | 59,350 | | | $ | 41,635 | | $ | 1,181 | | $ | 35,146 | | $ | (13,711 | ) | | $ | 64,251 | |
| | | | |
| Selling, General and Administrative Expenses | | $ | 4,507 | | $ | 1,817 | | $ | 2,540 | | $ | — | | $ | 8,864 | | | 3,633 | | 595 | | 1,980 | | — | | 6,208 | |
| | | | |
| Interest Expense | | $ | 90 | | $ | 544 | | $ | 331 | | $ | — | | $ | 965 | | | 58 | | 1,833 | | 378 | | — | | 2,269 | |
| | | | |
| | |
| (1) | | Intercompany transactions primarily consist of information technology infrastructure services and charges for the use of certain REAL products from our Technology Products segment to our other two segments. Generally, we reflect these charges within technology and communication in the segment receiving the services, except for consulting services, which we reflect in professional services. |
|
(2) | | Includes depreciation and amortization of $1.0 million, $2.0 million $2.8 million and $0.4$2.8 million in the years ended December 31, 2010, 2009 2008 and 2007,2008, respectively, for assets reflected in the Technology ProductsServices segment but utilized by the Financial Services segment. |
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Mortgage Services
The following table presents our results of operations for our Mortgage Services segment for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | Variance 2009 vs. 2008 | | Variance 2008 vs. 2007 | | | Years Ended December 31, | |
| (dollars in thousands) | | 2009 | | 2008 | | 2007 | | $ | | % | | $ | | % | | | 2010 | | (*) | | 2009 | | (*) | | 2008 | |
| | | |
| Revenue | | $ | 103,098 | | $ | 54,956 | | $ | 64,260 | | $ | 48,142 | | | 88 | % | | $ | (9,304 | ) | | | (14 | )% | |
| Service Revenue | | | $ | 153,318 | | | 76 | % | | $ | 87,021 | | | 58 | % | | $ | 54,956 | |
| Reimbursable Expenses | | | 44,550 | | 177 | | 16,077 | | 100 | | — | |
| Cooperative Non-controlling Interest | | | 6,903 | | 100 | | — | | 100 | | — | |
| | | | | | | | | |
| Total Revenue | | | 204,771 | | 99 | | 103,098 | | 88 | | 54,956 | |
| Cost of Revenue | | 60,735 | | 36,392 | | 44,158 | | 24,343 | | 67 | | | (7,766 | ) | | | (18 | ) | | 124,485 | | | (105 | ) | | 60,735 | | | (67 | ) | | 36,392 | |
| | | | | | | | | | | | | | | | | | | |
| Gross Profit | | 42,363 | | 18,564 | | 20,102 | | 23,799 | | 128 | | | (1,538 | ) | | | (8 | ) | | 80,286 | | 90 | | 42,363 | | 128 | | 18,564 | |
| | | |
| Gross Profit/Service Revenue | | | | 52 | % | | | 49 | % | | | 34 | % |
| | | |
| Selling, General and Administrative Expenses | | 5,625 | | 5,027 | | 7,876 | | 598 | | 12 | | | (2,849 | ) | | | (36 | ) | | 14,890 | | | (165 | ) | | 5,625 | | | (12 | ) | | 5,027 | |
| | | | | | | | | | | | | | | | | | | |
| Income from Operations | | $ | 36,738 | | $ | 13,537 | | $ | 12,226 | | $ | 23,201 | | | 171 | % | | $ | 1,311 | | | 11 | % | | $ | 65,396 | | | 78 | % | | $ | 36,738 | | | 171 | % | | $ | 13,537 | |
| | | | | | | | | | | | | | | | | | | |
| | | |
| Income from Operations/Service Revenue | | | | 43 | % | | | 42 | % | | | 25 | % |
| | | |
EBITDA(1) | | $ | 36,845 | | $ | 13,571 | | $ | 12,518 | | $ | 23,274 | | | 171 | % | | $ | 1,053 | | | 8 | % | | $ | 61,749 | | | 68 | % | | $ | 36,845 | | | 171 | % | | $ | 13,571 | |
| | | | | | | | | | | | | | | | | | | |
| | | |
| Transactions with Related Parties: | | |
| Revenue | | $ | 74,089 | | $ | 41,635 | | $ | 40,646 | | $ | 32,454 | | | 78 | % | | $ | 989 | | | 2 | % | | $ | 135,655 | | $ | 74,089 | | $ | 41,635 | |
| | | | | | | | | | | | | |
| Selling, General and Administrative Expenses | | $ | 2,712 | | $ | 3,633 | | $ | 4,507 | | $ | (921 | ) | | | (25 | )% | | $ | (874 | ) | | | (19 | )% | | — | | 2,712 | | 3,633 | |
| | | | | | | | | | | | | |
| Interest Expense | | $ | 30 | | $ | 58 | | $ | 90 | | $ | (28 | ) | | | (48 | )% | | $ | (32 | ) | | | (36 | )% | | — | | 30 | | 58 | |
| | | | | | | | | | | | | |
| | |
| (*) | | Represents percentage change (better/(worse)) from prior period. |
|
| (1) | | See table at the beginning of this section for a reconciliation of the most directly comparable GAAP measure to EBITDA. |
Our Mortgage Services segment continued to be the primary driver of our overall growth for the periods presented. The growth in Mortgage Services has been driven by our development and national rollout of default oriented Mortgage Services over our national delivery platform. This segment was also aided by the growth in Ocwen’s residential loan portfolio and our acquisition of MPA in February 2010.
We are committed to providing a suite of mortgage origination services including valuation, title, fulfillment and flood certification services. Through our acquisition of MPA, we have preferred access to financial institutions which we believe constitutes 6% of the total residential mortgage origination market. In addition, for members of MPA, we believe that over time we can work with Ocwen and other partners to provide additional avenues to sell loans beyond the current preferred investor arrangements resulting in improved capital markets execution. We expect this will facilitate the sale of our services to the members.
Although we believe the development of origination services is important to balancing out our service offerings, it will require a significant investment in personnel, technology and management. In addition, given the significant growth in our default oriented services, we continue to invest significant resources to ensure that we meet the demands of our customers. In addition, investments will be made in development stage services such as an enhanced consumer real estate portal. These investments could limit our ability to significantly expand margins during 2011.
We experienced significant growth in our Mortgage Services segment in 2009 as compared to 2008 as we rolled out our residential default related services. We were able to develop and rollout these services and still achieve a 36% EBITDA margin in 2009 which includes the impact of expense reimbursements for which we recognize no margin.reimbursements. We did this by leveraging our global delivery model and our experience with technological based solutions, econometrics and behavioral science.
We believe we are well positioned to grow revenues in Mortgage Services throughout the economic cycle for the foreseeable future for the following reasons:
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Revenue
| | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | |
| (dollars in thousands) | | 2010 | | | (*) | | | 2009 | | | (*) | | | 2008 | |
| | | | | | | | | | | | | | | | | | | | | |
| Revenue: | | | | | | | | | | | | | | | | | | | | |
| Asset Management Services | | $ | 78,999 | | | | 159 | % | | $ | 30,464 | | | | N/M | | | $ | 1,167 | |
| Component Services and Other | | | 40,473 | | | | 111 | | | | 19,196 | | | | 64 | % | | | 11,683 | |
| Residential Property Valuation | | | 33,502 | | | | 25 | | | | 26,800 | | | | (7 | ) | | | 28,882 | |
| Closing and Title Services | | | 28,056 | | | | 61 | | | | 17,444 | | | | (32 | ) | | | 13,173 | |
| Default Management Services | | | 23,741 | | | | 158 | | | | 9,194 | | | | N/M | | | | 51 | |
| | | | | | | | | | | | | | | | | | |
| Total Revenue | | $ | 204,771 | | | | 99 | % | | $ | 103,098 | | | | 88 | % | | $ | 54,956 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Reimbursable Expenses: | | | | | | | | | | | | | | | | | | | | |
| Asset Management Services | | $ | 41,920 | | | | | | | $ | 14,308 | | | | | | | $ | — | |
| Default Management Services | | | 2,328 | | | | | | | | 1,769 | | | | | | | | — | |
| Closing and Title Services | | | 302 | | | | | | | | — | | | | | | | | — | |
| | | | | | | | | | | | | | | | | | |
| Reimbursable Expenses | | $ | 44,550 | | | | | | | $ | 16,077 | | | | | | | $ | — | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Transactions with Related Parties: | | | | | | | | | | | | | | | | | | | | |
| Asset Management Services | | $ | 78,999 | | | | | | | $ | 30,464 | | | | | | | $ | 1,161 | |
| Residential Property Valuation | | | 32,525 | | | | | | | | 25,762 | | | | | | | | 27,301 | |
| Closing and Title Services | | | 17,379 | | | | | | | | 13,496 | | | | | | | | 13,173 | |
| Default Management Services | | | 6,752 | | | | | | | | 4,367 | | | | | | | | — | |
| | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 135,655 | | | | | | | $ | 74,089 | | | | | | | $ | 41,635 | |
| | | | | | | | | | | | | | | | | | |
| • | |
| (*) | | We expect to complete our national rollout toward the end of 2010. This will allow us to capture 50 — 55% of the available referralsRepresents percentage change (better/(worse)) from the loan portfolio serviced by Ocwen (currently we capture 30 — 35%). We typically generate revenue 1 — 6 months after the initial referral is placed with us;prior period. |
| |
| • | | Ocwen has sufficient equity to acquire additional portfolios. Referrals typically begin to accrue to us 3 to 6 months after the portfolio is acquired; |
|
| • | | Given the existing volume of loans in various stages of default and foreclosure, we believe the default services market is likely to grow through 2010; |
|
| • | | The acquisition of MPA should position Mortgage Services to grow if the economy were to improve more quickly than expected; |
|
| • | | We generate significant amounts of free cash flow that allow us to invest in new and existing services at attractive margins; and |
|
| • | | Given our small market position in very significant markets, we believe we have an ability to capture additional market share.N/M — not meaningful. |
Revenue
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | | Variance 2009 vs. 2008 | | | Variance 2008 vs. 2007 | |
| (dollars in thousands) | | 2009 | | | 2008 | | | 2007 | | | $ | | | % | | | $ | | | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential Property Valuation | | $ | 26,800 | | | $ | 28,882 | | | $ | 38,998 | | | $ | (2,082 | ) | | | (7 | )% | | $ | (10,116 | ) | | | (26 | )% |
| Closing and Title Services | | | 17,444 | | | | 13,173 | | | | 14,042 | | | | 4,271 | | | | 32 | | | | (869 | ) | | | (6 | ) |
| Default Management Services | | | 9,194 | | | | 51 | | | | — | | | | 9,143 | | | | N/M | | | | 51 | | | | 100 | |
| Asset Management Services | | | 30,464 | | | | 1,167 | | | | — | | | | 29,297 | | | | N/M | | | | 1,167 | | | | 100 | |
| Component Services | | | 19,196 | | | | 11,683 | | | | 11,220 | | | | 7,513 | | | | 64 | | | | 463 | | | | 4 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Total Revenue | | $ | 103,098 | | | $ | 54,956 | | | $ | 64,260 | | | $ | 48,142 | | | | 88 | % | | $ | (9,304 | ) | | | (14 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Transactions with Related Parties: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential Property Valuation | | $ | 25,762 | | | $ | 27,301 | | | $ | 26,604 | | | $ | (1,539 | ) | | | (6 | )% | | $ | 697 | | | | 3 | % |
| Closing and Title Services | | | 13,496 | | | | 13,173 | | | | 14,042 | | | | 323 | | | | 2 | | | | (869 | ) | | | (6 | ) |
| Default Management Services | | | 4,367 | | | | — | | | | — | | | | 4,367 | | | | 100 | | | | — | | | | — | |
| Asset Management Services | | | 30,464 | | | | 1,161 | | | | — | | | | 29,303 | | | | N/M | | | | 1,161 | | | | 100 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 74,089 | | | $ | 41,635 | | | $ | 40,646 | | | $ | 32,454 | | | | 78 | % | | $ | 989 | | | | 2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Expense Reimbursements: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Default Management Services | | $ | 1,770 | | | $ | — | | | $ | — | | | $ | 1,770 | | | | 100 | % | | $ | — | | | | — | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Asset Management Services | | $ | 14,308 | | | $ | — | | | $ | — | | | $ | 14,308 | | | | 100 | % | | $ | — | | | | — | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
N/M — not meaningful
In 2009,our Mortgage Services segment, we generatedgenerate the majority of our revenue by providing outsourced services for residential mortgage loans primarily for Ocwen or with respect to the residential loan portfolio serviced by Ocwen. In addition to our relationship with Ocwen, we have longstanding relationships with some of the leading capital markets firms, commercial banks, hedge funds, insurance companies, credit unions and lending institutions andinstitutions. We provide productsservices that enhance their ability to make informed investment decisions and manage their core operations. With
Asset Management Services.Asset management services principally include property preservation, property inspection, REO asset management and REO brokerage. During 2009, we established brokerage operations in three key states and launchedwww.altisourcehomes.com andwww.gohoming.com. In the acquisitionfirst quarter of 2010, we completed our national network for property preservation services and, including our real estate broker referral network, have national coverage for REO dispositions. The increase in revenue over the three year period has mostly been driven by our property preservation services to date; however, the increase in REO brokerage referrals should ultimately drive additional revenues.
Component Services and Other. Component Services includes our business process group which principally provides outsourced services for key insurers in the mortgage industry. In addition, we record the results of MPA in Februarythis grouping. The increase in component services over the three years is due to the inclusion of MPA’s results from the date of acquisition in 2010 we took a significant step in our evolution to become a full service providerand an expanded relationship with an existing customer beginning in the mortgage services vertical and gained increased accesssecond quarter of 2009. The renewed contract with the existing customer has a five year term, thus we anticipate that we will continue to over 155 mid-tier mortgage bankers.generate revenues from this customer at least at the current level for the next several years.
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Residential Property Valuation.During 2010, we saw an increase primarily in broker price opinion referrals and revenues as a result of Ocwen’s residential loan portfolio growth, including the HomEq portfolio. We expect to see an increased level of referrals to continue during 2011. As one of the more mature services in our portfolio, residential property valuations are more subject to market conditions and have therefore seensaw declines year over yearin 2009 as compared to 2008 given the downturn in private label mortgage crisis. During 2010, we expect this business to stabilize and potentially grow as it benefits from an array of new services that are extensions of our core appraisal management services. In addition, we expect to utilize the existing infrastructure to begin to diversify the client base.securitizations.
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Closing and Title Services. This business includes legacy services such as pre-foreclosure title services and mortgage due diligence as well as an expanded array of title services that were rolled out during 2010 and 2009 principally around default title.REO purchase transactions. During 2010, we are focused on rollingbegan to roll out our title agency business nationallyin key markets. In December 2010, we obtained agency status in California which we believe will drive significant revenue growth at attractive margins. We have also applied for our title agency license in several counties in California which is a significant market for us. However, we do not expect to obtain agency status in California prior to the fourth quarter of 2010.2011.
Default Management Services. One of the services we rolled out in 2009 was non-legalThis group includes support services whereby we provide non-legal back-office support functions for foreclosure, bankruptcy and eviction.eviction attorneys as well as non-judicial foreclosure services in California and Nevada. We do not execute or notarize foreclosure affidavits of debt or lost note affidavits. Higher revenue in 2010 was primarily driven by our increased footprint as we expanded the states where we provide foreclosure support services to 26 states during the year. In addition we also expanded the footprint over which we provide our bankruptcy and eviction support services. In 2009, the majority of our revenue was derived from processing foreclosures. We were able to develop this line of business without acquiring existing back-office operation thereby utilizing limited capital resources and increasing our overall returns. We expect this business to continue to grow during 2010 as we expand our geographic footprint entering into more states as well as expanding into providing non-legal bankruptcy and eviction services to a greater extent than during 2009.
Asset Management Services.Asset management services principally include property preservation and inspection and REO brokerage. During 2009, we established brokerage operations in three key states and launched www.altisourcehomes.com and www.gohoming.com. These websites along with our expanding brokerage and referral network will serve as the basis for our enhanced multi-channel real-estate marketplace service offering. We expect to complete our national broker network including a referral network during 2010.
Component Services. The increase in component services (formerly known as knowledge process outsourcing) is principally due to an expanded relationship with an existing customer in the second quarter of 2009. The renewed contract has a five year term, thus we anticipate that we will continue to generate revenues at least at the current level for the next several years.
Revenues declined in 2008 as loan originations continued to decrease partially offset by an increase in services to assist holders of delinquent loans. We determined early in 2008 to scale down the mortgage due diligence services due to a lack of demand. We shifted these resources to other areas, including our outsourcing services for which we increased our revenues by gaining a greater share of our customers’ outsourcing needs.foreclosure support services.
Cost of Revenue
Our gross margin| | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | |
| (dollars in thousands) | | 2010 | | | (*) | | | 2009 | | | (*) | | | 2008 | |
| | | | | | | | | | | | | | | | | | | | | |
| Expenditures | | $ | 79,935 | | | | (79 | )% | | $ | 44,658 | | | | (23 | )% | | $ | 36,392 | |
| Reimbursable Expenses | | | 44,550 | | | | (177 | ) | | | 16,077 | | | | (100 | ) | | | — | |
| | | | | | | | | | | | | | | | | | |
| Cost of Revenue | | $ | 124,485 | | | | (105 | )% | | $ | 60,735 | | | | (67 | )% | | $ | 36,392 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Gross Profit Percentage: | | | | | | | | | | | | | | | | | | | | |
| Gross Profit/Service Revenue | | | 52 | % | | | | | | | 49 | % | | | | | | | 34 | % |
| | | | | | | | | | | | | | | | | | |
| | |
| (*) | | Represents percentage change (better/(worse)) from prior period. |
During 2010, we began scaling our operations to support the national rollout of services and in anticipation of the growth in Ocwen’s residential loan portfolio. These costs have principally included increased compensation and benefits and technology costs. Due to the number of people hired and the requisite training time, it was 41% in 2009 including $16.1 millionnecessary to develop these resources several months prior to the completion of reimbursable expenses for which we achieve no margin. Ocwen’s acquisition of the HomEq residential loan portfolio.
Core to our operating philosophy is that wea focus on selling solutions and units of output as opposed to seats. This allows us to benefit from increased operational efficiencies. We gain operational efficiencies generally via use of technology, and employing econometrics, consumer behavioral principles and six sigma techniques. This philosophy along with a focus on default oriented services has allowed us to achieve high gross profit margins. During 2010,2011, we expect to continueinvest significantly in new services, some of which have a lower margin than our existing services or operate at a loss, in order to invest inbalance out our service offerings particularly residential loan origination services. We do not expect these investments to materially impact our margins.
Our gross profit increased from 31% in 2007 to 34% in 2008 primarily by continuing to increase the utilization of our proprietary technology as well as by scaling back our mortgage due diligence services that had lower margins. Partially offsetting this improvement was the impact of new product launches for which we incurred personnel and other costs to establish the products with minimal revenues during 2008.offerings.
Selling, General and Administrative Expenses
| | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | |
| (dollars in thousands) | | 2010 | | | (*) | | | 2009 | | | (*) | | | 2008 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total Selling, General and Administrative Expenses | | $ | 14,890 | | | | (165 | )% | | $ | 5,625 | | | | (12 | )% | | $ | 5,027 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Operating Percentage: | | | | | | | | | | | | | | | | | | | | |
| Income from Operations/Service Revenue | | | 43 | % | | | | | | | 42 | % | | | | | | | 25 | % |
| | | | | | | | | | | | | | | | | | |
| | |
| (*) | | Represents percentage change (better/(worse)) from prior period. |
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Selling, General and Administrative Expenses increased in 2010 principally as a result of the classification of certain compensation and benefit costs related to segment management and marketing previously being captured either in Cost of Revenue or as a component of the Corporate segment. In addition, professional services fees such as those associated with the external audit have increased as a result of being a public company for a full year. Finally, we incurred significant additional facility costs as a result of scaling our operations.
Selling, General and Administrative Expenses increased during 2009 as compared to 2008 mostly with respect to travel costs and increased training costs related to the increased workforce. As a percentage of Revenues, Selling, General and Administrative Expenses declined from 9% in 2008 to 5% in 2009Operating margin increased reflective of the increased leverage we areobtained as the business grew.
EBITDA
| | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | |
| (dollars in thousands) | | 2010 | | | (*) | | | 2009 | | | (*) | | | 2008 | |
| | | | | | | | | | | | | | | | | | | | | |
| EBITDA | | $ | 61,749 | | | | 68 | % | | $ | 36,845 | | | | 171 | % | | $ | 13,571 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| EBITDA Margin: | | | | | | | | | | | | | | | | | | | | |
| EBITDA/Service Revenue | | | 40 | % | | | | | | | 42 | % | | | | | | | 25 | % |
| | | | | | | | | | | | | | | | | | |
| | |
| (*) | | Represents percentage change (better/(worse)) from prior period. |
Mortgage Services EBITDA growth over the three years presented was predominantly driven by the expansion of our services over a national footprint and the increase in Ocwen’s residential loan portfolio over the three year period. Mortgage Services EBITDA margins in 2010 declined principally as a result of the timing of investments to scale our operations. Our margins fluctuate from period to period depending on the timing of portfolio additions by Ocwen, the mix of services delivered, the seasonality of the business and the timing of investments to scale our operations.
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obtaining as the business grows. We expect Selling, General and Administrative Expenses to increase during 2010 as we continue to incur additional costs as a separate company and as we expand our marketing efforts. The sales cycle for attracting new customers can be prolonged and ranges generally from 6 to 18 months.
Selling, General and Administrative Expenses decreased in 2008 as compared to 2007. Consistent with the changes in Cost of Revenue, we generated these improvements by continuing to increase our utilization of our technology and lowering our overhead costs.
Financial Services
The following table presents our results of operations for our Financial Services segment for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Variance 2009 vs. | | Variance 2008 vs. | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | 2008 | | 2007 | | | Years Ended December 31, | |
| (dollars in thousands) | | 2009 | | 2008 | | 2007 | | $ | | % | | $ | | % | | | 2010 | | (*) | | 2009 | | (*) | | 2008 | |
| | | |
| Revenue | | $ | 64,434 | | $ | 73,835 | | $ | 41,293 | | $ | (9,401 | ) | | | (13 | )% | | $ | 32,542 | | | 79 | % | |
| Service Revenue | | | $ | 57,080 | | | (11 | )% | | $ | 64,434 | | | (13 | )% | | $ | 73,835 | |
| Reimbursable Expenses | | | 2,899 | | 100 | | — | | — | | — | |
| | | | | | | | | |
| Total Revenue | | | 59,979 | | | (7 | ) | | 64,434 | | | (13 | ) | | 73,835 | |
| | | |
| Cost of Revenue | | 52,871 | | 62,590 | | 32,324 | | | (9,719 | ) | | | (16 | ) | | 30,266 | | 94 | | | 49,781 | | 6 | | 52,871 | | 16 | | 62,590 | |
| | | | | | | | | | | | | | | | | | | |
| Gross Profit | | 11,563 | | 11,245 | | 8,969 | | 318 | | 3 | | 2,276 | | 25 | | | 10,198 | | | (12 | ) | | 11,563 | | 3 | | 11,245 | |
| | | |
| Gross Profit/Service Revenue | | | | 18 | % | | | 18 | % | | | 15 | % |
| | | |
| Selling, General and Administrative Expenses | | 19,267 | | 17,168 | | 14,787 | | 2,099 | | 12 | | 2,381 | | 16 | | | 19,567 | | | (2 | ) | | 19,267 | | | (12 | ) | | 17,168 | |
| | | | | | | | | | | | | | | | | | | |
| Income from Operations | | $ | (7,704 | ) | | $ | (5,923 | ) | | $ | (5,818 | ) | | $ | (1,781 | ) | | | (30 | )% | | $ | (105 | ) | | | (2 | )% | |
| Loss from Operations | | | $ | (9,369 | ) | | | (22 | )% | | $ | (7,704 | ) | | | (30 | )% | | $ | (5,923 | ) |
| | | | | | | | | | | | | | | | | | | |
| | | |
| Loss from Operations/Service Revenue | | | | (16 | )% | | | (12 | )% | | | (8 | %) |
| | | |
EBITDA(1) | | $ | 8 | | $ | (94 | ) | | $ | (3,252 | ) | | $ | 102 | | | (109 | ) | | $ | 3,158 | | | 97 | % | | $ | (1,903 | ) | | N/M | | $ | 8 | | | 109 | % | | $ | (94 | ) |
| | | | | | | | | | | | | | | | | | | |
| | | |
| Transactions with Related Parties: | | |
| Revenue | | $ | 98 | | $ | 1,181 | | $ | 1,044 | | $ | (1,083 | ) | | | (92 | )% | | $ | 137 | | | 13 | % | | $ | 166 | | $ | 98 | | $ | 1,181 | |
| | | | | | | | | | | | | |
| Selling, General and Administrative Expenses | | $ | 467 | | $ | 595 | | $ | 1,817 | | $ | (128 | ) | | | (22 | )% | | $ | (1,222 | ) | | | (67 | )% | | — | | 467 | | 595 | |
| | | | | | | | | | | | | |
| Interest expense | | $ | 1,029 | | $ | 1,833 | | $ | 544 | | $ | (804 | ) | | | (44 | )% | | $ | 1,289 | | | 237 | % | | — | | 1,029 | | 1,833 | |
| | | | | | | | | | | | | |
| | |
| (*) | | Represents percentage change (better/(worse)) from prior period. |
|
| N/M — not meaningful. |
| |
| (1) | | See table at the beginning of this section for a reconciliation of the most directly comparable GAAP measure to EBITDA. |
TheAs with 2009, this past year ended December 31, 2009 continued to be a very difficult environment for the collections industry, particularly for participants such as ourselves that do not participate in debt buying activities. Liquidation rates declined year over year althoughBeyond the general industry issues, we sawfailed to execute on certain key strategic initiatives which resulted in performance issues and for some stabilization ascustomers the decline in placements. In the fourth quarter of year-end. With our cost cutting, variability reduction2010, we made significant changes to the management of this segment including the naming of a new President and other collector initiatives, we were able to improve EBITDA, after adjustment for the one-time legal matters (gainhiring of $0.9 million, net) and facility closure costs (loss of $1.9 million, net), in an environment where revenues declined $9.4 million year over year. Given that collection rates are generally inversely correlated to unemployment rates, we would expect that as unemployment declines the amount we are able to collect should improve without a corresponding increase in expenses leading to additional improvements in margin.
Furthermore, as noted above, we provide contingency collection services to seven of the most recognizable credit card issuers in the industry. Currently, we capture a negligible amount spent by these credit card issuers on contingency collection with the exception of American Express where wenew Chief Operations Officer. We continue to be one of their largest service providers. Asmake further investments in personnel and technology and believe this will lead to improved performance during 2011.
During 2011, we will continue to provefocus on improving revenue per collector, delivering more services over our collection capabilities, we would expect to gain additional market share. Our strategy for 2010 is to increase our margins principally viaglobal delivery platform, expanding our quality initiatives and investing in new technology while we increase our share with eachtechnology. We expect limited revenue growth in this segment and instead will be focused on performance of our key clients.collectors, which should facilitate growth in future years as well as margin improvement.
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Revenue
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Variance 2009 vs. | | Variance 2008 vs. | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | 2008 | | 2007 | | | Years Ended December 31, | |
| (dollars in thousands) | | 2009 | | 2008 | | 2007 | | $ | | % | | $ | | % | | | 2010 | | (*) | | 2009 | | (*) | | 2008 | |
| | | |
| Revenue: | | |
| Asset Recovery Management | | $ | 51,019 | | $ | 62,771 | | $ | 36,802 | | $ | (11,752 | ) | | | (19 | )% | | $ | 25,969 | | | 71 | % | | $ | 48,050 | | | (6 | )% | | $ | 51,019 | | | (19 | )% | | $ | 62,771 | |
| Customer Relationship Management | | 13,415 | | 11,064 | | 4,491 | | 2,351 | | 21 | | 6,573 | | 146 | | | 11,929 | | | (11 | ) | | 13,415 | | 21 | | 11,064 | |
| | | | | | | | | | | | | | | | | | | |
| Total Revenue | | $ | 64,434 | | $ | 73,835 | | $ | 41,293 | | $ | (9,401 | ) | | | (13 | )% | | $ | 32,542 | | | 79 | % | | $ | 59,979 | | | (7 | )% | | $ | 64,434 | | | (13 | )% | | $ | 73,835 | |
| | | | | | | | | | | | | | | | | | | |
| | | |
| Reimbursable Expenses: | | |
| Asset Recovery Management | | | $ | 2,899 | | $ | — | | $ | — | |
| | | |
| Transactions with Related Parties: | | |
| Asset Recovery Management | | $ | 98 | | $ | 1,181 | | $ | 1,044 | | $ | (1,083 | ) | | | (92 | )% | | $ | 137 | | | 13 | % | | $ | 166 | | $ | 98 | | $ | 1,181 | |
| | | | | | | | | | | | | |
| | |
| (*) | | Represents percentage change (better/(worse)) from prior period. |
In our Financial Services segment, we generate the majority of our revenue from asset recovery management fees we earn for collecting amounts due to our customers and from fees we earn for performing customer relationship management for our customers.
Asset Recovery Management.Our revenues associated with contingency collections continued to declinedeclined over the three year period principally due to the mix of placements and a shift in placements to operations that provide lower collection rates. Weper collector revenue, but we believe that our collection rates have declined as a directwill ultimately result of the current protracted economic environment and are consistent with the collections industry in general. At year-end, we began to see some stabilization of collection rates. While we cannot predict whether liquidation rates or placements will stabilize at current levels, increase or continue to decline, we are focused on mitigating the impact from decreasing liquidation rates by expanding our market share with existing customers.higher margins.
Customer Relationship Management. Our revenues associated with customer relationship management improved year over yeardeclined in 2010 as we sought to wind down our relationship with one customer due to unsatisfactory margins. In the third quarter of 2010, we expanded our relationship with one primarya utility customer.
The increase in revenues from 2007 to 2008 was the result of the acquisition of NCI effective June 6, 2007.
Cost of Revenue
| | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | |
| (dollars in thousands) | | 2010 | | | (*) | | | 2009 | | | (*) | | | 2008 | |
| | | | | | | | | | | | | | | | | | | | | |
| Expenditures | | $ | 46,882 | | | | 11 | % | | $ | 52,871 | | | | 16 | % | | $ | 62,590 | |
| Reimbursable Expenses | | | 2,899 | | | | (100 | ) | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | |
| Cost of Revenue | | $ | 49,781 | | | | 6 | % | | $ | 52,871 | | | | 16 | % | | $ | 62,590 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Gross Profit Percentage: | | | | | | | | | | | | | | | | | | | | |
| Gross Profit/Service Revenue | | | 18 | % | | | | | | | 18 | % | | | | | | | 15 | % |
| | | | | | | | | | | | | | | | | | |
| | |
| (*) | | Represents percentage change (better/(worse)) from prior period. |
Our Cost of Revenues, in 2009net of reimbursable expenses, decreased compared to 2008over the three year period principally due to a reduction in Compensationcompensation and Benefit costsbenefits as a result of $9.1 million due toa lower number of collectors and lowerreduced commissions. In addition, we have reduced Technology and Communicationcontinue to seek ways to further reduce technology and communication costs by $2.9 million.for this segment. Partially offsetting these decreases were higher collection letter costs which are a function ofassociated with the amount of placements we received. In addition, we utilized a higher numberutilization of outside collectors in an effort to limit our exposure to declining collection rates.collectors. We continue to analyze our cost structure and intend to manage our costs to improve our results even if collection rates remain at depressed levels.
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Cost of Revenue in 2008 increased compared to 2007. We began to expand our existing operations late in 2007 and continued this expansion in 2008 in order to migrate more of our collections functions to lower cost areas. We incurred additional training and recruiting costs as we built the new facility and ramped up staffing. We also generated lower collections per dollar placed with us in 2008 which we believe is consistent across the collections industry and is due to the general economic downturn in the U.S. and elsewhere. Finally, we incurred higher technology costs in 2008 relating to the acceleration of depreciation on a predictive dialer that we replaced and the addition of other technology assets. We reflect these costs in our Technology Products segment as well but eliminate the duplicate amounts in consolidation. We fully depreciated this dialer in 2008 and reduced many of our technology costs during the year. We also reduced the number of collectors late in 2008 without a corresponding decrease in revenue.
Selling, General and Administrative Expenses
The primary driver| | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | |
| (dollars in thousands) | | 2010 | | | (*) | | | 2009 | | | (*) | | | 2008 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total Selling, General and Administrative Expenses | | $ | 19,567 | | | | (2 | )% | | $ | 19,267 | | | | (12 | )% | | $ | 17,168 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Operating Percentage: | | | | | | | | | | | | | | | | | | | | |
| Loss from Operations/Service Revenue | | | (16 | )% | | | | | | | (12 | )% | | | | | | | (8 | )% |
| | | | | | | | | | | | | | | | | | |
| | |
| (*) | | Represents percentage change (better/(worse)) from prior period. |
For 2010 and 2009, Selling, General and Administrative Expenses include infrequent items. In 2010, we recognized $2.8 million of impairment for goodwill in the increase infourth quarter. Selling, General and Administrative Expenses in 2009 was $2.3included $1.9 million in facility closure costs accrued in the third quarter primarily consisting of lease exit costs and severance for closure of facilities in Miramar, Florida and Victoria, British Columbia, Canada (see Note 910 to the consolidated financial statements). In addition, 2009 included $1.4 million of legal settlement losses. Excluding these items, Selling, General and Administrative Expenses increased in 2010 principally as a result of the classification of certain compensation and benefit costs related to segment management and marketing previously being captured either in Cost of Revenue or as a component of the Corporate segment.
EBITDA
| | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | |
| (dollars in thousands) | | 2010 | | | (*) | | | 2009 | | | (*) | | | 2008 | |
| | | | | | | | | | | | | | | | | | | | | |
| EBITDA | | $ | (1,903 | ) | | | N/M | | | $ | 8 | | | | 109 | % | | $ | (94 | ) |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| EBITDA Margin: | | | | | | | | | | | | | | | | | | | | |
| EBITDA/Service Revenue | | | (3 | )% | | | | | | | 0 | % | | | | | | | 0 | % |
| | | | | | | | | | | | | | | | | | |
| | |
| (*) | | Represents percentage change (better/(worse)) from prior period. |
|
| N/M — Not meaningful. |
The decline in 2010 EBITDA was principally driven by the decline in revenue primarily as a result of the mix of placements with American Express as well as our strategic decision to cease servicing a first party customer in the first half of 2010. During 2011, we are focused on collector performance and reducing per unit costs.
In 2009, with our cost cutting, variability reduction and other collector initiatives, we were able to improve EBITDA, after adjustment for the one-time legal matters (gain of $0.9 million), net and facility closure costs (loss of $1.9 million), net, in an environment where revenues declined $9.4 million from 2008 levels.
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financial statements). We believe this will allow us to operate with lower costs in 2010. In addition, we had higher professional fees representing legal expenses due to recent litigation (see Note 14 to the consolidated financial statements). We were able to partially offset this increase by reducing compensation costs related to support functions. In addition, 2009 includes $1.4 million of settlement losses with respect to the Noble dialer arbitration.
The increase in Selling, General and Administrative Expenses from 2007 to 2008 was the result of the acquisition of NCI effective June 6, 2007.
Technology ProductsServices
The following table presents our results of operations for our Technology ProductsServices segment for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Variance 2009 vs. | | Variance 2008 vs. | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | 2008 | | 2007 | | | Years Ended December 31, | |
| (dollars in thousands) | | 2009 | | 2008 | | 2007 | | $ | | % | | $ | | % | | | 2010 | | (*) | | 2009 | | (*) | | 2008 | |
| | | |
| Revenue | | $ | 47,453 | | $ | 45,283 | | $ | 36,235 | | $ | 2,170 | | | 5 | % | | $ | 9,048 | | | 25 | % | | $ | 52,013 | | | 10 | % | | $ | 47,453 | | | 5 | % | | $ | 45,283 | |
| Cost of Revenue | | 24,477 | | 29,777 | | 27,354 | | | (5,300 | ) | | | (18 | ) | | 2,423 | | 9 | | | 28,909 | | | (18 | ) | | 24,477 | | 18 | | 29,777 | |
| | | | | | | | | | | | | | | | | | | |
| Gross Profit | | 22,976 | | 15,506 | | 8,881 | | 7,470 | | 48 | | 6,625 | | 75 | | | 23,104 | | 1 | | 22,976 | | 48 | | 15,506 | |
| | | |
| Gross Profit Percentage | | | | 44 | % | | | 48 | % | | | 34 | % |
| | | |
| Selling, General and Administrative Expenses | | 4,731 | | 6,118 | | 6,359 | | | (1,387 | ) | | | (23 | ) | | | (241 | ) | | | (4 | ) | | 4,985 | | | (5 | ) | | 4,731 | | 23 | | 6,118 | |
| | | | | | | | | | | | | | | | | | | |
| Income from Operations | | $ | 18,245 | | $ | 9,388 | | $ | 2,522 | | $ | 8,857 | | | 94 | % | | $ | 6,866 | | | 272 | % | | $ | 18,119 | | | (1 | )% | | $ | 18,245 | | | 94 | % | | $ | 9,388 | |
| | | | | | | | | | | | | | | | | | | |
| | | |
| Operating Income Percentage | | | | 35 | % | | | 38 | % | | | 21 | % |
| | | |
EBITDA(1) | | $ | 21,150 | | $ | 14,169 | | $ | 9,473 | | $ | 6,981 | | | 49 | % | | $ | 4,696 | | | 50 | % | | $ | 22,622 | | | 7 | % | | $ | 21,150 | | | 49 | % | | $ | 14,169 | |
| | | | | | | | | | | | | | | | | | | |
| | | |
| Transactions with Related Parties: | | |
Revenue(2) | | $ | 20,710 | | $ | 35,146 | | $ | 24,542 | | $ | (14,436 | ) | | | (41 | )% | | $ | 10,604 | | | 43 | % | | $ | 19,167 | | $ | 20,710 | | $ | 35,146 | |
| | | | | | | | | | | | | |
| Selling, General and Administrative Expenses | | $ | 1,517 | | $ | 1,980 | | $ | 2,540 | | $ | (463 | ) | | | (23 | )% | | $ | (560 | ) | | | (22 | )% | | — | | 1,517 | | 1,980 | |
| | | | | | | | | | | | | |
| Interest expense | | $ | 231 | | $ | 378 | | $ | 331 | | $ | (147 | ) | | | (39 | )% | | $ | 47 | | | 14 | % | | — | | 231 | | 378 | |
| | | | | | | | | | | | | |
| | |
| (*) | | Represents percentage change (better/(worse)) from prior period. |
|
| (1) | | See table at the beginning of this section for a reconciliation of the most directly comparable GAAP measure to EBITDA. |
| |
| (2) | | Includes revenue earned from other segments related to RealSuiteREALSuite and IT infrastrutureinfrastructure services of $1.8 million and $13.7 million, respectively in 2008 and $1.5 million and $6.9 million, respectively in 2007.2008. |
|
| N/M — Not meaningful. |
During 2009, theThe primary focus of the Technology ProductsServices segment wascontinues to supportbe supporting the growth of Mortgage Services and Ocwen as well as the cost reduction and quality initiatives on-going withwithin the Financial Services segment. During 2010,In 2011, however, we also intend to expend significant resources, principally personnel costs and external consulting costs, to accomplish several key objectives:
The re-architecture and enhancement of our REALSuite of services;
The deployment of business process management and business intelligence reporting systems to more effectively manage our operations; and
The development and early stage incubation of technology solutions based off our REALSuite technologies.
We are focused oncurrently evaluating how we manage and report this segment. This includes evaluation of the services offered by this segment and the way we charge for certain services. The change in pricing for our services along with significant expenditures related to the longer-term commercialization of our Technology Productservice offerings to expand their applicability towill either limit the growth of this segment or may result in a broader audience. In addition, we are focused on reducing IT infrastructure costs where possible including those costs incurred by Ocwen.lowering of the reported results for this segment in 2011.
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Revenues
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Variance 2009 vs. | | Variance 2008 vs. | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | 2008 | | 2007 | | | Years Ended December 31, | |
| (dollars in thousands) | | 2009 | | 2008 | | 2007 | | $ | | % | | $ | | % | | | 2010 | | (*) | | 2009 | | (*) | | 2008 | |
| | | |
| Revenue: | | |
| REALSuite | | $ | 25,784 | | $ | 20,463 | | $ | 18,328 | | $ | 5,321 | | | 26 | % | | $ | 2,135 | | | 12 | % | | $ | 31,214 | | | 21 | % | | $ | 25,784 | | | 26 | % | | $ | 20,463 | |
| IT infrastructure services | | 21,669 | | 24,820 | | 17,907 | | | (3,151 | ) | | | (13 | ) | | 6,913 | | 39 | | |
| IT Infrastructure Services | | | 20,799 | | | (4 | ) | | 21,669 | | | (13 | ) | | 24,820 | |
| | | | | | | | | | | | | | | | | | | |
| Total Revenue | | $ | 47,453 | | $ | 45,283 | | $ | 36,235 | | $ | 2,170 | | | 5 | % | | $ | 9,048 | | | 25 | % | | $ | 52,013 | | | 10 | % | | $ | 47,453 | | | 5 | % | | $ | 45,283 | |
| | | | | | | | | | | | | | | | | | | |
| | | |
Transactions with Related Parties(1): | | |
| REALSuite | | $ | 9,899 | | $ | 9,134 | | $ | 7,800 | | $ | 765 | | | 8 | % | | $ | 1,334 | | | 17 | % | | $ | 11,226 | | $ | 9,899 | | $ | 9,134 | |
| IT infrastructure services | | 10,811 | | 26,012 | | 16,742 | | | (15,201 | ) | | | (58 | ) | | 9,270 | | 55 | | |
| IT Infrastructure Services | | | 7,941 | | 10,811 | | 26,012 | |
| | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 20,710 | | $ | 35,146 | | $ | 24,542 | | $ | (14,436 | ) | | | (41 | )% | | $ | 10,604 | | | 43 | % | | $ | 19,167 | | $ | 20,710 | | $ | 35,146 | |
| | | | | | | | | | | | | | | | | | | |
| | |
| (*) | | Represents percentage change (better/(worse)) from prior period. |
|
| (1) | | Includes revenue earned from other segments related to RealSuiteREALSuite and IT infrastrutureinfrastructure services of $1.8 million and $13.7 million, respectively in 2008 and $1.5 million and $6.9 million, respectively in 2007.2008. |
InBeginning with the second quarter of 2009, we generatedbegan generating the majority of our revenue within this segment from our REALSuite services, and weof services. We expect this trend to continue in future periods. In addition, we were able to expand our third-party revenues for this segment during 2009.the foreseeable future.
REALSuite. Our REALSuite revenue is primarily driven by our REALServicing product which is our comprehensive residential loan servicing platform. InThe increase over the three year period was driven by increases in REALServicing attributable to an expanded five-year renewal agreement with a non-related third party customer in the second quarter of 2009, we expanded an agreement with an existing third-party customer for use of2009. More recently, the REALServicing product by executing a five year renewal. In addition, if Ocwen increases the size of its loan portfolio, our REALSuite revenues increase. Typically, REALServicing, REALTrans and REALRemit revenues increase as loans are boarded.
Revenues from our REALSuite of products increased in 2008 due primarilyis attributable to the billing changes described above and as a result of higher fees for our transaction based products. Although we generated higher revenuesgrowth in 2008 than in 2007, we experienced softness in these revenues late in 2008 as transaction volumes began to decline and the number of loans serviced by Ocwen contracted.Ocwen’s residential loan portfolio.
IT infrastructure services.Infrastructure Services.As expected, our IT infrastructure services revenues declined over the three year period as we continue to seek ways to reduce our internal expenditures (which we eliminate in consolidation but include in our segment presentation) as well as those of Ocwen. The primary driver for the reduction in revenue in 2009related to internal expenditures was intercompany charges toin our Financial Services segment due in part to fewer collections, facility closures and other cost reduction efforts.
Our change to a market-based rate card in During the second quarterhalf of 2008 resulted in our recording revenues of approximately $6.0 million more in 2008 than we would have recorded had we continued2010, revenue increased slightly as Ocwen expanded their operations to usesupport the cost-based system. Approximately $4.1 million of this increase related to IT infrastructure services and $1.9 million related to REAL products revenues. Additionally, revenues increased primarily due to our commencing IT infrastructure services to NCI in June 2007. Revenues from NCI were $7.9 million in 2008 and $2.2 million in 2007. The increase related to 2008 being a full year and to significant technology additions for NCI during the year. These included replacing a predictive dialer and improving the telephony and call recording capabilitiesacquisition of the operationHomEq residential loan portfolio. We expect revenues in orderthis grouping to better serve our customers. Excluding the impact of the billing change and the addition of NCI, IT infrastructure services revenues decreased 18%continue to decline in 2008 as Ocwen reduced its staffing levels throughout the year and therefore required less IT infrastructure services.2011.
Cost of Revenue
| | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | |
| (dollars in thousands) | | 2010 | | | (*) | | | 2009 | | | (*) | | | 2008 | |
| | | | | | | | | | | | | | | | | | | | | |
| Cost of Revenue | | $ | 28,909 | | | | (18 | )% | | $ | 24,477 | | | | 18 | % | | $ | 29,777 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Gross Margin Percentage: | | | | | | | | | | | | | | | | | | | | |
| Cost of Revenue/Total Revenue | | | 44 | % | | | | | | | 48 | % | | | | | | | 34 | % |
| | | | | | | | | | | | | | | | | | |
| | |
| (*) | | Represents percentage change (better/(worse)) from prior period. |
Cost of Revenue increased and Cost of Revenue margins decreased in 2010 as a result of an increase in compensation and benefits and technology and communication costs as we added new facilities and expanded bandwidth at existing facilities to enhance our service capabilities, support our growth and commercialize our products.
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Cost of Revenue in 2009 decreased compared to 2008 primarily for the following reasons:
$1.9 million reduction in Compensation costs as we integrated the Financial Services technology personnel into the existing technology group and eliminated certain positions;
32
• | | $2.5 million reduction in Depreciation expense as several assets became fully depreciated in 2008 and have not been replaced; |
|
• | | $0.9 million reduction in Expenses for Hardware and Software Maintenance as we analyzed usage of these assets and eliminated unused items; and |
|
• | | $0.6 million net reduction in Telephony as we reduced the number of personnel, renegotiated contracts with service providers and improved technology to drive down costs. |
$2.5 million reduction in Depreciation expense as several assets became fully depreciated in 2008 and were not replaced;$0.9 million reduction in Expenses for Hardware and Software Maintenance as we analyzed usage of these assets and eliminated unused items; and
$0.6 million net reduction in Telephony as we reduced the number of personnel, renegotiated contracts with service providers and improved technology to drive down costs.
In the fourth quarter of 2009, as expected, we incurred additional costs associated with the Separation such as new equipment, data links and licenses to operate as a separate company from Ocwen as well as additional costs associated with our consolidation of data centers in the United States.
Cost of revenue increased in 2008 compared to 2007. In connection with our acquisition of NCI in June 2007, we transferred NCI’s IT infrastructure services staff to our Technology Products segment and began managing NCI’s IT infrastructure services function. This change increased our expenses in Technology Products in 2007, but we offset this increase with reductions in the remainder of our operations. Late in 2007 and throughout 2008, we consolidated the NCI support function with our operations eliminating many of the NCI positions and enabling us to minimize the increase in our Cost of Revenue. Our billings to NCI increased over $5.7 million from 2007 to 2008 due to providing support for the full year in 2008 while our cost of revenue increased only $2.4 million.
Selling, General and Administrative Expenses
| | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | |
| (dollars in thousands) | | 2010 | | | (*) | | | 2009 | | | (*) | | | 2008 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total Selling, General and Administrative Expenses | | $ | 4,985 | | | | (5 | )% | | $ | 4,731 | | | | 23 | % | | $ | 6,118 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Operating Percentage: | | | | | | | | | | | | | | | | | | | | |
| Operating Income/Total Revenue | | | 35 | % | | | | | | | 38 | % | | | | | | | 21 | % |
| | | | | | | | | | | | | | | | | | |
| | |
| (*) | | Represents percentage change (better/(worse)) from prior period. |
Selling, General and Administrative Expenses increased in 2010 as a result of increased occupancy charges associated with the new data center and as a result of costs incurred in preparing for the HomEq transaction.
Selling, General and Administrative Expense declined in 2009 compared to 2008 due to lower occupancy and equipment charges given fewer personnel and lower bad debt expense as we automated processes to identify delinquent receivables.
EBITDA
| | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | |
| (dollars in thousands) | | 2010 | | | (*) | | | 2009 | | | (*) | | | 2008 | |
| | | | | | | | | | | | | | | | | | | | | |
| EBITDA | | $ | 22,622 | | | | 7 | % | | $ | 21,150 | | | | 49 | % | | $ | 14,169 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| EBITDA Margin: | | | | | | | | | | | | | | | | | | | | |
| EBITDA/Total Revenue | | | 43 | % | | | | | | | 45 | % | | | | | | | 31 | % |
| | | | | | | | | | | | | | | | | | |
| | |
| (*) | | Represents percentage change (better/(worse)) from prior period. |
Technology Services EBITDA margin decreased in 2010 as higher revenues were more than offset by increased compensation and occupancy costs associated with the new data center as described above. The Company is increasing expenditures in technology software and hardware to support its commercialization efforts, Ocwen’s growing servicing portfolio and Altisource’s growth.
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Corporate
Our Corporate segment prior to the Separation Date includes expenditures recognized by us related to the Separation. Subsequent to the Separation Date, in addition to these items, this segment also includes costs recognized by us related to corporate support functions such as finance, legal, human resources, compliance, quality assurance and consumer behavior.
Selling, General and Administrative Expenses were $6.1 million for
| | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | |
| (dollars in thousands) | | 2010 | | | (*) | | | 2009 | | | (*) | | | 2008 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total Selling, General and Administrative Expenses | | $ | 17,910 | | | | (82 | )% | | $ | 9,850 | | | | N/M | | | $ | (225 | ) |
| | | | | | | | | | | | | | | | | | |
| | |
| (*) | | Represents percentage change (better/(worse)) from prior period. |
|
| N/M — Not meaningful. |
Corporate costs rose throughout 2010 as we invested in staff to support our growing operations, as a result of our first full year of being a public company and as a result of the year ended December 31, 2008,increase in regulatory and compliance requirements. During 2011, we also intend to hire additional resources in corporate principally focused on compliance matters and quality assurance. In addition, we intend to invest in technologies to help with the increasing demands as a decreaseresult of $0.2 million, or 4%, as compared to $6.4 million for the year ended December 31, 2007. These decreases generally were due to reductionsgrowth in our businesses. We expect these investments will increase the numberquality of staff.
these services and eventually reduce our Cost of Revenue. SECTION 4 — LIQUIDITY AND CAPITAL RESOURCES
Liquidity
We believe that we have the abilityseek to generate more than sufficient cash from our current operations for the next twelve months to meet anticipated cash requirements. Anticipated cash requirements principally include operational expenditures such as compensation and benefits, working capital requirements and spending for capital expenditures. In addition, for over 60% of our revenues, we are paid as we provide the service or within a limited timeframe (i.e., within 1 — 2 weeks). This minimizes our working capital requirements and ensures sufficient timely cash flows to fund operations.
Given our size, we generate significantdeploy excess cash that we will seek to deploygenerated in a disciplined manner. Principally, we will continue to invest in compelling services that we believe will generate high margin.margins. In addition, we may seek to acquire a limited number of companies that fit our strategic objectives. Finally, given the tax inefficiency of dividends, the low returns earned on cash held and our desire to only perform a limited number of acquisitions, we believe one of the best ways to return value to shareholders is to consider a share repurchase program. Under Luxembourg law, we need shareholder approval
On May 19, 2010, our shareholders authorized us to initiate such a program. We intendpurchase up to request shareholder approval at3.8 million shares of our next Annual General Meeting scheduled for May 19th2010.
For periods prior to the Separation, total borrowings as well as cash as presentedcommon stock in the accompanying historical combined financial statements reflect only those balancesopen market. Through December 31, 2010, we required to operate as a subsidiarypurchased 0.7 million shares of Ocwen. Untilour common stock on the Separation Date, Ocwen centrally managed the majorityopen market at an average price of the consolidated company’s financing activities in order to optimize its costs of funding and financial flexibility at a corporate level. In addition, Ocwen historically
33
allocated interest expense to us based upon our portion of assets to Ocwen’s total assets which resulted in interest charges reflected on our Consolidated Statement of Operations. These interest charges reflect an allocation and are not indicative of the interest charge we expect to incur as a separate company.
In June 2009, the Company terminated its existing revolving credit facility after considering its positive operating cash flows year-to-date and the administrative costs of maintaining the facility. We continue to believe that the Company has sufficient operating cash flows and, if necessary, access to debt markets at reasonable costs as well as the equity market to finance our operations$27.11, leaving 3.1 million shares still available for at least the next twelve months without this facility.
Cash Flows
The following table presents our cash flows for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, | | Variance 2009 vs. 2008 | | Variance 2008 vs. 2007 | | | Years Ended December 31, | |
| (dollars in thousands) | | 2009 | | 2008 | | 2007 | | $ | | % | | $ | | % | | | 2010 | | (*) | | 2009 | | (*) | | 2008 | |
| | | |
| Net Income Adjusted for Non-Cash Items | | $ | 33,192 | | $ | 21,055 | | $ | 13,660 | | $ | 12,137 | | | 58 | % | | $ | 7,395 | | | 54 | % | | $ | 73,030 | | | 120 | % | | $ | 33,192 | | | 58 | % | | $ | 21,055 | |
| Working Capital | | 92 | | 7,850 | | | (5,631 | ) | | | (7,758 | ) | | | (99 | ) | | 13,481 | | 239 | | | | (20,218 | ) | | N/M | | 92 | | | (99 | ) | | 7,850 | |
| | | | | | | | | | | | | | | | | | | |
| Cash Flow from Operating Activities | | 33,284 | | 28,905 | | 8,029 | | 4,379 | | 15 | | 20,876 | | 260 | | | 52,812 | | 59 | | 33,284 | | 15 | | 28,905 | |
| Cash Flow from Investing Activities | | | (7,536 | ) | | | (5,216 | ) | | | (56,777 | ) | | | (2,320 | ) | | | (44 | ) | | 51,561 | | 91 | | | | (39,489 | ) | | N/M | | | (7,536 | ) | | | (44 | ) | | | (5,216 | ) |
| Cash Flow from Financing Activities | | | (2,280 | ) | | | (22,389 | ) | | 54,436 | | 20,109 | | 90 | | | (76,825 | ) | | | (141 | ) | | | (21,645 | ) | | N/M | | | (2,280 | ) | | | (90 | ) | | | (22,389 | ) |
| | | | | | | | | | | | | | | | | | | |
| Net Change in Cash | | 23,468 | | 1,300 | | 5,688 | | 22,168 | | N/M | | | (4,388 | ) | | | (77 | ) | | | (8,322 | ) | | | (135 | ) | | 23,468 | | N/M | | 1,300 | |
| Cash at Beginning of Period | | 6,988 | | 5,688 | | — | | 1,300 | | 23 | | 5,688 | | 100 | | | 30,456 | | N/M | | 6,988 | | 23 | | 5,688 | |
| | | | | | | | | | | | | | | | | | | |
| Cash at End of Period | | $ | 30,456 | | $ | 6,988 | | $ | 5,688 | | $ | 23,468 | | | 336 | % | | $ | 1,300 | | | 23 | % | | $ | 22,134 | | | (27 | ) | | $ | 30,456 | | N/M | | $ | 6,988 | |
| | | | | | | | | | | | | | | | | | | |
| | |
| (*) | | Represents percentage change (better/(worse)) from prior period. |
|
| N/M — Not meaningful. |
- 41 -
N/M — Not Meaningful.
Cash Flow from Operating Activities
Cash flow from operating activities consists of two components: (i) net income adjusted for depreciation, amortization and certain other non-cash items and (ii) working capital. For the year ended December 31, 2010, we generated $52.6 million in positive cash flow from operations which reflects our increased profitability adjusted for non-cash items as our businesses have expanded. Our working capital requirements increased significantly beginning the third quarter of 2010 as a result of our expanded Asset Management and Default Management services within our Mortgage Services segment and the increase in associated referrals.
The significant increase in operating cash flow in 2009 compared to 2008 was primarily driven by our expansion of high margin residential default services in our Mortgage Services segment. In addition, the operating improvement in both Financial Services and Technology ProductsServices contributed to the increased operating cash flow.
We generated $28.9 million in cash flows from operations for the year ended December 31, 2008 which represents our improved operating performance during 2008 compared to 2007 as well as significant working capital improvement particularly with respect to reduced accounts receivables.
Cash Flow from Investing Activities
OurThe largest use of cash flow fromfor investing activities includes ourin 2010 was the acquisition of MPA in February 2010 for which the purchase consideration included $26.8 million in cash, net of cash acquired. In addition, we increased purchases of premises and equipment. As expected, we saw an increaseequipment and technology to support our expansion of operations and in technology purchases duringanticipation of the lattergrowth in Ocwen’s residential loan portfolio. We currently expect capital expenditures in 2011 to be consistent with 2010 levels.
During the late half of 2009, we increased technology purchases due to our Separation from Ocwen and the consolidation of our data centers to a single center in the United States. We expect to spend approximately $5.0 million per year to update our premises and equipment.
We used $5.2 million of cash for investing activities in 2008 compared to $56.8 million in 2007. The large 2007 amount relates to our acquisition of NCI in June 2007 for which we used $25.0 million of cash and financed the remainder with debt.
34
Cash Flow from Financing Activities
OurDuring 2010, cash flow from financing activities primarily includesincluded activity associated with stock option exercises, share repurchases and payments on debtto non-controlling interest owners as a result of the acquisition of MPA. The largest use of cash flow from financing activities was the repurchase of shares for $17.8 million.
In 2009 and the net change in our invested equity balance. Prior2008, prior to our Separation from Ocwen, we participated in a centralized cash management program with Ocwen. We made a significant amount of our cash disbursements through centralized payable systems which were operated by Ocwen, and a significant amount of our cash receipts were received by us and transferred to centralized accounts maintained by Ocwen. There were no formal financing arrangements with Ocwen, andOcwen. Prior to the Separation we recorded all cash receipts and disbursement activity between Ocwen and us through invested equity in the Consolidated Balance Sheets and as net distributions or contributions in the Consolidated Statements of Stockholders’ and Invested Equity and Cash Flows because we considerconsidered such amounts to have been contributed by or distributed to Ocwen.
As such, our cash flow from financing activities in 2009 and 2008 primarily included payments on debt and the net change in our invested equity balance. Liquidity Requirements after December 31, 20092010
On February 12, 2010,During the first quarter of 2011, we announced the acquisition of MPA. Consideration for the transaction consisted of $29.0expect to distribute $3.1 million in cash which was paid from available funds (see also Note 20 to the consolidated financial statements).non-controlling interests.
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 (see also Contractual Obligations, Commitments and Contingencies below).
Capital Resources
The assets and liabilities of Altisource have been accounted for at the historical values carried by Ocwen priorGiven our ability to the Separation and were assignedgenerate cash flow which is sufficient to Altisource pursuant to the terms of the Separation Agreement. The indebtedness of Ocwen, other than certain capital lease obligations and indebtedness specific to Nationwide Credit, Inc., was not transferred to Altisource and remains the indebtedness of Ocwen. The Invested Capital balance included as a component of Stockholders’ Equity in the Company’s Consolidated Balance Sheet through the date of Separation includes accumulated earnings of the Companyfund both current operations as well as receivables/payables due to/from Ocwen resulting fromexpansion 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. In general, we have the ability to utilize cash transfers and intercompany activity. Interest was not charged or credited on amounts due to/from Ocwen.generated throughout our operations without incurring significant additional costs such as withholding taxes.
- 42 -
SECTION 5 — CRITICAL ACCOUNTING POLICIESJUDGMENTS
We prepare our consolidatedThe preparation of financial statements in accordanceconformity with generally accepted accounting principles generally accepted inof the United States. In applying many of these accounting principles, we need to makeStates (“GAAP”) requires estimates and assumptions estimates and/or judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in ourthe consolidated financial statements. We base our estimatesstatements and judgments on historical experienceaccompanying notes. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the company’s financial condition 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, forand which require the period in whichcompany to make its most difficult and subjective judgments, often as a result of the actual amounts become known. We believeneed to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the following critical accounting policies could potentially produce materially different results if we wereand judgments addressed below. We also have other key accounting policies, which involve the use of estimates, judgments, and assumptions that are significant to change underlying assumptions, estimates and/or judgments (seeunderstanding our results. For additional information, see Note 2 to the consolidated financial statements for a more detailed description of the significant accounting policiesstatements. Although we believe that have been followed in preparing our consolidated financial statements).estimates, assumptions, and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions.
Revenue Recognition
We recognize revenues from the services we provide in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 605. ASC 605 sets forth guidance as to when revenue is realized or realizable and earned when all of the following criteria are met: 1)(1) persuasive evidence of an
35
arrangement exists; 2)(2) delivery has occurred or services have been performed; 3)(3) the seller’s price to the buyer is fixed or determinable; and 4)(4) collectability is reasonably assured. Generally, the contract terms for these services are relatively short in duration, and we recognize revenues as the services are performed either on a per unit or a fixed price basis. Our revenue recognition policies are detailed in Note 2 to the Consolidated Financial Statements.consolidated financial statements. Significant areas of judgment include the period over which we recognize property preservation and certain default management services revenue and the determination of fair value for certain IT infrastructure services that we provide Ocwen. Management considers historical information and other third-party objective evidence on a periodic basis in determining the appropriate revenue recognition.
Goodwill and Identifiable Intangible Assets
As a result of our acquisition of NCI in 2007, we acquired goodwill and identifiable intangible assets of $54.8 million. Goodwill represents the cost of an acquired business in excess of the fair value of its net assets, including identifiable intangible assets, at the acquisition date. At December 31, 2009, the balance of goodwill was $7.9 million, of which $6.3 million relates to the acquisition of NCI and is included in our Financial Services segment and $1.6 million relates to our acquisition of the company that developed the predecessor to REALTrans and is included in our Technology Products segment.
Goodwill. We testevaluate goodwill for impairment at least annually during the fourth quarter or whenever eventsmore frequently when an event occurs or circumstances indicatechange that indicates that the carrying value of goodwill may not be recoverable from future cash flows based onrecoverable. We test goodwill for impairment by first comparing the book value of net assets to the fair value of the reporting units. If the fair value is determined to be less than the book value, a two-stepsecond step is performed to compute the amount of impairment test in accordance with ASC Topic 350. We evaluateas the recoverability by comparingdifference between the estimated fair value of each operating segment with its estimated netgoodwill and the carrying value (including goodwill).value. We deriveestimate the fair value of eachthe reporting units using discounted cash flows. Forecasts of our operating segmentsfuture cash flow are based on valuation techniques that we believeour best estimate of future net sales and operating expenses, based primarily on expected category expansion, pricing, market participants wouldsegment share, and general economic conditions. Certain estimates of discounted cash flows involve businesses and geographies with limited financial history and developing revenue models.
During the year, management monitored the actual performance of the businesses, particularly our Financial Services segment which was most likely to have impairment as a result of performance and economic conditions. As is common with the use for each segment (primarily aof discounted cash flow valuation methodology). Our goodwill impairment test involvesmodels, two of the making of estimatesmost judgmental and the exercise of management judgment. From time to time, we may obtain assistance from third parties in our evaluation. The discounted cash flow valuation methodology uses projections of future cash flows and includessensitive assumptions concerning future operating performance and economic conditions that may differ from actual future cash flows achieved.
In projecting our cash flows, we used projectedare revenue growth rates of 10% declining to 5%. Forand the discount rate, we used 18% which reflected our weighted average cost of capital determined partially based on our industry and size. Fair value is calculated as the sum(“WACC”). For purposes of the projected discounted cash flowsmodel in 2010, we assumed modest growth of approximately 3% for revenues for all years modeled. With respect to WACC, we utilized 17% which we believe reflects the reporting units over the next three yearsappropriate cost and terminal value at the endcapital structure of those three years.a stand-alone Financial Services segment.
DuringBased on the fourth quarters of 2008, 2007 and 2006, we completed our annual goodwill impairment tests andquarter analysis, management determined that thereit was no goodwill impairment. We recorded purchase price adjustments of $0.4prudent to impair the remaining $2.8 million during 2008 that increased the amount of the goodwill we recorded. Also, prior to our acquisition of NCI in 2007, NCI made an acquisition that created tax-deductible goodwill that amortizes for tax purposes over time. When we acquired NCI in 2007, we recorded a lesser amount of goodwill for financial reporting purposes than what had previously been recorded at NCI for tax purposes.in the Financial Services segment. This determination was made after considering quantitative and qualitative factors including past performance and execution risk.
Goodwill associated with our other segments was evaluated; however, management concluded no impairment was indicated given the difference between fair value and book value for the amount of goodwill recorded for financialassociated reporting purposes and the amount recorded for taxes is referred to as “Component 2” goodwill, and it results in our recording periodic reductions of our book goodwill balance in our consolidated financial statements. The reduction of book goodwill also resulted in a reduction of equity in the amount of $2.2 million in 2009, $3.6 million in 2008 and $1.1 million in 2007. We will amortize the remaining Component 2 goodwill for tax purposes which will result in our first reducing book goodwill to zero and then reducing intangible assets by the remaining tax benefits of the Component 2 goodwill as they are realized.unit.
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Identifiable Intangible Assets. The balanceIdentified intangible assets consist primarily of intangibles at December 31, 2009 was $33.7 million. These intangibles relate to trademarks and customer lists, we acquired in connection with our acquisition of NCI. We amortize our identifiabletrade names and trademarks. Indentified intangible assets over their estimated lives in accordance with ASC Topic 350. In accordance with ASC, identifiable intangible assetsthat amortize are tested for impairment whenever events or changes in circumstances suggestoccur indicating that the carrying valueamount of anthe asset or asset group may not be fully recoverable.
These circumstances include, but are not limited to, a significant adverse change in legal factors or in the business climate or operating or cash flow losses and projections of continuing losses. An impairment loss generally calculated as the difference between the estimated fair value and thewould be recognized for an intangible asset if its carrying value ofexceeds its fair value.
Since amortizing intangible assets are first tested on an asset or asset group, is
36
triggered if the sum of the estimated undiscounted cash flows relating to the asset or asset groupflow basis, impairment is less likely than in the corresponding carrying value.
During 2009,case of goodwill. However, given the performance of our Financial Services segment we didcontinue to monitor the performance of amortizing intangible assets, particularly those associated with customer lists. To date we have not identifydetermined the need for any indicators of impairment charges for our NCI customer relationship and trade name intangibles.identified intangible assets.
Accounting for Income Taxes
As part of the process of preparing the consolidated financial statements, we were requiredWe are subject to determine income taxes in each ofLuxembourg, the jurisdictionsUnited States, India and Uruguay. Significant judgment is required in which we operate. This process involves estimating actual currentevaluating our tax expense together with assessing temporary differences resulting from differing recognition of itemspositions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and estimates for which the ultimate tax determination may vary from year to year. For example, our effective tax rates could be adversely affected by lower than anticipated earnings in countries where we have lower statutory rates and accounting purposes. These differences resulthigher than anticipated earnings in deferred income tax assets and liabilities that are included within our Consolidated Balance Sheets. We must then assess the likelihood that deferred income tax assets will be recovered from future taxable income and, to the extentcountries where we believe that recovery is not likely, establish a valuation allowance. To the extent we establish a valuation allowancehave higher statutory rates, by changes in foreign currency exchange rates, or increase this allowance in a period, we must reflect this increase as an expense within income tax expense in the statement of earnings. Determination of the income tax expense requires estimates and can involve complex issues that may require an extended period to resolve. Further,by changes in the geographic mix of revenues orrelevant tax, accounting and other laws, regulations, principles and interpretations. We are subject to audit in the estimated level of annual pre-tax income can cause the overall effectivevarious taxing jurisdictions, and such jurisdictions may assess additional income tax rateduring an examination. Although we believe our tax balances are sufficient to vary from period to period.
We conduct periodic evaluations of positive and negative evidence to determine whether it is more likely than not thatsupport our future tax liabilities, the deferred tax asset can be realized in future periods. Among the factors considered in this evaluation are estimates of future taxable income, the future reversal of temporary differences, tax character and the impactfinal determination of tax planning strategies that can be implemented, if warranted. As a result of this evaluation,audits and any related litigation could differ from the balances we included in the tax provision a decrease of $0.3 million and an increase of $1.3 million to the valuation allowance for 2009 and 2008, respectively, related to certain state net operating losses. The decrease in 2009 is related to changes in effective tax rates. The increase in 2008 relates to net operating losses that we no longer considered to be more likely than not to be realized in future periods.
SECTION 6 — OFF-BALANCE SHEET ARRANGEMENTSOTHER MATTERS
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements other than operating leases.
Contractual Obligations, Commitments and Contingencies SECTION 7 — CONTRACTUAL OBLIGATIONS, COMMITMENTS AND CONTINGENCIES
Our long-term contractual obligations generally include our operating lease payments on certain of our property and equipment. The following table sets forth information relating to our contractual obligations as of December 31, 2009:2010:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Payments due by period | | | Payments due by period | |
| | | Less than | | More than | | | Less than | | More than | |
| (in thousands) | | Total | | 1 year | | 1-3 years | | 3-5 years | | 5 years | | | Total | | 1 year | | 1-3 years | | 3-5 years | | 5 years | |
| | | |
| Non-Cancelable Operating Lease Obligations | | $ | 9,991 | | $ | 4,110 | | $ | 5,415 | | $ | 466 | | $ | — | | | $ | 11,571 | | $ | 4,867 | | $ | 5,102 | | $ | 972 | | $ | 630 | |
| Capital Lease Obligations — Principal | | 664 | | 536 | | 128 | | — | | — | | | 1,531 | | 679 | | 852 | | — | | — | |
Contractual Interest Payments(1) | | 26 | | 26 | | — | | — | | — | | | 84 | | 59 | | 25 | | — | | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| Total | | $ | 10,681 | | $ | 4,672 | | $ | 5,543 | | $ | 466 | | $ | — | | | $ | 13,186 | | $ | 5,605 | | $ | 5,979 | | $ | 972 | | $ | 630 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | |
| (1) | | Represents estimated future interest payments on capital leases, based on applicable interest rates as of December 31, 2009.2010. |
For further information, see Note 17 to the consolidated financial statements.
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SECTION 8 — OTHER MATTERS
Related Party — Ocwen
For the year ended December 31, 2009,2010, approximately $74.1$135.7 million of the Mortgage Services, $0.1$0.2 million of the Financial Services and $20.7$19.2 million of the Technology ProductsServices segment revenues were from services provided to Ocwen businesses not included in the Separation or sales derived from Ocwen’s loan servicing portfolio. Services provided to Ocwen included residential property valuation, real estate 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 withFor the Separation,year ended December 31, 2010, Altisource billed Ocwen $1.8 million, and Ocwen entered into various agreements that addressbilled Altisource $1.1 million for services provided under 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 AgreementAgreement. These amounts are reflected as a component of Selling, General and certain long-term servicing contracts (collectively,Administrative Expenses in the “Agreements”) (See Note 4 to the consolidated financial statements).accompanying Consolidated Statements of Operations.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | | |
| ITEM 7A. | | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our financial market risk consists primarily of foreign currency exchange risk.
Foreign Currency Exchange Risk
We are exposed to foreign currency exchange rate risk in connection with our investment in non-U.S. dollar functional currency operations, which are very limited, to the extent that our foreign exchange positions remain un-hedged. We consider the US Dollar to be our functional currency worldwide and the majority of our servicing agreements are denominated in US Dollars. Where required locally, we incur certain costs, primarily lease and payroll costs, in local currencies which include the Euro and Indian Rupee. Costs incurred in local currencies expose us to foreign exchange rate fluctuations to the extent our foreign positions remain un-hedged.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | | |
| ITEM 8. | | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | |
| | | 41 | |
| | | 4247 | |
| | | | |
| | | 4350 | |
| | | | |
| | | 4451 | |
| | | | |
| | | 4552 | |
| | | | |
| | | 4653 | |
| | | | |
| | | 4754 | |
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Report of Independent Registered Public Accounting FirmREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Altisource Portfolio Solutions S.A.:
We have audited the accompanying consolidated balance sheetsheets of Altisource Portfolio Solutions S.A. and subsidiaries (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in stockholders’ and invested equity, and cash flows for each of the year then ended.two years in the period ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.audits. The consolidated financial statements of the Company for the yearsyear ended December 31, 2008, and 2007, before the inclusion of earnings per share information presented on the 2008 and 2007 statement of operations and the related disclosures in Note 1215 to the consolidated financial statements, were audited by other auditors whose report, dated May 12, 2009 (June 26, 2009 as to Note 1 and Note 10), expressed an unqualified opinion on those statements.
We conducted our auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit providesaudits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above present fairly, in all material respects, the financial position of Altisource Portfolio Solutions S.A. and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the year thentwo years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 43 to the consolidated financial statements, the Company has entered into significant transactions with Ocwen Financial Corporation, a related party.
We have also audited the earnings per share information presented on the 2008 and 2007 statement of operations and the related disclosures in Note 1215 to the consolidated financial statements. Our audit procedures were limited to (1) obtaining the Company’s earnings per share calculation and comparing the calculated amounts to the earnings per share disclosuresdisclosure for 2008, and 2007, (2) comparing the numerator used in the earnings per share calculationscalculation to the reported net income amountsamount for each of the yearsyear ended December 31, 2008, and 2007, (3) comparing the shares used as the denominator in the earnings per share calculationscalculation for each of the yearsyear ended December 31, 2008 and 2007 to the number of shares of common stock outstanding as of August 10, 2009, and (4) recalculating the earnings per share calculationscalculation for each of the yearsyear ended December 31, 2008 and 2007.2008. In our opinion, the earnings per share information presented on the 2008 and 2007consolidated statement of operations and the related disclosures in Note 1215 to the consolidated financial statements areis appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2008 and 2007 consolidated financial statements of the Company other than with respect to the earnings per share information and related disclosures included therein and, accordingly, we do not express an opinion or any other form of assurance on the 2008 and 2007 consolidated financial statements taken as a whole.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 18, 2011 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
March 16, 2010February 18, 2011
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Altisource Portfolio Solutions S.A.:
We have audited the internal control over financial reporting of Altisource Portfolio Solutions S.A. and subsidiaries (the “Company”) as of December 31, 2010, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the consolidated financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2010 of the Company and our report dated February 18, 2011 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding significant transactions with Ocwen Financial Corporation, a related party.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
February 18, 2011
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Report of Independent Registered Certified Public Accounting Firm
To the Board of Directors and Stockholders of Altisource Portfolio Solutions S.A.:
In our opinion, the combined consolidated balance sheet as of December 31, 2008 and the related combined consolidated statements of operations, invested equity and cash flows for each of the two years in the periodyear ended December 31, 2008, before the inclusion of earnings per share information presented on the income statement of operations and the related disclosure in Note 12,15, present fairly, in all material respects, the financial positionresults of operations, invested capital and cash flows of the Altisource businesses for the year ended December 31, 2008, as described in Note 1 of the combined consolidated financial statements at December 31, 2008, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.audit. We conducted our auditsaudit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provideaudit provides a reasonable basis for our opinion.
As discussed in Note 43 to the combined consolidated financial statements, the Company has entered into significant transactions with Ocwen Financial Corporation, a related party.
We were not engaged to audit, review, or apply any procedures with respect to the earnings per share information presented on the income statement of operations or the related disclosure in Note 1215 and accordingly, we do not express an opinion or any other form of assurance about whether such information and disclosures are appropriate. The earnings per share information and the related disclosures were audited by other auditors.
/s/ PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
May 12, 2009, except for the termination of the line of credit maturing July 2011 discussed in Note 10 and the completion of the conversion of Altisource Portfolio Solutions S.à r.l. into a Luxembourg société anonyme discussed in Note 1, which are as of June 26, 2009
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Consolidated Balance Sheets
(Dollars in Thousands, Except Per Share Data)
| | | | | | | | | | |
| | | December 31, | |
| | | December 31, | | 2008 | | | | | | | | |
| | | 2009 | | (Combined | | December 31, | |
| | | (Consolidated) | | Consolidated) | | 2010 | | 2009 | |
ASSETS
| | | | |
| Current Assets: | | |
| Cash and Cash Equivalents | | $ | 30,456 | | $ | 6,988 | | | $ | 22,134 | | $ | 30,456 | |
| Accounts Receivable, net | | 30,497 | | 9,077 | | | 53,495 | | 30,497 | |
| Prepaid Expenses and Other Current Assets | | 2,904 | | 3,021 | | | 13,076 | | 2,904 | |
| Deferred Tax Assets, net | | 1,546 | | 268 | | | 551 | | 1,546 | |
| | | | | | | | |
| Total Current Assets | | 65,403 | | 19,354 | | | 89,256 | | 65,403 | |
| | | |
| Restricted Cash | | | 1,045 | | — | |
| Premises and Equipment, net | | 11,408 | | 9,304 | | | 17,493 | | 11,408 | |
| Deferred Tax Assets, net | | | 1,206 | | — | |
| Intangible Assets, net | | 33,719 | | 36,391 | | | 72,428 | | 33,719 | |
| Goodwill | | 9,324 | | 11,540 | | | 11,836 | | 9,324 | |
| Other Non-current Assets | | 702 | | 86 | | | 4,536 | | 702 | |
| | | | | | | | |
| | | |
| Total Assets | | $ | 120,556 | | $ | 76,675 | | | $ | 197,800 | | $ | 120,556 | |
| | | | | | | | |
| | | |
LIABILITIES AND EQUITY
| | | | |
| Current Liabilities: | | |
| Accounts Payable and Accrued Expenses | | $ | 24,192 | | $ | 4,767 | | | $ | 35,384 | | $ | 24,192 | |
| Capital Lease Obligations — Current | | 536 | | 916 | | | 680 | | 536 | |
| Line of Credit and Other Secured Borrowings | | — | | 1,123 | | |
| Other Current Liabilities | | 5,939 | | 6,213 | | | 5,616 | | 5,939 | |
| | | | | | | | |
| Total Current Liabilities | | 30,667 | | 13,019 | | | 41,680 | | 30,667 | |
| | | |
| Capital Lease Obligations — Non-current | | 128 | | 440 | | | 852 | | 128 | |
| Deferred Tax Liability, net | | 2,769 | | 2,670 | | | — | | 2,769 | |
| Other Non-current Liabilities | | 644 | | — | | | 3,370 | | 644 | |
| | | |
| Commitment and Contingencies (Note 14) | | |
| Commitment and Contingencies (Note 17) | | |
| | | |
| Stockholders’ and Invested Equity | | |
| Common Stock ($1.00 par value; 100,000,000 shares authorized; 24,144,914 shares issued and outstanding in 2009; EUR 25 par value, 263,412 shares authorized, issued and outstanding in 2008 | | 24,145 | | 6,059 | | |
| Common Stock ($1.00 par value; 100,000 shares authorized; 25,413 shares issued and 24,881 outstanding in 2010; 24,145 shares issued and outstanding in 2009) | | | 25,413 | | 24,145 | |
| Retained Earnings | | 11,665 | | — | | | 58,546 | | 11,665 | |
| Additional Paid-in Capital | | 50,538 | | — | | | 79,297 | | 50,538 | |
| Invested Equity | | — | | 54,487 | | |
| Treasury Stock, at cost ($1.00 par value; 532 shares in 2010) | | | | (14,418 | ) | | — | |
| | | | | | | | |
| Total Stockholders’ Equity | | 86,348 | | 60,546 | | |
| Altisource Equity | | | 148,838 | | 86,348 | |
| Non—controlling Interests | | | 3,060 | | — | |
| | | | | | | |
| Total Equity | | | 151,898 | | 86,348 | |
| | | | | | | |
| | | | |
| Total Liabilities and Equity | | $ | 120,556 | | $ | 76,675 | | | $ | 197,800 | | 120,556 | |
| | | | | | | | |
See notes to consolidated and combined consolidated financial statements.
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Statements of Operations
(Dollars in Thousands, Except Share Data)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Years Ended December 31, | | For the Years Ended December 31, | |
| | | 2008 | | 2007 | | 2008 | |
| | | 2009 | | (Combined | | (Combined | | 2010 | | 2009 | | (Combined | |
| | | (Consolidated) | | Consolidated) | | Consolidated) | |
| (in thousands, except earnings per share) | | | (Consolidated) | | (Consolidated) | | Consolidated) | |
| | | |
| Revenue | | $ | 202,812 | | $ | 160,363 | | $ | 134,906 | | | $ | 301,378 | | $ | 202,812 | | $ | 160,363 | |
| Cost of Revenue | | 126,797 | | 115,048 | | 96,954 | | | 189,059 | | 126,797 | | 115,048 | |
| | | | | | | | | | |
| Gross Profit | | 76,015 | | 45,315 | | 37,952 | | | 112,319 | | 76,015 | | 45,315 | |
| | | |
| Selling, General and Administrative Expenses | | 39,473 | | 28,088 | | 27,930 | | | 57,352 | | 39,473 | | 28,088 | |
| | | | | | | | | | |
| | | |
| Income from Operations | | 36,542 | | 17,227 | | 10,022 | | | 54,967 | | 36,542 | | 17,227 | |
| Other Income (Expense), net | | 1,034 | | | (2,626 | ) | | | (1,743 | ) | | 804 | | 1,034 | | | (2,626 | ) |
| | | | | | | | | | |
| | | |
| Income Before Income Taxes | | 37,576 | | 14,601 | | 8,279 | | |
| Income Tax Provision | | | (11,605 | ) | | | (5,382 | ) | | | (1,564 | ) | |
| Income Before Income Taxes and Non-controlling Interests | | | 55,771 | | 37,576 | | 14,601 | |
| Income Tax Benefit (Provision) | | | 403 | | | (11,605 | ) | | | (5,382 | ) |
| | | | | | | | | | |
| Net Income | | $ | 25,971 | | $ | 9,219 | | $ | 6,715 | | | 56,174 | | 25,971 | | 9,219 | |
| Net Income Attributable to Non—controlling Interests | | | | (6,903 | ) | | — | | — | |
| | | | | | | | | |
| Net Income Attributable to Altisource | | | $ | 49,271 | | $ | 25,971 | | $ | 9,219 | |
| | | | | | | | | | |
| | | |
| Earnings Per Share | | |
| Basic | | $ | 1.08 | | $ | 0.38 | | $ | 0.28 | | | $ | 1.96 | | $ | 1.08 | | $ | 0.38 | |
| | | | | | | | | | |
| Diluted | | $ | 1.07 | | $ | 0.38 | | $ | 0.28 | | | $ | 1.88 | | $ | 1.07 | | $ | 0.38 | |
| | | | | | | | | | |
| | | |
| Weighted Average Shares Outstanding | | |
| Basic | | 24,061,912 | | 24,050,340 | | 24,050,340 | | | 25,083 | | 24,062 | | 24,050 | |
| Diluted | | 24,260,651 | | 24,050,340 | | 24,050,340 | | | 26,259 | | 24,261 | | 24,050 | |
| | | |
| Transactions with Related Parties included above: | | |
| Revenue | | $ | 94,897 | | $ | 64,251 | | $ | 59,350 | | | $ | 154,988 | | $ | 94,897 | | $ | 64,251 | |
| | | | |
| Selling, General and Administrative Expenses | | $ | 4,308 | | $ | 6,208 | | $ | 8,864 | | | 1,056 | | 4,308 | | 6,208 | |
| | | | |
| Interest Expense | | $ | 1,290 | | $ | 2,269 | | $ | 965 | | | — | | 1,290 | | 2,269 | |
| | | | |
See notes to consolidated and combined consolidated financial statements.
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Consolidated Statements of Changes in Stockholders’ and Invested Equity
(Dollars in Thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Additional | | | | | | |
| | | Invested | | Common Stock | | Retained | | Paid-in | | | | | | |
| | | Equity | | Shares | | | | | | Earnings | | Capital | | Total | | | | |
| Balance, January 1, 2007 | | $ | 8,789 | | | | 263,412 | | | $ | 6,059 | | | $ | — | | | $ | — | | | $ | 14,848 | | | | | |
| Net Income | | | 6,715 | | | | — | | | | — | | | | — | | | | — | | | | 6,715 | | | | | |
| Contribution for Acquisition | | | 56,980 | | | | — | | | | — | | | | — | | | | — | | | | 56,980 | | | | | |
| Net Transfers to Parent | | | (2,869 | ) | | | — | | | | — | | | | — | | | | — | | | | (2,869 | ) | | | | |
| | | | | | | |
| Balance, December 31, 2007 | | | 69,615 | | | | 263,412 | | | | 6,059 | | | | — | | | | — | | | | 75,674 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Income | | | 9,219 | | | | — | | | | — | | | | — | | | | — | | | | 9,219 | | | | | |
| Net Transfers to Parent | | | (24,347 | ) | | | — | | | | — | | | | — | | | | — | | | | (24,347 | ) | | | | |
| | | | | | | |
| Balance, December 31, 2008 | | | 54,487 | | | | 263,412 | | | | 6,059 | | | | — | | | | — | | | | 60,546 | | | Comprehensive
Income |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Share Issuance due to Conversion to a Luxembourg Societé Anonyme | | | (3,283 | ) | | | 9,078,495 | | | | 3,283 | | | | — | | | | — | | | | — | | | $ | — | |
| Net Income for Pre-separation Period | | | 14,306 | | | | — | | | | — | | | | — | | | | — | | | | 14,306 | | | | 14,306 | |
| Net transfers to Ocwen | | | (1,354 | ) | | | — | | | | — | | | | — | | | | — | | | | (1,354 | ) | | | — | |
| Consummation of Spin-off Transaction and Distribution to Common Stock | | | (64,156 | ) | | | 14,732,428 | | | | 14,732 | | | | — | | | | 49,424 | | | | — | | | | — | |
| Share-based compensation | | | — | | | | — | | | | — | | | | — | | | | 296 | | | | 296 | | | | — | |
| Exercise of stock options | | | — | | | | 70,579 | | | | 71 | | | | — | | | | 818 | | | | 889 | | | | — | |
| Net Income for Post-separation Period | | | — | | | | — | | | | — | | | | 11,665 | | | | — | | | | 11,665 | | | | 11,665 | |
| | | |
| Balance, December 31, 2009 | | $ | — | | | | 24,144,914 | | | $ | 24,145 | | | $ | 11,665 | | | $ | 50,538 | | | $ | 86,348 | | | $ | 25,971 | |
| | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Altisource Equity | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Additional | | | | | | | Non- | | | | | | | | |
| | | Invested | | | Common Stock | | | Retained | | | Paid-in | | | Treasury | | | controlling | | | | | | | Comprehensive | |
| | | Equity | | | Shares | | | | | | | Earnings | | | Capital | | | Stock, at cost | | | Interests | | | Total | | | Income | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, January 1, 2008 | | $ | 69,615 | | | | 263 | | | $ | 6,059 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 75,674 | | | | | |
| Net Income | | | 9,219 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 9,219 | | | | | |
| Net Transfers to Parent | | | (24,347 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (24,347 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2008 | | | 54,487 | | | | 263 | | | | 6,059 | | | | — | | | | — | | | | — | | | | — | | | | 60,546 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Share Issuance due to Conversion to a Luxembourg Societé Anonyme | | | (3,283 | ) | | | 9,079 | | | | 3,283 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | |
| Net Income for Pre-separation Period | | | 14,306 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 14,306 | | | $ | 14,306 | |
| Net transfers to Ocwen | | | (1,354 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,354 | ) | | | — | |
| Consummation of Spin-off Transaction and Distribution to Common Stock | | | (64,156 | ) | | | 14,732 | | | | 14,732 | | | | — | | | | 49,424 | | | | — | | | | — | | | | — | | | | — | |
| Share-Based Compensation Expense | | | — | | | | — | | | | — | | | | — | | | | 296 | | | | — | | | | — | | | | 296 | | | | — | |
| Exercise of Stock Options | | | — | | | | 71 | | | | 71 | | | | — | | | | 818 | | | | — | | | | — | | | | 889 | | | | — | |
| Net Income for Post-separation Period | | | — | | | | — | | | | — | | | | 11,665 | | | | — | | | | — | | | | — | | | | 11,665 | | | | 11,665 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2009 | | | — | | | | 24,145 | | | | 24,145 | | | | 11,665 | | | | 50,538 | | | | — | | | | — | | | | 86,348 | | | $ | 25,971 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Income | | | — | | | | — | | | | — | | | | 49,271 | | | | — | | | | — | | | | 6,903 | | | | 56,174 | | | $ | 56,174 | |
| Acquisition of The Mortgage Partnership of America, L.L.C. | | | — | | | | 959 | | | | 959 | | | | — | | | | 22,941 | | | | — | | | | 3,268 | | | | 27,168 | | | | — | |
| Contributions from Non-controlling Interest Holders | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 41 | | | | 41 | | | | — | |
| Distributions to Non-controlling Interest Holders | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (7,152 | ) | | | (7,152 | ) | | | — | |
| Share-based Compensation Expense | | | — | | | | — | | | | — | | | | — | | | | 3,110 | | | | — | | | | — | | | | 3,110 | | | | — | |
| Exercise of Stock Options | | | — | | | | 298 | | | | 298 | | | | (2,390 | ) | | | 2,708 | | | | 3,370 | | | | — | | | | 3,986 | | | | — | |
| Delivery of Vested Restricted Stock | | | — | | | | 11 | | | | 11 | | | | — | | | | — | | | | — | | | | — | | | | 11 | | | | — | |
| Repurchase of Shares | | | — | | | | — | | | | — | | | | — | | | | — | | | | (17,788 | ) | | | — | | | | (17,788 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2010 | | $ | — | | | | 25,413 | | | $ | 25,413 | | | $ | 58,546 | | | $ | 79,297 | | | $ | (14,418 | ) | | $ | 3,060 | | | $ | 151,898 | | | $ | 56,174 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See notes to consolidated and combined consolidated financial statements.
45
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Statements of Cash Flows
(Dollars in Thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Years Ended December 31, | | For the Years Ended December 31, | |
| | | 2008 | | 2007 | | 2008 | |
| | | 2009 | | (Combined | | (Combined | | 2010 | | 2009 | | (Combined | |
| (in thousands) | | | (Consolidated) | | (Consolidated) | | Consolidated) | |
| | | (Consolidated) | | Consolidated) | | Consolidated) | |
| Cash flows from operating activities: | | |
| Net income | | $ | 25,971 | | $ | 9,219 | | $ | 6,715 | | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | |
| Net Income | | | $ | 56,174 | | $ | 25,971 | | $ | 9,219 | |
| Reconciling Items: | | |
| Depreciation and Amortization | | 5,432 | | 7,836 | | 6,979 | | | 7,158 | | 5,432 | | 7,836 | |
| Amortization of Intangible Assets | | 2,672 | | 2,554 | | 1,555 | | | 4,891 | | 2,672 | | 2,554 | |
| Share-based compensation expense | | 296 | | — | | — | | |
| Deferred Income Taxes, net | | | (1,179 | ) | | 1,197 | | | (1,589 | ) | |
| Goodwill Impairment | | | 2,816 | | — | | — | |
| Share-based Compensation Expense | | | 3,110 | | 296 | | — | |
| Deferred Income Taxes | | | | (1,119 | ) | | | (1,179 | ) | | 1,197 | |
| Loss on Disposal of Premises and Equipment | | — | | 249 | | — | | | — | | — | | 249 | |
| Changes in Operating Assets and Liabilities, net of Acquisitions: | | |
| Accounts Receivable, net | | | (21,420 | ) | | 7,693 | | | (4,487 | ) | |
| Accounts Receivable | | | | (16,725 | ) | | | (21,420 | ) | | 7,693 | |
| Prepaid Expenses and Other Current Assets | | 117 | | 305 | | 587 | | | | (9,851 | ) | | 117 | | 305 | |
| Other Assets | | | (616 | ) | | 57 | | 207 | | | | (2,799 | ) | | | (616 | ) | | 57 | |
| Accounts Payable and Accrued Expenses | | 19,425 | | | (3,370 | ) | | | (2,551 | ) | | 8,180 | | 19,425 | | | (3,370 | ) |
| Other Current and Non-Current Liabilities | | 2,586 | | 3,165 | | 613 | | |
| Other Current and Non-current Liabilities | | | 977 | | 2,586 | | 3,165 | |
| | | | | | | | | | |
| Net Cash Flow from Operating Activities | | 33,284 | | 28,905 | | 8,029 | | | 52,812 | | 33,284 | | 28,905 | |
| | | | | | | | | | |
| | | |
| Cash flows from investing activities: | | |
| Additions to Premises and Equipment, net | | | (7,536 | ) | | | (5,216 | ) | | | (4,236 | ) | |
| Acquisition of NCI Holdings, Inc., net of Cash Acquired | | — | | — | | | (52,541 | ) | |
| | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | |
| Additions to Premises and Equipment | | | | (11,614 | ) | | | (7,536 | ) | | | (5,216 | ) |
| Acquisition of MPA, net of Cash Acquired | | | | (26,830 | ) | | — | | — | |
| Change in Restricted Cash | | | | (1,045 | ) | | — | | — | |
| | | | | | | | | |
| Net Cash Flow from Investing Activities | | | (7,536 | ) | | | (5,216 | ) | | | (56,777 | ) | | | (39,489 | ) | | | (7,536 | ) | | | (5,216 | ) |
| | | | | | | | | | |
| | | |
| Cash flows from Financing Activities: | | |
| Repayment of Short-Term Borrowings | | — | | | (147 | ) | | — | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | |
| Principal Payments on Capital Lease Obligations | | | (692 | ) | | | (2,275 | ) | | | (811 | ) | | | (743 | ) | | | (692 | ) | | | (2,275 | ) |
| Proceeds from Borrowing of Long-Term Debt | | — | | — | | 27,500 | | |
| Repayment of Long-Term Debt | | — | | — | | | (27,500 | ) | |
| Proceeds from Stock Option Exercises | | | 3,997 | | 889 | | — | |
| Purchase of Treasury Stock | | | | (17,788 | ) | | — | | — | |
| Contributions from Non-controlling Interests | | | 41 | | — | | — | |
| Distributions to Non-controlling Interests | | | | (7,152 | ) | | — | | — | |
| Net Distribution to Parent | | | — | | | (1,354 | ) | | | (21,090 | ) |
| Borrowings from Line of Credit | | — | | 33,417 | | — | | | — | | — | | 33,417 | |
| Payments of Line of Credit | | | (1,123 | ) | | | (32,294 | ) | | — | | | — | | | (1,123 | ) | | | (32,294 | ) |
| Proceeds from Stock Option Exercises | | 889 | | — | | — | | |
| Net (Distribution to) Contribution from Parent | | | (1,354 | ) | | | (21,090 | ) | | 55,247 | | |
| | | | |
| Repayment of Short-Term Borrowings | | | — | | — | | | (147 | ) |
| | | | | | | | | |
| Net Cash Flow from Financing Activities | | | (2,280 | ) | | | (22,389 | ) | | 54,436 | | | | (21,645 | ) | | | (2,280 | ) | | | (22,389 | ) |
| | | | | | | | | | |
| | | |
| Net (Decrease) Increase in Cash and Cash Equivalents | | 23,468 | | 1,300 | | 5,688 | | | | (8,322 | ) | | 23,468 | | 1,300 | |
| Cash and Cash Equivalents at the Beginning of the Year | | 6,988 | | 5,688 | | — | | | 30,456 | | 6,988 | | 5,688 | |
| | | | | | | | | | |
| Cash and Cash Equivalents at the End of the Year | | $ | 30,456 | | $ | 6,988 | | $ | 5,688 | | | $ | 22,134 | | $ | 30,456 | | $ | 6,988 | |
| | | | | | | | | | |
| | | |
| Supplemental Cash Flow Information | | |
| Interest Paid | | $ | 25 | | $ | 121 | | $ | 750 | | | $ | 108 | | $ | 25 | | $ | 121 | |
| Income Taxes Paid | | $ | 795 | | $ | 26 | | $ | — | | | 6,069 | | 795 | | 26 | |
| | | |
| Non-cash Investing and Financing Activities | | |
| Shares issued in Connection with MPA Acquisition | | | $ | 23,900 | | $ | — | | $ | — | |
| Reduction in Income Tax Payable from Tax Amortizable Goodwill | | $ | 2,216 | | $ | 3,622 | | $ | 1,136 | | | 3,029 | | 2,216 | | 3,622 | |
| Increase in Common Stock due to the Company’s Conversion to a Luxembourg Société Anonyme | | $ | 3,283 | | $ | — | | $ | — | | | — | | 3,283 | | — | |
See notes to consolidated and combined consolidated financial statements.
46
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements
1. ORGANIZATION AND BASIS OF PRESENTATION
Altisource Portfolio Solutions S.A. (which may be referred to as Altisource, the Company, we, us or our), together with its subsidiaries, 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, the Company provideswe provide solutions that improve clients’ performance and maximizesmaximize their returns.
We are publicly traded on the NASDAQ Global Select market under the symbol ASPS. Altisource waswere incorporated under the laws of Luxembourg on November 4, 1999 as Ocwen Luxembourg S.àr.l., renamed Altisource Portfolio Solutions S.à r.l. on May 12, 2009 and converted into Altisource Portfolio Solutions S.A. on June 5, 2009 (the “Conversion”). As part of the Conversion, we also changed the par value of equity from EUR 25 to $1.00 per share. Altisource2009. We became a publicly traded company on the NASDAQ Global Select market under the symbol “ASPS” as of August 10, 2009, see “Separation” below.
In February 2010, we acquired all of the outstanding membership interests of The Mortgage Partnership of America, L.L.C. (“MPA”). MPA was formed as a Missouri limited liability company to serve as the manager of Best Partners Mortgage Cooperative, Inc. (“BPMC”) doing business as Lenders One Mortgage Cooperative (“Lenders One”). Lenders One is a national alliance of independent mortgage bankers (“Members”) that provides its Members with education and training along with revenue enhancing, cost reducing and market share expanding opportunities (see Note 4).
We conduct our operations through three reporting segments: Mortgage Services, Financial Services and Technology Products.Services (formerly Technology Products). In addition, we report our corporate related expenditures as a separate segment (see Note 18 for a description of our business segments).
Separation— On August 10, 2009 (the “Separation Date”), we became a stand-alone public company in connection with our separation from Ocwen Financial Corporation (“Ocwen”) (the “Separation”). Prior to the Separation, our businesses were wholly-owned subsidiaries of Ocwen. On the Separation Date, Ocwen distributed all of the Altisource common stock to Ocwen’s shareholders (the “Distribution”). Ocwen’s stockholders received one share of Altisource common stock for every three shares of Ocwen common stock held as of August 4, 2009 (the “Record Date”). In addition, holders of Ocwen’s 3.25% Contingent Convertible Unsecured Senior Notes due 2024 received one share of Altisource common stock deemed held on an as if converted basis. For such notes, the conversion ratio of 82.1693 shares of Ocwen common stock for every $1,000 in aggregate principal amount of notes held on the Record Date was calculated first and then we applied the distribution ratio of one share of Altisource common stock for every three shares of Ocwen common stock on an as converted basis to determine the number of shares each note holder received.
In connection with the Separation, we entered into various agreements with Ocwen that define our relationship after the Separation including a separation agreement,Separation Agreement, a tax matters agreement,Tax Matters Agreement, an employee matters agreement,Employee Matters Agreement, an intellectual property agreement,Intellectual Property Agreement, a data centerData Center and disaster recovery agreement,Disaster Recovery Agreement, a technology products services agreement,Technology Services Agreement, a transition services agreementTransition Services Agreement and certain long-term servicing contracts (collectively, the “Agreements”) (See Note 4).
Basis of Presentation, Consolidated—Beginning August 10, 2009, after our assets and liabilities were formally contributed by Ocwen to Altisource pursuant to the terms of the Separation Agreement, (see Note 4), the financial statements of the Company have been presented on a consolidated basis for financial reporting purposes. Our consolidated financial statements include the assets and liabilities, revenues and expenses directly attributable to our operations.
Basis of Presentation, Combined Consolidated— The combined consolidated financial statements present the historical results of operations, assets and liabilities attributable to the Altisource businesses. These combined consolidated financial statements have been prepared on a “carve-out” basis from Ocwen and, because a direct ownership relationship did not exist among the various units comprising the Altisource business, combine and do not consolidate Altisource Portfolio Solutions S.àr.l., and its subsidiaries with Ocwen’s wholly owned subsidiaries NCI Holdings, Inc. (“NCI”); Nationwide Credit, Inc.; Premium Title Services, Inc.; REALHome Services and Solutions, Inc.; Portfolio Management Outsourcing Solutions, LLC; and Western Progressive Trustee LLC.
The combined consolidated statements also reflect the capital structures of each of the combined subsidiaries. We have recorded these balances in the combined consolidated financial statements as part our invested equity. NCI Holdings, Inc. includes only the operations of Nationwide Credit, Inc. We formed REALHome Services and Solutions, Inc. Portfolio Management Outsourcing Solutions, LLC and Western Progressive Trustee LLC late in 2008 with minimal capital and only Portfolio Management Outsourcing Solutions, LLC had operations during 2008. A summary of the individual equity accounts as of December 31, 2008 for each of the above incorporated entities is as follows:
47
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements (continued)
| | | | | | | | | | | | | | | | | |
| | | | | | | Retained | | | | |
| | | | | | | Earnings | | | | |
| | | Common | | (Accumulated | | Invested | | |
| (in thousands) | | Stock | | Deficit) | | Equity | | Total |
December 31, 2008: | | | | | | | | | | | | | | | | |
| Altisource Portfolio Solutions S.A. | | $ | 6,059 | | | $ | — | | | $ | 54,487 | | | $ | 60,546 | |
| NCI Holdings, Inc. | | | 29,480 | | | | (8,379 | ) | | | — | | | | 21,101 | |
| Premium Title Services, Inc. | | | 400 | | | | (628 | ) | | | — | | | | (228 | ) |
| Portfolio Management Outsourcing Solutions, LLC | | | — | | | | (213 | ) | | | — | | | | (213 | ) |
| Eliminations | | | (29,880 | ) | | | 9,220 | | | | — | | | | (20,660 | ) |
| | | |
| | | | | | | | | | | | | | | | | |
| Total Stockholder’s Equity | | $ | 6,059 | | | $ | — | | | $ | 54,487 | | | $ | 60,546 | |
| | | |
The indebtedness of Ocwen, other than certain capital lease obligations and indebtedness specific to Nationwide Credit, Inc (“NCI”), was not transferred to Altisource and remainsremained the indebtedness of Ocwen. Prior
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to the Separation, Ocwen centrally managed the cash flows generated from the Company’s various businesses. The Invested equity balance included as a component of Shareholders’ Equity in the Company’s Balance Sheet up to the Separation Date includes accumulated earnings of the Company as well as receivables/payables due to/from Ocwen resulting from cash transfersConsolidated and intercompany activity. Interest was not charged or credited on amounts due to/from Ocwen.Combined Consolidated Financial Statements(continued)
For periods prior to the Separation Date, these financial statements include allocations of expenses from Ocwen for corporate functions including insurance, employee benefit plan expense and allocations for certain centralized administration costs for executive management, treasury, real estate, accounting, auditing, tax, risk management, internal audit, human resources and benefits administration. We determined these allocations using proportional cost allocation methods including the use of relevant operating profit, fixed assets, sales and payroll measurements. Specifically, personnel and all associated costs, including compensation, benefits, occupancy and other costs, are allocated based on the estimated percentage of time spent by the individual in the various departments. External costs such as audit fees, legal fees, business insurance and other are allocated based on a combination of the sales, fixed assets and operating profits of the department, whichever is most appropriate given the nature of the expense. Management believes such allocations are reasonable; however, they may not be indicative of the actual expense that would have been incurred had the Company been operating as an independent companyFor additional information, see Note 3.
The financial statements for the periods presented. Total corporate costs allocated to the Company, excluding separation costs, were $4.3 million for the period ended August 9, 2009. The charges for these functions are included primarily in Selling, GeneralDecember 31, 2009 and Administrative Expenses in the Statements of Operations. In addition, Ocwen had allocated interest expense to us based upon our portion of assets to Ocwen’s total assets which is reflected as Interest Expense in the Statements of Operations. There have been no expenses allocated to us since the Separation Date.
The financial statements2008 also do not necessarily reflect what the Company’s consolidated results of operations, financial position and cash flows would have been had the Company operated as an independent company during the entire periods presented. For instance, as an independent public company, Altisource incurs costs for maintaining a separate Board of Directors, obtaining a separate audit, relocating certain executive management and hiring additional personnel.
48
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting— The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Principles of Consolidation— The consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiaries.subsidiaries and those entities in which we have a variable interest and are the primary beneficiary. Intercompany accountsbalances and transactions have been eliminated.
Prior to our acquisition of MPA, MPA and Lenders One entered into a management agreement that ends on December 31, 2025. MPA was formed to act on behalf of Lenders One and its Members principally to provide its Members with education and training along with revenue enhancing, cost reducing and market share expanding opportunities. For providing these services, MPA receives payment from Lenders One, and in some instances the vendors, based upon the benefits achieved for the Members. The management agreement provides MPA with broad powers such as recruiting members for Lenders One, collection of fees and other obligations from Members of Lenders One, processing of all rebates owed to Lenders One, day-to-day operation of Lenders One and negotiation of contracts with vendors including signing contracts on behalf of Lenders One.
The management agreement between MPA and Lenders One, pursuant to which MPA is the management company of Lenders One, represents a variable interest in a variable interest entity. MPA determined that they are the primary beneficiary of Lenders One as they have the power to direct the activities that most significantly impact Lenders One’s economic performance and the obligation to absorb losses or the right to receive benefits. As a result, Lenders One is presented in the accompanying consolidated financial statements on a consolidated basis with the interests of the Members reflected as Non-controlling Interest on the Consolidated Balance Sheets. At December 31, 2010, Lenders One had total assets of $5.0 million and liabilities of $0.1 million.
Use of Estimates— The preparation of these consolidated financial statements in accordanceconformity with GAAP requires management to make estimates and assumptions that affect the reported amounts reportedof assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in the accompanyingconsolidated financial statements and accompanying notes. Estimates are used for, but not limited to, determining shared-based compensation, income taxes, collectability of receivables, valuation of acquired intangibles and goodwill, depreciable lives of fixed assets and contingencies. Actual results could differ materially from those estimates and such differences could be material to the financial statements.estimates.
Cash and Cash Equivalents— Cash and Cash Equivalents include cash in banks and investments in short-termWe classify all highly liquid instruments with an original maturity date of three months or less.less at the time of purchase as cash equivalents.
Restricted Cash— Restricted cash at December 31, 2010 primarily represents $0.9 million in connection with the put option escrow account established in conjunction with our acquisition of MPA (see Note 4).
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements(continued)
Accounts Receivable, Net— Accounts Receivable are net of an allowance for doubtful accounts that represent an amount that we estimate to be uncollectible. We have estimated the allowance for doubtful accounts based on our historical write-offs, our analysis of past due accounts based on the contractual terms of the receivables, and our assessment of the economic status of our customers, if known. The carrying value of Accounts Receivable, net, approximates fair value.
Premises and Equipment, Net— We report Premises and Equipment, Net at cost or estimated fair value at acquisition and depreciate them over their estimated useful lives using the straight-line method as follows:
| | | |
|
| Furniture and Fixtures | | 5 years |
| Office Equipment | | 5 years |
| Computer Hardware and Software | | 2 —– 3 years |
| Leasehold Improvements | | Shorter of useful life or term of lease |
We record payments for maintenance and repairs as expenses when incurred. We record expenditures for significant improvements and new equipment as capital expenses and depreciate them over the shorter of the capitalized asset’s life or the life of the lease.
We review Premises and Equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. We measure recoverability of assets to be held and used by comparison of the carrying amount of an asset or asset group to estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset or asset group exceeds its estimated future cash flows, we recognize an impairment charge in the amount by which the carrying amount of the assets exceeds the fair value of the asset or asset group.
Computer software includes the fair value of software acquired in business combinations and purchased software. Purchased software is recorded at cost and amortized using the straight-line method over its estimated useful life. Software acquired in business combinations is recorded at its fair value and amortized using the straight-line or accelerated methodsmethod over its estimated useful life, ranging from two to three years.
Business Combinations— We account for acquisitions using the purchase method of accounting in accordance with Accounting Standards Codification (“ASC”) Topic 805.805). The purchase price of the acquisition is allocated to the assets acquired and liabilities assumed using the fair values determined by management as of the acquisition date.
Goodwill— Goodwill represents the excess cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. We evaluate goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicate that the carrying value may not be recoverable. We test goodwill for impairment by first comparing the book value of net assets to the fair value of the reporting units. If the fair value is determined to be less than the book value, a second step is performed to compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value. We estimate the fair value of the reporting units using discounted cash flows. Forecasts of future cash flows are based on our best estimate of future net sales and operating expenses, based primarily on estimated category expansion, pricing, market segment share and general economic conditions.
We conduct our annual impairment test as of November 30 of each year and determined in 2010 that it was appropriate to impair the remaining $2.8 million of goodwill in our Financial Service segment.
49
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements(continued)
Goodwill and Intangible Assets, Net —Identifiable intangible assets acquired in business combinations are recorded based on their fair values at the date of acquisition. We classify Intangible Assets. Net into two categories: (1)determine the useful lives of our identifiable Intangible Assets withafter considering the specific facts and circumstances related to each intangible asset. Factors we consider when determining useful lives include the contractual term of any arrangements, the history of the asset, our long-term strategy for use of the asset and other economic factors. We amortize intangible assets that we deem to have definite lives subjecton a straight-line basis over their useful lives, generally ranging from 5 to amortization and (2) Goodwill, which represents the excess of cost over the fair value of assets acquired and liabilities assumed in business combinations.20 years.
For Intangible Assets with definite lives, weWe perform tests for impairment if conditions exist that indicate the carrying value may not be recoverable. For Intangible Assets with indefinite lives and Goodwill, we perform tests for impairment at least annually or more frequently if events or circumstances indicate that assets might be impaired.
When facts and circumstances indicate that the carrying value of Intangible Assets determined to have definite lives may not be recoverable, management assesses the recoverability of the carrying value by preparing estimates of cash flows of discrete intangible assets consistent with models utilized for internal planning purposes. If the sum of the undiscounted expected future cash flows is less than the carrying value, we would recognize an impairment to the extent carrying amount exceeds fair value. No impairment was recognized during the periods presented.
We test Goodwill in the fourth quarter unless events or changes in circumstances indicate that the carrying amount may exceed its fair value. The impairment test has two steps. The first step identifies potential impairments by comparing the fair value of the reporting unit with its carrying value, including Goodwill. If the calculated fair value of a reporting unit exceeds the carrying value, Goodwill and indefinite lived intangibles are not impaired, and the second step is not necessary. If the carrying value of a reporting unit exceeds the fair value, the second step calculates the possible impairment loss by comparing the implied fair value with the carrying value. If the fair value is less than the carrying value, we would record an impairment charge. This analysis did not result in an impairment charge during the periods presented.
We determine the useful lives of our identifiable Intangible Assets after considering the specific facts and circumstances related to each intangible asset. Factors we consider when determining useful lives include the contractual term of any arrangements, the history of the asset, our long-term strategy for use of the asset and other economic factors. We amortize intangible assets that we deem to have definite lives on a straight-line basis over their useful lives, generally ranging from 5 to 20 years.
Fair Value of Financial Instruments—The fair value of financial instruments, which primarily include Cash and Cash Equivalents, Restricted Cash, Accounts Receivable and Accounts Payable and Accrued Expenses at December 31, 2009 are carried at amounts that approximate their fair value due to the short-term nature of these amounts.
In addition, we entered into a put option arrangement with some of the predecessor owners of MPA in conjunction with the acquisition. The arrangement allows the holders to put a portion of the Altisource shares issued as consideration to Altisource at a predetermined price. Altisource calculated the fair value of this put option arrangement on the acquisition date at $1.3 million by utilizing a Black-Scholes option pricing model (see Note 4). The fair value calculation is deemed to be a Level 3 calculation. The fair value of the put at December 31, 2010 of $0.7 million was valued using the following assumptions:
| | | | |
| | Assumptions | |
| | | | |
| Risk-free Interest Rate | | | 0.12% – 1.02 | % |
| Expected Stock Price Volatility | | | 30% – 58 | % |
| Expected Dividend Yield | | | — | |
| Contractual Life (in years) | | | 0.25 – 3.25 | |
| Fair Value | | $ | 0.00 – $3.91 | |
The put option agreement is a written derivative valued similar to stock options and is included within “Other Non-current Liabilities” on the 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 Consolidated Statements of Operations.
Foreign Currency Translation and Transactions— Our reporting currency is the U.S. dollar. Other foreign currency assets and liabilities that are considered monetary items are translated at exchange rates in effect at the balance sheet date. Foreign currency revenues and expenses are translated at transaction date exchange rates. These exchange gains and losses are included in the determination of net income.
Defined Contribution401(k) Plan— Some of our employees currently participate in a defined contribution 401(k) plan under which we may make matching contributions equal to a discretionary percentage determined by us. We recorded expense of $0.2 million and $0.1 million in 2010 and 2009, respectively, related to our discretionary amounts contributed.
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements(continued)
Equity-based Compensation —Equity-based compensation is accounted for under the provisions of ASC Topic 718. Under ASC Topic 718, the cost of employee services received in exchange for an award of equity instruments is generally measured based on the grant-date fair value of the award. Equity-based awards that do not require future service are expensed immediately. Equity-based employee awards that require future service are recognized over the relevant service period. Further, as required under ASC Topic 718, we estimate forfeitures for equity-based awards that are not expected to vest.
Earnings Per Share— We compute Earnings Per Share in accordance with ASC Topic 260. Basic Net Income per Share is computed by dividing Net Income by the weighted-average number of common stock
50
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements (continued)
outstanding for the period. Diluted Net Income Per Share reflects the assumed conversion of all dilutive securities. Due to the nature and timing of Separation, the number of outstanding shares issued in the capitalization were the only shares outstanding prior to the Separation.
Revenue Recognition— We recognize revenues from the services we provide in accordance with ASC Topic 605. ASC Topic 605 sets forth guidance as to when revenue is realized or realizable and earned when all of the following criteria are met: 1)(1) persuasive evidence of an arrangement exists; 2)(2) delivery has occurred or services have been performed; 3)(3) the seller’s price to the buyer is fixed or determinable; and 4)(4) collectability is reasonably assured. Generally, the contract terms for these services are relatively short in duration, and we recognize revenues as the services are performed either on a per unit or a fixed price basis. Specific policies for each of our reportable segments are as follows:
Mortgage Services: We recognize revenues for the majority of the services we provide in this segment on completion of the service to our customer. Residential property valuation, certain property inspection and property preservation services, mortgage due diligence and certain closing and title services include specific deliverables for our customers for which we recognize revenues when we deliver the related report or complete the related service to the customer, if collectibility is reasonably assured. We also perform services for which we recognize revenue at the time of closing of the related real estate transaction including real estate sales, real estate closings and certain title services. For default processing services and certain property preservation services, we recognize revenue over the period during which we perform the related services, with full recognition on completion of the related foreclosure filing or on closing of the related real estate transaction. For component services, we charge for these services based upon the number of employees utilized as the related services are performed. We record revenue associated with real estate sales on a net basis as we perform services as an agent without assuming the risks and rewards of ownership of the asset and the commission earned on the sale is a fixed percentage. Reimbursable expenses of $44.6 million and $16.1 million incurred in 2010 and 2009, respectively, primarily in conjunction with our property preservation and default processing services are included in revenues with an equal offsetting expense included in cost of revenues. These amounts are recognized on a gross basis, principally because we have complete control over selection of vendors.
Financial Services: We generally earn our fees for asset recovery management services as a percentage of the amount we collect on delinquent consumer receivables on behalf of our clients and recognize revenues upon collection from the debtors. We also provide customer relationship management services for which we earn and recognize revenues on a on a per-call, per-person or per minute basis as the related services are performed.
Technology ProductsServices: For our REAL suite,REALSuite, we charge based on the number of our client’s loans processed on the system or on a per-transaction basis. We record transactional revenues when the service is provided and other revenues monthly based on the number of loans processed, employees serviced or productsservices provided. Furthermore, we provide IT infrastructure services to Ocwen and charge for these services primarily based on the number of employees that are using the applicable systems and the number and type of licensed products used by Ocwen. We record revenue associated with implementation services upon completion and maintenance ratably over the related service period.
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements(continued)
Income Taxes— Until the effective date of the Separation, our operating results were included in Ocwen’s consolidated U.S. federal and state income tax returns and reflect the estimated income taxes we would have paid as a stand-alone taxable entity.
The Company accounts for certain income and expense items differently for financial purposes and income tax purposes. We recognize deferred income tax assets and liabilities for temporarythese differences between the financial reporting basis and the tax basis of our assets and liabilities andas well as expected benefits of utilizing net operating loss and credit carryforwards. The most significant temporary differences relate to accrued compensation, amortization, and loss and credit carryforwards. We measure deferred income tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which we expect to recover or settle those temporary differences. The effect on deferred assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all the deferred tax assets will not be realized. Our obligation for current taxes through the date of Separation has been paid by Ocwen on our behalf and settled through equity by means of net transfers to Parent.
51
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements (continued)
Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining tax expense and in evaluating tax positions including evaluating uncertainties under ASC Topic 740740.
3. ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED
In June 2009, the FASB issued guidance on accounting for transfers of financial assets (originally issued as SFAS 166 and now referred to as ASC Topic 860-20). ASC Topic 860-20 revises the criteria for the recognition of asset sales, particularly with respect to securitizations, and eliminates the concept of “Qualifying Special Purpose Entities” (“QSPEs”).
In June 2009, the FASB amended ASC Topic 810 which provides guidance for variable interest entities (“VIEs”) (issued as SFAS 167, Amendments to FASB Interpretation No. 46(R)). The amendments will significantly affect the overall consolidation analysis, changing the approach taken by companies in identifying which entities are VIEs and in determining which party is deemed the primary beneficiary. The guidance requires continuous assessment of an entity’s involvement with such VIEs.
Both ASC Topic 860-20 and ASC Topic 810 are effective for our financial statements beginning January 1, 2010. We do not expect the adoption of either standard to impact our consolidated financial statements.
4. TRANSACTIONS WITH RELATED PARTIES
Ocwen remains our largest customer. Following the Separation, Ocwen is contractually obligated to purchase certain Mortgage Services and Technology ProductsServices from us under service agreements. These agreements that extend for eight years from the Separation Date subject to termination under certain provisions;provisions. Ocwen is not restricted from redeveloping these services. We have agreedsettle amounts with Ocwen to settle intercompany amounts on a daily, weekly or monthly basis beginning in 2010 based upon the nature of the services and when either the earnings processservice is complete for those matters directly attributable to Ocwen or when reimbursement is available from the trusts for those matters derived from Ocwen’s loan servicing portfolio.completed.
We consider certain services to be derived from Ocwen’s 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 Ocwen’s loan servicing portfolio, as a percentage of each of our segments revenues and as a percentage of consolidated revenues was as follows for the year ended December 31:
| | | | |
| | 2009 |
| | | | |
Mortgage Services | | | 72 | % |
Technology Products | | | 44 | |
Financial Services | | | — | |
Consolidated Revenues | | | 47 | |
| | | | | | | | | |
| | | For the Years Ended December 31, | |
| | | 2010 | | | 2009 | |
| | | | | | | | | |
| Mortgage Services | | | 66 | % | | | 72 | % |
| Technology Services | | | 37 | | | | 44 | |
| Financial Services | | | < 1 | | | | < 1 | |
| Consolidated Revenues | | | 51 | % | | | 47 | % |
With the exception of certain Technology ProductServices revenues during the quarter ended March 31, 2008, and for the year ending December 31, 2007, we record revenues we earn from Ocwen under the various long-term servicing contracts at rates we believe to be market rates as they are consistent with one or more of the following: the fees we charge to other customers for comparable services; the rates Ocwen pays to other service providers; fees commensurate with market surveys prepared by unaffiliated firms; and prices being charged by our competitors. These rates are materially consistent with the rates we charge Ocwen under the various long-term servicing contracts that we entered into connection with the Separation.
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements(continued)
Allocation of Corporate Costs
For periods prior to the Separation Date, these financial statements include allocations of expenses from Ocwen for corporate functions including insurance, employee benefit plan expense and allocations for certain centralized administration costs for executive management, treasury, real estate, accounting, auditing, tax, risk management, internal audit, human resources and benefits administration. OcwenWe determined these allocations using proportional cost allocation methods including the use of relevant operating profit, fixed assets, sales and payroll measurements. Specifically, personnel and all associated costs, including compensation, benefits, occupancy and other costs, are allocated based on the estimated percentage of time spent by the individual in the various departments. External costs such as audit fees, legal fees, business insurance and other are allocated based on a combination of the sales, fixed assets and operating profits of the department, whichever is most appropriate given the nature of the expense. Management believes such allocations are reasonable; however, they may not be indicative of the actual expense that would have been incurred had the Company been operating as an independent company for the periods presented. Total corporate costs allocated to the Company, excluding Separationseparation costs, were $4.3 million for the period ended August 9, 2009. The charges for these functions are included primarily in Selling, General and Administrative Expenses in the 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, Ocwen had allocated interest expense to us based upon our portion of assets to Ocwen’s total assets which is reflected as “Interest expense”a component of Other Income (Expense), net in the Statements of Operations. There have been no expenses allocated to us since the Separation Date. However, these amounts may not be representative of the costs necessary for the Company to operate as a separate standalone company.
Transition Services
In connection with the Separation, Altisource and Ocwen entered into a Transition Services Agreement under which services in such areas as human resources, vendor management, corporate services, six sigma, quality assurance, quantitative analytics, treasury, accounting, tax, risk management, legal, strategic planning, compliance and other areas are provided to the counterparty for up to two years from the Separation Date. For the year ended December 31, 2010, Altisource billed Ocwen $1.8 million and Ocwen billed Altisource $1.1 million for services provided under this agreement. These amounts are reflected as a component of Selling, General and Administrative expenses in the Consolidated Statements of Operations. Amounts were immaterial in 2009.
Separation Related Expenditures
Included in Selling, General and Administrative Expenses in the accompanying Statement of Operations, we have recognized $3.4 million of Separation related expenses for the year ended December 31, 2009, primarily representing primarily professional fees and other costs associated with establishing the Company as a stand-alone entity. Prior to the second quarter of 2009, all previous costs in connection with the Separation were recognized by Ocwen.
Agreements with Ocwen4. ACQUISITION OF MPA
In connection withOn February 12, 2010, we acquired all of the Separation, Altisourceoutstanding membership interests of MPA pursuant to a Purchase and Ocwen entered intoSale Agreement. MPA serves as the manager of Lenders One, a separation agreementnational alliance of independent mortgage bankers. The alliance was established in 2000 and various ancillary agreements that complete the Separationas of our business from Ocwen. The agreements were prepared before the Separation and reflect agreements between affiliated parties. The primary agreements are as follows:
Separation Agreement— provides for, among other things, the principal corporate transactions required to effect the Separation and certain other agreements relating to the continuing relationship between Ocwen and us after the Separation.
Transition Services Agreement— 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. Following the Separation, through December 31, 2009, the impact2010 consisted of transition services was immaterial as the cost of services received was offset by the cost of services provided to Ocwen.
Tax Matters Agreement— sets out each party’s rights and obligations with respect to deficiencies and refunds, if any, of federal, state, local or foreign taxes for periods before and after the Separation and related matters such as the filing of tax returns and the conduct of Internal Revenue Service and other audits.
Employee Matters Agreement— provides for the transition of employee benefit plans and programs sponsored by Ocwen for employees.
Intellectual Property Agreement— governs the transfer of intellectual property assets specified therein to us.179 members.
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements(continued)
In addition, asConsideration for the transaction consisted of cash, common stock and put option agreements:
| | | | | |
| (in thousands) | | Consideration | |
| | | | | |
| Cash | | $ | 29,000 | |
| Common Stock | | | 23,900 | |
| Put Option Agreements at Fair Value | | | 1,289 | |
| Working Capital Adjustment | | | 835 | |
| | | | |
| | | | | |
| Total Consideration | | $ | 55,024 | |
| | | | |
The common stock consisted of 1.0 million shares of Altisource’s common stock valued at $24.92 per share based on the closing price of Altisource common stock on February 11, 2010. A portion of the Separationstock consideration (0.3 million shares) will be held in escrow two years from the closing date of the acquisition to secure MPA’s indemnification obligations under the Purchase and Sale Agreement. In addition, we entered into three put option agreements with certain of the sellers whereby each seller has the right, with respect to an aggregate of 0.5 million shares of our common stock, to put up to 25% of eligible shares each year for a total of four years at a price equal to $16.84 per share. The fair value of the put was initially established at the date of acquisition ($1.3 million) using the following long-term servicing contractsassumptions:
| | | | |
| | Assumptions | |
| | | | |
| Risk-free Interest Rate | | | 0.345% – 1.914 | % |
| Expected Stock Price Volatility | | | 40% – 55 | % |
| Expected Dividend Yield | | | — | |
| Contractual Life (in years) | | | 1 – 4 | |
| Fair Value | | $ | 0.74 – $3.90 | |
The allocation of the purchase price is as follows:
| | | | | |
| (in thousands) | | | | |
| | | | | |
| Cash | | $ | 2,170 | |
| Accounts Receivable | | | 4,279 | |
| Prepaid Expenses and Other Current Assets | | | 321 | |
| Premises and Equipment | | | 18 | |
| Identifiable Intangible Assets | | | 43,600 | |
| Goodwill | | | 10,218 | |
| | | | |
| | | | 60,606 | |
| Accounts Payable and Accrued Expenses | | | (2,176 | ) |
| Other Current Liabilities | | | (138 | ) |
| Non-controlling Interests | | | (3,268 | ) |
| | | | |
| Total Purchase Price | | $ | 55,024 | |
| | | | |
During the second quarter of 2010, Altisource finalized its calculation of the Working Capital Adjustment within the 90 day period allocated by the purchase contract. The payment of the Working Capital Adjustment was made during the third quarter.
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements(continued)
Management has assigned the following lives to identified assets acquired as a result of the acquisition:
| | | | |
| | Estimated | |
| | Life | |
| | (in Years) | |
| | | | |
| Premises and Equipment | | | 2 – 5 | |
Management Agreement(1) | | | 20 | |
Trademarks(1) | | | 20 | |
Non-compete(1) | | | 4 | |
| Goodwill | | | Indefinite | |
| | |
| (1) | | The identifiable assets are subject to amortization on a straight-line basis as this best approximates the benefit period related to these assets. |
The goodwill arising from the acquisition, which was assigned to our Mortgage Services segment, consists of various components principally in-place workforce and anticipated revenue synergies given MPA’s 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 up to eight year terms (subject to termination rights):
Services AgreementandTechnology Products Services Agreement—provides to Ocwen certain serviceskey employees of MPA who also received the majority of our shares issued in connection with the Ocwen businessacquisition.
Revenue and Net Income Attributable to Altisource from the date of acquisition through December 31, 2010, included in the Company’s Consolidated Statements of Operations, are as follows.
| | | | | |
| | | Year Ended | |
| | | December 31, | |
| (in thousands) | | 2010 | |
| | | | | |
| Revenue | | $ | 18,039 | |
| Net Income Before Income Taxes and Non-controlling Interests | | | 13,863 | |
Acquisition-related transaction costs are included in Selling, General and Administrative and Expenses in the Consolidated Statements of Operations.
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements(continued)
The following tables present the Separation. The specific servicesunaudited pro forma Revenue, Net Income Attributable to be provided under these umbrella agreements will be set forth separately on a service-by-service basisAltisource and Diluted Earnings Per Share as will economic terms. Services may be either fixed-price, in which case no yearly increase in service fee applies, or subject to annual increase in service fee based on market conditions and inflation. These agreements provide us with a right to first opportunity to bid on additional related services to Ocwen. Furthermore, if Ocwen receives a third party offer for the performanceacquisition of such additional services it must provide us with the opportunity to make our own offer for the same or substantially the same services, in which case Ocwen must accept our offer if such offer is equal to or better than the third party offer. We expect that all services pursuant to these agreements will be based on market rates prevailingMPA had occurred at the timebeginning of execution or otherwise on arms-length terms and will be materially similar to the terms of existing arrangements between the parties. We believe the terms and conditions of these agreements are comparable to those available from unrelated parties for a comparable arrangement.period presented.
Data Center and Disaster Recovery Agreement— we will provide to Ocwen certain data center and disaster recovery services in connection with the Ocwen business following the Separation. We expect that all services pursuant to this agreement will be based on the fully allocated cost of providing such service.| | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | |
| | | 2010 | | | 2009 | |
| | | As | | | | | | | As | | | | |
| (in thousands, except per share amounts) | | Reported | | | Pro Forma | | | Reported | | | Pro Forma | |
| | | | | | | | | | | | | | | | | |
| Revenue | | $ | 301,378 | | | $ | 303,022 | | | $ | 202,812 | | | $ | 223,810 | |
| Net Income Attributable to Altisource | | | 49,271 | | | | 49,143 | | | | 25,971 | | | | 30,283 | |
| Earnings Per Share — Diluted | | | 1.88 | | | | 1.87 | | | | 1.07 | | | | 1.20 | |
5. ACCOUNTS RECEIVABLE, NET
Accounts Receivable, net consists of the following:
| | | | | | | | | | | | | | | | | |
| (in thousands) | | December 31, | |
| | | | December 31, | |
| Quarter Ended | | | 2010 | | 2009 | |
| | | 2009 | | 2008 | |
| Third-party Accounts Receivable | | $ | 11,638 | | $ | 8,498 | | | $ | 19,039 | | $ | 11,638 | |
| Unbilled Fees | | 9,073 | | 1,356 | | | 32,055 | | 9,073 | |
| Receivable from Ocwen | | 10,066 | | — | | | 3,950 | | 10,066 | |
| Other Receivables | | 416 | | — | | | 583 | | 416 | |
| | | | | | | | |
| | | 31,193 | | 9,854 | | | 55,627 | | 31,193 | |
| Allowance for Doubtful Accounts | | | (696 | ) | | | (777 | ) | | | (2,132 | ) | | | (696 | ) |
| | | | | | | | |
| | | |
| Total | | $ | 30,497 | | $ | 9,077 | | | $ | 53,495 | | $ | 30,497 | |
| | | | | | | | |
Unbilled Fees consist primarily of Asset Management and Default Management Services for which we recognize revenues over the service delivery period but bill at completion of the service.
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements(continued)
A summary of the allowance for doubtful accounts, net of recoveries, for the years ended December 31, 2010, 2009 2008 and 20072008 is as follows:
| | | | | | | | | |
| | | (in thousands) | | | (in thousands) | |
| Balance, January 1, 2007 | | $ | 765 | | |
| Bad Debt Expense | | 1,779 | | |
| Recoveries | | | (1,134 | ) | |
| Write-offs | | | (451 | ) | |
| | | | | |
| Balance, December 31, 2007 | | 959 | | |
| Balance, January 1, 2008 | | | $ | 959 | |
| Bad Debt Expense | | 864 | | | 864 | |
| Recoveries | | | (449 | ) | | | (449 | ) |
| Write-offs | | | (597 | ) | | | (597 | ) |
| | | | | | | |
| Balance, December 31, 2008 | | 777 | | | 777 | |
| Bad Debt Expense | | 338 | | | 338 | |
| Recoveries | | | (205 | ) | | | (205 | ) |
| Write-offs | | | (214 | ) | | | (214 | ) |
| | | | | | | |
| Balance, December 31, 2009 | | $ | 696 | | | $ | 696 | |
| Bad Debt Expense | | | 1,735 | |
| Recoveries | | | | (106 | ) |
| Write-offs | | | | (193 | ) |
| | | | | | | |
| Balance, December 31, 2010 | | | $ | 2,132 | |
| | | | | |
One of our customers in the Financial Services segment accounted for 16% of consolidated revenue in 2009 and 26% in 2008. Another customer in our Mortgage Services and Technology Services segments accounted for 12% of consolidated revenue in 2009.
6. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid Expenses and Other Current Assets consists of the following:
| | | | | | | | | |
| | | December 31, | |
| (in thousands) | | 2010 | | | 2009 | |
| | | | | | | | | |
| Prepaid Expenses | | $ | 5,134 | | | $ | 2,435 | |
| Income Tax Receivable | | | 7,327 | | | | — | |
| Other Current Assets | | | 615 | | | | 469 | |
| | | | | | | |
| | | | | | | | | |
| Total | | $ | 13,076 | | | $ | 2,904 | |
| | | | | | | |
54
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements(continued)
One of our customers in the Financial Services segment accounted for 16% of consolidated revenues in 2009, 26% in 2008 and 14% in 2007. In addition, another customer accounted for 12% of our 2009 revenue contributing to both our Mortgage Services and Technology Services segments.
6. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid Expenses and Other Current Assets consist of the following:
| | | | | | | | | |
| (in thousands) | | December 31, |
| | | 2009 | | 2008 |
| Prepaid Expenses | | $ | 1,471 | | | $ | 1,792 | |
| Other Current Assets | | | 1,433 | | | | 1,229 | |
| | | |
| | | | | | | | | |
| Total | | $ | 2,904 | | | $ | 3,021 | |
| | | |
7. PREMISES AND EQUIPMENT, NET
Premises and Equipment, net which include amounts recorded under capital leases, consists of the following:
| | | | | | | | | | |
| | | | | | | | | | | December 31, | |
| (in thousands) | | December 31, | | 2010 | | 2009 | |
| | | 2009 | | 2008 | |
| Computer Hardware and Software | | $ | 23,591 | | $ | 86,714 | | | $ | 32,931 | | $ | 23,591 | |
| Office Equipment and Other | | 9,203 | | 6,072 | | | 9,717 | | 9,203 | |
| Furniture and Fixtures | | 2,663 | | 1,270 | | | 2,226 | | 2,663 | |
| Leasehold Improvements | | 3,441 | | 2,047 | | | 4,501 | | 3,441 | |
| | | | | | | | |
| | | 38,898 | | 96,103 | | | 49,375 | | 38,898 | |
| Less: Accumulated Depreciation and Amortization | | | (27,490 | ) | | | (86,799 | ) | | | (31,882 | ) | | | (27,490 | ) |
| | | | | | | | |
| | | |
| Total | | $ | 11,408 | | $ | 9,304 | | | $ | 17,493 | | $ | 11,408 | |
| | | | | | | | |
Depreciation and amortization expense, inclusive of capital lease obligations, amounted to $7.2 million, $5.4 million and $7.8 million for 2010, 2009 and $7.0 million for 2009, 2008, and 2007, 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 Statements of Operations.
8. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
Goodwill relates to the acquisitions of MPA, NCI and the company that developed the predecessor to our REALTrans®REALTrans® vendor management platform. No impairment charges were taken during the periods presented.
55
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements (continued)
Changes in Goodwill during the years ended December 31, 20092010 and 20082009 are summarized below:
| | | | | | | | | | | | | |
| | | Technology | | Financial | | |
| (in thousands) | | Products | | Services | | Total |
| Balance, January 1, 2008 | | $ | 1,618 | | | $ | 13,179 | | | $ | 14,797 | |
Purchase Price Adjustments(a) | | | — | | | | 365 | | | | 365 | |
Tax Amortizable Goodwill(b) | | | — | | | | (3,622 | ) | | | (3,622 | ) |
| | | |
| Balance, December 31, 2008 | | | 1,618 | | | | 9,922 | | | | 11,540 | |
Tax Amortizable Goodwill(b) | | | — | | | | (2,216 | ) | | | (2,216 | ) |
| | | |
| | | | | | | | | | | | | |
| Balance, December 31, 2009 | | $ | 1,618 | | | $ | 7,706 | | | $ | 9,324 | |
| | | |
| | | | | | | | | | | | | | | | | |
| | | Mortgage | | | Technology | | | Financial | | | | |
| (in thousands) | | Services | | | Services | | | Services | | | Total | |
| | | | | | | | | | | | | | | | | |
| Balance, January 1, 2009 | | $ | — | | | $ | 1,618 | | | $ | 9,922 | | | $ | 11,540 | |
| Component 2 Amortization (a) | | | — | | | | — | | | | (2,216 | ) | | | (2,216 | ) |
| | | | | | | | | | | | | |
| Balance, December 31, 2009 | | | — | | | | 1,618 | | | | 7,706 | | | | 9,324 | |
| Acquisition of MPA | | | 10,218 | | | | — | | | | — | | | | 10,218 | |
| Component 2 Amortization (a) | | | — | | | | — | | | | (4,890 | ) | | | (4,890 | ) |
| Impairment Loss (b) | | | — | | | | — | | | | (2,816 | ) | | | (2,816 | ) |
| | | | | | | | | | | | | |
| Balance, December 31, 2010 | | $ | 10,218 | | | $ | 1,618 | | | $ | — | | | $ | 11,836 | |
| | | | | | | | | | | | | |
| | |
(a) | | Purchase price adjustments related to the finalization of the NCI purchase accounting, which included fair valuing the assets acquired and liabilities assumed, recording of deal related costs and deferred taxes. |
|
(b)a) | | Prior to our acquisition of NCI in 2007, NCI madecompleted an acquisition which created tax-deductible goodwill that amortizes for tax purposes over time. When we acquired NCI in 2007, we recorded a lesser amount of goodwill for financial reporting purposes than what had previously been recorded at NCI for tax purposes. This difference between the amount of goodwill recorded for financial reporting purposes and the amount recorded for taxes is referred to as “Component 2” goodwill and it results in our recording periodic reductions of our book goodwill balance in our consolidated financial statements. The reduction of book goodwill also resulted in a reduction of equity of $2.2 million in 2009 and $3.6 million in 2008. We will continue to amortize the remaining Component 2 goodwill for U.S. tax purposes which will result in ourby reducing book goodwill to zero and then reducingcertain intangible assets by the remaining tax benefits of the Component 2 goodwill as they are realized in our tax returns. The balance of Component 2 goodwill remaining was $19.3$11.4 million as of December 31, 2009,2010 which should generate $12.3$6.8 million of reductions of goodwill and then intangible assets when the benefit can be realized for U.S. tax purposes. |
|
| b) | | Based on the fourth quarter goodwill impairment test, management determined it was prudent to impair the remaining $2.8 million of goodwill in the Financial Services segment. This determination was made after considering quantitative and qualitative factors including past performance and execution risk. |
Intangible Assets, Net
Intangible assets relate to our acquisition of NCI. No impairment charges were taken during the periods presented.
Intangible Assets, net during the years ended December 31, 2009 and 2008 consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Weighted | | | | | | |
| | | Average Estimated | | | | | | |
| | | Useful Life (Years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
| | | | | | | 2009 | | 2008 | | 2009 | | 2008 | | 2009 | | 2008 |
| Definite-lived Intangible Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Trademarks | | | 5 | | | $ | 2,800 | | | $ | 2,800 | | | $ | 1,447 | | | $ | 887 | | | $ | 1,353 | | | $ | 1,913 | |
| Customer Lists | | | 19 | | | | 37,700 | | | | 37,700 | | | | 5,334 | | | | 3,222 | | | | 32,366 | | | | 34,478 | |
| | | | | | | |
| Total Intangible Assets | | | | | | $ | 40,500 | | | $ | 40,500 | | | $ | 6,781 | | | $ | 4,109 | | | $ | 33,719 | | | $ | 36,391 | |
| | | | | | | |
Amortization expense for definite lived intangible assets was $2.7 million, $2.6 million and $1.6 million for the fiscal years ended December 31, 2009, 2008 and 2007, respectively. Expected annual amortization for years 2010 through 2014, is $2.7 million, $2.7 million, $2.3 million, $2.1 million and $2.1 million, respectively.
56
- 65 -
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements(continued)
Intangible Assets, Net
Intangible assets relate to our acquisitions of MPA (see Note 4) and NCI. No impairment charges were taken during the periods presented.
Intangible Assets, net during the years ended December 31, 2010 and 2009 consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Weighted | | | | | | | | | | |
| | | Average | | | | | | | | | | |
| | | Estimated | | | Gross | | | Accumulated | | | | |
| | | Useful Life | | | Carrying Amount | | | Amortization | | | Net Book Value | |
| (in thousands) | | (Years) | | | 2010 | | | 2009 | | | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Definite-lived Intangible Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Trademarks | | | 16 | | | $ | 10,200 | | | $ | 2,800 | | | $ | 2,346 | | | $ | 1,447 | | | $ | 7,854 | | | $ | 1,353 | |
| Customer Lists | | | 19 | | | | 37,700 | | | | 37,700 | | | | 7,447 | | | | 5,334 | | | | 30,253 | | | | 32,366 | |
| Operating Agreement | | | 20 | | | | 35,000 | | | | — | | | | 1,604 | | | | — | | | | 33,396 | | | | — | |
| Non Competing Agreement | | | 4 | | | | 1,200 | | | | — | | | | 275 | | | | — | | | | 925 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total Intangible Assets | | | | | | $ | 84,100 | | | $ | 40,500 | | | $ | 11,672 | | | $ | 6,781 | | | $ | 72,428 | | | $ | 33,719 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Amortization expense for definite lived intangible assets was $4.9 million, $2.7 million and $2.6 million for the fiscal years ended December 31, 2010, 2009 and 2008, respectively. Expected annual amortization for years 2011 through 2015, is $5.1 million, $4.8 million, $4.5 million, $4.3 million and $4.2 million, respectively.
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accounts Payable and Accrued Expenses consist of the following:
| | | | | | | | | | |
| | | | | | | | | | | December 31, | |
| (in thousands) | | December 31, | | 2010 | | 2009 | |
| | | 2009 | | 2008 | |
| Accounts Payable | | $ | 1,114 | | $ | 283 | | | $ | 5,960 | | $ | 1,114 | |
| Income Taxes Payable, Net | | 4,853 | | — | | |
| Income Taxes Payable, net | | | 3,807 | | 4,853 | |
| Payable to Ocwen | | 2,716 | | — | | | 2,418 | | 2,716 | |
| Accrued Expenses — General | | 8,373 | | 2,518 | | | 11,189 | | 8,373 | |
| Accrued Salaries and Benefits | | 7,136 | | 1,966 | | | 12,010 | | 7,136 | |
| | | | | | | | |
| | | |
| Total | | $ | 24,192 | | $ | 4,767 | | | $ | 35,384 | | $ | 24,192 | |
| | | | | | | | |
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements(continued)
Other Current Liabilities consist of the following:
| | | | | | | | | | |
| | | | | | | | | | | December 31, | |
| (in thousands) | | December 31, | | 2010 | | 2009 | |
| | | 2009 | | 2008 | |
| Mortgage Charge-Off and Deficiency Collections | | $ | 2,458 | | $ | 2,313 | | | $ | 8 | | $ | 2,458 | |
| Deferred Revenue | | 989 | | 1,505 | | | 2,542 | | 989 | |
| Facility closure cost accrual, current portion | | 272 | | — | | |
| Facility Closure Cost Accrual, Current Portion | | | 253 | | 272 | |
| Other | | 2,220 | | 2,395 | | | 2,813 | | 2,220 | |
| | | | | | | |
| | | | |
| Total | | $ | 5,939 | | $ | 6,213 | | | $ | 5,616 | | $ | 5,939 | |
| | | | | | | | |
Facility Closure Costs
During 2009, we accrued $1.6 million in facility closure costs (included in other current and other non-current liabilities in the Balance Sheet and in Selling, General and Administrative Expenses in the Statement of Operations) primarily consisting of lease exit costs (expected to be paid through 2014) and severance for closure of facilities in Miramar, Florida and Victoria, British Columbia, Canada. The facility closures were in connection with our efforts to reduce overall costs and increase the utilization of remaining facilities. The following table summarizes the activity for severance and other charges, all recorded in our Financial Services segment, for the yearyears ended December 31, 2010 and 2009:
| | | | | | | | | | | | | | | | | |
| | | | | | | Facility | | Termination | | |
| (in thousands) | | Lease Costs | | Costs | | Benefits | | Total |
| Balance, January 1, 2009 | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Additions Charged to Operations | | | 1,110 | | | | 747 | | | | 447 | | | | 2,304 | |
| Disposals or Transfers of Property | | | — | | | | (747 | ) | | | — | | | | (747 | ) |
| Payments | | | (194 | ) | | | — | | | | (447 | ) | | | (641 | ) |
| | | |
| Balance, December 31, 2009 | | | 916 | | | | — | | | | — | | | | 916 | |
| Less: Long-term Portion | | | (644 | ) | | | — | | | | — | | | | (644 | ) |
| | | |
| Facility Closure Cost Accrual, Current Portion | | $ | 272 | | | $ | — | | | $ | — | | | $ | 272 | |
| | | |
We do not expect additional significant costs related to the closure of these facilities.| | | | | | | | | | | | | | | | | |
| | | Lease | | | Facility | | | Termination | | | | |
| (in thousands) | | Costs | | | Costs | | | Benefits | | | Total | |
| | | | | | | | | | | | | | | | | |
| Balance, January 1, 2009 | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Additions Charged to Operations | | | 1,110 | | | | 747 | | | | 447 | | | | 2,304 | |
| Disposals or Transfers of Property | | | — | | | | (747 | ) | | | — | | | | (747 | ) |
| Payments | | | (194 | ) | | | — | | | | (447 | ) | | | (641 | ) |
| | | | | | | | | | | | | |
| Balance, December 31, 2009 | | | 916 | | | | — | | | | — | | | | 916 | |
| Less: Long-term Portion | | | (644 | ) | | | — | | | | — | | | | (644 | ) |
| | | | | | | | | | | | | |
| Facility Closure Cost Accrual, Current Portion | | $ | 272 | | | $ | — | | | $ | — | | | $ | 272 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Balance, December 31, 2009 | | $ | 916 | | | $ | — | | | $ | — | | | $ | 916 | |
| Payments | | | (244 | ) | | | — | | | | — | | | | (244 | ) |
| | | | | | | | | | | | | |
| Balance, December 31, 2010 | | | 672 | | | | — | | | | — | | | | 672 | |
| Less: Long-term Portion | | | (419 | ) | | | — | | | | — | | | | (419 | ) |
| | | | | | | | | | | | | |
| Facility Closure Cost Accrual, Current Portion | | $ | 253 | | | $ | — | | | $ | — | | | $ | 253 | |
| | | | | | | | | | | | | |
10. LINE OF CREDIT AND OTHER SECURED BORROWINGS
In July 2008, NCI entered into a revolving secured credit agreement with a financial institution that provided for borrowings of up to $10.0 million through July 2011. All borrowings outstanding on December 31, 2008 of $1.1 million were floating rate advances with an interest rate of 2.25%. Substantially all of NCI’s assets,
57
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements (continued)
which comprise substantially all of the assets in our Financial Services segment, were pledged as collateral for this credit agreement. On June 23, 2009, we terminated the agreement at which time there were no borrowings outstanding on the line of credit since we repaid the balance in full in January 2009.
- 67 -
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements(continued)
11. COST OF REVENUE
Cost of revenue principally includes payroll and employee benefits associated with personnel employed in customer service and operations roles, fees paid to external providers related to provision of services, reimbursable expenses, technology and telephony expenses as well as depreciation and amortization of operating assets. The components of cost of revenue were as follows for the years ended December 31:
| | | | | | | | | | | | | |
| | | For the Years Ended December 31, | |
| (in thousands) | | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | | | | | |
| Compensation and Benefits | | $ | 62,791 | | | $ | 51,251 | | | $ | 59,311 | |
| Outside Fees and Services | | | 60,583 | | | | 43,026 | | | | 35,825 | |
| Reimbursable Expenses | | | 47,449 | | | | 16,077 | | | | — | |
| Technology and Communications | | | 18,236 | | | | 16,443 | | | | 19,912 | |
| | | | | | | | | | |
| | | $ | 189,059 | | | $ | 126,797 | | | $ | 115,048 | |
| | | | | | | | | | |
12. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses include payroll, employee benefits, occupancy and other costs associated with personnel employed in executive, sales, marketing, human resources, consumer behavior, internal audit and finance roles. This category also includes professional fees, depreciation and amortization on non-operating assets. The components of selling, general and administrative expenses were as follows for the years ended December 31:
| | | | | | | | | | | | | |
| | | For the Years Ended December 31, | |
| (in thousands) | | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | | | | | |
| Compensation and Benefits | | $ | 19,116 | | | $ | 4,096 | | | $ | 6,208 | |
| Professional Services | | | 8,026 | | | | 10,252 | | | | 3,270 | |
| Occupancy Related Costs | | | 12,154 | | | | 8,456 | | | | 8,125 | |
| Amortization of Intangible Assets | | | 4,891 | | | | 2,672 | | | | 2,554 | |
| Goodwill Impairment | | | 2,816 | | | | — | | | | — | |
| Other | | | 10,349 | | | | 13,997 | | | | 7,931 | |
| | | | | | | | | | |
| | | $ | 57,352 | | | $ | 39,473 | | | $ | 28,088 | |
| | | | | | | | | | |
Compensation and Benefits has increased in 2010 primarily as a result of the cost of being a separate public company, the need to have separate support functions such as accounting, legal and human resources, the reclassification of certain executive and marketing related compensation costs from Cost of Revenues to Selling, General and Administrative Expenses and increased equity compensation for senior executives.
Other in 2009 includes $1.4 million relating to a litigation settlement (see Note 17).
- 68 -
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements(continued)
13. OTHER INCOME (EXPENSE), NET
Other Income (Expense) consists of the following:
| | | | | | | | | | | | | |
| | | For the Years Ended December 31, | |
| (in thousands) | | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | | | | | |
| Interest Income | | $ | 31 | | | $ | 16 | | | $ | 16 | |
| Interest Expense | | | (119 | ) | | | (1,660 | ) | | | (2,607 | ) |
| Change in Fair Value of Put Option | | | 557 | | | | — | | | | — | |
| Other, net | | | 335 | | | | 2,678 | | | | (35 | ) |
| | | | | | | | | | |
| | | $ | 804 | | | $ | 1,034 | | | $ | (2,626 | ) |
| | | | | | | | | | |
Through the date of Separation, Interest Expense included an interest charge from Ocwen which represented an allocation of Ocwen’s total interest expense calculated based on our assets in comparison to Ocwen’s total assets. This charge was $1.3 million and $2.3 million for the years ending December 31, 2009 and 2008, respectively. Subsequent to the date of Separation, we are no longer subject to the interest charge from Ocwen.
Other, net in 2009 includes $2.3 million of income relating to a litigation settlement (see Note 17).
14. INCOME TAXES
The income tax (benefit) provision consists of the following:
| | | | | | | | | | | | | |
| | | For the Years Ended December 31, | |
| (in thousands) | | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | | | | | |
| Current: | | | | | | | | | | | | |
| Domestic — Luxembourg | | $ | (1,031 | ) | | $ | 4,827 | | | $ | 4 | |
| Foreign — U.S. Federal | | | — | | | | 8,321 | | | | 202 | |
| Foreign — U.S. State | | | 561 | | | | — | | | | (379 | ) |
| Foreign — Non U.S. | | | 1,186 | | | | 26 | | | | 736 | |
| | | | | | | | | | |
| | | $ | 716 | | | $ | 13,174 | | | $ | 563 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Deferred: | | | | | | | | | | | | |
| Domestic — Luxembourg | | $ | 395 | | | $ | (107 | ) | | $ | — | |
| Foreign — U.S. Federal | | | (1,014 | ) | | | (1,581 | ) | | | (102 | ) |
| Foreign — U.S. State | | | (68 | ) | | | (66 | ) | | | 1,299 | |
| Foreign — Non U.S. | | | (432 | ) | | | 185 | | | | — | |
| | | | | | | | | | |
| | | | (1,119 | ) | | | (1,569 | ) | | | 1,197 | |
| | | | | | | | | | |
| Benefit Applied to Reduce Goodwill | | | | | | | | | | | 3,622 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Total | | $ | (403 | ) | | $ | 11,605 | | | $ | 5,382 | |
| | | | | | | | | | |
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements(continued)
We received a favorable ruling in June 2010 regarding the treatment of certain intangibles that exist for purposes of determining the Company’s taxable income. The ruling is retroactive to the Separation Date. As a result of the ruling, the Company recognized a $3.4 million credit attributable to 2009 in the second quarter 2010. The impact of this is included above as a component of the current Luxembourg tax benefit. This ruling did not have a material impact on our deferred tax assets or liabilities. Income tax computed by applying the Luxembourg statutory income tax rate of 28.6% differs from income tax computed at the effective tax rate primarily because of the effect of the favorable tax ruling as well as differing tax rates in multiple jurisdictions, including losses recognized in our US operations.
The Company accounts for certain income and expense items differently for financial purposes and income tax purposes. We recognize deferred income tax assets and liabilities for these differences between the financial reporting basis and the tax basis of our assets and liabilities as well as expected benefits of utilizing net operating loss and credit carryforwards. We measure deferred income tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which we expect to recover or settle those temporary differences. A summary of the tax effects of the temporary differences is as follows:
| | | | | | | | | |
| | | December 31, | |
| (in thousands) | | 2010 | | | 2009 | |
| | | | | | | | | |
Current Deferred Tax Assets: | | | | | | | | |
| Allowance for Doubtful Accounts and Other Reserves | | $ | 143 | | | $ | 1,074 | |
| Accrued Expenses | | | 807 | | | | 751 | |
Current Deferred Tax Liabilities: | | | | | | | | |
| Prepaid Expense | | | (399 | ) | | | (279 | ) |
| | | | | | | |
Current Deferred Tax Asset, Net: | | $ | 551 | | | $ | 1,546 | |
| | | | | | | |
| | | | | | | | | |
Non-current Deferred Tax Assets: | | | | | | | | |
| Non Operating Loss Carryforwards — U.S. Federal | | | 8,891 | | | | 6,644 | |
| Non Operating Loss Carryforwards — U.S. State | | | 2,058 | | | | 1,623 | |
| Depreciation | | | 58 | | | | 1,680 | |
| Non-U.S. Deferred Tax Asset | | | 916 | | | | 692 | |
| Other | | | 416 | | | | 193 | |
Non-current Deferred Tax Liabilities: | | | | | | | | |
| Intangible Assets | | | (9,258 | ) | | | (11,013 | ) |
| U.S. State Taxes | | | — | | | | (1,068 | ) |
| | | | | | | |
| | | | 3,081 | | | | (1,249 | ) |
| Valuation Allowance | | | (1,875 | ) | | | (1,520 | ) |
| | | | | | | |
Non-current Deferred Tax Asset (Liability), net | | $ | 1,206 | | | $ | (2,769 | ) |
| | | | | | | |
Net Deferred Tax Asset (Liability) | | $ | 1,757 | | | $ | (1,223 | ) |
| | | | | | | |
A valuation allowance is provided when it is deemed more-likely-than-not that some portion or all of a deferred tax asset will not be realized. In determining whether a valuation allowance is needed we considered estimates of future taxable income, future reversals of temporary differences, tax character and the impact of tax planning strategies that can be implemented if warranted. As of December 31, 2010, we provided a valuation allowance of $1.9 million related to certain state operating losses. This represents an increase of $0.3 million compared to the prior year decrease of $0.9 million. The increase in valuation allowance during 2010 relates to additional state losses generated in the current year. The decrease in 2009 is related to changes in effective tax rates.
We have not provided Luxembourg deferred taxes on cumulative earnings of non-Luxembourg affiliates as these earnings have been indefinitely reinvested. The earnings relate to ongoing operations and at December 31, 2010, were $1.4 million.
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements(continued)
As of December 31, 2010, the Company had a deferred tax asset of $10.9 million relating to U.S. Federal and State net operating losses. Of this amount, $1.9 million relating to state net operating losses were subject to a valuation allowance. The gross amount of net operating losses available for carryover to future years approximates $27.5 million. Of this amount $19.0 million relates to NCI for periods prior to our acquisition and is subject to Section 382 of the Internal Revenue Code which limits their use to approximately $1.3 million per year. These losses are scheduled to expire between the years 2022 and 2029.
The separation from Ocwen and relocation of certain operations to Luxembourg resulted in changes to deferred tax balances which include amounts charged to stockholders’ equity of approximately $1.0 million. For periods prior to the Separation Date, we are included in Ocwen’s tax returns. Our responsibility with respect to these periods is governed by a tax sharing agreement. In accordance with this agreement, U.S. income taxes arewere allocated as if they had been calculated on a separate company basis except that benefits for any net operating losses will be provided to the extent such loss is utilized in the consolidated U.S. federal tax return. The provision for income taxes prior to the Separation Date has been determined on a pro-forma basis as if we had filed separate income taxes under our current structure for the periods presented.
The income tax provision consists of the following:
| | | | | | | | | | | | | | | | | |
| | | For the Years Ended December 31, | | | | |
| | | 2009 | | 2008 | | 2007 | | | | |
| Current: | | | | | | | | | | | | | | | | |
| Domestic — Luxembourg | | $ | 4,827 | | | $ | 4 | | | $ | 401 | | | | | |
| Foreign — U.S. Federal | | | 8,321 | | | | 202 | | | | 1,567 | | | | | |
| Foreign — U.S. State | | | — | | | | (379 | ) | | | (89 | ) | | | | |
| Foreign — Non U.S. | | | 26 | | | | 736 | | | | 133 | | | | | |
| | | |
| | | | 13,174 | | | | 563 | | | | 2,012 | | | | | |
| | | |
| | | | | �� | | | | | | | | | | | | |
| Deferred: | | | | | | | | | | | | | | | | |
| Domestic — Luxembourg | | | (107 | ) | | | — | | | | — | | | | | |
| Foreign — U.S. Federal | | | (1,581 | ) | | | (102 | ) | | | (664 | ) | | | | |
| Foreign — U.S. State | | | (66 | ) | | | 1,299 | | | | 136 | | | | | |
| Foreign — Non U.S. | | | 185 | | | | — | | | | (1,056 | ) | | | | |
| | | |
| | | | (1,569 | ) | | | 1,197 | | | | (1,584 | ) | | | | |
| | | |
| Benefit Applied to Reduce Goodwill | | | | | | | 3,622 | | | | 1,136 | | | | | |
| | | |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 11,605 | | | $ | 5,382 | | | $ | 1,564 | | | | | |
| | | |
58
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements (continued)
Deferred income taxes reflect the net tax effects of temporary differences that may exist between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes using enacted tax rates in effect for the year in which the differences are expected to reverse. A summary of the tax effects of the temporary differences is as follows:
| | | | | | | | | |
| | | December 31, |
| (in thousands) | | 2009 | | 2008 |
| | | | | | | | | |
Current Deferred Tax Assets: | | | | | | | | |
| Allowance for Doubtful Accounts and Other Reserves | | $ | 1,074 | | | $ | 349 | |
| Accrued Expenses | | | 751 | | | | 561 | |
Current Deferred Tax Liabilities: | | | | | | | | |
| Prepaid Expense | | | (279 | ) | | | (642 | ) |
| | | |
| | | | | | | | | |
Current Deferred Tax Asset, Net: | | $ | 1,546 | | | $ | 268 | |
| | | |
| | | | | | | | | |
Non-current Deferred Tax Assets: | | | | | | | | |
| Non Operating Loss Carryforwards — U.S. Federal | | $ | 6,644 | | | $ | 6,908 | |
| Non Operating Loss Carryforwards — U.S. State | | | 1,623 | | | | 1,964 | |
| Depreciation | | | 1,680 | | | | 1,684 | |
| Non-U.S. Deferred Tax Asset | | | 692 | | | | 1,056 | |
| U.S. State Taxes | | | | | | | 103 | |
| Other | | | 193 | | | | — | |
Non-current Deferred Tax Liabilities: | | | | | | | | |
| Intangible assets | | | (11,013 | ) | | | (11,986 | ) |
| Restricted stock | | | — | | | | (474 | ) |
| U.S. State Taxes | | | (1,068 | ) | | | — | |
| Other | | | — | | | | (63 | ) |
| | | |
| | | | (1,249 | ) | | | (808 | ) |
| Valuation Allowance | | | (1,520 | ) | | | (1,862 | ) |
| | | |
| | | | | | | | | |
Non-current Deferred Tax Liabilities, net | | $ | (2,769 | ) | | | (2,670 | ) |
| | | |
Net Deferred Tax Liability | | $ | (1,223 | ) | | | (2,402 | ) |
| | | |
We conduct periodic evaluations of positive and negative evidence to determine whether it is more likely than not that the deferred tax asset can be realized in future periods. Among the factors considered in this evaluation are estimates of future taxable income, future reversals of temporary differences, tax character and the impact of tax planning strategies that can be implemented if warranted. As a result of this evaluation, we included in the tax provision a decrease of $0.3 million and an increase of $1.3 million to the valuation allowance for 2009 and 2008, respectively, related to certain state net operating losses. The decrease in 2009 is related to changes in effective tax rates. The increase in 2008 relates to net operating losses that we no longer consideredDistribution was intended to be more likely than not to be realized in future periods.
We have not provided Luxembourg deferred taxes on cumulative earnings of non-Luxembourg affiliates as these earnings have been reinvested indefinitely. The earnings relate to ongoing operations and at December 31, 2009, were $1.4 million.
As of December 31, 2009, the Company had a deferred tax asset of approximately $6.6 million relating to U.S. federal net operating losses. The gross amount of net operating losses available for carryover to future years approximates $19.0 million. These losses relate to NCI for periods prior to our acquisition and are subject totax-free transaction under Section 382355 of the Internal Revenue Code which limits their use(the “Code”). However, Ocwen recognized, and paid tax on, substantially all of the gain it has in the assets that comprise Altisource as a result of the restructuring. To the extent Ocwen does recognize tax under Section 355 of the Code, Altisource has agreed to approximately $1.3 million per year. These losses are scheduledindemnify Ocwen. In addition, we have agreed to expire betweenindemnify Ocwen should the years 2022 and 2028.
The separation from Ocwen and relocationexpected tax treatments not be upheld upon review or audit to the extent related to our operating results. As of certain operations to Luxembourg resulted in changes to deferred tax balances, which include amounts charged to shareholder’s equity of approximately $1.0 million.
59
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements (continued)December 31, 2010, the Company does not anticipate a material obligation under this indemnity.
The following table reconciles the Income Tax Provision to the Luxembourg income tax rate:
| | | | | | | | | | | | | |
| | | For the Years Ended December 31, |
| | | 2009 | | 2008 | | 2007 |
| |
| Statutory Tax Rate | | | 28.6 | % | | | 29.6 | % | | $ | 29.6 | % |
| Differential of Tax Rates in Non-Luxembourg Jurisdictions | | | 2.6 | | | | 11.0 | | | | (0.8 | ) |
| Valuation Allowances | | | (0.9 | ) | | | 9.1 | | | | 1.8 | |
| Indefinite Deferral on Earnings of Non- U.S. Affiliates | | | — | | | | (12.8 | ) | | | (11.7 | ) |
| Indefinite Deferral on Earnings of Non- Luxembourg Affiliates | | | 0.6 | | | | — | | | | — | |
| | | |
| | | | 30.9 | % | | | 36.9 | % | | | 18.9 | % |
| | | |
| | | | | | | | | | | | | |
| | | For the Years Ended December 31, | |
| | | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | | | | | |
| Statutory Tax Rate | | | 28.6 | % | | | 28.6 | % | | | 29.6 | % |
| Foreign Rate Differential | | | (23.0 | ) | | | 2.6 | | | | 11.0 | |
| Tax Adjustment for Retroactive Ruling | | | (7.0 | ) | | | — | | | | — | |
| Change in Valuation Allowances | | | 0.5 | | | | (0.9 | ) | | | 9.1 | |
| State Tax Expense | | | 0.3 | | | | — | | | | — | |
| Indefinite Deferral on Earnings of Non-U.S. Affiliates | | | — | | | | — | | | | (12.8 | ) |
| Indefinite Deferral on Earnings of Non-Luxembourg Affiliates | | | — | | | | 0.6 | | | | — | |
| Other | | | (0.2 | ) | | | — | | | | — | |
| | | | | | | | | | |
| | | | (0.8 | )% | | | 30.9 | % | | | 36.9 | % |
| | | | | | | | | | |
We adopted the provisions ofThe Company follows ASC Topic 740 thatwhich clarifies the accounting and disclosure for uncertainty in tax positions, as defined, on January 1, 2007.positions. We analyzed our tax filing positions in all of the domestic and foreign tax jurisdictions where we are required to file income tax returns as well as for all open tax years in these jurisdictions. Based on this review, no reserves for uncertain income tax positions were required to have been recorded pursuant to ASC Topic 740. In addition, we determined that we did not need to record a cumulative effect adjustment related to the adoption of ASC Topic 740.
We recognize accrued interest and penalties related to uncertain tax positions in Selling, General and Administrative Expenses in the Statements of Operations. As of December 31, 2010 and 2009, we did not have a liability recorded for payment of interest and penalties associated with uncertain tax positions.
- 71 -
12.ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements(continued)
15. EARNINGS PER SHARE
Basic earnings per share (“EPS”) is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the assumed conversion of all dilutive securities. On August 10, 2009, the Distribution by Ocwen was completed to the Ocwen stockholders of one share of Altisource common stock for every 3 shares of Ocwen common stock held as of August 4, 2009. In addition, holders of Ocwen’s 3.25% Contingent Convertible Unsecured Senior Notes due 2024 received one share of Altisource common stock deemed held on an as if converted basis. For such notes, the conversion ratio of 82.1693 shares of Ocwen common stock for every $1,000 in aggregate principal amount of notes held on August 4, 2009 was calculated first and then we applied the distribution ratio of one share of Altisource common stock for every three shares of Ocwen common stock on an as converted basis to determine the number of shares each note holder received.
As a result on August 10, 2009, the Company had 24,050,34024.1 million shares of common stock outstanding and this share amount is being utilized for the calculation of basic EPS for all periods presented prior to the date of the Distribution.
For all periods prior to the date of Distribution, the same number of shares is being used for diluted EPS as for basic EPS as no common stock of Altisource was traded prior to August 10, 2009 and no Altisource equity awards were outstanding for the prior period.
Basic and diluted earnings per share for the years ended December 31, 2010, 2009 2008 and 20072008 are calculated as follows:
| | | | | | | | | | | | | |
| | | For the Years Ended December 31, |
| (dollars in thousands, except per share amounts) | | 2009 | | 2008 | | 2007 |
| Net Income | | $ | 25,971 | | | $ | 9,219 | | | $ | 6,715 | |
| | | | | | | | | | | | | |
| Weighted-Average Common Shares Outstanding, Basic | | | 24,061,912 | | | | 24,050,340 | | | | 24,050,340 | |
60
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements (continued)| | | | | | | | | | | | | |
| | | For the Years Ended December 31, | |
| (in thousands, except per share amounts) | | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | | | | | |
| Net Income | | $ | 49,271 | | | $ | 25,971 | | | $ | 9,219 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Weighted-Average Common Shares Outstanding, Basic | | | 25,083 | | | | 24,062 | | | | 24,050 | |
| Dilutive Effect of Stock Options | | | 1,176 | | | | 196 | | | | — | |
| Dilutive Effect of Restricted Shares | | | — | | | | 3 | | | | — | |
| | | | | | | | | | |
| Weighted-Average Common Shares Outstanding, Diluted | | | 26,259 | | | | 24,261 | | | | 24,050 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Earnings Per Share | | | | | | | | | | | | |
| Basic | | $ | 1.96 | | | $ | 1.08 | | | $ | 0.38 | |
| | | | | | | | | | |
| Diluted | | $ | 1.88 | | | $ | 1.07 | | | $ | 0.38 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| | | For the Years Ended December 31, |
| (dollars in thousands, except per share amounts) | | 2009 | | 2008 | | 2007 |
| Dilutive Effect of Stock Options | | | 195,673 | | | | — | | | | — | |
| Dilutive Effect of Restricted Shares | | | 3,066 | | | | — | | | | — | |
| | | |
| Weighted-Average Common Shares Outstanding, Diluted | | | 24,260,651 | | | | 24,050,340 | | | | 24,050,340 | |
| | | |
| | | | | | | | | | | | | |
| Earnings Per Share | | | | | | | | | | | | |
| Basic | | $ | 1.08 | | | $ | 0.38 | | | $ | 0.28 | |
| | | |
| Diluted | | $ | 1.07 | | | $ | 0.38 | | | $ | 0.28 | |
| | | |
An averageA total of 0.1 million and 36,666 options that were anti-dilutive have been excluded from the computation of diluted EPS for the years ended December 31, 2009.2010 and 2009, respectively. These options were anti-dilutive because their exercise price was greater than the average market price of our stock. Also excluded from the computation of diluted EPS for the years ended December 31, 2010 and 2009 are 680,0030.7 million options granted for shares that are issuable upon the achievement of certain market and performance criteria related to our stock price and an annualized rate of return to investors that has not been met at this pointpoint.
- 72 -
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements(continued)
13.16. STOCKHOLDERS’ EQUITY AND EQUITY-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, 2009,2010, we had authorized 100,000,000100.0 million shares. At December 31, 2009,2010, we had 24,144,91424.9 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.
Treasury Stock
On May 19, 2010, our shareholders authorized us to purchase up to 3.8 million shares of our common stock in the open market. Through December 31, 2010, we purchased 0.7 million shares of our common stock on the open market at an average price of $27.11, leaving 3.1 million shares still available for purchase.
Equity Incentive Plan
Prior to Separation
Prior to the Separation, our employees participated in Ocwen’s stock incentive plans. As a result, these financial statements include an allocation of stock compensation expense from Ocwen for the periods presented up to August 9, 2010.2009. This allocation includes all stock compensation recorded by Ocwen for the employees within our segments and an allocation for certain corporate employees and directors.
At the Separation, all holders of Ocwen stock awards, including employees that remained with Ocwen, received the following:
• | | a new Altisource stock award to acquire the number of shares of Altisource common stock equal to the product of (a) the number of Ocwen stock awards held on the Separation date and (b) the distribution ratio of one share of Altisource common stock for every three shares of Ocwen common stock; and |
|
• | | an adjusted Ocwen award for the same number of shares of Ocwen common stock with a reduced exercise price for stock option awards. Each company will record compensation expense for the stock awards held by its employees even though some of the awards relate to the common stock of the other company. As a result of the Separation, we did not record any incremental compensation expense. |
Post-Separation
The Company’s 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, the Company may grant up to 6.7 million share-based awards to officers, directors, key employees and certain Ocwen employees. As of December 31, 2009, 6.62010, 2.5 million share-based
61
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements (continued)
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.
Equity-Based Compensation
We provide stock-based awards as a form of compensation for 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, including the allocation discussed above of $0.3$3.1 million, $0.3 million and $0.4$0.3 million for the years ended December 31, 2010, 2009 2008 and 2007,2008, respectively. The compensation expense is included in Selling, General and Administrative Expenses in the accompany Statements of Operations.
Below is a summary of the different types of stock-based awards issued under our stock plans:
Stock Options
Service-based Options.These options are granted at fair market value on the date of grant. The options generally vest over four or five years with equal annual cliff-vesting and expire on the earlier of 10 years after the date of grant or 3 months after termination of service. A total of 1.41.2 million service-based awards were outstanding at December 31, 2009.2010.
- 73 -
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements(continued)
Market-based Options. These optionsoption grants have two components each of which begin to vest in equal increments over four years commencing upon the achievement of certain performance criteria relatedcriteria. The first component, which we refer to our stock price and the annualized rateinternally as “ordinary performance” grants, consists of return to investors. Two-thirdstwo-thirds of the market-based options would begingrant and begins 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, which we refer to internally as “extraordinary performance” grants, would begin to vest over three years if the stock price realizes a compounded annual gain of at least 25% gain,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 criterion and the remaining 75% in three equal annual installments.
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:
| | | | | | | | | | | | | | | | | | |
| | | | 2010 | | 2009 | |
| | | | | | | | | | | Black-Scholes | | Binomial | | Black-Scholes | | Binomial | |
| | | Black-Scholes | | Binomial | |
| Risk-free Interest Rate | | | 2.64 | % | | | 0.50 — 3.86 | % | | | 1.50 – 3.20 | % | | | 0.02 – 3.66 | % | | | 2.64 | % | | | 0.50 – 3.86 | % |
| Expected Stock Price Volatility | | | 39 | % | | | 38 — 46 | % | | | 47 – 50 | % | | | 51 – 52 | % | | | 39 | % | | | 38 – 46 | % |
| Expected Dividend Yield | | — | | — | | | — | | — | | — | | — | |
| Expected Option Life (in years) | | 5 | | — | | | 6.25 – 7 | | — | | 5 | | — | |
| Contractual Life (in years) | | — | | 10 | | | — | | 13 | | — | | 10 | |
| Fair Value | | $ | 5.35 | | $4.54 and $5.33 | | | $ | 11.95 – $13.24 | | $ | 10.05 – $12.42 | | $ | 5.35 | | $ | 4.54 and $5.33 | |
The following table summarizes the weighted-average fair value of stock options granted, and the total intrinsic value of stock options exercised:
| | | | | | | | | | | | | | |
| | | | December 31 | |
| | | | | | | 2010 | | 2009 | |
| | | December 31, 2009 | |
| Weighted-Average Fair Value at Date of Grant | | $ | 5.14 | | | $ | 18.18 | | $ | 5.14 | |
| Intrinsic Value of Options Exercised | | $ | 344,623 | | | (in thousands) | | $ | 7,530 | | $ | 345 | |
| Fair Value of Options Vested | | $ | 441,213 | | | (in thousands) | | $ | 926 | | $ | 441 | |
Stock-based compensation expense is recorded, net of estimated forfeitures which rangeforfeiture rates ranging from 1% to 3% per year.. The 2010 and 2009 compensation expense included $0.5 million and $0.1 million, respectively relating to certain performance based options for which the performance and market-based criteria for vesting were met during 2010 and 2009.
As of December 31, 2010, estimated unrecognized compensation costs related to share-based payments amounted to $8.5 million which we expect to recognize over a weighted-average remaining requisite service period of approximately 3.4 years.
62
- 74 -
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements(continued)
As of December 31, 2009, estimated unrecognized compensation costs related to share-based payments amounted to $1.7 million which we expect to recognize over a weighted-average remaining requisite service period of approximately 2.7 years.
The following table summarizes activity of our stock options:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Weighted | | | | | Weighted | | Aggregate | |
| | | Weighted | | Average | | Aggregate | | | Weighted | | Average | | Intrinsic | |
| | | Average | | Contractual | | Intrinsic | | | Average | | Contractual | | Value | |
| | | Number of | | Exercise | | Term | | Value | | | Number of | | Exercise | | Term | | (in | |
| | | Options | | Price | | (in years) | | (in thousands) | | | Options | | Price | | (in years) | | thousands) | |
| Outstanding at December 31, 2008 | | — | | $ | — | | |
| Issued at Separation | | 3,115,173 | | 9.76 | | |
| | | |
| Outstanding at December 31, 2009 | | | 3,190,639 | | $ | 9.90 | |
| Granted | | 146,666 | | 14.15 | | | 927,501 | | 23.58 | |
| Exercised | | | (70,579 | ) | | 12.58 | | | | (422,485 | ) | | 9.43 | |
| Forfeited | | | (621 | ) | | 12.78 | | | | (244,042 | ) | | 11.19 | |
| | | | | | | | | |
| Outstanding at December 31, 2009 | | 3,190,639 | | $ | 9.90 | | 7.5 | | $ | 35,374 | | |
| Outstanding at December 31, 2010 | | | 3,451,613 | | $ | 13.46 | | 7.3 | | $ | 52,641 | |
| | | | | | | | | | | | | | | |
| | | |
| Exercisable at December 31, 2009 | | 1,148,949 | | $ | 9.82 | | 5.4 | | $ | 12,831 | | |
| Exercisable at December 31, 2010 | | | 1,333,283 | | $ | 10.00 | | 5.8 | | $ | 24,945 | |
| | | | | | | | | | | | | | | |
The following table summarizes information about sharestock options outstanding and exercisable at December 31, 2009:2010:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Options Outstanding | | Options Exercisable |
| | | | | | | Weighted | | Weighted | | | | | | Weighted | | Weighted |
| | | | | | | Average | | Average | | | | | | Average | | Average |
| Exercise | | | | | | Remaining | | Exercise | | | | | | Remaining | | Exercise |
| Price Range | | Number | | Contractual Life | | Price | | Number | | Contractual Life | | Price |
| $1.00 - $3.00 | | | 26,109 | | | | 3.1 | | | $ | 2.23 | | | | 26,109 | | | | 3.1 | | | $ | 2.23 | |
| $3.01 - $6.00 | | | 117,173 | | | | 2.0 | | | | 4.31 | | | | 117,173 | | | | 2.0 | | | | 4.31 | |
| $6.01 - $9.00 | | | 160,933 | | | | 2.0 | | | | 7.66 | | | | 160,933 | | | | 2.0 | | | | 7.66 | |
$9.01 - $12.00(a) | | | 2,439,736 | | | | 8.3 | | | | 9.62 | | | | 568,972 | | | | 7.8 | | | | 9.80 | |
$12.01 - $15.00(a) | | | 446,688 | | | | 6.3 | | | | 14.17 | | | | 275,762 | | | | 4.4 | | | | 14.18 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 3,190,639 | | | | | | | | | | | | 1,148,949 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Options Outstanding | | �� | Options Exercisable | |
| | | | | | | Weighted | | | | | | | | | | | Weighted | | | | |
| | | | | | | Average | | | Weighted | | | | | | | Average | | | Weighted | |
| | | | | | | Remaining | | | Average | | | | | | | Remaining | | | Average | |
| Exercise Price | | | | | | Contractual | | | Exercise | | | | | | | Contractual | | | Exercise | |
| Range | | Number | | | Life | | | Price | | | Number | | | Life | | | Price | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| $2.00 – $6.00 | | | 67,037 | | | | 2.09 | | | $ | 2.95 | | | | 67,037 | | | | 2.1 | | | $ | 2.95 | |
| $6.01 – $9.00 | | | 115,433 | | | | 1.28 | | | | 7.50 | | | | 115,433 | | | | 1.3 | | | | 7.50 | |
| $9.01 – $12.00 | | | 2,070,835 | | | | 7.4 | | | | 9.61 | | | | 904,588 | | | | 7.2 | | | | 9.69 | |
$12.01 – $15.00(a) | | | 303,308 | | | | 4.7 | | | | 14.21 | | | | 246,225 | | | | 3.7 | | | | 14.22 | |
$15.01 – $18.00(a) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
$18.01 – $21.00(a) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
$21.01 – $24.00(a) | | | 375,000 | | | | 9.1 | | | | 22.01 | | | | — | | | | — | | | | — | |
$24.01 – $27.00(a) | | | 520,000 | | | | 9.4 | | | | 24.86 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | 3,451,613 | | | | | | | | | | | | 1,333,283 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | |
| (a) | | These options contain market-based components as described above. All other options are time-based awards. |
63
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements(continued)
The following table summarizes the market prices necessary in order for the market performance options to begin to vest:
| | | | | | | | | |
| (in thousands, except share prices) | | Market Based Options | |
| | | Ordinary | | | Extraordinary | |
| Vesting Price | | Performance | | | Performance | |
| | | | | | | | | |
| $40.00 – $45.00 | | | 188 | | | | 8 | |
| $45.01 – $50.00 | | | 250 | | | | — | |
| $50.01 – $55.00 | | | 10 | | | | — | |
| $65.01 – $70.00 | | | — | | | | 94 | |
| $70.01 – $75.00 | | | — | | | | 125 | |
| $75.01 – $80.00 | | | — | | | | 5 | |
| | | | | | | |
| | | | 448 | | | | 232 | |
| | | | | | | |
| | | | | | | | | |
| Weighted Average Share Price | | $ | 47.33 | | | $ | 69.97 | |
| | | | | | | |
Restricted Shares
Activity with respect to restricted shares was as follows for the years ended December 31:
| | | | | | | | | | | | | | | | | |
| | | Weighted | | Weighted | |
| | | Average | | Average | |
| | | Grant Date | | Restricted | | Grant Date | |
| | | Restricted Shares | | Fair Value | | Shares | | Fair Value | |
| Outstanding at December 31, 2008 | | — | | $ | — | | |
| | | |
| Outstanding at December 31, 2009 | | | 3,236 | | $ | 18.00 | |
| Issued at Separation | | 3,294 | | 18.00 | | | — | | — | |
| Vested | | — | | — | | | | (3,236 | ) | | 18.00 | |
| Forfeited | | | (58 | ) | | 13.00 | | | — | | — | |
| Treasury stock repurchased | | | — | |
| | | | | | | |
| Outstanding at December 31, 2009 | | 3,236 | | $ | 18.00 | | |
| Outstanding at December 31, 2010 | | | — | |
| | | | | | | |
14.17. COMMITMENTS AND CONTINGENCIES
Litigation
Noble Systems Corp.We have filed suit against a former equipment vendor seeking revocation of acceptance of the equipment and damages for breaches of implied warranties and related torts. Separately, we arewere a party to a pending arbitration brought by the vendor seeking payment of annual support and maintenance fees for periods subsequent to when we returned the equipment to the vendor. The vendor also is requestingrequested payment of discounts it provided to us purportedly to be a marketing partner for the vendor. On March 2, 2010, we were notified that the arbitrator ruled in a binding opinion that we owed $1.4 million to Noble Systems Corp, which has beenwas accrued as of December 31, 2009, in the Financial Services segment.segment and was paid during 2010.
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements(continued)
Nationwide Inflection, LLC.In the first quarter of 2009, we received a complaint from Nationwide Inflection, LLC (“Inflection”) related to the release of escrow in connection with the June 2007 acquisition of NCI. Inflection claimed that it had not breached any representations and was entitled to recover all sums in escrow. We responded timely claiming that we had suffered losses in excess of the escrow as a result of breach of contract. Ultimately, during the third quarter of 2009, the parties agreed to settle all complaints which resulted in $2.3 million being released to Altisource and recognized as a gain in other income, net in the Statement of Operations. We also received $0.4 million related to interest received on the escrow and reimbursement for expenses incurred in connection with defending ourselves in lawsuits in existence at the time of the acquisition, with an additional $0.3 million in escrow available to cover future legal expenses incurred in the one remaining lawsuit that was subsequently resolved.
Altisource is subject to various other pending legal proceedings arising in the ordinary course of business. In our opinion, the resolution of the matter above and those other proceedings will not have a material effect on our financial condition, results of operations or cash flows.
Taxation
The Distribution was intended to be a tax-free transaction under Section 355 of the Internal Revenue Code (the “Code”). However, Ocwen recognized, and will pay tax on, substantially all of the gain it has in the assets that comprise Altisource as a result of the restructuring. To the extent Ocwen does recognize tax under Section 355 of the Code, Altisource has agreed to indemnify Ocwen. In addition, we have agreed to indemnify Ocwen should the expected tax treatments not be upheld upon review or audit to the extent related to our operating results. As of December 31, 2009, the Company does not believe it has a material obligation under this indemnity.
64
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements (continued)
Leases
The Company leases certain premises and equipment under various capital and operating lease agreements. Future minimum lease payments at December 31, 20092010 under non-cancelable capital and operating leases with an original term exceeding one year are as follows:
| | | | | | | | | | |
| | | | | | | | | | | Operating | |
| | | Capital Lease | | Operating
Lease | | | Capital Lease | | Lease | |
| (in thousands) | | Obligations | | Obligations | | | Obligations | | Obligations | |
| 2010 | | $ | 562 | | $ | 4,110 | | |
| | | |
| 2011 | | 96 | | 3,458 | | | $ | 738 | | $ | 4,867 | |
| 2012 | | 32 | | 1,957 | | | 619 | | 3,408 | |
| 2013 | | — | | 278 | | | 258 | | 1,695 | |
| 2014 | | — | | 188 | | | — | | 762 | |
| 2015 | | | — | | 210 | |
| | | | | | | | |
| | | 690 | | $ | 9,991 | | | 1,615 | | $ | 10,942 | |
| | | | | | | |
| Less: Amounts Representing Interest | | | (26 | ) | | | | (84 | ) | |
| | | | | | | |
| Capital Lease Obligations | | 664 | | | 1,531 | |
| Less: Current Portion Under Capital Lease Obligation | | | (536 | ) | | | | (679 | ) | |
| | | | | | | |
| Long-term Portion Under Capital Lease Obligation | | $ | 128 | | | $ | 852 | |
| | | | | | | |
Total operating lease expense, net of sublease income, was $7.8 million, $4.2 million $3.9 million and $2.9$3.9 million for the years ended December 31, 2010, 2009, 2008, and 2007,2008, respectively. The operating leases generally relate to office locations and reflect customary lease terms which range from 1 to 7 years in duration.
15. COST OF REVENUE
Cost of Revenue principally includes: (i) payroll and employee benefits associated with personnel employed in customer service roles; (ii) fees paid to external providers of valuation, title, due diligence and other outsourcing services, as well as printing and mailing costs for correspondence with debtors; (iii) technology and telephone expenses, as well as depreciation and amortization of operating assets and (iv) reimbursable expenses. Costs of revenue consists of the following:
| | | | | | | | | | | | | |
| | | For the Years Ended December 31, |
| (in thousands) | | 2009 | | 2008 | | 2007 |
| |
| Compensation and Benefits | | $ | 51,251 | | | $ | 59,311 | | | $ | 44,886 | |
| Outside Fees and Services | | | 59,103 | | | | 35,825 | | | | 32,830 | |
| Technology and Communications | | | 16,443 | | | | 19,912 | | | | 19,238 | |
| | | |
| | | $ | 126,797 | | | $ | 115,048 | | | $ | 96,954 | |
| | | |
65
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements (continued)
16. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, General, and Administrative Expenses include payroll, employee benefits, occupancy and other costs associated with personnel employed in executive, sales, marketing, human resources and finance roles. Selling, General, and Administrative Expenses also includes professional fees, depreciation on non-operating assets and amortization of Intangible Assets with definite lives. Selling, General and Administrative Expenses consists of the following:
| | | | | | | | | | | | | |
| | | For the Years Ended December 31, |
| (in thousands) | | 2009 | | 2008 | | 2007 |
| Occupancy and Equipment | | $ | 8,456 | | | $ | 8,125 | | | $ | 7,999 | |
| Corporate Allocations | | | 4,096 | | | | 6,208 | | | | 8,864 | |
| Professional Services | | | 10,252 | | | | 3,270 | | | | 3,121 | |
| Other | | | 16,669 | | | | 10,485 | | | | 7,946 | |
| | | |
| | | $ | 39,473 | | | $ | 28,088 | | | $ | 27,930 | |
| | | |
Other in 2009 includes $1.4 million relating to a litigation settlement (see Note 14).
17. OTHER INCOME (EXPENSE), NET
Other Income (Expense) consists of the following:
| | | | | | | | | | | | | |
| | | For the Years Ended December 31, |
| (in thousands) | | 2009 | | 2008 | | 2007 |
| Interest Income | | $ | 16 | | | $ | 16 | | | $ | 6 | |
| Interest Expense | | | (1,660 | ) | | | (2,607 | ) | | | (1,932 | ) |
| Other, net | | | 2,678 | | | | (35 | ) | | | 183 | |
| | | |
| | | $ | 1,034 | | | $ | (2,626 | ) | | $ | (1,743 | ) |
| | | |
Through the date of Separation, Interest Expense included an interest charge from Ocwen which represented an allocation of Ocwen’s total interest expense, calculated based on our assets in comparison to Ocwen’s total assets was $1.3 million, $2.3 million and $1.0 million for the years ending December 31, 2009, 2008 and 2007, respectively. Subsequent to the date of Separation, we are no longer subject to the interest charge from Ocwen.
Other, net in 2009 includes $2.3 million of income relating to a litigation settlement (see Note 14).
18. SEGMENT REPORTING
Our business segments reflect the internal reporting that we use to evaluate operating performance and to assess the allocation of our resources by our Chief Executive Officer.
Our segments are based upon our organizational structure which focuses primarily on the services offered.
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements(continued)
We classify our businesses into three reportable segments.Mortgage Servicesconsists of mortgage portfolio management services that span the mortgage lifecycle.Financial Services principally consists of unsecured asset recovery and customer relationship management.Technology ProductsServicesconsists of modular, comprehensive integrated technological solutions for loan servicing, vendor management and invoice presentment.
66
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidatedpresentment and Combined Consolidated Financial Statements (continued)
payment as well as providing infrastructure support. In addition, ourCorporate Items and Eliminationssegment prior to the Separation Date includes eliminations of transactions between the reporting segments as well as expenditures recognized by us related to the Separation. Subsequent to the Separation Date, in addition to the previously mentioned items, this segment also includes costs recognized by us related to corporate support functions such as finance, legal, human resources and human resources.consumer behavior.
Financial information for our segments is as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | For the Year Ended December 31, 2010 | |
| | | For the Year Ended December 31, 2009 | | Corporate | | | |
| | | Corporate Items and | | Consolidated | | Mortgage | | Financial | | Technology | | Items and | | Consolidated | |
| (in thousands) | | Mortgage Services | | Financial Services | | Technology Products | | Eliminations(1) | | Altisource | | Services | | Services | | Services | | Eliminations | | Altisource | |
| | | |
| Revenue | | $ | 103,098 | | $ | 64,434 | | $ | 47,453 | | $ | (12,173 | ) | | $ | 202,812 | | | $ | 204,771 | | $ | 59,979 | | $ | 52,013 | | $ | (15,385 | ) | | $ | 301,378 | |
| Cost of Revenue | | 60,735 | | 52,871 | | 24,477 | | | (11,286 | ) | | 126,797 | | | 124,485 | | 49,781 | | 28,909 | | | (14,116 | ) | | 189,059 | |
| | | | | | | | | | | | | | |
| Gross Profit | | 42,363 | | 11,563 | | 22,976 | | | (887 | ) | | 76,015 | | | 80,286 | | 10,198 | | 23,104 | | | (1,269 | ) | | 112,319 | |
| Selling, General and Administrative Expenses | | 5,625 | | 19,267 | | 4,731 | | 9,850 | | 39,473 | | | 14,890 | | 19,567 | | 4,985 | | 17,910 | | 57,352 | |
| | | | | | | | | | | | | | |
| Income (Loss) from Operations | | 36,738 | | | (7,704 | ) | | 18,245 | | | (10,737 | ) | | 36,542 | | | 65,396 | | | (9,369 | ) | | 18,119 | | | (19,179 | ) | | 54,967 | |
| Other income (expense), net | | 31 | | 1,324 | | | (319 | ) | | | (2 | ) | | 1,034 | | |
| Other Income (Expense), net | | | 781 | | | (50 | ) | | | (60 | ) | | 133 | | 804 | |
| | | | | | | | | | | | | | |
| Income (Loss) Before Income Taxes | | $ | 36,769 | | $ | (6,380 | ) | | $ | 17,926 | | $ | (10,739 | ) | | $ | 37,576 | | | $ | 66,177 | | $ | (9,419 | ) | | $ | 18,059 | | $ | (19,046 | ) | | $ | 55,771 | |
| | | | |
| | | |
| Depreciation | | $ | 48 | | $ | 2,402 | | $ | 2,906 | | $ | 76 | | $ | 5,432 | | |
| | | | |
| Amortization of Intangibles | | $ | — | | $ | 2,672 | | $ | — | | $ | — | | $ | 2,672 | | |
| | | | | | | | | | | | | | |
| | | |
| Transactions with Related Parties Included Above: | | |
| Revenue | | $ | 74,089 | | $ | 98 | | $ | 20,710 | | $ | — | | $ | 94,897 | | | $ | 135,655 | | $ | 166 | | $ | 19,167 | | $ | — | | $ | 154,988 | |
| | | | | | | | | | | | | | |
| Selling, General and Administrative Expenses | | $ | 2,712 | | $ | 467 | | $ | 1,517 | | $ | (388 | ) | | $ | 4,308 | | | $ | — | | $ | — | | $ | — | | $ | 1,056 | | $ | 1,056 | |
| | | | | | | | | | | | | | |
| Interest Expense | | $ | 30 | | $ | 1,029 | | $ | 231 | | $ | — | | $ | 1,290 | | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, 2009 | |
| | | | | | | | | | | | | | | Corporate | | | | |
| | | Mortgage | | | Financial | | | Technology | | | Items and | | | Consolidated | |
| (in thousands) | | Services | | | Services | | | Services | | | Eliminations | | | Altisource | |
| | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 103,098 | | | $ | 64,434 | | | $ | 47,453 | | | $ | (12,173 | ) | | $ | 202,812 | |
| Cost of Revenue | | | 60,735 | | | | 52,871 | | | | 24,477 | | | | (11,286 | ) | | | 126,797 | |
| | | | | | | | | | | | | | | | |
| Gross Profit | | | 42,363 | | | | 11,563 | | | | 22,976 | | | | (887 | ) | | | 76,015 | |
| Selling, General and Administrative Expenses | | | 5,625 | | | | 19,267 | | | | 4,731 | | | | 9,850 | | | | 39,473 | |
| | | | | | | | | | | | | | | | |
| Income (Loss) from Operations | | | 36,738 | | | | (7,704 | ) | | | 18,245 | | | | (10,737 | ) | | | 36,542 | |
| Other Income (Expense), net | | | 31 | | | | 1,324 | | | | (319 | ) | | | (2 | ) | | | 1,034 | |
| | | | | | | | | | | | | | | | |
| Income (Loss) Before Income Taxes | | $ | 36,769 | | | $ | (6,380 | ) | | $ | 17,926 | | | $ | (10,739 | ) | | $ | 37,576 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Transactions with Related Parties Included Above: | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 74,089 | | | $ | 98 | | | $ | 20,710 | | | $ | — | | | $ | 94,897 | |
| | | | | | | | | | | | | | | | |
| | | $ | 2,712 | | | $ | 467 | | | $ | 1,517 | | | $ | (388 | ) | | $ | 4,308 | |
| | | | | | | | | | | | | | | | |
| | | $ | 30 | | | $ | 1,029 | | | $ | 231 | | | $ | — | | | $ | 1,290 | |
| | | | | | | | | | | | | | | | |
67
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements(continued)
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | For the Year Ended December 31, 2008 | |
| | | For the Year Ended December 31, 2008 | | Corporate | | | |
| | | Corporate Items and | | Consolidated | | Mortgage | | Financial | | Technology | | Items and | | Consolidated | |
| (in thousands) | | Mortgage Services | | Financial Services | | Technology Products | | Eliminations(1) | | Altisource | | Services | | Services | | Services | | Eliminations | | Altisource | |
| | | |
| Revenue | | $ | 54,956 | | $ | 73,835 | | $ | 45,283 | | $ | (13,711 | ) | | $ | 160,363 | | | $ | 54,956 | | $ | 73,835 | | $ | 45,283 | | $ | (13,711 | ) | | $ | 160,363 | |
| Cost of Revenue | | 36,392 | | 62,590 | | 29,777 | | | (13,711 | ) | | 115,048 | | | 36,392 | | 62,590 | | 29,777 | | | (13,711 | ) | | 115,048 | |
| | | | | | | | | | | | | | |
| Gross Profit | | 18,564 | | 11,245 | | 15,506 | | — | | 45,315 | | | 18,564 | | 11,245 | | 15,506 | | — | | 45,315 | |
| Selling, General and Administrative Expenses | | 5,027 | | 17,168 | | 6,118 | | | (225 | ) | | 28,088 | | | 5,027 | | 17,168 | | 6,118 | | | (225 | ) | | 28,088 | |
| | | | | | | | | | | | | | |
| Income (Loss) from Operations | | 13,537 | | | (5,923 | ) | | 9,388 | | 225 | | 17,227 | | | 13,537 | | | (5,923 | ) | | 9,388 | | 225 | | 17,227 | |
| Other income (expense), net | | | (58 | ) | | | (1,952 | ) | | | (391 | ) | | | (225 | ) | | | (2,626 | ) | |
| Other Income (Expense), net | | | | (58 | ) | | | (1,952 | ) | | | (391 | ) | | | (225 | ) | | | (2,626 | ) |
| | | | | | | | | | | | | | |
| Income (Loss) Before Income Taxes | | $ | 13,479 | | $ | (7,875 | ) | | $ | 8,997 | | $ | — | | $ | 14,601 | | | $ | 13,479 | | $ | (7,875 | ) | | $ | 8,997 | | $ | — | | $ | 14,601 | |
| | | | |
| | | |
| Depreciation | | $ | 34 | | $ | 3,202 | | $ | 4,600 | | $ | — | | $ | 7,836 | | |
| | | | |
| Amortization of Intangibles | | $ | — | | $ | 2,554 | | $ | — | | $ | — | | $ | 2,554 | | |
| | | | | | | | | | | | | | |
| | | |
| Transactions with Related Parties Included Above: | | |
| Revenue | | $ | 41,635 | | $ | 1,181 | | $ | 35,146 | | $ | (13,711 | ) | | $ | 64,251 | | | $ | 41,635 | | $ | 1,181 | | $ | 35,146 | | $ | (13,711 | ) | | $ | 64,251 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, 2007 |
| | | | | | | | | | | | | | | Corporate Items and | | Consolidated |
| (in thousands) | | Mortgage Services | | Financial Services | | Technology Products | | Eliminations(1) | | Altisource |
| | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 64,260 | | | $ | 41,293 | | | $ | 36,235 | | | $ | (6,882 | ) | | $ | 134,906 | |
| Cost of Revenue | | | 44,158 | | | | 32,324 | | | | 27,354 | | | | (6,882 | ) | | | 96,954 | |
| | | |
| Gross Profit | | | 20,102 | | | | 8,969 | | | | 8,881 | | | | — | | | | 37,952 | |
| Selling, General and Administrative Expenses | | | 7,876 | | | | 14,787 | | | | 6,359 | | | | (1,092 | ) | | | 27,930 | |
| | | |
| Income (Loss) from Operations | | | 12,226 | | | | (5,818 | ) | | | 2,522 | | | | 1,092 | | | | 10,022 | |
| Other income (expense), net | | | (90 | ) | | | (1,269 | ) | | | 708 | | | | (1,092 | ) | | | (1,743 | ) |
| | | |
| Income (Loss) Before Income Taxes | | $ | 12,136 | | | $ | (7,087 | ) | | $ | 3,230 | | | $ | — | | | $ | 8,279 | |
| | | |
| | | | | | | | | | | | | | | | | | | | | |
| Depreciation | | $ | 292 | | | $ | 980 | | | $ | 5,707 | | | $ | — | | | $ | 6,979 | |
| | | |
| Amortization of Intangibles | | $ | — | | | $ | 1,555 | | | $ | — | | | $ | — | | | $ | 1,555 | |
| | | |
| | | | | | | | | | | | | | | | | | | | | |
| Transactions with Related Parties Included Above: | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 40,646 | | | $ | 1,044 | | | $ | 24,542 | | | $ | (6,882 | ) | | $ | 59,350 | |
| | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Corporate | | | | |
| | | Mortgage | | | Financial | | | Technology | | | Items and | | | Consolidated | |
| (in thousands) | | Services | | | Services | | | Services | | | Eliminations | | | Altisource | |
| | | | | | | | | | | | | | | | | | | | | |
| Total Assets: | | | | | | | | | | | | | | | | | | | | |
| December 31, 2010 | | $ | 93,173 | | | $ | 43,202 | | | $ | 31,469 | | | $ | 29,956 | | | $ | 197,800 | |
| | | | | | | | | | | | | | | | |
| December 31, 2009 | | $ | 8,259 | | | $ | 51,579 | | | $ | 15,677 | | | $ | 45,041 | | | $ | 120,556 | |
| | | | | | | | | | | | | | | | |
68
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated and Combined Consolidated Financial Statements(continued)
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Corporate Items and | | Consolidated |
| (in thousands) | | Mortgage Services | | Financial Services | | Technology Products | | Eliminations | | Altisource |
| | | | | | | | | | | | | | | | | | | | | |
| Total Assets: | | | | | | | | | | | | | | | | | | | | |
| December 31, 2009 | | $ | 8,259 | | | $ | 51,579 | | | $ | 15,677 | | | $ | 45,041 | | | $ | 120,556 | |
| | | |
| December 31, 2008 | | $ | 3,361 | | | $ | 59,744 | | | $ | 8,836 | | | $ | 4,734 | | | $ | 76,675 | |
| | | |
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
| | | | | | | | | | | | | | | | | |
| | | 2009 Quarter Ended |
| | | December 31, | | September 30, | | June 30, | | March 31, |
| Revenue | | $ | 56,326 | | | $ | 54,064 | | | $ | 49,803 | | | $ | 42,619 | |
| Gross Profit | | | 21,334 | | | | 20,611 | | | | 19,454 | | | | 14,616 | |
| Income Before Income Taxes | | | 8,956 | | | | 12,092 | | | | 10,009 | | | | 6,519 | |
| Net Income | | | 5,873 | | | | 8,644 | | | | 7,015 | | | | 4,439 | |
| | | | | | | | | | | | | | | | | |
| Net Income Per Share | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.25 | | | $ | 0.36 | | | $ | 0.29 | | | $ | 0.18 | |
| Diluted | | $ | 0.24 | | | $ | 0.36 | | | $ | 0.29 | | | $ | 0.18 | |
| Weighted Average Shares Outstanding | | | | | | | | | | | | | | | | |
| Basic | | | 24,082,947 | | | | 24,050,340 | | | | 24,050,340 | | | | 24,050,340 | |
| Diluted | | | 24,338,474 | | | | 24,050,340 | | | | 24,050,340 | | | | 24,050,340 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | 2008 Quarter Ended |
| | | December 31, | | September 30, | | June 30, | | March 31, |
| Revenue | | $ | 38,940 | | | $ | 38,007 | | | $ | 40,868 | | | $ | 42,548 | |
| Gross Profit | | | 12,528 | | | | 9,080 | | | | 10,835 | | | | 12,872 | |
| Income Before Income Taxes | | | 5,042 | | | | 1,311 | | | | 3,424 | | | | 4,824 | |
| Net Income | | | 2,343 | | | | 943 | | | | 2,463 | | | | 3,470 | |
| | | | | | | | | | | | | | | | | |
| Net Income Per Share | | | | | | | | | | | | | | | | |
| Basic and Diluted | | $ | 0.10 | | | $ | 0.04 | | | $ | 0.10 | | | $ | 0.14 | |
| Weighted Average Shares Outstanding | | | | | | | | | | | | | | | | |
| Basic and Diluted | | | 24,050,340 | | | | 24,050,340 | | | | 24,050,340 | | | | 24,050,340 | |
20. SUBSEQUENT EVENTS
AcquisitionThe following tables contain selected unaudited statement of operations information for each quarter of 2010 and 2009. The Mortgage Partnership of America, L.L.C.
In February 2010, we acquiredfollowing information reflects all normal recurring adjustments necessary for a fair presentation of the outstanding membership interests of The Mortgage Partnership of America, L.L.C. (“MPA”). MPA serves as the manager of Best Partners Mortgage Cooperative, Inc. doing business as Lenders One Mortgage Cooperative (“Lenders One”), a national alliance of mortgage bankers established in 2000 that today consists of more than 155 members that originated more than $75.0 billion in mortgage loans during
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (continued)
2009. Altisource acquired 100% of the outstanding equity interest of MPA pursuant to a Purchase and Sale Agreement.
Considerationinformation for the transaction consistedperiods presented. The operating results for any quarter are not necessarily indicative of $29.0 million in cash, paid from available funds, and approximately 1.0 million shares of our common stock. In addition, 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. A portion of the consideration will be held in escrow to secure the sellers’ indemnification obligations under the Purchase Agreement.results for any future period. Our business is affected by seasonality.
In connection with the acquisition, we entered into put option agreements with certain of the sellers, whereby each seller has the right, with respect to an aggregate of 0.5 million shares of our common stock, to put up to 25% of eligible shares each year at a price equal to $16.84 per share.Unaudited quarterly results are as follows:
Noble Systems Corp Arbitration| | | | | | | | | | | | | | | | | |
| | | 2010 Quarter Ended(1) | |
| (in thousands, except per share amounts) | | December 31, | | | September 30, | | | June 30, | | | March 31, | |
| | | | | | | | | | | | | | | | | |
| Revenue | | $ | 91,477 | | | $ | 77,580 | | | $ | 71,347 | | | $ | 60,974 | |
| Gross Profit | | | 35,060 | | | | 28,667 | | | | 26,972 | | | | 21,620 | |
| Income Before Income Taxes and Non-controlling Interests | | | 17,121 | | | | 14,635 | | | | 14,536 | | | | 9,479 | |
| Net Income | | | 19,553 | | | | 11,884 | | | | 17,643 | | | | 7,094 | |
| Net Income Attributable to Altisource | | | 16,786 | | | | 9,832 | | | | 16,346 | | | | 6,307 | |
| | | | | | | | | | | | | | | | | |
| Net Income Per Share | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.67 | | | $ | 0.39 | | | $ | 0.65 | | | $ | 0.26 | |
| Diluted | | $ | 0.64 | | | $ | 0.37 | | | $ | 0.62 | | | $ | 0.25 | |
| Weighted Average Shares Outstanding | | | | | | | | | | | | | | | | |
| Basic | | | 25,091 | | | | 25,318 | | | | 25,226 | | | | 24,690 | |
| Diluted | | | 26,183 | | | | 26,544 | | | | 26,247 | | | | 25,663 | |
As noted in Note 14, we accrued $1.4 million as of December 31, 2009 due to the receipt of a binding arbitration order on March 2, 2010. Such amount resolves all pending claims between us and Noble.| | | | | | | | | | | | | | | | | |
| | | 2009 Quarter Ended(1) | |
| (in thousands, except per share amounts) | | December 31, | | | September 30, | | | June 30, | | | March 31, | |
| | | | | | | | | | | | | | | | | |
| Revenue | | $ | 56,326 | | | $ | 54,064 | | | $ | 49,803 | | | $ | 42,619 | |
| Gross Profit | | | 21,334 | | | | 20,611 | | | | 19,454 | | | | 14,616 | |
| Income Before Income Taxes and Non-controlling Interests | | | 8,956 | | | | 12,092 | | | | 10,009 | | | | 6,519 | |
| Net Income | | | 5,873 | | | | 8,644 | | | | 7,015 | | | | 4,439 | |
| | | | | | | | | | | | | | | | | |
| Net Income Per Share | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.25 | | | $ | 0.36 | | | $ | 0.29 | | | $ | 0.18 | |
| Diluted | | $ | 0.24 | | | $ | 0.36 | | | $ | 0.29 | | | $ | 0.18 | |
| Weighted Average Shares Outstanding | | | | | | | | | | | | | | | | |
| Basic | | | 24,083 | | | | 24,050 | | | | 24,050 | | | | 24,050 | |
| Diluted | | | 24,339 | | | | 24,050 | | | | 24,050 | | | | 24,050 | |
| | |
| (1) | | The sum of quarterly amounts, including per share amounts, may not equal amounts reported for year-to-date periods. This is due to the effects of rounding and changes in the number of weighted-average shares outstanding for each period. |
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| | |
| ITEM 9. | | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES |
None.
| | |
| ITEM 9A. | | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
We maintain “disclosurecarried out an evaluation required by the 1934 Act, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures,” as such term is defined in RulesRule 13a-15(e) of the 1934 Act, as of December 31, 2010. Based on this evaluation, our principal executive officer and 15d-15(e) under the Securities Exchange Actprincipal financial officer concluded that, as of 1934 (the “Exchange Act”), that are designedDecember 31, 2010, our disclosure controls and procedures were effective to ensureprovide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange1934 Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commissionthe SEC’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our Chief Executive Officerprincipal executive officer and Chief Financial Officer,principal financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing disclosure controlsdisclosures.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and procedures, our management necessarily was required to apply its judgmentmaintaining adequate internal control over financial reporting, as defined in evaluatingRule 13a-15(f) of the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated1934 Act. Management has assessed the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Actinternal control over financial reporting as of December 31, 2010 based on criteria established in Internal Control—Integrated Framework issued by the endCommittee of Sponsoring Organizations of the period covered byTreadway Commission. As a result of this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer haveassessment, management concluded that, as of December 31, 2010, our internal control over financial reporting was effective in providing reasonable assurance regarding the endreliability of financial reporting and the period covered by this annualpreparation of financial statements for external purposes in accordance with generally accepted accounting principles. Deloitte & Touche LLP has independently assessed the effectiveness of our internal control over financial reporting and its report our disclosure controls and procedures (as definedis included herein.
Changes in Rule 13a-15(e) under the Exchange Act) are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and ChiefInternal Control Over Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.Reporting
NoThere were no changes in our internal control over financial reporting (as such term is defined in Rules 13a—15(f) and 15d—15(f) under the Securities Exchange Act) occurred during the fourth quarter of 2009,ended December 31, 2010 that has materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.
Management’s ReportLimitations on Internal Control Over Financial ReportingControls
This annual report does not include a report of management’s assessment regardingOur disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures or an attestation reportour internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of our independent registered public accounting firmcontrols can provide absolute assurance that misstatements due to a transition period established byerror or fraud will not occur or that all control issues and instances of fraud, if any, within the rules of the SEC for newly public companies.Company have been detected.
| | |
| ITEM 9B. | | OTHER INFORMATION |
None.
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PART III
| | |
| ITEM 10. | | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by this item is incorporated herein by reference to our definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act.
| | |
| ITEM 11. | | EXECUTIVE COMPENSATION |
The information required by this item is incorporated herein by reference to our definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act.
| | |
| ITEM 12. | | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this item is incorporated herein by reference to our definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act.
| | |
| ITEM 13. | | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
The information required by this item is incorporated herein by reference to our definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act.
| | |
| ITEM 14. | | PRINCIPAL ACCOUNTINGACCOUNTANT FEES AND SERVICES |
The information required by this item is incorporated herein by reference to our definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act.
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PART IV
| | |
| ITEM 15. | | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
| (a) | | The following documents are filed as part of this annual report. |
| |
| 1. | | Financial Statements |
| |
| | | See Item 8 above. |
| |
| 2. | | Financial Statement Schedules: |
| |
| | | Schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are not applicable, and therefore have been omitted. |
| |
| 3. | | Exhibits: |
| | | | | |
| Exhibit | | |
| Number | | Exhibit Description |
| | | | | |
| 2.1 | | | Form of Separation Agreement between Altisource Portfolio Solutions S.A. and Ocwen Financial Corporation (incorporated by reference to Exhibit 2.1 of the Registrant’s Form 10-12B/A — Amendment No. 1 to Form 10, as filed with the Commission on June 29, 2009) |
| | | | | |
| 3.1 | | | Articles of Incorporation of Altisource Portfolio Solutions S.A. (incorporated by reference to Exhibit 2.1 of the Registrant’s Form 10-12B/A — Amendment No. 1 to Form 10, as filed with the Commission on June 29, 2009) |
| | | | | |
| 10.1 | | | Separation Agreement, dated as of August 10, 2009, by and between Altisource Portfolio Solutions S.A. and Ocwen Financial Corporation (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K, as filed with the Commission on August 13, 2009) |
| | | | | |
| 10.2 | | Form of | Tax Matters Agreement, dated as of August 10, 2009, between Altisource Solutions S.à r.l. and Ocwen Financial Corporation (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K, as filed with the Commission on August 13, 2009) |
| | | | | |
| 10.3 | | Form of | Employee Matters Agreement, dated as of August 10, 2009, between Altisource Solutions S.à r.l. and Ocwen Financial Corporation (incorporated by reference to Exhibit 10.310.4 of the Registrant’s Current Report on Form 8-K, as filed with the Commission on August 13, 2009) |
| | | | | |
| 10.4 | | | Technology Products Services Agreement, dated as of August 10, 2009, between Altisource Solutions S.à r.l. and Ocwen Financial Corporation (incorporated by reference to Exhibit 10.5 of the Registrant’s Current Report on Form 8-K, as filed with the Commission on August 13, 2009) |
| | | | |
| 10.5 | | | Services Agreement, dated as of August 10, 2009, between Altisource Solutions S.à r.l. and Ocwen Financial Corporation (incorporated by reference to Exhibit 10.6 of the Registrant’s Current Report on Form 8-K, as filed with the Commission on August 13, 2009) |
| | | | |
| 10.6 | | | Data Center and Disaster Recovery Services Agreement, dated as of August 10, 2009, between Altisource Solutions S.à r.l. and Ocwen Financial Corporation (incorporated by reference to Exhibit 10.7 of the Registrant’s Current Report on Form 8-K, as filed with the Commission on August 13, 2009) |
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| | | | |
| Exhibit | | |
| Number | | Exhibit Description |
| | | | |
| 10.7 | | | Intellectual Property Agreement, dated as of August 10, 2009, by and between Altisource Solutions S.à r.l. and Ocwen Financial Corporation (incorporated by reference to Exhibit 10.8 of the Registrant’s Current Report on Form 8-K, as filed with the Commission on August 13, 2009) |
| | | |
10.5 | | Form of Services Agreement between Altisource Solutions S.à r.l. and Ocwen Financial Corporation (incorporated by reference to Exhibit 10.5 of the Registrant’s Current Report on Form 8-K, as filed with the Commission on August 13, 2009) |
| | |
10.6 | 10.8 | Form of Technology Products Services Agreement between Altisource Solutions S.à r.l. and Ocwen Financial Corporation (incorporated by reference to Exhibit 10.6 of the Registrant’s Current Report on Form 8-K, as filed with the Commission on August 13, 2009) |
| | |
10.7 | | Form of Data Center and Disaster Recovery Services Agreement between Altisource Solutions S.à r.l. and Ocwen Financial Corporation (incorporated by reference to Exhibit 10.7 of the Registrant’s Current Report on Form 8-K, as filed with the Commission on August 13, 2009) |
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| | |
Exhibit | | |
Number | | Exhibit Description |
| | |
10.8† | | Form of Altisource Portfolio Solutions S.A. 2009 Equity Incentive Plan (incorporated by reference to Exhibit 10.8 of Amendment No. 1 to the Registration Statement on Form 10, as filed with the Commission on June 29, 2009) |
| | | | | |
| 10.9 | † | | Employment Agreement by and between Altisource Solutions S.à r.l. and William B. Shepro (incorporated by reference to Exhibit 10.9 of Amendment No. 1 to the Registration Statement on Form 10, as filed with the Commission on June 29, 2009) |
| | | | | |
| 10.10 | † | | Employment Agreement by and between Altisource Solutions S.à r.l. and Robert D. Stiles (incorporated by reference to Exhibit 10.10 of Amendment No. 1 to the Registration Statement on Form 10, as filed with the Commission on June 29, 2009) |
| | | | | |
| 10.11 | † | | Employment Agreement by and between Altisource Solutions S.à r.l. and Kevin J. Wilcox (incorporated by reference to Exhibit 10.11 of Amendment No. 1 to the Registration Statement on Form 10, as filed with the Commission on June 29, 2009) |
| | | | | |
10.12* | 10.12 | | | Purchase and Sale Agreement, dated as of February 12, 2010, by and among Altisource Portfolio Solutions S.A., and the Equity Interest Holders of The Mortgage Partnership of America, L.L.C. and the Management Owners (incorporate by reference to Exhibit 10.12 of the Company’s 10-K as filed with the Commission on March 17, 2010) |
| | | | | |
10.13* | 10.13 | † | | Form of Put Option Agreements (incorporate by reference to Exhibit 10.13 of the Company’s 10-K as filed with the Commission on March 17, 2010) |
| | | | | |
21.1* | 10.14 | *† | | Form of Non-qualified Stock Option Agreement, pursuant to the 2009 Equity Incentive Plan |
| | | | |
| 21.1 | * | | Subsidiaries of the Registrant. |
| | | | | |
23.1* | 23.1 | * | | Consent of Independent Registered Public Accounting Firm (Deloitte & Touche LLP). |
| | | | | |
23.2* | 23.2 | * | | Consent of Independent Registered Public Accounting Firm (PricewaterhouseCoopers LLP). |
| | | | | |
| 24.1 | | | Power of Attorney (included on signature page). |
| | | | | |
31.1* | 31.1 | * | | Section 302 Certification of the Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a). |
| | | | | |
31.2* | 31.2 | * | | Section 302 Certification of the Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a). |
| | | | | |
32.1* | 32.1 | * | | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | | | |
32.2* | 32.2 | * | | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
| * | | Filed herewith (certain appendices, exhibits and/ |
|
| † | | Denotes management contract or similar attachments to this agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-X. The registrant will furnish supplementally a copy of any omitted appendix, exhibit or similar attachment to the SEC upon request)compensatory arrangement |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 16, 2010February 18, 2011
| | | | | |
| | Altisource Portfolio Solutions S.A.
By:
| |
| By: | /s/ William B. Shepro | |
| | Name: | William B. Shepro | |
| | | Title: | Director and Chief Executive Officer
(Principal Executive Officer) | |
| |
| | |
| By: | /s/ Robert D. Stiles | |
| | | Name: | Robert D. Stiles | |
| | Title: | Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer) | |
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of March 16, 2010.February 18, 2011.
| | | | | |
| | | |
| By: | /s/ William B. Shepro | |
| | Name: | William B. Shepro | |
| | | Title: | Director and Chief Executive Officer
(Principal Executive Officer) | |
| |
| | |
| By: | /s/ Robert D. Stiles | |
| | | Name: | Robert D. Stiles | |
| | Title: | Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer) | |
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POWER OF ATTORNEY
Each person whose signature appears below, in so signing, also makes, constitutes and appoints William B. Shepro and Robert DD. Stiles, and each or either of them, his true and lawful attorneys-in-fact, with full power and substitution, for him in any and all capacities, to execute and cause to be filed with the SEC any and all amendments to the Report on Form 10-K, with exhibits thereto, andall other documents connected therewith and any and all amendments to any of the foregoing and to perform any acts necessary to be done in order to file such documents, and hereby ratifies and confirms all that said attorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of March 16, 2010.February 18, 2011.
| | | | |
| Signature | | Title | | Date |
| | | | |
| /s/ William C. Erbey | | Chairman of the Board of Directors | | February 18, 2011 |
| | | | |
| | | | |
| /s/ William B. Shepro | | Director and Chief Executive Officer | | February 18, 2011 |
| | (Principal Executive Officer) | | |
| | | | |
/s/ William B. ErbeySilke Andresen-Kienz William B. ErbeySilke Andresen-Kienz | | Chairman of the Board of Directors Director | | February 18, 2011 |
| | | |
/s/ Robert L. DeNormandieRobert L. DeNormandie | | Director |
| | |
/s/ Roland Müller-Ineichen | | Director | | February 18, 2011 |
| | Director | | |
| | | | | |
/s/ Timo Vättö | | Director | | February 18, 2011 |
| | Director | | |
| | | |
/s/ William B. SheproWilliam B. Shepro | | Director and Chief Executive Officer
(Principal Executive Officer) |
| | |
/s/ Robert D. Stiles | | Chief Financial Officer | | February 18, 2011 |
| | Chief Financial Officer
(Principal Financial Officer and | | |
| | Principal Accounting Officer) | | |
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