LendingTree, Inc.
Tree.com, Inc. (Form: 10-Q, Received: 11/12/2013 17:27:40)
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q  
 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2013
Or  
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                 
Commission File No. 001-34063  
 
 
TREE.COM, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
 
26-2414818
(I.R.S. Employer
Identification No.)
  11115 Rushmore Drive, Charlotte, North Carolina 28277
(Address of principal executive offices)
(704) 541-5351
(Registrant's telephone number, including area code)
 
 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.  Yes   ý   No   o  
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation 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).  Yes   ý   No   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.
Large accelerated filer  o
 
Accelerated filer  o
 
 
 
Non-accelerated filer  o
 
Smaller reporting company  x
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   o   No   ý  
As of November 5, 2013 there were 11,139,557 shares of the Registrant's common stock, par value $.01 per share, outstanding, excluding treasury shares.
 



Table of Contents

TABLE OF CONTENTS
 
 
 
Page
Number
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
 

2

Table of Contents

PART 1—FINANCIAL INFORMATION
Item 1.  Financial Statements  
TREE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)  
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
 
(in thousands, except per share amounts)
Revenue
$
37,343

 
$
23,296

 
$
102,829

 
$
53,501

Costs and expenses:
 

 
 

 
 

 
 

Cost of revenue (exclusive of depreciation shown separately below)
1,733

 
1,231

 
5,039

 
2,830

Selling and marketing expense
24,832

 
13,376

 
68,473

 
34,997

General and administrative expense
5,610

 
5,532

 
17,817

 
16,166

Product development
1,217

 
853

 
3,914

 
2,383

Depreciation
891

 
934

 
2,648

 
3,204

Amortization of intangibles
33

 
101

 
119

 
314

Restructuring and severance
(70
)
 
(48
)
 
76

 
(109
)
Litigation settlements and contingencies (Note 10)
2,875

 
510

 
6,812

 
948

Total costs and expenses
37,121

 
22,489

 
104,898

 
60,733

Operating income (loss)
222

 
807

 
(2,069
)
 
(7,232
)
Other income (expense):
 

 
 

 
 

 
 

Interest expense
(4
)
 
(349
)
 
(18
)
 
(606
)
Income (loss) before income taxes
218

 
458

 
(2,087
)
 
(7,838
)
Income tax benefit (provision)
98

 
(188
)
 
97

 
3,086

Net income (loss) from continuing operations
316

 
270

 
(1,990
)
 
(4,752
)
Discontinued operations:
 
 
 
 
 
 
 
Gain from sale of discontinued operations, net of tax

 

 
10,101

 
24,313

Income (loss) from operations of discontinued operations, net of tax
(529
)
 
4,112

 
(3,962
)
 
24,745

Income (loss) from discontinued operations
(529
)
 
4,112

 
6,139

 
49,058

Net income (loss)
$
(213
)
 
$
4,382

 
$
4,149

 
$
44,306

 
 
 
 
 
 
 
 
Weighted average basic shares outstanding
11,017

 
10,771

 
11,039

 
10,670

Weighted average diluted shares outstanding
11,720

 
11,385

 
11,039

 
10,670

Net income (loss) per share from continuing operations:
 

 
 

 
 

 
 

Basic
$
0.03

 
$
0.03

 
$
(0.18
)
 
$
(0.45
)
Diluted
$
0.03

 
$
0.02

 
$
(0.18
)
 
$
(0.45
)
Net income (loss) per share from discontinued operations:
 

 
 

 
 

 
 

Basic
$
(0.05
)
 
$
0.38

 
$
0.56

 
$
4.60

Diluted
$
(0.05
)
 
$
0.36

 
$
0.56

 
$
4.60

Net income (loss) per share:
 

 
 

 
 

 
 

Basic
$
(0.02
)
 
$
0.41

 
$
0.38

 
$
4.15

Diluted
$
(0.02
)
 
$
0.38

 
$
0.38

 
$
4.15

 
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

3

Table of Contents

TREE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

 (in thousands, except par value and share amounts)
 
 
September 30,
2013
 
December 31,
2012
 
(Unaudited)
 
 

ASSETS:
 

 
 

Cash and cash equivalents
$
87,752

 
$
80,190

Restricted cash and cash equivalents
26,018

 
29,414

Accounts receivable, net of allowance of $485 and $503, respectively
15,446

 
11,488

Prepaid and other current assets
2,043

 
773

Current assets of discontinued operations
31

 
407

Total current assets
131,290

 
122,272

Property and equipment, net
5,537

 
6,155

Goodwill
3,632

 
3,632

Intangible assets, net
10,712

 
10,831

Other non-current assets
110

 
152

Non-current assets of discontinued operations (Note 13)
129

 
129

Total assets
$
151,410

 
$
143,171

LIABILITIES:
 

 
 

Accounts payable, trade
$
3,034

 
$
2,741

Deferred revenue
8

 
648

Accrued expenses and other current liabilities
24,562

 
19,960

Current liabilities of discontinued operations
31,946

 
31,017

Total current liabilities
59,550

 
54,366

Other non-current liabilities
481

 
936

Deferred income taxes
4,595

 
4,694

Non-current liabilities of discontinued operations (Note 13)
151

 
253

Total liabilities
64,777

 
60,249

Commitments and contingencies (Note 10)


 


SHAREHOLDERS' EQUITY:
 

 
 

Preferred stock $.01 par value; authorized 5,000,000 shares; none issued or outstanding

 

Common stock $.01 par value; authorized 50,000,000 shares; issued 12,505,331 and 12,195,209 shares, respectively, and outstanding 11,136,399 and 11,006,730 shares, respectively
125

 
122

Additional paid-in capital
906,572

 
903,692

Accumulated deficit
(807,331
)
 
(811,480
)
Treasury stock 1,368,932 and 1,188,479 shares, respectively
(12,733
)
 
(9,412
)
Total shareholders' equity
86,633

 
82,922

Total liabilities and shareholders' equity
$
151,410

 
$
143,171

 
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

4

Table of Contents

TREE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
 
(Unaudited)
 
 
 
 
Common Stock
 
 
 
 
 
Treasury Stock
 
Total
 
Number
of Shares
 
Amount
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Number
of Shares
 
Amount
 
(in thousands)
Balance as of December 31, 2012
$
82,922

 
12,625

 
$
126

 
$
903,688

 
$
(811,480
)
 
1,188

 
$
(9,412
)
Revision (Note 1)

 
(430
)
 
(4
)
 
4

 

 

 

Balance as of December 31, 2012 (Revised)
$
82,922

 
12,195

 
$
122

 
$
903,692

 
$
(811,480
)
 
1,188

 
$
(9,412
)
Comprehensive income:
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income for the nine months ended September 30, 2013
4,149

 

 

 

 
4,149

 

 

Comprehensive income
$
4,149

 
 
 
 
 
 
 
 
 
 
 
 
Non-cash compensation
4,280

 

 

 
4,280

 

 

 

Purchase of treasury stock
(3,321
)
 

 

 

 

 
181

 
(3,321
)
Dividends
618

 

 

 
618

 

 

 

Issuance of common stock upon exercise of stock options and vesting of restricted stock units, net of withholding taxes
(2,015
)
 
310

 
3

 
(2,018
)
 

 

 

Balance as of September 30, 2013
$
86,633

 
12,505

 
$
125

 
$
906,572

 
$
(807,331
)
 
1,369

 
$
(12,733
)
 
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

5

Table of Contents

TREE.COM, INC. AND SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
(in thousands)
Cash flows from operating activities attributable to continuing operations:
 

 
 

Net income
$
4,149

 
$
44,306

Income from discontinued operations, net of tax
(6,139
)
 
(49,058
)
Net loss from continuing operations
(1,990
)
 
(4,752
)
Adjustments to reconcile net loss from continuing operations to net cash provided by (used in) operating activities attributable to continuing operations:
 

 
 

Loss on disposal of fixed assets
25

 
344

Amortization of intangibles
119

 
314

Depreciation
2,648

 
3,204

Non-cash compensation expense
4,278

 
3,565

Deferred income taxes
(99
)
 
134

Bad debt expense (benefit)
(2
)
 
(4
)
Changes in current assets and liabilities:
 

 
 

Accounts receivable
(5,201
)
 
(4,938
)
Prepaid and other current assets
(656
)
 
401

Accounts payable, accrued expenses and other current liabilities
5,940

 
(2,492
)
Income taxes payable
(570
)
 
(658
)
Deferred revenue
(640
)
 
986

Other, net
(457
)
 
(410
)
Net cash provided by (used in) operating activities attributable to continuing operations
3,395

 
(4,306
)
Cash flows from investing activities attributable to continuing operations:
 

 
 

Capital expenditures
(2,054
)
 
(2,046
)
Decrease (increase) in restricted cash
3,396

 
(4,047
)
Net cash provided by (used in) investing activities attributable to continuing operations
1,342

 
(6,093
)
Cash flows from financing activities attributable to continuing operations:
 

 
 

Issuance of common stock, net of withholding taxes
(1,889
)
 
(301
)
Purchase of treasury stock
(3,321
)
 
(360
)
Dividends
185

 

Decrease in restricted cash

 
4,150

Net cash provided by (used in) financing activities attributable to continuing operations
(5,025
)
 
3,489

Total cash used in continuing operations
(288
)
 
(6,910
)
Net cash provided by (used in) operating activities attributable to discontinued operations
(2,150
)
 
222,885

Net cash provided by investing activities attributable to discontinued operations
10,000

 
25,923

Net cash used in financing activities attributable to discontinued operations

 
(197,659
)
Total cash provided by discontinued operations
7,850

 
51,149

Net increase in cash and cash equivalents
7,562

 
44,239

Cash and cash equivalents at beginning of period
80,190

 
45,541

Cash and cash equivalents at end of period
$
87,752

 
$
89,780

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

6

Table of Contents

TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1—ORGANIZATION
Company Overview
Tree.com, Inc. is the parent of LendingTree, LLC, which owns several brands and businesses that provide information, tools, advice, products and services for critical transactions in consumers' lives. Our family of brands includes: LendingTree ® , GetSmart ® , DegreeTree ® , LendingTreeAutos, DoneRight! ® , ServiceTree ®  and InsuranceTree ® . Together, these brands serve as an ally for consumers who are looking to comparison-shop for loans, education programs, home services providers and other services from multiple businesses and professionals that will compete for their business.
Discontinued Operations
The businesses of RealEstate.com and RealEstate.com, REALTORS ®  (which together represent the former Real Estate segment) and LendingTree Loans are presented as discontinued operations in the accompanying consolidated balance sheets and consolidated statements of operations and cash flows for all periods presented. The notes accompanying these consolidated financial statements reflect our continuing operations and, unless otherwise noted, exclude information related to the discontinued operations.
Real Estate
On March 10, 2011, management made the decision and finalized a plan to close all of the field offices of the proprietary full-service real estate brokerage business known as RealEstate.com, REALTORS ® . We exited all markets in which we previously operated by March 31, 2011. In September 2011, we sold the remaining assets of RealEstate.com, which consisted primarily of internet domain names and trademarks, for $8.3 million and recognized a gain on sale of $7.8 million .
LendingTree Loans
On May 12, 2011, we entered into an asset purchase agreement with Discover Bank, a wholly-owned subsidiary of Discover Financial Services, as amended on February 7, 2012, for the sale of substantially all of the operating assets of our LendingTree Loans business. We completed the sale on June 6, 2012. 
The asset purchase agreement as amended provided for a purchase price of approximately $55.9 million in cash for the assets, subject to certain conditions. Of this total purchase price, $8.0 million was paid prior to the closing, $37.9 million was paid upon the closing and the contingent amount of $10.0 million was paid in the second quarter of 2013 and recognized as a gain from sale of discontinued operations.
Discover generally did not assume liabilities of the LendingTree Loans business that arose before the closing date, except for certain liabilities directly related to assets Discover acquired. Of the purchase price paid, $18.1 million is being held in escrow pending resolution of certain actual and/or contingent liabilities that remain with us following the sale, as of September 30, 2013 . The escrowed amount is recorded as restricted cash at September 30, 2013 .
Separate from the asset purchase agreement, we agreed to provide certain marketing-related services to Discover in connection with its mortgage origination business for approximately seventeen months following the closing, or such earlier point as the agreed-upon services are satisfactorily completed. The services were satisfactorily completed in the second quarter of 2013. Discover remains a network lender on our mortgage exchange following completion of the services.
Basis of Presentation
The accompanying unaudited interim consolidated financial statements as of September 30, 2013 and for the three and nine months ended September 30, 2013 and 2012 , respectively, have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. In the opinion of management, the unaudited interim consolidated financial statements have been prepared on the same basis as the audited financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of our financial position for the periods presented. The results for the three and nine months ended September 30, 2013 are not necessarily indicative of the results to be expected for the year ending December 31, 2013 , or any other period. These financial statements and notes should be read in conjunction

7

TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


with the audited financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2012
Revision of Prior Period Financial Statements
In connection with the preparation of our consolidated financial statements for the first quarter of 2013, we determined that the number of outstanding shares had been overstated in prior periods due to issuances of unrestricted shares upon satisfaction of vesting conditions on restricted shares from 2009 to 2012, without canceling the original restricted share certificates. This resulted in double counting of certain vested restricted shares in the calculation of shares outstanding. Management has determined that unrestricted shares issued upon vesting of restricted shares should not have been considered validly issued or outstanding until the associated restricted shares were canceled.  All of the restricted stock awards that were double-counted were issued to our Chairman and CEO.  The error in shares noted above was not reflected in our Chairman and CEO's filings made under Section 13(d) or Section 16 of the Securities Exchange Act of 1934 or in our disclosures of his holdings in public filings. In addition, our weighted average share calculation had erroneously included restricted shares, resulting in errors in the previously reported weighted average shares and earnings per share.
On December 26, 2012, we paid a special dividend of $1.00 per share to our shareholders of record on December 17, 2012. The dividend was paid on all shares shown as outstanding in our records, including the shares granted to our Chairman and CEO for which management has determined should not have been considered issued or outstanding.  As a result, we unintentionally overpaid $0.4 million in dividends to our Chairman and CEO, which was presented as a financing cash outflow for the year ended December 31, 2012. Such amount was repaid to the company during the second quarter of 2013 and is presented as a financing cash inflow in the nine months ended September 30, 2013 .  Other than that special dividend, we have not declared or paid any cash dividends on our common stock.  There was also a related error in the dividend accrual recorded for unvested shares entitled to the special dividend upon vesting, resulting in an over-accrual of $0.2 million at December 31, 2012.
In accordance with ASC 250-10, we assessed materiality of the errors and concluded that the errors were not material to any of our previously issued financial statements.  Accordingly, we corrected the dividend errors in the first quarter of 2013 and we are revising our previously issued financial statements prospectively to correct share errors.
 
The following table presents the effect of these corrections on the company's consolidated statements of operations for the years ended December 31, 2012 and December 31, 2011 (in thousands, except per share amounts)
 
Year Ended December 31, 2012
 
Year Ended December 31, 2011
 
As Reported
 
Adjustment
 
As Revised
 
As Reported
 
Adjustment
 
As Revised
Weighted average basic shares outstanding
11,313

 
(618
)
 
10,695

 
10,995

 
(618
)
 
10,377

Weighted average diluted shares outstanding
11,313

 
(618
)
 
10,695

 
10,995

 
(618
)
 
10,377

Net loss per share from continuing operations:
 

 
 

 
 

 
 

 
 

 
 

Basic
$
(0.20
)
 
$
(0.01
)
 
$
(0.21
)
 
$
(4.52
)
 
$
(0.27
)
 
$
(4.79
)
Diluted
$
(0.20
)
 
$
(0.01
)
 
$
(0.21
)
 
$
(4.52
)
 
$
(0.27
)
 
$
(4.79
)
Net income (loss) per share from discontinuing operations:
 

 
 

 
 

 
 

 
 

 
 

Basic
$
4.32

 
$
0.25

 
$
4.57

 
$
(0.89
)
 
$
(0.05
)
 
$
(0.94
)
Diluted
$
4.32

 
$
0.25

 
$
4.57

 
$
(0.89
)
 
$
(0.05
)
 
$
(0.94
)
Net income (loss) per share:
 

 
 

 
 

 
 

 
 

 
 

Basic
$
4.12

 
$
0.24

 
$
4.36

 
$
(5.41
)
 
$
(0.32
)
 
$
(5.73
)
Diluted
$
4.12

 
$
0.24

 
$
4.36

 
$
(5.41
)
 
$
(0.32
)
 
$
(5.73
)
 
For the years ended December 31, 2012 and 2011, we had losses from continuing operations and, as a result, no potentially dilutive securities were included in the denominator for computing diluted earnings per share because the impact would have been anti-dilutive. Accordingly, the weighted average basic shares outstanding were used to compute all earnings per share amounts.

8

TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


The following tables present the effect of these corrections on the company's consolidated statements of operations for each of the quarters in the year ended December 31, 2012 (in thousands, except per share amounts)
 
Three Months Ended March 31, 2012
 
Three Months Ended June 30, 2012
 
As Reported
 
Adjustment
 
As Revised
 
As Reported
 
Adjustment
 
As Revised
Weighted average basic shares outstanding
11,173

 
(618
)
 
10,555

 
11,303

 
(618
)
 
10,685

Weighted average diluted shares outstanding
11,414

 
(859
)*
 
10,555

 
11,303

 
(618
)
 
10,685

Net loss per share from continuing operations:
 

 
 

 
 

 
 

 
 

 
 

Basic
$
(0.29
)
 
$
(0.02
)
 
$
(0.31
)
 
$
(0.16
)
 
$
0.00

 
$
(0.16
)
Diluted
$
(0.29
)
 
$
(0.02
)
 
$
(0.31
)
 
$
(0.16
)
 
$
0.00

 
$
(0.16
)
Net income per share from discontinuing operations:
 

 
 

 
 

 
 

 
 

 
 

Basic
$
1.56

 
$
0.09

 
$
1.65

 
$
2.44

 
$
0.14

 
$
2.58

Diluted
$
1.53

 
$
0.12
*
 
$
1.65

 
$
2.44

 
$
0.14

 
$
2.58

Net income per share:
 

 
 

 
 

 
 

 
 

 
 

Basic
$
1.27

 
$
0.07

 
$
1.34

 
$
2.28

 
$
0.13

 
$
2.41

Diluted
$
1.24

 
$
0.10
*
 
$
1.34

 
$
2.28

 
$
0.13

 
$
2.41

 
 
 
 
 
 
 
 
 
 
 
 
 
*
Includes correction of an error of 241 shares and $0.03 per share made during the first quarter of 2012 related to the control number utilized for diluted earnings per share. 
 
Three Months Ended September 30, 2012
 
Three Months Ended December 31, 2012
 
As Reported
 
Adjustment
 
As Revised
 
As Reported
 
Adjustment
 
As Revised
Weighted average basic shares outstanding
11,389

 
(618
)
 
10,771

 
11,386

 
(618
)
 
10,768

Weighted average diluted shares outstanding
12,003

 
(618
)
 
11,385

 
12,175

 
(618
)
 
11,557

Net income per share from continuing operations:
 

 
 

 
 

 
 

 
 

 
 

Basic
$
0.02

 
$
0.01

 
$
0.03

 
$
0.22

 
$
0.01

 
$
0.23

Diluted
$
0.02

 
$
0.00

 
$
0.02

 
$
0.21

 
$
0.01

 
$
0.22

Net income (loss) per share from discontinuing operations:
 

 
 

 
 

 
 

 
 

 
 

Basic
$
0.36

 
$
0.02

 
$
0.38

 
$
(0.02
)
 
$
0.00

 
$
(0.02
)
Diluted
$
0.35

 
$
0.01

 
$
0.36

 
$
(0.02
)
 
$
0.00

 
$
(0.02
)
Net income per share:
 

 
 

 
 

 
 

 
 

 
 

Basic
$
0.38

 
$
0.03

 
$
0.41

 
$
0.20

 
$
0.02

 
$
0.22

Diluted
$
0.37

 
$
0.01

 
$
0.38

 
$
0.19

 
$
0.01

 
$
0.20

 The following table presents the effect these errors had on the consolidated balance sheet at December 31, 2012:
 
December 31, 2012
 
As Reported
 
Adjustment
 
As Adjusted
Issued shares
12,625,678

 
(430,469
)
 
12,195,209

Outstanding shares
11,437,199

 
(430,469
)
 
11,006,730

 

9

TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


NOTE 2—SIGNIFICANT ACCOUNTING POLICIES
Accounting Estimates
Management is required to make certain estimates and assumptions during the preparation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. They also impact the reported amount of net earnings during any period. Actual results could differ from those estimates. 
Significant estimates underlying the accompanying consolidated financial statements, including discontinued operations, include: loan loss obligations; the recoverability of long-lived assets, goodwill and intangible assets; the determination of income taxes payable and deferred income taxes, including related valuation allowances; restructuring reserves; contingent consideration related to business combinations; various other allowances, reserves and accruals; and assumptions related to the determination of stock-based compensation. 
Restricted Cash  
Restricted cash and cash equivalents consists of the following (in thousands) :
 
September 30,
2013
 
December 31,
2012
Cash in escrow for surety bonds
$
2,453

 
$
6,500

Cash in escrow for corporate purchasing card program
400

 
800

Cash in escrow for sale of LTL (Note 13)
18,117

 
17,077

Cash in escrow for earnout related to an acquisition
1,956

 
1,956

Cash restricted for loan loss obligations
3,051

 
3,051

Other
41

 
30

Total restricted cash and cash equivalents
$
26,018

 
$
29,414

During the third quarter of 2013, we obtained a reduction in the collateral requirement for certain of our surety bonds, which are required by the various states in which the company currently operates or previously operated.  As a result, $4.0 million of cash previously held in escrow was released.
Certain Risks and Concentrations
Our business is subject to certain risks and concentrations including dependence on third-party technology providers, exposure to risks associated with online commerce security and credit card fraud. 
Financial instruments, which potentially subject us to concentration of credit risk, consist primarily of cash and cash equivalents. Cash and cash equivalents are in excess of Federal Deposit Insurance Corporation insurance limits, but are maintained with quality financial institutions of high credit. 
Due to the nature of the mortgage lending industry, interest rate increases may negatively impact future revenue from our lender network.
Lenders participating on our lender network can offer their products directly to consumers through brokers, mass marketing campaigns or through other traditional methods of credit distribution. These lenders can also offer their products online, either directly to prospective borrowers, through one or more of our online competitors, or both. If a significant number of potential consumers are able to obtain loans from our participating lenders without utilizing our service, our ability to generate revenue may be limited. Because we do not have exclusive relationships with the lenders whose loan offerings are offered on our online marketplace, consumers may obtain offers and loans from these lenders without using our service.
We maintain operations solely in the United States. 

10

TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Recent Accounting Pronouncements  
In December 2011, the Financial Accounting Standards Board ("FASB") issued new accounting guidance that requires additional disclosures on financial instruments and derivative instruments that are either offset in accordance with existing accounting guidance or are subject to an enforceable master netting arrangement or similar agreement. The new requirements do not change the accounting guidance on netting, but rather enhance the disclosures to more clearly show the impact of netting arrangements on a company's financial position. This new accounting guidance is effective on a retrospective basis for all comparative periods presented beginning on January 1, 2013. The adoption of this guidance did not have a material impact on our consolidated financial statements. 
In July 2012, the FASB issued new guidance which allows an entity to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that an indefinite-lived intangible asset is impaired. This assessment should be used as a basis for determining whether it is necessary to perform the quantitative impairment test. An entity would not be required to calculate the fair value of the intangible asset and perform the quantitative test unless the entity determines, based upon its qualitative assessment, that it is more likely than not that its fair value is less than its carrying value. The update expands previous guidance by providing more examples of events and circumstances that an entity should consider in determining whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. The update also allows an entity the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. This update is effective for annual and interim periods beginning after September 15, 2012, with early adoption permitted. The adoption of this guidance did not have a material impact on our consolidated financial statements. 
In February 2013, the FASB issued new accounting guidance that requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. The new accounting guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. We are evaluating the impact that the adoption will have on our consolidated financial statements in fiscal 2014. 
In July 2013, the FASB issued guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists.  The new accounting guidance is effective for interim and annual reporting periods beginning after December 15, 2013, with early adoption permitted.  Prospective or retrospective application is permitted. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements. 
NOTE 3—GOODWILL AND INTANGIBLE ASSETS
The balance of goodwill and intangible assets, net is as follows (in thousands)
 
September 30,
2013
 
December 31,
2012
Goodwill
$
486,720

 
$
486,720

Accumulated impairment losses
(483,088
)
 
(483,088
)
Net goodwill
$
3,632

 
$
3,632

 
 
 
 
Intangible assets with indefinite lives
$
10,142

 
$
10,142

Intangible assets with definite lives, net
570

 
689

Total intangible assets, net
$
10,712

 
$
10,831


11

TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Intangible Assets
Intangible assets with indefinite lives relate to our trademarks. Intangible assets with definite lives relate to the following (dollars in thousands) :
 
Cost
 
Accumulated
Amortization
 
Net
 
Weighted
Average
Amortization
Life (Years)
Purchase agreements
$
236

 
$
(200
)
 
$
36

 
5.0
Technology
25,194

 
(25,194
)
 

 
3.0
Customer lists
6,682

 
(6,151
)
 
531

 
4.2
Other
1,517

 
(1,514
)
 
3

 
2.5
Balance at September 30, 2013
$
33,629

 
$
(33,059
)
 
$
570

 
 
 
Cost
 
Accumulated
Amortization
 
Net
 
Weighted
Average
Amortization
Life (Years)
Purchase agreements
$
236

 
$
(165
)
 
$
71

 
5.0
Technology
25,194

 
(25,158
)
 
36

 
3.0
Customer lists
6,682

 
(6,106
)
 
576

 
4.2
Other
1,517

 
(1,511
)
 
6

 
2.5
Balance at December 31, 2012
$
33,629

 
$
(32,940
)
 
$
689

 
 
Amortization of intangible assets with definite lives is computed on a straight-line basis and, based on September 30, 2013 balances, such amortization for the next five years is estimated to be as follows (in thousands) :
 
Amortization Expense
Three months ending December 31, 2013
$
28

Year ending December 31, 2014
86

Year ending December 31, 2015
60

Year ending December 31, 2016
60

Year ending December 31, 2017
60

Thereafter
276

Total intangible assets with definite lives, net
$
570

 
NOTE 4—PROPERTY AND EQUIPMENT
The balance of property and equipment, net is as follows (in thousands) :
 
September 30,
2013
 
December 31,
2012
Computer equipment and capitalized software
$
26,439

 
$
25,592

Leasehold improvements
2,096

 
2,055

Furniture and other equipment
1,303

 
1,302

Projects in progress
1,545

 
500

Total gross property and equipment
31,383

 
29,449

Less: accumulated depreciation and amortization
(25,846
)
 
(23,294
)
Total property and equipment, net
$
5,537

 
$
6,155

 

12

TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


NOTE 5—ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following (in thousands) :
 
September 30,
2013
 
December 31,
2012
Litigation accruals
$
515

 
$
535

Accrued advertising expense
9,766

 
6,638

Accrued compensation and benefits
2,581

 
2,603

Accrued professional fees
2,863

 
1,399

Accrued restructuring costs
298

 
364

Customer deposits and escrows
3,891

 
2,101

Deferred rent
242

 
217

Other
4,406

 
6,103

Total accrued expenses and other current liabilities
$
24,562

 
$
19,960

An additional $0.3 million and $0.5 million of accrued restructuring liability is classified in other non-current liabilities at September 30, 2013 and December 31, 2012 , respectively. 
NOTE 6—EARNINGS PER SHARE  
The basic and diluted earnings per share were determined based on the following share data (in thousands) :
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Basic income per share:
 

 
 

 
 

 
 

Weighted average common shares
11,017

 
10,771

 
11,039

 
10,670

Diluted income per share:
 

 
 

 
 

 
 

Effect of stock options
419

 
244

 

 

Effect of dilutive share awards
284

 
370

 

 

Weighted average common shares
11,720

 
11,385

 
11,039

 
10,670

For the three months ended September 30, 2013 and 2012 , we had net income from continuing operations. Accordingly, potentially dilutive securities were included in the denominator for computing diluted earnings per share. Approximately 0.3 million shares related to potentially dilutive securities were excluded from the calculation of diluted earnings per share for the three months ended September 30, 2012 because their inclusion would have been anti-dilutive. No anti-dilutive shares were excluded for the three months ended September 30, 2013 .
For the nine months ended September 30, 2013 and 2012 , we had losses from continuing operations and, as a result, no potentially dilutive securities were included in the denominator for computing diluted earnings per share, because the impact would have been anti-dilutive. Accordingly, the weighted average basic shares outstanding were used to compute earnings per share amounts for these periods. For the nine months ended September 30, 2013 and 2012 , approximately 0.7 million and 2.1 million shares, respectively, related to potentially dilutive securities were excluded from the calculation of diluted earnings per share, because their inclusion would have been anti-dilutive.
 
Common Stock Repurchases
On January 11, 2010, our board of directors authorized the repurchase of up to $10 million of our common stock.  During the three and nine months ended September 30, 2013 , we purchased 97,726 and 180,453 shares of our common stock for aggregate consideration of $1.8 million and $3.3 million , respectively.  At September 30, 2013 , we had approximately $0.8 million remaining in our share repurchase authorization. 

13

TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


NOTE 7—STOCK-BASED COMPENSATION
Non-cash compensation expense related to equity awards is included in the following line items in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2013 and 2012 (in thousands) :
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
Cost of revenue
$
4

 
$
2

 
$
9

 
$
6

Selling and marketing expense
242

 
145

 
765

 
504

General and administrative expense
976

 
1,026

 
2,885

 
2,662

Product development
190

 
136

 
619

 
393

Total non-cash compensation expense
$
1,412

 
$
1,309

 
$
4,278

 
$
3,565

The forms of stock-based awards granted to Tree.com employees are principally RSUs, restricted stock and stock options. RSUs are awards in the form of units, denominated in a hypothetical equivalent number of shares of Tree.com common stock and with the value of each award equal to the fair value of Tree.com common stock at the date of grant. RSUs may be settled in cash, stock or both, as determined by the Compensation Committee at the time of grant. Each stock-based award is subject to service-based vesting, where a specific period of continued employment must pass before an award vests. Certain restricted stock awards also include market condition vesting, where certain market conditions must be achieved before an award vests. Tree.com recognizes expense for all stock-based awards for which vesting is considered probable. For stock-based awards, the accounting charge is measured at the grant date as the fair value of Tree.com common stock awarded and expensed ratably as non-cash compensation over the vesting term. 
The amount of stock-based compensation expense recognized in the consolidated statement of operations is reduced by estimated forfeitures, as the amount recorded is based on awards ultimately expected to vest. The forfeiture rate is estimated at the grant date based on historical experience and revised, if necessary, in subsequent periods if the actual forfeiture rate differs from the estimated rate.
During February 2013, our Chairman and CEO was granted 62,500 shares of restricted stock with a fair value of $1.1 million and a three year vesting period.  The fair value of the restricted stock is based upon the market price of the underlying common stock as of the date of grant.  Compensation expense is recognized on a straight-line basis over the vesting period.  He was also granted 62,500 shares of restricted stock which vest based on the achievement of a market-based performance target within three years , but not earlier than one year from the grant date. The market-based performance target was achieved during the third quarter of 2013. The fair value of the market-based performance restricted stock was determined to be $0.9 million using a Monte Carlo simulation model.  The fair value on grant date is recognized over the requisite service period.
A summary of changes in outstanding stock options for the nine months ended September 30, 2013 is as follows:
 
Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
 
 
 
 
 
(in years)
 
(in thousands)
Options outstanding at January 1, 2013
1,072,503

 
$
8.97

 
 
 
 

Granted

 

 
 
 
 

Exercised
(27,029
)
 
7.79

 
 
 
 

Forfeited

 

 
 
 
 

Expired
(1,737
)
 
11.63

 
 
 
 

Options outstanding at September 30, 2013
1,043,737

 
8.99

 
5.00
 
$
18,020

Options exercisable at September 30, 2013
892,445

 
$
9.35

 
4.47
 
$
15,092


14

TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


The following table summarizes the information about stock options outstanding and exercisable as of September 30, 2013 :
 
 
Options Outstanding
 
Options Exercisable
Range of Option Exercise Prices
 
Outstanding
 
Weighted
Average
Remaining
Contractual
Life in Years
 
Weighted
Average
Exercise
Price
 
Exercisable
 
Weighted
Average
Exercise
Price
$0.01 to $4.99
 
173

 
0.45
 
$
2.49

 
173

 
$
2.49

$5.00 to $7.45
 
304,327

 
7.96
 
6.65

 
153,035

 
6.39

$7.46 to $9.99
 
602,418

 
4.27
 
8.46

 
602,418

 
8.46

$10.00 to $14.99
 
10,029

 
1.00
 
12.27

 
10,029

 
12.27

$15.00 to $19.99
 
80,127

 
1.68
 
15.00

 
80,127

 
15.00

$20.00 to $20.19
 
46,663

 
1.68
 
20.19

 
46,663

 
20.19

As of September 30, 2013
 
1,043,737

 
5.00
 
$
8.99

 
892,445

 
$
9.35

Nonvested RSUs, restricted stock and restricted stock with a market condition as of September 30, 2013 and changes during the nine months ended September 30, 2013 are as follows:
 
RSUs
 
Restricted Stock
 
Restricted Stock
Market Condition
 
Number of
Shares
 
Weighted
Average
Grant Date
Fair Value
 
Number of
Shares
 
Weighted
Average
Grant Date
Fair Value
 
Number of
Shares
 
Weighted
Average
Grant Date
Fair Value
Nonvested at January 1, 2013
757,111

 
$
9.09

 
187,501

 
$
7.44

 

 
$

Granted
289,745

 
18.04

 
62,500

 
17.49

 
62,500

 
13.93

Vested
(276,291
)
 
9.60

 
(187,501
)
 
7.44

 

 

Forfeited
(76,545
)
 
9.56

 

 

 

 

Nonvested at September 30, 2013
694,020

 
$
12.69

 
62,500

 
$
17.49

 
62,500

 
$
13.93

 
NOTE 8—INCOME TAXES
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
 
(in thousands, except percentages)
Income tax benefit (provision)
$
98

 
$
(188
)
 
$
97

 
$
3,086

Effective tax rate
45.0
%
 
41.0
%
 
4.6
%
 
39.4
%
The company established a valuation allowance of approximately $55 million during the year ended December 31, 2012 to offset its U.S. net deferred tax assets, after excluding deferred tax liabilities related to indefinite-lived intangible assets that are not anticipated to provide a source of taxable income in the foreseeable future.  For the three and nine months ended September 30, 2013 , the effective tax rate was impacted by the indefinite-lived intangible assets, which were adjusted for the change to the North Carolina income tax rate enacted during the period. The effect of a change in tax rates on deferred tax balances is not apportioned among interim periods, but is recognized discretely in the period in which the change occurs. As such, all of the impact of the rate change has been recorded during the three months ended September 30, 2013 , resulting in a higher effective tax rate. For the three and nine months ended September 30, 2012 , our effective tax rates were higher than the federal statutory rate primarily due to the impact of state income taxes. 
NOTE 9—DISCRETIONARY CASH BONUS
During February 2013, the company incurred a compensation charge of $0.9 million related to a discretionary cash bonus payment to employee stock option holders. 

15

TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


NOTE 10—CONTINGENCIES
Overview
We are involved in legal proceedings on an ongoing basis. If we believe that a loss arising from such matters is probable and can be reasonably estimated, we accrue the estimated liability in our financial statements. If only a range of estimated losses can be determined, we accrue an amount within the range that, in our judgment, reflects the most likely outcome; if none of the estimates within that range is a better estimate than any other amount, we accrue the low end of the range. For those proceedings in which an unfavorable outcome is reasonably possible but not probable, we have disclosed an estimate of the reasonably possible loss or range of losses or we have concluded that an estimate of the reasonably possible loss or range of losses arising directly from the proceeding (i.e., monetary damages or amounts paid in judgment or settlement) is not material.
In assessing the materiality of a legal proceeding, we evaluate, among other factors, the amount of monetary damages claimed, as well as the potential impact of non-monetary remedies sought by plaintiffs (e.g., injunctive relief) that may require us to change our business practices in a manner that could have a material adverse impact on our business. With respect to the matters disclosed in this Note 10, unless otherwise indicated, we are unable to estimate the possible loss or range of losses that could potentially result from the application of such non-monetary remedies.
Specific Matters
Intellectual Property Litigation
Zillow
LendingTree v. Zillow, Inc., et al. Civil Action No. 3:10-cv-439 . On September 8, 2010, the company filed an action for patent infringement in the US District Court for the Western District of North Carolina against Zillow, Inc., Nextag, Inc., Quinstreet, Inc., Quinstreet Media, Inc. and Adchemy, Inc. The complaint was amended to include Leadpoint, Inc. d/b/a Securerights on September 24, 2010. The complaint alleges that each of the defendants infringe one or both of the company's patents—U.S. Patent No. 6,385,594, entitled "Method and Computer Network for Co-Ordinating a Loan over the Internet," and U.S. Patent No. 6,611,816, entitled "Method and Computer Network for Co-Ordinating a Loan over the Internet." Collectively, the asserted patents cover computer hardware and software used in facilitating business between computer users and multiple lenders on the internet. The defendants in this action asserted various counterclaims against the company, including the assertion by certain of the defendants of counterclaims alleging illegal monopolization via our maintenance of the asserted patents. In July 2011, the company reached a settlement agreement with Leadpoint, Inc. On July 20, 2011, all claims against Leadpoint, Inc. and all counter-claims against the company by Leadpoint, Inc. were dismissed. In November 2012, the company reached a settlement agreement with Quinstreet, Inc. and Quinstreet Media, Inc. (collectively, the Quinstreet Parties); all claims against the Quinstreet Parties and all counterclaims against the company by the Quinstreet Parties were dismissed. Trial is currently expected in early 2014. The company intends to vigorously defend against all such counterclaims.
Internet Patents Corp.
Internet Patents Corporation f/k/a InsWeb v. Tree.com, Inc., No. C-12-6505 (U.S. Dist. Ct., N.D. Cal.).  In December 2012, the plaintiff filed a patent infringement lawsuit against the company seeking a judgment that we had infringed a patent held by the plaintiff. Process was formally served with respect to this matter in April 2013.  The plaintiff sought injunctive relief, damages, costs, expenses, pre- and post-judgment interest, punitive damages and attorneys' fees.  The plaintiff alleged that we infringe U.S. Patent No. 7,707,505, entitled "Dynamic Tabs for a Graphical User Interface".  On October 25, 2013, the court dismissed the suit based on the finding that the plaintiff's claims failed as a matter of law because the asserted patent is invalid for lack of patent-eligible subject matter. Plaintiff filed a notice of appeal on November 7, 2013.
Money Suite
The Money Suite Company v. Lending Tree, LLC, No. 1:13-ev-986 (U.S. Dist. Ct, D Del.).  In June 2013, the plaintiff filed a patent infringement lawsuit against the company seeking a judgment that we infringed a patent held by plaintiff.  The plaintiff alleges that we infringe U.S. Patent No. 6,685,189 for "an apparatus and method using front end network gateways and search criteria for efficient quoting at a remote location".  The plaintiff seeks damages (including pre- and post- judgment interest thereon), costs and attorneys' fees.  We believe the plaintiff's allegations lack merit and intend to defend against this action vigorously. 

16

TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Other Litigation
Boschma
Boschma v. Home Loan Center, Inc., No. SACV7-613 (U.S. Dist. Ct., C.D. Cal.).  On May 25, 2007, the plaintiffs filed this putative class action against Home Loan Center, Inc. (HLC) in the U.S. District Court for the Central District of California. The plaintiffs allege that HLC sold them an option "ARM" (adjustable-rate mortgage) loan but failed to disclose in a clear and conspicuous manner, among other things, that the interest rate was not fixed, that negative amortization could occur and that the loan had a prepayment penalty. Based upon these factual allegations, the plaintiffs asserted violations of the federal Truth in Lending Act, violations of the Unfair Competition Law, breach of contract, and breach of the covenant of good faith and fair dealing. The plaintiffs purport to represent a class of all individuals who between June 1, 2003 and May 31, 2007 obtained through HLC an option ARM loan on their primary residence located in California, and seek rescission, damages, attorneys' fees and injunctive relief. The plaintiffs have not yet filed a motion for class certification, but have filed a total of eight complaints in connection with this lawsuit. Each of the first seven complaints has been dismissed by the federal and state courts. The plaintiffs filed the eighth complaint (a Second Amended Complaint) in Orange County (California) Superior Court on March 4, 2010 alleging only the fraud and Unfair Competition Law claims. As with each of the seven previous versions of plaintiffs' complaint, the Second Amended Complaint was dismissed in April 2010. The plaintiffs appealed the dismissal and on August 10, 2011, the appellate court reversed the trial court's dismissal and directed the trial court to overrule the demurrer. The case was remanded to superior court.  During the second quarter of 2013, the parties reached a tentative settlement agreement with respect to this matter. A preliminary settlement approval hearing is scheduled for November 2013. A provision is included in current liabilities of discontinued operations as of September 30, 2013 . The impact of the settlement was not material. 
Mortgage Store, Inc.
Mortgage Store, Inc. v. LendingTree Loans d/b/a Home Loan Center, Inc., No. 6CC250 (Cal. Super. Ct., Orange Cty.).  On November 30, 2006, The Mortgage Store, Inc. and Castleview Home Loans, Inc. filed this putative class action against HLC in the California Superior Court for Orange County. The plaintiffs, two former network lenders, alleged that HLC interfered with LendingTree's contracts with network lenders by taking referrals from LendingTree without adequately disclosing the relationship between them and that HLC charged the plaintiffs higher rates and fees than they otherwise would have been charged. Based upon these factual allegations, the plaintiffs assert claims for intentional interference with contractual relations, intentional interference with prospective economic advantage, and violation of the California Unfair Competition Law and California Business and Professions Code §17500. The plaintiffs purport to represent all network lenders from December 14, 2004 to date, and seek damages, restitution, attorneys' fees and punitive damages.
The plaintiffs' motion for class certification was granted April 29, 2010. On October 17, 2011, the court granted HLC's motion for summary judgment. Judgment was entered in favor of HLC on April 9, 2012. On June 15, 2012, the plaintiffs filed a Notice of Appeal. The plaintiffs filed their opening appellate brief on December 17, 2012. We filed our opposition to the plaintiffs' appellate brief in April 2013. Oral arguments were heard on this matter on September 25, 2013. We believe the plaintiffs' allegations lack merit and we intend to defend against this action vigorously. 
Dijkstra
Lijkel Dijkstra v. Harry Carenbauer, Home Loan Center, Inc. et al., No. 5:11-cv-152-JPB (U.S. Dist. Ct., N.D.WV).  On November 7, 2008, the plaintiffs filed this putative class action in Circuit Court of Ohio County, West Virginia against Harry Carenbauer, HLC, HLC Escrow, Inc. et al. The complaint alleges that HLC engaged in the unauthorized practice of law in West Virginia by permitting persons who were neither admitted to the practice of law in West Virginia nor under the direct supervision of a lawyer admitted to the practice of law in West Virginia to close mortgage loans. The plaintiffs assert claims for declaratory judgment, contempt, injunctive relief, conversion, unjust enrichment, breach of fiduciary duty, intentional misrepresentation or fraud, negligent misrepresentation, violation of the West Virginia Consumer Credit and Protection Act (CCPA), violation of the West Virginia Lender, Broker & Services Act, civil conspiracy, outrage and negligence. The claims against all defendants other than Mr. Carenbauer, HLC and HLC Escrow, Inc. have been dismissed. The case was removed to federal court in October 2011. On January 3, 2013, the court granted a conditional class certification only with respect to the declaratory judgment, contempt, unjust enrichment and CCPA claims. The conditional class includes consumers with mortgage loans in effect any time after November 8, 2007 who obtained such loans through HLC, and whose loans were closed by persons not admitted to the practice of law in West Virginia or by persons not under the direct supervision of a lawyer admitted to the practice of law in West Virginia. A trial is expected in March 2014 . We believe that the plaintiffs' allegations lack merit and we intend to defend against this action vigorously. 

17

TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Massachusetts Division of Banks
On February 11, 2011, the Massachusetts Division of Banks (the "Division") delivered a Report of Examination/Inspection to LendingTree, LLC, which identified various alleged violations of Massachusetts and federal laws, including the alleged insufficient delivery by LendingTree, LLC of various disclosures to its customers. On October 14, 2011, the Division provided a proposed Consent Agreement and Order to settle the Division's allegations, which the Division had shared with other state mortgage lending regulators. Thirty-four of such state mortgage lending regulators (the "Joining Regulators") indicated that if LendingTree, LLC would enter into the Consent Agreement and Order, they would agree not to pursue any analogous allegations that they otherwise might assert. As of the date of this report, none of the Joining Regulators have asserted any such allegations.
 The proposed Consent Agreement and Order calls for a fine to be allocated among the Division and the Joining Regulators and for LendingTree, LLC to adopt various new procedures and practices. We have commenced negotiations toward an acceptable Consent Agreement and Order. We do not believe our mortgage exchange business violated any federal or state mortgage lending laws; nor do we believe that any past operations of the mortgage business have resulted in a material violation of any such laws. Should the Division or any Joining Regulator bring any actions relating to the matters alleged in the February 2011 Report of Examination/Inspection, we intend to defend against such actions vigorously. The range of possible loss is estimated to be between $0.5 million and $6.5 million , and a reserve of $0.5 million has been established for this matter as of September 30, 2013
NOTE 11—SEGMENT INFORMATION  
Effective December 31, 2012, we expanded our reportable segments from one to two , consisting of mortgage and non-mortgage. The change was made as the convergence of economic similarities associated with our mortgage and non-mortgage operating segments was no longer expected. This decision was made in connection with the update of our annual budget and forecast, which occurs in the fourth quarter each year. The non-mortgage reportable segment consists of our auto, education, home services and other operating segments, which are not yet mature businesses and have been aggregated. Prior period results have been reclassified to conform with the change in reportable segments.
The expenses presented below for each segment include allocations of certain corporate expenses that are identifiable and directly benefit those segments. The unallocated expenses are those corporate overhead expenses that are not directly attributable to a segment and include: corporate expenses such as finance, legal, executive technology support and human resources, as well as elimination of inter-segment revenue and costs.
Adjusted EBITDA, a non-GAAP measure, is the primary metric by which the chief operating decision maker evaluates the performance of our businesses, on which our internal budgets are based and by which management is compensated. Adjusted EBITDA is defined as operating income or loss (which excludes interest expense and taxes) adjusted to exclude amortization of intangibles and depreciation, and to further exclude (1) non-cash compensation expense, (2) non-cash intangible asset impairment charges, (3) gain/loss on disposal of assets, (4) restructuring and severance expenses, (5) litigation settlements and contingencies, (6) adjustments for significant acquisitions or dispositions, and (7) one-time items.
Assets and other balance sheet information are not used by the chief operating decision maker.

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TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Summarized information by segment and reconciliations to Adjusted EBITDA and income (loss) before income taxes is as follows (in thousands) :
 
Three Months Ended September 30, 2013
 
Mortgage
 
Non-Mortgage
 
Corporate
 
Total
Revenue
$
34,257

 
$
3,086

 
$

 
$
37,343

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue (exclusive of depreciation shown separately below)
1,545

 
168

 
20

 
1,733

Selling and marketing expense
23,072

 
1,760

 

 
24,832

General and administrative expense
711

 
604

 
4,295

 
5,610

Product development
990

 
227

 

 
1,217

Depreciation
357

 
426

 
108

 
891

Amortization of intangibles

 
33

 

 
33

Restructuring and severance
1

 
(77
)
 
6

 
(70
)
Litigation settlements and contingencies

 

 
2,875

 
2,875

Total costs and expenses
26,676

 
3,141

 
7,304

 
37,121

Operating income (loss)
7,581

 
(55
)
 
(7,304
)
 
222

Adjustments to reconcile to Adjusted EBITDA:
 

 
 

 
 

 
 

Amortization of intangibles

 
33

 

 
33

Depreciation
357

 
426

 
108

 
891

Restructuring and severance
1

 
(77
)
 
6

 
(70
)
Loss on disposal of assets

 

 
1

 
1

Non-cash compensation
411

 
220

 
781

 
1,412

Litigation settlements and contingencies

 

 
2,875

 
2,875

Adjusted EBITDA
$
8,350

 
$
547

 
$
(3,533
)
 
$
5,364

 
 
 
 
 
 
 
 
Adjustments to reconcile to income before income taxes:
 

 
 

 
 

 
 

Operating income
 

 
 

 
 

 
$
222

Interest expense
 

 
 

 
 

 
(4
)
Income before income taxes
 

 
 

 
 

 
$
218



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TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


 
Three Months Ended September 30, 2012
 
Mortgage
 
Non-Mortgage
 
Corporate
 
Total
Revenue
$
19,471

 
$
3,563

 
$
262

 
$
23,296

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue (exclusive of depreciation shown separately below)
879

 
149

 
203

 
1,231

Selling and marketing expense
9,755

 
3,807

 
(186
)
 
13,376

General and administrative expense
1,117

 
551

 
3,864

 
5,532

Product development
541

 
312

 

 
853

Depreciation
389

 
429

 
116

 
934

Amortization of intangibles

 
101

 

 
101

Restructuring and severance
16

 
6

 
(70
)
 
(48
)
Litigation settlements and contingencies

 

 
510

 
510

Total costs and expenses
12,697

 
5,355

 
4,437

 
22,489

Operating income (loss)
6,774

 
(1,792
)
 
(4,175
)
 
807

Adjustments to reconcile to Adjusted EBITDA:
 

 
 

 
 

 
 

Amortization of intangibles

 
101

 

 
101

Depreciation
389

 
429

 
116

 
934

Restructuring and severance
16

 
6

 
(70
)
 
(48
)
Loss on disposal of assets
284

 

 

 
284

Non-cash compensation
201

 
129

 
979

 
1,309

Litigation settlements and contingencies

 

 
510

 
510

Adjusted EBITDA
$
7,664

 
$
(1,127
)
 
$
(2,640
)
 
$
3,897

 
 
 
 
 
 
 
 
Adjustments to reconcile to income before income taxes:
 

 
 

 
 

 
 

Operating income
 

 
 

 
 

 
$
807

Interest expense
 

 
 

 
 

 
(349
)
Income before income taxes
 

 
 

 
 

 
$
458

 

20

TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


 
Nine Months Ended September 30, 2013
 
Mortgage
 
Non-Mortgage
 
Corporate
 
Total
Revenue
$
93,305

 
$
8,902

 
$
622

 
$
102,829

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue (exclusive of depreciation shown separately below)
4,095

 
505

 
439

 
5,039

Selling and marketing expense
62,351

 
6,117

 
5

 
68,473

General and administrative expense
2,563

 
1,534

 
13,720

 
17,817

Product development
3,166

 
748

 

 
3,914

Depreciation
1,076

 
1,269

 
303

 
2,648

Amortization of intangibles

 
119

 

 
119

Restructuring and severance
24

 
48

 
4

 
76

Litigation settlements and contingencies

 

 
6,812

 
6,812

Total costs and expenses
73,275

 
10,340

 
21,283

 
104,898

Operating income (loss)
20,030

 
(1,438
)
 
(20,661
)