LendingTree, Inc.
Tree.com, Inc. (Form: 10-Q, Received: 08/08/2014 06:05:15)
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 June 30, 2014
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  x
 
 
 
Non-accelerated filer  o
 
Smaller reporting company  o
(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 August 5, 2014 , there were 11,308,431 shares of the Registrant's common stock, par value $.01 per share, outstanding, excluding treasury shares.
 





TABLE OF CONTENTS


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

2

Table of Contents

PART I—FINANCIAL INFORMATION


Item 1.  Financial Statements  

TREE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)  
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands, except per share amounts)
Revenue
$
42,144

 
$
37,406

 
$
82,180

 
$
65,486

Costs and expenses:
 

 
 

 
 

 
 

Cost of revenue (exclusive of depreciation shown separately below)
1,895

 
1,950

 
3,560

 
3,306

Selling and marketing expense
28,964

 
26,386

 
56,413

 
43,641

General and administrative expense
5,478

 
5,651

 
11,611

 
12,207

Product development
1,826

 
1,492

 
3,758

 
2,697

Depreciation
946

 
872

 
1,701

 
1,757

Amortization of intangibles
27

 
43

 
55

 
86

Restructuring and severance
23

 
148

 
225

 
146

Litigation settlements and contingencies
385

 
2,909

 
8,092

 
3,937

Total costs and expenses
39,544

 
39,451

 
85,415

 
67,777

Operating income (loss)
2,600

 
(2,045
)
 
(3,235
)
 
(2,291
)
Other expense:
 

 
 

 
 

 
 

Interest expense

 
(7
)
 

 
(14
)
Income (loss) before income taxes
2,600

 
(2,052
)
 
(3,235
)
 
(2,305
)
Income tax benefit (expense)
83

 
19

 
84

 
(1
)
Net income (loss) from continuing operations
2,683

 
(2,033
)
 
(3,151
)
 
(2,306
)
Discontinued operations:
 
 
 
 
 
 
 
Gain from sale of discontinued operations, net of tax

 
10,003

 

 
10,101

Loss from operations of discontinued operations, net of tax
(2,931
)
 
(891
)
 
(3,505
)
 
(3,433
)
Income (loss) from discontinued operations
(2,931
)
 
9,112

 
(3,505
)
 
6,668

Net income (loss)
$
(248
)
 
$
7,079

 
$
(6,656
)
 
$
4,362

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
11,214

 
11,133

 
11,178

 
11,050

Diluted
11,849

 
11,133

 
11,178

 
11,050

Income (loss) per share from continuing operations:
 

 
 

 
 

 
 

Basic
$
0.24

 
$
(0.18
)
 
$
(0.28
)
 
$
(0.21
)
Diluted
$
0.23

 
$
(0.18
)
 
$
(0.28
)
 
$
(0.21
)
Income (loss) per share from discontinued operations:
 

 
 

 
 

 
 

Basic
$
(0.26
)
 
$
0.82

 
$
(0.31
)
 
$
0.60

Diluted
$
(0.25
)
 
$
0.82

 
$
(0.31
)
 
$
0.60

Income (loss) per share attributable to common shareholders:
 

 
 

 
 

 
 

Basic
$
(0.02
)
 
$
0.64

 
$
(0.60
)
 
$
0.39

Diluted
$
(0.02
)
 
$
0.64

 
$
(0.60
)
 
$
0.39

 
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
 (Unaudited)
 
 
June 30,
2014
 
December 31,
2013
 
(in thousands, except par value and share amounts)
ASSETS:
 

 
 

Cash and cash equivalents
$
87,618

 
$
91,667

Restricted cash and cash equivalents
22,044

 
26,017

Accounts receivable (net of allowance of $474 and $408, respectively)
13,260

 
12,850

Prepaid and other current assets
1,518

 
1,689

Current assets of discontinued operations
715

 
521

Total current assets
125,155

 
132,744

Property and equipment (net of accumulated depreciation of $19,709 and $18,008, respectively)
5,602

 
5,344

Goodwill
3,632

 
3,632

Intangible assets, net
11,219

 
10,684

Other non-current assets
102

 
111

Non-current assets of discontinued operations
100

 
129

Total assets
$
145,810

 
$
152,644

 
 
 
 
LIABILITIES:
 

 
 

Accounts payable, trade
$
5,949

 
$
4,881

Accrued expenses and other current liabilities
23,505

 
23,314

Current liabilities of discontinued operations (Note 12)
32,620

 
32,004

Total current liabilities
62,074

 
60,199

Other non-current liabilities
67

 
334

Deferred income taxes
4,849

 
4,849

Non-current liabilities of discontinued operations
261

 
254

Total liabilities
67,251

 
65,636

Commitments and contingencies (Note 9)


 


SHAREHOLDERS' EQUITY:
 

 
 

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

 

Common stock $.01 par value; 50,000,000 shares authorized; 12,771,101 and 12,619,835 shares issued, respectively, and 11,342,969 and 11,250,903 shares outstanding, respectively
128

 
126

Additional paid-in capital
906,866

 
907,148

Accumulated deficit
(814,189
)
 
(807,533
)
Treasury stock 1,428,132 and 1,368,932 shares, respectively
(14,246
)
 
(12,733
)
Total shareholders' equity
78,559

 
87,008

Total liabilities and shareholders' equity
$
145,810

 
$
152,644

 
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, 2013
$
87,008

 
12,620

 
$
126

 
$
907,148

 
$
(807,533
)
 
1,369

 
$
(12,733
)
Comprehensive loss:
 

 
 

 
 

 
 

 
 

 
 

 
 

Net loss
(6,656
)
 

 

 

 
(6,656
)
 

 

Comprehensive loss
$
(6,656
)
 
 
 
 
 
 
 
 
 
 
 
 
Non-cash compensation
3,076

 

 

 
3,076

 

 

 

Purchase of treasury stock
(1,513
)
 

 

 

 

 
59

 
(1,513
)
Dividends
(12
)
 

 

 
(12
)
 

 

 

Issuance of restricted stock awards

 
43

 
1

 
(1
)
 

 

 

Net-share settlement of stock-based compensation, net of issuance of common stock upon restricted stock unit vesting and stock option exercise
(3,344
)
 
108

 
1

 
(3,345
)
 

 

 

Balance as of June 30, 2014
$
78,559

 
12,771

 
$
128

 
$
906,866

 
$
(814,189
)
 
1,428

 
$
(14,246
)
 
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)
 
Six Months Ended June 30,
 
2014
 
2013
 
(in thousands)
Cash flows from operating activities attributable to continuing operations:
 

 
 

Net income (loss)
$
(6,656
)
 
$
4,362

Less: Loss (income) from discontinued operations
3,505

 
(6,668
)
Net loss from continuing operations
(3,151
)
 
(2,306
)
Adjustments to reconcile net loss from continuing operations to net cash provided by operating activities attributable to continuing operations:
 

 
 

Loss on disposal of fixed assets
52

 
24

Amortization of intangibles
55

 
86

Depreciation
1,701

 
1,757

Non-cash compensation expense
3,073

 
2,866

Deferred income taxes
(1
)
 

Bad debt expense
143

 
73

Changes in current assets and liabilities:
 

 
 

Accounts receivable
(813
)
 
(6,871
)
Prepaid and other current assets
(399
)
 
91

Accounts payable, accrued expenses and other current liabilities
1,107

 
6,241

Income taxes payable
576

 
(570
)
Other, net
(161
)
 
(321
)
Net cash provided by operating activities attributable to continuing operations
2,182

 
1,070

Cash flows from investing activities attributable to continuing operations:
 

 
 

Capital expenditures
(2,039
)
 
(1,217
)
Acquisition of intangible assets
(530
)
 

Decrease (increase) in restricted cash
3,973

 
(652
)
Net cash provided by (used in) investing activities attributable to continuing operations
1,404

 
(1,869
)
Cash flows from financing activities attributable to continuing operations:
 

 
 

Payments related to net-share settlement of stock-based compensation, net of proceeds from exercise of stock options
(3,237
)
 
(1,473
)
Purchase of treasury stock
(1,470
)
 
(1,452
)
Dividends
(140
)
 
284

Net cash used in financing activities attributable to continuing operations
(4,847
)
 
(2,641
)
Total cash used in continuing operations
(1,261
)
 
(3,440
)
Net cash used in operating activities attributable to discontinued operations
(2,788
)
 
(1,467
)
Net cash provided by investing activities attributable to discontinued operations

 
10,000

Total cash provided by (used in) discontinued operations
(2,788
)
 
8,533

Net increase (decrease) in cash and cash equivalents
(4,049
)
 
5,093

Cash and cash equivalents at beginning of period
91,667

 
80,190

Cash and cash equivalents at end of period
$
87,618

 
$
85,283

 

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
(Unaudited)




NOTE 1—ORGANIZATION
Company Overview
Tree.com, Inc. ("Tree.com" or the "Company") 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. The family of brands includes: LendingTree ® , GetSmart ® , LendingTree Autos SM , LendingTree Education SM and LendingTree Home Pros SM . 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.
The consolidated financial statements include the accounts of Tree.com and all its wholly-owned entities. Intercompany transactions and accounts have been eliminated.
Certain amounts from the prior consolidated financial statements have been reclassified to conform to the presentation adopted in the current year.
Discontinued Operations
The businesses of RealEstate.com, REALTORS ®  (which represents the former Real Estate segment) and LendingTree Loans are presented as discontinued operations in the accompanying consolidated balance sheets, consolidated statements of operations and consolidated cash flows for all periods presented. The notes accompanying these consolidated financial statements reflect the Company's continuing operations and, unless otherwise noted, exclude information related to the discontinued operations.
LendingTree Loans
On May 12, 2011, the Company entered into an asset purchase agreement with Discover Bank ("Discover"), 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 its LendingTree Loans business. The sale was completed 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 and recognized as a gain from sale of discontinued operations in the second quarter of 2013.
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, as of June 30, 2014 , $16.1 million is being held in escrow pending resolution of certain actual and/or contingent liabilities that remain with the Company following the sale. The escrowed amount is recorded as restricted cash as of June 30, 2014 .
Separate from the asset purchase agreement, Tree.com 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 the Company's mortgage exchange following completion of the services.
Basis of Presentation
The accompanying unaudited interim consolidated financial statements as of June 30, 2014 and for the three and six months ended June 30, 2014 and 2013 , respectively, have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). 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 the Company's financial position for the periods presented. The results for the three and six months ended June 30, 2014 are not necessarily indicative of the results to be expected for the year ending December 31, 2014 , or any other period. The accompanying consolidated balance sheet as of December 31, 2013 was derived from audited financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2013 (the "2013 Annual Report"). These consolidated financial statements do not include all of the information and footnotes required by GAAP for annual financial statements. Accordingly, they should be read in conjunction with the audited financial statements and notes thereto included in the 2013 Annual Report. 

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Table of Contents

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 GAAP. 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; various other allowances, reserves and accruals; and assumptions related to the determination of stock-based compensation. 
Certain Risks and Concentrations
Tree.com's 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 the Company to concentration of credit risk at June 30, 2014 , consist primarily of cash and cash equivalents and accounts receivable, as disclosed in the consolidated balance sheet. Cash and cash equivalents are in excess of Federal Deposit Insurance Corporation insurance limits, but are maintained with quality financial institutions of high credit. The Company generally requires certain network lenders to maintain security deposits with the Company, which in the event of non-payment, would be applied against any accounts receivable outstanding.
Due to the nature of the mortgage lending industry, interest rate increases may negatively impact future revenue from the Company's lender network.
Lenders participating on the Company's 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 online competitors, or both. If a significant number of potential consumers are able to obtain loans from participating lenders without utilizing the Company's service, its ability to generate revenue may be limited. Because the Company does not have exclusive relationships with the lenders whose loan offerings are offered on its online marketplace, consumers may obtain offers and loans from these lenders without using its service.
The Company maintains operations solely in the United States.
Litigation Settlements and Contingencies
Litigation settlements and contingencies consists of expenses related to actual or anticipated litigation settlements, in addition to legal fees incurred in connection with various patent litigation claims the Company pursues against others.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09 related to revenue recognition. This ASU was initiated as a joint project between the FASB and the International Accounting Standards Board ("IASB") to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP and IFRS. This guidance will supersede the existing revenue recognition requirements in Accounting Standards Codification ("ASC") Topic 605, Revenue Recognition and is effective for annual reporting periods beginning after December 15, 2016. Early adoption is not permitted and the ASU can be applied (i) retrospectively to each prior period presented or (ii) retrospectively with the cumulative effect of initially adopting the ASU recognized at the date of initial application. The Company is evaluating the impact this ASU will have on its consolidated financial statements.
There are no recently issued accounting pronouncements that were adopted during the quarter ended June 30, 2014 .

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Table of Contents

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


NOTE 3—RESTRICTED CASH
Restricted cash and cash equivalents consists of the following (in thousands) :
 
June 30,
2014
 
December 31,
2013
Cash in escrow for surety bonds
$
2,453

 
$
2,453

Cash in escrow for corporate purchasing card program
400

 
400

Cash in escrow for sale of LendingTree Loans (a)
16,105

 
18,117

Cash in escrow for earnout related to an acquisition (b)

 
1,956

Cash restricted for loan loss obligations
3,051

 
3,051

Other
35

 
40

Total restricted cash and cash equivalents
$
22,044

 
$
26,017

(a)
Home Loan Center, Inc. ("HLC"), a subsidiary of the Company, continues to be liable for certain indemnification obligations, repurchase obligations and premium repayment obligations following the sale of substantially all of the operating assets of its LendingTree Loans business in the second quarter of 2012. During the second quarter of 2014, the Company reached and executed a settlement with one of its secondary market purchasers related to these contingent liabilities, upon which $2.0 million of cash previously held in escrow was released to the Company. This settlement had no impact on the results of operations for the three and six months ended June 30, 2014 .
(b)
During the first quarter of 2014, the Company reached and executed a settlement with the disputing party on the earnout related to an acquisition, upon which $2.0 million of cash previously held in escrow was released, of which $1.0 million was paid out to the disputing party. This settlement had no impact on the results of operations for the three and six months ended June 30, 2014 .
NOTE 4—GOODWILL AND INTANGIBLE ASSETS
The balance of goodwill and intangible assets, net is as follows (in thousands)
 
June 30,
2014
 
December 31,
2013
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
1,077

 
542

Total intangible assets, net
$
11,219

 
$
10,684

Goodwill and Indefinite-Lived Intangible Assets
The Company's goodwill is associated with its one reportable segment, lending. Intangible assets with indefinite lives relate to the Company's trademarks.

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


Intangible Assets with Definite Lives
On June 30, 2014, the Company acquired certain intangible assets to be used in its home services business for $0.6 million plus contingent consideration of $0 to $0.8 million . As of August 5, 2014 , the Company has not completed its determination of the final purchase price or the allocation thereof to these intangible assets. Accordingly, reflected in the tables below, the Company has preliminarily recorded the $0.6 million paid on the acquisition date to customer lists and other intangible assets.
Intangible assets with definite lives relate to the following (in thousands) :
 
Cost
 
Accumulated
Amortization
 
Net
Purchase agreements
$
236

 
$
(236
)
 
$

Technology
25,194

 
(25,194
)
 

Customer lists
7,222

 
(6,196
)
 
1,026

Other
1,567

 
(1,516
)
 
51

Balance at June 30, 2014
$
34,219

 
$
(33,142
)
 
$
1,077

 
Cost
 
Accumulated
Amortization
 
Net
Purchase agreements
$
236

 
$
(212
)
 
$
24

Technology
25,194

 
(25,194
)
 

Customer lists
6,682

 
(6,166
)
 
516

Other
1,517

 
(1,515
)
 
2

Balance at December 31, 2013
$
33,629

 
$
(33,087
)
 
$
542

Amortization of intangible assets with definite lives is computed on a straight-line basis and, based on balances as of June 30, 2014 , future amortization is estimated to be as follows (in thousands) :
 
Amortization Expense
Remainder of current year
$
66

Year ending December 31, 2015
101

Year ending December 31, 2016
101

Year ending December 31, 2017
92

Year ending December 31, 2018
84

Thereafter
633

Total intangible assets with definite lives, net
$
1,077

 

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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) :
 
June 30,
2014
 
December 31,
2013
Accrued litigation liabilities
$
500

 
$
500

Accrued advertising expense
11,501

 
8,837

Accrued compensation and benefits
2,614

 
3,378

Accrued professional fees
823

 
1,806

Accrued restructuring costs
295

 
284

Customer deposits and escrows
4,424

 
4,279

Deferred rent
271

 
245

Other
3,077

 
3,985

Total accrued expenses and other current liabilities
$
23,505

 
$
23,314

NOTE 6—SHAREHOLDERS' EQUITY  
Basic and diluted loss per share was determined based on the following share data (in thousands) :
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Weighted average basic common shares
11,214

 
11,133

 
11,178

 
11,050

Effect of stock options
461

 

 

 

Effect of dilutive share awards
174

 

 

 

Weighted average diluted common shares
11,849

 
11,133

 
11,178

 
11,050

For the six months ended June 30, 2014 and the three and six months ended June 30, 2013 , the Company had losses from continuing operations and, as a result, no potentially dilutive securities were included in the denominator for computing diluted loss per share, because the impact would have been anti-dilutive. Accordingly, the weighted average basic shares outstanding were used to compute loss per share amounts for these periods. For the three months ended June 30, 2013 , approximately 0.6 million shares, and for the six months ended June 30, 2014 and 2013 , approximately 0.7 million and 0.7 million shares, respectively, related to potentially dilutive securities were excluded from the calculation of diluted loss per share, because their inclusion would have been anti-dilutive. For the three months ended June 30, 2014 , less than 0.1 million shares 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, the board of directors authorized the repurchase of up to $10.0 million of Tree.com's common stock.  On May 7, 2014, the board of directors authorized the repurchase of up to an additional $10.0 million of Tree.com's common stock. During the three and six months ended June 30, 2014 , the Company purchased 59,200 shares of its common stock pursuant to this stock repurchase program. At June 30, 2014 , approximately $8.6 million remains authorized for share repurchase. 

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


NOTE 7—STOCK-BASED COMPENSATION
Non-cash compensation related to equity awards is included in the following line items in the accompanying consolidated statements of operations (in thousands) :
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
Cost of revenue
$
7

 
$
3

 
$
13

 
$
5

Selling and marketing expense
226

 
306

 
459

 
523

General and administrative expense
928

 
879

 
1,989

 
1,909

Product development
260

 
244

 
576

 
429

Restructuring and severance

 

 
36

 

Total non-cash compensation
$
1,421

 
$
1,432

 
$
3,073

 
$
2,866

Stock Options
A summary of changes in outstanding stock options is as follows:
 
Number of Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value (a)
 
 
 
(per option)
 
(in years)
 
(in thousands)
Options outstanding at January 1, 2014
1,038,999

 
$
8.98

 
 
 
 

Granted (b)
104,910

 
27.95

 
 
 
 

Exercised
(4,534
)
 
12.12

 
 
 
 

Forfeited

 

 
 
 
 

Expired
(669
)
 
13.46

 
 
 
 

Options outstanding at June 30, 2014
1,138,706

 
10.72

 
4.76
 
$
21,171

Options exercisable at June 30, 2014
983,795

 
$
9.04

 
4.12
 
$
19,771

(a)
The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the Company's closing stock price of $29.14 on the last trading day of the quarter ended June 30, 2014 and the exercise price, multiplied by the number of shares covered by in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2014 . The intrinsic value changes based on the market value of the Company's common stock.
(b)
During the first six months ended June 30, 2014 , the Company granted stock options to certain executives with weighted average grant date fair values per share ranging from $12.29 to $17.13 that vest over a period of three years from the grant date and to non-employee members of the board of directors with a weighted average grant date fair value per share of $13.08 that vest over a period of two years from the grant date. For purposes of determining stock-based compensation expense, the weighted average grant date fair value per share of the stock options was estimated using the Black-Scholes option pricing model, which requires the use of various key assumptions. The weighted average assumptions used are as follows:
Expected term (1)
5.75 - 6.0 years

Expected dividend (2)

Expected volatility (3)
53% - 54%

Risk-free interest rate (4)
1.85% - 1.97%


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(1)
The expected term of stock options granted was calculated using the 'Simplified Method', which utilizes the midpoint between the weighted average time of vesting and the end of the contractual term. This method was utilized for the stock options due to a lack of historical exercise behavior by the Company's employees.
(2)
For all stock options granted in 2014 , no dividends are expected to be paid over the contractual term of the stock options, resulting in a zero expected dividend rate.
(3)
The expected volatility rate is based on the historical volatility of the Company's common stock for the four years preceding the grant date, supplemented with the historical volatility of its peer group for the two years preceding the Company's historical volatility. A blended rate was used because the Company became a public company in 2008 and, therefore, does not have a historical volatility equal to the expected term of these awards.
(4)
The risk-free interest rate is specific to the date of grant. The risk-free interest rate is based on U.S. Treasury yields for notes with comparable expected terms as the awards, in effect at the grant date.
On August 6, 2014, the Company granted 1,000,000 stock options with an exercise price of $26.59 to certain executives, of which 25% and 75% vest over a period of 2.5 years and 3.5 years , respectively, from the grant date. The Company has not completed its determination of the grant date fair value per share of the stock options.
Restricted Stock Units and Restricted Stock
A summary of the changes in outstanding nonvested restricted stock units ("RSUs") and restricted stock is as follows:
 
RSUs
 
RSUs
Performance Condition
 
Number of Units
 
Weighted
Average
Grant Date
Fair Value
 
Number of Units
 
Weighted
Average
Grant Date
Fair Value
 
 
 
(per unit)
 
 
 
(per unit)
Nonvested at January 1, 2014
599,122

 
$
14.15

 

 
$

Granted
121,873

 
32.28

 
500

 
33.59

Vested
(209,507
)
 
13.36

 

 

Forfeited
(42,952
)
 
15.85

 

 

Nonvested at June 30, 2014
468,536

 
$
19.12

 
500

 
$
33.59

 

 
Restricted Stock
 
Restricted Stock
Market Condition
 
Number of
Shares
 
Weighted
Average
Grant Date
Fair Value
 
Number of
Shares
 
Weighted
Average
Grant Date
Fair Value
 
 
 
(per share)
 
 
 
(per share)
Nonvested at January 1, 2014
119,500

 
$
22.47

 
62,500

 
$
13.93

Granted
43,389

 
25.14

 

 

Vested
(20,833
)
 
17.49

 
(62,500
)
 
13.93

Forfeited

 

 

 

Nonvested at June 30, 2014
142,056

 
$
24.02

 

 
$


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


NOTE 8—INCOME TAXES
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands, except percentages)
Income tax benefit (provision)
$
83

 
$
19

 
$
84

 
$
(1
)
Effective tax rate
3.2
%
 
0.9
%
 
2.6
%
 
%
For the three and six months ended June 30, 2014 , the effective tax rates varied from the statutory rate primarily due to the existence of a valuation allowance that has been provided to offset the Company's net deferred tax asset, after excluding deferred tax liabilities related to indefinite-lived intangible assets that are not going to provide a source of taxable income in the foreseeable future, and state tax refunds.
For the three and six months ended June 30, 2013 , the effective income tax rates varied from the statutory rate due primarily to the impact of the valuation allowance, indefinite-lived intangible assets and state taxes.
Valuation Allowance
There have been no changes to the Company's valuation allowance assessment for the three and six months ended June 30, 2014 .
NOTE 9 —CONTINGENCIES
Overview
Tree.com is involved in legal proceedings on an ongoing basis. In assessing the materiality of a legal proceeding, the Company evaluates, 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 it to change its business practices in ways that could have a material adverse impact on the business. With respect to the matters disclosed in this footnote, unless otherwise indicated, the Company is unable to estimate the possible loss or range of losses that could potentially result from the application of such non-monetary remedies.
As of June 30, 2014 and December 31, 2013 , the Company had a litigation settlement accrual for its continuing operations of $0.5 million . The litigation settlement accrual relates to litigation matters that were either settled or a firm offer for settlement was extended, thereby establishing an accrual amount that is both probable and reasonably estimable.
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." The defendants in this action asserted various defenses and counterclaims against the Company, including the assertion by certain of the defendants of counterclaims alleging illegal monopolization via our maintenance of the asserted patents. Defendant NexTag asserted a defense of laches. In July 2011, the Company reached a settlement agreement with Leadpoint, Inc., pursuant to which all claims against Leadpoint, Inc. and all counterclaims 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"), pursuant to which all claims against the Quinstreet Parties and all counterclaims against the Company by the Quinstreet Parties were dismissed. After an unsuccessful attempt to reach settlement through mediation with the remaining parties, this matter went to

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


trial beginning in February 2014, and on March 12, 2014, the jury returned a verdict. The jury found that the defendants Zillow, Inc., Adchemy, Inc., and NexTag, Inc. did not infringe the two patents referenced above and determined that those patents are invalid due to an inventorship defect, and the court found that NexTag was entitled to a defense of laches. The jury found in the Company's favor on the defendants' counterclaims alleging inequitable conduct and antitrust violations. Judgment was entered on March 31, 2014. After the court entered judgment, on May 27, 2014, the Company reached a settlement agreement with defendant Adchemy, Inc., including an agreement to dismiss and withdraw all claims, counterclaims, and motions between the Company and Adchemy, Inc. As a result, a joint and voluntary dismissal was filed June 12, 2014. Certain matters remain pending with the court, including the Company's motions for a new trial and to correct the inventorship defect and restore the validity of the patents and the defendants' motions for sanctions and attorneys' fees. The Company believes it has strong grounds for appeal and filed a notice of appeal on April 22, 2014. The range of possible loss on the remaining motions for sanctions and awards of attorneys' fees is estimated to be between $0 to $7.3 million . The Company believes the defendants' motions for sanctions and attorneys' fees lack merit and intends to defend these motions vigorously.
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 it 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 the Company infringed upon 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. The plaintiff filed a notice of appeal on November 7, 2013. In December 2013, the Company's case was consolidated with three other pending appeals involving the asserted patents. The plaintiff filed its opening appellate brief in January 2014, and the Company filed a joint appellate response brief in April 2014. A hearing on the consolidated appeals is expected in August 2014. The Company believes the plaintiff's allegations lack merit and intends to defend against this action vigorously.
Money Suite
The Money Suite Company v. LendingTree, LLC, No. 1:13-ev-986 (U.S. Dist. Ct, D Del.). In June 2013, the plaintiff filed a patent infringement lawsuit against LendingTree, LLC ("LendingTree") seeking a judgment that it infringed a patent held by plaintiff. The plaintiff alleges that LendingTree infringes U.S. Patent No. 6,684,189 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. In December 2013, the court stayed this case pending review of the patent by the United States Patent and Trademark Office. The Company believes the plaintiff's allegations lack merit and intends to defend against this action vigorously. 
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 a putative class action against 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 option ARM loans through HLC on their primary residences 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 2013, the parties agreed to a $450,000 settlement, which was approved in 2013. A nominal payment into the settlement fund was made in late 2013. The

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Company expects administration of the settlement to be completed by the fourth quarter of 2014. A provision for the remaining $435,000 is included in current liabilities of discontinued operations as of June 30, 2014 . Subsequent to June 30, 2014, the settlement fund was fully funded. The impact of the settlement was not material.
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 a 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. On February 26, 2014, the court granted and denied certain of each party's motions for summary judgment. With respect to the Class Claims, the court granted plaintiff's motions for summary judgment with respect to declaratory judgment, unjust enrichment and violation of the CCPA. The court granted HLC's motion for summary judgment with respect to contempt. In addition, the court denied HLC's motion to decertify the class. With respect to the claims applicable to the named plaintiff only (the "Individual Claims"), HLC's motions for summary judgment were granted with respect to conversion, breach of fiduciary duty, intentional misrepresentation, negligent misrepresentation and outrage. As of June 30, 2014, HLC and the plaintiff have reached a tentative settlement agreement with respect to the remaining Individual Claims.
A reserve of $2.8 million has been established for this matter in the accompanying consolidated balance sheet as of June 30, 2014 , of which some or all may be covered by insurance. Subsequent to June 30, 2014, the court awarded damages to plaintiffs in the amount of $2.8 million . HLC believes it has strong grounds for appeal.
Massachusetts Division of Banks
On February 11, 2011, the Massachusetts Division of Banks (the "Division") delivered a Report of Examination/Inspection to LendingTree, which identified various alleged violations of Massachusetts and federal laws, including the alleged insufficient delivery by LendingTree 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 would enter into the Consent Agreement and Order, they would agree not to pursue any analogous allegations that they otherwise might assert. As of August 7, 2014 , 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 to adopt various new procedures and practices. The Company has commenced negotiations toward an acceptable Consent Agreement and Order. It does not believe its mortgage exchange business violated any federal or state mortgage lending laws; nor does it 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, the Company intends 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 in the accompanying consolidated balance sheet as of June 30, 2014

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


NOTE 10 —SEGMENT INFORMATION  
The Company has one reportable segment, its lending operating segment. Its additional operating segments—auto, education and home services—are included in the "Other" category in the reconciliation of segment information below.
The expenses presented below for the lending segment and the operating segments shown in the Other category include allocations of certain corporate expenses that are identifiable and directly benefit those segments. The unallocated expenses included in the "Corporate" category are those corporate overhead expenses that are not directly attributable to an operating segment and include: finance, legal, executive technology support and human resources.
Adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA"), a non-GAAP measure, is the primary metric by which the chief operating decision maker evaluates the performance of the Company's businesses, on which its marketing expenditures and internal budgets are based and by which management and many employees are 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 excludes (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 and legal fees for certain patent litigation, (6) adjustments for acquisitions or dispositions and (7) one-time items. For the periods presented in this report, there are no adjustments for one-time items, except for $0.9 million related to a discretionary cash bonus payment to employee stock option holders during the six months ended June 30, 2013 .
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 June 30, 2014
 
Lending
 
Other
 
Corporate
 
Total
Revenue
$
39,049

 
$
3,095

 
$

 
$
42,144

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue (exclusive of depreciation shown separately below)
1,773

 
122

 

 
1,895

Selling and marketing expense
26,952

 
2,012

 

 
28,964

General and administrative expense
1,247

 
615

 
3,616

 
5,478

Product development
1,474

 
352

 

 
1,826

Depreciation
400

 
441

 
105

 
946

Amortization of intangibles

 
27

 

 
27

Restructuring and severance
14

 

 
9

 
23

Litigation settlements and contingencies

 

 
385

 
385

Total costs and expenses
31,860

 
3,569

 
4,115

 
39,544

Operating income (loss)
7,189

 
(474
)
 
(4,115
)
 
2,600

Adjustments to reconcile to Adjusted EBITDA:
 

 
 

 
 

 
 

Amortization of intangibles

 
27

 

 
27

Depreciation
400

 
441

 
105

 
946

Restructuring and severance
14

 

 
9

 
23

Loss on disposal of assets

 
27

 
17

 
44

Non-cash compensation
528

 
169

 
724

 
1,421

Acquisition expense

 
74

 

 
74

Litigation settlements and contingencies

 

 
385

 
385

Adjusted EBITDA
$
8,131

 
$
264

 
$
(2,875
)
 
$
5,520

 
 
 
 
 
 
 
 
Operating income
 

 
 

 
 

 
$
2,600

Interest expense
 

 
 

 
 

 

Income before income taxes
 

 
 

 
 

 
$
2,600



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


 
Three Months Ended June 30, 2013 (a)
 
Lending
 
Other
 
Corporate
 
Total
Revenue
$
33,781

 
$
3,003

 
$
622

 
$
37,406

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue (exclusive of depreciation shown separately below)
1,395

 
163

 
392

 
1,950

Selling and marketing expense
24,119

 
2,262

 
5

 
26,386

General and administrative expense
874

 
420

 
4,357

 
5,651

Product development
1,226

 
266

 

 
1,492

Depreciation
345

 
426

 
101

 
872

Amortization of intangibles

 
43

 

 
43

Restructuring and severance
23

 
125

 

 
148

Litigation settlements and contingencies

 

 
2,909

 
2,909

Total costs and expenses
27,982

 
3,705

 
7,764

 
39,451

Operating income (loss)
5,799

 
(702
)
 
(7,142
)
 
(2,045
)
Adjustments to reconcile to Adjusted EBITDA:
 

 
 

 
 

 
 

Amortization of intangibles

 
43

 

 
43

Depreciation
345

 
426

 
101

 
872

Restructuring and severance
23

 
125

 

 
148

Loss on disposal of assets

 

 

 

Non-cash compensation
483

 
95

 
854

 
1,432

Litigation settlements and contingencies

 

 
2,909

 
2,909

Adjusted EBITDA
$
6,650

 
$
(13
)
 
$
(3,278
)
 
$
3,359

 
 
 
 
 
 
 
 
Operating loss
 

 
 

 
 

 
$
(2,045
)
Interest expense
 

 
 

 
 

 
(7
)
Loss before income taxes
 

 
 

 
 

 
$
(2,052
)
(a)
For comparative purposes, revenue from and expenses related to personal loan offerings have been recast from the "Other" category to the lending segment.

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


 
Six Months Ended June 30, 2014
 
Lending
 
Other
 
Corporate
 
Total
Revenue
$
75,977

 
$
6,203

 
$

 
$
82,180

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue (exclusive of depreciation shown separately below)
3,318

 
242

 

 
3,560

Selling and marketing expense
52,571

 
3,842

 

 
56,413

General and administrative expense
2,493

 
1,397

 
7,721

 
11,611

Product development
3,097

 
661

 

 
3,758

Depreciation
763

 
734

 
204

 
1,701

Amortization of intangibles

 
55

 

 
55

Restructuring and severance
162

 
15

 
48

 
225

Litigation settlements and contingencies

 

 
8,092

 
8,092

Total costs and expenses
62,404

 
6,946

 
16,065

 
85,415

Operating income (loss)
13,573

 
(743
)
 
(16,065
)
 
(3,235
)
Adjustments to reconcile to Adjusted EBITDA:
 

 
 

 
 

 
 

Amortization of intangibles

 
55

 

 
55

Depreciation
763

 
734

 
204

 
1,701

Restructuring and severance
162

 
15

 
48

 
225

Loss on disposal of assets

 
35

 
17

 
52

Non-cash compensation
1,127

 
434

 
1,476

 
3,037

Acquisition expense

 
74

 

 
74

Litigation settlements and contingencies

 

 
8,092

 
8,092

Adjusted EBITDA
$
15,625

 
$
604

 
$
(6,228
)
 
$
10,001

 
 
 
 
 
 
 
 
Operating loss
 

 
 

 
 

 
(3,235
)
Interest expense
 

 
 

 
 

 

Loss before income taxes
 

 
 

 
 

 
$
(3,235
)

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


 
Six Months Ended June 30, 2013 (a)
 
Lending
 
Other
 
Corporate
 
Total
Revenue
$
59,454

 
$
5,410

 
$
622

 
$
65,486

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue (exclusive of depreciation shown separately below)
2,550

 
337

 
419

 
3,306

Selling and marketing expense
39,279

 
4,357

 
5

 
43,641

General and administrative expense
1,852

 
930

 
9,425

 
12,207

Product development
2,176

 
521

 

 
2,697

Depreciation
719

 
843

 
195

 
1,757

Amortization of intangibles

 
86

 

 
86

Restructuring and severance
23

 
125

 
(2
)
 
146

Litigation settlements and contingencies

 

 
3,937

 
3,937

Total costs and expenses
46,599

 
7,199

 
13,979

 
67,777

Operating income (loss)
12,855

 
(1,789
)
 
(13,357
)
 
(2,291
)
Adjustments to reconcile to Adjusted EBITDA:
 

 
 

 
 

 
 

Amortization of intangibles

 
86

 

 
86

Depreciation
719

 
843

 
195

 
1,757

Restructuring and severance
23

 
125

 
(2
)
 
146

Loss on disposal of assets

 

 
24

 
24

Non-cash compensation
896

 
237

 
1,733

 
2,866

Discretionary cash bonus

 

 
920

 
920

Litigation settlements and contingencies

 

 
3,937

 
3,937

Adjusted EBITDA
$
14,493

 
$
(498
)
 
$
(6,550
)
 
$
7,445

 
 
 
 
 
 
 
 
Operating loss
 

 
 

 
 

 
(2,291
)
Interest expense
 

 
 

 
 

 
(14
)
Loss before income taxes
 

 
 

 
 

 
$
(2,305
)
(a)
For comparative purposes, revenue from and expenses related to personal loan offerings have been recast from the "Other" category to the lending segment.
NOTE 11 —RESTRUCTURING
Accrued restructuring costs primarily relate to lease obligations for call center leases exited in 2010, which are expected to be completed by 2015. Restructuring expense and payments against liabilities are as follows (in thousands)
 
Continuing
Lease
Obligations
Balance at December 31, 2013
$
462

Restructuring expense
8

Payments
(148
)
Balance at June 30, 2014
$
322

The Company does not expect to incur significant additional costs related to the restructuring noted above.

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


NOTE 12—DISCONTINUED OPERATIONS
On May 12, 2011, the Company entered into an asset purchase agreement, later amended on February 7, 2012, that provided for the sale of substantially all of the operating assets of its LendingTree Loans business to Discover. The sale was completed on June 6, 2012. Discover has participated as a network lender since the closing of the transaction. An evaluation of the facts and circumstances of the transaction and the applicable accounting guidance for discontinued operations indicates that the LendingTree Loans business should be reflected as discontinued operations in the accompanying consolidated financial statements for all periods presented. The continuing cash flows related to this transaction are not significant and, accordingly, are not deemed to be direct cash flows of the divested business.
The Company agreed to indemnify Discover for a breach or inaccuracy of any representation, warranty or covenant made by it in the asset purchase agreement, for any liability of LendingTree Loans that was not assumed, for any claims by its stockholders against Discover and for its failure to comply with any applicable bulk sales law, subject to certain limitations. Discover submitted a claim for indemnification relating to the sale prior to the closing of certain loans that were listed in the asset purchase agreement as to be conveyed to Discover at closing. In May 2013, this indemnification claim and other miscellaneous items were settled by agreeing to credit Discover for $1.3 million in future services. A majority of these credits were applied against services during the year ended December 31, 2013. The remaining credits were exhausted in the first quarter of 2014.
The revenue and net loss reported as discontinued operations in the accompanying consolidated statements of operations are as follows (in thousands) :
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
Revenue
$
2

 
$
(292
)
 
$
4

 
$
(1,486
)
 
 
 
 
 
 
 
 
Income (loss) before income taxes
$
(2,930
)
 
$
(891
)
 
$
(3,501
)
 
$
(3,382
)
Income tax benefit (expense)
(1
)
 

 
(4
)
 
(51
)
Gain from sale of discontinued operations, net of tax

 
10,003

 

 
10,101

Net income (loss)
$
(2,931
)
 
$
9,112

 
$
(3,505
)
 
$
6,668

The assets and liabilities of discontinued operations in the accompanying consolidated balance sheets are as follows (in thousands) :
 
June 30,
2014
 
December 31,
2013
Current assets
$
715

 
$
521

Non-current assets
100

 
129

Current liabilities
(32,620
)
 
(32,004
)
Non-current liabilities
(261
)
 
(254
)
Net liabilities
$
(32,066
)
 
$
(31,608
)
Significant Assets and Liabilities of LendingTree Loans
Upon closing of the sale of substantially all of the operating assets of the LendingTree Loans business on June 6, 2012, LendingTree Loans ceased to originate consumer loans. The remaining operations are being wound down. These wind-down activities have included, among other things, selling the balance of loans held for sale to investors, paying off and then terminating the warehouse lines of credit and settling derivative obligations, all of which have been completed. Liability for losses on previously sold loans will remain with LendingTree Loans and are discussed below.

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


Loan Loss Obligations
LendingTree Loans sold loans it originated to investors on a servicing-released basis, so the risk of loss or default by the borrower was generally transferred to the investor. However, LendingTree Loans was required by these investors to make certain representations and warranties relating to credit information, loan documentation and collateral. These representations and warranties may extend through the contractual life of the loan. Subsequent to the loan sale, if underwriting deficiencies, borrower fraud or documentation defects are discovered in individual loans, LendingTree Loans may be obligated to repurchase the respective loan or indemnify the investors for any losses from borrower defaults if such deficiency or defect cannot be cured within the specified period following discovery. In the case of early loan payoffs and early defaults on certain loans, LendingTree Loans may be required to repay all or a portion of the premium initially paid by the investor.
HLC, a subsidiary of the Company, continues to be liable for these indemnification obligations, repurchase obligations and premium repayment obligations following the sale of substantially all of the operating assets of its LendingTree Loans business in the second quarter of 2012. As of June 30, 2014 , approximately $19.2 million is being held in escrow pending resolution of certain of these contingent liabilities. The Company has been negotiating with certain secondary market purchasers to settle any existing and future contingent liabilities, but it may not be able to complete such negotiations on acceptable terms, or at all. Because LendingTree Loans does not service the loans it sold, it does not maintain nor generally have access to the current balances and loan performance data with respect to the individual loans previously sold to investors. Accordingly, LendingTree Loans is unable to determine, with precision, its maximum exposure for breaches of the representations and warranties it made to the investors that purchased such loans.
During the fourth quarter of 2013, the Company revised its estimation process for evaluating the adequacy of the reserve for loan losses to use a settlement discount framework. This model estimates the lifetime losses on the population of remaining loans originated and sold by LendingTree Loans using actual defaults for loans with similar characteristics and projected future defaults. It also considers the likelihood of claims expected due to alleged breaches of representations and warranties made by LendingTree Loans and the percentage of those claims investors estimate LendingTree Loans may agree to repurchase. A settlement discount factor is then applied to the result of the foregoing to reflect publicly announced bulk settlements for similar loan types and vintages, as well as LendingTree Loans' non-operating status, in order to estimate a range of potential obligation.
The estimated range of remaining loan losses using this settlement discount framework was determined to be $15.9 million to $28.8 million as of June 30, 2014 . The reserve balance recorded as of June 30, 2014 was $28.4 million . Management has considered both objective and subjective factors in the estimation process, but given current general industry trends in mortgage loans as well as housing prices and market expectations, actual losses related to LendingTree Loans' obligations could vary significantly from the obligation recorded as of the balance sheet date or the range estimated above.
Additionally, Tree.com has guaranteed certain loans sold to two investors in the event that LendingTree Loans is unable to satisfy its repurchase and warranty obligations related to such loans.
The following table represents the loans sold for the periods shown and the aggregate loan losses through June 30, 2014 :
 
 
June 30, 2014
Period of Loan Sales
 
Number of
Loans Sold
 
Original
Principal
Balance
 
Number of
Loans with
Losses
 
Original
Principal
Balance of
Loans with
Losses
 
Amount of
Aggregate
Losses
 
 
 
 
(in billions)
 
 
 
(in millions)
 
(in millions)
2014
 

 
$

 

 
$

 
$

2013
 

 

 

 

 

2012
 
9,200

 
1.9

 

 

 

2011
 
12,500

 
2.7

 
1

 
0.3

 
0.1

2010
 
12,400

 
2.8

 
4

 
1.1

 
0.1

2009
 
12,800

 
2.8

 
5

 
1.2

 
0.2

2008
 
11,000

 
2.2

 
33

 
6.9

 
2.2

2007
 
36,300

 
6.1

 
160

 
22.1

 
8.2

2006
 
55,000

 
7.9

 
207

 
24.5

 
13.4

2005 and prior years
 
86,700

 
13.0

 
89

 
12.3

 
5.0

Total
 
235,900

 
$
39.4

 
499

 
$
68.4

 
$
29.2


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


In the second quarter of 2014, LendingTree Loans completed settlements with two buyers of previously purchased loans. The settlement amounts were included in charge-offs to the reserve in the second quarter of 2014. The settlement amounts for these settlements were not determined on an individual loan basis and are, therefore, not included in the loss amounts disclosed above for the years such loans were sold.
Based on historical experience, it is anticipated that LendingTree Loans will continue to receive repurchase requests and incur losses on loans sold in prior years. 
The activity related to loss reserves on previously sold loans is as follows (in thousands) :
 
Three Months Ended June 30,