Use these links to rapidly review the document
TABLE OF CONTENTS

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 March 31, 2010

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 during the preceding 12 months (or for such shorter period than the Registrant was required to submit and post such files). Yes o    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 definition of "accelerated filer," "large accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o   Accelerated filer o   Non-accelerated filer ý
(Do not check if a smaller
reporting company)
  Smaller reporting company o

        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 May 6, 2010 there were 11,205,794 shares of the Registrant's common stock, par value $.01 per share, outstanding.


Table of Contents


TABLE OF CONTENTS

 
   
  Page
Number
 

 

PART I—FINANCIAL INFORMATION

       

Item 1.

 

Financial Statements

    1  

Item 2.

 

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

    30  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

    40  

Item 4T.

 

Controls and Procedures

    41  

 

PART II—OTHER INFORMATION

       

Item 1.

 

Legal Proceedings

    42  

Item 1A.

 

Risk Factors

    42  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

    44  

Item 5.

 

Other Information

    45  

Item 6.

 

Exhibits

    45  

i


Table of Contents

PART 1—FINANCIAL INFORMATION

Item 1.    Financial Statements


TREE.COM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 
  Three Months
Ended March 31,
 
 
  2010   2009  
 
  (In thousands, except
per share amounts)

 

Revenue

             
   

LendingTree Loans

  $ 25,738   $ 34,372  
   

Exchanges and other

    18,374     17,129  
   

Real Estate

    3,899     5,759  
           
 

Total revenue

    48,011     57,260  

Cost of revenue

             
   

LendingTree Loans

    10,154     11,856  
   

Exchanges and other

    1,452     2,467  
   

Real Estate

    2,455     3,864  
           
 

Total cost of revenue (exclusive of depreciation shown separately below)

    14,061     18,187  
           
 

Gross margin

    33,950     39,073  

Operating expenses

             
 

Selling and marketing expense

    20,146     13,822  
 

General and administrative expense

    12,702     16,299  
 

Product development

    1,366     1,608  
 

Litigation settlements and contingencies

    16     394  
 

Restructuring expense

    2,610     842  
 

Amortization of intangibles

    943     1,263  
 

Depreciation

    1,509     1,664  
           
   

Total operating expenses

    39,292     35,893  
           
   

Operating (loss) income

    (5,342 )   3,180  

Other income (expense)

             
 

Interest income

    7     48  
 

Interest expense

    (166 )   (151 )
           

Total other (expense), net

    (159 )   (103 )
           

(Loss) income before income taxes

    (5,501 )   3,077  

Income tax (provision) benefit

    (645 )   83  
           

Net (loss) income

  $ (6,146 ) $ 3,160  
           

Weighted average common shares outstanding

    10,960     9,676  
           

Weighted average diluted shares outstanding

    10,960     9,739  
           

Net (loss) income per share available to common shareholders

             
 

Basic

  $ (0.56 ) $ 0.33  
           
 

Diluted

  $ (0.56 ) $ 0.32  
           

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

1


Table of Contents


TREE.COM, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 
  March 31, 2010   December 31, 2009  
 
  (unaudited)
   
 
 
  (In thousands, except par value and
share amounts)

 

ASSETS:

             

Cash and cash equivalents

  $ 73,051   $ 86,093  

Restricted cash and cash equivalents

    12,173     12,019  

Accounts receivable, net of allowance of $974 and $518, respectively

    7,149     6,835  

Loans held for sale ($99,471and $92,236 measured at fair value, respectively)

    100,716     93,596  

Prepaid and other current assets

    10,104     10,758  
           
 

Total current assets

    203,193     209,301  

Property and equipment, net

    12,397     12,257  

Goodwill

    12,152     12,152  

Intangible assets, net

    56,683     57,626  

Other non-current assets

    602     496  
           
 

Total assets

  $ 285,027   $ 291,832  
           

LIABILITIES:

             

Warehouse lines of credit

  $ 83,498   $ 78,481  

Accounts payable, trade

    9,840     5,905  

Deferred revenue

    1,781     1,731  

Deferred income taxes

    2,033     2,211  

Accrued expenses and other current liabilities

    42,058     54,694  
           
 

Total current liabilities

    139,210     143,022  

Income taxes payable

    488     510  

Other long-term liabilities

    14,589     12,010  

Deferred income taxes

    16,088     15,380  
           
 

Total liabilities

    170,375     170,922  

Commitments and contingencies (Note 12)

             

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 11,227,117 and 10,904,330 shares, respectively, and outstanding 11,148,327 and 10,904,330 shares, respectively

    112     109  

Additional paid-in capital

    902,370     901,818  

Accumulated deficit

    (787,163 )   (781,017 )

Treasury stock 78,790 and -0- shares, respectively

    (667 )    
           
 

Total shareholders' equity

    114,652     120,910  
           
 

Total liabilities and shareholders' equity

  $ 285,027   $ 291,832  
           

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

2


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, 2009

  $ 120,910     10,904   $ 109   $ 901,818   $ (781,017 )     $  

Comprehensive loss:

                                           
 

Net loss for the three months ended March 31, 2010

    (6,146 )               (6,146 )        
                                           

Comprehensive loss

    (6,146 )                        

Non-cash compensation

    1,094             1,094              

Issuance of common stock upon exercise of stock options and vesting of restricted stock units, net of withholding taxes

    (539 )   173     2     (541 )            

Issuance of restricted stock

        150     1     (1 )            

Purchase of treasury stock

    (667 )                   (79 )   (667 )
                               

Balance as of March 31, 2010

  $ 114,652     11,227   $ 112   $ 902,370   $ (787,163 )   (79 ) $ (667 )
                               

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

3


Table of Contents


TREE.COM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 
  Three Months Ended
March 31,
 
 
  2010   2009  
 
  (In thousands)
 

Cash flows from operating activities:

             

Net (loss) income

  $ (6,146 ) $ 3,160  

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

             
 

Loss on disposal of fixed assets

    4     638  
 

Amortization of intangibles

    943     1,263  
 

Depreciation

    1,509     1,664  
 

Non-cash compensation expense

    1,094     1,177  
 

Non-cash restructuring expense

    93     161  
 

Deferred income taxes

    530      
 

Gain on origination and sale of loans

    (23,400 )   (32,764 )
 

Loss on impaired loans not sold

        61  
 

Loss on sale of real estate acquired in satisfaction of loans

    368     34  
 

Bad debt expense

    75     79  

Changes in current assets and liabilities:

             
 

Accounts receivable

    (390 )   684  
 

Origination of loans

    (608,365 )   (714,441 )
 

Proceeds from sales of loans

    626,226     747,332  
 

Principal payments received on loans

    180     446  
 

Payments to investors for loan repurchases and early payoff obligations

    (2,236 )   (876 )
 

Prepaid and other current assets

    (175 )   (421 )
 

Accounts payable and other current liabilities

    (7,997 )   2,901  
 

Income taxes payable

    59     (126 )
 

Deferred revenue

    (36 )   (14 )
 

Other, net

    2,573     287  
           

Net cash (used in) provided by operating activities

    (15,091 )   11,245  
           

Cash flows from investing activities:

             
 

Acquisitions

        (1,000 )
 

Capital expenditures

    (1,609 )   (592 )
 

Other, net

    446     458  
           

Net cash used in investing activities

    (1,163 )   (1,134 )
           

Cash flows from financing activities:

             
 

Borrowing under warehouse lines of credit

    551,088     592,347  
 

Repayments of warehouse lines of credit

    (546,070 )   (596,374 )
 

Issuance of common stock, net of withholding taxes

    (539 )   1,909  
 

Purchase of treasury stock

    (667 )    
 

Increase in restricted cash

    (600 )   (200 )
           

Net cash provided by (used in) financing activities

    3,212     (2,318 )
           

Net (decrease) increase in cash and cash equivalents

    (13,042 )   7,793  

Cash and cash equivalents at beginning of period

    86,093     73,643  
           

Cash and cash equivalents at end of period

  $ 73,051   $ 81,436  
           

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

4


Table of Contents


TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—ORGANIZATION

Spin-Off

        On August 20, 2008, Tree.com, Inc. ("Tree.com" or the "Company") was spun off from its parent company, IAC/InterActiveCorp ("IAC") into a separate publicly traded company. In these consolidated financial statements, we refer to the separation transaction as the "spin-off." In connection with the spin-off, Tree.com was incorporated as a Delaware corporation in April 2008.

Company Overview

        Tree.com is the parent of LendingTree, LLC and the owner of several brands and businesses that provide information, tools, advice, products and services for critical transactions in our customers' lives. Our family of brands includes: LendingTree.com®, GetSmart.com®, RealEstate.com®, DegreeTree.comSM, HealthTree.comSM, LendingTreeAutos.com, DoneRight.com®, and InsuranceTree.comSM. Together, these brands serve as an ally for consumers who are looking to comparison shop for loans, real estate and other services from multiple businesses and professionals who will compete for their business.

        These businesses and brands are operated under the segments known as LendingTree Loans, the Exchanges and Real Estate.

        The LendingTree Loans segment originates, processes, approves and funds various residential real estate loans through Home Loan Center, Inc. ("HLC"), (d/b/a LendingTree Loans). The HLC and LendingTree Loans brand names are collectively referred to in these consolidated financial statements as "LendingTree Loans."

        The Exchanges segment consists of online lead generation networks and call centers (principally LendingTree.com, Tree.com, DegreeTree.com, LendingTreeAutos and GetSmart.com) that connect consumers and service providers principally in the lending, higher education and automobile marketplaces.

        The Real Estate segment consists of a proprietary full service real estate brokerage (RealEstate.com, REALTORS®) that operates in 20 U.S. markets, as well as an online lead generation network accessed at www.RealEstate.com, that connects consumers with third party real estate brokerages around the country.

        Tree.com maintains operations solely in the United States.

Basis of Presentation

        The accompanying unaudited interim consolidated financial statements as of March 31, 2010 and 2009 and for the three months then ended have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Accordingly, they do

5


Table of Contents


TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1—ORGANIZATION (Continued)


not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. In the opinion of the Company's 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 months ended March 31, 2010 are not necessarily indicative of the results to be expected for the year ending December 31, 2010, or any other period. These financial statements and notes should be read in conjunction with the audited financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2009, as amended by Amendment No. 1 to the Company's annual report on Form 10-K/A.

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES

Accounting Estimates

        Tree.com's 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 ("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 include: valuation allowance for impaired loans held for sale; loan loss obligations; the fair value of loans held for sale and related derivatives; 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.

6


Table of Contents


TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES (Continued)

Restricted Cash and Cash Equivalents

        Restricted cash and cash equivalents consists of the following (in thousands):

 
  March 31, 2010   December 31, 2009  

Cash in escrow for future operating lease commitments

  $   $ 788  

Cash in escrow for surety bonds

    5,030     5,030  

Cash in escrow for corporate purchasing card program

    2,203     2,203  

Minimum required balances for warehouse lines of credit(a)

    2,475     1,875  

Other

    2,465     2,123  
           
 

Total restricted cash and cash equivalents

  $ 12,173   $ 12,019  
           

(a)
An additional $0.6 million of restricted cash is required under a warehouse line of credit that had no borrowings outstanding as of December 31, 2009. At March 31, 2010, the Company transferred $0.6 million from cash and cash equivalents to restricted cash and cash equivalents related to borrowings against this line of credit.

Recent Accounting Pronouncements

        On June 12, 2009, the FASB issued the accounting standard for transfers and servicing of financial assets. The objective is to improve relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor's continuing involvement, if any, in transferred financial assets. This standard is effective for annual reporting periods beginning after November 15, 2009. Tree.com adopted this standard on January 1, 2010 and determined there was no material impact to the financial statements.

        On January 21, 2010, the FASB amended and Tree.com adopted the accounting standard for fair value measurements and disclosures, which added new requirements for disclosures about transfers into and out of Level 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. The amendment also clarifies existing fair value disclosures about the level of disaggregation and the inputs and valuation techniques used to measure fair value. This amendment is effective for the first reporting period (including interim periods) beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early adoption is permitted. See Note 9 for further information.

7


Table of Contents


TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3—GOODWILL AND INTANGIBLE ASSETS

        The balance of goodwill and intangible assets, net is as follows (in thousands):

 
  March 31, 2010   December 31, 2009  

Goodwill

  $ 12,152   $ 12,152  

Intangible assets with indefinite lives

    52,733     52,733  

Intangible assets with definite lives, net

    3,950     4,893  
           
 

Total goodwill and intangible assets, net

  $ 68,835   $ 69,778  
           

        Intangible assets with indefinite lives relate principally to trade names and trademarks acquired in various acquisitions.

        At March 31, 2010, intangible assets with definite lives relate to the following (in thousands):

 
  Cost   Accumulated
Amortization
  Net   Weighted Average
Amortization Life
(Years)
 

Purchase agreements

  $ 76,352   $ (75,304 ) $ 1,048     5.7  

Technology

    30,491     (29,506 )   985     3.0  

Customer lists

    7,388     (6,647 )   741     3.9  

Other

    9,813     (8,637 )   1,176     4.1  
                     
 

Total

  $ 124,044   $ (120,094 ) $ 3,950        
                     

        At December 31, 2009, intangible assets with definite lives relate to the following (in thousands):

 
  Cost   Accumulated
Amortization
  Net   Weighted Average
Amortization Life
(Years)
 

Purchase agreements

  $ 76,352   $ (74,657 ) $ 1,695     5.7  

Technology

    30,491     (29,396 )   1,095     3.0  

Customer lists

    7,388     (6,631 )   757     3.9  

Other

    9,813     (8,467 )   1,346     4.1  
                     
 

Total

  $ 124,044   $ (119,151 ) $ 4,893        
                     

        Amortization of intangible assets with definite lives is computed on a straight-line basis and, based on March 31, 2010 balances, such amortization for the next five years is estimated to be as follows (in thousands):

 
  Amount  

Nine months ending December 31, 2010

  $ 1,769  

Year ending December 31, 2011

    1,086  

Year ending December 31, 2012

    411  

Year ending December 31, 2013

    144  

Year ending December 31, 2014

    84  

Thereafter

    456  
       
 

Total

  $ 3,950  
       

8


Table of Contents


TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3—GOODWILL AND INTANGIBLE ASSETS (Continued)

        The following table presents the balance of goodwill by segment at March 31, 2010 and December 31, 2009 (in thousands):

 
  LendingTree
Loans
  Exchanges   Real
Estate
  Total  
 

Goodwill

  $ 46,526   $ 485,955   $ 70,091   $ 602,572  
 

Accumulated impairment losses

    (46,526 )   (483,088 )   (60,806 )   (590,420 )
                   

Goodwill, net

  $   $ 2,867   $ 9,285   $ 12,152  
                   

        There was no activity in goodwill during the three months ended March 31, 2010.

NOTE 4—PROPERTY AND EQUIPMENT

        The balance of property and equipment, net is as follows (in thousands):

 
  March 31, 2010   December 31, 2009  

Computer equipment and capitalized software

  $ 36,753   $ 35,881  

Leasehold improvements

    2,544     2,888  

Furniture and other equipment

    4,109     4,096  

Projects in progress

    2,342     1,532  
           

    45,748     44,397  

Less: accumulated depreciation and amortization

    (33,351 )   (32,140 )
           
 

Total property and equipment, net

  $ 12,397   $ 12,257  
           

NOTE 5—ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

        Accrued expenses and other current liabilities consist of the following (in thousands):

 
  March 31, 2010   December 31, 2009  

Accrued loan loss liability related to loans previously sold

  $ 6,254   $ 6,115  

Loan loss settlement liability related to loans previously sold

    3,450     4,500  

Litigation accruals

    4,750     12,750  

Accrued advertising expense

    8,122     8,095  

Accrued compensation and benefits

    4,032     7,525  

Accrued professional fees

    856     1,528  

Accrued restructuring costs

    1,356     1,848  

Derivative liabilities

    229     356  

Customer deposits and escrows

    3,697     3,387  

Deferred rent

    546     793  

Other

    8,766     7,797  
           
 

Total accrued expenses and other current liabilities

  $ 42,058   $ 54,694  
           

9


Table of Contents


TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 5—ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES (Continued)

        The other category above reflects an earnout payable related to an acquisition, franchise taxes, self-insured health claims and other miscellaneous accrued expenses.

        An additional $6.6 million and $6.4 million of accrued loan loss liability related to loans previously sold are classified in other long term liabilities at March 31, 2010 and December 31, 2009, respectively.

NOTE 6—WAREHOUSE LINES OF CREDIT

        Borrowings on warehouse lines of credit were $83.5 million and $78.5 million at March 31, 2010 and December 31, 2009, respectively.

        As of March 31, 2010, LendingTree Loans had three committed lines of credit totaling $165.0 million of borrowing capacity. Borrowings under these lines of credit are used to fund, and are secured by, consumer residential loans that are held for sale. Loans under these lines of credit are repaid using proceeds from the sales of loans held for sale by LendingTree Loans.

        The $40.0 million first line is with a lender that is exiting the warehouse lending business, and it expires on June 30, 2010. No advances under the warehouse line may be requested or funded after May 31, 2010. The interest rate under this line is 30-day LIBOR plus 3.00%. We do not expect this line to be renewed after June 30, 2010. The Company has anticipated that decision and has factored it into the future liquidity needs.

        The $50.0 million second line was scheduled to expire on April 30, 2010, but has been extended to June 29, 2010 and can be cancelled at the option of the lender without default upon sixty days notice. This second line includes an additional uncommitted credit facility of $75.0 million. This second line is also guaranteed by Tree.com, Inc., Lending Tree, LLC and Lending Tree Holdings Corp. The interest rate under the second line is 2.25% plus the greater of (a) the 30-day LIBOR or (b) 2.00%. The interest rate under the $75.0 million uncommitted line is 30-day LIBOR plus 1.50%. LendingTree Loans is also required to sell at least 25% of the loans it originates to the lender under this line or pay a "pair-off fee" of 0.25% on the difference between the required and actual volume of loans sold.

        The $75.0 million third line is scheduled to expire on October 29, 2010. This third line is also guaranteed by Tree.com, Inc., LendingTree, LLC and LendingTree Holdings Corporation. The interest rate under this line is 30-day LIBOR or 2.0% (whichever is greater) plus 2.50% to 3.0% for loans being sold to the lender and 30-day LIBOR or 2.0% (whichever is greater) plus 2.75% for loans not being sold to the lender.

        Under the terms of these warehouse lines, LendingTree Loans is required to maintain various financial and other covenants. These financial covenants include, but are not limited to, maintaining (i) minimum tangible net worth of $45.0 million, (ii) minimum liquidity, (iii) a minimum current ratio, (iv) a maximum ratio of total liabilities to net worth, (v) a maximum leverage ratio and (vi) pre-tax net income requirements. During the quarter ended March 31, 2010, LendingTree Loans was in compliance with the covenants under the lines.

        The LendingTree Loans business is highly dependent on the availability of these warehouse lines. Although we believe that our existing lines of credit are adequate for our current operations, reductions in our available credit, or the inability to renew or replace these lines, would have a material adverse effect on our business, financial condition and results of operations. Management has determined that it could continue to operate the LendingTree Loans business at a reduced capacity if two, but not all three, of the warehouse lines were lost. We expect to renew the lines that are expiring on June 29, 2010 and October 29, 2010.

10


Table of Contents


TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7—SEGMENT INFORMATION

        The overall concept that Tree.com employs in determining its reportable segments and related financial information is to present them in a manner consistent with how the chief operating decision maker and executive management view the Tree.com businesses, how the businesses are organized as to segment management, and the focus of the Tree.com businesses with regards to the types of products or services offered or the target market.

        The expenses presented below for each of the business segments include an allocation 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.

        Tree.com's primary performance metrics are EBITDA and Adjusted EBITDA. EBITDA is defined as earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA excluding (1) non-cash compensation expense, (2) non-cash intangible asset impairment charges, (3) gain/loss on disposal of assets, (4) restructuring expenses, (5) litigation loss contingencies and settlements, (6) pro forma adjustments for significant acquisitions, and (7) one-time items, which are truly one-time in nature and non-recurring, infrequent or unusual, and have not occurred in the past two years or are not expected to recur in the next two years, in accordance with SEC rules. For the periods presented in this report, there are no one-time items. These measures are two of the primary metrics by which Tree.com evaluates the performance of its businesses, on which its internal budgets are based and by which management is compensated. Tree.com believes that investors should have access to the same set of tools that it uses in analyzing its results. EBITDA and Adjusted EBITDA have certain limitations in that they do not take into account the impact to Tree.com's statement of operations of certain expenses, including depreciation, non-cash compensation and acquisition related accounting. Tree.com endeavors to compensate for the limitations of the non-GAAP measure presented by also providing the comparable GAAP measure with equal or greater prominence and descriptions of the reconciling items, including quantifying such items, to derive the non-GAAP measure.

11


Table of Contents


TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7—SEGMENT INFORMATION (Continued)

        Summarized information by segment and reconciliation to EBITDA is as follows (in thousands):

 
  For the Three Months Ended March 31, 2010:  
 
  LendingTree
Loans
  Exchanges   Real
Estate
  Unallocated—
Corporate
  Total  

Revenue

  $ 25,738   $ 26,051   $ 3,899   $ (7,677 ) $ 48,011  

Cost of revenue (exclusive of depreciation shown separately below)

    10,154     1,128     2,455     324     14,061  
                       
 

Gross margin

    15,584     24,923     1,444     (8,001 )   33,950  

Operating expenses:

                               
 

Selling and marketing expense

    7,998     19,085     689     (7,626 )   20,146  
 

General and administrative expense

    4,816     1,593     1,541     4,752     12,702  
 

Product development

    131     882     168     185     1,366  
 

Litigation loss contingencies and settlements

    16                 16  
 

Restructuring expense

    7     140         2,463     2,610  
 

Amortization of intangibles

        295     636     12     943  
 

Depreciation

    490     319     334     366     1,509  
                       
 

Total operating expenses

    13,458     22,314     3,368     152     39,292  
                       

Operating income (loss)

    2,126     2,609     (1,924 )   (8,153 )   (5,342 )

Adjustments to reconcile to EBITDA and Adjusted EBITDA:

                               
 

Amortization of intangibles

        295     636     12     943  
 

Depreciation

    490     319     334     366     1,509  
                       

EBITDA

    2,616     3,223     (954 )   (7,775 )   (2,890 )
 

Restructuring expense

    7     140         2,463     2,610  
 

Loss on disposal of assets

            1     3     4  
 

Non-cash compensation

    131     333     55     575     1,094  
 

Litigation loss contingencies and settlements

    16                 16  
                       

Adjusted EBITDA

  $ 2,770   $ 3,696   $ (898 ) $ (4,734 ) $ 834  
                       

Reconciliation to net loss in total:

                               

Operating loss per above

                          $ (5,342 )

Other expense, net

                            (159 )
                               

Loss before income taxes

                            (5,501 )

Income tax provision

                            (645 )
                               

Net loss

                          $ (6,146 )
                               

12


Table of Contents


TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7—SEGMENT INFORMATION (Continued)

 

 
  For the Three Months Ended March 31, 2009:  
 
  LendingTree
Loans
  Exchanges   Real
Estate
  Unallocated—
Corporate
  Total  

Revenue

  $ 34,372   $ 19,067   $ 5,759   $ (1,938 ) $ 57,260  

Cost of revenue (exclusive of depreciation shown separately below)

    11,856     1,891     3,864     576     18,187  
                       
 

Gross margin

    22,516     17,176     1,895     (2,514 )   39,073  

Operating expenses:

                               
 

Selling and marketing expense

    2,114     11,968     1,678     (1,938 )   13,822  
 

General and administrative expense

    4,974     2,784     2,699     5,842     16,299  
 

Product development

    150     632     534     292     1,608  
 

Litigation loss contingencies and settlements

    363     7     25         395  
 

Restructuring expense

    (108 )   58     733     159     842  
 

Amortization of intangibles

    70     50     1,143         1,263  
 

Depreciation

    787     199     260     418     1,664  
                       
 

Total operating expenses

    8,350     15,698     7,072     4,773     35,893  
                       

Operating income (loss)

    14,166     1,478     (5,177 )   (7,287 )   3,180  

Adjustments to reconcile to EBITDA and Adjusted EBITDA:

                               
 

Amortization of intangibles

    70     50     1,143         1,263  
 

Depreciation

    787     199     260     418     1,664  
                       

EBITDA

    15,023     1,727     (3,774 )   (6,869 )   6,107  
 

Restructuring expense

    (108 )   58     733     159     842  
 

Loss on disposal of assets

        638             638  
 

Non-cash compensation

    69     113     98     897     1,177  
 

Litigation loss contingencies and settlements

    363     7     25         395  
                       

Adjusted EBITDA

  $ 15,347   $ 2,543   $ (2,918 ) $ (5,813 ) $ 9,159  
                       

Reconciliation to net income in total:

                               

Operating income per above

                          $ 3,180  

Other expense, net

                            (103 )
                               

Income before income taxes

                            3,077  

Income tax benefit

                            83  
                               

Net income

                          $ 3,160  
                               

13


Table of Contents


TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7—SEGMENT INFORMATION (Continued)

        Significant components of revenue for the three months ended March 31, 2010 and 2009 are as follows (in thousands):

 
  Three Months Ended
March 31,
 
 
  2010   2009  

LendingTree Loans:

             
 

Origination and sale of loans

  $ 23,400   $ 32,764  
 

Other

    2,338     1,608  
           
   

Total LendingTree Loans revenue

    25,738     34,372  

Exchanges:

             
 

Match fees

    14,166     9,966  
 

Closed loan fees

    3,327     6,430  
 

Other

    881     733  
 

Inter-segment

    7,677     1,938  
           
   

Total Exchanges

    26,051     19,067  

Real Estate revenue

    3,899     5,759  

Inter-segment elimination

    (7,677 )   (1,938 )
           

Total revenue

  $ 48,011   $ 57,260  
           

        Total assets by segment at March 31, 2010 and December 31, 2009 are as follows (in thousands):

 
  March 31,
2010
  December 31,
2009
 

LendingTree Loans

  $ 177,262   $ 167,976  

Real Estate

    27,125     28,031  

Exchanges and Unallocated—Corporate(a)

    80,640     95,825  
           

Total

  $ 285,027   $ 291,832  
           

(a)
Assets are jointly used by the Exchanges and Unallocated—Corporate segments, and it is not practicable to allocate assets between these segments.

14


Table of Contents


TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 8—EARNINGS PER SHARE AND STOCK-BASED COMPENSATION

        The following table sets forth the computation of Basic and Diluted earnings per share:

 
  Three Months Ended March 31,  
 
  2010   2009  
 
  Basic   Diluted   Basic   Diluted  
 
  (In thousands, except per share data)
 

Numerator:

                         

Net income (loss) available to common shareholders

  $ (6,146 ) $ (6,146 ) $ 3,160   $ 3,160  

Denominator:

                         

Weighted average common shares

    10,960     10,960     9,676     9,739  
                   

Net income (loss) per common share

  $ (0.56 ) $ (0.56 ) $ 0.33   $ 0.32  
                   

        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 months ended March 31, 2010 and 2009 (in thousands):

 
  Three Months Ended
March 31,
 
 
  2010   2009  

Cost of revenue

  $ 15   $ 38  

Selling and marketing expense

    68     36  

General and administrative expense

    957     1,075  

Product development

    54     28  
           

Non-cash compensation expense

  $ 1,094   $ 1,177  
           

        The forms of stock-based awards granted to Tree.com employees are principally restricted stock units ("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 performance-based vesting, where certain performance targets set at the time of grant 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 and expensed ratably as non-cash compensation over the vesting term. For performance-based awards, the expense is measured at the grant date as the fair value of Tree.com common stock and expensed as non-cash compensation over the vesting period if the performance targets are considered probable of being achieved.

        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.

15


Table of Contents


TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 8—EARNINGS PER SHARE AND STOCK-BASED COMPENSATION (Continued)

        A summary of changes in outstanding stock options for the three months ended March 31, 2010 is as follows:

 
  Shares   Weighted
Average
Exercise
Price
  Weighted
Average
Remaining
Contractual
Term
  Aggregate
Intrinsic
Value
 
 
   
   
  (In years)
  (In thousands)
 

Outstanding at January 1, 2010

    1,177,319   $ 9.34              

Granted

                     

Exercised

    (18,274 )   7.37              

Forfeited

    (30,938 )   7.46              

Expired

    (45,805 )   11.11              
                       

Outstanding at March 31, 2010

    1,082,302   $ 9.36     6.9   $ 971  
                   

Options exercisable at March 31, 2010

    251,207   $ 8.49     5.3   $ 382  
                   

        The following table summarizes the information about stock options outstanding and exercisable as of March 31, 2010:

 
  Options Outstanding   Options Exercisable  
Range of Exercise Prices
  Outstanding at
March 31, 2010
  Weighted
Average
Remaining
Contractual
Life in Years
  Weighted
Average
Exercise Price
  Exercisable at
March 31, 2010
  Weighted
Average
Exercise Price
 

$.01 to $4.99

    19,732     2.30   $ 2.91     19,732   $ 2.91  

$5.00 to $7.45

    15,301     2.71     6.68     15,301     6.68  

$7.46 to $9.99

    851,860     7.66     8.21     147,521     7.68  

$10.00 to $14.99

    66,903     2.96     12.12     66,903     12.12  

$15.00 to $19.99

    81,725     5.14     15.04     1,750     16.79  

$20.00 to $24.99

    46,781     5.19     20.19          
                             

    1,082,302     6.90   $ 9.36     251,207   $ 8.49  
                             

16


Table of Contents


TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 8—EARNINGS PER SHARE AND STOCK-BASED COMPENSATION (Continued)

        Nonvested RSUs and restricted stock outstanding as of March 31, 2010 and changes during the three months ended March 31, 2010 were as follows:

 
  RSUs   Restricted Stock  
 
  Number of
Shares
  Weighted
Average
Grant
Date Fair
Value
  Number of
Shares
  Weighted
Average
Grant
Date Fair
Value
 

Nonvested at January 1, 2010

    704,938   $ 8.03     350,000   $ 5.42  

Granted

    376,031     8.25     150,000     9.15  

Vested

    (158,544 )   10.98     (87,500 )   5.42  

Forfeited

    (75,711 )   6.43          
                   

Nonvested at March 31, 2010

    846,714   $ 7.84     412,500   $ 6.78  
                   

        On March 31, 2010, the Company entered into a restricted stock award agreement with the Chief Executive Officer in which he was awarded a total of 150,000 shares of restricted common stock of the Company. These shares of restricted common stock vest in three equal annual installments beginning on February 17, 2011, provided certain financial performance targets are met and he is employed by the Company on such dates. In the event shares do not vest in 2011 or 2012 because of the failure to attain the applicable financial performance target, such shares may vest in 2012 or 2013 if additional performance targets are met. These shares of restricted stock are entitled to voting rights prior to vesting. Until the shares of restricted common stock granted under these agreements vest, he is prohibited from selling, transferring, pledging, assigning or otherwise alienating or hypothecating such shares. All of the then-outstanding and unvested portion of the restricted common stock will vest upon the occurrence of a change of control.

NOTE 9—FAIR VALUE MEASUREMENTS

        Tree.com categorizes its assets and liabilities measured at fair value into a fair value hierarchy that prioritizes the assumptions used in pricing the asset or liability into the following three levels:

17


Table of Contents


TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9—FAIR VALUE MEASUREMENTS (Continued)

        LendingTree Loans enters into commitments with consumers to originate loans at a specified interest rate (interest rate lock commitments—"IRLCs"). Tree.com reports IRLCs as derivative instruments at fair value with changes in fair value being recorded in current earnings as a component of revenue from the origination and sale of loans. IRLCs for loans to be sold to investors using a mandatory or assignment of trade ("AOT") method are hedged using "to be announced mortgage-backed securities" ("TBA MBS") and are valued using quantitative risk models. The IRLCs derive their base value from an underlying loan type with similar characteristics using the TBA MBS market which is actively quoted and easily validated through external sources. The most significant data inputs used in this valuation include, but are not limited to, loan type, underlying loan amount, note rate, loan program, and expected sale date of the loan. IRLCs for loans sold to investors on a best efforts basis are hedged using best efforts forward delivery commitments and are valued on an individual loan basis using a proprietary database program. These valuations are based on investor pricing tables stratified by product, note rate and term. The valuation is adjusted at the loan level to consider the servicing release premium and loan pricing adjustments specific to each loan. The Company applies an anticipated loan funding probability based on its own experience to value IRLCs , which results in the classification of these derivatives as Level 3. At March 31, 2010 and December 31, 2009, there were $354.2 million and $258.4 million, respectively, of IRLCs notional value outstanding.

        Loans held for sale measured at fair value and sold to investors using a mandatory or AOT method are also hedged using TBA MBS and valued using quantitative risk models. The valuation is based on the loan amount, note rate, loan program, and expected sale date of the loan. Loans held for sale measured at fair value and sold to investors on a best efforts basis are hedged using best efforts forward delivery commitments and are valued using a proprietary database program. The best efforts valuations are based on daily investor pricing tables stratified by product, note rate and term. These valuations are adjusted at the loan level to consider the servicing release premium and loan pricing adjustments specific to each loan. Loans held for sale, excluding impaired loans, are classified as Level 2. Loans held for sale measured at fair value that become impaired are transferred from Level 2 to Level 3, as the estimate of fair value is based on the Company's experience considering lien position and current status of the loan.

        Under LendingTree Loans' risk management policy, LendingTree Loans economically hedges the changes in fair value of IRLCs and loans held for sale caused by changes in interest rates by using TBA MBS and entering into best efforts forward delivery commitments. These hedging instruments are recorded at fair value with changes in fair value recorded in current earnings as a component of revenue from the origination and sale of loans. TBA MBS used to hedge both IRLCs and loans are valued using quantitative risk models based primarily on inputs related to characteristics of the MBS stratified by product, coupon, and settlement date. These derivatives are classified as Level 2. Best efforts forward delivery commitments are valued using a proprietary database program using investor pricing tables considering the current base loan price. An anticipated loan funding probability is applied to value best efforts commitments hedging IRLCs, which results in the classification of these contracts as Level 3. The best efforts forward delivery commitments hedging loans held for sale are classified as Level 2, so such contracts are transferred from Level 3 to Level 2 at the time the underlying loan is originated. For the purposes of the tables below, we refer to TBA MBS and best efforts forward delivery commitments collectively as "Forward Delivery Contracts".

18


Table of Contents


TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9—FAIR VALUE MEASUREMENTS (Continued)

        The following presents Tree.com's assets and liabilities that are measured at fair value on a recurring basis at March 31, 2010 and December 31, 2009 (in thousands):

 
  As of March 31, 2010  
 
  Recurring Fair Value Measurements Using  
 
  Quoted Market
Prices in Active
Markets for
Identical
Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
  Total Fair Value
Measurements
 

Loans held for sale

  $   $ 98,695   $ 776   $ 99,471  

Interest rate lock commitments ("IRLCs")

            5,508     5,508  

Forward delivery contracts

        930     153     1,083  
                   

Total

  $   $ 99,625   $ 6,437   $ 106,062  
                   

 

 
  As of December 31, 2009  
 
  Recurring Fair Value Measurements Using  
 
  Quoted Market
Prices in Active
Markets for
Identical
Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
  Total Fair Value
Measurements
 

Loans held for sale

  $   $ 91,459   $ 777   $ 92,236  

Interest rate lock commitments ("IRLCs")

            3,680     3,680  

Forward delivery contracts

        2,737     487     3,224  
                   

Total

  $   $ 94,196   $ 4,944   $ 99,140  
                   

19


Table of Contents


TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9—FAIR VALUE MEASUREMENTS (Continued)

        The following presents the changes in Tree.com's assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2010 and 2009 (in thousands):

 
  Three Months
Ended March 31, 2010
 
 
  Interest Rate
Lock
Commitments
  Forward
Delivery
Contracts
  Loans
Held
for Sale
 

Balance at January 1, 2010

  $ 3,680   $ 487   $ 777  
 

Transfers into Level 3

             
 

Transfers out of Level 3

        25      
 

Transfers of IRLCs to closed loans

    (14,791 )        
 

Total net gains (losses) included in earnings (realized and unrealized)

    21,333     (359 )   1  
 

Purchases, sales, and settlements

                   
   

Purchases

             
   

Sales

             
   

Settlements

    (4,714 )       (2 )
               

Balance at March 31, 2010

  $ 5,508   $ 153   $ 776  
               

 

 
  Three Months
Ended March 31, 2009
 
 
  Interest Rate
Lock
Commitments
  Forward
Delivery
Contracts
  Loans
Held
for Sale
 

Balance at January 1, 2009

  $ 5,904   $ (20 ) $ 814  
 

Transfers into Level 3

             
 

Transfers out of Level 3

        154      
 

Transfers of IRLCs to closed loans

    (15,172 )        
 

Total net gains (losses) included in earnings (realized and unrealized)

    29,286     (158 )   65  
 

Purchases, sales, and settlements

                   
   

Purchases

             
   

Sales

            (358 )
   

Settlements

    (11,238 )       (250 )
               

Balance at March 31, 2009

  $ 8,780   $ (24 ) $ 271  
               

20


Table of Contents


TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9—FAIR VALUE MEASUREMENTS (Continued)

        The following presents the gains included in earnings for the three months ended March 31, 2010 and 2009 relating to Tree.com's assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):

 
  Three Months
Ended March 31, 2010
 
 
  Interest Rate
Lock
Commitments
  Forward
Delivery
Contracts
  Loans
Held
for Sale
 

Total net gains included in earnings, which are included in revenue from LendingTree Loans

  $ 21,333   $ (359 ) $ 1  
               

Change in unrealized gains relating to assets and liabilities still held at March 31, 2010, which are included in revenue from LendingTree Loans

  $ 5,508   $ 153   $ 1  
               

 

 
  Three Months
Ended March 31, 2009
 
 
  Interest Rate
Lock
Commitments
  Forward
Delivery
Contracts
  Loans
Held
for Sale
 

Total net gains included in earnings, which are included in revenue from LendingTree Loans

  $ 29,286   $ (158 ) $ 65  
               

Change in unrealized gains relating to assets and liabilities still held at March 31, 2009, which are included in revenue from LendingTree Loans

  $ 8,780   $ (24 ) $ 130  
               

        The following table summarizes the Company's derivative instruments not designated as hedging instruments as of March 31, 2010 and December 31, 2009 (in thousands):

 
  March 31, 2010   December 31, 2009  
 
  Balance Sheet Location   Fair Value   Balance Sheet Location   Fair Value  

Interest Rate Lock Commitments

  Prepaid and other current assets   $ 5,623   Prepaid and other current assets   $ 3,919  

Forward Delivery Contracts

  Prepaid and other current assets     1,197   Prepaid and other current assets     3,341  

Interest Rate Lock Commitments

  Accrued expenses and other current liabilities     (115 ) Accrued expenses and other current liabilities     (239 )

Forward Delivery Contracts

  Accrued expenses and other current liabilities     (114 ) Accrued expenses and other current liabilities     (117 )
                   

Total Derivatives

      $ 6,591       $ 6,904  
                   

21


Table of Contents


TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9—FAIR VALUE MEASUREMENTS (Continued)

        The gain/(loss) recognized in the consolidated statements of operations for derivatives for the three months ended March 31, 2010 and 2009 was as follows (in thousands):

 
   
  Three Months Ended  
 
  Location of Gain/(Loss) Recognized
in Income on Derivative
  March 31,
2010
  March 31,
2009
 

Interest Rate Lock Commitments

  LendingTree Loans revenue   $ 21,333   $ 29,286  

Forward Delivery Contracts

  LendingTree Loans revenue     (2,073 )   (981 )
               
 

Total

      $ 19,260   $ 28,305  
               

        Tree.com has elected to account for loans held for sale originated on or after January 1, 2008 at fair value. Electing the fair value option allows a better offset of the changes in fair values of the loans and the forward delivery contracts used to economically hedge them without the burden of complying with the requirements for hedge accounting.

        Tree.com did not elect the fair value option on loans held for sale originated prior to January 1, 2008 and on loans that were repurchased from investors on or subsequent to that date. As of March 31, 2010 and December 31, 2009, 27 and 29 such loans, respectively, all of which were impaired, were included in loans held for sale and were carried at the lower of cost or market ("LOCOM") value assessed on an individual loan basis. The market value (or fair value) of these impaired loans at March 31, 2010 and December 31, 2009, measured on a non-recurring basis using significant unobservable inputs (Level 3), was $1.2 and $1.4 million, respectively. This fair value measurement is management's best estimate of the market value of such loans and considers the lien position and loan status.

        The following presents the difference between the aggregate principal balance of loans held for sale for which the fair value option has been elected and for loans measured at LOCOM as of March 31, 2010 and December 31, 2009 (in thousands):

 
  As of March 31, 2010  
 
  Loans Held
for Sale—
Measured at
Fair Value
  Loans Held
for Sale—
Measured at
LOCOM
  Total Loans
Held For
Sale
 

Aggregate unpaid principal balance

  $ 98,038   $ 3,093   $ 101,131  

Difference between fair value and aggregate unpaid principal balance

    1,433         1,433  

Lower of cost or market valuation allowance

        (1,839 )   (1,839 )

Deferred loan fees, net of costs

        (9 )   (9 )
               

Loans held for sale

  $ 99,471   $ 1,245   $ 100,716  
               

22


Table of Contents


TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9—FAIR VALUE MEASUREMENTS (Continued)

 

 
  As of December 31, 2009  
 
  Loans Held
for Sale—
Measured at
Fair Value
  Loans Held
for Sale—
Measured at
LOCOM
  Total Loans
Held For
Sale
 

Aggregate unpaid principal balance

  $ 91,824   $ 3,217   $ 95,041  

Difference between fair value and aggregate unpaid principal balance

    412         412  

Lower of cost or market valuation allowance

        (1,848 )   (1,848 )

Deferred loan fees, net of costs

        (9 )   (9 )
               

Loans held for sale

  $ 92,236   $ 1,360   $ 93,596  
               

        During the three months ended March 31, 2010 and 2009, the change in fair value of loans held for sale for which the fair value option has been elected was a gain of $2.0 million and a loss of $0.4 million, respectively, and is included as a component of LendingTree Loans revenue in the accompanying consolidated statements of operations.

NOTE 10—ORIGINATION AND SALE OF LOANS, LOANS HELD FOR SALE AND LOAN LOSS OBLIGATIONS

Origination and Sale of Loans

        LendingTree Loans' revenues are primarily derived from the origination and sale of loans. Mortgage loans are funded through warehouse lines of credit and are recorded at fair value. Changes in the fair value of mortgage loans are recorded through revenue prior to the sale of the loans to investors, which typically occurs within thirty days. The gain or loss on the sale of loans is recognized on the date the loans are sold and is based on the difference between the sale proceeds received and the fair value of the loans. The Company sells its loans on a servicing released basis in which the Company gives up the right to service the loans.

        A summary of the initial unpaid principal balance of loans sold by type of loan for the three months ended March 31, 2010 and 2009 is presented below ($ amounts in millions):

 
  Three Months Ended March 31,  
 
  2010   2009  
 
  Amount   %   Amount   %  

Conforming

  $ 460     77 % $ 636     89 %

FHA and Alt-A

    110     18 %   77     11 %

Jumbo

    32     5 %   3     %
                   

Total

  $ 602     100 % $ 716     100 %
                   

23


Table of Contents


TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 10—ORIGINATION AND SALE OF LOANS, LOANS HELD FOR SALE AND LOAN LOSS OBLIGATIONS (Continued)

Loans Held for Sale

        LendingTree Loans originates all of its residential real estate loans with the intent to sell them in the secondary market. Loans held for sale consist primarily of residential first mortgage loans that are secured by residential real estate throughout the United States.

        The following table represents the loans held for sale by type of loan as of March 31, 2010 and December 31, 2009 ($ amounts in thousands):

 
  March 31, 2010   December 31, 2009  
 
  Amount   %   Amount   %  

Conforming

  $ 71,299     71 % $ 72,670     77 %

FHA and Alt-A

    24,052     24 %   16,596     18 %

Jumbo

    4,595     4 %   3,486     4 %

Subprime

    656     1 %   720     1 %

Home equity

    114     %   124     %
                   

Total

  $ 100,716     100 % $ 93,596     100 %
                   

        The unpaid principal amount of loans on nonaccrual status at March 31, 2010 and December 31, 2009 was $4.4 million and $4.5 million, respectively. These loans have a net book value (net of lower of cost or market valuation allowances and fair value adjustments) of $2.0 million and $2.1 million at March 31, 2010 and December 31, 2009, respectively. Included within the loans on nonaccrual status are repurchased loans with a net book value of $0.6 million and $0.7 million at March 31, 2010 and December 31, 2009, respectively. During the three months ended March 31, 2010 and 2009, LendingTree Loans did not repurchase any loans.

        Real estate properties acquired in satisfaction of loans totaled $0.6 million and $0.9 million, net of estimated selling expenses, at March 31, 2010 and December 31, 2009, respectively, and are included in prepaid and other current assets in the accompanying consolidated balance sheets.

Loan Loss Obligations

        LendingTree Loans sells loans it originates to investors on a servicing released basis so the risk of loss or default by the borrower is generally transferred to the investor. However, LendingTree Loans is required by these investors to make certain representations relating to credit information, loan documentation and collateral. These representations and warranties may extend through the contractual life of the mortgage loan. Subsequent to the sale, if underwriting deficiencies, borrower fraud or documentation defects are discovered in individual mortgage loans, LendingTree Loans may be obligated to repurchase the respective mortgage 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, which occurs when a borrower prepays a loan prior to the end of a specified period, LendingTree Loans may be required to repay all or a portion of the premium initially paid by the investor. The estimated obligation associated with early loan payoffs is calculated based on historical loss experience by type of loan.

24


Table of Contents


TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 10—ORIGINATION AND SALE OF LOANS, LOANS HELD FOR SALE AND LOAN LOSS OBLIGATIONS (Continued)

        The obligation for losses related to the representations and warranties and other provisions discussed above is initially recorded at its estimated fair value, which includes a projection of expected future losses as well as a market based premium. Because LendingTree Loans does not service the loans it sells, it does not maintain nor have access to the current balances and loan performance data with respect to the individual loans previously sold to investors. Accordingly, the Company is unable to determine, with precision, its maximum exposure under its representations and warranties. However, LendingTree Loans utilizes the original loan balance (before it was sold to an investor), historical and projected loss frequency and loss severity ratios by loan type as well as analyses of losses in process to estimate its exposure to losses on loans previously sold. The Company maintains a liability related to this exposure based, in part, on historical and projected loss frequency and loss severity using its loan loss history (adjusted for recent trends in loan loss experience), the original principal amount of the loans previously sold, the year the loans were sold, and loan type. Accordingly, subsequent adjustments to the obligation, if any, are not made based on changes in the fair value of the obligation, which might include an estimated change in losses that may be expected in the future, but are made once further losses are estimated to be both probable and estimable. As such, given current general industry trends in mortgage loans as well as housing prices, market expectations around losses related to the Company's obligations could vary significantly from the obligation recorded as of the balance sheet date or the range estimated below. In estimating its exposure to loan losses, LendingTree Loans categorizes its loan sales into four types based on the extent of the documentation provided by the borrower to substantiate income and/or assets (full or limited documentation) and the lien position of the mortgage in the underling property (first or second position). Each of these loan types has a different loss experience with full documentation, first lien position loans generally having the lowest loss ratios and limited documentation, second lien position loans generally having the highest loss ratios.

        The following table represents the loans sold for the period shown and the aggregate loan losses through March 31, 2010:

 
  As of March 31, 2010  
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)
 

Three months ended March 31, 2010

    2,700   $ 0.6       $   $  

2009

    12,800     2.8     2     0.6     0.1  

2008

    11,000     2.2     13     2.5     0.3  

2007

    36,300     6.1     121     14.9     4.5  

2006

    55,000     7.9     171     19.3     10.1  

2005 and prior years

    86,700     13.0     81     10.8     4.1  
                       

Total

    204,500   $ 32.6     388   $ 48.1   $ 19.1  
                       

        The pipeline of 104 loan repurchase requests and indemnifications as of March 31, 2010 was considered in determining the appropriate reserve amount. The status of these 104 loans varied from an initial review stage, which may result in a rescission of the request, to in process, where the probability of incurring a loss is high, to indemnification, whereby the Company has agreed to

25


Table of Contents


TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 10—ORIGINATION AND SALE OF LOANS, LOANS HELD FOR SALE AND LOAN LOSS OBLIGATIONS (Continued)


reimburse the purchaser of that loan if and when losses are incurred. The indemnification may have a specific term, thereby limiting the Company's exposure. The original principal amount of these loans is approximately $16.5 million, comprised of approximately 51% full documentation first liens, 4% full documentation second liens, 31% low documentation first liens, and 14% low documentation second liens.

        In the fourth quarter of 2009, LendingTree Loans entered into settlement negotiations with two buyers of previously purchased limited documentation loans. The settlement with one buyer was completed in December 2009 and included a payment of $1.9 million related to all second lien loans sold to this buyer, including both full and limited documentation. This amount was not determined on an individual loan basis and is, therefore, not included in the loss amounts disclosed above based on the year such loans were sold. The settlement was included as a charge off to the reserve in 2009. Negotiations with the second buyer were completed in January 2010. This settlement of $4.5 million, to be paid in four equal quarterly installments in 2010, relates to all future losses on limited documentation second lien loans on loans sold to this buyer. This settlement amount was included as a charge off to the reserve in January 2010 and is not included in the table above.

        Based on historical experience, it is anticipated that the Company will continue to receive repurchase requests and incur losses on loans sold in prior years. However, the two settlements discussed above will eliminate future repurchase requests from those buyers for the loan types included in those settlements. As of March 31, 2010 LendingTree Loans estimated the range of remaining possible losses due to representations and warranty issues based on the methodology described above, excluding the $3.5 million settlement remaining to be paid in 2010, as $10 million to $17 million. The Company believes that it has adequately reserved for these losses.

        The activity related to loss reserves on previously sold loans for the three months ended March 31, 2010 and 2009, is as follows (in thousands):

 
  Three Months Ended
March 31,
 
 
  2010   2009  

Balance, beginning of period

  $ 16,985   $ 10,451  

Provisions

    1,464     358  

Charge offs to reserves(a)

    (5,617 )   (977 )
           

Balance, end of period

  $ 12,832   $ 9,832  
           

(a)
The three months ended March 31, 2010 includes a charge off for the amount of the $4.5 million loan loss settlement discussed above. This settlement is now a known liability, and as such, the remaining settlement payments due of $3.5 million are tracked as a liability separate from the loan loss reserve (see table below).

        Based on an analysis of the Company's historical loan loss experience, it has been determined that a portion of the loan losses expected to be made by investors will be made more than twelve months following the initial sale of the underlying loan. Accordingly, the Company has estimated the portion of its loans sold reserve that it anticipates it will be liable for after twelve months and has classified that

26


Table of Contents


TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 10—ORIGINATION AND SALE OF LOANS, LOANS HELD FOR SALE AND LOAN LOSS OBLIGATIONS (Continued)


portion of the reserve as a long-term liability. The liability for losses on previously sold loans, including the remaining portion of the settlement discussed above, is presented in the accompanying consolidated balance sheet as of March 31, 2010 and December 31, 2009 as follows (in thousands):

 
  As of March 31,
2010
  As of December 31,
2009
 

Current portion related to settlement above, included in accrued expenses and other current liabilities

  $ 3,450   $ 4,500  

Other current portion, included in accrued expenses and other current liabilities

    6,254     6,115  

Long term portion, included in other long-term liabilities

    6,578     6,370  
           

Total

  $ 16,282   $ 16,985  
           

NOTE 11—INCOME TAXES

        For the three months ended March 31, 2010 and 2009, Tree.com recorded a tax (provision) benefit of $(0.6) million and $0.1 million, respectively, which represents effective tax rates of 11.7% and (2.7%), respectively. For the three months ended March 31, 2010, the tax rate is lower than the federal statutory rate of 35% mainly due to an increase in the valuation allowance on deferred tax assets and an increase to the uncertainty for income taxes reserve. For the three months ended March 31, 2009, there was an increase in the valuation allowance that caused the tax rate to be lower than the federal statutory rate.

        Tree.com's unrecognized tax benefits decreased by approximately $0.6 million in the first quarter. The decrease was due to obtaining audit protection of filing a change of accounting method for a prior year tax position. Tree.com believes that it is reasonably possible that its unrecognized tax benefits could decrease by approximately $0.5 million within twelve months of the current reporting date due to the expiration of statute of limitations. An estimate of other changes in unrecognized tax benefits cannot be made, but are not expected to be significant.

        For the three months ended March 31, 2010, Tree.com determined that its valuation allowance yielded an unusual effective tax rate; therefore, Tree.com utilized the actual year to date effective tax rate for purposes of determining year to date tax expense. For the three months ended March 31, 2009, Tree.com used an ASC 740-270-30 approach to calculate an estimated annual effective tax rate for the tax provision.

NOTE 12—CONTINGENCIES

        During the three months ended March 31, 2010 and 2009, provisions for litigation settlements of $-0- million, $0.4 million, respectively, were recorded in litigation settlements and contingencies in the accompanying consolidated statements of operations. The balance of the related liability was $4.8 million and $12.8 million at March 31, 2010 and December 31, 2009, respectively. As of March 31,

27


Table of Contents


TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 12—CONTINGENCIES (Continued)


2010, $8.0 million of the initial $12.8 million liability has been paid with the remaining $4.8 million to be paid in the second quarter of 2010.

        In the ordinary course of business, Tree.com is a party to various lawsuits. Tree.com establishes reserves for specific legal matters when it determines that the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable. Management has also identified certain other legal matters where it believes an unfavorable outcome is not probable and, therefore, no reserve is established. Although management currently believes that an unfavorable resolution of claims against Tree.com, including claims where an unfavorable outcome is reasonably possible, will not have a material impact on the liquidity, results of operations, or financial condition of Tree.com, these matters are subject to inherent uncertainties and management's view of these matters may change in the future. It is possible that an unfavorable outcome of one or more of these lawsuits could have a material impact on the liquidity, results of operations, or financial condition of Tree.com. Tree.com also evaluates other contingent matters, including tax contingencies, to assess the probability and estimated extent of potential loss.

NOTE 13—RESTRUCTURING CHARGES

        The restructuring charges in 2010 primarily relate to continuing lease obligations on facilities previously used for call center operations, for which management had a plan to exit at December 31, 2009, but the cease-use date did not occur until January 2010. The restructuring charges in 2009 primarily relate to Tree.com's segment reorganizations and aligning the cost structure with future revenue opportunities. Costs that relate to ongoing operations are not part of restructuring charges. Restructuring charges by segment and type are as follows (in thousands):

 
  For The Three Months Ended March 31, 2010  
 
  Employee
Termination
Costs
  Continuing
Lease
Obligations
  Asset
Write-offs
  Total  

LendingTree Loans

  $   $ 9   $ (2 ) $ 7  

Exchanges

    47         93     140  

Real Estate

                 

Unallocated—corporate

        2,463         2,463  
                   

Total

  $ 47   $ 2,472   $ 91   $ 2,610  
                   

 

 
  For The Three Months Ended March 31, 2009  
 
  Employee
Termination
Costs
  Continuing
Lease
Obligations
  Asset
Write-offs
  Total  

LendingTree Loans

  $   $ (108 ) $   $ (108 )

Exchanges

    58             58  

Real Estate

    536     73     124     733  

Unallocated—corporate

    208     (49 )       159  
                   

Total

  $ 802   $ (84 ) $ 124   $ 842  
                   

28


Table of Contents


TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 13—RESTRUCTURING CHARGES (Continued)

        Restructuring charges and spending against liabilities are as follows (in thousands):

 
  For The Three Months Ended March 31, 2010  
 
  Employee
Termination
Costs
  Continuing
Lease
Obligations
  Asset
Write-offs
  Other   Total  

Balance, beginning of period

  $ 1,505   $ 1,043   $   $ 12   $ 2,560  
 

Restructuring charges

    47     2,472     91         2,610  
 

Payments

    (1,125 )   (362 )   2     (12 )   (1,497 )
 

Write-offs

        234     (93 )       141  
                       

Balance, end of period

  $ 427   $ 3,387   $   $   $ 3,814  
                       

        At March 31, 2010, restructuring liabilities of $1.4 million are included in accrued expenses and other current liabilities and $2.5 million are included in other long-term liabilities in the accompanying consolidated balance sheet. At December 31, 2009, restructuring liabilities of $1.8 million are included in accrued expenses and other current liabilities and $0.7 million are included in other long-term liabilities in the accompanying consolidated balance sheet. Tree.com does not expect to incur significant additional costs related to the prior restructurings noted above.

29


Table of Contents

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Management Overview

        On August 20, 2008, Tree.com, Inc. ("Tree.com") was spun off from its parent company, IAC/InterActiveCorp ("IAC") into a separate publicly traded company. We refer to the separation transaction as the "spin-off." In connection with the spin-off, Tree.com was incorporated as a Delaware corporation in April 2008.

        Tree.com is the parent of LendingTree, LLC and the owner of several brands and businesses that provide information, tools, advice, products and services for critical transactions in our customers' lives. Our family of brands includes: LendingTree.com®, GetSmart.com®, RealEstate.com®, DegreeTree.comSM, HealthTree.comSM, LendingTreeAutos.com, DoneRight.com, and InsuranceTree.comSM. Together, these brands serve as an ally for consumers who are looking to comparison shop for loans, real estate and other services from multiple businesses and professionals who will compete for their business.

        These businesses and brands are operated under the segments known as LendingTree Loans, the Exchanges and Real Estate. Additionally, certain shared indirect costs that are described below are reported as "Unallocated—Corporate."

        The expenses presented below for each of the business segments include an allocation 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.

        The LendingTree Loans segment originates, processes, approves and funds various residential real estate loans through Home Loan Center, Inc. ("HLC"), (d/b/a LendingTree Loans). The HLC and LendingTree Loans brand names are collectively referred to in these consolidated financial statements as "LendingTree Loans."

        The Exchanges segment consists of online lead generation networks and call centers (principally LendingTree.com, Tree.com, DegreeTree.com, LendingTreeAutos.com and GetSmart.com) that connect consumers and service providers principally in the lending, higher education and automobile marketplaces.

        The Real Estate segment consists of a proprietary full-service real estate brokerage (RealEstate.com, REALTORS®) that operates in 20 U.S. markets, as well as an online lead generation network accessed at www.RealEstate.com, that connects consumers with third party real estate brokerages around the country.

30


Table of Contents

Results of operations for the three months ended March 31, 2010 compared to the three months ended March 31, 2009:

 
  Three Months Ended March 31,  
 
  2010   % Change   2009  
 
  (Dollars in thousands)
 

LendingTree Loans:

                   
 

Origination and sale of loans

  $ 23,400     (29 )% $ 32,764  
 

Other

    2,338     45 %   1,608  
                 

Total LendingTree Loans

    25,738     (25 )%   34,372  

Exchanges:

                   
 

Match fees

    14,166     42 %   9,966  
 

Closed loan fees

    3,327     (48 )%   6,430  
 

Other

    881     20 %   733  
 

Inter-segment revenue

    7,677     296 %   1,938  
                 

Total Exchanges

    26,051     37 %   19,067  

Real Estate

    3,899     (32 )%   5,759  

Inter-segment revenue

    (7,677 )   296 %   (1,938 )
                 

Total revenue

    48,011     (16 )% $ 57,260  
                 

        LendingTree Loans revenue in 2010 decreased $8.6 million, or 25%, from the same period in 2009. Revenue generated from the origination and sale of loans decreased $9.4 million, or 29%. The total dollar value of loans closed declined by 15% during 2010, even though the number of consumer loan requests increased by 20% in the same period. The resulting decrease in loan closing rates was primarily driven by tight secondary credit markets that are unable to serve many consumers who do not have sufficient collateral value or are not eligible for conforming prime first-lien position loans.

        The dollar value of loans closed directly by LendingTree Loans is as follows:

 
  Three Months Ended
March 31,
 
 
  2010   % Change   2009  
 
  (Dollars in thousands)
 

Refinance mortgages

  $ 552     (15 )% $ 647  

Purchase mortgages

    56     (17 )%   68  
                 

Total

  $ 608     (15 )% $ 715  
                 

        LendingTree Loans originates mortgage loans on property located throughout the United States, with no one location representing more than 10% of Tree.com's consolidated revenue for any period presented. Revenue from loans originated for property in California totaled approximately 14% and 12% of Tree.com's consolidated revenue for the three months ended March 31, 2010 and 2009, respectively.

        Revenue from the Exchanges in 2010 increased $7.0 million, or 37%, due primarily to an increase in inter-segment revenue from sales of consumer mortgage leads to LendingTree Loans, reflecting both an expansion of consumer volume LendingTree Loans takes to include direct consumer calls and a higher transfer price due to increased marketing costs to acquire leads. Overall matched requests in the first quarter of 2010 declined 8% from the same period in 2009, which reflects a decline of 39% in home loan matches and an increase of 180% in matches for the new consumer vertical areas of higher education, home services and insurance. Home loan matches were down because in the first quarter of

31


Table of Contents


2009, the Federal Reserve cut interest rates five times, which stimulated significant consumer demand for home loans on our network. Matches in new consumer verticals have grown as a result of both seasonality and increased marketing spending. The overall impact on match fees was an increase of 42%, reflecting a shift in pricing on home loan related matches to increase the average match fee (and decrease the average close loan fee), Also impacting the revenue from closed loan fees was a 36% decline in closed units in the period as a result of the decline in matched loan requests.

        The dollar value of loans closed by Exchange network lenders is as follows:

 
  Three Months Ended March 31,  
 
  2010   % Change   2009  
 
  (Dollars in millions)
 

Refinance mortgages

  $ 1,034     (48 )% $ 2,007  

Purchase mortgages

    563     22 %   461  

Other

    66     (58 )%   157  
                 

Total

  $ 1,663     (37 )% $ 2,625  
                 

        No single Exchange network lender accounts for revenue representing more than 10% of Tree.com's consolidated revenue for any periods presented.

        Real Estate revenue in 2010 decreased $1.9 million, or 32%, principally due to a decrease in closings due to the persistent negative real estate market conditions contributing to lower home sales prices and fewer real estate transactions overall. In addition, the Company consolidated three office locations in the fourth quarter of 2009, which resulted in lower agent count and transactions. The dollar value of the Company's real estate closings decreased 42% in 2010, from $281 million in 2009 to $165 million in 2010.

 
  Three Months Ended March 31,  
 
  2010   % Change   2009  
 
  (Dollars in thousands)
 

LendingTree Loans

  $ 10,154     (14 )% $ 11,856  

Exchanges

    1,128     (40 )%   1,891  

Real Estate

    2,455     (36 )%   3,864  

Unallocated—corporate

    324     (44 )%   576  
                 

Cost of revenue

  $ 14,061     (23 )% $ 18,187  
                 

As a percentage of total revenue

    29 %         32 %

 

 
  Three Months
Ended
March 31,
 
As a Percentage of Segment Revenue
  2010   2009  

LendingTree Loans

    39 %   34 %

Exchanges

    4 %   10 %

Real Estate

    63 %   67 %

Unallocated—corporate, as a percentage of total revenue

    1 %   1 %

        Cost of revenue consists primarily of costs associated with loan originations, compensation and other employee related costs (including stock-based compensation) related to customer call centers, real estate network support staff and loan officers, as well as credit scoring fees, consumer incentive costs, real estate agent commissions and website network hosting and server fees.

32


Table of Contents

        Cost of revenue in 2010 decreased $4.1 million from 2009 primarily due to decreases of $1.8 million in costs associated with loan originations at LendingTree Loans, $1.0 million in compensation and other employee related costs, $0.8 million in consumer incentive rebates related to decreased closings at the Exchanges and in Real Estate, and $0.7 million in commissions paid to real estate agents. The decreases in the cost of loan originations and in compensation and other employee related costs are primarily due to lower originations and sales of loans and lower commissions to loan officers, as the dollar value of loans closed directly by LendingTree Loans decreased 15% in 2010 as compared to 2009.

 
  Three Months Ended March 31,  
 
  2010   % Change   2009  
 
  (Dollars in thousands)
 

LendingTree Loans

  $ 7,998     278 % $ 2,114  

Exchanges

    19,085     59 %   11,968  

Real Estate

    689     (59 )%   1,678  

Inter-segment marketing

    (7,626 )   294 %   (1,938 )
                 

Selling and marketing expense

  $ 20,146     46 % $ 13,822  
                 

As a percentage of total revenue

    42 %         24 %

 

 
  Three Months
Ended
March 31,
 
As a Percentage of Segment Revenue
  2010   2009  

LendingTree Loans

    31 %   6 %

Exchanges

    73 %   63 %

Real Estate

    18 %   29 %

        Selling and marketing expense consists primarily of advertising and promotional expenditures, fees paid to lead sources and compensation and other employee related costs (including stock-based compensation) for personnel engaged in the sales function. Advertising and promotional expenditures primarily include online marketing, as well as television, print and radio spending. Advertising production costs are expensed in the period the related ad is first run.

        Advertising for the Exchanges is primarily the building and maintaining of the Company's core brands, using both online and offline spending, and generates leads not only for the Exchanges but for our other segments as well. Marketing expense for LendingTree Loans is primarily comprised of inter-segment purchases of leads from the Exchanges, leveraging the LendingTree and GetSmart brands. The remainder of the expense is comprised of lead purchases from third parties. Advertising for Real Estate primarily consists of lead generation through online spending, as well as lead purchases from the Exchanges.

        Overall selling and marketing expense in 2010 increased $6.3 million from 2009 primarily due to an increase of $6.0 million in advertising and promotional expenditures. In 2010, Tree.com increased its online marketing advertising by $5.5 million, from $7.6 million in 2009 to $13.1 million in 2010, while broadcast advertising remained flat at $3.9 million in both 2010 and 2009. Additionally, print advertising increased $0.9 million from 2009 primarily due to the costs associated with the production of a referral book for home services professionals within the DoneRight® brand.

        The overall increase from 2009 in both dollars and as a percentage of revenue is due to several factors. In the first quarter of 2009, the Exchanges was able to decrease advertising spending as it experienced naturally higher consumer demand that was driven by the lower mortgage interest rate

33


Table of Contents


environment and improvements in organic traffic. Also, LendingTree Loans received "overflow" leads during the early part of 2009 from a partner that received more leads than its capacity could handle. Moving into the first quarter of 2010, while overall mortgage interest rates remained low, there was not the significant and swift decline in rates that was seen in the first quarter of 2009 that captured the attention of the consumer, so the Exchanges responded by increasing advertising spending by 59% and generated a slightly lower quantity of matched requests (an 8% decrease from 2009). This returned the marketing expense as a percentage of revenue to a more normalized level of 42% in 2010. This increase also directly impacts the cost per lead acquired for LendingTree Loans, which is reflected in the increase in marketing expense for that segment in the table above.

        Tree.com anticipates that it will continue to adjust selling and marketing expenditures generally in relation to revenue producing opportunities and that selling and marketing will continue to represent a high percentage of revenue as it continues to promote its brands both online and offline.

 
  Three Months Ended March 31,  
 
  2010   % Change   2009  
 
  (Dollars in thousands)
 

LendingTree Loans

  $ 4,816     (3 )% $ 4,974  

Exchanges

    1,593     (43 )%   2,784  

Real Estate

    1,541     (43 )%   2,699  

Unallocated—corporate

    4,752     (19 )%   5,842  
                 

General and administrative expense

  $ 12,702     (22 )% $ 16,299  
                 

As a percentage of total revenue

    26 %         28 %

 

 
  Three Months
Ended
March 31,
 
As a Percentage of Segment Revenue
  2010   2009  

LendingTree Loans

    19 %   14 %

Exchanges

    6 %   15 %

Real Estate

    40 %   47 %

Unallocated—corporate, as a percentage of total revenue

    10 %   10 %

        General and administrative expense consists primarily of compensation and other employee related costs (including stock-based compensation) for personnel engaged in finance, legal, tax, corporate information technology, human resources and executive management functions, as well as facilities and infrastructure costs and fees for professional services.

        General and administrative expense in 2010 decreased across all segments by $3.6 million from 2009. These decreases reflect a $2.8 million reduction in compensation and other employee related costs, excluding non-cash compensation, as a result of prior restructuring activities. Other significant decreases during 2010 include $0.6 million in loss on disposal of fixed assets and $0.2 million in facilities costs due to lower headcount and occupying fewer facilities.

        General and administrative expense within the LendingTree Loans segment declined $0.2 million primarily due to decreases of $0.6 million in compensation and other employee related costs (excluding non-cash compensation) due to lower headcount, partially offset by a $0.2 million increase in professional fees.

        General and administrative expense within the Exchanges segment decreased $1.2 million primarily due to decreases of $0.6 million in compensation and other employee related costs (excluding non-cash compensation) and $0.6 million in loss on disposal of fixed assets.

34


Table of Contents

        General and administrative expense within the Real Estate segment decreased $1.2 million primarily due to a decrease of $0.9 million in compensation and other employee related costs (excluding non-cash compensation) as a result of prior restructuring activities.

        General and administrative expense within the Unallocated—corporate segment decreased $1.1 million primarily due to a decrease of $0.7 million in compensation and other employee related costs (excluding non-cash compensation) as a result of prior restructuring activities.

 
  Three Months Ended March 31,  
 
  2010   % Change   2009  
 
  (Dollars in thousands)
 

LendingTree Loans

  $ 131     (13 )% $ 150  

Exchanges

    882     40 %   632  

Real Estate

    168     (69 )%   534  

Unallocated—corporate

    185     (37 )%   292  
                 

Product development

  $ 1,366     (15 )% $ 1,608  
                 

As a percentage of total revenue

    3 %         3 %

 

 
  Three Months
Ended
March 31,
 
As a Percentage of Segment Revenue
  2010   2009  

LendingTree Loans

    1 %   %

Exchanges

    3 %   3 %

Real Estate

    4 %   9 %

Unallocated—corporate, as a percentage of total revenue

    %   1 %

        Product development expense consists primarily of compensation and other employee related costs (including stock-based compensation) for personnel engaged in product development, which include costs related to the design, development, testing and enhancement of technology that are not capitalized.

        Product development expense in 2010 decreased $0.2 million from 2009, due to decreased compensation and other employee related costs.

        Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") is a non-GAAP measure and is defined in "Tree.com's Principles of Financial Reporting". For a

35


Table of Contents

reconciliation of Adjusted EBITDA to net loss for Tree.com's operating segments, see Note 7 to the consolidated financial statements.

 
  Three Months Ended March 31,  
 
  2010   % Change   2009  
 
  (Dollars in thousands)
 

LendingTree Loans

  $ 2,770     (82 )% $ 15,347  

Exchanges

    3,696     45 %   2,543  

Real Estate

    (898 )   69 %   (2,918 )

Unallocated—corporate

    (4,734 )   19 %   (5,813 )
                 

Adjusted EBITDA

  $ 834     (91 )% $ 9,159  
                 

As a percentage of total revenue

    2 %         16 %

 

 
  Three Months
Ended
March 31,
 
As a Percentage of Segment Revenue
  2010   2009  

LendingTree Loans

    11 %   45 %

Exchanges

    14 %   13 %

Real Estate

    (23 )%   (51 )%

Unallocated—corporate, as a percentage of total revenue

    (10 )%   (10 )%

        Adjusted EBITDA in 2010 decreased $8.3 million to $0.8 million, reflecting a decrease in revenue at LendingTree Loans as described above.

 
  Three Months Ended March 31,  
 
  2010   % Change   2009  
 
  (Dollars in thousands)
 

LendingTree Loans

  $ 2,126     (85 )% $ 14,166  

Exchanges

    2,609     76 %   1,478  

Real Estate

    (1,924 )   63 %   (5,177 )

Unallocated—corporate

    (8,153 )   (12 )%   (7,287 )
                 

Operating income (loss)

  $ (5,342 )   NM   $ 3,180  
                 

As a percentage of total revenue

    (11 )%         6 %

 

 
  Three Months
Ended
March 31,
 
As a Percentage of Segment Revenue
  2010   2009  

LendingTree Loans

    8 %   41 %

Exchanges

    10 %   8 %

Real Estate

    (49 )%   (90 )%

Unallocated—corporate, as a percentage of total revenue

    (17 )%   (13 )%

        Operating income in 2010 decreased $8.5 million from 2009 resulting primarily from the issues discussed above and an increase of $1.8 million in restructuring charges. In the first quarter of 2010, the Company recorded $2.6 million of previously disclosed restructuring charges that primarily relate to continuing lease obligations on facilities previously used for call center operations, for which management had a plan to exit at December 31, 2009, but the cease-use date did not occur before the end of 2009.

36


Table of Contents

        For the three months ended March 31, 2010 and 2009, Tree.com recorded a tax (provision) benefit of $(0.6) million and $0.1 million, respectively, which represents effective tax rates of 11.7% and (2.7%), respectively. For the three months ended March 31, 2010, the tax rate is lower than the federal statutory rate of 35% mainly due to an increase in the valuation allowance on deferred tax assets and an increase to the uncertainty for income taxes reserve. For the three months ended March 31, 2009, there was an increase in the valuation allowance that caused the tax rate to be lower than the federal statutory rate.


FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

        As of March 31, 2010, Tree.com had $85.2 million of cash and cash equivalents and restricted cash and cash equivalents.

        Net cash used in operating activities was $15.1 million in the three months ended March 31, 2010, compared to net cash provided of $11.2 million in the same period in 2009. In addition to the decrease in net income in 2010, this net $26.3 million decrease in cash provided from operations was caused by a $10.9 million decrease in accounts payable and other current liabilities, principally litigation related payments of $8.0 million that were made in 2010. Additionally, the amount of net cash proceeds from the origination and sale of loans decreased $7.3 million, which can fluctuate based on the timing of loan originations and sales.

        Net cash used in investing activities in the three months ended March 31, 2010 of $1.2 million primarily resulted from capital expenditures of $1.6 million, offset by the release of restricted cash of $0.4 million. Net cash used in investing activities in the three months ended March 31, 2009 of $1.1 million primarily resulted from an acquisition of $1.0 million and capital expenditures of $0.6 million.

        Net cash provided by financing activities in the three months ended March 31, 2010 of $3.2 million was primarily due to net borrowings under warehouse lines of credit of $5.0 million, less purchases of treasury stock and increases in restricted cash. Net cash used in financing activities in the three months ended March 31, 2009 of $2.3 million was primarily due to net repayments under warehouse lines of credit of $4.0 million, offset by proceeds from the sale of common stock of $1.9 million.

        As of March 31, 2010, LendingTree Loans had three committed lines of credit totaling $165 million of borrowing capacity. Borrowings under these lines of credit are used to fund, and are secured by, consumer residential loans that are held for sale. Loans under these lines of credit are repaid using proceeds from the sales of loans held for sale by LendingTree Loans. At March 31, 2010, there was $83.5 million outstanding under the committed lines of credit.

        The $40.0 million first line is with a lender that is exiting the warehouse lending business, and it expires on June 30, 2010. No advances under the warehouse line may be requested or funded after May 31, 2010. The interest rate under this line is LIBOR plus 3.00%. We do not expect this line to be renewed after June 30, 2010. The Company has anticipated that decision and has factored it into the future liquidity needs.

        The $50.0 million second line was scheduled to expire on April 30, 2010, but has been extended to June 29,2010 and can be cancelled at the option of the lender without default upon sixty days notice. This second line includes an additional uncommitted credit facility of $75 million. This second line is also guaranteed by Tree.com, Inc., Lending Tree, LLC and Lending Tree Holdings Corp. The interest rate under the second line is 2.25% plus the greater of (a) the 30-day LIBOR or (b) 2.00%. The interest rate under the $75 million uncommitted line is 30-day LIBOR plus 1.50%. LendingTree Loans is also required to sell at least 25% of the loans it originates to an affiliate of the lender under this line or pay a "pair-off fee" of 0.25% on the difference between the required and actual volume of loans sold.

37


Table of Contents

        The $75.0 million third line is scheduled to expire on October 29, 2010. The interest rate under this line is 30-day LIBOR or 2.0% (whichever is greater) plus 2.50% for loans being sold to the lender and 30-day LIBOR or 2.0% (whichever is greater) plus 2.75% for loans not being sold to the lender.

        Under the terms of these warehouse lines, LendingTree Loans is required to maintain various financial and other covenants. These financial covenants include, but are not limited to, maintaining (i) minimum tangible net worth of $45.0 million, (ii) minimum liquidity, (iii) a minimum current ratio, (iv) a maximum ratio of total liabilities to net worth, (v) a maximum leverage ratio and (vi) pre-tax net income requirements. During the quarter ended March 31, 2010, LendingTree Loans was in compliance with the covenants under the lines.

        The LendingTree Loans business is highly dependent on the availability of these warehouse lines. Although we believe that our existing lines of credit are adequate for our current operations, reductions in our available credit, or the inability to renew or replace these lines, would have a material adverse effect on our business, financial condition and results of operations. Management has determined that it could continue to operate the LendingTree Loans business, at a reduced capacity, if two but not all three of the warehouse lines were lost. We expect to renew the lines that are expiring on June 29, 2010 and October 29, 2010.

        Tree.com anticipates that it will need to make capital and other expenditures in connection with the development and expansion of its overall operations.

        In connection with the completion of the spin-off, intercompany payable balances with IAC were extinguished and IAC transferred to Tree.com an amount of cash that was sufficient for its initial capitalization. Tree.com has considered its anticipated operating cash flows in 2010, cash and cash equivalents, current capacity under its warehouse lines of credit and access to capital markets, subject to restrictions in the tax sharing agreement, and believes that these are sufficient to fund its operating needs, including debt requirements, commitments, contingencies, capital and investing commitments for the foreseeable future.


CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

 
  Payments Due by Period  
Contractual Obligations as of March 31, 2010
  Total   Less Than
1 Year
  1-3
Years
  3-5
Years
  More
Than
5 Years
 
 
  (In thousands)
 

Short-term borrowings(a)

  $ 83,498   $ 83,498   $   $   $  

Purchase obligations(b)

    2,077     2,077              

Loan loss settlement obligations(c)

    3,450     3,450              

Litigation settlement(d)

    4,750     4,750              

Preferred stock liquidation value and accreted interest(e)

    8,000             8,000      

Operating leases

    21,142     4,793     8,310     7,260     779  
                       

Total contractual cash obligations

  $ 122,917   $ 98,568   $ 8,310   $ 15,260   $ 779  
                       

(a)
The short-term borrowings are the Company's warehouse lines of credit that are used exclusively for funding loans held for sale. These borrowings are collateralized by and are repaid from proceeds from selling the loans held for sale. Interest on these borrowings as of March 31, 2010 is not significant.

(b)
The purchase obligations primarily relate to marketing event contracts in 2010.

38


Table of Contents

(c)
In the fourth quarter of 2009, LendingTree Loans completed settlement negotiations with a buyer of previously purchased stated income second lien position loans. The settlement provides for fixed payments to be made in 2010 by LendingTree Loans as full settlement of all future losses with this investor related to this type of loans.

(d)
The litigation settlement obligation, as more fully described in a Form 8-K dated January 5, 2010, is the amount due to be paid by Tree.com, Inc., to Source Search Technologies, LLC ("SST"). Under the terms of the settlement agreement, SST granted LendingTree, LLC (a wholly owned subsidiary of Tree.com) a fully paid-up, irrevocable, worldwide, royalty-free and non-exclusive license under the SST patent and LendingTree will pay SST $9.5 million ($4.75 million was paid in the first quarter of 2010 and the remaining $4.75 million is payable in the second quarter of 2010).

(e)
The preferred stock obligation represents the obligation the Company has to redeem at maturity the 5,000 shares of preferred stock which the Company's CEO was granted in LendingTree Holdings Corp., a subsidiary of Tree.com at the time of the spin-off from IAC. The shares earn dividends at 12%, vest over 3 years, and have a liquidation preference of $5.0 million.

Seasonality

        LendingTree Loans, Exchanges and Real Estate revenue is subject to the cyclical and seasonal trends of the U.S. housing market. Home sales typically rise during the spring and summer months and decline during the fall and winter months. Refinancing and home equity activity is principally driven by mortgage interest rates as well as real estate values. The broader cyclical trends in the mortgage and real estate markets have upset the usual seasonal trends.

New Accounting Pronouncements

        Refer to Note 2 to the consolidated financial statements for a description of recent accounting pronouncements.


TREE.COM'S PRINCIPLES OF FINANCIAL REPORTING

        Tree.com reports Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"), and adjusted for certain items discussed below ("Adjusted EBITDA"), as supplemental measures to GAAP. These measures are two of the primary metrics by which Tree.com evaluates the performance of its businesses, on which its internal budgets are based and by which management is compensated. Tree.com believes that investors should have access to the same set of tools that it uses in analyzing its results. These non-GAAP measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results. Tree.com provides and encourages investors to examine the reconciling adjustments between the GAAP and non-GAAP measure discussed below.

Definition of Tree.com's Non-GAAP Measures

        Adjusted EBITDA is defined as EBITDA excluding (1) non-cash compensation expense, (2) non-cash intangible asset impairment charges, (3) gain/loss on disposal of assets, (4) restructuring expenses, (5) litigation loss contingencies and settlements, (6) pro forma adjustments for significant acquisitions, and (7) one-time items. Adjusted EBITDA has certain limitations in that it does not take into account the impact to Tree.com's statement of operations of certain expenses, including depreciation, non-cash compensation and acquisition related accounting. Tree.com endeavors to compensate for the limitations of the non-GAAP measure presented by also providing the comparable GAAP measure with equal or greater prominence and descriptions of the reconciling items, including quantifying such items, to derive the non-GAAP measure.

39


Table of Contents

Pro Forma Results

        Tree.com will only present EBITDA and Adjusted EBITDA on a pro forma basis if it views a particular transaction as significant in size or transformational in nature. For the periods presented in this report, there are no transactions that Tree.com has included on a pro forma basis.

One-Time Items

        EBITDA and Adjusted EBITDA are presented before one-time items, if applicable. These items are truly one-time in nature and non-recurring, infrequent or unusual, and have not occurred in the past two years or are not expected to recur in the next two years, in accordance with SEC rules. For the periods presented in this report, there are no one-time items.

Non-Cash Expenses That Are Excluded From Tree.com's Non-GAAP Measures

        Non-cash compensation expense consists principally of expense associated with the grants of restricted stock units and stock options. These expenses are not paid in cash, and Tree.com will include the related shares in its future calculations of fully diluted shares outstanding. Upon vesting of restricted stock units and the exercise of certain stock options, the awards will be settled, at Tree.com's discretion, on a net basis, with Tree.com remitting the required tax withholding amount from its current funds.

        Amortization and impairment of intangibles are non-cash expenses relating primarily to acquisitions. At the time of an acquisition, the intangible assets of the acquired company, such as purchase agreements, technology and customer relationships, are valued and amortized over their estimated lives.


RECONCILIATION OF EBITDA

        For a reconciliation of EBITDA and Adjusted EBITDA to net loss for Tree.com's operating segments for the three months ended March 31, 2010 and 2009, see Note 7 to the consolidated financial statements.


OTHER

        REALTORS®—a registered collective membership mark that identifies a real estate professional who is a member of the National Association of REALTORS® and subscribes to its strict Code of Ethics.

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

        Tree.com's exposure to market rate risk for changes in interest rates relates primarily to LendingTree Loans' loans held for sale and interest rate lock commitments.

Loans Held for Sale and Interest Rate Lock Commitments

        LendingTree Loans' mortgage banking operations expose the Company to interest rate risk for loans originated until those loans are sold in the secondary market ("loans held for sale"). The fair value of loans held for sale is subject to change primarily due to changes in market interest rates. LendingTree Loans hedges the changes in fair value of certain loans held for sale primarily by entering into mortgage forward delivery contracts. The changes in fair value of the derivative instruments are recognized in current earnings as a component of revenue.

40


Table of Contents

        In addition, LendingTree Loans provides interest rate lock commitments ("IRLCs") to fund mortgage loans at interest rates previously agreed upon with the borrower for specified periods of time, which also expose it to interest rate risk. IRLCs are considered derivative instruments and, therefore, are recorded at fair value, with changes in fair value reflected in current period earnings. To manage the interest rate risk associated with the IRLCs, the Company uses derivative instruments, including mortgage forward delivery contracts.

        The net change in the fair value of the IRLCs and related forward delivery contracts, including the impact of day one gains and servicing value, for the three months ended March 31, 2010 and 2009 resulted in gains of $19.3 million and $28.3 million, respectively, which have been recognized as a component of revenue.

        The fair values of derivative financial instruments at LendingTree Loans are impacted by movements in market interest rates. Changes in the fair value of the derivative financial instruments would substantially be offset by changes in the fair value of the items for which risk is being mitigated. As of March 31, 2010, if market interest rates had increased by 1.00%, the aggregate fair value of the derivative financial instruments and the hedged items at LendingTree Loans would have decreased by $0.6 million. As of March 31, 2010, if market interest rates had decreased by 1.00%, the aggregate fair value of the derivative financial instruments and the hedged items at LendingTree Loans would have decreased by $1.0 million.

Item 4T.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

        As of the end of the period covered by this report, an evaluation of the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in its reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

        During the Company's first quarter of fiscal 2010, there has been no change in the Company's internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.

41


Table of Contents


PART II
OTHER INFORMATION

Item 1.    Legal Proceedings

        In the ordinary course of business, the Company and its subsidiaries are parties to litigation involving property, contract, intellectual property and other claims. We included a discussion of certain legal proceedings in Part I, Item 3, of our Annual Report on Form 10-K for the year ended December 31, 2009 as amended by our Annual Report on Form 10-K/A (the "2009 Form 10-K") and in our Current Reports on Form 8-K filed with the Securities and Exchange Commission (the "SEC") on January 11, 2010, January 15, 2010 and February 19, 2010 (the "Form 8-Ks"). During the quarter ended March 31, 2010 there were no material developments in connection with the Company's legal proceedings other than as disclosed in our Form 8-Ks or in the 2009 Form 10-K. A summary of the material developments described in our Form 8-Ks is set forth below:

Patent Litigation

        Source Search Technologies, LLC v. LendingTree, Inc., et al., No. 04-CV-4420 (U.S. Dist. Ct., D.N.J.).    On January 5, 2010, our wholly-owned subsidiary, LendingTree, LLC ("LendingTree"), and Source Search Technologies, LLC ("SST") settled their outstanding patent litigation. The lawsuit alleged that certain aspects of LendingTree's operations infringe SST's patent relating to online transactions between buyers and sellers. In connection with the settlement, LendingTree will pay SST a total of $9.5 million ($4.75 million was paid in the first quarter of 2010 and the remaining $4.75 million is payable in the second quarter of 2010), and SST granted LendingTree a fully paid-up, irrevocable, worldwide, royalty-free and non-exclusive license under the patent.

        Block Financial Corp. v. LendingTree, Inc., No. 01-cv-1007 ODS (U.S. Dist. Ct., W.D. Mo.); LendingTree, LLC v. Block Financial LLC, No. 08-cv-164 ODS (U.S. Dist. Ct., W.D. Mo.).    On February 17, 2010, LendingTree and Block Financial Corporation ("Block") settled their outstanding patent litigation. The lawsuit alleged that LendingTree's loan-matching process infringes U.S. Patent No. 6,014,645 (the "645 Patent"), which generally claims a real-time application system for financial cards, and U.S. Patent No. 7,310,617 (the "617 Patent"), a continuation of the 645 Patent that purports to claim a real-time application system for financial offerings (as opposed to only financial cards). In connection with the settlement, LendingTree paid Block $3.25 million during the first quarter of 2010, and Block granted LendingTree a fully paid-up, perpetual, irrevocable, non-exclusive, worldwide, right and license under both the 645 Patent and the 617 Patent.

Item 1A.    Risk Factors

Cautionary Statement Regarding Forward-Looking Information

        This Quarterly Report on Form 10-Q contains "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The use of words such as "anticipates," "estimates," "expects," "projects," "intends," "plans" and "believes," among others, generally identify forward-looking statements. These forward-looking statements include, among others, statements relating to: the adequacy of our current warehouse lines for our current operations and our ability to operate our LendingTree Loans business at a reduced capacity if we were to lose two of these lines; our belief that we will continue to adjust selling and marketing expenditures generally in relation to revenue producing opportunities and that our selling and marketing efforts will continue to represent a high percentage of our revenues; our Compensation Committee's belief that placing a greater emphasis on incentive arrangements and equity compensation will result in the Company's executives and employees being paid for performance and will better align their incentives with the Company's strategic goals; our belief that we will need to make capital and other expenditures in connection with the development and expansion of our overall operations; and our belief that our sources of liquidity

42


Table of Contents


are sufficient to fund our operating needs, including debt requirements, commitments and contingencies and capital and investing commitments for the foreseeable future. These forward-looking statements also include statements related to: Tree.com's anticipated financial performance; Tree.com's business prospects and strategy; anticipated trends and prospects in the various industries in which Tree.com businesses operate; new products, services and related strategies; and other similar matters. These forward looking statements are based on management's current expectations and assumptions about future events, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict.

        Actual results could differ materially from those contained in the forward looking statements included in this report for a variety of reasons, including, among others, the risk factors set forth below. Other unknown or unpredictable factors that could also adversely affect Tree.com's business, financial condition and results of operations may arise from time to time. In light of these risks and uncertainties, the forward looking statements discussed in this report may not prove to be accurate. Accordingly, you should not place undue reliance on these forward looking statements, which only reflect the views of Tree.com management as of the date of this report. Tree.com does not undertake to update these forward-looking statements.

        Other than the factor set forth below, there have been no material changes to the risk factors included in Part I, Item 1A, of the 2009 Form 10-K.

Adverse Events and Trends—Adverse conditions in the credit markets could materially and adversely affect our business, financial condition and results of operations.

        The credit markets, in particular those financial institutions that provide warehouse financing and similar arrangements to mortgage lenders, have been experiencing unprecedented and continued disruptions resulting from instability in the mortgage and housing markets. LendingTree Loans originates, processes, approves and funds various consumer mortgage loans through HLC, which operates primarily under the brand name "LendingTree Loans®." These direct lending operations have significant financing needs that are currently being met through borrowings under warehouse lines of credit or repurchase agreements to fund and close loans, followed by the sale of substantially all loans funded to investors in the secondary mortgage markets. Current credit market conditions, such as significantly reduced and limited availability of credit, increased credit risk premiums for certain market participants and increased interest rates generally, increase the cost and reduce the availability of debt and may continue for a prolonged period of time or worsen in the future.

        As of March 31, 2010, LendingTree Loans had three committed lines of credit totaling $165.0 million of borrowing capacity. Borrowings under these lines of credit are used to fund, and are secured by, consumer residential loans that are held for sale. Loans under these lines of credit are repaid using proceeds from the sales of loans held for sale by LendingTree Loans. At March 31, 2010, there was $83.5 million outstanding under the committed lines of credit.

        The $40.0 million first line is with a lender that is exiting the warehouse lending business, and it expires on June 30, 2010. No advances under the warehouse line may be requested or funded after May 31, 2010. The interest rate under this line is LIBOR plus 3.00%. We do not expect this line to be renewed after June 30, 2010. The Company has anticipated that decision and has factored it into the future liquidity needs.

        The $50.0 million second line was scheduled to expire on April 30, 2010, but has been extended to June 29, 2010 and can be cancelled at the option of the lender without default upon sixty days notice. This second line includes an additional uncommitted credit facility of $75 million. This second line is also guaranteed by Tree.com, Inc., Lending Tree, LLC and Lending Tree Holdings Corp. The interest rate under the second line is 2.25% plus the greater of (a) the 30-day LIBOR or (b) 2.00%. The interest rate under the $75 million uncommitted line is 30-day LIBOR plus 1.50%. LendingTree Loans

43


Table of Contents


is also required to sell at least 25% of the loans it originates to an affiliate of the lender under this line or pay a "pair-off fee" of 0.25% on the difference between the required and actual volume of loans sold.

        The $75.0 million third line is scheduled to expire on October 29, 2010. The interest rate under this line is 30-day LIBOR or 2.0% (whichever is greater) plus 2.50% for loans being sold to the lender and 30-day LIBOR or 2.0% (whichever is greater) plus 2.75% for loans not being sold to the lender.

        Although we believe that our existing lines of credit are adequate for our current operations, further reductions in our available credit, or the inability to renew or replace these lines, could have an adverse effect on our business, financial condition and results of operations. LendingTree Loans attempts to mitigate the impact of current conditions and future credit market disruptions by maintaining committed and uncommitted warehouse lines of credit with several financial institutions. However, these financial institutions, like all financial institutions, are subject to the same adverse market conditions and may be affected by recent market disruptions, which may affect the decision to reduce or renew these lines or the pricing for these lines. As a result, current committed warehouse lines of credit may be reduced or not renewed, and alternative financing may be unavailable or inadequate to support operations or the cost of such alternative financing may not allow LendingTree Loans to operate at profitable levels. Because LendingTree Loans is highly dependent on the availability of credit to finance its operations, the continuation of current credit market conditions for a prolonged period of time or the worsening of such conditions could have an adverse effect on our business, financial condition and results of operations, particularly over the next few years.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

        The following table provides information about the Company's purchases of equity securities during the quarter ended March 31, 2010.

Period
  Total
Number of
Shares
Purchased
  Average
Price Paid
per Share
  Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs(1)
  Maximum
Number/Approximate
Dollar Value of Shares
that May Yet be
Purchased Under the
Plans or Programs
 
 
   
   
   
  (in thousands)
 

01/01/10 - 01/31/10

      $       $ 10,000  

02/01/10 - 02/28/10

    34,139     8.25     34,139     9,718  

03/01/10 - 03/31/10

    44,651     9.31     44.651     9,335  
                   

Total

    78,790   $ 8.43     78,790   $ 9,335  
                   

(1)
On January 11, 2010, the Company announced that its Board of Directors approved a stock repurchase program for an amount up to $10 million. The program authorizes repurchases of common shares in the open market or through privately-negotiated transactions. The Company began this program in February 2010 and expects to use available cash to finance these repurchases and will determine the timing and amount of them based on its evaluation of market conditions, applicable SEC guidelines and regulations and other factors. This program may be suspended or discontinued at any time at the discretion of the Board of Directors.

        The Company did not have any unregistered sales of its equity securities during the three months ended March 31, 2010.

44


Table of Contents


Item 5.    Other Information

        On May 10, 2010, Matthew A. Packey advised the Company that he will resign from his position as Senior Vice President, Chief Financial Officer and Chief Accounting Officer of the Company, effective May 28, 2010. Beginning May 28, 2010, his duties will be divided, as described below. In addition, on May 10, 2010, the Company entered into a Severance Agreement with Mr. Packey pursuant to which he will be paid severance pay for a maximum of seven (7) months (with mitigation and offset provisions in place should he secure other employment) for a maximum payout of $182,292. Mr. Packey will receive a subsidy for his COBRA benefits for the duration of the period he is eligible for COBRA benefits (not to exceed February 15, 2011) with a maximum subsidy amount of $11,133. He will also receive a payout for 40 hours of accrued, unused Paid Time Off ("PTO") from 2009 ($4,808) and a payout for 2010 accrued unused PTO time (maximum 117 hours) at a maximum payout of $14,062.

        On May 28, 2010, the Company will appoint Christopher R. Hayek, age 41, as Senior Vice President and Chief Accounting Officer. As of that date, he will become an executive officer and will serve as the principal financial officer and principal accounting officer of the Company. Mr. Hayek has served as the Company's Vice President and Corporate Controller since joining the Company in August 2005. Prior to joining the Company, Mr. Hayek served as Vice President of Finance at Wachovia Bank and as a Senior Manager at McGladrey & Pullen, LLP. Mr. Hayek is a certified public accountant.

        In addition, on May 28, 2010, the Company will appoint Tamara W. Kotronis as Senior Vice President, Financial Planning and Analysis and Investor Relations.

Item 6.    Exhibits

Exhibit   Description   Location
  10.1   Fourth Amendment to Warehousing Credit Agreement, made and entered into as of February 15, 2010 by and among Home Loan Center, Inc. d/b/a Lending Tree Loans, PNC Bank, National Association (successor to National City Bank) and PNC Bank, National Association (successor to National City Bank), in its capacity as Agent for the Banks (as defined therein)   Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed February 19, 2010

 

10.2

 

Amendment No. 1 to Stock Purchase Agreement between Tree.com, Inc. and Douglas R. Lebda, dated May 10, 2010

 


 

10.3

 

Amendment No. 3 to the Employment Agreement between Douglas R. Lebda and Tree.com, Inc., dated May 10, 2010

 


 

10.4

 

Form of Amendment to Restricted Stock Awards for Douglas R. Lebda

 


 

10.5

 

Employment Agreement by and between David Norris and LendingTree, LLC, dated June 30, 2008.

 


 

10.6

 

Amendment to Employment Agreement between David Norris and Tree.com, Inc., dated December 3, 2009

 


 

10.7

 

Amendment No. 2 to Employment Agreement between David Norris and Tree.com, Inc., dated May 10, 2010

 


 

10.8

 

Severance Agreement between Greg Hanson, RealEstate.com and Tree.com, dated April 22, 2009

 

45


Table of Contents

Exhibit   Description   Location
  10.9   Change in Control Letter from Tree.com, Inc. to Greg Hanson, dated March 26, 2010  

 

10.10

 

Confidential Severance Agreement and Release by and between Robert L. Harris and Tree.com, Inc., dated March 2, 2010

 


 

10.11

 

Form of Restricted Stock Award Agreement

 


 

10.12

 

Form of Notice of Restricted Stock Unit Award

 


 

10.13

 

Form of Notice of Stock Option Award

 


 

10.14

 

Amendment No. 1 to Transactions Term Letter, made and entered into as of April 28, 2010 by and between Home Loan Center, Inc. d/b/a LendingTree Loans and Bank of America

 

Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed April 30, 2010

 

10.15

 

Amendment No. 1 to the Stock Option Award Agreement between Douglas R. Lebda and Tree.com, Inc., dated May 10, 2010

 


 

31.1

 

Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 


 

31.2

 

Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 


 

32.1

 

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

††

 

32.2

 

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

††

Filed herewith

††
Furnished herewith

46


Table of Contents


SIGNATURE

        Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: May 12, 2010

    TREE.COM, INC.

 

 

By:

 

/s/ MATTHEW PACKEY

Matthew Packey
Senior Vice President and
Chief Financial Officer

47


Table of Contents


EXHIBIT INDEX

Exhibit   Description   Location
  10.1   Fourth Amendment to Warehousing Credit Agreement, made and entered into as of February 15, 2010 by and among Home Loan Center, Inc. d/b/a Lending Tree Loans, PNC Bank, National Association (successor to National City Bank) and PNC Bank, National Association (successor to National City Bank), in its capacity as Agent for the Banks (as defined therein)   Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed February 19, 2010

 

10.2

 

Amendment No. 1 to Stock Purchase Agreement between Tree.com, Inc. and Douglas R. Lebda, dated May 10, 2010

 


 

10.3

 

Amendment No. 3 to the Employment Agreement between Douglas R. Lebda and Tree.com, Inc., dated May 10, 2010

 


 

10.4

 

Form of Amendment to Restricted Stock Awards for Douglas R. Lebda

 


 

10.5

 

Employment Agreement by and between David Norris and LendingTree, LLC, dated June 30, 2008.

 


 

10.6

 

Amendment to Employment Agreement between David Norris and Tree.com, Inc., dated December 3, 2009

 


 

10.7

 

Amendment No. 2 to Employment Agreement between David Norris and Tree.com, Inc., dated May 10, 2010

 


 

10.8

 

Severance Agreement between Greg Hanson, RealEstate.com and Tree.com, dated April 22, 2009

 


 

10.9

 

Change in Control Letter from Tree.com, Inc. to Greg Hanson, dated March 26, 2010

 


 

10.10

 

Confidential Severance Agreement and Release by and between Robert L. Harris and Tree.com, Inc., dated March 2, 2010

 


 

10.11

 

Form of Restricted Stock Award Agreement

 


 

10.12

 

Form of Notice of Restricted Stock Unit Award

 


 

10.13

 

Form of Notice of Stock Option Award

 


 

10.14

 

Amendment No. 1 to Transactions Term Letter, made and entered into as of April 28, 2010 by and between Home Loan Center, Inc. d/b/a LendingTree Loans and Bank of America

 

Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed April 30, 2010

 

10.15

 

Amendment No. 1 to the Stock Option Award Agreement between Douglas R. Lebda and Tree.com, Inc., dated May 10, 2010

 


 

31.1

 

Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

48


Table of Contents

Exhibit   Description   Location
  31.2   Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.  

 

32.1

 

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

††

 

32.2

 

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

††

Filed herewith

††
Furnished herewith

49




Exhibit 10.2

 

AMENDMENT NO. 1 TO STOCK PURCHASE AGREEMENT

BETWEEN DOUGLAS R. LEBDA AND TREE.COM, INC.

 

May 10, 2010

 

This Amendment No. 1 to that certain Stock Purchase Agreement, dated as of February 8, 2009 between Douglas R. Lebda (“Employee”) and Tree.com, Inc. (the “Company”), is effective as of February 25, 2010 (the “Agreement”) unless otherwise indicated.  All capitalized terms used herein without definition shall have the meanings given to them in the Agreement.

 

WHEREAS, subject to the terms and conditions set forth herein, Employee and the Company wish to make certain amendments to the Agreement.

 

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows:

 

1.             Article 5 of the Agreement is hereby amended by adding a new Section 5.8 to the end thereof:

 

“Section 5.8           Termination of Repurchase Option.  Notwithstanding anything in this Article 5 to the contrary, the Repurchase Option shall automatically expire effective February 25, 2010 and shall have no force or effect thereafter.”

 

2.             Except as explicitly set forth herein, the remaining provisions of the Agreement will remain in full force and effect.

 

IN WITNESS WHEREOF, the parties have executed this Amendment No. 1 as of the date first set forth above.

 

 

 

TREE.COM, INC.

 

 

 

 

 

/s/ Claudette Hampton

 

By: Claudette Hampton

 

Senior Vice President — Human Resources

 

 

 

 

 

EMPLOYEE

 

 

 

 

/s/ Douglas R. Lebda

 

Douglas R. Lebda

 




Exhibit 10.3

 

AMENDMENT NO. 3 TO THE EMPLOYMENT AGREEMENT

BETWEEN DOUGLAS R. LEBDA AND TREE.COM, INC.

 

May 10, 2010

 

This Amendment No. 3 to that certain Employment Agreement, dated as of January 7, 2008 between Douglas R. Lebda (“Employee”) and Tree.com (as successor by assignment to IAC/InterActiveCorp) (the “Company”), as subsequently amended by Amendment No. 1, dated August 15, 2008 (“Amendment No. 1”) and Amendment No. 2, dated March 20, 2009 (“Amendment No. 2”) (collectively, the “Agreement”), is effective as of February 25, 2010, unless otherwise indicated.  All capitalized terms used herein without definition shall have the meanings given to them in the Agreement.

 

WHEREAS, subject to the terms and conditions set forth herein, Employee and the Company wish to make certain amendments to the Agreement to provide Employee with enhanced severance in the event that his employment terminates under certain circumstances following a change in control of the Company;

 

WHEREAS, Employee and the Company also wish to make certain clarifications to the timing upon which Employee may receive such severance payments consistent with recent guidance set forth in applicable Internal Revenue Service guidance: and

 

WHEREAS, Employee’s right to receive severance payments is subject to a substantial risk of forfeiture within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended.

 

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency is hereby acknowledged, the parties hereby agree as follows:

 

1.             Section 1A of the Agreement is hereby amended by adding the following sentence as a separate paragraph to the end thereof:

 

“Notwithstanding the foregoing, effective as of the LT Spin-Off (as defined below), the term LendingTree shall mean the Company.”

 

2.             Section 3A(c) of the Agreement is hereby amended by adding a new subsection (iv) to the end thereof:

 

“(iv)        Notwithstanding the foregoing and anything to the contrary in this Agreement or any other agreement pursuant to which Employee has received or shall receive in the future awards of equity from the Company, to the extent not vested in such equity awards, Employee shall become immediately 100% vested in such equity awards upon the occurrence of a “Change in Control” (as such term is defined by Section 1(h) of the Standard Terms and Conditions to the Agreement) and in the case of restricted stock awards, such underlying shares shall become immediately nonforfeitable and transferable.”

 



 

3.             Section 1(d) of the Standard Terms and Conditions of the Agreement is hereby deleted and replaced in its entirety as follows:

 

“(d)         TERMINATION BY THE COMPANY OTHER THAN FOR DEATH, DISABILITY OR CAUSE; RESIGNATION BY EMPLOYEE FOR GOOD REASON.  Upon termination of Employee’s employment with LendingTree prior to expiration of the Term (i) by the Company without Cause (other than for death or Disability) or (ii) upon Employee’s resignation for Good Reason (either such termination, a “Qualifying Termination”), the Company shall pay Employee the amounts described in clauses (A) and (B) on the 60th day following Employee’s termination (the “Payment Date”) and take the actions described in clauses (C) and (D); provided that, payment of the amount described in clause (A) and the actions described in clauses (C) and (D) shall be conditioned on Employee’s execution and non-revocation before the Payment Date of a general release of the Company and its affiliates substantially in the form attached hereto as Exhibit A, on and Employee’s compliance with Sections 2(a) through 2(e):

 

(A) Employee’s Base Salary, payable over the period commencing on the Payment Date and ending on the date that is the earlier of (i) the last day of the Term or (ii) three (3) years from the date of termination (the “Salary Continuation Period”) and paid in accordance with the Company’s normal payroll practices in effect at the time of Employee’s termination;

 

(B) a lump sum cash payment equal to any Accrued Obligations;

 

(C) the vesting of all IAC restricted stock units held by Employee on the Effective Date shall be accelerated in full; and

 

(D) to the extent previously granted, the Company shall vest in full the LT Restricted Stock and the LT Options on the termination date and such options shall remain exercisable for a period of twelve months from the date of such termination.

 

Notwithstanding the foregoing, in no event shall Employee’s resignation be for Good Reason unless (x) an event or circumstance set forth in any of clauses (i) through (iv) of the definition thereof shall have occurred and Employee provides the Company with written notice thereof within forty-five (45) days after Employee has knowledge of the occurrence or existence of such event or circumstance, which notice specifically identifies the event or circumstance that Employee believes constitutes Good Reason, (y) the Company fails to correct the circumstance or event so identified within thirty (30) days after the receipt of such notice, and (z) Employee resigns within ninety (90) days after the date of delivery of the notice referred to in clause (x) above.”

 

4.             Section 1 of the Standard Terms and Conditions of the Agreement is hereby amended by adding a new subsection (h) to the end thereof:

 

“(h)         QUALIFYING TERMINATION WITHIN ONE YEAR FOLLOWING CHANGE IN CONTROL.  If Employee experiences a Qualifying Termination within the one-year period following a Change in Control (as defined below), the Company shall pay Employee the amounts described in clauses (A) and (B) on the 60th day following Employee’s termination (the “Payment Date”) and take the actions described in clauses (C) and (D); ); provided that, payment of the amount described in clause (A) and the actions described in clauses (C) and (D) shall be conditioned

 

2



 

on Employee’s execution and non-revocation before the Payment Date of a general release of the Company and its affiliates substantially in the form attached hereto as Exhibit A, on and Employee’s compliance with Sections 2(a) through 2(e):

 

(A) an amount equal to three (3) times Employee’s then-current Base Salary payable over the Salary Continuation Period, paid in accordance with the Company’s normal payroll practices in effect at the time of Employee’s termination;

 

(B) a lump sum cash payment equal to any Accrued Obligations;

 

(C) the vesting of all IAC restricted stock units held by Employee on the Effective Date shall be accelerated in full; and

 

(D) to the extent previously granted, the Company shall vest in full the LT Restricted Stock and the LT Options on the termination date and such options shall remain exercisable for a period of twelve months from the date of such termination.

 

Notwithstanding the foregoing, in no event shall Employee’s resignation be for Good Reason unless the requirements of paragraph 1(d)(x) through paragraph 1(d)(z) are met with respect to such resignation.

 

For purposes of this paragraph 1(h), the term “Change in Control” has the meaning set forth in the Second Amended and Restated Tree.com, Inc. 2008 Stock and Annual Incentive Plan.

 

Further, no amounts payable to Employee pursuant to this paragraph 1(h) shall be subject to the mitigation or offset provisions described in paragraph 1(e) of these Standard Terms and Conditions.”

 

5.             Section 2(b) of the Standard Terms and Conditions of the Agreement is hereby amended by adding the following sentence to the end thereof:

 

“Notwithstanding the foregoing and exclusively with respect to Employee’s termination of employment pursuant to paragraph 1(h), the Restricted Period shall be reduced from 24 months to 12 months following Employee’s date of termination, solely to the extent applicable to Competitive Activity unrelated to online lending.”

 

6.             Section 2(c) of the Standard Terms and Conditions of the Agreement is hereby amended by adding the following sentence to the end thereof:

 

3



 

“Notwithstanding the foregoing and exclusively with respect to Employee’s termination of employment pursuant to paragraph 1(h), the Restricted Period shall be reduced from 24 months to 12 months following Employee’s date of termination, solely to the extent applicable to Competitive Activity unrelated to online lending.”

 

7.             Section 2(d) of the Standard Terms and Conditions of the Agreement is hereby amended by adding the following sentence to the end thereof:

 

“Notwithstanding the foregoing and exclusively with respect to Employee’s termination of employment pursuant to paragraph 1(h), the Restricted Period shall be reduced from 24 months to 12 months following Employee’s date of termination, solely to the extent applicable to Competitive Activity unrelated to online lending.”

 

8.             Section 10 of the Standard Terms and Conditions of the Agreement is hereby amended by adding the following sentence to the end thereof:

 

“For purposes of this Agreement, the terms “termination” and “termination of employment” (and variations thereof) shall mean Employee’s “separation from service” within the meaning of Section 1.409A-1(h) of the Treasury Regulations promulgated under Section 409A of the Code, apply the default terms thereof.”

 

9.             Except as explicitly set forth herein, the remaining provisions of the Agreement will remain in full force and effect.

 

* * * Signature Page to Follow * * *

 

4



 

IN WITNESS WHEREOF, the parties have executed this Amendment No. 3 as of the date first set forth above.

 

 

 

TREE.COM, INC.

 

 

 

 

 

/s/ Claudette Hampton

 

By:

Claudette Hampton

 

 

Senior Vice President — Human Resources

 

 

 

 

 

EMPLOYEE

 

 

 

 

 

/s/ Douglas R. Lebda

 

Douglas R. Lebda

 

5




Exhibit 10.4

 

AMENDMENT NO.     TO THE RESTRICTED STOCK AWARD AGREEMENT

BETWEEN DOUGLAS R. LEBDA AND TREE.COM, INC.

 

[Date]

 

This Amendment No.    to that certain Restricted Stock Award Agreement, dated as of [DATE] (the “Agreement”) between Douglas R. Lebda (“Employee”) and Tree.com (the “Company”) is effective as of [DATE], unless otherwise indicated.  All capitalized terms used herein without definition shall have the meanings given to them in the Agreement.

 

WHEREAS, subject to the terms and conditions set forth herein, Employee and the Company wish to make certain amendments to the Agreement.

 

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows:

 

1.             Section 2 of the Agreement is hereby deleted and replaced in its entirety with the following:

 

“2.                                 In order for your Award to vest, you must be continuously employed by Tree.com or any of its Subsidiaries or Affiliates during the Restriction Period (as defined below).  Notwithstanding the foregoing or any other provision to the contrary in the Plan or this Agreement, you shall become 100% vested in your Award upon the occurrence of a Change in Control.  Nothing in this Agreement or the Plan shall confer upon you any right to continue in the employ or service of Tree.com or any of its Subsidiaries or Affiliates or interfere in any way with their rights to terminate your employment or service at any time.”

 

2.             Except as explicitly set forth herein, the remaining provisions of the Agreement will remain in full force and effect.

 

* * * Signature Page to Follow * * *

 



 

IN WITNESS WHEREOF, the parties have executed this Amendment No.    as of the date first set forth above.

 

 

 

TREE.COM, INC.

 

 

 

 

 

 

 

By: Claudette Hampton

 

Senior Vice President — Human Resources

 

 

 

 

 

EMPLOYEE

 

 

 

 

 

 

 

Douglas R. Lebda

 




EXHIBIT 10.5

 

EMPLOYMENT AGREEMENT

 

THIS EMPLOYMENT AGREEMENT (“Agreement”) is entered into by and between David Norris (“Executive”) and Tree.com, Inc., a corporation (the “Company”), and is effective as of June 30th, 2008 (the “Effective Date”).

 

WHEREAS, the Company desires to establish its right to the services of Executive, in the capacity described below, on the terms and conditions hereinafter set forth, and Executive is willing to accept such employment on such terms and conditions.

 

NOW, THEREFORE, in consideration of the mutual agreements hereinafter set forth, Executive and the Company have agreed and do hereby agree as follows:

 

1.             EMPLOYMENT.  During the Term (as defined below), the Company shall employ Executive, and Executive shall be employed, as President, Home Loan Center.  During Executive’s employment with the Company, Executive shall do and perform all services and acts necessary or advisable to fulfill the duties and responsibilities as are commensurate and consistent with Executive’s position and shall render such services on the terms set forth herein.  During Executive’s employment with the Company, Executive shall report directly to the Chief Executive Officer of the Company or any officer designated by him (hereinafter referred to as the “Reporting Officer”).  Executive shall have such powers and duties with respect to the Company or its affiliates as may reasonably be assigned to Executive by the Reporting Officer, to the extent consistent with Executive’s position.  Executive agrees to devote all of Executive’s working time, attention and efforts to the Company and to perform the duties of Executive’s position in accordance with Company policies applicable to all employees of the Company and its subsidiaries and/or affiliates, as well as Company policies (or the policies of such other businesses for which Executive has direct or indirect responsibility under this Agreement) as in effect from time to time.  Executive’s principal place of employment shall be the principal offices of Home Loan Center, Inc., located in Irvine, California; provided, however, that travel to the Company’s other offices in Charlotte or Irvine may occasionally be required.  Executive acknowledges that the Company may, in its sole discretion from time to time, change the Executive’s responsibilities or his or her direct / indirect reports without any effect hereunder.

 

2.             TERM.  The term of this Agreement, which shall commence on the Effective Date, shall continue until and including June 30, 2010 (the “Term”) unless terminated earlier as set forth in the Standard Terms and Conditions; provided, that certain provisions herein may specify a greater period of effectiveness.

 

3.             COMPENSATION.

 

(a)           BASE SALARY.  During the period that Executive is employed with the Company hereunder, the Company shall pay Executive an annual base salary of $350,000 (the “Base Salary”), payable in equal biweekly installments (or, if different, in accordance with the

 



 

Company’s payroll practice as in effect from time to time), or such higher salary as shall be agreed to in writing by Executive and the Company from time to time.  For all purposes under this Agreement, the term “Base Salary” shall refer to the Base Salary as in effect from time to time.

 

(b)           EQUITY INCENTIVES.  During the period that Executive is employed with the Company hereunder, Executive shall be eligible to receive a discretionary equity incentives, including but not limited to restricted stock unit awards and/or stock options, which incentives shall be granted to Executive at the time the Company normally grants such incentives generally and otherwise in accordance with applicable policies, practices, terms, and conditions (including but not limited to vesting requirements), and provided further, that Executive is employed by the Company on the date such incentives are awarded.

 

(c)           DISCRETIONARY BONUS.  During the period that Executive is employed with the Company hereunder, Executive shall be eligible to receive a discretionary annual bonus in an amount determined by the Reporting Officer, which bonus shall be payable to Executive at the time the Company pays year-end bonuses generally and otherwise in accordance with applicable policies and practices, provided, that Executive is employed by Company on the date such bonuses are paid.

 

(d)           BENEFITS.  From the Effective Date through the date of termination of Executive’s employment with the Company for any reason, Executive shall be entitled to participate in any welfare, health and life insurance and pension benefit programs as may be adopted from time to time by the Company on the same basis as that provided to similarly situated employees of the Company.  Without limiting the generality of the foregoing, Executive shall be entitled to the following benefits:

 

(i)            Reimbursement for Business Expenses.  During the period that Executive is employed with the Company hereunder, the Company shall reimburse Executive for all reasonable, necessary and documented expenses incurred by Executive in performing Executive’s duties for the Company, on the same basis as similarly situated employees and in accordance with applicable policies as in effect from time to time.

 

(ii)           Vacation and other Paid Time Off.  During the period that Executive is employed with the Company hereunder, Executive shall be entitled to paid vacation and other paid time off each year, in accordance with applicable plans, policies, programs and practices applicable to similarly situated employees generally.

 

4.             NOTICES.  All notices and other communications under this Agreement shall be in writing and shall be given by first-class mail, certified or registered with return receipt requested, or by hand delivery, or by overnight delivery by a nationally recognized carrier, in each case to the applicable address set forth below, and any such notice is deemed effectively given when received by the recipient (of if receipt is refused by the recipient, when so refused):

 

2



 

If to the Company:

Tree.com, Inc.

 

11115 Rushmore Drive

 

Charlotte, NC 28277

 

Attention: Senior Vice President, Human Resources

 

 

If to Executive:

At the most recent address for Executive on file at the Company.

 

Either party may change such party’s address for notices by notice duly given pursuant hereto.

 

5.             GOVERNING LAW; JURISDICTION.  This Agreement and the legal relations thus created between the parties hereto (including, without limitation, any dispute arising out of or related to this Agreement) shall be governed by and construed under and in accordance with the internal laws of the State of North Carolina without reference to its principles of conflicts of laws.  Any such dispute will be heard exclusively and determined before an appropriate federal court located in the State of North Carolina in the Western District, or, if not maintainable therein, then in an appropriate state court located in Mecklenburg County, North Carolina, and each party hereto submits itself and its property to the exclusive jurisdiction of the foregoing courts with respect to such disputes.  Each party hereto (i) agrees that service of process may be made by mailing a copy of any relevant document to the address of the party set forth above, (ii) waives to the fullest extent permitted by law any objection which it may now or hereafter have to the courts referred to above on the grounds of inconvenient forum or otherwise as regards any dispute between the parties hereto arising out of or related to this Agreement, (iii) waives to the fullest extent permitted by law any objection which it may now or hereafter have to the laying of venue in the courts referred to above as regards any dispute between the parties hereto arising out of or related to this Agreement and (iv) agrees that a judgment or order of any court referred to above in connection with any dispute between the parties hereto arising out of or related to this Agreement is conclusive and binding on it and may be enforced against it in the courts of any other jurisdiction.

 

6.             COUNTERPARTS.  This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.

 

7.             STANDARD TERMS AND CONDITIONS.  Executive expressly understands and acknowledges that the Executive Standard Terms and Conditions attached hereto are incorporated herein by reference, deemed a part of this Agreement and are binding and enforceable provisions of this Agreement.  References to “this Agreement” or the use of the term “hereof” shall refer to this Agreement and the Executive Standard Terms and Conditions attached hereto, taken as a whole.

 

8.             SECTION 409A OF THE INTERNAL REVENUE CODE.  This Agreement is not intended to constitute a “nonqualified deferred compensation plan” within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended, and the rules and regulations issued thereunder (“Section 409A”).  Notwithstanding the foregoing, if this Agreement or any benefit paid to Executive hereunder is subject to Section 409A and if the Executive is a

 

3



 

“Specified Employee” (as defined under Section 409A) as of the date of Executive’s termination of employment hereunder, then the payment of benefits, if any, scheduled to be paid by the Company to Executive hereunder during the first six (6) month period beginning on the date of a termination of employment hereunder shall be delayed during such six (6) month period and shall commence immediately following the end of such six (6) month period (and, if applicable, the period in which such payments were scheduled to be made if not for such delay shall be extended accordingly).  In no event shall the Company be required to pay Executive any “gross-up” or other payment with respect to any taxes or penalties imposed under Section 409A with respect to any benefit paid to Executive hereunder.

 

IN WITNESS WHEREOF, the Company has caused this Agreement to be executed and delivered by its duly authorized officer and Executive has executed and delivered this Agreement as of June 30th, 2008.

 

 

Tree.com, Inc.

 

 

 

 

 

/s/ Claudette Hampton

 

By: Claudette Hampton

 

Title: Senior Vice President, Human Resources

 

 

 

 

 

/s/ David Norris

 

David Norris

 

4



 

EXECUTIVE STANDARD TERMS AND CONDITIONS

 

1A.          TERMINATION OF EXECUTIVE’S EMPLOYMENT.

 

(a)           DEATH.  In the event Executive’s employment hereunder is terminated by reason of Executive’s death, the Company shall pay Executive’s designated beneficiary or beneficiaries, within thirty (30) days of Executive’s death in a lump sum in cash, (i) Executive’s Base Salary through the end of the month in which death occurs and (ii) any Other Accrued Obligations (as defined in Section 1A(e) below).

 

(b)           DISABILITY.  If, as a result of Executive’s incapacity due to physical or mental illness (“Disability”), Executive shall have been absent from the full-time performance of Executive’s duties with the Company for a period of four (4) consecutive months and, within thirty (30) days after written notice is provided to Executive by the Company (in accordance with Section 4 of the Employment Agreement), Executive shall not have returned to the full-time performance of Executive’s duties, Executive’s employment under this Agreement may be terminated by the Company for Disability.  During any period prior to such termination during which Executive is absent from the full-time performance of Executive’s duties with the Company due to Disability, the Company shall continue to pay Executive’s Base Salary at the rate in effect at the commencement of such period of Disability, offset by any amounts payable to Executive under any disability insurance plan or policy provided by the Company.  Upon termination of Executive’s employment due to Disability, the Company shall pay Executive within thirty (30) days of such termination (i) Executive’s Base Salary through the end of the month in which termination occurs in a lump sum in cash, offset by any amounts payable to Executive under any disability insurance plan or policy provided by the Company; and (ii) any Other Accrued Obligations (as defined in paragraph 1(e) below).

 

(c)           TERMINATION FOR CAUSE.  Upon the termination of Executive’s employment by the Company for Cause (as defined below), the Company shall have no further obligation hereunder, except for the payment of any Other Accrued Obligations (as defined in paragraph 1(e) below).  As used herein, “Cause” shall mean:  (i) the Executive’s plea of guilty or nolo contendere to, or conviction for, the commission of (A) a felony offense, or (B) a misdemeanor offense involving any breach of trust or fiduciary duty by Executive or involving any moral turpitude; provided, however, that after indictment, the Company may suspend Executive from the rendition of services, but without limiting or modifying in any other way the Company’s obligations under this Agreement; (ii) a material breach by Executive of a fiduciary duty owed to the Company; (iii) a material breach by Executive of any of the covenants made by Executive in Section 2A hereof; (iv) the willful or gross neglect by Executive of the material duties required by this Agreement; or (v) a material violation by Executive of any Company policy pertaining to ethics, wrongdoing or conflicts of interest.

 

(d)           TERMINATION OR BREACH BY THE COMPANY OTHER THAN FOR DEATH, DISABILITY OR CAUSE.  If (i) Executive’s employment hereunder is terminated by the Company or the Company commits a material breach of this Agreement prior to the

 



 

expiration of the Term for any reason other than Executive’s death or Disability or for Cause, then the Company shall pay Executive the following:

 

(i) Within thirty (30) days following such termination, breach, or resignation, an amount equal to all Other Accrued Obligations (as defined herein); and

 

(ii) An amount equal to one (1) year’s Base Salary, payable in equal installments on the Company’s regularly scheduled paydays over the one (1) year period following the date of such termination, breach, or resignation (the “Severance Period”).

 

If Executive obtains other employment or is otherwise compensated for services provided during this Severance Period, the Company’s obligation to make future payments to Executive under these subparagraph (d)(ii) and shall be offset against any compensation earned by Employee as a result of employment with or services provided to a third party.  Executive agrees to inform the Company promptly of his or her employment status and any amounts so earned during the Severance Period.  Executive’s right to the payments under these subparagraph (d)(ii) shall be subject to Executive’s execution and non-revocation of a general release of the Company and its affiliates, in a form substantially similar to that used for similarly situated executives of the Company and its affiliates, and Executive’s compliance with the restrictive covenants set forth in Section 2A of these Standard Terms and Conditions.  Executive acknowledges and agrees that the payments described in this Section 1A(d) constitutes good and valuable consideration for such release.

 

(e)           OTHER ACCRUED OBLIGATIONS.  As used in this Agreement, “Other Accrued Obligations” shall mean the sum of (i) any portion of Executive’s accrued but unpaid Base Salary or Bonus through the date of death or termination of employment for any reason, as the case may be; (ii) any compensation previously earned but deferred by Executive (together with any interest or earnings thereon) that has not yet been paid and that is not otherwise to be paid at a later date pursuant to the executive deferred compensation plan of the Company, if any, and (iii) any reimbursements that Executive is entitled to receive under Section 3(d) of the Agreement.

 

2A.                             CONFIDENTIAL INFORMATION; NON-COMPETITION; NON-SOLICITATION; AND PROPRIETARY RIGHTS.

 

(f)            CONFIDENTIALITY.  Executive acknowledges that, while employed by the Company, Executive will occupy a position of trust and confidence.  The Company, its subsidiaries and/or affiliates shall provide Executive with “Confidential Information” as referred to below.  Executive shall not, except as may be required to perform Executive’s duties hereunder or as required by applicable law, without limitation in time, communicate, divulge, disseminate, disclose to others or otherwise use, whether directly or indirectly, any Confidential Information regarding the Company and/or any of its subsidiaries and/or affiliates.

 

“Confidential Information” shall mean information about the Company or any of its subsidiaries or affiliates, and their respective businesses, employees, consultants, contractors, clients and customers that is not disclosed by the Company or any of its subsidiaries or affiliates

 

2A



 

for financial reporting purposes or otherwise generally made available to the public (other than by Executive’s breach of the terms hereof) and that was learned or developed by Executive in the course of employment by the Company or any of its subsidiaries or affiliates, including (without limitation) any proprietary knowledge, trade secrets, data, formulae, information and client and customer lists and all papers, resumes, and records (including computer records) of the documents containing such Confidential Information.  Executive acknowledges that such Confidential Information is specialized, unique in nature and of great value to the Company and its subsidiaries or affiliates, and that such information gives the Company and its subsidiaries or affiliates a competitive advantage.  Executive agrees to deliver or return to the Company, at the Company’s request at any time or upon termination or expiration of Executive’s employment or as soon thereafter as possible, all documents, computer tapes and disks, records, lists, data, drawings, prints, notes and written information (and all copies thereof) furnished by the Company and its subsidiaries or affiliates or prepared by Executive in the course of Executive’s employment by the Company and its subsidiaries or affiliates.  As used in this Agreement, “subsidiaries” and “affiliates” shall mean any company controlled by, controlling or under common control with the Company.  For purposes of this Agreement, “Confidential Information” shall not include any information that is now or hereafter becomes known to the public or otherwise is in the public domain other than through Executive’s fault, breach, disclosure, or other act of Executive.

 

(g)           NON-COMPETITION.  In consideration of this Agreement, and other good and valuable consideration provided hereunder, the receipt and sufficiency of which are hereby acknowledged by Executive, Executive hereby agrees and covenants that, during Executive’s employment hereunder and for a period of twelve (12) months thereafter (the “Restricted Period”), Executive shall not, without the prior written consent of the Company, directly or indirectly, engage in or become associated with a Competitive Activity.

 

For purposes of this Section 2A(b), (i) a “Competitive Activity” means any business or other endeavor involving Similar Products if such business or endeavor is in a country (including the United States) in which the Company (or any of its businesses) provides or planned to provide during Executive’s employment hereunder such Similar Products; (ii) “Similar Products” means any products or services that are the same (or substantially the same) as any of the (A) types of products or services that the online loan origination, online loan brokerage, or online real estate brokerage businesses of Home Loan Center, Inc., LendingTree and/or the Company or (B) significant types of products or services that any other business for which Executive has direct or indirect responsibility hereunder, in each case, provides, has provided or planned to provide during Executive’s employment hereunder; and (iii) Executive shall be considered to have become “associated with a Competitive Activity” if Executive becomes directly or indirectly involved as an owner, principal, employee, officer, director, independent contractor, representative, stockholder, financial backer, agent, partner, member, advisor, lender, consultant or in any other individual or representative capacity with any individual, partnership, corporation or other organization that is engaged in a Competitive Activity.

 

Notwithstanding the foregoing, Executive may make and retain investments during the Restricted Period, for investment purposes only, in less than one percent (5%) of the outstanding capital stock of any publicly-traded corporation engaged in a Competitive Activity if the stock of

 

3A



 

such corporation is either listed on a national stock exchange or on the NASDAQ National Market System if Executive is not otherwise affiliated with such corporation.   Executive acknowledges that Executive’s covenants under this Section 2A(b) are a material inducement to the Company’s entering into this Agreement.

 

(h)           NON-SOLICITATION OF EMPLOYEES.  Executive recognizes that he or she will possess Confidential Information about other employees, consultants and contractors of the Company and its subsidiaries or affiliates relating to their education, experience, skills, abilities, compensation and benefits, and inter-personal relationships with suppliers to and customers of the Company and its subsidiaries or affiliates.  Executive recognizes that the information he or she will possess about these other employees, consultants and contractors is not generally known, is of substantial value to the Company and its subsidiaries or affiliates in developing their respective businesses and in securing and retaining customers, and will be acquired by Executive because of Executive’s business position with the Company.  Executive agrees that, during Executive’s employment hereunder and for a period of twelve (12) months thereafter, (i) Executive will not, directly or indirectly, hire or solicit or recruit any person then employed by the Company and/or any of its subsidiaries and/or affiliates with whom Executive has had direct contact during his or her employment hereunder, in all cases, for the purpose of being employed by Executive or by any business, individual, partnership, firm, corporation or other entity on whose behalf Executive is acting as an agent, representative or employee; and (ii) Executive will not convey any such Confidential Information or trade secrets about employees of the Company or any of its subsidiaries or affiliates to any other person except within the scope of Executive’s duties hereunder.  Notwithstanding the foregoing, the restrictions set forth immediately above shall, in the case of employees with whom Executive had a direct working relationship prior to his or her employment with the Company, its subsidiaries and/or affiliates, (i) upon a termination of Executive’s employment by the Company for any reason other than for Cause, shall apply for a period of nine (9) months following such termination, or (ii) if Executive terminates his or her employment hereunder, apply for a period of twelve (12) months following such termination.

 

(i)            NON-SOLICITATION OF CUSTOMERS.  During Executive’s employment hereunder and for a period of twelve (12) months thereafter, Executive shall not solicit any Customers of the Company or encourage (regardless of who initiates the contact) any such Customers to use the facilities or services of any competitor of the Company.  For the purposes of this subsection, “Customers” means any persons or entities that purchased products or services from the Company within twelve (12) calendar months of the termination of Executive’s employment.

 

(j)            PROPRIETARY RIGHTS; ASSIGNMENT.  All Employee Developments (defined below) shall be considered works made for hire by Executive for the Company or, as applicable, its subsidiaries or affiliates, and Executive agrees that all rights of any kind in any Employee Developments belong exclusively to the Company.  In order to permit the Company to exploit such Employee Developments, Executive shall promptly and fully report all such Employee Developments to the Company.  Except in furtherance of his or her obligations as an employee of the Company, Executive shall not use or reproduce any portion of any record associated with any Employee Development without prior written consent of the Company or, as applicable, its subsidiaries or affiliates.  Executive agrees that in the event actions of Executive

 

4A



 

are required to ensure that such rights belong to the Company under applicable laws, Executive will cooperate and take whatever such actions are reasonably requested by the Company, whether during or after the Term, and without the need for separate or additional compensation.  “Employee Developments” means any idea, know-how, discovery, invention, design, method, technique, improvement, enhancement, development, computer program, machine, algorithm or other work of authorship, whether developed, conceived or reduced to practice during or following the period of employment, that (i) concerns or relates to the actual or anticipated business, research or development activities, or operations of the Company (or any other Company business for which Executive has direct or indirect responsibility during his or her employment hereunder), or (ii) results from or is suggested by any undertaking assigned to Executive or work performed by Executive for or on behalf of the Company or any of its subsidiaries or affiliates, whether created alone or with others, during or after working hours, or (iii) uses, incorporates or is based on Company equipment, supplies, facilities, trade secrets or inventions of any form or type.  All Confidential Information and all Employee Developments are and shall remain the sole property of the Company or any of its subsidiaries or affiliates.  Executive shall acquire no proprietary interest in any Confidential Information or Employee Developments developed or acquired during the Term.  To the extent Executive may, by operation of law or otherwise, acquire any right, title or interest in or to any Confidential Information or Employee Development, Executive hereby assigns and covenants to assign to the Company all such proprietary rights without the need for a separate writing or additional compensation.  Executive shall, both during and after the Term, upon the Company’s request, promptly execute, acknowledge, and deliver to the Company all such assignments, confirmations of assignment, certificates, and instruments, and shall promptly perform such other acts, as the Company may from time to time in its discretion deem necessary or desirable to evidence, establish, maintain, perfect, enforce or defend the Company’s rights in Confidential Information and Employee Developments.

 

(k)           COMPLIANCE WITH POLICIES AND PROCEDURES.  During the period that Executive is employed with the Company hereunder, Executive shall adhere to the policies and standards of professionalism set forth in the Company’s Policies and Procedures applicable to all employees of the Company and its subsidiaries and/or affiliates, as well as Company policies (or the policies of such other businesses for which Executive has direct or indirect responsibility under this Agreement) as they may exist from time to time.

 

(g)           SURVIVAL OF PROVISIONS.  The obligations contained in this Section 2A shall, to the extent provided in this Section 2A, survive the termination or expiration of Executive’s employment with the Company and, as applicable, shall be fully enforceable thereafter in accordance with the terms of this Agreement.  If it is determined by a court of competent jurisdiction that any restriction in this Section 2A is excessive in duration or scope or is unreasonable or unenforceable under applicable law, it is the intention of the parties that such restriction may be modified or amended by the court to render it enforceable to the maximum extent permitted by applicable law.

 

3A.          TERMINATION OF PRIOR AGREEMENTS.  This Agreement constitutes the entire agreement between the parties and, as of the Effective Date, terminates and supersedes any and all prior agreements and understandings (whether written or oral) between the parties with

 

5A



 

respect to the subject matter of this Agreement.  Executive acknowledges and agrees that neither the Company nor anyone acting on its behalf has made, and is not making, and in executing this Agreement, Executive has not relied upon, any representations, promises or inducements except to the extent the same is expressly set forth in this Agreement.  Executive hereby represents and warrants that by entering into this Agreement, Executive will not rescind or otherwise breach an employment agreement or other agreement with Executive’s current employer prior to the natural expiration date of such agreement.  Notwithstanding the foregoing, nothing in this Agreement shall alter the Executive’s rights to (i) any grant of RSUs or other equity interests, or the vesting rights or conditions of termination and/or expiration thereof, granted in any prior agreement (including, without limitation, the rights granted to Executive under that certain Restricted Shares Grant and Shareholders’ Agreement dated as of May 5, 2003, as amended from time to time), or (ii) the payment of any cash bonus, whether guaranteed or discretionary, attributable to the Company’s 2007 fiscal year and awarded in any prior agreement.

 

4A.          ASSIGNMENT; SUCCESSORS.  Without limiting the provisions of Section 2A(d) of this Agreement, the parties agree that this Agreement is personal in its nature and that none of the parties hereto shall, without the consent of the others, assign or transfer this Agreement or any rights or obligations hereunder; provided, that the Company may assign this Agreement to, or allow any of its obligations to be fulfilled by, or take actions through, any affiliate of the Company and, in the event of the merger, consolidation, transfer, or sale of all or substantially all of the assets of the Company (a “Transaction”) with or to any other individual or entity, this Agreement shall, subject to the provisions hereof, be binding upon and inure to the benefit of such successor and such successor shall discharge and perform all the promises, covenants, duties, and obligations of the Company hereunder, and in the event of any such assignment or Transaction, all references herein to the “Company” shall refer to the Company’s assignee or successor hereunder.  Further, it is the intent of the parties that this Agreement shall survive the spin-off of LendingTree, LLC and shall be automatically assigned to, assumed by, and binding upon the new parent company of LendingTree (referred to herein as “Tree.com”) following the spin-off.  Following the spin-off, all references herein to “Company” or “LendingTree” shall thereafter refer to Tree.com.

 

5A.