LendingTree, Inc.
Tree.com, Inc. (Form: 10-Q, Received: 08/07/2009 15:45:02)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q




ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2009

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 that 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 "large accelerated filer," "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 August 5, 2009 there were 10,803,486 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

  34

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  52

Item 4T.

 

Controls and Procedures

  53

 

PART II—OTHER INFORMATION

   

Item 1.

 

Legal Proceedings

 
54

Item 1A.

 

Risk Factors

  55

Item 4.

 

Submission of Matters to a Vote of Security Holders

  56

Item 6.

 

Exhibits

  57

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PART 1—FINANCIAL INFORMATION

Item 1.     Financial Statements

TREE.COM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2009   2008   2009   2008  
 
  (In thousands, except per share amounts)
 

Revenue

                         
   

LendingTree Loans

  $ 36,257   $ 25,254   $ 70,629   $ 56,056  
   

Exchanges and other

    16,923     24,514     34,052     55,523  
   

Real Estate

    7,793     10,215     13,552     18,597  
                   
 

Total revenue

    60,973     59,983     118,233     130,176  

Cost of revenue

                         
   

LendingTree Loans

    14,003     11,413     25,859     23,213  
   

Exchanges and other

    2,531     3,601     4,998     8,072  
   

Real Estate

    4,792     5,907     8,656     10,777  
                   
 

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

    21,326     20,921     39,513     42,062  
                   
 

Gross margin

    39,647     39,062     78,720     88,114  

Operating expenses

                         
 

Selling and marketing expense

    13,892     27,819     27,714     57,746  
 

General and administrative expense

    17,112     15,027     33,806     35,686  
 

Product development

    1,561     1,443     3,169     3,552  
 

Restructuring expense

    (1,078 )   1,761     (236 )   2,163  
 

Amortization of intangibles

    1,318     3,660     2,581     7,328  
 

Depreciation

    1,687     1,771     3,351     3,546  
 

Asset impairments

    3,903     164,335     3,903     164,335  
                   
   

Total operating expenses

    38,395     215,816     74,288     274,356  
                   
   

Operating income (loss)

    1,252     (176,754 )   4,432     (186,242 )

Other income (expense)

                         
 

Interest income

    27     2     75     11  
 

Interest expense

    (151 )   (219 )   (302 )   (328 )
 

Other

                (2 )
                   

Total other income (expense), net

    (124 )   (217 )   (227 )   (319 )
                   

Income (loss) before income taxes

    1,128     (176,971 )   4,205     (186,561 )

Income tax (provision) benefit

    (386 )   14,051     (303 )   13,842  
                   

Net income (loss)

  $ 742   $ (162,920 ) $ 3,902   $ (172,719 )
                   

Weighted average common shares outstanding

    10,706     9,328     10,194     9,328  
                   

Weighted average diluted shares outstanding

    11,034     9,328     10,354     9,328  
                   

Net income (loss) per share available to common shareholders

                         
 

Basic

  $ 0.07   $ (17.47 ) $ 0.38   $ (18.52 )
                   
 

Diluted

  $ 0.07   $ (17.47 ) $ 0.38   $ (18.52 )
                   

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

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TREE.COM, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 
  June 30, 2009   December 31, 2008  
 
  (unaudited)
   
 
 
  (In thousands, except
share amounts)

 

ASSETS:

             

Cash and cash equivalents

  $ 83,705   $ 73,643  

Restricted cash and cash equivalents

    15,499     15,204  

Accounts receivable, net of allowance of $408 and $367, respectively

    6,011     7,234  

Loans held for sale ($110,054 and $85,638 measured at fair value, respectively)

    111,917     87,835  

Prepaid and other current assets

    11,080     8,960  
           
 

Total current assets

    228,212     192,876  

Property and equipment, net

    13,968     17,057  

Goodwill

    9,285     9,285  

Intangible assets, net

    59,179     64,663  

Other non-current assets

    476     202  
           
 

Total assets

  $ 311,120   $ 284,083  
           

LIABILITIES:

             

Warehouse lines of credit

  $ 93,122   $ 76,186  

Accounts payable, trade

    4,787     3,541  

Deferred revenue

    1,561     1,231  

Deferred income taxes

    2,290     2,290  

Accrued expenses and other current liabilities

    35,042     37,146  
           
 

Total current liabilities

    136,802     120,394  

Income taxes payable

    882     862  

Other long-term liabilities

    9,923     9,016  

Deferred income taxes

    15,683     15,683  
           
 

Total liabilities

    163,290     145,955  

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 and outstanding 10,806,584 and 9,369,381 shares, respectively

    108     94  

Additional paid-in capital

    900,363     894,577  

Accumulated deficit

    (752,641 )   (756,543 )
           
 

Total shareholders' equity

    147,830     138,128  
           
 

Total liabilities and shareholders' equity

  $ 311,120   $ 284,083  
           

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

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TREE.COM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

(Unaudited)

 
   
  Common Stock    
   
 
 
  Total   Number
of Shares
  Amount   Additional
Paid-in Capital
  Accumulated
Deficit
 
 
  (In thousands)
 

Balance as of December 31, 2008

  $ 138,128     9,369   $ 94   $ 894,577   $ (756,543 )

Comprehensive income:

                               
 

Net income for the six months ended June 30, 2009

   
3,902
   
   
   
   
3,902
 
                               

Comprehensive income

   
3,902
   
   
   
   
 

Non-cash compensation

   
1,993
   
   
   
1,993
   
 

Sale of common stock

   
3,656
   
935
   
9
   
3,647
   
 

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

   
151
   
152
   
2
   
149
   
 

Issuance of restricted stock

   
   
350
   
3
   
(3

)
 
 
                       

Balance as of June 30, 2009

 
$

147,830
   
10,806
 
$

108
 
$

900,363
 
$

(752,641

)
                       

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

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TREE.COM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 
  Six Months Ended June 30,  
 
  2009   2008  
 
  (In thousands)
 

Cash flows from operating activities:

             

Net income (loss)

  $ 3,902   $ (172,719 )

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

             
 

Loss on disposal of assets

    949      
 

Amortization of intangibles

    2,581     7,328  
 

Depreciation

    3,351     3,546  
 

Intangible impairment

    3,903     33,378  
 

Goodwill impairment

        130,957  
 

Non-cash compensation expense

    1,993     2,219  
 

Non-cash restructuring expense

    161     370  
 

Deferred income taxes

        (13,869 )
 

Gain on origination and sale of loans

    (67,206 )   (50,828 )
 

Loss on impaired loans not sold

    290     47  
 

Loss on sale of real estate acquired in satisfaction of loans

    77     198  
 

Bad debt expense

    243     432  
 

Non-cash interest expense

        76  

Changes in current assets and liabilities:

             
 

Accounts receivable

    864     2,153  
 

Origination of loans

    (1,612,556 )   (1,246,436 )
 

Proceeds from sales of loans

    1,658,128     1,295,909  
 

Principal payments received on loans

    627     222  
 

Payments to investors for loan losses and early payoff obligations

    (4,141 )   (2,907 )
 

Prepaid and other current assets

    (623 )   2,129  
 

Accounts payable and other current liabilities

    (1,888 )   4,147  
 

Income taxes payable

    123     (508 )
 

Deferred revenue

    236     (718 )

Other, net

    1,003     (278 )
           

Net cash used in operating activities

    (7,983 )   (5,152 )
           

Cash flows from investing activities:

             
 

Contingent acquisition consideration

        (14,487 )
 

Acquisitions

    (1,000 )    
 

Capital expenditures

    (1,404 )   (2,770 )
 

Other, net

    581     (146 )
           

Net cash used in investing activities

    (1,823 )   (17,403 )
           

Cash flows from financing activities:

             
 

Borrowing under warehouse lines of credit

    1,402,823     1,142,343  
 

Repayments of warehouse lines of credit

    (1,385,887 )   (1,146,336 )
 

Principal payments on long-term obligations

        (20,045 )
 

Transfers to IAC

        27,266  
 

Capital contributions from IAC

        14,487  
 

Issuance of common stock

    3,807      
 

Excess tax benefits from stock-based awards

        153  
 

(Increase) decrease in restricted cash

    (875 )   12,048  
           

Net cash provided by financing activities

    19,868     29,916  
           

Net increase in cash and cash equivalents

    10,062     7,361  

Cash and cash equivalents at beginning of period

    73,643     45,940  
           

Cash and cash equivalents at end of period

  $ 83,705   $ 53,301  
           

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

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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. Tree.com consists of the brands and businesses that formerly comprised IAC's Lending and Real Estate segments. We refer herein to these brands and businesses as the "Tree.com Businesses," which include LendingTree.com, RealEstate.com, GetSmart.com, Home Loan Center, Inc. (d/b/a LendingTree Loans) and iNest.com.

        In conjunction with the spin-off, Tree.com completed the following transactions: (1) extinguished all intercompany payable balances with IAC, which totaled $56.2 million, by recording a non-cash contribution from IAC, (2) recapitalized the invested capital balances with common stock in the amount of $0.1 million, whereby holders of IAC stock received one-thirtieth of a share of common stock of Tree.com, and (3) received $55.2 million of cash from IAC.

Basis of Presentation

        The historical consolidated financial statements of Tree.com and its subsidiaries reflect the contribution or other transfer to Tree.com of all of the subsidiaries and assets and the assumption by Tree.com of all of the liabilities relating to the Tree.com Businesses in connection with the spin-off and the allocation to Tree.com of certain IAC corporate expenses relating to the Tree.com Businesses. Accordingly, the historical consolidated financial statements of Tree.com reflect the historical financial position, results of operations and cash flows of the Tree.com Businesses since their respective dates of acquisition by IAC, based on the historical consolidated financial statements and accounting records of IAC and using the historical results of operations and historical bases of the assets and liabilities of the Tree.com Businesses with the exception of accounting for income taxes. For purposes of these financial statements, income taxes have been computed for Tree.com on an as if stand-alone, separate tax return basis. Intercompany transactions and accounts have been eliminated.

        In the opinion of Tree.com's management, the assumptions underlying the historical consolidated financial statements of Tree.com are reasonable. However, this financial information does not necessarily reflect what the historical financial position, results of operations and cash flows of Tree.com would have been had Tree.com been a stand-alone company during the periods presented.

        The accompanying unaudited interim consolidated financial statements as of June 30, 2009 and 2008 and for the three and six 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 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 and six months ended June 30, 2009 are not necessarily indicative of the results to be expected for the year ending December 31, 2009, 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, 2008.

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1—ORGANIZATION (Continued)

        We evaluated subsequent events through August 7, 2009, the issuance date of our consolidated financial statements for the period ended June 30, 2009, as this is the date on which we filed such financial statements on Form 10-Q with the SEC.

Company Overview

    LendingTree Loans

        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."

    Exchanges

        The Exchanges segment consists of online lead generation networks and call centers (principally LendingTree.com and GetSmart.com) that connect consumers and service providers principally in the lending industry.

    Real Estate

        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 real estate brokerages around the country.

        Tree.com maintains operations solely in the United States.

Business Combinations

        In 2009 Tree.com purchased certain assets of three separate companies, with an aggregate purchase price of $5.5 million in cash. One of the purchases closed in January 2009, and the two other purchases closed in July 2009. All three transactions are part of our strategic initiative to diversify our revenue streams outside of the mortgage and real estate industries.

        These asset purchases are being accounted for under the acquisition method of accounting in accordance with SFAS No. 141R (see Note 2). Accordingly, the purchase price is allocated to the acquired assets and liabilities based on their estimated fair values at the acquisition date. The purchase that closed in January 2009 has been allocated as $1.0 million to intangible assets with useful lives of three years. The allocation of the purchase price for the two other transactions, including goodwill, if any, is not yet complete and will be finalized upon completion of the analysis of the fair values of the acquired assets and liabilities. The pro forma effect of these purchases was not material to our results of operations.

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

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES (Continued)


accounting principles. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. They also impact the reported amount of net earnings during any period. Actual results could differ from those estimates.

        Significant estimates underlying the accompanying consolidated financial statements include: valuation allowance for impaired loans held for sale; reserve for obligations on loans that have been previously sold; 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; various other allowances, reserves and accruals; and assumptions related to the determination of stock-based compensation.

Reclassifications

        In connection with the change in reportable segments (see Note 7), certain prior period amounts have been reclassified to conform with the current year presentation with no effect on net income (loss) or accumulated deficit. Specifically, compensation and other employee-related costs for loan officers within the LendingTree Loans segment totaling $3.5 million and $6.9 million for the three and six months ending June 30, 2008, respectively, were reclassified from selling and marketing expense to cost of revenue, and certain other expenses totaling $0.1 million and $0.2 million for the three and six months ending June 30, 2008, respectively, were reclassified from general and administrative expense to selling and marketing expense.

Restricted Cash and Cash Equivalents

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

 
  June 30, 2009   December 31, 2008  

Cash in escrow for future operating lease commitments

  $ 3,478   $ 5,587  

Cash in escrow for surety bonds

    5,029     5,016  

Cash in escrow for corporate purchasing card program

    2,202     2,200  

Minimum required balances for warehouse lines of credit

    1,875     1,000  

Other

    2,915     1,401  
           
 

Total restricted cash and cash equivalents

  $ 15,499   $ 15,204  
           

        Changes in restricted cash balances are shown within investing and financing activities in the accompanying consolidated statements of cash flows.

Recent Accounting Pronouncements

        In December 2007, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141 (revised 2007), "Business Combinations" ("SFAS No. 141R"), which replaces FASB Statement No. 141. SFAS No. 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES (Continued)


assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements that will enable users to evaluate the nature and financial effects of the business combination. SFAS No. 141R applies prospectively to business combinations in fiscal years beginning after December 15, 2008. The Company applied SFAS No. 141R to its business combinations made subsequent to January 1, 2009. See Note 1 for further information.

        Tree.com adopted SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" ("SFAS No. 161") on January 1, 2009. SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133") with the intent to provide users of financial statements with an enhanced understanding of: (i) how and why an entity uses derivative instruments; (ii) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations; and (iii) how derivative instruments and related hedged items affect an entity's financial position, financial performance and cash flows. The adoption of SFAS No. 161 did not have a material impact on the Company's consolidated financial statements. See Note 9 for further information.

        In April 2009, the FASB issued and Tree.com adopted FASB Staff Position ("FSP") No. FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments". This FSP amends SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, "Interim Financial Reporting", to require those disclosures in summarized financial information at interim reporting periods. See Note 9 for further information.

        In May 2009, the FASB issued and Tree.com adopted SFAS No. 165, "Subsequent Events" ("SFAS No. 165"). SFAS No. 165 establishes principles and requirements for subsequent events, in particular: (i) the period after the balance sheet date during which management of a reporting entity shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (ii) the circumstances under which an entity shall recognize events or transactions occurring after the balance sheet date in its financial statements; and (iii) the disclosures that an entity shall make about events or transactions that occurred after the balance sheet date. See Note 1 for further information.

        In June 2009, the FASB issued SFAS No. 166, "Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140". 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. SFAS No. 166 is effective for annual reporting periods beginning after November 15, 2009. The Company is evaluating the impact of adopting SFAS No. 166.

        In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—A Replacement of FASB Statement No. 162." The objective is to replace SFAS No. 162 and to establish the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES (Continued)


and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. SFAS No. 168 does not change GAAP. SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of SFAS No. 168 will have no material impact on our consolidated financial statements.

NOTE 3—GOODWILL AND INTANGIBLE ASSETS

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

 
  June 30, 2009   December 31, 2008  

Goodwill—Real Estate

  $ 9,285   $ 9,285  

Intangible assets:

             
 

Intangible assets with indefinite lives

    55,229     55,229  
 

Intangible assets with definite lives, net

    3,950     9,434  
           
   

Total intangible assets, net

    59,179     64,663  
           
     

Total goodwill and intangible assets, net

  $ 68,464   $ 73,948  
           

        Intangible assets with indefinite lives relate principally to trade names and trademarks.

        At June 30, 2009, intangible assets with definite lives relate to the following (in thousands):

 
  Cost   Accumulated
Amortization
  Net   Weighted Average
Amortization Life
(Years)
 

Purchase agreements

  $ 76,117   $ (73,352 ) $ 2,765     5.7  

Technology

    29,997     (29,200 )   797     3.0  

Customer lists

    6,607     (6,607 )       2.8  

Other

    9,614     (9,226 )   388     4.8  
                     
 

Total

  $ 122,335   $ (118,385 ) $ 3,950        
                     

        At December 31, 2008, intangible assets with definite lives relate to the following (in thousands):

 
  Cost   Accumulated
Amortization
  Net   Weighted Average
Amortization Life
(Years)
 

Purchase agreements

  $ 76,117   $ (68,898 ) $ 7,219     5.7  

Technology

    29,100     (29,100 )       3.0  

Customer lists

    6,607     (6,607 )       2.8  

Other

    9,512     (7,297 )   2,215     4.8  
                     
 

Total

  $ 121,336   $ (111,902 ) $ 9,434        
                     

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3—GOODWILL AND INTANGIBLE ASSETS (Continued)

        Amortization of intangible assets with definite lives is computed on a straight-line basis and, based on June 30, 2009 balances, such amortization for the next five years is estimated to be as follows (in thousands):

 
  Amount  

Six months ending December 31, 2009

  $ 1,623  

Year ending December 31, 2010

    1,887  

Year ending December 31, 2011

    366  

Year ending December 31, 2012

    74  
       

  $ 3,950  
       

        In the second quarter of 2009, Tree.com recorded impairment charges of $3.9 million related to definite-lived intangible assets within Real Estate. In the second quarter of 2009, the new Real Estate operating segment leadership undertook significant changes in management, operational focus and marketing efforts related to the new homes referral service business. These changes combined with the continued deterioration of new housing starts and new homes sales in 2009, caused the Company to reassess the remaining useful lives and the likely future recoverability of the remaining value of these intangible assets. In testing the recoverability of these assets, indications of impairment were determined to exist, and subsequent impairment testing resulted in the charge noted above.

        In the second quarter of 2008, Tree.com recorded impairment charges of $131.0 million and $33.4 million related to goodwill and an indefinite-lived intangible asset, respectively. The charge related to LendingTree Loans was a goodwill impairment charge of $0.9 million. The charges associated with the Exchanges were $69.3 million related to goodwill and $33.4 million related to an indefinite-lived intangible asset. The charge related to Real Estate was a goodwill impairment charge of $60.8 million.

        The impairments in 2008 resulted from the Company's reassessment of the likely future profitability in light of the persistent adverse mortgage and real estate market realities. These adverse conditions included, among others, constrained liquidity, lender focus on low margin mortgage offerings, the decline in real estate values and a high rate of delinquency for existing mortgages. Tree.com updated its assessment of mortgage and real estate market conditions and Tree.com's responsive operational strategies during the second quarter of 2008, and quantified these considerations in Tree.com's future forecasted results.

        The following table presents the balance of goodwill by segment, including changes in the carrying amount of goodwill, for the six months ended June 30, 2008 (in thousands):

 
  Balance as of
January 1, 2008
  Additions   (Deductions)   Impairments   Balance as of
June 30, 2008
 

LendingTree Loans

  $ 898   $   $   $ (898 ) $  

Exchanges

    69,868         (615 )   (69,253 )    

Real Estate

    70,126         (35 )   (60,806 )   9,285  
                       
 

Total

  $ 140,892   $   $ (650 ) $ (130,957 ) $ 9,285  
                       

        Deductions principally relate to the establishment of deferred tax assets related to the acquired tax attributes and income tax benefit realized pursuant to the exercise of stock options assumed in a business acquisition that were vested at the transaction date and are treated as a reduction in goodwill when the income tax deductions are realized. The impairments are described above.

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 4—PROPERTY AND EQUIPMENT

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

 
  June 30, 2009   December 31, 2008  

Computer equipment and capitalized software

  $ 35,969   $ 34,416  

Leasehold improvements

    3,184     3,184  

Furniture and other equipment

    4,949     5,088  

Projects in progress

    2,001     3,169  
           

    46,103     45,857  

Less: accumulated depreciation and amortization

    (32,135 )   (28,800 )
           
 

Total property and equipment, net

  $ 13,968   $ 17,057  
           

NOTE 5—ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

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

 
  June 30, 2009   December 31, 2008  

Accrued loan loss liability related to loans previously sold

  $ 5,634   $ 3,972  

Litigation accruals

        2,031  

Accrued advertising expense

    5,556     5,518  

Accrued compensation and benefits

    7,224     5,251  

Accrued professional fees

    1,016     1,576  

Accrued restructuring costs

    876     3,262  

Derivative liabilities

    1,421     2,164  

Customer deposits and escrows

    3,763     2,957  

Deferred rent

    851     1,035  

Other

    8,701     9,380  
           
 

Total accrued expenses and other current liabilities

  $ 35,042   $ 37,146  
           

        The other category above reflects an estimated earnout payable related to an acquisition and other miscellaneous accrued expenses.

        An additional $6.5 million of accrued loan loss liability related to loans previously sold is classified in other long term liabilities at both June 30, 2009 and December 31, 2008.

NOTE 6—WAREHOUSE LINES OF CREDIT

        Borrowings on warehouse lines of credit were $93.1 million and $76.2 million at June 30, 2009 and December 31, 2008, respectively.

        As of June 30, 2009, LendingTree Loans had two $50 million committed lines of credit ("warehouse lines"). Borrowings under these lines are limited for funding, and are secured by, consumer residential loans that are held for sale. Loans under these warehouse lines are repaid directly from proceeds from the sales of loans by LendingTree Loans.

        The first line is scheduled to expire on April 30, 2010, but can be cancelled at the option of the lender without default upon sixty days notice. The second line is scheduled to expire on December 29, 2009; however, that lender has indicated it is exiting the warehouse lending business and will honor the existing contract only through the stated term. The first line includes an additional uncommitted credit

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 6—WAREHOUSE LINES OF CREDIT (Continued)


facility of $75 million. The first line is also guaranteed by Tree.com, Inc., LendingTree, LLC and LendingTree Holdings Corp.

        The interest rate under the first line is 225 basis points plus the greater of (a) the 30-day LIBOR or (b) 200 basis points. The interest rate under the $75 million uncommitted line is 30-day LIBOR plus 150 basis points. The interest rate under the second line is 30-day LIBOR plus 125 basis points.

        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 $44.0 million, cash on hand with a certain lender and liquid assets, (ii) a maximum ratio of total liabilities to net worth and (iii) pre-tax net income requirements on a quarterly basis. LendingTree Loans is also required to sell at least 50% of the loans it originates to an affiliate of the lender under the first line or pay a "pair-off fee" of 37.5 basis points on the difference between the required and actual volume of loans sold. During the quarter ended June 30, 2009, 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 one but not both of the warehouse lines were lost and not replaced. Management has been and continues to be in discussions with several financial institutions that could serve as potential sources of credit to replace or supplement the current credit facilities. 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 provide a credit line, or the pricing for such lines.

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.

        Following the spin-off from IAC, the new chief operating decision maker began to realign the Tree.com Businesses into new operating segments. During the first quarter of 2009, management completed its realignment of staffing and direct revenue and costs for each new segment and created reporting structures to enable the chief operating decision maker and management to evaluate the results of operations for each of these new segments on a comparative basis with prior periods. In prior periods, the segments "Lending" and "Real Estate" were presented, which have been changed to "LendingTree Loans", "Exchanges" and "Real Estate" segments. Additionally, certain shared indirect costs that are described below are reported as "Unallocated—Corporate". All items of segment information for prior periods have been restated to conform to the new reportable segment presentation.

        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:

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7—SEGMENT INFORMATION (Continued)


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) proceeds from litigation settlements, (6) pro forma adjustments for significant acquisitions, and (7) one-time items. Tree.com believes these measures are useful to investors because they represent the operating results from Tree.com's segments, but exclude the effects of any other non-cash expenses. 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.

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

 
  For the Three Months Ended June 30, 2009:  
 
  LendingTree
Loans
  Exchanges   Real Estate   Unallocated—
Corporate
  Total  

Revenue

  $ 36,257   $ 20,630   $ 7,793   $ (3,707 ) $ 60,973  

Cost of revenue (exclusive of depreciation shown separately below)

    14,003     2,020     4,792     511     21,326  
                       
 

Gross Margin

    22,254     18,610     3,001     (4,218 )   39,647  

Operating Expenses:

                               
 

Selling and marketing expense

    4,098     12,474     1,020     (3,700 )   13,892  
 

General and administrative expense

    5,911     2,665     2,331     6,205     17,112  
 

Product development

    97     807     347     310     1,561  
 

Restructuring expense

    (1,084 )       6         (1,078 )
 

Amortization of intangibles

    70     106     1,142         1,318  
 

Depreciation

    759     198     287     443     1,687  
 

Asset impairments

            3,903         3,903  
                       
 

Total operating expenses

    9,851     16,250     9,036     3,258     38,395  
                       

Operating income (loss)

    12,403     2,360     (6,035 )   (7,476 )   1,252  

Adjustments to reconcile to EBITDA and Adjusted EBITDA:

                               
 

Amortization of intangibles

    70     106     1,142         1,318  
 

Depreciation

    759     198     287     443     1,687  
                       

EBITDA

    13,232     2,664     (4,606 )   (7,033 )   4,257  
 

Restructuring expense

    (1,084 )       6         (1,078 )
 

Asset impairments

            3,903         3,903  
 

Loss on disposal of assets

        311             311  
 

Non-cash compensation

    67     306     33     410     816  
                       

Adjusted EBITDA

  $ 12,215   $ 3,281   $ (664 ) $ (6,623 ) $ 8,209  
                       

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7—SEGMENT INFORMATION (Continued)


 
  For the Three Months Ended June 30, 2008:  
 
  LendingTree
Loans
  Exchanges   Real Estate   Unallocated—
Corporate
  Total  

Revenue

  $ 25,254   $ 30,128   $ 10,215   $ (5,614 ) $ 59,983  

Cost of revenue (exclusive of depreciation shown separately below)

    11,413     3,063     5,907     538     20,921  
                       
 

Gross Margin

    13,841     27,065     4,308     (6,152 )   39,062  

Operating Expenses:

                               
 

Selling and marketing expense

    5,623     25,327     2,223     (5,354 )   27,819  
 

General and administrative expense

    5,618     183     3,654     5,572     15,027  
 

Product development

    60     733     611     39     1,443  
 

Restructuring expense

    404     151     513     693     1,761  
 

Amortization of intangibles

    70     2,502     1,088         3,660  
 

Depreciation

    848     194     252     477     1,771  
 

Asset impairments

    898     102,630     60,807         164,335  
                       
 

Total operating expenses

    13,521     131,720     69,148     1,427     215,816  
                       

Operating income (loss)

    320     (104,655 )   (64,840 )   (7,579 )   (176,754 )

Adjustments to reconcile to EBITDA and Adjusted EBITDA:

                               
 

Amortization of intangibles

    70     2,502     1,088         3,660  
 

Depreciation

    848     194     252     477     1,771  
                       

EBITDA

    1,238     (101,959 )   (63,500 )   (7,102 )   (171,323 )
 

Restructuring expense

    404     151     513     693     1,761  
 

Asset impairments

    898     102,631     60,806         164,335  
 

Non-cash compensation

        250     552     861     1,663  
                       

Adjusted EBITDA

  $ 2,540   $ 1,073   $ (1,629 ) $ (5,548 ) $ (3,564 )
                       

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7—SEGMENT INFORMATION (Continued)


 
  For the Six Months Ended June 30, 2009:  
 
  LendingTree
Loans
  Exchanges   Real Estate   Unallocated—
Corporate
  Total  

Revenue

  $ 70,629   $ 39,697   $ 13,552   $ (5,645 ) $ 118,233  

Cost of revenue (exclusive of depreciation shown separately below)

    25,859     3,911     8,656     1,087     39,513  
                       
 

Gross Margin

    44,770     35,786     4,896     (6,732 )   78,720  

Operating Expenses:

                               
 

Selling and marketing expense

    6,212     24,442     2,698     (5,638 )   27,714  
 

General and administrative expense

    11,248     5,456     5,055     12,047     33,806  
 

Product development

    247     1,439     881     602     3,169  
 

Restructuring expense

    (1,192 )   58     739     159     (236 )
 

Amortization of intangibles

    140     156     2,285         2,581  
 

Depreciation

    1,546     397     547     861     3,351  
 

Asset impairments

            3,903         3,903  
                       
 

Total operating expenses

    18,201     31,948     16,108     8,031     74,288  
                       

Operating income (loss)

    26,569     3,838     (11,212 )   (14,763 )   4,432  

Adjustments to reconcile to EBITDA and Adjusted EBITDA:

                               
 

Amortization of intangibles

    140     156     2,285         2,581  
 

Depreciation

    1,546     397     547     861     3,351  
                       

EBITDA

    28,255     4,391     (8,380 )   (13,902 )   10,364  
 

Restructuring expense

    (1,192 )   58     739     159     (236 )
 

Asset impairments

            3,903         3,903  
 

Loss on disposal of assets

        949             949  
 

Non-cash compensation

    136     419     131     1,307     1,993  
                       

Adjusted EBITDA

  $ 27,199   $ 5,817   $ (3,607 ) $ (12,436 ) $ 16,973  
                       

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7—SEGMENT INFORMATION (Continued)


 
  For the Six Months Ended June 30, 2008:  
 
  LendingTree
Loans
  Exchanges   Real Estate   Unallocated—
Corporate
  Total  

Revenue

  $ 56,056   $ 67,188   $ 18,597   $ (11,665 ) $ 130,176  

Cost of revenue (exclusive of depreciation shown separately below)

    23,213     6,968     10,777     1,104     42,062  
                       
 

Gross Margin

    32,843     60,220     7,820     (12,769 )   88,114  

Operating Expenses:

                               
 

Selling and marketing expense

    11,639     52,763     4,414     (11,070 )   57,746  
 

General and administrative expense

    12,719     3,892     6,938     12,137     35,686  
 

Product development

    404     1,843     1,266     39     3,552  
 

Restructuring expense

    806     151     513     693     2,163  
 

Amortization of intangibles

    140     4,992     2,196         7,328  
 

Depreciation

    1,650     380     454     1,062     3,546  
 

Asset impairments

    898     102,630     60,807         164,335  
                       
 

Total operating expenses

    28,256     166,651     76,588     2,861     274,356  
                       

Operating income (loss)

    4,587     (106,431 )   (68,768 )   (15,630 )   (186,242 )

Adjustments to reconcile to EBITDA and Adjusted EBITDA:

                               
 

Amortization of intangibles

    140     4,992     2,196         7,328  
 

Depreciation

    1,650     380     454     1,062     3,546  
                       

EBITDA

    6,377     (101,059 )   (66,118 )   (14,568 )   (175,368 )
 

Restructuring expense

    806     151     513     693     2,163  
 

Asset impairments

    898     102,630     60,807         164,335  
 

Non-cash compensation

        330     717     1,172     2,219  
                       

Adjusted EBITDA

  $ 8,081   $ 2,052   $ (4,081 ) $ (12,703 ) $ (6,651 )
                       

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7—SEGMENT INFORMATION (Continued)

        Significant components of revenue for the three and six months ended June 30, 2009 and 2008 are as follows (in thousands):

 
  Three Months Ended June 30,   Six Months Ended June 30,  
 
  2009   2008   2009   2008  

LendingTree Loans:

                         
 

Origination and sale of loans

  $ 34,442   $ 22,821   $ 67,206   $ 50,828  
 

Other(a)

    1,815     2,433     3,423     5,228  
                   
   

Total LendingTree Loans revenue

    36,257     25,254     70,629     56,056  

Exchanges:

                         
 

Match fees

    9,903     13,715     19,869     33,573  
 

Closed loan fees

    6,432     10,154     12,862     20,896  
 

Other

    588     905     1,321     1,649  
 

Inter-segment

    3,707     5,354     5,645     11,070  
                   
   

Total Exchanges

    20,630     30,128     39,697     67,188  

Real Estate revenue

    7,793     10,215     13,552     18,597  

Inter-segment elimination

    (3,707 )   (5,614 )   (5,645 )   (11,665 )
                   

Total revenue

  $ 60,973   $ 59,983   $ 118,233   $ 130,176  
                   

      (a)
      Other revenue within the LendingTree Loans segment includes $0.3 million and $0.6 million of inter-segment revenue for the three and six months ended June 30, 2008, respectively, which is also included in the inter-segment elimination.

        Total assets by segment at June 30, 2009 and December 31, 2008 are as follows (in thousands):

 
  June 30,
2009
  December 31,
2008
 

LendingTree Loans

  $ 185,221   $ 149,310  

Real Estate

    32,284     38,085  

Exchanges and Unallocated—Corporate(a)

    93,615     96,688  
           

Total

  $ 311,120   $ 284,083  
           

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

17



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 June 30,  
 
  2009   2008  
 
  Basic   Diluted   Basic   Diluted  
 
  (In thousands, except per share data)
 

Numerator:

                         

Net income (loss) available to common shareholders

  $ 742   $ 742   $ (162,920 ) $ (162,920 )

Denominator:

                         

Weighted average common shares(a)

    10,706     11,034     9,328     9,328  
                   

Net income (loss) per common share

  $ 0.07   $ 0.07   $ (17.47 ) $ (17.47 )
                   
 
  Six Months Ended June 30,  
 
  2009   2008  
 
  Basic   Diluted   Basic   Diluted  
 
  (In thousands, except per share data)
 

Numerator:

                         

Net income (loss) available to common shareholders

  $ 3,902   $ 3,902   $ (172,719 ) $ (172,719 )

Denominator:

                         

Weighted average common shares(a)

    10,194     10,354     9,328     9,328  
                   

Net income (loss) per common share

  $ 0.38   $ 0.38   $ (18.52 ) $ (18.52 )
                   

      (a)
      The weighted average common shares for the three and six months ended June 30, 2008 is equal to the number of shares outstanding immediately following the spin-off from IAC.

        Non-cash compensation expense related to equity awards is included in the following line items in the accompanying consolidated statements of operations for the three and six months ended June 30, 2009 and 2008 (in thousands):

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2009   2008   2009   2008  

Cost of revenue

  $ 31   $ 125   $ 69   $ 162  

Selling and marketing expense

    50     136     86     177  

General and administrative expense

    690     1,401     1,765     1,878  

Product development

    45     1     73     2  
                   

Non-cash compensation expense

  $ 816   $ 1,663   $ 1,993   $ 2,219  
                   

        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

18



TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


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. 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.

        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.

        A summary of changes in outstanding stock options for the six months ended June 30, 2009 is as follows:

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

Outstanding at January 1, 2009

    1,870,707   $ 14.43              

Granted

    21,250     7.46              

Exercised

    (10,356 )   6.98              

Forfeited

    (616,634 )   24.65              

Expired

    (15,705 )   9.56              
                       

Outstanding at June 30, 2009

    1,249,262   $ 9.38     7.6   $ 1,596  
                   

Options exercisable

    283,304   $ 9.59     4.3   $ 402  
                   

        The following table summarizes the information about stock options outstanding and exercisable as of June 30, 2009:

 
  Options Outstanding   Options Exercisable  
Range of Exercise Prices
  Outstanding at
June 30, 2009
  Weighted
Average
Remaining
Contractual
Life in Years
  Weighted
Average
Exercise Price
  Exercisable at
June 30, 2009
  Weighted
Average
Exercise Price
 

$.01 to $4.99

    22,951     2.86   $ 3.10     22,951   $ 3.10  

$5.00 to $7.45

    20,715     3.24     6.68     20,715     6.68  

$7.46 to $9.99

    944,498     8.81     8.13     105,390     7.79  

$10.00 to $14.99

    124,650     2.41     11.87     124,456     11.87  

$15.00 to $19.99

    86,906     5.57     15.30     6,913     18.76  

$20.00 to $24.99

    48,447     5.74     20.24     1,784     21.50  

Greater than $25.00

    1,095     0.50     38.69     1,095     38.69  
                             

    1,249,262     7.62   $ 9.38     283,304   $ 9.59  
                             

19



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 June 30, 2009 and changes during the six months ended June 30, 2009 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, 2009

    380,205   $ 11.39     117,970   $ 7.46  

Granted

    483,178     5.05     350,000     5.42  

Vested

    (10,133 )   9.71          

Forfeited

    (47,879 )   11.52          
                   

Nonvested at June 30, 2009

    805,371   $ 8.09     467,970   $ 5.93  
                   

        On April 28, 2009 the shareholders of the Company approved the Second Amended and Restated 2008 Stock and Annual Incentive Plan. The Stock Plan effects the following amendments to our Amended and Restated 2008 Stock and Annual Incentive Plan:

    Increases by 550,000 the maximum number of shares that may be delivered pursuant to awards under the Stock Plan to 2,750,000 (plus those shares issuable upon the exercise or vesting of awards under IAC incentive plans that were converted into awards denominated in shares of our common stock in connection with the spin-off);

    Increases by 366,667 the maximum number of shares that may be granted pursuant to options intended to be "incentive stock options" to 1,833,333;

    Increases by 366,667 the maximum number of shares that may be subject to awards granted to any individual participant to 1,833,333 (and clarifies that shares subject to awards that are forfeited, are terminated, expire or lapse are not counted against such individual limit); and

    Adds a new provision to the effect that notwithstanding anything in the Stock Plan to the contrary,

    our Chief Executive Officer may surrender for cancellation an outstanding stock option to purchase 589,850 shares with an exercise price of $25.43 per share, and

    the shares subject to such surrendered stock option will be available for future awards under the plan (including to our Chief Executive Officer) immediately following such surrender.

        On April 28, 2009, the Company also entered into an Option Cancellation Agreement with the Chief Executive Officer, in which he surrendered for cancellation in its entirety such stock option award to purchase 589,850 shares of the Company's common stock at an exercise price of $25.43 per share.

NOTE 9—FAIR VALUE MEASUREMENTS

        Tree.com adopted SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157") effective January 1, 2008. In accordance with SFAS No. 157, Tree.com categorizes its assets and liabilities

20



TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9—FAIR VALUE MEASUREMENTS (Continued)


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:

    Level 1: Observable inputs such as quoted prices for identical assets and liabilities in active markets obtained from independent sources.

    Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs that are derived principally from or corroborated by observable market data.

    Level 3: Unobservable inputs for which there is little or no market data and require Tree.com to develop its own assumptions, based on the best information available in the circumstances, about the assumptions market participants would use in pricing the asset or liability.

        The following presents Tree.com's assets and liabilities that are measured at fair value on a recurring basis at June 30, 2009 and December 31, 2008 (in thousands):

 
  As of June 30, 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

  $   $ 109,783   $ 271   $ 110,054  

Interest rate lock commitments ("IRLCs")

            6,698     6,698  

Forward delivery contracts

        (205 )   (82 )   (287 )
                   

Total

  $   $ 109,578   $ 6,887   $ 116,465  
                   

 

 
  As of December 31, 2008  
 
  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

  $   $ 84,824   $ 814   $ 85,638  

Interest rate lock commitments ("IRLCs")

            5,904     5,904  

Forward delivery contracts

        (1,884 )   (20 )   (1,904 )
                   

Total

  $   $ 82,940   $ 6,698   $ 89,638  
                   

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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 and six months ended June 30, 2009 and 2008 (in thousands):

 
  Three Months
Ended June 30, 2009
  Six Months
Ended June 30, 2009
 
 
  Interest Rate
Lock Commitments
and Forward
Delivery Contracts
  Loans Held
for Sale
  Interest Rate
Lock Commitments
and Forward
Delivery Contracts
  Loans Held
for Sale
 

Balance at beginning of period

  $ 8,755   $ 271   $ 5,884   $ 814  
 

Total net gains (realized and unrealized) included in earnings

    24,247     1     53,374     66  
 

Transfers of IRLCs to closed loans

    (12,308 )       (27,480 )    
 

Purchase, sales, issuances and settlements, net

    (13,439 )   (1 )   (24,677 )   (609 )
 

Transfers in or out of Level 3, net

    (639 )       (485 )    
                   

Balance at June 30, 2009

  $ 6,616   $ 271   $ 6,616   $ 271  
                   

 

 
  Three Months
Ended June 30, 2008
  Six Months
Ended June 30, 2008
 
 
  Interest Rate
Lock Commitments
and Forward
Delivery Contracts
  Loans Held
for Sale
  Interest Rate
Lock Commitments
and Forward
Delivery Contracts
  Loans Held
for Sale
 

Balance at beginning of period

  $ 5,264   $   $ 3,465   $  
 

Total net gains (realized and unrealized) included in earnings

    12,404         29,137      
 

Transfers of IRLCs to closed loans

    (7,189 )       (15,581 )    
 

Purchase, sales, issuances and settlements, net

    (6,797 )       (12,871 )    
 

Transfers in or out of Level 3, net

    (623 )       (1,091 )    
                   

Balance at June 30, 2008

  $ 3,059   $   $ 3,059   $  
                   

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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 and six months ended June 30, 2009 and 2008 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 June 30, 2009
  Six Months
Ended June 30, 2009
 
 
  Interest Rate
Lock Commitments
and Forward
Delivery Contracts
  Loans Held
for Sale
  Interest Rate
Lock Commitments
and Forward
Delivery Contracts
  Loans Held
for Sale
 

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

  $ 24,247   $ 1   $ 53,374   $ 66  
                   

Change in unrealized gains relating to assets and liabilities still held at June 30, 2009, which are included in revenue from LendingTree Loans

  $ 6,616   $ 1   $ 6,616   $ 1  
                   

 

 
  Three Months
Ended June 30, 2008
  Six Months
Ended June 30, 2008
 
 
  Interest Rate
Lock Commitments
and Forward
Delivery Contracts
  Loans Held
for Sale
  Interest Rate
Lock Commitments
and Forward
Delivery Contracts
  Loans Held
for Sale
 

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

  $ 12,404   $   $ 29,137   $  
                   

Change in unrealized gains relating to assets and liabilities still held at June 30, 2008, which are included in revenue from LendingTree Loans

  $ 3,059   $   $ 3,059   $  
                   

        LendingTree Loans economically hedges the changes in fair value of certain loans held for sale primarily by entering into mortgage forward delivery contracts. Although LendingTree Loans continued to enter into forward delivery contracts for risk management purposes, effective April 1, 2007 it no longer designated these derivatives as hedges for accounting purposes. When hedge accounting was discontinued, the affected loans held for sale were no longer adjusted for changes in fair value. However, the changes in fair value of the forward delivery contracts continued to be recognized in current earnings as a component of LendingTree Loans revenue.

        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 in accordance with SFAS No. 133. Accordingly, LendingTree Loans determines the fair value of IRLCs using current secondary market prices for underlying loans with similar coupons, maturity and credit quality, subject to the anticipated loan funding probability. The fair value of IRLCs is subject to change primarily due to changes in interest rates and the loan funding probability. Under LendingTree Loans' risk management policy, LendingTree Loans economically

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9—FAIR VALUE MEASUREMENTS (Continued)


hedges the changes in fair value of IRLCs primarily by entering into mortgage forward delivery contracts which can reduce the volatility of economic outcomes. IRLCs and the related hedging instruments are recorded 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 in the consolidated statement of operations. At June 30, 2009 and December 31, 2008, there were $289.9 million and $252.9 million, respectively, of IRLCs notional value outstanding.

        Prior to the adoption of SFAS No. 157 the recognition of gains and losses at the inception of a derivative contract were prohibited unless the fair value of the contract was evidenced by a quoted price in an active market. As no active market exists for IRLCs, such day one gains and losses were not recognized until the related loan was sold. Prior to January 1, 2008, guidance also prohibited including the value of servicing the loan in calculating the fair value of an IRLC. Such guidance was rescinded by Staff Accounting Bulletin No. 109, "Written Loan Commitments Recorded at Fair Value Through Earnings" ("SAB 109"). Accordingly, with the adoption of SFAS No. 157 and SAB 109 on January 1, 2008, the day one gains and servicing value, adjusted by the loan funding probability, are included in the value of IRLCs.

        The following table summarizes the Company's derivative instruments not designated as hedging instruments under SFAS No. 133, as of June 30, 2009 and December 31, 2008 (in thousands):

 
  June 30, 2009   December 31, 2008  
 
  Balance Sheet Location   Fair Value   Balance Sheet Location   Fair Value  

Interest Rate Lock Commitments

  Prepaid and other current assets   $ 6,711   Prepaid and other current assets   $ 5,913  

Forward Delivery Contracts

  Prepaid and other current assets     1,121   Prepaid and other current assets     251  

Interest Rate Lock Commitments

  Accrued expenses and other current liabilities     (13 ) Accrued expenses and other current liabilities     (9 )

Forward Delivery Contracts

  Accrued expenses and other current liabilities     (1,408 ) Accrued expenses and other current liabilities     (2,155 )
                   

Total Derivatives

      $ 6,411       $ 4,000  
                   

        The gain/(loss) recognized in the consolidated statements of operations for derivatives for the three and six months ended June 30, 2009 and 2008 was as follows (in thousands):

 
   
  Three Months
Ended
  Six Months
Ended
 
 
  Location of Gain/(Loss)
Recognized in Income on Derivative
  June 30,
2009
  June 30,
2008
  June 30,
2009
  June 30,
2008
 

Interest Rate Lock Commitments

  LendingTree Loans revenue   $ 23,664   $ 10,558   $ 52,951   $ 25,502  

Forward Delivery Contracts

  LendingTree Loans revenue     3,400     2,477     2,419     2,270  
                       
 

Total

      $ 27,064   $ 13,035   $ 55,370   $ 27,772  
                       

        Tree.com adopted SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities Including and amendment of FASB Statement No. 115" ("SFAS No. 159"), effective

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9—FAIR VALUE MEASUREMENTS (Continued)


January 1, 2008. SFAS No. 159 permits entities to choose to measure certain financial instruments at fair value with the objective of reducing both the complexity in the accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. Upon adoption, Tree.com 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 under SFAS No. 133.

        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 June 30, 2009 and December 31, 2008, 56 and 60 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 June 30, 2009 and December 31, 2008, measured on a non-recurring basis using significant unobservable inputs (Level 3), was $1.9 and $2.2 million, respectively. This fair value measurement is management's best estimate of the market value of such loans and considers current bids in the secondary market for similar loans.

        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 June 30, 2009 and December 31, 2008 (in thousands):

 
  As of June 30, 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

  $ 108,631   $ 5,423   $ 114,054  

Difference between fair value and aggregate unpaid principal balance

    1,423         1,423  

Lower of cost or market valuation allowance

        (3,541 )   (3,541 )

Deferred loan fees, net of costs

        (19 )   (19 )
               

Loans held for sale

  $ 110,054   $ 1,863   $ 111,917  
               

 

 
  As of December 31, 2008  
 
  Loans Held
for Sale
—Measured at
Fair Value
  Loans Held
for Sale
—Measured at
LOCOM
  Total Loans
Held For Sale
 

Aggregate unpaid principal balance

  $ 83,094   $ 5,949   $ 89,043  

Difference between fair value and aggregate unpaid principal balance

    2,544         2,544  

Lower of cost or market valuation allowance

        (3,726 )   (3,726 )

Deferred loan fees, net of costs

        (26 )   (26 )
               

Loans held for sale

  $ 85,638   $ 2,197   $ 87,835  
               

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9—FAIR VALUE MEASUREMENTS (Continued)

        During each of the three months ended June 30, 2009 and 2008, the change in fair value of loans held for sale for which the fair value option has been elected was a loss of $1.6 million, and is included as a component of LendingTree Loans revenue in the accompanying consolidated statements of operations.

        During the six months ended June 30, 2009 and 2008, the change in fair value of loans held for sale for which the fair value option has been elected was a loss of $2.0 million and $1.7 million, respectively, and is included as a component of LendingTree Loans revenue in the accompanying consolidated statements of operations.

        SFAS No. 107, "Disclosures About Fair Value of Financial Instruments" ("SFAS No. 107") and SFAS No. 157, requires the disclosure of the estimated fair value of financial instruments, including those financial instruments for which the Company did not elect the fair value option. The following disclosures represent financial instruments in which the ending balances at June 30, 2009 and December 31, 2008 are not carried at fair value in their entirety on the Company's consolidated balance sheets. The additional disclosure below of the estimated fair value of financial instruments has been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions or estimation methodologies may have a material impact on the estimated fair value amounts. The Company's financial instruments include letters of credit and surety bonds. The Company had $5.0 million in restricted cash at June 30, 2009 and December 31, 2008 as collateral for the surety bonds. These commitments remain in place to facilitate the commercial operations of certain Tree.com subsidiaries.

 
  June 30, 2009   December 31, 2008  
 
  Carrying
Amount
  Fair
Value
  Carrying
Amount
  Fair
Value
 

Cash and cash equivalents

  $ 83,705   $ 83,705   $ 73,643   $ 73,643  

Restricted cash

    15,499     15,499     15,204     15,204  

Accounts receivable, net

    6,011     6,011     7,234     7,234  

Loans held for sale, net

    111,917     111,917     87,835     87,835  

Warehouse lines of credit and notes payable

    (93,122 )   (93,122 )   (76,186 )   (76,186 )

Accounts payable

    (4,787 )   (4,787 )   (3,541 )   (3,541 )

Accrued expenses

    (35,042 )   (35,042 )   (37,146 )   (37,146 )

Surety bonds and letters of credit

    N/A     (8,357 )   N/A     (7,732 )

        The carrying amounts of cash and cash equivalents and restricted cash reflected in the accompanying consolidated balance sheets approximate fair value as they are maintained with various high-quality financial institutions or in short-term duration high-quality debt securities. Accounts receivable, net, are short-term in nature and are generally settled shortly after the sale, and therefore the carrying amount approximates fair value. The fair value of loans held for sale, net, was estimated using current secondary market prices for underlying loans with similar coupons, maturity and credit quality. The carrying amounts for the remaining warehouse lines of credit and notes payable and all other financial instruments approximate their fair value.

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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

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. The recognition of the sale of loans is accounted for in accordance with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 140").

        A summary of the initial unpaid principal balance of loans sold by type of loan for the three months ended June 30, 2009 and 2008 is presented below ($ amounts in millions):

 
  Three Months ended June 30,   Six Months ended June 30,  
 
  2009   2008   2009   2008  
 
  Amount   %   Amount   %   Amount   %   Amount   %  

Conforming

  $ 751     86 % $ 537     84 % $ 1,387     87 % $ 1,060     85 %

FHA and Alt-A

    111     13 %   103     16 %   188     12 %   173     14 %

Jumbo

    9     1 %   1     %   12     1 %   14     1 %
                                   

Total

  $ 871     100 % $ 641     100 % $ 1,587     100 % $ 1,247     100 %
                                   

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 June 30, 2009 and December 31, 2008 ($ amounts in thousands):

 
  June 30, 2009   December 31, 2008  
 
  Amount   %   Amount   %  

Conforming

  $ 92,928     83 % $ 74,993     86 %

FHA and Alt-A

    18,061     16 %   11,737     13 %

Subprime

    779     1 %   878     1 %

Home equity

    149     %   227     %
                   

Total

  $ 111,917     100 % $ 87,835     100 %
                   

        The unpaid principal amount of loans on nonaccrual status at June 30, 2009 and December 31, 2008 was $5.8 million and $7.0 million, respectively. These loans have a net book value (net of lower of cost or market valuation allowances and fair value adjustments) of $2.1 million and $3.0 million at June 30, 2009 and December 31, 2008, respectively. Included within the loans on nonaccrual status are repurchased loans with a net book value of $1.0 million and $1.1 million at June 30, 2009 and

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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)


December 31, 2008, respectively. During the three and six months ended June 30, 2009 LendingTree Loans did not repurchase any loans. During the three months ended June 30, 2008, LendingTree Loans repurchased 2 loans with $0.1 million of unpaid principal balances. During the six months ended June 30, 2008 LendingTree Loans repurchased 16 loans with $1.3 million of unpaid principal balances.

        Real estate properties acquired in satisfaction of loans totaled $0.8 million and $0.9 million, net of estimated selling expenses, at June 30, 2009 and December 31, 2008, respectively, and is 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.

        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. Subsequently, the Company maintains the liability using the estimated obligation related to this exposure based, in part, on historical and projected loss frequency and loss severity using its claims history (adjusted for recent trends in claims experience as well as market pricing information on loans repurchased), 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.

        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 frequencies and loss severities by loan segment as well as analyses of loss claims in investor pipelines to estimate its exposure to losses on loans previously sold.

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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)

        In estimating its exposure to loan losses, LendingTree Loans segments its loan sales into four segments 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 segments 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.

        For the six months ended June 30, 2009, LendingTree Loans sold approximately 7,200 loans with an original principal balance of $1.6 billion. Through June 30, 2009 there had been no loans from this group which had experienced losses.

        For 2008, LendingTree Loans sold approximately 11,000 loans with an original principal balance of $2.2 billion. Through June 30, 2009 there were 9 loans from this group with an original balance of $1.7 million that had experienced aggregate losses of $0.2 million.

        For 2007, LendingTree Loans sold approximately 36,300 loans with an original principal balance of $6.1 billion. Through June 30, 2009 there were 105 loans from this group with an original balance of $13.1 million that had experienced aggregate losses of $3.2 million.

        For 2006, LendingTree Loans sold approximately 55,000 loans with an original principal balance of $7.9 billion. Through June 30, 2009 there were 146 loans from this group with an original balance of $16.7 million that had experienced aggregate losses of $7.6 million.

        For 2005 and prior years, LendingTree Loans sold an aggregate of approximately 86,700 loans with an original principal balance of $13.0 billion. Through June 30, 2009 there were 76 loans from this group with an original balance of $10.1 million that had experienced aggregate losses of $3.4 million.

        Based on historical experience, it is anticipated that the Company will continue to experience losses on these vintage loans sold for years to come.

        The activity related to loss reserves on previously sold loans for the three and six months ended June 30, 2009 and 2008, is as follows (in thousands):

 
  Three Months Ended June 30,   Six Months Ended June 30,  
 
  2009   2008   2009   2008  

Balance, beginning of period

  $ 9,832   $ 12,702   $ 10,451   $ 13,886  

Provisions

    5,585     429     5,943     114  

Charge offs to reserves

    (3,332 )   (1,739 )   (4,309 )   (2,608 )
                   

Balance, end of period

  $ 12,085   $ 11,392   $ 12,085   $ 11,392  
                   

        Based on an analysis of the Company's historical loan loss experience, it has been determined that a portion of the loss claims 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 portion of the reserve as a long-term liability. The liability for losses on previously sold loans is

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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)


presented in the accompanying consolidated balance sheet as of June 30, 2009 and December 31, 2008 as follows (in thousands):

 
  June 30,
2009
  December 31,
2008
 

Current portion, included in accrued expenses and other current liabilities

  $ 5,634   $ 3,972  

Long term portion, included in other long-term liabilities

    6,451     6,479  
           

Total

  $ 12,085   $ 10,451  
           

NOTE 11—INCOME TAXES

        For the three months ended June 30, 2009 and 2008, Tree.com recorded a tax (provision) benefit of ($0.4) million and $14.1 million, respectively, which represents effective tax rates of 34.2% and 7.9%, respectively. The 2008 tax rate is lower than the federal statutory rate of 35% due principally to non-deductible impairment charges and an increase in the valuation allowance on deferred tax assets. For 2009, the tax rate is lower than the federal statutory rate of 35% due to the change in the valuation allowance on deferred tax assets.

        For the six months ended June 30, 2009 and 2008, Tree.com recorded a tax (provision) benefit of ($0.3) million and 13.8 million, respectively, which represents effective tax rates of 7.2% and 7.4%, respectively. These tax rates are lower than the federal statutory rate of 35% due principally to non-deductible impairment charges and an increase in the valuation allowance on deferred tax assets.

        Tree.com believes that it is reasonably possible that its unrecognized tax benefits could decrease by approximately $0.3 million within twelve months of the current reporting date due to the expiration of statutes of limitations. An estimate of other changes in unrecognized tax benefits cannot be made, but are not expected to be significant.

        During the second quarter, Tree.com determined that because its valuation allowance and permanent differences yielded an unusual effective tax rate, Tree.com utilized the actual year to date effective tax rate (under FASB Interpretation No. 18, "Accounting for Income Taxes in Interim Periods-an interpretation of APB Opinion No. 28") for purposes of determining year to date tax expense.

NOTE 12—CONTINGENCIES

        HLC is party to various employment related lawsuits. During the six months ended June 30, 2009 and 2008, provisions of $0.3 million and $—0-, respectively, were recorded in general and administrative expenses in the accompanying consolidated statements of operations. The balance of the related liability was $—0- and $2.0 million at June 30, 2009 and December 31, 2008, respectively.

        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

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 12—CONTINGENCIES (Continued)


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—RELATED PARTY TRANSACTIONS

        While affiliated with IAC, Tree.com's expenses included allocations from IAC of costs associated with IAC's accounting, treasury, legal, tax, corporate support, human resources and internal audit functions. These expenses were allocated based on the ratio of Tree.com's revenue as a percentage of IAC's total revenue. Allocated costs were $0.1 million and $0.3 million for the three and six months ended June 30, 2008, and are included in "General and administrative expense" in the accompanying consolidated statements of operations. It is not practicable to determine the amounts of these expenses that would have been incurred had Tree.com operated as an unaffiliated entity. In the opinion of management, the allocation method was reasonable.

Relationship Between Tree.com and IAC after the Spin-Off

        For purposes of governing certain of the ongoing relationships between Tree.com and IAC at and after the spin-off, and to provide for an orderly transition, Tree.com and IAC entered into a separation agreement, a tax sharing agreement, an employee matters agreement and a transition services agreement (the "Spin-Off Agreements"), among other agreements.

NOTE 14—RESTRUCTURING CHARGES

        The restructuring charges primarily relate to Tree.com's significant reduction in its mortgage origination and real estate operations in response to the adverse developments in mortgage and real estate market conditions. 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 June 30, 2009  
 
  Employee
Termination
Costs
  Continuing
Lease
Obligations
  Asset
Write-offs
  Other   Total  

LendingTree Loans

  $   $ (1,084 ) $   $   $ (1,084 )

Exchanges

                     

Real Estate

    6                 6  

Unallocated—corporate

                     
                       

Total

  $ 6   $ (1,084 ) $   $   $ (1,078 )
                       

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 14—RESTRUCTURING CHARGES (Continued)


 
  For The Three Months Ended June 30, 2008  
 
  Employee
Termination
Costs
  Continuing
Lease
Obligations
  Asset
Write-offs
  Other   Total  

LendingTree Loans

  $ 403   $   $ 1   $   $ 404  

Exchanges

    151                 151  

Real Estate

    367         34     112     513  

Unallocated—corporate

    705             (12 )   693  
                       

Total

  $ 1,626   $   $ 35   $ 100   $ 1,761  
                       

 

 
  For The Six Months Ended June 30, 2009  
 
  Employee
Termination
Costs
  Continuing
Lease
Obligations
  Asset
Write-offs
  Other   Total  

LendingTree Loans

  $   $ (1,192 ) $   $   $ (1,192 )

Exchanges

    58                 58  

Real Estate

    542     73     124         739  

Unallocated—corporate

    208     (49 )           159  
                       

Total

  $ 808   $ (1,168 ) $ 124   $   $ (236 )
                       

 

 
  For The Six Months Ended June 30, 2008  
 
  Employee
Termination
Costs
  Continuing
Lease
Obligations
  Asset
Write-offs
  Other   Total  

LendingTree Loans

  $ 403   $ 65   $ 338   $   $ 806  

Exchanges

    151                 151  

Real Estate

    367         34     112     513  

Unallocated—corporate

    705             (12 )   693  
                       

Total

  $ 1,626   $ 65   $ 372   $ 100   $ 2,163  
                       

        The recovery of restructuring charges under the continuing lease obligations category for LendingTree Loans during the three and six months ended June 30, 2009 primarily relate to the cancellation of certain lease agreements for facilities that had been previously exited. The remaining obligation was cancelled in conjunction with cancelling the lease agreement and renewing the lease on facilities currently occupied, resulting in the recovery of the expense.

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 14—RESTRUCTURING CHARGES (Continued)

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

 
  For The Six Months Ended June 30, 2009  
 
  Employee
Termination
Costs
  Continuing
Lease
Obligations
  Asset
Write-offs
  Other   Total  

Balance, beginning of period

  $ 385   $ 3,703   $   $   $ 4,088  
 

Restructuring charges

    808     (1,168 )   124         (236 )
 

Payments

    (900 )   (1,367 )           (2,267 )
 

Write-offs

        20     (124 )       (104 )
                       

Balance, end of period

  $ 293   $ 1,188   $   $   $ 1,481  
                       

        At June 30, 2009, restructuring liabilities of $0.9 million are included in "Accrued expenses and other current liabilities" and $0.6 million are included in "Other long-term liabilities" in the accompanying consolidated balance sheet. At December 31, 2008, restructuring liabilities of $3.3 million are included in "Accrued expenses and other current liabilities" and $0.8 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.

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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 consists of the brands and businesses that formerly comprised IAC's Lending and Real Estate segments. These brands and businesses include LendingTree.com, RealEstate.com, GetSmart.com and Home Loan Center, Inc. (d/b/a LendingTree Loans).

        Following the spin-off from IAC, the new chief operating decision maker began to realign the Tree.com businesses into new operating segments. For the first quarter of 2009, management completed its realignment of staffing and direct revenue and costs for each new segment and created reporting structures to enable the chief operating decision maker and management to evaluate the results of operations for each of these new segments on a comparative basis with prior periods. In prior periods, the segments "Lending" and "Real Estate" were presented, which have been changed to "LendingTree Loans", "Exchanges" and "Real Estate" segments. Additionally, certain shared indirect costs that are described below are reported as "Unallocated—Corporate." All items of segment information for prior periods have been restated to conform to the new reportable segment presentation.

        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 and GetSmart.com) that connect consumers and service providers principally in the lending industry.

        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 real estate brokerages around the country.

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Results of operations for the three and six months ended June 30, 2009 compared to the three and six months ended June 30, 2008:

    Revenue

    For the three months ended June 30, 2009 compared to the three months ended June 30, 2008

 
  Three Months Ended June 30,  
 
  2009   % Change   2008  
 
  (Dollars in thousands)
 

LendingTree Loans:

                   
 

Origination and sale of loans

  $ 34,442     51 % $ 22,821  
 

Other

    1,815     (25 )%   2,433  
                 

Total LendingTree Loans

    36,257     44 %   25,254  

Exchanges:

                   
 

Match fees

    9,903     (28 )%   13,715  
 

Closed loan fees

    6,432     (37 )%   10,154  
 

Other

    588     (33 )%   905  
 

Inter-segment revenue

    3,707     (31 )%   5,354  
                 

Total Exchanges

    20,630     (32 )%   30,128  

Real Estate

    7,793     (24 )%   10,215  

Inter-segment revenue

    (3,707 )   34 %   (5,614 )
                 

Total revenue

  $ 60,973     2 % $ 59,983  
                 

        LendingTree Loans revenue in 2009 increased $11.0 million, or 44%, from the same period in 2008. Revenue generated from the origination and sale of loans in the secondary market increased 11.6 million, or 51%, primarily due to a dramatically declining mortgage interest rate environment that began late in the fourth quarter of 2008, improvement in revenue per closed loan and higher loan closing rates. Offsetting this increase in revenue was a higher charge to the provision for previously sold loans, which is recorded as a reduction of revenue. The provision increased from $0.4 million in 2008 to $5.6 million in 2009, reflecting an increase in the trend of losses realized in the second quarter that related primarily to loans sold in 2006 and 2007.

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

 
  Three Months Ended June 30,  
 
  2009   % Change   2008  
 
  (Dollars in millions)
 

Refinance mortgages

  $ 812     65 % $ 493  

Purchase mortgages

    86     (40 )%   144  
                 

Total

  $ 898     41 % $ 637  
                 

        LendingTree Loans originates mortgage loans on property located throughout the United States. Revenue from loans originated for property in California totaled approximately 16% and 5% of Tree.com's consolidated revenue for the three months ended June 30, 2009 and 2008, respectively.

        Revenue from the Exchanges declined $9.5 million, or 32%, due primarily to fewer loan requests from consumers, fewer matched loan requests with network lenders and fewer loans closed through network lenders. Matched loan requests in the second quarter of 2009 were down 29% from the same period in 2008 due to the five Federal Reserve interest rate cuts during the first quarter of 2008, which stimulated significant consumer demand on our network in the first quarter and the early part of the second quarter of 2008. Although mortgage rates remained at or near historical lows during most of

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the second quarter of 2009, the Exchanges experienced a decline in matched loan requests, reflecting lower network lender demand for consumer leads. Management believes the lower demand for loan requests from network lenders was primarily attributable to production and warehouse capacity limitations for many of the lenders participating on the network. Additionally, many lenders experienced their own higher levels of organic lead volume through other channels during this low interest rate environment. As a result of fewer matched loan requests, closed loan units through the Exchange also declined resulting in 37% lower closed loan fees.

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

 
  Three Months Ended June 30,  
 
  2009   % Change   2008  
 
  (Dollars in millions)
 

Refinance mortgages

  $ 1,882     (7 )% $ 2,020  

Purchase mortgages

    590     (45 )%   1,069  

Other

    141     (76 )%   596  
                 

Total

  $ 2,613     (29 )% $ 3,685  
                 

        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 decreased $2.4 million, or 24%, principally due to a decrease in closings year-over-year due to the persistent negative real estate market conditions contributing to lower home sales prices and fewer real estate transactions overall. The dollar value of the Company's real estate closings decreased $209 million, or 39%, from $541 million in 2008 to $332 million in 2009. However, Real Estate experienced positive growth in the number of agents working for our company-owned brokerage, which increased from 1,000 at the end of the second quarter 2008 to over 1,300 at the end of the second quarter 2009.

 
  Six Months Ended June 30,  
 
  2009   % Change   2008  
 
  (Dollars in thousands)
 

LendingTree Loans:

                   
 

Origination and sale of loans

  $ 67,206     32 % $ 50,828  
 

Other

    3,423     (35 )%   5,228  
                 

Total LendingTree Loans

    70,629     26 %   56,056  

Exchanges:

                   
 

Match fees

    19,869     (41 )%   33,573  
 

Closed loan fees

    12,862     (38 )%   20,896  
 

Other

    1,321     (20 )%   1,649  
 

Inter-segment revenue

    5,645     (49 )%   11,070  
                 

Total Exchanges

    39,697     (41 )%   67,188  

Real Estate

    13,552     (27 )%   18,597  

Inter-segment revenue

    (5,645 )   52 %   (11,665 )
                 

Total revenue

  $ 118,233     (9 )% $ 130,176  
                 

        LendingTree Loans revenue in 2009 increased $14.6 million, or 26%, from the same period in 2008. Revenue generated from the origination and sale of loans in the secondary market increased $16.4 million, or 32%, primarily due to a dramatically declining mortgage interest rate environment

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that began late in the fourth quarter of 2008, improvement in revenue per closed loan and higher loan closing rates. Offsetting this increase in revenue was a higher charge to the provision for previously sold loans, which is recorded as a reduction of revenue. The provision increased from $0.1 million in 2008 to $5.9 million in 2009, reflecting an increase in losses realized in the second quarter that related primarily to loans sold in 2006 and 2007.

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

 
  Six Months Ended June 30,  
 
  2009   % Change   2008  
 
  (Dollars in millions)
 

Refinance mortgages

  $ 1,459     46 % $ 993  

Purchase mortgages

    154     (39 )%   254  
                 

Total

  $ 1,613     29 % $ 1,247  
                 

        LendingTree Loans originates mortgage loans on property located throughout the United States. Revenue from loans originated for property in California totaled approximately 14% and 5% of Tree.com's consolidated revenue for the six months ended June 30, 2009 and 2008, respectively.

        Revenue from the Exchanges declined $27.5 million, or 41%, due primarily to fewer loan requests from consumers, fewer matched loan requests with network lenders and fewer loans closed through network lenders. Matched loan requests in 2009 were down 33% from the same period in 2008 due to the five Federal Reserve interest rate cuts during the first quarter of 2008, which stimulated significant consumer demand on our network in the first quarter and the early part of the second quarter of 2008. Although mortgage rates remained at or near historical lows during most of the first half of 2009, the Exchanges experienced a decline in matched loan requests, reflecting lower network lender demand for consumer leads. Management believes the lower demand for loan requests from network lenders was primarily attributable to production and warehouse capacity limitations for many of the lenders participating on the network. Additionally, many lenders experienced their own higher levels of organic lead volume through other channels during this low interest rate environment. As a result of fewer matched loan requests, closed loan units through the Exchange also declined resulting in 38% lower closed loan fees.

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

 
  Six Months Ended June 30,  
 
  2009   % Change   2008  
 
  (Dollars in millions)
 

Refinance mortgages

  $ 3,889     (8 )% $ 4,241  

Purchase mortgages

    1,051     (45 )%   1,914  

Other

    298     (76 )%   1,221  
                 

Total

  $ 5,238     (29 )% $ 7,376  
                 

        Real Estate revenue decreased $5.0 million, or 27%, principally due to a decrease in closings year-over-year due to the persistent negative real estate market conditions contributing to lower home sales prices and fewer real estate transactions overall. The dollar value of the Company's real estate closings decreased $342 million, or 36%, from $956 million in 2008 to $614 million in 2009. However, Real Estate experienced positive growth in the number of agents working for our company-owned brokerage, which increased from 1,000 at the end of the second quarter 2008 to over 1,300 at the end of the second quarter 2009.

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  Three Months Ended June 30,  
 
  2009   % Change   2008  
 
  (Dollars in thousands)
 

LendingTree Loans

  $ 14,003     23 % $ 11,413  

Exchanges

    2,020     (34 )%   3,063  

Real Estate

    4,792     (19 )%   5,907  

Unallocated—corporate

    511     (5 )%   538  
                 

Cost of revenue

  $ 21,326     2 % $ 20,921  
                 

As a percentage of total revenue

    35 %         35 %

 

 
  Three Months Ended June 30,  
As a Percentage of Segment Revenue
  2009    
  2008  

LendingTree Loans

    39 %         45 %

Exchanges

    10 %         10 %

Real Estate

    61 %         58 %

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.

        Cost of revenue in 2009 increased $0.4 million from 2008. During 2009 the Company's costs associated with loan originations in LendingTree Loans increased by $2.1 million, which corresponds to the increases in both revenue from the origination and sales of loans and the dollar value of loans closed directly by LendingTree Loans. In addition, commissions paid to real estate agents increased $0.3 million, and credit scoring fees increased $0.2 million.

        Offsetting these increases in cost of revenue were decreases of $0.7 million in compensation and other employee-related costs and $1.6 million in consumer incentive rebates related to decreased closings at the Exchanges and in Real Estate. The decrease in compensation and other employee-related costs reflects the net of reduced personnel costs associated with Tree.com's customer call center, settlement services operation and portions of its loan processing department, offset by an increase in commissions paid to loan officers at LendingTree Loans due to higher loan originations.

 
  Six Months Ended June 30,  
 
  2009   % Change   2008  
 
  (Dollars in thousands)
 

LendingTree Loans

  $ 25,859     11 % $ 23,213  

Exchanges

    3,911     (44 )%   6,968  

Real Estate

    8,656     (20 )%   10,777  

Unallocated—corporate

    1,087     (2 )%   1,104  
                 

Cost of revenue

  $ 39,513     (6 )% $ 42,062  
                 

As a percentage of total revenue

    33 %         32 %

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  Six Months Ended June 30,  
As a Percentage of Segment Revenue
  2009    
  2008  

LendingTree Loans

    37 %         41 %

Exchanges

    10 %         10 %

Real Estate

    64 %         58 %

Unallocated—corporate, as a percentage of total revenue

    1 %         1 %

        Cost of revenue in 2009 decreased $2.5 million from 2008 primarily due to decreases of $2.6 million in compensation and other employee-related costs and $3.0 million in consumer incentive rebates related to decreased closings at the Exchanges and in Real Estate. The decrease in compensation and other employee-related costs reflects the net of reduced personnel costs associated with Tree.com's customer call center, settlement services operation and portions of its loan processing department, offset by an increase in commissions paid to loan officers at LendingTree Loans due to higher loan originations.

        Offsetting these decreases in cost of revenue was an increase of $2.7 million in costs associated with loan originations in LendingTree Loans. This increase corresponds to the increases in both revenue from the origination and sales of loans and the dollar value of loans closed directly by LendingTree Loans.

 
  Three Months Ended June 30,  
 
  2009   % Change   2008  
 
  (Dollars in thousands)
 

LendingTree Loans

  $ 4,098     (27 )% $ 5,623  

Exchanges

    12,474     (51 )%   25,327  

Real Estate

    1,020     (54 )%   2,223  

Elimination of inter-segment marketing

    (3,700 )   (31 )%   (5,354 )
                 

Selling and marketing expense

  $ 13,892     (50 )% $ 27,819  
                 

As a percentage of total revenue

    23 %         46 %

 

 
  Three Months Ended June 30,  
As a Percentage of Segment Revenue
  2009    
  2008  

LendingTree Loans

    11 %         22 %

Exchanges

    60 %         84 %

Real Estate

    13 %         22 %

        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

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primarily consists of lead generation through online spending, as well as lead purchases from the Exchanges.

        Overall selling and marketing expense in 2009 decreased $13.9 million from 2008 primarily due to a decrease of $13.5 million in advertising and promotional expenditures. In 2009, Tree.com decreased its online marketing advertising by $8.6 million, from $15.2 million in 2008 to $6.6 million in 2009. Tree.com also decreased its broadcast advertising by $4.3 million, from $8.7 million in 2008 to $4.4 million in 2009.

        The decline in selling and marketing expense for the LendingTree Loans segment, both in dollars and as a percentage of revenue, is related to a decrease in the cost per lead acquired from the Exchanges. The Exchanges were able to decrease advertising spend due to naturally higher consumer demand driven by the favorable mortgage rate trends and improvements in organic traffic.

        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.

 
  Six Months Ended June 30,  
 
  2009   % Change   2008  
 
  (Dollars in thousands)
 

LendingTree Loans

  $ 6,212     (47 )% $ 11,639  

Exchanges

    24,442     (54 )%   52,763  

Real Estate

    2,698     (39 )%   4,414  

Elimination of inter-segment marketing

    (5,638 )   49 %   (11,070 )
                 

Selling and marketing expense

  $ 27,714     (52 )% $ 57,746  
                 

As a percentage of total revenue

    23 %         44 %

 

 
  Six Months Ended June 30,  
As a Percentage of Segment Revenue
  2009    
  2008  

LendingTree Loans

    9 %         21 %

Exchanges

    62 %         79 %

Real Estate

    20 %         24 %

        Overall selling and marketing expense in 2009 decreased $30.0 million from 2008 primarily due to a decrease of $29.3 million in advertising and promotional expenditures. In 2009, Tree.com decreased its online marketing advertising by $18.9 million, from $33.0 million in 2008 to $14.1 million in 2009. Tree.com also decreased its broadcast advertising by $7.8 million, from $16.0 million in 2008 to $8.2 million in 2009.

        The decline in selling and marketing expense for the LendingTree Loans segment, both in dollars and as a percentage of revenue, is related to a decrease in the cost per lead acquired from the Exchanges and receiving "overflow" leads from a partner that received more leads than their current capacity could handle. The Exchanges were able to decrease advertising spend due to naturally higher consumer demand driven by the favorable mortgage rate trends and improvements in organic traffic.

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  Three Months Ended June 30,  
 
  2009   % Change   2008  
 
  (Dollars in thousands)
 

LendingTree Loans

  $ 5,911     5 % $ 5,618  

Exchanges

    2,665     1,344 %   183  

Real Estate

    2,331     (36 )%   3,654  

Unallocated—corporate

    6,205     11 %   5,572  
                 

General and administrative expense

  $ 17,112     14 % $ 15,027  
                 

As a percentage of total revenue

    28 %         25 %

 

 
  Three Months Ended June 30,  
As a Percentage of Segment Revenue
  2009    
  2008  

LendingTree Loans

    16 %         22 %

Exchanges

    13 %         1 %

Real Estate

    30 %         36 %

Unallocated—corporate, as a percentage of total revenue

    10 %         9 %

        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 IT, human resources and executive management functions, as well as facilities and infrastructure costs and fees for professional services.

        General and administrative expense in 2009 increased by $2.1 million from 2008. However, 2008 includes a recovery of $1.6 million in the Exchanges associated with legal and regulatory costs. Significant increases during 2009 include $0.9 million in professional fees and $0.3 million in loss on disposal of fixed assets. Offsetting these were decreases of $0.3 million in compensation and other employee-related costs and $0.2 million in facilities costs.

 
  Six Months Ended June 30,  
 
  2009   % Change   2008  
 
  (Dollars in thousands)
 

LendingTree Loans

  $ 11,248     (12 )% $ 12,719  

Exchanges

    5,456     40 %   3,892  

Real Estate

    5,055     (27 )%   6,938  

Unallocated—corporate

    12,047     (1 )%   12,137  
                 

General and administrative expense

  $ 33,806     (5 )% $ 35,686  
                 

As a percentage of total revenue

    29 %         27 %

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  Six Months Ended June 30,  
As a Percentage of Segment Revenue
  2009    
  2008  

LendingTree Loans

    16 %         23 %

Exchanges

    14 %         6 %

Real Estate

    37 %         37 %

Unallocated—corporate, as a percentage of total revenue

    10 %         9 %

        General and administrative expense in 2009 decreased by $1.9 million from 2008. This decrease reflects a $2.5 million reduction in compensation and other employee-related costs as a result of prior restructuring activities, and a $0.5 million decrease in facilities costs. In addition, 2008 includes a recovery of $1.6 million in the Exchanges associated with legal and regulatory costs. These decreases were partially offset by a $0.9 million increase in loss on disposal of fixed assets.

        As a result of the spin-off and reductions in base salaries for executives and other employees, the Company has placed greater emphasis on equity compensation than did IAC. In February 2009, the Compensation Committee determined that the Company's compensation programs should have less of a fixed component and, instead, should be much more variable and tied to individual and corporate performance. The Compensation Committee believes 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.

        As of June 30, 2009, there was approximately $3.0 million, $4.3 million and $1.8 million of unrecognized compensation cost, net of estimated forfeitures, related to stock options, RSUs and restricted stock, respectively. These costs are expected to be recognized over a weighted average period of approximately 3.2 years for stock options, 2.2 years for RSUs and 3.4 years for restricted stock.

 
  Three Months Ended June 30,  
 
  2009   % Change   2008  
 
  (Dollars in thousands)
 

LendingTree Loans

  $ 97     61 % $ 60  

Exchanges

    807     10 %   733  

Real Estate

    347     (43 )%   611  

Unallocated—corporate

    310     685 %   39  
                 

Product development

  $ 1,561     8 % $ 1,443  
                 

As a percentage of total revenue

    3 %         2 %

 

 
  Three Months Ended June 30,  
As a Percentage of Segment Revenue
  2009    
  2008  

LendingTree Loans

               

Exchanges

    4 %         2 %

Real Estate

    4 %         6 %

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

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costs related to the design, development, testing and enhancement of technology that are not capitalized.

        Product development expense in 2009 increased $0.1 million from 2008, due to an increase in outsourcing and technology contractors, offset by decreased compensation and other employee-related costs.

 
  Six Months Ended June 30,  
 
  2009   % Change   2008