UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2013
Or
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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)
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Delaware |
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26-2414818 |
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 x No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o |
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Accelerated filer o |
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Non-accelerated filer o |
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Smaller reporting company x |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of August 12, 2013 there were 11,123,249 shares of the Registrant’s common stock, par value $.01 per share, outstanding, excluding treasury shares.
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Page |
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3 | ||
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
29 | |
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39 | ||
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39 | ||
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40 | ||
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40 | ||
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41 | ||
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43 |
TREE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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2013 |
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2012 |
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2013 |
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2012 |
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(In thousands, except per share amounts) |
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Revenue |
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$ |
37,406 |
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$ |
16,970 |
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$ |
65,486 |
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$ |
30,205 |
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Costs and expenses |
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Cost of revenue (exclusive of depreciation shown separately below) |
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1,950 |
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803 |
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3,306 |
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1,599 |
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Selling and marketing expense |
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26,386 |
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10,969 |
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43,641 |
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21,621 |
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General and administrative expense |
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5,651 |
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5,831 |
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12,207 |
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10,634 |
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Product development |
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1,492 |
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756 |
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2,697 |
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1,530 |
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Depreciation |
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872 |
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1,046 |
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1,757 |
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2,270 |
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Amortization of intangibles |
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43 |
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106 |
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86 |
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213 |
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Restructuring and severance |
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148 |
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3 |
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146 |
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(61 |
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Litigation settlements and contingencies (Note 10) |
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2,909 |
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216 |
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3,937 |
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438 |
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Total costs and expenses |
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39,451 |
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19,730 |
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67,777 |
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38,244 |
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Operating loss |
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(2,045 |
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(2,760 |
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(2,291 |
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(8,039 |
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Other income (expense) |
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Interest expense |
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(7 |
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(136 |
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(14 |
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(257 |
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Loss before income taxes |
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(2,052 |
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(2,896 |
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(2,305 |
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(8,296 |
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Income tax benefit (provision) |
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19 |
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1,142 |
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(1 |
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3,274 |
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Net loss from continuing operations |
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(2,033 |
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(1,754 |
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(2,306 |
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(5,022 |
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Gain from sale of discontinued operations, net of tax |
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10,003 |
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24,313 |
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10,101 |
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24,313 |
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Income (loss) from operations of discontinued operations, net of tax |
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(891 |
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3,215 |
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(3,433 |
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20,633 |
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Income from discontinued operations |
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9,112 |
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27,528 |
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6,668 |
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44,946 |
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Net income |
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$ |
7,079 |
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$ |
25,774 |
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$ |
4,362 |
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$ |
39,924 |
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Weighted average basic shares outstanding |
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11,133 |
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10,685 |
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11,050 |
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10,620 |
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Weighted average diluted shares outstanding |
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11,133 |
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10,685 |
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11,050 |
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10,620 |
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Net (loss) per share from continuing operations |
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Basic |
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$ |
(0.18 |
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$ |
(0.16 |
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$ |
(0.21 |
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$ |
(0.47 |
) |
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Diluted |
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$ |
(0.18 |
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$ |
(0.16 |
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$ |
(0.21 |
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$ |
(0.47 |
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Net income per share from discontinued operations |
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Basic |
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$ |
0.82 |
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$ |
2.58 |
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$ |
0.60 |
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$ |
4.23 |
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Diluted |
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$ |
0.82 |
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$ |
2.58 |
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$ |
0.60 |
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$ |
4.23 |
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Net income per share |
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Basic |
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$ |
0.64 |
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$ |
2.41 |
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$ |
0.39 |
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$ |
3.76 |
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Diluted |
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$ |
0.64 |
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$ |
2.41 |
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$ |
0.39 |
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$ |
3.76 |
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The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
TREE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and share amounts)
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June 30, |
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December 31, |
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(Unaudited) |
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ASSETS: |
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Cash and cash equivalents |
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$ |
85,283 |
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$ |
80,190 |
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Restricted cash and cash equivalents |
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30,066 |
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29,414 |
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Accounts receivable, net of allowance of $554 and $503, respectively |
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17,778 |
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11,488 |
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Prepaid and other current assets |
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1,580 |
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773 |
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Current assets of discontinued operations |
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23 |
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407 |
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Total current assets |
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134,730 |
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122,272 |
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Property and equipment, net |
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5,591 |
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6,155 |
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Goodwill |
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3,632 |
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3,632 |
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Intangible assets, net |
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10,745 |
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10,831 |
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Other non-current assets |
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111 |
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152 |
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Non-current assets of discontinued operations (Note 13) |
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129 |
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129 |
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Total assets |
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$ |
154,938 |
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$ |
143,171 |
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LIABILITIES: |
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Accounts payable, trade |
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$ |
1,821 |
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$ |
2,741 |
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Deferred revenue |
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17 |
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648 |
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Accrued expenses and other current liabilities |
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28,038 |
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19,960 |
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Current liabilities of discontinued operations |
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32,068 |
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31,017 |
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Total current liabilities |
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61,944 |
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54,366 |
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Other non-current liabilities |
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616 |
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936 |
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Deferred income taxes |
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4,694 |
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4,694 |
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Non-current liabilities of discontinued operations (Note 13) |
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174 |
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253 |
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Total liabilities |
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67,428 |
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60,249 |
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Commitments and contingencies (Note 10) |
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SHAREHOLDERS’ EQUITY: |
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Preferred stock $.01 par value; authorized 5,000,000 shares; none issued or outstanding |
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— |
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— |
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Common stock $.01 par value; authorized 50,000,000 shares; issued 12,472,335 and 12,195,209 shares, respectively, and outstanding 11,201,129 and 11,006,730 shares, respectively |
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125 |
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122 |
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Additional paid-in capital |
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905,408 |
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903,692 |
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Accumulated deficit |
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(807,118 |
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(811,480 |
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Treasury stock 1,271,206 and 1,188,479 shares, respectively |
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(10,905 |
) |
(9,412 |
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Total shareholders’ equity |
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87,510 |
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82,922 |
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Total liabilities and shareholders’ equity |
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$ |
154,938 |
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$ |
143,171 |
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The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
TREE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(Unaudited)
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Common Stock |
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Additional |
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Treasury Stock |
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Total |
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Number |
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Amount |
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Paid-in |
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Accumulated |
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Number |
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Amount |
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(In thousands) |
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Balance as of December 31, 2012 |
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$ |
82,922 |
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12,625 |
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$ |
126 |
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$ |
903,688 |
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$ |
(811,480 |
) |
1,188 |
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$ |
(9,412 |
) |
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Revision (Note 1) |
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— |
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(430 |
) |
(4 |
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4 |
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— |
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— |
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— |
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Balance as of December 31, 2012 (Revised) |
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$ |
82,922 |
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12,195 |
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$ |
122 |
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$ |
903,692 |
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$ |
(811,480 |
) |
1,188 |
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$ |
(9,412 |
) |
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Comprehensive income: |
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Net income for the six months ended June 30, 2013 |
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4,362 |
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— |
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— |
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— |
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4,362 |
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— |
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— |
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Comprehensive income |
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4,362 |
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— |
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— |
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— |
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— |
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— |
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— |
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Non-cash compensation |
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2,866 |
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— |
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— |
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2,866 |
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— |
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— |
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— |
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Purchase of treasury stock |
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(1,493 |
) |
— |
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— |
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— |
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— |
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83 |
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(1,493 |
) | |||||
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Dividends |
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618 |
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— |
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— |
|
618 |
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— |
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— |
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— |
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Issuance of common stock upon exercise of stock options and vesting of restricted stock units, net of withholding taxes |
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(1,765 |
) |
277 |
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3 |
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(1,768 |
) |
— |
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— |
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— |
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Balance as of June 30, 2013 |
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$ |
87,510 |
|
12,472 |
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$ |
125 |
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$ |
905,408 |
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$ |
(807,118 |
) |
1,271 |
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$ |
(10,905 |
) |
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
TREE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Six Months Ended |
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2013 |
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2012 |
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(In thousands) |
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Cash flows from operating activities attributable to continuing operations: |
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Net income |
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$ |
4,362 |
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$ |
39,924 |
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Less income from discontinued operations, net of tax |
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(6,668 |
) |
(44,946 |
) | ||
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Net loss from continuing operations |
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(2,306 |
) |
(5,022 |
) | ||
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Adjustments to reconcile net loss from continuing operations to net cash provided by (used in) operating activities attributable to continuing operations: |
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Loss on disposal of fixed assets |
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24 |
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60 |
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Amortization of intangibles |
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86 |
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213 |
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Depreciation |
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1,757 |
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2,270 |
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Non-cash compensation expense |
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2,866 |
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2,256 |
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Deferred income taxes |
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— |
|
76 |
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Bad debt expense (benefit) |
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73 |
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(8 |
) | ||
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Changes in current assets and liabilities: |
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Accounts receivable |
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(6,871 |
) |
(1,928 |
) | ||
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Prepaid and other current assets |
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91 |
|
230 |
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Accounts payable, accrued expenses and other current liabilities |
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6,872 |
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(6,033 |
) | ||
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Income taxes payable |
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(570 |
) |
(855 |
) | ||
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Deferred revenue |
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(631 |
) |
1,267 |
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Other, net |
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(321 |
) |
884 |
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Net cash provided by (used in) operating activities attributable to continuing operations |
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1,070 |
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(6,590 |
) | ||
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Cash flows from investing activities attributable to continuing operations: |
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|
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Capital expenditures |
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(1,217 |
) |
(1,459 |
) | ||
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Increase in restricted cash |
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(652 |
) |
(4,647 |
) | ||
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Net cash used in investing activities attributable to continuing operations |
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(1,869 |
) |
(6,106 |
) | ||
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Cash flows from financing activities attributable to continuing operations: |
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Issuance of common stock, net of withholding taxes |
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(1,473 |
) |
(348 |
) | ||
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Purchase of treasury stock |
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(1,452 |
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(129 |
) | ||
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Dividends |
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284 |
|
— |
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(Increase) decrease in restricted cash |
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— |
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4,150 |
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Net cash (used in) provided by financing activities attributable to continuing operations |
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(2,641 |
) |
3,673 |
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Total cash used in continuing operations |
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(3,440 |
) |
(9,023 |
) | ||
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Net cash provided by operating activities attributable to discontinued operations |
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(1,467 |
) |
225,824 |
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Net cash provided by investing activities attributable to discontinued operations |
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10,000 |
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29,651 |
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Net cash used in financing activities attributable to discontinued operations |
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— |
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(197,311 |
) | ||
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Total cash provided by discontinued operations |
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8,533 |
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58,164 |
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Net increase in cash and cash equivalents |
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5,093 |
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49,141 |
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Cash and cash equivalents at beginning of period |
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80,190 |
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45,541 |
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Cash and cash equivalents at end of period |
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$ |
85,283 |
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$ |
94,682 |
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The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1—ORGANIZATION
Company Overview
Tree.com, Inc. is the parent of LendingTree, LLC, which owns several brands and businesses that provide information, tools, advice, products and services for critical transactions in consumers’ lives. Our family of brands includes: LendingTree®, GetSmart®, DegreeTree®, LendingTreeAutos, DoneRight!®, ServiceTree® and InsuranceTree®. Together, these brands serve as an ally for consumers who are looking to comparison-shop for loans, education programs, home services providers and other services from multiple businesses and professionals that will compete for their business.
Segment Reporting
Effective December 31, 2012, we expanded our reportable segments from one to two, consisting of mortgage and non-mortgage. The change was made as the convergence of economic similarities associated with our mortgage and non-mortgage operating segments was no longer expected. This decision was made in connection with the update of our annual budget and forecast, which occurs in the fourth quarter each year. The non-mortgage reportable segment consists of our auto, education and home services and other operating segments, which are not yet mature businesses and have been aggregated. Prior period results have been reclassified to conform with the change in reportable segments.
Discontinued Operations
The businesses of RealEstate.com and RealEstate.com, REALTORS® (which together represent the former Real Estate segment) and LendingTree Loans are presented as discontinued operations in the accompanying consolidated balance sheets and consolidated statements of operations and cash flows for all periods presented. The notes accompanying these consolidated financial statements reflect our continuing operations and, unless otherwise noted, exclude information related to the discontinued operations.
Real Estate
On March 10, 2011, management made the decision and finalized a plan to close all of the field offices of the proprietary full-service real estate brokerage business known as RealEstate.com, REALTORS®. We exited all markets in which we previously operated by March 31, 2011. In September 2011, we sold the remaining assets of RealEstate.com, which consisted primarily of internet domain names and trademarks, for $8.3 million and recognized a gain on sale of $7.8 million.
LendingTree Loans
On May 12, 2011, we entered into an asset purchase agreement with Discover Bank, a wholly-owned subsidiary of Discover Financial Services, as amended on February 7, 2012, for the sale of substantially all of the operating assets of our LendingTree Loans business. We completed the sale on June 6, 2012.
The asset purchase agreement as amended provided for a purchase price of approximately $55.9 million in cash for the assets, subject to certain conditions. Of this total purchase price, $8.0 million was paid prior to the closing, $37.9 million was paid upon the closing and the contingent amount of $10.0 million was paid in the second quarter of 2013 and recognized as a gain from sale of discontinued operations.
Discover generally did not assume liabilities of the LendingTree Loans business that arose before the closing date, except for certain liabilities directly related to assets Discover acquired. Of the purchase price paid, $18.1 million is being held in escrow pending resolution of certain actual and/or contingent liabilities that remain with us following the sale, as of June 30, 2013. The escrowed amount is recorded as restricted cash at June 30, 2013.
Separate from the asset purchase agreement, we agreed to provide certain marketing-related services to Discover in connection with its mortgage origination business for approximately seventeen months following the closing, or such earlier point as the agreed-upon services are satisfactorily completed. The services have been satisfactorily completed as of June 30, 2013. Discover remains a network lender on our mortgage exchange following completion of the services.
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Basis of Presentation
The accompanying unaudited interim consolidated financial statements as of June 30, 2013 and for the six months ended June 30, 2013 and 2012, respectively, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. In the opinion of management, the unaudited interim consolidated financial statements have been prepared on the same basis as the audited financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of our financial position for the periods presented. The results for the three and six months ended June 30, 2013 are not necessarily indicative of the results to be expected for the year ending December 31, 2013, or any other period. These financial statements and notes should be read in conjunction with the audited financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2012.
Revision of Prior Period Financial Statements
In connection with the preparation of our consolidated financial statements for the first quarter of 2013, we determined that the number of outstanding shares had been overstated in prior periods due to issuances of unrestricted shares upon satisfaction of vesting conditions on restricted shares from 2009 to 2012, without canceling the original restricted share certificates. This resulted in double counting of certain vested restricted shares in the calculation of shares outstanding. Management has determined that unrestricted shares issued upon vesting of restricted shares should not have been considered validly issued or outstanding until the associated restricted shares were canceled. All of the restricted stock awards that were double-counted were issued to our Chairman and CEO. The error in shares noted above was not reflected in our Chairman and CEO’s filings made under Section 13(d) or Section 16 of the Securities Exchange Act of 1934 or in our disclosures of his holdings in public filings. In addition, our weighted average share calculation had erroneously included restricted shares, resulting in errors in the previously reported weighted average shares and earnings per share.
On December 26, 2012, we paid a special dividend of $1.00 per share to our shareholders of record on December 17, 2012. The dividend was paid on all shares shown as outstanding in our records, including the shares granted to our Chairman and CEO for which management has determined should not have been considered issued or outstanding. As a result, we unintentionally overpaid $0.4 million in dividends to our Chairman and CEO, which was presented as a financing cash outflow for the year ended December 31, 2012. Such amount was repaid to the Company during the second quarter of 2013 and is presented as a financing cash inflow in the six months ended June 30, 2013. Other than that special dividend, we have not declared or paid any cash dividends on our common stock. There was also a related error in the dividend accrual recorded for unvested shares entitled to the special dividend upon vesting, resulting in an over accrual of $0.2 million at December 31, 2012.
In accordance with ASC 250-10, we assessed materiality of the errors and concluded that the errors were not material to any of our previously issued financial statements. Accordingly, we corrected the dividend errors in the first quarter of 2013 and we are revising our previously issued financial statements prospectively to correct share errors.
The following table presents the effect of these corrections on the Company’s Consolidated Statements of Operations for the years ended December 31, 2012 and December 31, 2011 (in thousands, except per share amounts):
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Year Ended December 31, 2012 |
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Year Ended December 31, 2011 |
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As |
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Adjustment |
|
As Revised |
|
As |
|
Adjustment |
|
As Revised |
| ||||||
|
Weighted average basic shares outstanding |
|
11,313 |
|
(618 |
) |
10,695 |
|
10,995 |
|
(618 |
) |
10,377 |
| ||||||
|
Weighted average diluted shares outstanding |
|
11,313 |
|
(618 |
) |
10,695 |
|
10,995 |
|
(618 |
) |
10,377 |
| ||||||
|
Net loss per share from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Basic |
|
$ |
(0.20 |
) |
$ |
(0.01 |
) |
$ |
(0.21 |
) |
$ |
(4.52 |
) |
$ |
(0.27 |
) |
$ |
(4.79 |
) |
|
Diluted |
|
$ |
(0.20 |
) |
$ |
(0.01 |
) |
$ |
(0.21 |
) |
$ |
(4.52 |
) |
$ |
(0.27 |
) |
$ |
(4.79 |
) |
|
Net income (loss) per share from discontinuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Basic |
|
$ |
4.32 |
|
$ |
0.25 |
|
$ |
4.57 |
|
$ |
(0.89 |
) |
$ |
(0.05 |
) |
$ |
(0.94 |
) |
|
Diluted |
|
$ |
4.32 |
|
$ |
0.25 |
|
$ |
4.57 |
|
$ |
(0.89 |
) |
$ |
(0.05 |
) |
$ |
(0.94 |
) |
|
Net income (loss) per share attributable to common shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Basic |
|
$ |
4.12 |
|
$ |
0.24 |
|
$ |
4.36 |
|
$ |
(5.41 |
) |
$ |
(0.32 |
) |
$ |
(5.73 |
) |
|
Diluted |
|
$ |
4.12 |
|
$ |
0.24 |
|
$ |
4.36 |
|
$ |
(5.41 |
) |
$ |
(0.32 |
) |
$ |
(5.73 |
) |
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 31, 2012 and 2011, we had losses from continuing operations and, as a result, no potentially dilutive securities were included in the denominator for computing diluted earnings per share because the impact would have been anti-dilutive. Accordingly, the weighted average basic shares outstanding were used to compute all earnings per share amounts.
The following tables present the effect of these corrections on the Company’s Consolidated Statements of Operations for each of the quarters in the year ended December 31, 2012 (in thousands, except per share amounts):
|
|
|
Three months ended March 31, 2012 |
|
Three months ended June 30, 2012 |
| ||||||||||||||
|
|
|
As |
|
Adjustment |
|
As Revised |
|
As |
|
Adjustment |
|
As Revised |
| ||||||
|
Weighted average basic shares outstanding |
|
11,173 |
|
(618 |
) |
10,555 |
|
11,303 |
|
(618 |
) |
10,685 |
| ||||||
|
Weighted average diluted shares outstanding |
|
11,414 |
|
(859 |
)* |
10,555 |
|
11,303 |
|
(618 |
) |
10,685 |
| ||||||
|
Net loss per share from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Basic |
|
$ |
(0.29 |
) |
$ |
(0.02 |
) |
$ |
(0.31 |
) |
$ |
(0.16 |
) |
$ |
(0.00 |
) |
$ |
(0.16 |
) |
|
Diluted |
|
$ |
(0.29 |
) |
$ |
(0.02 |
) |
$ |
(0.31 |
) |
$ |
(0.16 |
) |
$ |
(0.00 |
) |
$ |
(0.16 |
) |
|
Net income per share from discontinuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Basic |
|
$ |
1.56 |
|
$ |
0.09 |
|
$ |
1.65 |
|
$ |
2.44 |
|
$ |
0.14 |
|
$ |
2.58 |
|
|
Diluted |
|
$ |
1.53 |
|
$ |
0.12 |
* |
$ |
1.65 |
|
$ |
2.44 |
|
$ |
0.14 |
|
$ |
2.58 |
|
|
Net income per share attributable to common shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Basic |
|
$ |
1.27 |
|
$ |
0.07 |
|
$ |
1.34 |
|
$ |
2.28 |
|
$ |
0.13 |
|
$ |
2.41 |
|
|
Diluted |
|
$ |
1.24 |
|
$ |
0.10 |
* |
$ |
1.34 |
|
$ |
2.28 |
|
$ |
0.13 |
|
$ |
2.41 |
|
* Includes correction of an error of 241 shares and $0.03 per share made during the first quarter of 2012 related to the control number utilized for diluted earnings per share.
|
|
|
Three months ended September 30, 2012 |
|
Three months ended December 31, 2012 |
| ||||||||||||||
|
|
|
As |
|
Adjustment |
|
As Revised |
|
As |
|
Adjustment |
|
As Revised |
| ||||||
|
Weighted average basic shares outstanding |
|
11,389 |
|
(618 |
) |
10,771 |
|
11,386 |
|
(618 |
) |
10,768 |
| ||||||
|
Weighted average diluted shares outstanding |
|
12,003 |
|
(618 |
) |
11,385 |
|
12,175 |
|
(618 |
) |
11,557 |
| ||||||
|
Net income per share from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Basic |
|
$ |
0.02 |
|
$ |
0.01 |
|
$ |
0.03 |
|
$ |
0.22 |
|
$ |
0.01 |
|
$ |
0.23 |
|
|
Diluted |
|
$ |
0.02 |
|
$ |
0.00 |
|
$ |
0.02 |
|
$ |
0.21 |
|
$ |
0.01 |
|
$ |
0.22 |
|
|
Net income (loss) per share from discontinuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Basic |
|
$ |
0.36 |
|
$ |
0.02 |
|
$ |
0.38 |
|
$ |
(0.02 |
) |
$ |
0.00 |
|
$ |
(0.02 |
) |
|
Diluted |
|
$ |
0.35 |
|
$ |
0.01 |
|
$ |
0.36 |
|
$ |
(0.02 |
) |
$ |
0.00 |
|
$ |
(0.02 |
) |
|
Net income per share attributable to common shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Basic |
|
$ |
0.38 |
|
$ |
0.03 |
|
$ |
0.41 |
|
$ |
0.20 |
|
$ |
0.02 |
|
$ |
0.22 |
|
|
Diluted |
|
$ |
0.37 |
|
$ |
0.01 |
|
$ |
0.38 |
|
$ |
0.19 |
|
$ |
0.01 |
|
$ |
0.20 |
|
The following table presents the effect these errors had on the Consolidated Balance Sheet at December 31, 2012:
|
|
|
December 31, 2012 |
| ||||
|
|
|
As Reported |
|
Adjustment |
|
As Adjusted |
|
|
Issued shares |
|
12,625,678 |
|
(430,469 |
) |
12,195,209 |
|
|
Outstanding shares |
|
11,437,199 |
|
(430,469 |
) |
11,006,730 |
|
NOTE 2—SIGNIFICANT ACCOUNTING POLICIES
Accounting Estimates
Management is required to make certain estimates and assumptions during the preparation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. They also impact the reported amount of net earnings during any period. Actual results could differ from those estimates.
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Significant estimates underlying the accompanying consolidated financial statements, including discontinued operations, include: loan loss obligations; the recoverability of long-lived assets, goodwill and intangible assets; the determination of income taxes payable and deferred income taxes, including related valuation allowances; restructuring reserves; contingent consideration related to business combinations; various other allowances, reserves and accruals; and assumptions related to the determination of stock-based compensation.
Cash and Cash Equivalents
Cash and cash equivalents include cash and short-term, highly liquid money market investments with original maturities of three months or less.
Restricted Cash
Restricted cash and cash equivalents consists of the following (in thousands):
|
|
|
June 30, |
|
December 31, |
| ||
|
Cash in escrow for surety bonds |
|
$ |
6,501 |
|
$ |
6,500 |
|
|
Cash in escrow for corporate purchasing card program |
|
400 |
|
800 |
| ||
|
Cash in escrow for sale of LTL (Note 13) |
|
18,117 |
|
17,077 |
| ||
|
Cash in escrow for earnout related to an acquisition |
|
1,956 |
|
1,956 |
| ||
|
Cash restricted for loan loss obligations |
|
3,051 |
|
3,051 |
| ||
|
Other |
|
41 |
|
30 |
| ||
|
Total restricted cash and cash equivalents |
|
$ |
30,066 |
|
$ |
29,414 |
|
Certain Risks and Concentrations
Our business is subject to certain risks and concentrations including dependence on third-party technology providers, exposure to risks associated with online commerce security and credit card fraud.
Financial instruments, which potentially subject us to concentration of credit risk, consist primarily of cash and cash equivalents. Cash and cash equivalents are in excess of Federal Deposit Insurance Corporation insurance limits, but are maintained with quality financial institutions of high credit.
Due to the nature of the mortgage lending industry, interest rate increases may negatively impact future revenue from our lender network.
Lenders participating on our lender network can offer their products directly to consumers through brokers, mass marketing campaigns or through other traditional methods of credit distribution. These lenders can also offer their products online, either directly to prospective borrowers, through one or more of our online competitors, or both. If a significant number of potential consumers are able to obtain loans from our participating lenders without utilizing our service, our ability to generate revenue may be limited. Because we do not have exclusive relationships with the lenders whose loan offerings are offered on our online marketplace, consumers may obtain offers and loans from these lenders without using our service.
We maintain operations solely in the United States.
Recent Accounting Pronouncements
In December 2011, the FASB issued new accounting guidance that requires additional disclosures on financial instruments and derivative instruments that are either offset in accordance with existing accounting guidance or are subject to an enforceable master netting arrangement or similar agreement. The new requirements do not change the accounting guidance on netting, but rather enhance the disclosures to more clearly show the impact of netting arrangements on a company’s financial position. This new accounting guidance is effective on a retrospective basis for all comparative periods presented beginning on January 1, 2013. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In July 2012, the FASB issued new guidance which allows an entity to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that an indefinite-lived intangible asset is impaired. This assessment should be used as a basis for determining whether it is necessary to perform the quantitative impairment test. An
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
entity would not be required to calculate the fair value of the intangible asset and perform the quantitative test unless the entity determines, based upon its qualitative assessment, that it is more likely than not that its fair value is less than its carrying value. The update expands previous guidance by providing more examples of events and circumstances that an entity should consider in determining whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. The update also allows an entity the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. This update is effective for annual and interim periods beginning after September 15, 2012, with early adoption permitted. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In February 2013, the FASB issued ASU No. 2013-04, “Liabilities.” ASU No. 2013-04 requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance in this ASU also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. We are evaluating the impact that the adoption will have on our consolidated financial statements in fiscal 2014.
In July 2013, the FASB issued guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The new accounting guidance is effective for interim and annual reporting periods beginning after December 15, 2013, with early adoption permitted. Prospective or retrospective application is permitted. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
NOTE 3—GOODWILL AND INTANGIBLE ASSETS
The balance of goodwill and intangible assets, net is as follows (in thousands):
|
|
|
June 30, |
|
December 31, |
| ||
|
Goodwill |
|
$ |
486,720 |
|
$ |
486,720 |
|
|
Accumulated impairment losses |
|
(483,088 |
) |
(483,088 |
) | ||
|
Net goodwill |
|
$ |
3,632 |
|
$ |
3,632 |
|
|
Intangible assets with indefinite lives |
|
$ |
10,142 |
|
$ |
10,142 |
|
|
Intangible assets with definite lives, net |
|
603 |
|
689 |
| ||
|
Total intangible assets, net |
|
$ |
10,745 |
|
$ |
10,831 |
|
Intangible assets with indefinite lives relate to our trademarks.
At June 30, 2013, intangible assets with definite lives relate to the following ($ in thousands):
|
|
|
Cost |
|
Accumulated |
|
Net |
|
Weighted |
| |||
|
Purchase agreements |
|
$ |
236 |
|
$ |
(188 |
) |
$ |
48 |
|
5.0 |
|
|
Technology |
|
25,194 |
|
(25,189 |
) |
5 |
|
3.0 |
| |||
|
Customer lists |
|
6,682 |
|
(6,136 |
) |
546 |
|
4.2 |
| |||
|
Other |
|
1,517 |
|
(1,513 |
) |
4 |
|
2.5 |
| |||
|
Total |
|
$ |
33,629 |
|
$ |
(33,026 |
) |
$ |
603 |
|
|
|
At December 31, 2012, intangible assets with definite lives relate to the following ($ in thousands):
|
|
|
Cost |
|
Accumulated |
|
Net |
|
Weighted |
| |||
|
Purchase agreements |
|
$ |
236 |
|
$ |
(165 |
) |
$ |
71 |
|
5.0 |
|
|
Technology |
|
25,194 |
|
(25,158 |
) |
36 |
|
3.0 |
| |||
|
Customer lists |
|
6,682 |
|
(6,106 |
) |
576 |
|
4.2 |
| |||
|
Other |
|
1,517 |
|
(1,511 |
) |
6 |
|
2.5 |
| |||
|
Total |
|
$ |
33,629 |
|
$ |
(32,940 |
) |
$ |
689 |
|
|
|
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Amortization of intangible assets with definite lives is computed on a straight-line basis and, based on June 30, 2013 balances, such amortization for the next five years is estimated to be as follows (in thousands):
|
|
|
Amount |
| |
|
Six months ending December 31, 2013 |
|
$ |
61 |
|
|
Year ending December 31, 2014 |
|
86 |
| |
|
Year ending December 31, 2015 |
|
60 |
| |
|
Year ending December 31, 2016 |
|
60 |
| |
|
Year ending December 31, 2017 |
|
60 |
| |
|
Thereafter |
|
276 |
| |
|
Total |
|
$ |
603 |
|
NOTE 4—PROPERTY AND EQUIPMENT
The balance of property and equipment, net is as follows (in thousands):
|
|
|
June 30, |
|
December 31, |
| ||
|
Computer equipment and capitalized software |
|
$ |
26,432 |
|
$ |
25,592 |
|
|
Leasehold improvements |
|
2,089 |
|
2,055 |
| ||
|
Furniture and other equipment |
|
1,303 |
|
1,302 |
| ||
|
Projects in progress |
|
722 |
|
500 |
| ||
|
|
|
30,546 |
|
29,449 |
| ||
|
Less: accumulated depreciation and amortization |
|
(24,955 |
) |
(23,294 |
) | ||
|
Total property and equipment, net |
|
$ |
5,591 |
|
$ |
6,155 |
|
NOTE 5—ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following (in thousands):
|
|
|
June 30, |
|
December 31, |
| ||
|
Litigation accruals |
|
$ |
840 |
|
$ |
535 |
|
|
Accrued advertising expense |
|
12,356 |
|
6,638 |
| ||
|
Accrued compensation and benefits |
|
2,637 |
|
2,603 |
| ||
|
Accrued professional fees |
|
3,482 |
|
1,399 |
| ||
|
Accrued restructuring costs |
|
316 |
|
364 |
| ||
|
Customer deposits and escrows |
|
2,831 |
|
2,101 |
| ||
|
Deferred rent |
|
240 |
|
217 |
| ||
|
Other |
|
5,336 |
|
6,103 |
| ||
|
Total accrued expenses and other current liabilities |
|
$ |
28,038 |
|
$ |
19,960 |
|
An additional $0.3 million and $0.5 million of accrued restructuring liability is classified in other non-current liabilities at June 30, 2013 and December 31, 2012, respectively.
NOTE 6—EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
Three Months Ended June 30, |
| ||||||||||
|
|
|
2013 |
|
2012 |
| ||||||||
|
|
|
Basic |
|
Diluted |
|
Basic |
|
Diluted |
| ||||
|
|
|
(In thousands, except per share data) |
| ||||||||||
|
Numerator: |
|
|
|
|
|
|
|
|
| ||||
|
Net loss from continuing operations |
|
$ |
(2,033 |
) |
$ |
(2,033 |
) |
$ |
(1,754 |
) |
$ |
(1,754 |
) |
|
Income from discontinued operations |
|
9,112 |
|
9,112 |
|
27,528 |
|
27,528 |
| ||||
|
Net income |
|
$ |
7,079 |
|
$ |
7,079 |
|
$ |
25,774 |
|
$ |
25,774 |
|
|
Denominator: |
|
|
|
|
|
|
|
|
| ||||
|
Weighted average common shares |
|
11,133 |
|
11,133 |
|
10,685 |
|
10,685 |
| ||||
|
Income (loss) per share: |
|
|
|
|
|
|
|
|
| ||||
|
Net loss from continuing operations |
|
$ |
(0.18 |
) |
$ |
(0.18 |
) |
$ |
(0.16 |
) |
$ |
(0.16 |
) |
|
Income from discontinued operations |
|
0.82 |
|
0.82 |
|
2.58 |
|
2.58 |
| ||||
|
Net income per common share |
|
$ |
0.64 |
|
$ |
0.64 |
|
$ |
2.41 |
|
$ |
2.41 |
|
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
Six Months Ended June 30, |
| ||||||||||
|
|
|
2013 |
|
2012 |
| ||||||||
|
|
|
Basic |
|
Diluted |
|
Basic |
|
Diluted |
| ||||
|
|
|
(In thousands, except per share data) |
| ||||||||||
|
Numerator: |
|
|
|
|
|
|
|
|
| ||||
|
Net loss from continuing operations |
|
$ |
(2,306 |
) |
$ |
(2,306 |
) |
$ |
(5,022 |
) |
$ |
(5,022 |
) |
|
Income from discontinued operations |
|
6,668 |
|
6,668 |
|
44,946 |
|
44,946 |
| ||||
|
Net income |
|
$ |
4,362 |
|
$ |
4,362 |
|
$ |
39,924 |
|
$ |
39,924 |
|
|
Denominator: |
|
|
|
|
|
|
|
|
| ||||
|
Weighted average common shares |
|
11,050 |
|
11,050 |
|
10,620 |
|
10,620 |
| ||||
|
Income (loss) per share: |
|
|
|
|
|
|
|
|
| ||||
|
Net loss from continuing operations |
|
$ |
(0.21 |
) |
$ |
(0.21 |
) |
$ |
(0.47 |
) |
$ |
(0.47 |
) |
|
Income from discontinued operations |
|
0.60 |
|
0.60 |
|
4.23 |
|
4.23 |
| ||||
|
Net income per common share |
|
$ |
0.39 |
|
$ |
0.39 |
|
$ |
3.76 |
|
$ |
3.76 |
|
For the three and six months ended June 30, 2013 and 2012, we had losses from continuing operations and, as a result, no potentially dilutive securities were included in the denominator for computing diluted earnings per share, because the impact would have been anti-dilutive. Accordingly, the weighted average basic shares outstanding were used to compute all earnings per share amounts. For the three months ended June 30, 2013 and 2012, approximately 0.6 million and 0.5 million shares, respectively, related to potentially dilutive securities were excluded from the calculation of diluted earnings per share, because their inclusion would have been anti-dilutive. For the six months ended June 30, 2013 and 2012, approximately 0.7 million and 0.3 million shares, respectively, related to potentially dilutive securities were excluded from the calculation of diluted earnings per share, because their inclusion would have been anti-dilutive.
Commom Stock Repurchases
On January 11, 2010, our board of directors authorized the repurchase of up to $10 million of our common stock. During the second quarter of 2013, we purchased 44,142 shares of our common stock for aggregate consideration of $0.8 million. At June 30, 2013 we had approximately $2.6 million remaining in our share repurchase authorization.
NOTE 7—STOCK-BASED COMPENSATION
Non-cash compensation expense related to equity awards is included in the following line items in the accompanying consolidated statements of operations for the three and six months ended June 30, 2013 and 2012 (in thousands):
|
|
|
Three Months |
|
Six Months |
| ||||||||
|
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
|
Cost of revenue |
|
$ |
3 |
|
$ |
1 |
|
$ |
5 |
|
$ |
4 |
|
|
Selling and marketing expense |
|
306 |
|
202 |
|
523 |
|
359 |
| ||||
|
General and administrative expense |
|
879 |
|
761 |
|
1,909 |
|
1,636 |
| ||||
|
Product development |
|
244 |
|
108 |
|
429 |
|
257 |
| ||||
|
Non-cash compensation expense |
|
$ |
1,432 |
|
$ |
1,072 |
|
$ |
2,866 |
|
$ |
2,256 |
|
The forms of stock-based awards granted to Tree.com employees are principally RSUs, restricted stock and stock options. RSUs are awards in the form of units, denominated in a hypothetical equivalent number of shares of Tree.com common stock and with the value of each award equal to the fair value of Tree.com common stock at the date of grant. RSUs may be settled in cash, stock or both, as determined by the Compensation Committee at the time of grant. Each stock-based award is subject to service-based vesting, where a specific period of continued employment must pass before an award vests. Certain restricted stock awards also include market condition vesting, where certain market conditions must be achieved before an award vests. Tree.com recognizes expense for all stock-based awards for which vesting is considered probable. For stock-based awards, the accounting charge is measured at the grant date as the fair value of Tree.com common stock awarded and expensed ratably as non-
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
cash compensation over the vesting term.
The amount of stock-based compensation expense recognized in the consolidated statement of operations is reduced by estimated forfeitures, as the amount recorded is based on awards ultimately expected to vest. The forfeiture rate is estimated at the grant date based on historical experience and revised, if necessary, in subsequent periods if the actual forfeiture rate differs from the estimated rate.
During February 2013, our Chairman and CEO was granted 62,500 shares of restricted stock with a fair value of $1.1 million and a three year vesting period. The fair value of the restricted stock is based upon the market price of the underlying common stock as of the date of grant. Compensation expense is recognized on a straight-line basis over the vesting period. He was also granted 62,500 shares of restricted stock which vest based on a market condition, but not earlier than one year from the grant date, and will be forfeited if the market-based performance target is not achieved within three years. The fair value of the market-based performance restricted stock was determined to be $0.9 million using a Monte Carlo simulation model. The fair value on grant date is recognized over the requisite service period and will not change regardless of the Company’s actual performance versus the market-based performance target.
A summary of changes in outstanding stock options for the six months ended June 30, 2013 is as follows:
|
|
|
Shares |
|
Weighted |
|
Weighted |
|
Aggregate |
| ||
|
|
|
|
|
|
|
(In years) |
|
|
| ||
|
Outstanding at January 1, 2013 |
|
1,072,503 |
|
$ |
8.97 |
|
|
|
|
| |
|
Granted |
|
— |
|
— |
|
|
|
|
| ||
|
Exercised |
|
(19,958 |
) |
7.87 |
|
|
|
|
| ||
|
Forfeited |
|
— |
|
— |
|
|
|
|
| ||
|
Expired |
|
(1,308 |
) |
10.37 |
|
|
|
|
| ||
|
Outstanding at June 30, 2013 |
|
1,051,237 |
|
8.99 |
|
5.24 |
|
$ |
8,712,665 |
| |
|
Options exercisable at June 30, 2013 |
|
310,095 |
|
$ |
10.97 |
|
5.08 |
|
$ |
2,056,274 |
|
The following table summarizes the information about stock options outstanding and exercisable as of June 30, 2013:
|
|
|
Options Outstanding |
|
Options Exercisable |
| ||||||||
|
Range of Exercise Prices |
|
Outstanding |
|
Weighted |
|
Weighted |
|
Exercisable |
|
Weighted |
| ||
|
$.01 to $4.99 |
|
365 |
|
0.56 |
|
$ |
2.58 |
|
365 |
|
$ |
2.58 |
|
|
$5.00 to $7.45 |
|
304,352 |
|
8.21 |
|
6.65 |
|
153,060 |
|
6.39 |
| ||
|
$7.46 to $9.99 |
|
608,949 |
|
4.52 |
|
8.45 |
|
19,099 |
|
7.55 |
| ||
|
$10.00 to $14.99 |
|
10,517 |
|
1.26 |
|
12.26 |
|
10,517 |
|
12.26 |
| ||
|
$15.00 to $19.99 |
|
80,391 |
|
1.93 |
|
15.01 |
|
80,391 |
|
15.01 |
| ||
|
$20.00 to $24.99 |
|
46,663 |
|
1.94 |
|
20.19 |
|
46,663 |
|
20.19 |
| ||
|
|
|
1,051,237 |
|
5.24 |
|
$ |
8.99 |
|
310,095 |
|
$ |
10.97 |
|
Nonvested RSUs, restricted stock and restricted stock with a market condition as of June 30, 2013 and changes during the six months ended June 30, 2013 are as follows:
|
|
|
RSUs |
|
Restricted Stock |
|
Restricted Stock Market Condition |
| |||||||||
|
|
|
Number of |
|
Weighted |
|
Number of |
|
Weighted |
|
Number of |
|
Weighted |
| |||
|
Nonvested at January 1, 2013 |
|
757,111 |
|
$ |
9.09 |
|
187,501 |
|
$ |
7.44 |
|
— |
|
$ |
— |
|
|
Granted |
|
232,831 |
|
17.79 |
|
62,500 |
|
17.49 |
|
62,500 |
|
13.93 |
| |||
|
Vested |
|
(235,457 |
) |
9.26 |
|
(187,501 |
) |
7.44 |
|
— |
|
— |
| |||
|
Forfeited |
|
(61,041 |
) |
9.00 |
|
— |
|
— |
|
— |
|
— |
| |||
|
Nonvested at June 30, 2013 |
|
693,444 |
|
$ |
12.07 |
|
62,500 |
|
$ |
17.49 |
|
62,500 |
|
$ |
13.93 |
|
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8—INCOME TAXES
For the three months ended June 30, 2013 and 2012, we recorded tax benefits of $(19) thousand and $(1.1) million, respectively, which represent effective tax rates of 0.9% and 39.4%, respectively. For the six months ended June 30, 2013 and 2012, we recorded a tax provision (benefit) of $1 thousand and $(3.3) million, respectively, which represent effective tax rates of 0.04% and 39.5%, respectively. The Company established a valuation allowance of approximately $55 million during the year ended December 31, 2012 to offset its US net deferred tax assets, after excluding deferred tax liabilities related to indefinite-lived intangible assets that are not anticipated to provide a source of taxable income in the foreseeable future. For the three and six months ended June 30, 2013, the effective income tax rates were impacted by the indefinite-lived intangible assets which are amortized for tax purposes but not amortized for book purposes, as well as a discrete state tax liability occurring during the periods. For the three and six months ended June 30, 2012, our effective tax rates were higher than the federal statutory rate of 35%, primarily due to the impact of state income taxes.
NOTE 9—DISCRETIONARY CASH BONUS
During February 2013, the Company incurred a compensation charge of $0.9 million related to a discretionary cash bonus payment to employee stock option holders.
NOTE 10—CONTINGENCIES
Overview
We are involved in legal proceedings on an ongoing basis. If we believe that a loss arising from such matters is probable and can be reasonably estimated, we accrue the estimated liability in our financial statements. If only a range of estimated losses can be determined, we accrue an amount within the range that, in our judgment, reflects the most likely outcome; if none of the estimates within that range is a better estimate than any other amount, we accrue the low end of the range. For those proceedings in which an unfavorable outcome is reasonably possible but not probable, we have disclosed an estimate of the reasonably possible loss or range of losses or we have concluded that an estimate of the reasonably possible loss or range of losses arising directly from the proceeding (i.e., monetary damages or amounts paid in judgment or settlement) is not material.
In assessing the materiality of a legal proceeding, we evaluate, among other factors, the amount of monetary damages claimed, as well as the potential impact of non-monetary remedies sought by plaintiffs (e.g., injunctive relief) that may require us to change our business practices in a manner that could have a material adverse impact on our business. With respect to the matters disclosed in this Note 10, unless otherwise indicated, we are unable to estimate the possible loss or range of losses that could potentially result from the application of such non-monetary remedies.
Specific Matters
Intellectual Property Litigation
Zillow
LendingTree v. Zillow, Inc., et al. Civil Action No. 3:10-cv-439. On September 8, 2010, the Company filed an action for patent infringement in the US District Court for the Western District of North Carolina against Zillow, Inc., Nextag, Inc., Quinstreet, Inc., Quinstreet Media, Inc. and Adchemy, Inc. The complaint was amended to include Leadpoint, Inc. d/b/a Securerights on September 24, 2010. The complaint alleges that each of the defendants infringe one or both of the Company’s patents—U.S. Patent No. 6,385,594, entitled “Method and Computer Network for Co-Ordinating a Loan over the Internet,” and U.S. Patent No. 6,611,816, entitled “Method and Computer Network for Co-Ordinating a Loan over the Internet.” Collectively, the asserted patents cover computer hardware and software used in facilitating business between computer users and multiple lenders on the internet. The defendants in this action asserted various counterclaims against the Company, including the assertion by certain of the defendants of counterclaims alleging illegal monopolization via our maintenance of the asserted patents. In July 2011, the Company reached a settlement agreement with Leadpoint, Inc. On July 20, 2011, all claims against Leadpoint, Inc. and all counter-claims against the Company by Leadpoint, Inc. were dismissed. In November 2012, the Company reached a settlement agreement with Quinstreet, Inc. and Quinstreet Media, Inc. (collectively, the Quinstreet Parties); all claims against the QuinStreet Parties and all counterclaims against the Company by the Quinstreet Parties were dismissed. Trial is currently expected in early 2014. The Company intends to vigorously defend all such counterclaims.
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Internet Patents Corp.
Internet Patents Corporation f/k/a InsWeb v. Tree.com, Inc., No. C-12-6505 (U.S. Dist. Ct., N.D. Cal.). In December 2012, Plaintiff filed a patent infringement lawsuit against us seeking a judgment that we had infringed a patent held by Plaintiff. Process was formally served with respect to this matter in April 2013. Plaintiff seeks injunctive relief, damages, costs, expenses, pre- and post-judgment interest, punitive damages and attorneys’ fees. The complaint alleges that we infringe U.S. Patent No. 7,707,505, entitled “Dynamic Tabs for a Graphical User Interface”. We believe the Plaintiff’s allegations lack merit and intend to defend against this action vigorously.
Money Suite
The Money Suite Company v. Lending Tree, LLC, No. 1:13-ev-00986 (U.S. Dist. Ct, D Del.). In June 2013, Plaintiff filed a patent infringement lawsuit against us seeking a judgement that we infringed a patent held by Plaintiff. The complaint alleges that we infringe U.S. Patent no. 6,685,189 for “an apparatus and method using front end network gateways and search criteria for efficient quoting at a remote location”. Plaintiff seeks damages (including pre- and post- judgment interest thereon), costs and attorneys’ fees. We believe Plaintiff’s allegations lack merit and intend to defend against this action vigorously.
Other Litigation
Boschma
Boschma v. Home Loan Center, Inc., No. SACV07-613 (U.S. Dist. Ct., C.D. Cal.). On May 25, 2007, Plaintiffs filed this putative class action against HLC in the U.S. District Court for the Central District of California. Plaintiffs allege that HLC sold them an option “ARM” (adjustable-rate mortgage) loan but failed to disclose in a clear and conspicuous manner, among other things, that the interest rate was not fixed, that negative amortization could occur and that the loan had a prepayment penalty. Based upon these factual allegations, Plaintiffs asserted violations of the federal Truth in Lending Act, violations of the Unfair Competition Law, breach of contract, and breach of the covenant of good faith and fair dealing. Plaintiffs purport to represent a class of all individuals who between June 1, 2003 and May 31, 2007 obtained through HLC an option ARM loan on their primary residence located in California, and seek rescission, damages, attorneys’ fees and injunctive relief. Plaintiffs have not yet filed a motion for class certification. Plaintiffs have filed a total of eight complaints in connection with this lawsuit. Each of the first seven complaints has been dismissed by the federal and state courts. Plaintiffs filed the eighth complaint (a Second Amended Complaint) in Orange County (California) Superior Court on March 4, 2010 alleging only the fraud and Unfair Competition Law claims. As with each of the seven previous versions of Plaintiffs’ complaint, the Second Amended Complaint was dismissed in April 2010. Plaintiffs appealed the dismissal and on August 10, 2011, the appellate court reversed the trial court’s dismissal and directed the trial court to overrule the demurrer. The case was remanded to superior court. During the second quarter of 2013, the parties reached a tentative settlement agreement with respect to this matter. A preliminary settlement approval hearing is scheduled for August 2013. A provision is included in current liabilities of discontinued operations as of June 30, 2013. The impact of the settlement was not material.
Mortgage Store, Inc.
Mortgage Store, Inc. v. LendingTree Loans d/b/a Home Loan Center, Inc., No. 06CC00250 (Cal. Super. Ct., Orange Cty.). On November 30, 2006, The Mortgage Store, Inc. and Castleview Home Loans, Inc. filed this putative class action against Home Loan Center, Inc. in the California Superior Court for Orange County. Plaintiffs, two former network lenders, alleged that HLC interfered with LendingTree’s contracts with network lenders by taking referrals from LendingTree without adequately disclosing the relationship between them and that HLC charged Plaintiffs higher rates and fees than they otherwise would have been charged. Based upon these factual allegations, Plaintiffs assert claims for intentional interference with contractual relations, intentional interference with prospective economic advantage, and violation of the California Unfair Competition Law and California Business and Professions Code § 17500. Plaintiffs purport to represent all network lenders from December 14, 2004 to date, and seek damages, restitution, attorneys’ fees and punitive damages.
Plaintiffs’ motion for class certification was granted April 29, 2010. On October 17, 2011, the Court granted HLC’s motion for summary judgment. Judgment was entered in favor of HLC on April 9, 2012. On June 15, 2012, Plaintiffs filed a Notice of Appeal. Plaintiffs filed their opening appellate brief on December 17, 2012. We filed our opposition to Plaintiffs’ appellate brief in April 2013. We believe Plaintiffs’ allegations lack merit and we intend to defend against this action vigorously.
Dijkstra
Lijkel Dijkstra v. Harry Carenbauer, Home Loan Center, Inc. et al., No. 5:11-cv-152-JPB (U.S. Dist. Ct., N.D.WV). On November 7, 2008 Plaintiffs filed this putative class action in Circuit Court of Ohio County, West Virginia against Harry Carenbauer, Home Loan Center, Inc., HLC Escrow, Inc. et al. The complaint alleges that HLC engaged in the unauthorized practice of law in West Virginia by permitting persons who were neither admitted to the practice of law in West Virginia nor under the direct supervision of a lawyer admitted to the practice of law in West Virginia to close mortgage loans. Plaintiffs assert claims for declaratory judgment, contempt, injunctive relief, conversion, unjust enrichment, breach of fiduciary duty, intentional misrepresentation or fraud, negligent misrepresentation, violation of the West Virginia Consumer Credit and Protection Act (CCPA), violation of the West Virginia Lender, Broker & Services Act, civil conspiracy, outrage and negligence. The claims against all
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
defendants other than Mr. Carenbauer, HLC and HLC Escrow, Inc. have been dismissed. The case was removed to federal court in October 2011. On January 3, 2013, the court granted a conditional class certification only with respect to the declaratory judgment, contempt, unjust enrichment and CCPA claims. The conditional class includes consumers with mortgage loans in effect any time after November 8, 2007 who obtained such loans through HLC, and whose loans were closed by persons not admitted to the practice of law in West Virginia or by persons not under the direct supervision of a lawyer admitted to the practice of law in West Virginia. A trial is expected in December 2013. We believe that Plaintiffs’ allegations lack merit and we intend to defend against this action vigorously.
Massachusetts Division of Banks
The Massachusetts Division of Banks (the “Division”) delivered to LendingTree, LLC on February 11, 2011 a Report of Examination/Inspection which identified various alleged violations of Massachusetts and federal laws, including the alleged insufficient delivery by LendingTree, LLC of various disclosures to its customers. On October 14, 2011, the Division provided a proposed Consent Agreement and Order to settle the Division’s allegations, which the Division had shared with other state mortgage lending regulators. Thirty-four of such state mortgage lending regulators (the “Joining Regulators”) indicated that if LendingTree, LLC would enter into the Consent Agreement and Order, they would agree not to pursue any analogous allegations that they otherwise might assert. As of the date of this report, none of the Joining Regulators have asserted any such allegations.
The proposed Consent Agreement and Order calls for a fine to be allocated among the Division and the Joining Regulators and for LendingTree, LLC to adopt various new procedures and practices. We have commenced negotiations toward an acceptable Consent Agreement and Order. We do not believe our mortgage exchange business violated any federal or state mortgage lending laws; nor do we believe that any past operations of the mortgage business have resulted in a material violation of any such laws. Should the Division or any Joining Regulator bring any actions relating to the matters alleged in the February 2011 Report of Examination/Inspection, we intend to defend against such actions vigorously. The range of possible loss is estimated to be between $0.5 million and $6.5 million, and a reserve of $0.5 million has been established for this matter as of June 30, 2013.
NOTE 11—SEGMENT INFORMATION
Effective December 31, 2012, we expanded our reportable segments from one to two, consisting of mortgage and non-mortgage. The change was made as the convergence of economic similarities associated with our mortgage and non-mortgage operating segments was no longer expected. This decision was made in connection with the update of our annual budget and forecast, which occurs in the fourth quarter each year. The non-mortgage reportable segment consists of our auto, education, home services and other operating segments, which are not yet mature businesses and have been aggregated. Prior period results have been reclassified to conform with the change in reportable segments.
The expenses presented below for each segment include allocations of certain corporate expenses that are identifiable and directly benefit those segments. The unallocated expenses are those corporate overhead expenses that are not directly attributable to a segment and include: corporate expenses such as finance, legal, executive technology support and human resources, as well as elimination of inter-segment revenue and costs.
Adjusted EBITDA is the primary metric by which the chief operating decision maker evaluates the performance of our businesses, on which our internal budgets are based and by which management is compensated. Adjusted EBITDA is defined as operating income or loss (which excludes interest expense and taxes) adjusted to exclude amortization of intangibles and depreciation, and excluding (1) non-cash compensation expense, (2) non-cash intangible asset impairment charges, (3) gain/loss on disposal of assets, (4) restructuring and severance expenses, (5) litigation settlements and contingencies, (6) adjustments for significant acquisitions or dispositions, and (7) one-time items.
Assets and other balance sheet information are not used by the chief operating decision maker.
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Summarized information by segment and reconciliations to Adjusted EBITDA and income (loss) before income taxes is as follows (in thousands):
|
|
|
For the Three Months Ended June 30, 2013: |
| ||||||||||
|
|
|
Mortgage |
|
Non-Mortgage |
|
Corporate |
|
Total |
| ||||
|
Revenue |
|
$ |
33,528 |
|
$ |
3,256 |
|
$ |
622 |
|
$ |
37,406 |
|
|
Cost of revenue (exclusive of depreciation shown separately below) |
|
1,395 |
|
163 |
|
392 |
|
1,950 |
| ||||
|
Selling and marketing expense |
|
24,119 |
|
2,262 |
|
5 |
|
26,386 |
| ||||
|
General and administrative expense |
|
874 |
|
420 |
|
4,357 |
|
5,651 |
| ||||
|
Product development |
|
1,226 |
|
266 |
|
— |
|
1,492 |
| ||||
|
Depreciation |
|
345 |
|
426 |
|
101 |
|
872 |
| ||||
|
Amortization of intangibles |
|
— |
|
43 |
|
— |
|
43 |
| ||||
|
Restructuring and severance |
|
23 |
|
125 |
|
— |
|
148 |
| ||||
|
Litigation settlements and contingencies |
|
— |
|
— |
|
2,909 |
|
2,909 |
| ||||
|
Total costs and expenses |
|
27,982 |
|
3,705 |
|
7,764 |
|
39,451 |
| ||||
|
Operating income (loss) |
|
5,546 |
|
(449 |
) |
(7,142 |
) |
(2,045 |
) | ||||
|
Adjustments to reconcile to Adjusted EBITDA: |
|
|
|
|
|
|
|
|
| ||||
|
Amortization of intangibles |
|
— |
|
43 |
|
— |
|
43 |
| ||||
|
Depreciation |
|
345 |
|
426 |
|
101 |
|
872 |
| ||||
|
Restructuring and severance |
|
23 |
|
125 |
|
— |
|
148 |
| ||||
|
Loss on disposal of assets |
|
— |
|
— |
|
— |
|
— |
| ||||
|
Non-cash compensation |
|
483 |
|
95 |
|
854 |
|
1,432 |
| ||||
|
Litigation settlements and contingencies |
|
— |
|
— |
|
2,909 |
|
2,909 |
| ||||
|
Adjusted EBITDA |
|
$ |
6,397 |
|
$ |
240 |
|
$ |
(3,278 |
) |
$ |
3,359 |
|
|
Adjustments to reconcile to income/loss before taxes: |
|
|
|
|
|
|
|
|
| ||||
|
Operating loss |
|
|
|
|
|
|
|
(2,045 |
) | ||||
|
Interest expense |
|
|
|
|
|
|
|
(7 |
) | ||||
|
Loss before income taxes |
|
|
|
|
|
|
|
$ |
(2,052 |
) | |||
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
For the Three Months Ended June 30, 2012: |
| ||||||||||
|
|
|
Mortgage |
|
Non-Mortgage |
|
Corporate |
|
Total |
| ||||
|
Revenue |
|
$ |
11,406 |
|
$ |
4,484 |
|
$ |
1,080 |
|
$ |
16,970 |
|
|
Cost of revenue (exclusive of depreciation shown separately below) |
|
623 |
|
165 |
|
15 |
|
803 |
| ||||
|
Selling and marketing expense |
|
6,957 |
|
4,002 |
|
10 |
|
10,969 |
| ||||
|
General and administrative expense |
|
769 |
|
560 |
|
4,502 |
|
5,831 |
| ||||
|
Product development |
|
422 |
|
334 |
|
— |
|
756 |
| ||||
|
Depreciation |
|
396 |
|
509 |
|
141 |
|
1,046 |
| ||||
|
Amortization of intangibles |
|
— |
|
106 |
|
— |
|
106 |
| ||||
|
Restructuring and severance |
|
2 |
|
— |
|
1 |
|
3 |
| ||||
|
Litigation settlements and contingencies |
|
— |
|
— |
|
216 |
|
216 |
| ||||
|
Total costs and expenses |
|
9,169 |
|
5,676 |
|
4,885 |
|
19,730 |
| ||||
|
Operating income (loss) |
|
2,237 |
|
(1,192 |
) |
(3,805 |
) |
(2,760 |
) | ||||
|
Adjustments to reconcile to Adjusted EBITDA: |
|
|
|
|
|
|
|
|
| ||||
|
Amortization of intangibles |
|
— |
|
106 |
|
— |
|
106 |
| ||||
|
Depreciation |
|
396 |
|
509 |
|
141 |
|
1,046 |
| ||||
|
Restructuring and severance |
|
2 |
|
— |
|
1 |
|
3 |
| ||||
|
Loss on disposal of assets |
|
— |
|
— |
|
— |
|
— |
| ||||
|
Non-cash compensation |
|
111 |
|
95 |
|
866 |
|
1,072 |
| ||||
|
Litigation settlements and contingencies |
|
— |
|
— |
|
216 |
|
216 |
| ||||
|
Adjusted EBITDA |
|
$ |
2,746 |
|
$ |
(482 |
) |
$ |
(2,581 |
) |
$ |
(317 |
) |
|
Adjustments to reconcile to income/loss before taxes: |
|
|
|
|
|
|
|
|
| ||||
|
Operating loss |
|
|
|
|
|
|
|
(2,760 |
) | ||||
|
Interest expense |
|
|
|
|
|
|
|
(136 |
) | ||||
|
Loss before income taxes |
|
|
|
|
|
|
|
$ |
(2,896 |
) | |||
|
|
|
For the Six Months Ended June 30, 2013: |
| ||||||||||
|
|
|
Mortgage |
|
Non-Mortgage |
|
Corporate |
|
Total |
| ||||
|
Revenue |
|
$ |
59,048 |
|
$ |
5,816 |
|
$ |
622 |
|
$ |
65,486 |
|
|
Cost of revenue (exclusive of depreciation shown separately below) |
|
2,550 |
|
337 |
|
419 |
|
3,306 |
| ||||
|
Selling and marketing expense |
|
39,279 |
|
4,357 |
|
5 |
|
43,641 |
| ||||
|
General and administrative expense |
|
1,852 |
|
930 |
|
9,425 |
|
12,207 |
| ||||
|
Product development |
|
2,176 |
|
521 |
|
— |
|
2,697 |
| ||||
|
Depreciation |
|
719 |
|
843 |
|
195 |
|
1,757 |
| ||||
|
Amortization of intangibles |
|
— |
|
86 |
|
— |
|
86 |
| ||||
|
Restructuring and severance |
|
23 |
|
125 |
|
(2 |
) |
146 |
| ||||
|
Litigation settlements and contingencies |
|
— |
|
— |
|
3,937 |
|
3,937 |
| ||||
|
Total costs and expenses |
|
46,599 |
|
7,199 |
|
13,979 |
|
67,777 |
| ||||
|
Operating income (loss) |
|
12,449 |
|
(1,383 |
) |
(13,357 |
) |
(2,291 |
) | ||||
|
Adjustments to reconcile to Adjusted EBITDA: |
|
|
|
|
|
|
|
|
| ||||
|
Amortization of intangibles |
|
— |
|
86 |
|
— |
|
86 |
| ||||
|
Depreciation |
|
719 |
|
843 |
|
195 |
|
1,757 |
| ||||
|
Restructuring and severance |
|
23 |
|
125 |
|
(2 |
) |
146 |
| ||||
|
Loss on disposal of assets |
|
— |
|
— |
|
24 |
|
24 |
| ||||
|
Non-cash compensation |
|
896 |
|
237 |
|
1,733 |
|
2,866 |
| ||||
|
Discretionary cash bonus |
|
— |
|
— |
|
920 |
|
920 |
| ||||
|
Litigation settlements and contingencies |
|
— |
|
— |
|
3,937 |
|
3,937 |
| ||||
|
Adjusted EBITDA |
|
$ |
14,087 |
|
$ |
(92 |
) |
$ |
(6,550 |
) |
$ |
7,445 |
|
|
Adjustments to reconcile to income/loss before taxes: |
|
|
|
|
|
|
|
|
| ||||
|
Operating loss |
|
|
|
|
|
|
|
(2,291 |
) | ||||
|
Interest expense |
|
|
|
|
|
|
|
(14 |
) | ||||
|
Loss before income taxes |
|
|
|
|
|
|
|
$ |
(2,305 |
) | |||
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
For the Six Months Ended June 30, 2012: |
| ||||||||||
|
|
|
Mortgage |
|
Non-Mortgage |
|
Corporate |
|
Total |
| ||||
|
Revenue |
|
$ |
20,398 |
|
$ |
8,947 |
|
$ |
860 |
|
$ |
30,205 |
|
|
Cost of revenue (exclusive of depreciation shown separately below) |
|
1,322 |
|
247 |
|
30 |
|
1,599 |
| ||||
|
Selling and marketing expense |
|
13,953 |
|
7,668 |
|
— |
|
21,621 |
| ||||
|
General and administrative expense |
|
1,413 |
|
1,084 |
|
8,137 |
|
10,634 |
| ||||
|
Product development |
|
941 |
|
595 |
|
(6 |
) |
1,530 |
| ||||
|
Depreciation |
|
788 |
|
1,133 |
|
349 |
|||||||