TREE

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2008, for Tree.com, Inc. (formerly Tree.com, Inc. and subsidiaries). On August 20, 2008, the company was spun off from its parent, IAC/InterActiveCorp ("IAC"), becoming a separate publicly traded entity. The business operates two primary segments: Lending (connecting consumers with financial providers via LendingTree.com and originating loans via LendingTree Loans) and Real Estate (operating RealEstate.com and iNest.com).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 33% year-over-year for the quarter and 39% for the nine-month period. Lending revenue dropped 34% (quarter) and 40% (nine months), driven by a 55% decrease in the dollar value of loans closed and a shift to lower-margin conforming loans. Real Estate revenue fell 29% (quarter) and 33% (nine months) due to decreased closings and the cessation of the agent network business in late 2007.
• Impairment Charges: The nine-month operating loss was significantly impacted by non-cash impairment charges totaling $164.4 million ($131.0 million for goodwill and $33.4 million for indefinite-lived intangible assets). These charges were recorded in Q2 2008 due to adverse mortgage and real estate market conditions.
• EBITDA Performance: Adjusted for the $15.0 million litigation settlement proceeds received in 2007, EBITDA improved in 2008 as cost reductions (marketing and restructuring) outpaced revenue declines. However, reported EBITDA loss widened to $(10.7) million for the quarter and $(19.5) million for the nine months.
• Cash Flow: Net cash used in operating activities was $11.8 million for the nine months ended Sep 30, 2008, compared to $195.1 million provided in the prior year period, primarily due to reduced proceeds from loan sales.

Guidance, Outlook, Risks, and Unusual Items

• Unusual Items: The 2007 period included a $15.0 million litigation settlement gain. The 2008 period included significant non-cash compensation expenses ($10.0 million for nine months) related to the spin-off and equity award modifications.
• Liquidity and Debt Covenants: LendingTree Loans operates with $100 million in committed lines of credit and $150 million uncommitted. The company was not in compliance with the "positive pre-tax net income" covenant for the quarter ended September 30, 2008, but received a waiver on October 28, 2008. A $50 million committed line expires January 24, 2009, and the lender reserves the right to deem it expired if the spin-off materially and adversely affects the business.
• Risk Factors: The company faces significant risks from the ongoing disruption in primary and secondary mortgage markets, which limits loan origination volume and secondary market liquidity. There is also risk regarding the renewal of warehouse lines of credit and potential litigation related to wage-and-hour claims and mortgage broker disclosures.
• Outlook: Management believes current cash and borrowing capacity are sufficient to fund operations for the foreseeable future, though continued adverse market conditions could necessitate further restructuring or impairments.

Investor Verification Checklist

• Covenant Compliance: Verify the status of the waiver for the positive pre-tax net income covenant and the renewal terms for the $50 million warehouse line expiring in January 2009.
• Loan Origination Volume: Monitor the dollar value of loans closed and the mix of conforming vs. non-conforming loans, as this directly drives revenue.
• Secondary Market Liquidity: Assess the ability to sell originated loans in the secondary market, which is critical for repaying warehouse lines of credit.
• Legal Contingencies: Review updates on the wage-and-hour class action lawsuits and South Carolina mortgage broker disclosure litigation.
• Spin-Off Costs: Track the impact of one-time costs associated with operating as an independent public entity versus the cost savings from the IAC separation.