Classmates.com 2003 Annual Report Download

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UNITED ONLINE INC
FORM 10-KT
(Annual Transition Report)
Filed 02/05/04 for the Period Ending 12/31/03
Address 21301 BURBANK BOULEVARD
WOODLAND HILLS, CA 91367
Telephone 8182873000
CIK 0001142701
Symbol UNTD
SIC Code 7370 - Computer Programming, Data Processing, And
Industry Computer Services
Sector Technology
Fiscal Year 12/31
http://www.edgar-online.com
© Copyright 2008, EDGAR Online, Inc. All Rights Reserved.
Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.

Table of contents

  • Page 1
    UNITED ONLINE INC FORM 10-KT (Annual Transition Report) Filed 02/05/04 for the Period Ending 12/31/03 Address Telephone CIK Symbol SIC Code Industry Sector Fiscal Year 21301 BURBANK BOULEVARD WOODLAND HILLS, CA 91367 8182873000 0001142701 UNTD 7370 - Computer Programming, Data Processing, And ...

  • Page 2
    ... ONLINE, INC. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 2555 Townsgate Road Westlake Village, California (Address of principal executive office) (805) 418-2000 (Registrant's telephone number, including area code...

  • Page 3
    ... Owners and Management and Related Stockholder Matters Certain Relationships and Related Party Transactions Principal Accounting Fees and Services 50 50 50 50 50 Exhibits, Financial Statement Schedules and Current Reports on Form 8-K 51 53 In this document, "United Online," the "Company...

  • Page 4
    ... telephone customer support, accelerated access services, multiple account names and email addresses, virus protection, parental controls, Web storage and, in some cases, proprietary content. A number of ISPs, including America Online ("AOL") and EarthLink, currently offer nationwide, value-priced...

  • Page 5
    ... 31, 2002. Billable services revenues consist primarily of monthly fees charged to subscribers for Internet access and, to a lesser extent, fees charged to users for live telephone technical support and premium email. Our pay services have been offered under a number of pricing plans. Currently, our...

  • Page 6
    ... particular Web site they visit. The toolbar contains Internet search functionality and a variety of buttons, icons and drop-down menus. On our free access 4 services, the toolbar is larger than on our pay access services and also contains banner advertisements. We generate revenues from the start...

  • Page 7
    .... We have developed software to enhance the functionality of certain components of our services, including user connectivity, billing, email, customer support and targeted advertising. We maintain data centers in multiple locations around the country with redundant systems to provide high levels of...

  • Page 8
    ... offer. In addition, many of our competitors have significantly greater brand recognition than we do and spend significantly more on marketing their services than we do. The success of our business model is predicated upon maintaining a marketing budget that is sufficient to grow our revenues...

  • Page 9
    ...the number of advertisers on our services, price reductions and reductions in advertising revenues. We also compete with television, radio, cable and print media for a share of advertisers' total advertising budgets. Privacy Policy We believe that issues relating to the privacy of Internet users and...

  • Page 10
    ... practices and breach of contract. Specifically, plaintiff alleges that Juno was unjustly enriched and deceived consumers by: (i) advertising "free" Internet access services and limiting the usage of heavier users of the service, and (ii) advertising a free trial month for its premium service...

  • Page 11
    ...Stipulation of Settlement. The pending lawsuits involve complex questions of fact and law and may require the expenditure of significant funds and the diversion of other resources to defend. Although we do not believe the outcome of the above outstanding legal proceedings, claims and litigation will...

  • Page 12
    ... our acquisitions, see Note 2 to our consolidated financial statements contained in this report. The following amounts are in thousands, except per share data: Six Months Ended December 31, 2003 Year Ended June 30, 2003 2002 2001 2000 1999 Consolidated Statements of Operations Data: Total revenues...

  • Page 13
    ... of Revenue % of Revenue Year Ended June 30, % of Revenue % of Revenue 2003 2002 2003 2002 2001 (unaudited) Statements of Operations Data: Revenues: Billable services Advertising and commerce Total revenues Operating expenses: Cost of billable services Cost of free services Sales and marketing...

  • Page 14
    ... services revenues consist primarily of monthly fees charged to users for dial-up Internet access services and, to a lesser extent, fees charged to users for live telephone technical support and premium email services. Our pay Internet access services have been offered under a number of pricing...

  • Page 15
    ... monthly revenue per pay access subscriber due to significant adoption of our accelerated dial-up services; a decrease in average hourly telecommunications costs per pay access subscriber; decreased customer billing and support costs per pay access subscriber as a result of better pricing obtained...

  • Page 16
    ... in October 2003. We are required to pay Best Buy a fee for each pay access subscriber we acquire through Best Buy's channels. If we acquire a significant number of pay access subscribers through Best Buy, this agreement could account for a substantial percentage of our marketing expenses in...

  • Page 17
    ... and administrative expenses include fees for professional legal and accounting services, nonincome taxes, insurance, and occupancy and other overhead-related costs, as well as the expenses incurred and credits received as a result of certain legal settlements. General and administrative expenses...

  • Page 18
    ...31, 2003, we reviewed both positive and negative evidence pursuant to the requirements of SFAS No. 109, Accounting for Income Taxes, including current and historical results of operations, the annual limitation on utilization of net operating loss carryforwards pursuant to Internal Revenue Code (the...

  • Page 19
    ...-related costs allocated to billable services increased due to the increase in telecommunications hours utilized by pay subscribers as a percentage of total telecommunications hours purchased. Customer support and billing-related costs increased as a result of the increase in the number of pay...

  • Page 20
    ... termination fees and $2.9 million in lease exit costs, which includes a charge of approximately $1.4 million to write off leasehold improvements associated with our former offices in New York and Rhode Island. In an effort to streamline our operations in response to changing market conditions...

  • Page 21
    ... on our free services during October 2001. Additionally, our pay subscriber base increased as a result of a shift in our marketing strategy during the year ended June 30, 2002 to focusing on promoting our pay services. 26 Advertising and Commerce Revenues Advertising and commerce revenues decreased...

  • Page 22
    ... imposed on our free services and overall softness in the online advertising market, which resulted in significant declines in advertising rates and the number of advertisers on our services. These decreases were partially offset by increased advertising revenue generated from our agreement...

  • Page 23
    ... fees and $2.9 million in lease exit-related costs, which included a charge of approximately $1.4 million to write off leasehold improvements associated with our former offices in New York and Rhode Island. In an effort to streamline our operations in response to changing market conditions...

  • Page 24
    ... as a result of better payment terms obtained from certain vendors and increased marketing and telecommunications expenditures as a result of the growth in the business; and increases in deferred revenue due to an increase in the number of pay subscribers to our services, which was partially offset...

  • Page 25
    ... flexibility with respect to short-term working capital requirements and to support the company's overall business strategy. At December 31, 2003, a $0.7 million letter of credit in connection with one of our leased facilities was outstanding, reducing the total amount available under the line...

  • Page 26
    ..., fees generated by enabling customer registrations for partners and fees from referring users to, or from users making purchases on, sponsors' Web sites. Revenues are 32 recognized provided that no significant obligations remain, fees are fixed or determinable, and collection of the related...

  • Page 27
    ... 2003 quarter in connection with the release of the deferred tax valuation allowance (see Note 4 to the consolidated financial statements). Business Combinations Our acquisitions to date have all been accounted for as purchase business combinations. Under the purchase method of accounting, the cost...

  • Page 28
    ... one unit of accounting. EITF Issue No. 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003, or entities may elect to report the change in accounting as a cumulative-effect adjustment in accordance with APB Opinion No. 20, Accounting Changes, and...

  • Page 29
    ...; the effect of acquisitions; 36 conditions or trends in the Internet services industry generally; changes in the demand and market rates for Internet advertising; increases or reductions in advertising and commerce revenues from significant customers; the effects of litigation and the timing...

  • Page 30
    ... of advertising impressions we have available to sell, and on how 38 many pay subscribers we can potentially acquire through marketing our pay services to our free users. Each month, a significant number of free users become inactive and we may experience continued declines in our active free user...

  • Page 31
    ... have encountered, and may in the future continue to encounter, issues with the operation, provisioning or the performance of these services. Problems with these services could adversely affect our business in a number of ways, including increased account cancellations and refunds. We cannot assure...

  • Page 32
    ... the online advertising market, decreases in capital available to Internet companies, changes in our advertising inventory and the effect of key advertising relationships. 40 A small number of customers have accounted for, and may in the future account for, a significant portion of our advertising...

  • Page 33
    ...the failure to bill and collect from users on a timely basis, over-charging or under-charging users, inaccurate financial and customer data, excessive credit card chargebacks or refunds, delays in new product or payment plan introductions and other billing-related errors. Such problems could lead to...

  • Page 34
    ...and of third parties. Third parties have in the past used our network, services and brand names to perpetrate crimes, such as identity theft or credit card theft, and may do so in the future. Users or third parties may assert claims of liability against us as a result of any failure by us to prevent...

  • Page 35
    ... business. We could incur substantial costs and diversion of management resources in the defense of any claims relating to proprietary rights. Parties making these claims could secure a judgment awarding substantial damages as well as injunctive or other equitable relief that could effectively block...

  • Page 36
    ... our senior management team or other key employees. Our business is largely dependent on the efforts and abilities of our senior management, particularly Mark Goldston, our chairman, chief executive officer and president, and other key personnel. Any of our officers or employees can terminate his or...

  • Page 37
    ... for redress payments and specific disclosures or notices regarding, among other things, the cost of its Internet access services, its cancellation terms and local versus longdistance charges, as well as the requirement to provide adequate customer support to process cancellations. Various state...

  • Page 38
    Our business could be severely impacted due to political instability in India. A significant number of our employees are located in Hyderabad, India and a portion of our outsourced customer service is in Banglore, India. Due to the current political instability between India and Pakistan, it is ...

  • Page 39
    ... the Series A junior participating preferred stock as Exhibit A, and the form of Rights Certificate as Exhibit B Amendment No. 1 to Rights Agreement, dated as of April 29, 2003, between Registrant and U.S. Stock Transfer Corporation Amended and Restated Registration Rights Agreement Lease Agreement...

  • Page 40
    ...this Form 10-K. 52 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on February 5, 2004. UNITED ONLINE, INC. By: /s/ MARK R. GOLDSTON Mark...

  • Page 41
    ...person whose signature appears below constitutes and appoints Mark R. Goldston, Frederic A. Randall, Jr. and Charles S. Hilliard, as his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendment to this Transition Report on Form 10...

  • Page 42
    .... 2001 Amended and Restated Employee Stock Purchase Plan 2001 Stock Incentive Plan 2001 Supplemental Stock Incentive Plan United Online, Inc. Fiscal Year 2004 Management Bonus Plan Amended and Restated Employment Agreement between the Registrant and Mark R. Goldston Amended and Restated Employment...

  • Page 43
    ... LLP Los Angeles, California February 2, 2004 F-2 UNITED ONLINE, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) December 31, 2003 June 30, 2003 June 30, 2002 Assets Current assets: Cash and cash equivalents Short-term investments Restricted cash Accounts receivable, net...

  • Page 44
    ... F-3 UNITED ONLINE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (in thousands, except per share amounts) Six Months Ended December 31, 2003 Year Ended June 30, 2003 2002 2001 Revenues: Billable services Advertising and commerce Total revenues Operating expenses: Cost...

  • Page 45
    ... of restricted common stock for acquisition Deferred stock-based charges Issuance of restricted shares to employees Stock-based charges Cancellation of previously issued equity awards Unrealized gain on short-term investments, net of tax Interest earned on notes receivable from stockholders Net loss...

  • Page 46
    ... for acquisitions Repurchases of common stock Cancellations of previously issued equity awards Repayments of notes receivable from stockholders Stock-based charges Issuance of restricted shares to employees Unrealized gain on short-term investments, net of tax Interest earned on notes receivable...

  • Page 47
    ... - 49,802 The accompanying notes are an integral part of these consolidated financial statements. F-7 1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS Description of Business United Online, Inc. ("United Online" or the "Company...

  • Page 48
    ... that the hourly and certain other limitations set for the free services do not apply. In addition, the free access services incorporate a number of advertising initiatives, including a persistent on-screen advertising banner, which are not included on the pay access services. United Online does not...

  • Page 49
    ..., short-term investments and accounts receivable. The Company's accounts receivable are derived primarily from revenue earned from pay subscribers and customers located in the United States. The Company extends credit based F-9 upon an evaluation of the customer's financial condition, and...

  • Page 50
    ... 2003 quarter in connection with the release of the deferred tax valuation allowance (see Note 4). Business Combinations -All of the Company's acquisitions have been accounted for as purchase business combinations. Under the purchase method of accounting, the cost, including transaction costs...

  • Page 51
    ... Internet search services, fees generated by users viewing and clicking on third-party Web site banners and text-link advertisements, fees generated by enabling customer registrations for partners and fees from referring users to, or from users making purchases on, sponsors' Web sites. Revenues are...

  • Page 52
    ... to September 23, 1999 has been estimated at the date of grant using the Black-Scholes option-pricing model, using the following weightedaverage assumptions: : Year Ended June 30, Six Months Ended December 31, 2003 2003 2002 2001 Risk-free interest rate Expected life (in years) Dividend yield...

  • Page 53
    ...-based employee compensation. In January 2003, the EITF issued EITF Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables . This consensus addresses certain aspects of accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities...

  • Page 54
    ...intangible assets, related to the acquisition of Simpli (see Note 4). In April 2002, the Company sold the remaining assets related to the Simpli acquisition for a 9.9% equity interest in the acquiring company, which was valued at $0.8 million and resulted in a loss of $0.7 million. In June 2003, the...

  • Page 55
    ... the Company's growth in pay subscribers, leverage NetZero's and Juno's operating and cost infrastructures to create a lower cost structure for providing Internet access and to create a more attractive base of users for advertising customers. Under the terms of the merger agreement, entered...

  • Page 56
    ...primary reason for the acquisition was to acquire BlueLight's pay user base in order to accelerate the Company's pay user growth and leverage its operating and cost infrastructure. The purchase price of approximately $8.4 million, including $0.1 million of acquisition-related costs, was paid in cash...

  • Page 57
    ... benefit charges of $3.8 million. Of the 49 employees terminated, 35 were in general and administrative, 11 were in sales and marketing and the remaining 3 were in product development functions. Early contract termination fees relate to costs incurred to exit redundant contracts with no future...

  • Page 58
    ... $ 10,940 (1,399) 9,541 $ Intangible assets consist of the following (in thousands): December 31, 2003 Accumulated Amortization Cost Net Pay subscribers and free users Software and technology Patents, trademarks and other $ 61,200 $ 3,750 4,639 (34,450) $ (1,870) (2,542) 26,750 1,880 2,097

  • Page 59
    ...at December 31, 2003 consist primarily of pay subscribers and software and technology related to the Merger and the acquisition of the Internet access assets of BlueLight. The Merger and the acquisition of the Internet access assets of BlueLight were accounted for under the purchase method (see Note...

  • Page 60
    .... The average advertising and commerce revenue per free user would not, in the foreseeable future, return to historic levels or to levels reflected in previous projections as a result of the change in the Company's business model and continued weakness in online advertising. Impairment related to...

  • Page 61
    2003 2003 2002 Employee compensation and related expenses Subscriber referral fees Other Total $ 8,205 4,281 1,542 14,028 $ 11,224 4,281 1,568 17,073 $ 6,950 3,557 705 11,212 $ $ $ Notes Payable During the year ended June 30, 2002, the Company repaid all of its notes payable obligations...

  • Page 62
    ... of its Series A junior participating preferred stock at a price of $25 per unit. On April 29, 2003, the Board of Directors voted to amend the purchase price per unit from $25 to $140. The rights generally will be exercisable only if a person or group acquires beneficial ownership of 15% or more...

  • Page 63
    ... eligible pretax earnings up to the Internal Revenue Service annual contribution limit. All full-time employees on the payroll of the Company are eligible... due to the release of valuation allowance attributable to the expected utilization of net operating loss and tax credit carryforwards in the ...

  • Page 64
    ... loss carryforwards and a change in deferred tax liabilities during the period. Pursuant to Notice 2003-65, taxpayers were permitted to modify the calculation of the annual limitation associated with acquired net operating loss carryforwards under Internal Revenue Code section 382. As a result...

  • Page 65
    ... has also claimed income tax deductions from the exercise of certain stock options and the related sale of common stock by employees. At December 31, 2003, the total benefit associated with these stock option deductions was approximately $23.5 million and has been credited directly to additional...

  • Page 66
    ... ended June 30, 2003 and 2002 did not result in any deferred stock-based charges. Options granted and restricted stock issued (excluding restricted stock issued in connection with acquisitions) during the year ended June 30, 2001 resulted in total deferred stock-based charges of $7.8 million, which...

  • Page 67
    ... of the periods presented (in thousands): Year Ended June 30, 2003 2002 2001 Operating expenses: Cost of billable services Cost of free services Sales and marketing Product development General and administrative Total stock-based charges $ 8 - 20 6 73 107 $ 99 60 548 1,785 3,925 6,417 $ 29...

  • Page 68
    ... filed against more than 300 issuers that conducted their initial public offerings between 1998 and 2000, their underwriters and an unspecified number of their individual corporate officers and directors (the "Consolidated Cases."). Counsel for the plaintiffs, the issuers and the insurers for the...

  • Page 69
    ...business practices and breach of contract. Specifically, plaintiff alleges that Juno was unjustly enriched and deceived consumers by: (a) advertising "free" Internet access services and limiting the usage of heavier users of the service, and (b) advertising a free trial month for its premium service...

  • Page 70
    ... the consolidated financial statements referred to in our report dated February 2, 2004 appearing in the December 31, 2003 Transition Report on Form 10-K of United Online, Inc. also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this...

  • Page 71
    ...FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ITEM 6. SELECTED FINANCIAL DATA ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PART III PART IV SIGNATURES EXHIBIT INDEX UNITED ONLINE, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS REPORT...

  • Page 72
    ... shall deliver to Employee a stock certificate representing such Released Shares, less a number of Released Shares (calculated based on the fair market value thereof as of such date) equal to the minimum amount of withholding as may be required by law. The terms and conditions of the Restricted...

  • Page 73
    ...pay to Employee (i) any accrued but unpaid Base Salary and vacation through the date of termination, (ii) reimbursement for any expenses as set forth in Section 3.6, through the date of termination, (iii) Employee's Annual Bonus, prorated through the date of termination, and (iv) a severance payment...

  • Page 74
    ...providing consumers with dial-up Internet access services (free or pay). The term "Restricted Territory" shall mean each and every county, city or other political subdivision of the United States in which the Company is engaged in business or providing its services. The Company agrees that providing...

  • Page 75
    ...of such notice or other communication. 5 8.5 8.6 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the first date written above. UNITED ONLINE, INC. By: /s/ FREDERIC A. RANDALL, JR. Frederic A. Randall, Jr. Executive Vice President and General Counsel /s/ MARK GOLDSTON Mark...

  • Page 76
    ... shall deliver to Employee a stock certificate representing such Released Shares, less a number of Released Shares (calculated based on the fair market value thereof as of such date) equal to the minimum amount of withholding as may be required by law. The terms and conditions of the Restricted...

  • Page 77
    ...pay to Employee (i) any accrued but unpaid Base Salary and vacation through the date of termination, (ii) reimbursement for any expenses as set forth in Section 3.6, through the date of termination, (iii) Employee's Annual Bonus, prorated through the date of termination, and (iv) a severance payment...

  • Page 78
    ...providing consumers with dial-up Internet access services (free or pay). The term "Restricted Territory" shall mean each and every county, city or other political subdivision of the United States in which the Company is engaged in business or providing its services. The Company agrees that providing...

  • Page 79
    ... prior to the giving of such notice or other communication. 5 8.5 8.6 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the first date written above. UNITED ONLINE, INC. By: /s/ MARK GOLDSTON Mark Goldston, Chief Executive Officer /s/ CHARLES S. HILLIARD Charles S. Hilliard...

  • Page 80
    ... shall deliver to Employee a stock certificate representing such Released Shares, less a number of Released Shares (calculated based on the fair market value thereof as of such date) equal to the minimum amount of withholding as may be required by law. The terms and conditions of the Restricted...

  • Page 81
    ...pay to Employee (i) any accrued but unpaid Base Salary and vacation through the date of termination, (ii) reimbursement for any expenses as set forth in Section 3.6, through the date of termination, (iii) Employee's Annual Bonus, prorated through the date of termination, and (iv) a severance payment...

  • Page 82
    ...providing consumers with dial-up Internet access services (free or pay). The term "Restricted Territory" shall mean each and every county, city or other political subdivision of the United States in which the Company is engaged in business or providing its services. The Company agrees that providing...

  • Page 83
    ... acquiring or ultimate parent entity, if any, following any Corporate Transaction...notice or other communication. 6 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the first date written above. UNITED ONLINE, INC. By: /s/ MARK GOLDSTON Mark Goldston, Chief Executive Officer...

  • Page 84
    ...Compensation and Other Benefits . 3.1 Base Salary . During the Term, the Company shall pay to Employee a base per fiscal year equal to Employee's current base salary (the "Base Salary"), with payments to be made in accordance with the Company's standard payment policy and subject to such withholding...

  • Page 85
    ...pay to Employee (i) any accrued but unpaid Base Salary and vacation through the date of termination, (ii) reimbursement for any expenses as set forth in Section 3.6, through the date of termination, (iii) Employee's Annual Bonus, prorated through the date of termination, and (iv) a severance payment...

  • Page 86
    ... title and/or responsibilities if Employee is not offered the position of Executive Vice President and Chief Marketing Officer of the Company or its successor as well as the acquiring and ultimate parent entity, if any, following the Corporate Transaction), (b) a decrease in pay and/or benefits from...

  • Page 87
    ...prior to the giving of such notice or other communication. 5 8. 8.2 8.3 8.4 8.5 8.6 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the first date written above. UNITED ONLINE, INC. By: /s/ MARK GOLDSTON Mark Goldston, Chief Executive Officer /s/ BRIAN WOODS Brian Woods...

  • Page 88
    ... by reference in the Registration Statements on Form S-8 (Nos. 333-70532, 333-88766 and 333106003) of United Online, Inc. of our report dated February 2, 2004 relating to the financial statements of United Online, Inc., which appears in this Transition Report on Form 10-K. We also consent...

  • Page 89
    ... or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 5, 2004 /s/ MARK R. GOLDSTON Mark R. Goldston Chairman, Chief Executive Officer and President QuickLinks Exhibit 31.1 Certification...

  • Page 90
    ...not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 5, 2004 /s/ CHARLES S. HILLIARD Charles S. Hilliard Executive Vice President, Finance and Chief Financial Officer QuickLinks Exhibit 31...

  • Page 91
    ...the information contained in such report fairly presents, in all material respects, the financial condition and result of operations of the Company. Dated: February 5, 2004 /s/ MARK R. GOLDSTON Mark R. Goldston Chairman, Chief Executive Officer and President QuickLinks Exhibit 32.1 CERTIFICATION OF...