Classmates.com 2004 Annual Report Download

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UNITED ONLINE INC
FORM 10-K
(Annual Report)
Filed 03/16/05 for the Period Ending 12/31/04
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-K (Annual Report) Filed 03/16/05 for the Period Ending 12/31/04 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 Computer ...

  • Page 2
    ... Woodland Hills, California (Address of principal executive office) (818) 287-3000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.0001 per...

  • Page 3
    ... by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes 1 No 3 At June 30, 2004, the aggregate market value of voting stock held by non-affiliates of the registrant, based on the last reported sales price of the registrant's common stock on...

  • Page 4
    ... include, but are not limited to, statements about the markets in which we compete, our pay accounts and subscriptions, our product and service offerings, the advertising market, operating expenses, operating efficiencies, revenues, capital requirements and our cash position. In addition, any...

  • Page 5
    ... Internet subscription services through a number of brands, including NetZero, Juno, and Classmates Online. Our pay services include dial-up Internet access, community-based networking, personal Web-hosting, and premium email services, among others. We also offer, at no charge, advertising-supported...

  • Page 6
    ... a migration of premium-priced dial-up users to value-priced services, like those offered by United Online. Although long-term projections vary greatly, most analysts expect these trends to continue. There are several thousand dial-up access providers in the U.S., with a small number of nationwide...

  • Page 7
    ... premium-priced offerings generally provide, among other features, some or all of the following at no additional cost: telephone technical support, proprietary content, parental controls, spam controls, pop-up blocking capability, multiple account names and email addresses, enhanced email storage...

  • Page 8
    ... and launched other new non-access services, including our premium email and premium content services. Additionally, with the recent recovery and growth of Internet advertising, we have begun to focus additional resources toward addressing the online advertising market. We believe our assets and...

  • Page 9
    ...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 services, the toolbar is larger than on our pay access services and also contains banner advertisements. We generate revenues from the start page...

  • Page 10
    ... a portion of our advertising inventory for the purpose of marketing and selling our own services. BILLING The vast majority of our pay accounts pay for our services in advance with a credit card. Other payment options for some of our pay services include electronic check payment, or "ACH", personal...

  • Page 11
    ..., India; Renton, Washington; and Orem, Utah. However, we outsource substantially all of our telephone support to a third party. We offer a variety of online and offline "self-help" tools for our access services, including our offline "Quick Help" software that is loaded onto a user's computer...

  • Page 12
    ...open source software system. User information is stored in an Oracle database, which is also used to support Web sites, target advertising, and prepare email campaigns. PROPRIETARY RIGHTS Our trademarks, patents, copyrights, domain names and trade secrets are important to the success of our business...

  • Page 13
    ... aggressive in offering discounted services and one or more free months of services in order to obtain and retain pay access accounts. Despite these measures, our growth in pay access accounts was limited during the June and September 2004 quarters and our number of access accounts declined in the...

  • Page 14
    ... premium-services include at no additional charge telephone technical support, proprietary content, parental controls, multiple accounts and email addresses, increased email storage, virus protection, firewalls, spyware protection and accelerated dial-up functionality. Some providers of value-priced...

  • Page 15
    ... users. We cannot assure you that our premium email offerings or our Web-hosting offerings will be competitive or will generate growth in pay accounts. In addition, we have evaluated, and expect to continue to evaluate, the development or acquisition of new subscription services. New services...

  • Page 16
    ... services, with telecommunications cost per user lower in periods of lower usage. We do not know if these seasonal trends will continue. INTERNATIONAL OPERATIONS We have foreign operations in India, Sweden and Germany. We have a significant number of employees located in our India office. Our...

  • Page 17
    ... employees to be good. AVAILABLE INFORMATION Our corporate Web site is www.untd.com. On this Web site, we make available, free of charge, our annual, quarterly and current reports, changes in the stock ownership of our directors and executive officers, and other documents filed with, or furnished...

  • Page 18
    .... The case against NetZero was consolidated with approximately 300 other suits 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. In a court order...

  • Page 19
    ... such actions will not be material and will not adversely affect our business, financial condition, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We did not submit any matters to a vote of security holders during the quarter ended December 31, 2004...

  • Page 20
    ... low prices per share of our common stock as reported on the NASDAQ. Prices have been adjusted to reflect the 3-for-2 stock dividend ...2004, the Board of Directors authorized us to purchase up to an additional $100 million of our common stock through May 31, 2005 under the program, bringing the total...

  • Page 21
    ... and related notes and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Annual Report on Form 10-K. The following table presents the consolidated statements of operations data for the year ended December 31, 2004, the six months ended...

  • Page 22
    ... Internet subscription services through a number of brands, including NetZero, Juno, and Classmates Online. Our pay services include dial-up Internet access, community-based networking, personal Web-hosting, and premium email services, among others. We also offer, at no charge, advertising-supported...

  • Page 23
    ... account represents a unique billing relationship with a customer who subscribes to one or more of our services. A subscription represents a unique subscription to any individual pay service offered by us including Internet access, community-based networking, accelerator services, premium email, Web...

  • Page 24
    ... consist of subscription fees charged to pay accounts for dial-up and accelerated Internet access services, community-based networking, Web-hosting and domain name registration services, premium email services and premium content. In addition, we charge fees for live telephone technical support. Our...

  • Page 25
    ...new pay services, particularly our premium email services; an expansion of our online and offline distribution channels; our Web-hosting acquisition in April 2004; and a significant number of our free accounts upgrading to our pay services. However, we experienced limited growth in the June 2004 and...

  • Page 26
    ... services. Direct costs consist of costs related to providing telephone technical support, customer billing and billing support to our pay accounts and domain name registration fees. Allocated costs consist primarily of telecommunications and data center costs, personnel and overhead-related costs...

  • Page 27
    ... our network and data centers, depreciation of network computers and equipment and email technical support. We allocate costs associated with access services between pay services and free services based on the aggregate hourly usage of our free access accounts as a percentage of total hours used by...

  • Page 28
    ... include advertising and promotion expenses, fees paid to distribution partners to acquire new pay and free accounts, personnel-related expenses for sales and marketing personnel and telemarketing costs incurred to acquire and retain pay accounts and up-sell pay accounts to additional services. We...

  • Page 29
    ... include personnel-related expenses for executive, finance, legal, human resources and internal customer support personnel. In addition, general and administrative expenses include fees for professional legal, accounting and financial services, office relocation costs, non-income taxes, insurance...

  • Page 30
    ... annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value amount. Amortization of intangible assets increased by $4.5 million, or 29%, to $20.4 million for the year ended December 31, 2004, compared...

  • Page 31
    ... number of pay accounts resulted from a number of factors including increased marketing and promotion of our pay services, the acquisition of approximately 174,000 pay accounts from BlueLight in November 2002 and a significant number of our free users upgrading to our pay access services. ARPU...

  • Page 32
    ...telecommunications hours utilized by pay access accounts as a percentage of total telecommunications hours purchased. Customer support and billing-related costs increased as a result of the increase in the average number of pay access accounts. Depreciation expense allocated to billable services has...

  • Page 33
    ... that focus on increasing our pay account base, promoting our accelerated dialup services and building our brands. Additionally, sales and marketing expenses increased as a result of a $4.4 million increase in telemarketing expenses related to customer acquisition, retention and up sell activities...

  • Page 34
    ...The effective tax rate differs from the statutory tax rate primarily due to the release of valuation allowance attributable to the expected utilization of net operating loss and tax credit carryforwards in the years ending December 31, 2004 and 2005, offset by current California state income tax. In...

  • Page 35
    ... to billable services increased due to the increase in telecommunications hours utilized by pay accounts 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 accounts. Depreciation expense...

  • Page 36
    ... support costs per pay account decreased as a result of cost savings gained through the consolidation of NetZero's and Juno's customer billing and support functions, which resulted in better pricing from our primary customer support vendor as a result of increased call volumes. Cost of Free Services...

  • Page 37
    ... 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 38
    ...million. The change in the valuation allowance of approximately $15 million was primarily due to the release of valuation allowance associated with actual and expected utilization of net operating loss and tax credit carryforwards in 2003 and 2004, respectively. Our effective income tax rate for the...

  • Page 39
    ...acquisition of the Web-hosting services assets of About, Inc. in April 2004 for $11.9 million in cash and the acquisition of Classmates in November 2004 for $98.2 million in cash, net of cash acquired; changes in our short-term investment portfolio based on the liquidity requirements of our business...

  • Page 40
    ... stock price, the number of vested and in-themoney options outstanding and the timing of employee exercises. • • We previously had access to a $25 million unsecured revolving line of credit with Silicon Valley Bank, which was canceled in December 2004 in connection with our $100 million term...

  • Page 41
    ... by a credit agreement dated December 3, 2004, among United Online, Inc., the Lenders party thereto from time to time, Deutsche Bank Trust Company Americas, as Administrative agent, and Deutsche Bank Securities, as Lead Arranger. The term loan matures in four years and amortizes in an annual amount...

  • Page 42
    ... indebtedness by us, liens against our assets, payment of dividends, consolidation, merger, purchase or sale of assets, capital expenditures, investments and acquisitions. At December 31, 2004, we were in compliance with all covenants. The credit agreement also includes certain customary events of...

  • Page 43
    ... user. Our pay accounts generally pay in advance for their service by credit card, and revenue is then recognized ratably over the period in which the related services are provided. Advance payments from pay accounts are recorded on the balance sheet as deferred revenue. We offer alternative payment...

  • Page 44
    ... likely than not reduce the fair value of a reporting unit below its carrying value amount. Events or circumstances which could trigger an impairment review include a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated...

  • Page 45
    ... (revised 2004). This statement replaces SFAS No. 123, Accounting for Stock-Based Compensation , and supersedes Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees . This statement requires that the cost resulting from all share-based payment transactions be...

  • Page 46
    ... on offering dial-up Internet access services at prices below the standard monthly pricing of the premium dial-up services of most of our major competitors. Competition from broadband providers and value-priced providers such as United Online has resulted in significant declines in the number of...

  • Page 47
    ... premium-services include at no additional charge telephone technical support, proprietary content, parental controls, multiple accounts and email addresses, increased email storage, virus protection, firewalls, spyware protection and accelerated dial-up functionality. Some providers of value-priced...

  • Page 48
    ... users. We cannot assure you that our premium email offerings or our Web-hosting offerings will be competitive or will generate growth in pay accounts. In addition, we have evaluated, and expect to continue to evaluate, the development or acquisition of new subscription services. New services...

  • Page 49
    ...also sources of significant advertising revenue cease to do business with us, our revenues and profits could suffer. We may be unable to grow our revenues. Our ability to grow our revenues is primarily dependent upon our ability to increase our number of pay subscriptions, our number of pay accounts...

  • Page 50
    ...successfully complete acquisitions. The merger and acquisition market for companies offering Internet subscription services is extremely competitive, particularly for companies who have demonstrated a profitable business model with long-term growth potential. Recently, the public equity markets have...

  • Page 51
    ... be required to incur significant marketing expenses to maintain our brands and we may not be successful in increasing pay accounts, subscriptions or revenues. This could result in increased costs without a commensurate increase in revenues, which could adversely affect our profitability. We have 49

  • Page 52
    ... the number of advertising impressions we have available to sell, and on how many pay subscriptions we can potentially acquire through marketing our pay services to our active free accounts. Each month, a significant number of free accounts become inactive and we may experience continued declines in...

  • Page 53
    ... in significant fluctuations in our results of operations and the number of users signing up for, or accessing, our services. We may be unable to maintain or grow our advertising revenues, particularly if we lose key advertising relationships. Reduced advertising revenues may reduce our profits...

  • Page 54
    ... attractive rates with these carriers may negatively impact our business. Our access business substantially depends on the capacity, affordability, reliability and security of our telecommunications networks. Only a small number of telecommunications providers offer the network and data services we...

  • Page 55
    ...offer new pay services or alternative payment plans is dependent on our ability to customize our billing and support systems. Issues associated with these systems could cause a variety of problems including the failure to bill and collect from users on a timely basis, over-charging or under-charging...

  • Page 56
    ..., a number of adverse consequences, which have included or may include users being disconnected from our services or being unable to access our services; loss of data or revenue; injury to reputation; and diversion of development resources. We have experienced technical and customer support issues...

  • Page 57
    ...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 58
    ... rights, could require us to change our business practices or obtain licenses from third parties, which licenses may not be available on acceptable terms, if at all. Lawsuits also involve the risk of significant settlements or judgments against us. Both the cost of defending claims, as well as the...

  • Page 59
    ... result in user turnover and decreased revenues. Our business could be severely impacted due to political instability or other factors in India. We have a significant number of employees located in our India office. Our operations in India primarily handle email customer support, product development...

  • Page 60
    ... suffer significant declines in the market price of our common stock. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to certain market risks arising from transactions in the normal course of business, principally risk associated with interest rate and foreign...

  • Page 61
    ... to the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management's Report on Internal Control Over Financial Reporting Management of United Online, Inc. is responsible...

  • Page 62
    ... its assessment of internal control over financial reporting as of December 31, 2004 because it was acquired by the Company in a purchase business combination in November 2004. Classmates Online, Inc. is a wholly-owned subsidiary of the Company whose total assets and total revenues represent 31% and...

  • Page 63
    ... for 2001 Supplemental Stock Incentive Plan Classmates Online, Inc. Amended and Restated 1999 Stock Plan Classmates Online, Inc. 2004 Stock Plan United Online, Inc. 2004 Management Bonus Plan Amended and Restated Employment Agreement between the Registrant and Mark R. Goldston Amended and Restated...

  • Page 64
    ... of December 13, 2004 Second Amendment to Credit Agreement, dated as of March 11, 2005 List of Subsidiaries Consent of Independent Registered Public Accounting Firm Power of Attorney (see Power of Attorney in the signature page hereto) Certification of the Chief Executive Officer pursuant to Section...

  • Page 65
    ... 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 March 16, 2005. UNITED ONLINE, INC. By: /s/ MARK R. GOLDSTON Mark R. Goldston Chairman, Chief Executive Officer and President KNOW ALL...

  • Page 66
    /s/ KENNETH L. COLEMAN Director Kenneth L. Coleman /s/ DENNIS HOLT Director Dennis Holt /s/ CAROL A. SCOTT Director Carol A. Scott 64 March 16, 2005 March 16, 2005 March 16, 2005

  • Page 67
    ... for 2001 Supplemental Stock Incentive Plan Classmates Online, Inc. Amended and Restated 1999 Stock Plan Classmates Online, Inc. 2004 Stock Plan United Online, Inc. 2004 Management Bonus Plan Amended and Restated Employment Agreement between the Registrant and Mark R. Goldston Amended and Restated...

  • Page 68
    ... thereto from time to time, Deutsche Bank Trust Company Americas, as Administrative Agent, and Deutsche Bank Securities Inc., as Lead Arranger (the "Credit Agreement") First Amendment to Credit Agreement, dated as of December 13, 2004, among United Online, the lenders from time to time party to the...

  • Page 69
    UNITED ONLINE, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Comprehensive Income (Loss) Consolidated Statements of Stockholders' Equity ...

  • Page 70
    ... and of its internal control over financial reporting as of December 31, 2004 and audits of its December 31, 2003 and June 30, 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our...

  • Page 71
    ... acquired by the Company in a purchase business combination in November 2004. We have also excluded Classmates Online, Inc. from our audit of internal control over financial reporting. Classmates Online, Inc. is a wholly-owned subsidiary of the Company whose total assets and total revenues represent...

  • Page 72
    ... Deferred revenue Term loan Capital leases Other liabilities Total liabilities Commitments and contingencies (see Note 10) Stockholders' equity: Preferred stock, $0.0001 par value; 5,000 shares authorized; no shares issued or outstanding at December 31, 2004 and 2003 Common stock, $0.0001 par value...

  • Page 73
    ...31, 2004 Six Months Ended December 31, 2003 2003 2002 Revenues: Billable services Advertising and commerce Total revenues Operating expenses: Cost of billable services (including stock-based charges, see Note 9) Cost of free services (including stock-based charges, see Note 9) Sales and marketing...

  • Page 74
    UNITED ONLINE, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) Six Months Ended December 31, 2003 Year Ended June 30, Year Ended December 31, 2004 2003 2002 Net income (loss) Unrealized gain (loss) on short-term investments, net of tax of $(452), $(553), $992 and $0 ...

  • Page 75
    ...of common stock Issuance of restricted stock Repurchase of restricted stock Options assumed in connection with acquisition Stock-based charges Unrealized loss on short-term investments, net of tax Foreign currency translation Tax benefits from stock options Net income Balance at December 31, 2004 37...

  • Page 76
    ... Allowance for doubtful accounts Stock-based charges Deferred taxes Tax benefits from stock options Other Changes in operating assets and liabilities (excluding the effects of acquisitions): Accounts receivable Other assets Accounts payable and accrued liabilities Deferred revenue Other liabilities...

  • Page 77
    allowance Issuance of common stock and options assumed for acquisitions Notes receivable from stockholders in connection with the exercise of stock options 20,782 2,880 - 1,399 - - - - - - 81,266 700 The accompanying notes are an integral part of these consolidated financial statements. F-8

  • Page 78
    ...and domain name registration business of About Web Services, Inc. The Company's corporate headquarters are located in Woodland Hills, California, and the Company also maintains offices in Renton, Washington; New York, New York; San Francisco, California; Orem, Utah; Hyderabad, India; Munich, Germany...

  • Page 79
    ... risk consist of cash and cash equivalents, short-term investments and accounts receivable. The Company's accounts receivable are derived primarily from revenue earned from pay accounts and advertising customers located in the United States. The Company extends credit based upon an evaluation of the...

  • Page 80
    ... in the extent or manner in which an asset is used, significant declines in the Company's stock price for a sustained period, shifts in technology, loss of key management or personnel, changes in the Company's operating model or strategy and competitive forces. If events and circumstances indicate...

  • Page 81
    ... more likely than not reduce the fair value of a reporting unit below its carrying amount. Events or circumstances which could trigger an impairment review include a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated...

  • Page 82
    ... usage of pay accounts as a percentage of total hours used by active accounts. Direct costs consist of costs related to providing technical support, customer billing and billing support to pay accounts. Allocated costs consist primarily of telecommunications and data center costs, personnel and...

  • Page 83
    ... networking services are allocated based on the number of Web site visits by free accounts relative to the total number of visits. Sales and Marketing -Sales and marketing expenses include advertising and promotion expenses, fees paid to distribution partners to acquire new pay and free accounts...

  • Page 84
    ..., 1999 has been estimated at the date of grant using the Black-Scholes option-pricing model, using the following weighted-average assumptions: Year Ended December 31, 2004 Six Months Ended December 31, 2003 Year Ended June 30, 2003 2002 Risk-free interest rate Expected life (in years) Dividend...

  • Page 85
    ...subscription services through a number of brands, including NetZero, Juno, and Classmates Online. The Company's pay services include dial-up Internet access, community-based networking, personal Web-hosting, and premium email services, among others. The Company also offers, at no charge, advertising...

  • Page 86
    ..., Business Combinations . The primary reason for the acquisition was to acquire Classmates' services and account base to continue to expand the Company's subscription offerings. Classmates' results of operations are included in the consolidated financial statements from the date of acquisition. The...

  • Page 87
    five years, 0% dividend, volatility of 99%, and a risk-free interest rate of 3%. The following table summarizes the purchase price (in thousands): Cash Fair value of options assumed Intrinsic value of unvested options Acquisition costs Total purchase price $ 125,453 4,325 (1,445) 3,065 131,398 $ ...

  • Page 88
    About Web Services In April 2004, the Company acquired substantially all of the assets associated with the Web-hosting business of About, Inc. The business offers consumers Web-site services, including hosting, domain and email services. The acquisition has been accounted for under the purchase ...

  • Page 89
    ... United Online common stock issued was determined based on an average price per share of NetZero common stock on the dates surrounding the announcement of the execution of the merger agreement. The fair value of the Juno options assumed was determined based on the Black-Scholes option pricing model...

  • Page 90
    ...with the Merger, the Company incurred the following acquisition costs, which were capitalized and included as part of the purchase price (in thousands): Employee termination benefits Investment banking, accounting and legal fees Early contract termination fees Total $ 3,844 2,301 1,833 7,978 $ The...

  • Page 91
    .... ("Simpli") in a stock and cash transaction. Simpli was a targeted marketing infrastructure and search technology company. 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...

  • Page 92
    ... the years ended June 30, 2003 and 2002. Maturities of short-term investments were as follows (in thousands): December 31, 2004 Estimated Fair Value Amortized Cost Maturing within 1 year Maturing between 1 year and 4 years Maturing after 4 years Total $ 29,159 62,854 84,292 176,305 $ 29,158 62...

  • Page 93
    ... with the release of the deferred tax valuation allowance. Intangible assets consist of the following (in thousands): December 31, 2004 Accumulated Amortization Cost Net Pay accounts and free accounts Trademarks and trade names Advertising contracts and related relationships Software and...

  • Page 94
    ... market rates. The line of credit contained covenants pertaining to the maintenance of a minimum quick ratio, minimum cash balances with the lender and minimum profitability levels. The line of credit provided additional working capital to support the Company's growth and overall business strategy...

  • Page 95
    ... dated December 3, 2004. A small portion of the proceeds of the term loan facility were used to purchase shares tendered pursuant to the Company's tender offer and pay related fees and expenses. Going forward, the funds will be used for general corporate purposes, stock repurchases and acquisitions...

  • Page 96
    ... the stockholders of record at the close of business on that date. Each right entitles the registered holder to purchase from the Company one unit consisting of one one-thousandth of a share of its Series A junior participating preferred stock at a price of $25 per unit. On April 29, 2003, the Board...

  • Page 97
    ... the program. Share repurchases executed under the common stock repurchase program at December 31, 2004 were as follows (in thousands, except per share amounts): Maximum Approximate Dollar Value that May Yet be Purchased Under the Program Period Shares Repurchased(1) Average Price Paid per Share...

  • Page 98
    ... gain (loss) on short-term investments, net of tax Accumulated...securities: Stock options, restricted shares, warrants and employee stock ... computations exclude options, unvested common stock and warrants, which are antidilutive. The number of antidilutive shares at December 31, 2004 and 2003 and...

  • Page 99
    ... plan under Section 401(k) of the Internal Revenue Code. Under the Savings Plan, participating employees...2004 2003 2002 Taxes on income at the statutory federal rate State income taxes, net of federal tax benefits Non-deductible acquisition-related costs Other differences, net Change in valuation...

  • Page 100
    ... California state income...annual limitation associated with acquired net operating loss carryforwards under Internal Revenue Code section 382. As a result, the Company increased its net deferred tax asset. The decrease in the valuation allowance of $85.3 million during the year ended December 31, 2004...

  • Page 101
    ...United Online common stock shares equal to the product of 0.2000 and 0.3570, respectively, multiplied by the number of shares of common stock underlying the option. As a result, all stock option share amounts and price per share amounts for prior periods provided herein have been restated to account...

  • Page 102
    ... options and direct stock issuances may be made under the Classmates 2004 Stock Plan (i) to employees, directors and officers of Classmates or its subsidiaries whose service commenced prior to the date of the acquisition and (ii) to employees, consultants, directors and executive officers of United...

  • Page 103
    ...2004 (in thousands, except per share amounts): Number of Shares Price Per Share Weighted Average Exercise Price Options outstanding at July 1, 2001 Assumed in connection with acquisition Granted Exercised Canceled Options... $ The number of option shares exercisable at December 31, 2004 and 2003 and...

  • Page 104
    ... thousands): Year Ended June 30, Year Ended December 31, 2004 Six Months Ended December 31, 2003 2003 2002 Operating expenses: Cost of billable services Cost of free services Sales and marketing Product development General and administrative Total stock-based charges $ 16 - 76 32 2,325 2,449...

  • Page 105
    ... obligations for computer and office equipment. The future minimum lease payments are discounted using varying rates over the lease terms. Future minimum lease payments at December 31, 2004 are as follows (in thousands): Year Ending December 31, 2005 2006 2007 Total minimum obligations Less amount...

  • Page 106
    .... The case against NetZero was consolidated with approximately 300 other suits 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. In a court order...

  • Page 107
    ... continuing and the court has set several dates for the parties to submit briefs on claim construction issues. Trial has been set for October 2005. The pending lawsuits involve complex questions of fact and law and may require the expenditure of significant funds and the diversion of other resources...

  • Page 108
    ... (UNAUDITED) (in thousands, except per share data) Year ended December 31, 2004: Quarter Ended December 31, September 30, June 30, March 31, Revenues Operating income Net income Net income per share-basic Net income per share-diluted $ $ $ $ $ 119,620 19,036 80,189 1.33 1.27 $ $ $ $ $ 110,704...

  • Page 109
    UNITED ONLINE, INC. SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS (in thousands) Balance at Beginning of Period Charged/ (Credited) to Expense Charged to Other Accounts Charges Utilized/ Writeoffs Balance at End of Period Allowance for doubtful accounts: Year ended December 31, 2004 Six months ...

  • Page 110
    ..., FINANCIAL STATEMENT SCHEDULES UNITED ONLINE, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM UNITED ONLINE, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) UNITED ONLINE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS...

  • Page 111
    ...respective meanings provided such terms in the Credit Agreement referred to below. WITNESSETH: WHEREAS, the Borrower, the Lenders, Deutsche Bank Securities Inc., as Lead Arranger, and the Administrative Agent are parties to a Credit Agreement, dated as of December 3, 2004 (as amended, modified, and...

  • Page 112
    ... to a securities account "control" agreement, no such notification shall be required to be given until the first date of delivery (or required delivery) of the financial statements pursuant to Section 9.01(b) or (c), as the case may be, of the Credit Agreement following the acquisition of such...

  • Page 113
    ...way of facsimile transmission) the same to the Administrative Agent at its Notice Office. 6. From and after the Amendment Effective Date, all references in the Credit Agreement and each of the other Credit Documents to the Credit Agreement and the Pledge Agreement shall be deemed to be references to...

  • Page 114
    ...a counterpart of this Amendment to be duly executed and delivered as of the date first above written. UNITED ONLINE, INC. By: /s/ CHARLES S. HILLIARD Name: Charles S. Hilliard Title: Executive Vice President, Finance and Chief Financial Officer NETZERO, INC., as a Pledgor By: /s/ CHARLES S. HILLIARD...

  • Page 115
    ...: Charles S. Hilliard Title: Executive Vice President, Finance and Chief Financial Officer JUNO INTERNET SERVICES, INC., as a Pledgor By: /s/ CHARLES S. HILLIARD Name: Charles S. Hilliard Title: Executive Vice President, Finance and Chief Financial Officer CLASSMATES ONLINE, INC., as a Pledgor By...

  • Page 116
    By: /s/ ANCA TRIFAN Name: Anca Trifan Title: Director By: /s/ PAUL O'LEARY Name: Paul O'Leary Title: Vice President 6

  • Page 117
    ... PLEDGE AGREEMENT, DATED AS OF MARCH 11, 2005, AMONG UNITED ONLINE, INC., CERTAIN PLEDGORS PARTY TO THE PLEDGE AGREEMENT, VARIOUS LENDERS PARTY TO THE CREDIT AGREEMENT, AND DEUTSCHE BANK TRUST COMPANY AMERICAS, AS ADMINISTRATIVE AGENT AND AS COLLATERAL AGENT NAME OF INSTITUTION: ACA Management, LLC...

  • Page 118
    ... Investment Management, LLC, as Manager By: /s/ KATHLEEN A. ZAM Name: Kathleen A. Zam Title: Vice President Olympic CLO I By: /s/ JOHN M. COGEDIAN Name: John M. Cogedian Title: Chief Operating Officer, LLC (Manager) Sankaty Advisors, LLC as Collateral Manager for AVERY POINT CLO, LTD. as Term Lender...

  • Page 119
    Manager For Loan Funding XI LLC, as Term Lender By: /s/ JEFFREY HAWKINS Name: Jeffrey Hawkins Title: Senior Vice President Sankaty Advisors, LLC as Collateral Manager for Race Point CLO, Limited, as Term Lender By: /s/ JEFFREY HAWKINS Name: Jeffrey Hawkins Title: Senior Vice President 9

  • Page 120
    ... Advisors LLC as Collateral Manager for Race Point II CLO Limited, as Term Lender By: /s/ JEFFREY HAWKINS Name: Jeffrey Hawkins Title: Senior Vice President Sankaty High Yield Asset Partners, L.P. By: /s/ JEFFREY HAWKINS Name: Jeffrey Hawkins Title: Senior Vice President Sankaty High Yield Asset...

  • Page 121
    ... LLC as its Collateral Manager By: /s/ CHRISTOPHER E. JENSEN Name: Christopher E. Jensen Title: Managing Partner Stanfield Quattro CLO, Ltd. By: Stanfield Capital Partners LLC As its Collateral Manager By: /s/ CHRISTOPHER E. JENSEN Name: Christopher E. Jensen Title: Managing Partner WhiteHorse II...

  • Page 122
    QuickLinks SECOND AMENDMENT TO CREDIT AGREEMENT AND FIRST AMENDMENT TO PLEDGE AGREEMENT WITNESSETH

  • Page 123
    ..., Inc., a Delaware corporation Juno Online Services, Inc., a Delaware corporation NetBrands, Inc., a California corporation (dba Bluelight Internet Service) Classmates Online, Inc., a Washington corporation Classmates Advertising, Inc., a Delaware corporation Mega Web Services, Inc., a Delaware...

  • Page 124
    QuickLinks Exhibit 21.1

  • Page 125
    ...in the Registration Statements on Form S-8 (Nos. 333-70532, 333-88766, 333-106003, 333-114919 and 333-121217) of United Online, Inc. of our report dated March 15, 2005 relating to the financial statements, financial statement schedule, management's assessment of the effectiveness of internal control...

  • Page 126
    QuickLinks CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

  • Page 127
    ... Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Mark R. Goldston, certify that: 1. I have reviewed this annual report of United Online, Inc.; 2. Based on my...

  • Page 128
    QuickLinks Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

  • Page 129
    ... and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 16, 2005 /s/ CHARLES S. HILLIARD Charles S. Hilliard Executive Vice President, Finance and Chief Financial...

  • Page 130
    QuickLinks Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

  • Page 131
    ... ACT OF 2002 I, Mark R. Goldston, Chairman, Chief Executive Officer and President of United Online, Inc. (the "Company"), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (a) the Annual Report on Form 10-K of...

  • Page 132
    QuickLinks Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

  • Page 133
    ... Chief Financial Officer of United Online, Inc. (the "Company"), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (a) the Annual Report on Form 10-K of the Company for the year ended December 31, 2004, as filed...

  • Page 134
    QuickLinks Exhibit 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002