Classmates.com 2005 Annual Report Download

Download and view the complete annual report

Please find the complete 2005 Classmates.com annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 116

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116

UNITED ONLINE INC
FORM 10-K
(Annual Report)
Filed 03/06/06 for the Period Ending 12/31/05
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
    ... ONLINE INC FORM 10-K (Annual Report) Filed 03/06/06 for the Period Ending 12/31/05 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 Services...

  • Page 2
    ... by check mark whether the registrant is a shell company (as defined in Rule 12b-2) of the Act). Yes 3 No  At June 30, 2005, 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 such date...

  • Page 3
    ..., 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 requirement, tax payments and our cash position. In addition, any...

  • Page 4
    ...Web-hosting, premium email, Internet security and online digital photo-sharing, among others. We also offer advertising-supported versions of many of our services at no charge to consumers. On a combined basis, our Web properties attract a significant number of Internet users each month. Advertisers...

  • Page 5
    ... people from their past. Membership in our social-networking services is free and allows users to post a personal profile, access and search our database of other registered members within personally relevant online communities from school, work and the military. In addition to features of our free...

  • Page 6
    ... such search services. In addition, we offer advertisers sophisticated market research capabilities through our CyberTarget division, which can design and execute customized, real-time market research in an Internet environment and help advertisers better understand their target audience. INDUSTRY...

  • Page 7
    .... It is estimated that subscription sales for social networking Web sites (including personals, dating, communities, and careers) was $556 million in 2005, up 7.6% from 2004. We believe that consumer interest in the online social-networking market will be fueled by a number of factors, including...

  • Page 8
    ... all of United Online's operations were focused on providing value-priced dial-up Internet access services in the U.S. and Canada. During 2005, competitive factors caused our access revenues to decrease and we expect this trend to continue. While we intend to attempt to minimize the decline in our...

  • Page 9
    ...services, including Internet search. In addition, a significant portion of the Web pages for our Web-based email, free community-based networking and consumer Web-hosting services are dedicated to advertising partners. We also display a toolbar on access users' screens throughout their online access...

  • Page 10
    ... 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 ACH, personal check or money order, or via their local telephone bill. Pay access accounts that...

  • Page 11
    ... hardware and outsourced network services. We have developed software to enhance the functionality of certain components of our services, including connectivity, Web services, billing, email, customer support and targeted advertising. We maintain data centers in multiple locations around the country...

  • Page 12
    ... in multiple data centers with a variety of fail-over logic. We also maintain infrastructure to support our PhotoSite photo service, our Web-hosting services, and our Classmates social-networking service. Our photo business principally utilizes internally developed and acquired software. The...

  • Page 13
    ... Corporation; local telephone companies; and regional and local commercial ISPs. Also, a number of municipalities, such as San Francisco, have announced their intention to make available wireless broadband access services to their communities free of charge or for discounted fees, and significant...

  • Page 14
    ...the features of their offerings in response to competition from broadband and valuepriced providers. In particular, many premium-priced services include at no additional charge telephone technical support, proprietary content, parental controls, multiple accounts and email addresses, increased email...

  • Page 15
    ... fee, if any, charged by other value-priced providers for comparable features. Our decision not to offer a broader variety of features and our charges for additional services or features, particularly accelerated functionality, virus protection and telephone technical support, may adversely impact...

  • Page 16
    ...pay accounts, subscriptions, revenues or profitability. Competition in Additional Service Markets One element of our strategy is to offer a variety of non-access subscription services. In addition to social-networking and VoIP services, we currently offer Web-hosting and domain registration services...

  • Page 17
    ... access, email, Web-hosting and online photo-sharing subscribers and indirectly for subscribers to our social-networking services. To the extent competitors who are also sources of significant advertising revenue cease to do business with us, our revenues and profits could suffer. PRIVACY POLICY...

  • Page 18
    ... 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, our code of ethics and other documents filed...

  • Page 19
    ...-market additional subscriptions to existing users or successfully acquire or develop and commercialize new services, our pay accounts and subscriptions could continue to decline. Our business is subject to fluctuations. Our results of operations and changes in the number and mix of pay accounts...

  • Page 20
    ...to successfully complete acquisitions. The merger and acquisition market for companies offering Internet 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 been very...

  • Page 21
    ..., primarily Best Buy. If the number of new pay accounts acquired through Best Buy were to decrease, such decrease could negatively impact the number of pay access accounts and our revenues and profitability could be negatively impacted. If we are unable to retain users, our business and financial...

  • Page 22
    ... to attract advertisers, on the number of advertising impressions we have available to sell, and on how many pay accounts and 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...

  • Page 23
    ... to maintain or renew our significant agreements or to replace such agreements with similar agreements with new customers. If our access accounts usage increases or our telecommunications costs increase, our business may suffer. Other than sales and marketing, our telecommunications costs are our...

  • Page 24
    ... in market rates would increase the cost of providing our services and, if significant, could have a material adverse effect on our business, financial position, results of operations and cash flows. If we fail to manage our telecommunications or our internal network capacities, our access service...

  • Page 25
    ... addition, our ability to 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...

  • Page 26
    ... of third parties. Third parties have in the past used our networks, 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 27
    ... 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 28
    ... our business. On February 12, 2004, the FCC opened a rulemaking proceeding that is considering, among other things, whether to classify VoIP services as information or telecommunications services under federal law. Other issues under consideration include access to telephone numbers, contributions...

  • Page 29
    ... authority. If the CPUC does so, users of VoIP services could be required to obtain telephone numbers from specific area codes and we could be required to provision new telephone numbers to our customers that access our service via dialup accounts. The FCC's order allows the CPUC to determine what...

  • Page 30
    ... 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 long-distance charges, as well as the requirement to provide adequate customer support to process cancellations. We received...

  • Page 31
    ... in their current form, acquire additional users, enhance or expand our services, respond to competitive pressures or take advantage of perceived opportunities, and our business and its future prospects may suffer. We may stop paying quarterly cash dividends on our common stock. Commencing with the...

  • Page 32
    ...: Approximate Facilities Location Square Feet Lease Expiration Principal executive and corporate offices Operations facility Customer support and technology facility Operations and technology facility Operations facility Woodland Hills, California Renton, Washington Hyderabad, India New York...

  • Page 33
    ...cover user access to a computer network. On October 28, 2005, the court issued an order granting defendants' motions for summary judgment of non-infringement of the patent. MyMail has filed a notice of appeal of the trial court's ruling. The pending lawsuits involve complex questions of fact and law...

  • Page 34
    ... II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock has been quoted on the Nasdaq National Market ("NASDAQ") under the symbol "UNTD" since September 26, 2001. Prior to that, NetZero common stock had been quoted...

  • Page 35
    ... to offer our eligible employees the opportunity to exchange any outstanding stock options granted to them which have an exercise price per share of our common stock at or above $16.00 (the "Eligible Options") in return for restricted stock units ("RSUs"). The number of RSUs that will be issued in...

  • Page 36
    ... in this Annual Report on Form 10-K. The following amounts are in thousands, except per share data: Year Ended December 31, 2005 2004(1) Six Months Ended December 31, 2003(2) Year Ended June 30, 2002(4) 2001(5) 2003(3) Consolidated Statements of Operations Data: Total revenues Operating income...

  • Page 37
    ...Classmates Online. Our subscription services include dial-up Internet access, social-networking, VoIP telephony, personal Web-hosting, premium email, Internet security and online digital photo-sharing, among others. We also offer advertising-supported versions of many of our services at no charge to...

  • Page 38
    ... access services, we have diversified our business by acquiring or developing a number of non-access Internet services, including social-networking, VoIP, personal Web-hosting, premium email and content, and online digital photo-sharing. A significant part of our strategy is to enhance and market...

  • Page 39
    ..., Web-hosting and domain name registration services, premium email services, premium content, Internet security, photo-sharing services and VoIP. In addition, we charge fees for certain VoIP telephony for minutes and live telephone technical support. Our billable services revenues are...

  • Page 40
    ...including our pay accounts. Factors impacting our advertising and commerce revenues generally include changes in orders from significant customers, the state of the online search and advertising markets, seasonality, increases or decreases in our active accounts, limitations on our free services and...

  • Page 41
    ... networks and data centers, depreciation of network computers and equipment, email technical support and license fees. We allocate costs associated with access services between billable services and free services based on the aggregate hourly usage of our pay access accounts as a percentage of total...

  • Page 42
    ... used by free Web-hosting and online photo accounts. Costs associated with our social-networking services are allocated between billable services and free services based on the number of Web site visits by free accounts relative to the total number of user visits. Cost of free services increased by...

  • Page 43
    ... marketing activities, changes in the cost to purchase advertising, changes in the number of pay accounts, the introduction of new services such as VoIP, and the impact of such activities on our results of operations. While we anticipate that sales and marketing expenses as a percentage of revenues...

  • Page 44
    ... 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, and...

  • Page 45
    ... pay accounts and free accounts, acquired trademarks and trade names, purchased technologies and other identifiable intangible assets. At December 31, 2005, we had approximately $59.3 million in net identifiable intangible assets resulting primarily from the acquisitions of Classmates, BlueLight...

  • Page 46
    ... statutory rate primarily due to the release of substantially all of the balance of the valuation allowance attributable to the expected utilization of net deferred tax assets in the future. At December 31, 2005, the Company had net operating loss and tax credit carryforwards for federal and state...

  • Page 47
    ...; 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 September 2004 quarters in pay access accounts and, for the first time since we began offering pay access services...

  • Page 48
    ... costs per pay access account; decreased customer billing and support costs per pay account primarily as a result of better pricing obtained from our principal customer support vendor; and a decrease in average hourly usage per pay access account. Cost of Free Services Cost of free services...

  • Page 49
    ...expenses as a result of higher compensation costs, including increased costs associated with our acquisitions of our Web-hosting and community-based networking businesses. These increases were partially offset by a $1.7 million decrease in legal settlement costs. Amortization of Intangible Assets At...

  • Page 50
    ... 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 51
    ... pay access account; decreased customer billing and support costs per pay access account as a result of better pricing obtained from our primary customer support vendor; decreased depreciation expense; and a slight decrease in average hourly usage per pay access account. Cost of Free Services Cost...

  • Page 52
    ... that focus on increasing our pay account base, promoting our accelerated dial-up 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 53
    ... primarily on our history of net operating losses as compared to, at the time, only a recent trend of profitable operations, the potential for future stock option deductions to significantly reduce taxable income, our annual net operating loss limitations under Section 382 of the Code and the need...

  • Page 54
    ...by employees. Our net operating loss and tax credit carryforwards, when combined with exercises of employee stock options, have helped to reduce the level of cash paid for income taxes. However, cash paid for income taxes in 2005 was $14.0 million, compared to $2.9 million in 2004, with the majority...

  • Page 55
    ..., potential future acquisitions and new business initiatives, which are difficult to predict and could change significantly over time. Additionally, technological advances may require us to make capital expenditures to develop or acquire new equipment or technology in order to replace aging...

  • Page 56
    ...balances and future cash generated from operations to fund dividend payments; to develop and acquire complementary services, businesses or technologies; to repurchase shares of our common stock if we believe market conditions to be favorable; pay the withholding taxes due on vested RSUs; and to fund...

  • Page 57
    ...Advance payments from pay accounts are recorded on the balance sheet as deferred revenue. We offer alternative payment methods to credit cards for certain pay service plans. These alternative payment methods currently include payment by ACH, personal check or money order or through a local telephone...

  • Page 58
    ... a discount rate commensurate with the risk involved, quoted market prices or appraised values, depending on the nature of the assets. Goodwill We adopted SFAS No. 142 on July 1, 2002. Under SFAS No. 142, goodwill is not amortized, but is tested for impairment at a reporting unit level on an annual...

  • Page 59
    ...; perpetual growth rate; determination of appropriate market comparables; and the determination of whether a premium or a discount should be applied to comparables. Most of the foregoing assumptions are made based on available historical information. Income Taxes Income taxes are accounted for under...

  • Page 60
    ... 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 recognized in the financial statements. This statement establishes fair value as the measurement objective in accounting for share...

  • Page 61
    ...modification of employee share options prior to adoption of SFAS No. 123R and disclosures in Management's Discussion and Analysis subsequent to adoption of SFAS No. 123R. In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections-a replacement of APB Opinion No. 20 and FASB...

  • Page 62
    ... market funds. Our primary objective is the preservation of principal and liquidity while maximizing yield. The minimum long-term rating is A, and if a long-term rating is not available, we require a short-term credit rating of A1 and P1. The value of these investments may fluctuate with changes...

  • Page 63
    ... because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company's internal control over financial reporting at December 31, 2005. In making this assessment, management used the criteria...

  • Page 64
    ... the consolidated financial statements or notes thereto. 3. Exhibits: No. Exhibit Description Filed with this Form 10-K Incorporated by Reference to Form File No. Date Filed 2.1 3.1 3.2 3.3 Agreement and Plan of Merger, dated October 23, 2004, among United Online, Inc., Mariner Acquisition Corp...

  • Page 65
    ... Amended and Restated 1999 Stock Plan Classmates Online, Inc. 2004 Stock Plan Form of Option Agreement for Classmates Online, Inc. 2004 Stock Plan United Online, Inc. 2005 Management Bonus Plan Amended and Restated Employment Agreement between the Registrant and Mark R. Goldston Amended and Restated...

  • Page 66
    ...19 10.20 Employment Agreement between the Registrant and Gerald Popek Employment Agreement between the Registrant and Robert Taragan Office Lease between LNR Warner Center, LLC and NetZero, Inc. Credit Agreement, dated as of December 3, 2004, among United Online, the Lenders party thereto from time...

  • Page 67
    ... 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 6, 2006. UNITED ONLINE, INC. By: /s/ MARK R. GOLDSTON Mark R. Goldston Chairman, Chief Executive Officer and President KNOW ALL PERSONS BY THESE...

  • Page 68
    ... and Restated 1999 Stock Plan Classmates Online, Inc. 2004 Stock Plan Form of Option Agreement for Classmates Online, Inc. 2004 Stock Plan United Online, Inc. 2005 Management Bonus Plan Amended and Restated Employment Agreement between the Registrant and Mark R. Goldston 8-K 8-K 8-K 000-33367 000...

  • Page 69
    ... Jon Fetveit Employment Agreement between the Registrant and Gerald Popek Employment Agreement between the Registrant and Robert Taragan Office Lease between LNR Warner Center, LLC and NetZero, Inc. Credit Agreement, dated as of December 3, 2004, among United Online, the Lenders party thereto from...

  • Page 70
    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 Consolidated Statements of Stockholders' Equity Consolidated ...

  • Page 71
    ... OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of United Online, Inc.: We have completed an integrated audit of United Online, Inc.'s 2005 and 2004 consolidated financial statements and of its internal control over financial reporting as of December...

  • Page 72
    ... generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that... of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use...

  • Page 73
    ... Deferred revenue Term loan Capital leases Other liabilities Total liabilities Commitments and contingencies (see Note 9) Stockholders' equity: Preferred stock, $0.0001 par value; 5,000 shares authorized; no shares issued or outstanding at December 31, 2005 and 2004 Common stock, $0.0001 par value...

  • Page 74
    UNITED ONLINE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) Year Ended December 31, 2005 2004 Six Months Ended December 31, 2003 Year Ended June 30, 2003 Revenues: Billable services Advertising and commerce Total revenues Operating expenses: Cost of ...

  • Page 75
    UNITED ONLINE, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) Year Ended December 31, 2005 2004 Six Months Ended ... tax of $(193), $(452), $(553) and $992 for the years ended December 31, 2005 and 2004, the six months ended December 31, 2003 and the year ended June 30, 2003...

  • Page 76
    UNITED ONLINE, INC. CONSOLIDATED...stock through employee stock purchase plan Exercises of stock options Repurchases of common stock Issuance of restricted stock units Cancellation of restricted stock units Cancellation of options assumed in connection with acquisition Common Stock... Total ...

  • Page 77
    ... on shares outstanding and restricted stock units Stock-based compensation Unrealized loss on short-term investments, net of tax Unrealized gain on derivative Foreign currency translation Tax benefits from stock options Net income Balance at December 31, 2005 62,606 6 (38,067 ) 8 - - - 7,185...

  • Page 78
    ... from sale of cost-basis investment Cash paid for acquisitions, net of cash acquired Net cash used for investing activities Cash flows from financing activities: Payments on capital leases Proceeds from term loan and line of credit, net Payments on term loan Repayment of line of credit Repayment...

  • Page 79
    ... Web-hosting, premium email, Internet security and online digital photo-sharing, among others. The Company also offers advertising-supported versions of many of its services at no charge to customers. On a combined basis, the Company's Web properties attract a significant number of Internet users...

  • Page 80
    ... of revenues and expenses. Actual results could differ from those estimates. Significant Accounting Policies Use of Estimates- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates...

  • Page 81
    ... 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 82
    ... 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 amount. Events or circumstances which could trigger an impairment review include a significant adverse change in legal factors or in the business...

  • Page 83
    ... sheet as deferred revenue. The Company offers alternative payment methods to credit cards for certain pay service plans. These alternative payment methods currently include electronic check payment, payment by personal check or money order or through a local telephone company. In circumstances...

  • Page 84
    ...free Web-hosting and online photo accounts. Costs associated with the Company's social-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...

  • Page 85
    ...professional, legal, accounting and financial services, non-income 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. Stock-Based Compensation- The Company accounts for stock-based employee...

  • Page 86
    ... ended December 31, 2005, the Company issued 1.7 million restricted stock units ("RSUs") with a weighted average grantdate fair value of $10.77. During the year ended December 31, 2004, the Company issued 0.6 million shares of restricted stock with a weighted average grant-date fair value of $19.91...

  • Page 87
    ...dial-up Internet access, social-networking, VoIP telephony, personal Web-hosting, online digital photo sharing and premium email services, among others. The Company also offers, at no charge, advertising supported versions of certain of its services. In addition, the Company offers marketers a broad...

  • Page 88
    ... of employee share options prior to adoption of SFAS No. 123R and disclosures in Management's Discussion and Analysis ("MD&A") subsequent to adoption of SFAS No. 123R. In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections-a replacement of APB Opinion No. 20 and...

  • Page 89
    ... the U.S. and Canada with friends and acquaintances from school, work and the military. Its Classmates International subsidiary also operates leading community-based networking sites in Sweden (www.klasstraffen.com), and in Germany (www.stayfriends.de). The acquisition was accounted for under the...

  • Page 90
    ... expand the Company's subscription offerings. Classmates' results of operations are included in the consolidated financial statements from the date of acquisition. The purchase price of approximately $131.4 million, including acquisition costs of $3.1 million for professional, accounting, legal and...

  • Page 91
    ... and email services. The acquisition has been accounted for under the purchase method in accordance with SFAS No. 141. The primary reason for the acquisition was to acquire About, Inc.'s Web-hosting services and account base in order to expand the Company's service offerings. The purchase price of...

  • Page 92
    ... the acquisition (in thousands): Description Estimated Fair Value Estimated Amortizable Life Net tangible assets acquired: Accounts receivable Property and equipment Accounts payable Deferred service liabilities Total net tangible assets acquired Intangible assets acquired: Pay accounts Proprietary...

  • Page 93
    ... yield-at-cost show a mark-to-market unrealized loss. All unrealized losses are due to changes in interest rates and bond yields. We expect to realize the full value of all these investments upon maturity or sale. Maturities of short-term investments were as follows (in thousands): December 31, 2005...

  • Page 94
    ... in the state income tax rate expected to apply to future reversals of acquired book/tax basis differences. Intangible assets consist of the following (in thousands): December 31, 2005 Accumulated Cost Amortization Net Pay accounts and free accounts Trademarks and trade names Advertising contracts...

  • Page 95
    ... 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 96
    ..., liens against the Company's assets, payment of dividends, consolidation, merger, purchase or sale of assets, capital expenditures, investments and acquisitions. At December 31, 2005, the Company was in compliance with all covenants. The credit agreement also includes certain customary events of...

  • Page 97
    ... generally will be entitled to redeem the rights at $0.0007 per right at any time until 10 days after a public announcement that a 15% position in the Company's common stock has been acquired or that a tender or exchange offer which would result in a person owning 15% or more of the Company's common...

  • Page 98
    ... of a publicly announced program. Dividends In May, August and October of 2005, the Company's Board of Directors declared a quarterly cash dividend of $0.20 per share of common stock. The quarterly dividends were paid on May 31, 2005, August 31, 2005 and November 30, 2005 and totaled $12.6 million...

  • Page 99
    ...0.52 0.48 5,386 67,074 0.45 0.41 $ $ $ $ $ $ $ $ The diluted per share computations exclude options, unvested common stock and warrants, which are antidilutive. The number of antidilutive shares at December 31, 2005, 2004 and 2003 and June 30, 2003 was 6.8 million, 6.4 million, 1.1 million and...

  • Page 100
    ... contribution plan under Section 401(k) of the Internal Revenue Code (the "Code"). Under the Savings Plan, participating employees may defer a percentage (not to exceed 40%) of their eligible pretax earnings up to the Internal Revenue Service annual contribution limit. All full-time employees on...

  • Page 101
    ... tax rate primarily due to the release of the 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 state income taxes. In September 2002, the State of California enacted legislation...

  • Page 102
    ... pursuant to the state allocation and apportionment laws. These carryforwards have been adjusted to reflect limitations under Section 382 of the Code. The Company has also claimed income tax deductions from the exercise of certain stock options and the related sale of common stock by employees, and...

  • Page 103
    ... of United Online or its subsidiaries whose service commenced or commences following the date of the acquisition. An aggregate of approximately 0.4 million shares have been reserved under the Classmates 1999 Stock Plan, of which approximately 60,000 options remained outstanding at December 31, 2005...

  • Page 104
    ... December 31, 2004 and 2005 (in thousands, except per share amounts): Number of Shares Price Per Share Weighted Average Exercise Price Options outstanding at June 30, 2002 Granted Exercised Canceled Options outstanding at June 30, 2003 Granted Exercised Canceled Options outstanding at December 31...

  • Page 105
    ...Year Ended Year Ended December 31, 2005 2004 Six Months Ended December 31, 2003 June 30, 2003 Operating expenses: Cost of billable services Sales and marketing Product development General and administrative Total stock-based compensation Acceleration of Stock Options $ 183 954 1,069 7,746 $ 9,952...

  • Page 106
    ... grant and have an exercise price of $18.70. In March 2005, the Company issued approximately 1.0 million RSUs to certain of the Company's executive officers. Each RSU entitles the officer to receive one share of the Company's common stock upon vesting. The units vest 25% annually over the four-year...

  • Page 107
    ... are discounted using varying rates over the lease terms. Amounts i nclude $33,000 of imputed interest. (2) The Company leases its facilities under operating leases expiring at various periods through 2014. The leases generally contain annual escalation provisions as well as renewal options. Total...

  • Page 108
    ...cover user access to a computer network. On October 28, 2005, the court issued an order granting defendants' motions for summary judgment of non-infringement of the patent. MyMail has filed a notice of appeal of the trial court's ruling. The pending lawsuits involve complex questions of fact and law...

  • Page 109
    ... is reflected in the consolidated financial statements, though the Company can provide no assurance that such reserves will be adequate. The Company is subject to various other legal proceedings and claims that arise in the ordinary course of business. Management believes the amount and ultimate...

  • Page 110
    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, 2005 Year ended...

  • Page 111
    ... a California corporation (dba BlueLight Internet Service) Classmates Online, Inc., a Washington corporation United Online Web Services, Inc., a Delaware corporation (dba 50 Megs, Bizhosting, Freeservers, Global Servers and MySite) United Online Advertising Network, Inc., a Delaware corporation (dba...

  • Page 112
    ...the Registration Statements on Form S-8 (Nos. 333-70532, 333-88766, 333-106003, 333-114919, 333-121217 and 333-123392) of United Online, Inc. of our report dated March 3, 2006 relating to the financial statements, financial statement schedule, management's assessment of the effectiveness of internal...

  • Page 113
    ... information; 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 6, 2006 /s/ MARK R. GOLDSTON Mark R. Goldston Chairman, Chief Executive Officer and President

  • Page 114
    ... report financial information; 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 6, 2006 /s/ CHARLES S. HILLIARD Charles S. Hilliard Executive Vice President...

  • Page 115
    ...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 the...

  • Page 116
    ... 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, 2005, as filed...