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UNITED ONLINE INC
FORM 10-K
(Annual Report)
Filed 03/01/07 for the Period Ending 12/31/06
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 03/01/07 for the Period Ending 12/31/06 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, 2006, 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
    ... Information Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accounting Fees and Services...

  • Page 4
    ... entitled "Risk Factors" in this Annual Report on Form 10-K and our other...business, financial position, results of operations and cash flows. Statements indicating factors that we believe may impact our results are not intended to be exclusive. We undertake no obligation to revise or update publicly...

  • Page 5
    ... and core competencies to expand our businesses, through internal development and acquisitions, beyond dial-up Internet access while managing our declining dial-up access services for profitability. United Online, Inc., a Delaware corporation headquartered in Woodland Hills, California, commenced...

  • Page 6
    ...for our Communications segment is to manage our dial-up business for profitability while extending the business life cycle of our dial-up subscribers by offering them a DSL alternative to their dial-up service. Industry Background The United States consumer Internet access service market has evolved...

  • Page 7
    ...-networking services is free and the vast majority of our social-networking accounts are free accounts. A free account allows a user to engage in a variety of activities on our Web sites including posting a personal profile and searching our database for other registered members. We also offer pay...

  • Page 8
    ... plans and promotions, such as one or more free months of service or discounted rates for an initial period or an extended commitment. Advertising Revenues We provide advertising solutions to marketers with both brand and direct response objectives through a full suite of display, search, email and...

  • Page 9
    ... CDs at retail locations, the preloading of our access software on personal computers and partner CDs, and links to our services on partner Web sites. In most cases, we pay a per pay account acquisition fee to these distributors. SALES OF ADVERTISING INVENTORY We have internal media groups dedicated...

  • Page 10
    ... social-networking services compete for members directly against a small number of companies, including Reunion.com, offering similar online social-networking services, and against many schools, employers, Web sites, and associations that maintain their own Internetbased alumni information services...

  • Page 11
    ...help tools are also designed to assist users in updating and verifying billing information, downloading and operating our software and setting up their accounts. We also offer live telephone technical support for our access services billed on a per-minute basis and telephone billing support for free...

  • Page 12
    ... with employees to be good. AVAILABLE INFORMATION Our corporate Web site is www.unitedonline.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...

  • Page 13
    ... no longer have a significant, if any, price advantage over certain broadband services. As a result, dial-up services have an increasingly difficult time competing with broadband services and the number of dialup accounts in the United States has been declining at an increasing rate. In addition to...

  • Page 14
    ....com service, offering similar online social-networking services based on work, school and military communities. Our social-networking services also compete directly with many schools, employers, Web sites, and associations that maintain their own Internet-based alumni information services. In...

  • Page 15
    ... Data security and privacy concerns may cause consumers not to sign up for our program or cause our members to stop using the service or resist providing the personal data necessary to support our program's profiling capability. In addition, we acquire a significant number of our new members through...

  • Page 16
    ... be effective, and our advertising revenues may decline in future periods. Our business is subject to fluctuations. Our results of operations and changes in the number and mix of pay accounts from period to period have varied in the past and may fluctuate significantly in the future due to a variety...

  • Page 17
    ... market for companies offering Internet services is extremely competitive, particularly for companies who have demonstrated a profitable business model with long-term growth potential. Companies with these characteristics trade publicly or are privately valued at multiples of earnings, revenues...

  • Page 18
    ... in developing, acquiring or implementing new or enhanced services, or that new or enhanced services will be commercially successful. Our access business is dependent on our ability to effectively manage our telecommunications and network capacities. Our access business substantially depends on...

  • Page 19
    ... the live technical and billing support functions. As a result, we maintain only a small number of internal customer service personnel. We are not equipped to provide the necessary range of customer service functions in the event that our vendors become unable or unwilling to offer these services to...

  • Page 20
    ... assure you that the security measures of our third-party network providers, providers of customer and billing support services or other vendors will be adequate. In addition to potential legal liability, these activities may adversely impact our reputation or our revenues and may interfere with...

  • Page 21
    ... regulations, including those relating to issues such as user privacy and data protection, defamation, pricing, advertising, taxation, sweepstakes, promotions, billing, content regulation, bulk email or "spam," anti-spyware initiatives, security breaches and consumer protection. Compliance with the...

  • Page 22
    ... could materially and adversely affect our business. Our social-networking services and loyalty marketing business deliver a significant number of emails to our members. In addition to any government laws and regulations, voluntary actions by third parties to block, impose restrictions on or charge...

  • Page 23
    ... by our board of directors. Our future cash flows may significantly decline due to declines in our dial-up Internet access business, the payment of income taxes and other factors, and our cash balances will decline if we use our cash to acquire businesses or technologies, repurchase stock or for...

  • Page 24
    ...the complaint. On July 27, 2006, plaintiff Donald E. Ewart filed a purported consumer class action lawsuit in the Superior Court of the State of California, County of Los Angeles, against NetZero claiming that NetZero continues to charge consumers fees after they cancel their Internet access account...

  • Page 25
    ... a new class representative. 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...

  • Page 26
    ... surplus, as defined and computed in accordance with the General Corporation Law of the State of Delaware. Common Stock Repurchases Our Board of Directors authorized a common stock repurchase program that allows us to repurchase shares of our common stock through open market or privately negotiated...

  • Page 27
    ...in cash, which is accounted for as a repurchase of common stock. Common stock repurchases at December 31, 2006 were as follows (in thousands, except per share amounts): Maximum Approximate Total Number of Shares Purchased as Part of a Publicly Announced Program Dollar Value that May Yet be Purchased...

  • Page 28
    ... any filing of United Online under the Securities Act of 1933, as amended or the Exchange Act. The following graph compares, for the five year period ended December 31, 2006, the cumulative total stockholder return for the Company's common stock, the Nasdaq Stock Market (U.S. companies) Index (the...

  • Page 29
    ... to a change in the valuation allowance. Net income included NOL tax benefits of $12.3 million for the six months ended December 31, 2003. In November 2004, we acquired Classmates. The results of Classmates are included in our consolidated results of operations from the date of acquisition. See Note...

  • Page 30
    ... and measurement services. Segment Definitions We report our businesses in two reportable segments: Segment Internet Services Communications Content & Media Internet access, email, Internet security, family services and VoIP. Social networking, loyalty marketing, Web hosting and photo sharing. 29

  • Page 31
    ... million active accounts. A pay account represents a unique billing relationship with a customer who subscribes to one or more of our pay services. "Active" accounts include total pay accounts as well as free users who have logged onto our access, social-networking, email or VoIP services during the...

  • Page 32
    Consolidated information is as follows: Year Ended December 31, 2006 2005 2004 Billable services Advertising Total revenues Operating expenses: Cost of revenues Sales and marketing Product development General and administrative Amortization of intangible assets Impairment of goodwill, intangible ...

  • Page 33
    ... purchases related to the Employee Stock Purchase Plan ("employee stock purchases") based on the grant date fair values of the awards. SFAS No. 123R supersedes our previous accounting under Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees . In March 2005...

  • Page 34
    ... related to stock options had been recognized in our consolidated statements of operations, other than as related to acquisitions, because the exercise price of our stock options granted to employees and directors equaled the fair market value of the underlying stock at the grant date. Stock-based...

  • Page 35
    ...; the number of services subscribed to by each pay account; pricing and success of new pay services and the penetration of these types of services as a percentage of total pay accounts; and the timing of pay accounts being added or removed during a period. Consolidated Billable Services Revenues...

  • Page 36
    ... and search placements, email campaigns and user registration placements. In addition, we offer advertisers sophisticated market research capabilities and online direct marketing solutions. Factors impacting our advertising revenues generally include changes in orders from significant customers, the...

  • Page 37
    ... of network computers and equipment; email technical support and license fees; costs related to providing telephone technical support; customer billing and billing support to our pay accounts; domain name registration fees; and costs of providing rewards to members of our loyalty marketing service...

  • Page 38
    ... partners to acquire new 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. Marketing and advertising costs to promote our products and services are expensed...

  • Page 39
    ...-networking services and increased headcount associated with the acquisition of our loyalty marketing service in April 2006. General and Administrative General and administrative expenses include personnel-related expenses for executive, finance, legal, human resources and internal customer support...

  • Page 40
    ... between annual tests if an event occurs or circumstances change that would indicate the fair value of a reporting unit below its carrying value amount. Consolidated amortization of intangible assets decreased by $4.2 million, or 19%, to $17.6 million for the year ended December 31, 2006, compared...

  • Page 41
    ...of the Internal Revenue Code (the "Code"); (2) foreign losses, the benefit of which is not currently recognizable due to uncertainty regarding realization; and (3) the re-measurement of net deferred tax assets in New York. Additionally, in 2006, the effective rate was increased due to employee stock...

  • Page 42
    ... was primarily attributable to a decline in ARPU for our access services due to increased use of free months of service and promotional pricing to obtain or retain pay access accounts. This decrease was partially offset by a 4% increase in our average number of pay accounts from 3,098,000 for the...

  • Page 43
    ...of Communications revenues, for the year ended December 31, 2004. The decrease was due to a $6.4 million decrease in telecommunications costs and a $1.3 million decrease in customer support and billing-related costs. These decreases were partially offset by an increase of $1.3 million in network and...

  • Page 44
    ... 31, 2005, compared to $174.6 million, or 40.2% of Communications revenues, for the year ended December 31, 2004. This decrease is attributable to a $16.3 million decline in advertising, promotion and distribution costs related to our access services, the majority of which was due to reductions in...

  • Page 45
    ...and the Web-hosting and photo-sharing services. In accordance with the provisions set forth in SFAS No. 142, Goodwill and Other Intangible Assets , goodwill is not being amortized but is tested for impairment at a reporting unit level on an annual basis and between annual tests if an event occurs or...

  • Page 46
    ... for legal settlements and a $0.9 million increase in net amortization on short-term investments; and • a $37.7 million net decrease in working capital accounts, including a $28.9 million decrease in accounts payable and accrued liabilities, a $6.2 million decrease in deferred revenue primarily...

  • Page 47
    ...a number of factors including, without limitation, 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...

  • Page 48
    ...near term. We intend to use our existing cash balances and future cash generated from operations to fund dividend payments, if declared by the Board; to develop and acquire complementary services, businesses or technologies; to repurchase shares of our common stock if we believe market conditions to...

  • Page 49
    ...in working capital accounts due to increases in revenues and operating expenses and the timing of related cash receipts and payments,...acquisition for $98.2 million in cash, net of cash acquired, in November 2004; and • a $17.0 million net increase in proceeds from maturities and sales of short-term...

  • Page 50
    ... 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 51
    ... from corporate advertising customers by charging fees for sending emails to the MyPoints' members and placing advertising on the MyPoints Web site. Under the terms of advertising contracts, MyPoints earns revenue primarily based on three components: (1) transmission of email advertisements to...

  • Page 52
    ... the reporting unit is less than book value, then the carrying amount of the goodwill is compared with its implied fair value. The estimate of implied fair value of goodwill may require independent valuations of certain internally generated and unrecognized intangible assets such as our pay account...

  • Page 53
    ...outcome of those claims. As additional information becomes available, we continually assesses the potential liability related to all pending litigation. Recent Accounting Pronouncements Accounting Changes and Errors In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections...

  • Page 54
    ... Value Measurements In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements , which clarifies the definition of fair value, establishes guidelines for measuring fair value, and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value...

  • Page 55
    ... procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that...

  • Page 56
    ... December 31, 2006 and 8% of consolidated revenue for the year then ended. Management's assessment of the effectiveness of the Company's internal control over financial reporting at December 31, 2006 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as...

  • Page 57
    ... are filed as part of this report: 1. 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...

  • Page 58
    ... 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. 2006 Management Bonus Plan Amended and Restated Employment Agreement between the Registrant and Mark R. Goldston Amended and Restated...

  • Page 59
    ... and Robert Taragan Employment Agreement between the Registrant and Jeremy Helfand Office Lease between LNR Warner Center, LLC and NetZero, Inc. List of Subsidiaries Consent of Independent Registered Public Accounting Firm Certification of the Chief Executive Officer pursuant to Section 302 of the...

  • Page 60
    ... 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 1, 2007. UNITED ONLINE, INC. By: /s/ MARK R. GOLDSTON Mark R. Goldston Chairman and Chief Executive Officer KNOW ALL PERSONS...

  • Page 61
    ... Stock Incentive Plan Form of Option Agreement for 2001 Supplemental Stock Incentive Plan Classmates Online, Inc. 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. 2006 Management...

  • Page 62
    ... and Robert Taragan Employment Agreement between the Registrant and Jeremy Helfand Office Lease between LNR Warner Center, LLC and NetZero, Inc. List of Subsidiaries Consent of Independent Registered Public Accounting Firm Certification of the Chief Executive Officer pursuant to Section 302 of the...

  • Page 63
    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 64
    Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of United Online, Inc.: We have completed integrated audits of United Online, Inc.'s consolidated financial statements and of its internal control over financial reporting as of December 31, 2006, in ...

  • Page 65
    ... over financial reporting of the acquired business from our audit of the Company's internal control over financial reporting. The excluded elements represent controls over accounts of approximately 4% of the Company's consolidated assets at December 31, 2006 and 8% of consolidated revenue for the...

  • Page 66
    ... liabilities Member redemption liability Deferred revenue Term loan Capital leases Other liabilities Total liabilities Commitments and contingencies (see Note 11) Stockholders' equity: Preferred stock, $0.0001 par value; 5,000 shares authorized; no shares issued or outstanding at December 31, 2006...

  • Page 67
    UNITED ONLINE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) Year Ended December 31, 2005 2006 2004 Revenues Operating expenses: Cost of revenues (including stock-based compensation, see Note 5) Sales and marketing (including stock-based compensation, see ...

  • Page 68
    UNITED ONLINE, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) Year Ended December 31, 2006 2005 2004 Net income Unrealized gain (loss) on short-term investments, net of tax of $120, $(193) and $(452) for the years ended December 31, 2006, 2005 and 2004 Unrealized gain (loss) on...

  • Page 69
    ... Unrealized loss on short-term investments, net of tax Unrealized gain on derivative, net of tax Foreign currency translation Tax benefits from stock options Net income Balance at December 31, 2005 Cumulative effect of accounting change, net of tax Balance at January 1, 2006 Reversal of deferred...

  • Page 70
    ...benefits from stock options Excess tax benefits from stock-based compensation Cumulative effect of accounting change, net of tax Other Changes in operating assets and liabilities (excluding the effects of acquisitions): Accounts receivable Other assets Accounts payable and accrued liabilities Member...

  • Page 71
    ...global social-networking service. In April 2006, the Company acquired MyPoints.com, Inc. ("MyPoints"), a leading provider of online loyalty marketing services. The Company's corporate headquarters are located in Woodland Hills, California, and the Company also maintains offices in New York, New York...

  • Page 72
    ... of accounts receivable, and, to date, such losses have been within management's expectations. The Company evaluates specific accounts where information exists that the customer may have an inability to meet its financial obligations. In these cases, based on the best available facts and...

  • Page 73
    ... to expected historical or projected future results of operations, a change 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...

  • Page 74
    ...the right to cancel or disable accounts and expire unredeemed points in those accounts that are inactive for a period of twelve consecutive months. "Inactive" shall be defined as a lack of one of the following: Web site visit (click through); email response; survey completion; profile update; or any...

  • Page 75
    ... from corporate advertising customers by charging fees for sending emails to the MyPoints' members and placing advertising on the MyPoints Web site. Under the terms of advertising contracts, MyPoints earns revenue primarily based on three components: (1) transmission of email advertisements to...

  • Page 76
    ... of network computers and equipment; email technical support and license fees; costs related to providing telephone technical support; customer billing and billing support to our pay accounts; domain name registration fees; and costs of providing rewards to members of our loyalty marketing service...

  • Page 77
    ... restricted stock. SFAS No. 123R requires companies to estimate the fair value of share-based payment awards on the grant date using an option-pricing model. Under SFAS No. 123, the Company used the Black-Scholes option-pricing model for valuation of share-based awards for its pro forma information...

  • Page 78
    ... the cumulative effect of accounting change: Year Ended December 31, 2006 Operating expenses: Cost of revenues Sales and marketing Product development General and administrative Stock-based compensation Tax benefit recognized Stock-based compensation, net of tax Stock-based compensation, net of...

  • Page 79
    ... of its Internet access, email and VoIP services; and Content & Media-consisting of its social-networking, Web-hosting, photo-sharing and, subsequent to the acquisition of MyPoints, loyalty marketing services. Unallocated corporate expenses are centrally managed at the corporate level and consist...

  • Page 80
    ... Corrections In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections-a replacement of APB Opinion No. 20 and FASB Statement No. 3 . SFAS No. 154 changes the requirements for the accounting for and reporting of a change in accounting principle and applies to all voluntary...

  • Page 81
    ...Inc. On April 10, 2006, the Company acquired MyPoints.com, Inc. for approximately $56.6 million in cash, including acquisition costs. MyPoints is a leading provider of member-driven Internet direct marketing services and provides advertisers with an integrated suite of incentive-based media products...

  • Page 82
    ... reason for the acquisition was to expand the Company's Content & Media business offerings. MyPoints' results of operations are included in the Company's consolidated financial statements from the date of acquisition. The purchase price was allocated based on the estimated fair values of assets and...

  • Page 83
    ... of expanding the Company's social-networking services. The Names Database's results of operations are included in the Company's consolidated financial statements from the date of acquisition. The purchase price was allocated based on the estimated fair values of assets and liabilities, including...

  • Page 84
    ... acquired Classmates, which operates Classmates.com (www.classmates.com), connecting millions of members throughout 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...

  • Page 85
    ... pricing model using a weighted-average expected life of 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...

  • Page 86
    ... 1.82 $ 1.70 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 method in...

  • Page 87
    3. BALANCE SHEET COMPONENTS Short-Term Investments Short-term investments consist of the following (in thousands): December 31, 2006 Gross Gross Unrealized Unrealized Amortized Cost Gains Losses Estimated Fair Value U.S. corporate notes Government agencies Total $ 2,500 140,822 $ 143,322 $- 15 $...

  • Page 88
    ... The Names Database acquisition Goodwill recorded in connection with MyPoints acquisition Goodwill recorded in connection with Trombi acquisition Impairment of goodwill related to the Company's photo-sharing service (see Note 6) Reduction of acquired deferred tax assets Balance at December 31, 2006...

  • Page 89
    ... consist of the following (in thousands): December 31, 2006 Accumulated Cost Amortization Net Pay accounts and free accounts Trademarks and trade names Advertising contracts and related relationships Software and technology Patents, domain names and other Total $ 107,903 25,786 7,229 5,340 4,595...

  • Page 90
    ... pursuant to the Company's tender offer and to pay related fees and expenses. The funds were available for general corporate purposes, stock repurchases and acquisitions, subject to certain limitations. The term loan was to mature in four years and amortized in an annual amount of $23.3 million in...

  • Page 91
    ... rate cap. During the quarter ended March 31, 2006, the Company accelerated and recognized approximately $1.5 million in deferred financing costs in connection with the early repayment of the term loan. 4. STOCKHOLDERS' EQUITY Stockholders' Rights Plan On November 15, 2001, the Board of Directors...

  • Page 92
    ... per share of common stock. The record date for the dividend was February 14, 2007 and the dividend, which totaled $13.7 million, was paid on February 28, 2007. The payment of future dividends is discretionary and will be subject to determination by the Board of Directors each quarter following its...

  • Page 93
    ... each of the periods presented (in thousands): Year Ended December 31, 2006 2005 2004 Operating expenses: Cost of revenues Sales and marketing Product development General and administrative Total stock-based compensation Tax benefit recognized $ 817 3,457 5,367 9,527 $ 19,168 $ 3,962 $ 183 954...

  • Page 94
    ... grant for the expected term of the option. The Company determines the expected dividend yield percentage by dividing the expected annual dividend by the market price of United Online common stock at the date of grant. Year Ended December 31, 2006 2005 2004 Risk-free interest rate Expected life (in...

  • Page 95
    ...exercise prices in excess of the then current market value of the Company's common stock, the options had limited economic value and were not fully achieving their original objective of incentive compensation and employee retention. Tender Offer- In March 2006, the Company offered eligible employees...

  • Page 96
    ... purchase date. Each offering period has a twenty-four month duration and purchase intervals of six months. The fair value of ESPP shares was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions: Year Ended December 31, 2006 Risk-free interest rate...

  • Page 97
    ...rate assumed in valuing the ESPP shares is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term. The Company determines the expected dividend yield percentage by dividing the expected annual dividend by the market price of United Online common stock at the date...

  • Page 98
    ... Internal Revenue Code (the "Code"); (2) foreign losses, the benefit of which is not currently recognizable due to uncertainty regarding realization; and (3) the re-measurement of net deferred tax assets in New York. Additionally, in 2006, the effective rate was increased due to the employee stock...

  • Page 99
    ... has also claimed income tax deductions from the exercise of certain stock options and the related sale of common stock by employees, and, in 2006, the deduction includes the excess deduction for vested restricted stock. For the years ended December 31, 2006, 2005 and 2004, benefits of $5.8 million...

  • Page 100
    ...the "Savings Plan") that qualifies as a defined contribution plan under Section 401(k) of 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...

  • Page 101
    ... and income from operations by segment are as follows (in thousands): Year Ended December 31, 2006 Communications Content & Media Total Billable services Advertising Total revenues Segment income from operations $ 336,924 39,013 $ 375,937 $ 132,839 $ 86,641 60,076 $ 146,717 $ 17,913 $ 423,565...

  • Page 102
    ... 2001. 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. The majority...

  • Page 103
    ...the complaint. On July 27, 2006, plaintiff Donald E. Ewart filed a purported consumer class action lawsuit in the Superior Court of the State of California, County of Los Angeles, against NetZero claiming that NetZero continues to charge consumers fees after they cancel their Internet access account...

  • Page 104
    ...) Year ended December 31, 2006: December 31, Quarter Ended September 30, June 30, March 31, Revenues Impairment of goodwill, intangible assets and long-lived assets Operating income Income before cumulative effect of accounting change Cumulative effect of accounting change, net of tax Net income...

  • Page 105
    ... executive compensation subject to Section 162(m) of the Code. Represents the release of valuation allowance primarily to recognize the actual and future tax benefits of deferred tax assets. Represents the release of valuation allowance primarily to recognize the future tax benefits for stock option...

  • Page 106
    ... UNITED ONLINE, INC. ARTICLE 1 The name of the Corporation is United Online, Inc. (the "Corporation"). No change to the name of the Corporation may be made (by amendment, merger or otherwise) to contain the words "NetZero" or "Zero" or the letter "Z." ARTICLE 2 The address of the registered office...

  • Page 107
    ... directors of the class whose terms expire at such annual meeting. If the number of directors is hereafter changed, each director then serving as such shall nevertheless continue as a director of the class of which she or he is a member until the expiration of his current term and any newly created...

  • Page 108
    ...to be cast. Unless the Board of Directors has made a determination that removal is in the best interests of the Corporation (in which case the following definition shall not apply), "cause" for removal of a director shall be deemed to exist only if (i) the director whose removal is proposed has been...

  • Page 109
    ...279 of the DGCL order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or...

  • Page 110
    ... 1.1 Offices. United Online, Inc., a Delaware corporation (the "Corporation"), may have offices at such places both within and without the State of Delaware as the board of directors of the Corporation (the "Board of Directors") may from time to time determine or the business of the Corporation may...

  • Page 111
    ... holders of preferred stock of the Corporation to nominate and elect a specified number of directors in certain circumstances. Nominations of persons for election to the Board of Directors may be made at any annual meeting of stockholders (a) by or at the direction of the Board of Directors (or any...

  • Page 112
    ... proposes to nominate for election as a director (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of...

  • Page 113
    at the annual meeting, (ii) the name and record address of such stockholder, (iii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by such stockholder, (iv) a description of all arrangements or understandings between such ...

  • Page 114
    ... may be changed from time to time by resolution of the Board of Directors. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. If for any cause, the directors shall not have been elected at an annual meeting...

  • Page 115
    ... newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series of stock of the Corporation then in office, or by a sole remaining director so elected. Section 3.8 Standing Committees. The Board of Directors, by...

  • Page 116
    ... in writing, by mail, addressed to such director or stockholder, at his, her or its address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail or, by a form...

  • Page 117
    .... Section 5.7 The Chief Executive Officer, President and Senior Vice-Presidents. The chief executive officer of the Corporation shall have general and active management of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect...

  • Page 118
    ...the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the chief executive officer and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions...

  • Page 119
    ... of Directors adopts a resolution permitting shares to be uncertificated. Certificates for shares of capital stock of the Corporation shall be signed by, or in the name of the Corporation by, (a) the Chairman of the Board, the Vice Chairman of the Board, the Chief Executive Officer, the President or...

  • Page 120
    ...any such reserve in the manner in which it was created. Section 7.2 Checks. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. Section 7.3 Fiscal Year. The...

  • Page 121
    ...a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit...

  • Page 122
    ... or former director or officer of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding described above, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually...

  • Page 123
    ... 8.9 Certain Definitions. For purposes of this Article 8, references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, officer, employee or...

  • Page 124
    Exhibit 4.1 RIGHTS AGREEMENT by and between UNITED ONLINE, INC. and U.S. STOCK TRANSFER CORPORATION, as Rights Agent Dated as of November 15, 2001

  • Page 125
    ... or Change of Name of Rights Agent. Duties of Rights Agent Change of Rights Agent Issuance of New Rights Certificates Redemption and Termination. Exchange. Notice of Certain Events. Notices Supplements and Amendments Successors Determinations and Actions by the Board of Directors Benefits of...

  • Page 126
    Section 32. Section 33. Section 34. EXHIBITS Exhibit A Exhibit B Governing Law Counterparts Descriptive Headings Form of Certificate of Designation of Series A Junior Participating Preferred Stock Form of Rights Certificate 28 28 28

  • Page 127
    ... of the Close of Business (as hereinafter defined) on November 26, 2001 (the "Record Date"), each Right initially representing the right to purchase one one-thousandth of a share (a "Unit") of Preferred Stock (as hereinafter defined) upon the terms and subject to the conditions herein set forth, and...

  • Page 128
    ...a bona fide public offering of securities), for the purpose of acquiring, holding, voting (except to the extent contemplated by the proviso to clause (B) of subparagraph (ii) above) or disposing of any securities of the Company; provided, however , that in no case shall an officer or director of the...

  • Page 129
    ...York City time, on such date; provided , however , that if such date is not a Business Day it shall mean 5:00 p.m., New York City time, on the next succeeding Business Day. "Common Stock" when used with reference to the Company shall mean the shares of Common Stock, par value $0.0001, of the Company...

  • Page 130

  • Page 131
    ... the tenth Business Day (or such later date as may be determined by action of the Company's board of directors prior to such time as any Person becomes an Acquiring Person and of which the Company will give the Rights Agent prompt written notice) after the date that a tender or exchange offer by any...

  • Page 132
    ...in a Rights Agreement between United Online, Inc. and U.S. Stock Transfer Corporation, dated as of November 15, 2001 (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of United Online, Inc. Under...

  • Page 133
    ...owned by a Person who was or became an Acquiring Person or an Affiliate or Associate of an Acquiring Person (as such terms are defined in the Rights Agreement by and between United Online, Inc. and U.S. Stock Transfer Corporation, as Rights Agent, dated as of November 15, 2001 (the "Rights Agreement...

  • Page 134
    ... time after the Distribution Date upon surrender of the Rights Certificate, with the form of election to purchase and the related certification duly executed, to the Rights Agent at the office of the Rights Agent designated for such purpose, together with payment of the Purchase Price for each Right...

  • Page 135
    ... to any other Person as a result of its making or failing to make any determinations with respect to an Acquiring Person or any of such Acquiring Person's Affiliates, Associates or transferees or taking or failing to take any actions with respect any Rights or Rights Certificates of any such Person...

  • Page 136
    ... satisfaction that no such tax is due. Section 10. Preferred Stock Record Date. Each person in whose name any certificate for Units of Preferred Stock (or, following the occurrence of a Triggering Event, other securities) is issued upon the exercise of Rights shall for all purposes be deemed...

  • Page 137
    ...or Affiliate of any Acquiring Person, at any time after the date of this Agreement, directly or indirectly, shall (1) merge into the Company or otherwise combine with the Company and the Company shall be the continuing or surviving corporation of such merger or combination and shares of Common Stock...

  • Page 138
    ... with the terms of this Agreement and payment of the then-current Purchase Price, in lieu of the number of Units of Preferred Stock for which a Right was exercisable immediately prior to the first occurrence of a Section 11(a)(ii) Event, such number of Units of Preferred Stock as shall equal...

  • Page 139
    ... outstanding on such record date plus the number of Units of Preferred Stock which the aggregate offering price of the total number of Units of Preferred Stock and/or Equivalent Preferred Stock so to be offered (and/or the aggregate initial conversion price of the convertible securities so to be...

  • Page 140
    ...way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the Nasdaq Stock Market ("NASDAQ") or...

  • Page 141
    ...If no shares of the Common Stock of the Company or the Preferred Stock are publicly held or so listed or traded, "Current Per Share Market Price" of the Preferred Stock shall mean the fair value per share as determined in good faith by the board of directors of the Company, whose determination shall...

  • Page 142
    ..., the Company shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable number of Units of Preferred Stock at such adjusted Purchase Price. (l) In any case in which this Section 11 shall...

  • Page 143
    ... and until it shall have received such certificate. Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power. (a) In the event that, following a Share Acquisition Date, directly or indirectly, (x) the Company shall consolidate with, or merge with and into, any other Person...

  • Page 144
    ... Market Price and (B) if no securities are so issued, the Person that is the other party to such merger or consolidation, or, if there is more than one such Person, the Person whose outstanding shares of Common Stock have the greatest aggregate Current Per Share Market Price; and (ii) in the case...

  • Page 145
    ... complying with the requirements of the Securities Act) until the Expiration Date, and (C) as soon as practicable following the execution of such agreement take such action as may be required to ensure that any acquisition of such shares of Common Stock of such Principal Party upon the exercise...

  • Page 146
    ... Rights Certificate (or, prior to the Distribution Date, of a certificate representing shares of Common Stock of the Company), may, in such holder's own behalf and for such holder's own benefit, enforce, and may institute and maintain any suit, action or proceeding against the Company to enforce, or...

  • Page 147
    ... Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in Section 25), or to...

  • Page 148
    ... be genuine and to be signed, executed and, where necessary, verified or acknowledged, by the proper person or persons, or otherwise upon the advice of counsel as set forth in Section 20. Section 19. Merger or Consolidation or Change of Name of Rights Agent. (a) Any corporation into which the Rights...

  • Page 149
    ... shall not be less than five Business Days after the date any officer of the Company actually received such application, unless any such officer shall have consented in writing to an earlier date) unless, prior to taking any such action (or the effective date in the case of an omission), the Rights...

  • Page 150
    ...as the case may be, and to each transfer agent of the Common Stock or Preferred Stock (as to which the Rights Agent has received prior written notice) by registered or certified mail, and to the holders of the Rights Certificates by first-class mail. If the Rights Agent shall resign or be removed or...

  • Page 151
    ... options or under any employee benefit plan or arrangement or upon the exercise, conversion or exchange of securities of the Company currently outstanding or issued at any time in the future by the Company and (b) may, in any other case, if deemed necessary or appropriate by the board of directors...

  • Page 152
    ... Current Per Share Market Price per Unit of Preferred Stock on the earlier of (i) the date on which any Person becomes an Acquiring Person and (ii) the date on which a tender or exchange offer by any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan maintained...

  • Page 153
    ...of any such suspension, the Company shall issue a public announcement stating that the exercisability of the Rights has been temporarily suspended. Section 25. Notice of Certain Events . (a) In case the Company shall propose (i) to pay any dividend payable in stock of any class to the holders of its...

  • Page 154
    ... than an Acquiring Person or an Affiliate or Associate of an Acquiring Person), including, without limitation, to change the Purchase Price, the Redemption Price, any time periods herein specified, and any other term hereof, any such supplement or amendment to be evidenced by a writing signed by the...

  • Page 155
    ... or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Rights Agent and the registered holders of the Rights Certificates (and, prior to the Distribution Date, shares of Common Stock of the Company). Section 31. Severability . If any term...

  • Page 156
    ... hereto have caused this Agreement to be duly executed and attested, all as of the day and year first above written. UNITED ONLINE, INC. By: /s/ MARK R. GOLDSTON Mark R. Goldston Chairman Chief Executive Officer and President U.S. STOCK TRANSFER CORPORATION By: /s/ RICHARD BROWN Richard Brown Vice...

  • Page 157
    ... to and vested in the board of directors of the Corporation (hereinafter the "Board") in accordance with the provisions of the certificate of incorporation of the Corporation, as currently in effect, the Board hereby creates a series of Preferred Stock, par value $0.0001per share (the "Preferred...

  • Page 158
    ... 1,000 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares...

  • Page 159
    ... a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board) to all holders of such shares upon such terms as the Board, after consideration of the respective annual dividend rates and other relative rights and...

  • Page 160
    to such event. A-2

  • Page 161
    ... as the case may be, into which or for which each share of Common Stock is converted, changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the...

  • Page 162
    IN WITNESS WHEREOF, this Certificate of Designation is executed on behalf of the Corporation as of November UNITED ONLINE, INC By: Name: Mark R. Goldston Title: Chairman, Chief Executive Officer and President , 2001.

  • Page 163
    ... BY THIS RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT). ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY BECOME NULL...

  • Page 164
    ... "Company"), and U.S. Stock Transfer Corporation, as Rights Agent (the "Rights Agent"), to purchase from the Company at any time after the Distribution Date (as such term is defined in the Rights Agreement) and prior to 5:00 p.m., New York City time, on November 26, 2011, at the office of the Rights...

  • Page 165
    ... by the Rights Agent. WITNESS the signature of the proper officers of the Company and its corporate seal. Dated as of UNITED ONLINE, INC. By : Name Title Countersigned: U.S. Stock Transfer Corporation, as Rights Agent By: Authorized Signatory Name: Richard Brown Title: Vice President , . B-2

  • Page 166
    ... on the books of the within-named Company, with full power of substitution. DATED: Signature hereby sells, assigns and transfers Signature Guaranteed: Signatures must be guaranteed by a participant in a Securities Transfer Association Inc. recognized signature guarantee medallion program. B-3

  • Page 167
    ... this Rights Certificate are not beneficially owned by an Acquiring Person or an Affiliate or Associate thereof (each as defined in the Rights Agreement). Signature NOTICE The signature in the foregoing Form of Assignment must conform to the name as written upon the face of this Rights Certificate...

  • Page 168
    ...in the name of and delivered to: Please insert social security or other identifying number (Please print name and address) DATED: Signature Signature Guaranteed: Signatures must be guaranteed by a participant in a Securities Transfer Association Inc. recognized signature guarantee medallion program...

  • Page 169
    ... by this Rights Certificate are not beneficially owned by an Acquiring Person or an Affiliate or Associate thereof (each as defined in the Rights Agreement). Signature NOTICE The signature in the foregoing Form of Election to Purchase must conform to the name as written upon the face of this Rights...

  • Page 170
    ..., 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 United Online Media Group) United Online Communications, Inc., a Delaware...

  • Page 171
    ... 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in 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 February 28, 2007...

  • Page 172
    ... 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 1, 2007 /s/ MARK R. GOLDSTON Mark R. Goldston Chairman and Chief Executive Officer

  • Page 173
    ... 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 1, 2007 /s/ CHARLES S. HILLIARD Charles S. Hilliard President and Chief Financial Officer

  • Page 174
    ... 15(d) of the Securities Exchange Act of 1934; and (b) the information contained in such report fairly presents, in all material respects, the financial condition and result of operations of the Company. Dated: March 1, 2007 /s/ MARK R. GOLDSTON Mark R. Goldston Chairman and Chief Executive Officer

  • Page 175
    ...or 15(d) of the Securities Exchange Act of 1934; and (b) the information contained in such report fairly presents, in all material respects, the financial condition and result of operations of the Company. Dated: March 1, 2007 /s/ CHARLES S. HILLIARD Charles S. Hilliard President and Chief Financial...