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UNITED ONLINE INC
FORM 10-K
(Annual Report)
Filed 02/20/08 for the Period Ending 12/31/07
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 02/20/08 for the Period Ending 12/31/07 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
    ...name of Registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 21301 Burbank Boulevard Woodland Hills, California (Address of principal executive office) (818) 287-3000 (Registrant's telephone number, including area code) Securities registered...

  • Page 3
    ... by check mark whether the Registrant is a shell company (as defined in Rule 12b-2) of the Act). At June 30, 2007, 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 reported by...

  • Page 4
    ... and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information Directors and Executive Officers of the Registrant Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related...

  • Page 5
    ... Media services are online social networking and online loyalty marketing. Our primary Communications services are Internet access and email. Our Web properties, in aggregate, attract a significant number of Internet users each month among our base of more than 60 million registered accounts. Our...

  • Page 6
    ...networking services provide users with tools that enable individuals to identify, build and maintain personal networks from their relevant affiliations. Many advertisers, recognizing that consumers spend an increasing amount of time online, view social networking Web sites as an attractive marketing...

  • Page 7
    ... in the information technology industry, total advertising spending on the Internet in the United States is expected to almost double, from $16.9 billion in 2006 to $31.4 billion in 2011. In addition, more consumers are shopping online for goods and services. According to an April 2007 report by IDC...

  • Page 8
    ...significant number of our members visiting our Web sites on a recurring basis over many years. Our social networking members can choose between free membership and a paid subscription offering additional features. Free accounts constitute the vast majority of our social networking accounts. Revenues...

  • Page 9
    ... an email address. Free members are required to affiliate with at least one high school, college, work or military community. In addition, free members can elect to provide information about their personal interests and post photos. Free members have free access to the following features: • Search...

  • Page 10
    ... of marketing and registration techniques; increase monetization of our social networking Web sites by marketing our pay account services to our free members; increase our advertising revenues; and evaluate further opportunities to expand internationally. Online Loyalty Marketing MyPoints connects...

  • Page 11
    sales leads, soliciting information, registrations or the purchase of an advertiser's products or services, or increasing customer traffic on an advertiser's Web site. All of our loyalty marketing service revenues are classified as advertising revenues. Advertisers primarily pay us when our emails ...

  • Page 12
    ... accounts for our billable services. Classmates Media billable services revenues consist of amounts charged to pay accounts for social networking services. Communications billable services revenues consist of amounts charged to pay accounts for Internet access, Web hosting, email, Internet security...

  • Page 13
    ... solutions. Our social networking services generate advertising revenues primarily from display advertisements and from post-transaction sales. Advertising inventory on our social networking Web sites includes text and graphic placements on the user home page, profile page, class list page, and...

  • Page 14
    ... CDs, distribution of our Internet access software on CDs at retail locations, and links to our services on partner Web sites. In most cases, we pay a perpay account acquisition fee to these distributors. Sales of Advertising Inventory We have internal sales organizations dedicated to selling our...

  • Page 15
    ... certain factors. We compete for advertising revenues with portal companies, social networking Web sites, online direct marketing businesses, content providers, large Web publishers, Web search engine companies, certain advertising networks, major Internet access service providers, and various other...

  • Page 16
    ...advertisers and others could adversely affect our revenues. Billing The vast majority of our pay accounts pay us in advance with a credit card. Other payment options for some of our pay services include ACH, personal check or money order, or via a customer's local telephone bill. Pay Internet access...

  • Page 17
    ... direct marketers and advertisers. In addition, the United States Federal Trade Commission, or FTC, and many state attorneys general are applying federal and state consumer protection laws to the online collection, use and dissemination of personal information and the presentation of Web site...

  • Page 18
    ... Form 10-K for information about executive officers of the Registrant. 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...

  • Page 19
    ... new people with similar interests or affiliations, we may compete with the increasing number of social networking Web sites for special niches and areas of interest. The market for loyalty marketing services is highly competitive, and we expect competition to significantly increase in the future...

  • Page 20
    ...We use online advertising to promote our social networking services to potential new free members. Most of our online advertising arrangements are structured such that we pay a fee for each new free account registration generated through a particular advertisement. The cost of online advertising has...

  • Page 21
    ... new users to our Web sites, convert free members to pay accounts and attract advertisers to our Web sites will be adversely affected. As a result, our business and financial results will suffer, and we will not be able to grow our business as planned. Our social networking and loyalty marketing...

  • Page 22
    ...Austria, and international pay accounts now constitute a significant portion of our pay account growth. One of our strategies is to continue the expansion of our social networking services into additional international markets. Our international operations, in total, are not currently profitable. We...

  • Page 23
    ... and the number of dial-up accounts in the United States continues to decline. In addition to competition from broadband providers, competition among dial-up Internet access service providers is intense and neither our pricing nor our features provide us with a significant competitive advantage, if...

  • Page 24
    ...Communications revenues may materially and adversely impact the profitability of this segment and the Company as a whole. If we are unable to retain users, our business and financial results will suffer. A number of our Communications pay account subscriptions each month are not renewed or cancelled...

  • Page 25
    ... revenues in the Communications segment which will adversely impact our profitability. 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...

  • Page 26
    ...from the acquired business; risks of entering markets in which we have little or no direct prior experience; potential impairment of relationships with users, customers or vendors as a result of changes in management of the acquired business; large write-offs either at the time of the acquisition or...

  • Page 27
    ... additional problems in the future. We currently outsource a majority of our live technical and billing support functions. We rely on one customer support vendor, and its call centers are located in the Philippines and India. As a result, we maintain only a small number of internal customer support...

  • Page 28
    ...legal actions, inquiries or investigations relating to our business practices, such as our marketing, billing, customer retention, renewal, cancellation, refund, or disclosure practices. Defending against lawsuits, inquiries and investigations involves significant expense and diversion of management...

  • Page 29
    ... team or other key employees. Our business is largely dependent on the efforts and abilities of our senior management, particularly Mark R. Goldston, our chairman, president and chief executive officer, and other key personnel. Any of our officers or employees can terminate his or her employment...

  • Page 30
    ... have a significant number of employees located in our India office. In addition, a significant portion of our customer support is handled by a third-party vendor with customer support agents located in call centers in India and the Philippines. Our internal product development, customer support and...

  • Page 31
    ... cash to acquire businesses, services or technologies, repurchase our common stock or for other purposes. A change in our business needs, including working capital and funding for acquisitions, or a change in tax laws relating to dividends, among other factors, could cause our Board of Directors to...

  • Page 32
    ... customer support and technology centers or for any additional sales offices. For additional information regarding our obligations under leases, see Note 13-"Commitments and Contingencies" to our Consolidated Financial Statements included in this Annual Report on Form 10-K. ITEM 3. LEGAL PROCEEDINGS...

  • Page 33
    ... BC348461. On June 13, 2007, Peter Chrisler was substituted as a purported class representative. On July 13, 2007, the plaintiffs filed a consolidated amended class action complaint. A trial date has not yet been set. The pending lawsuits involve complex questions of fact and law and may require the...

  • Page 34
    ... share of our common stock. The record date for the dividend was February 14, 2008 and is payable on February 29, 2008. The payment of future dividends is discretionary and is subject to determination by our Board of Directors each quarter following its review of our financial performance. Dividends...

  • Page 35
    ..., we automatically withhold, from the restricted stock units that vest, the portion of those shares with a fair market value equal to the amount of the employee withholding taxes due. We then pay the applicable withholding taxes in cash. Common stock repurchases through December 31, 2007 were as...

  • Page 36
    ... 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, 2007, the cumulative total stockholder return for the Company's common stock, the Nasdaq Stock Market (U.S. companies) Index (the...

  • Page 37
    ... statements of operations from the date of acquisition. For additional information regarding our acquisitions, see Note 2-"Acquisitions" of the Notes to the Consolidated Financial Statements, which appears in Part II, Item 8 of this Annual Report on Form 10-K. Additionally, in the December...

  • Page 38
    ...Internet access and email. On a combined basis, our Web properties attract a significant number of Internet users each month, and we offer marketers a broad array of Internet advertising services as well as online market research and measurement services. Segment Definitions We report our businesses...

  • Page 39
    ... period of all free social networking accounts who have visited the Company's domestic or international social networking Web sites (excluding The Names Database) at least once during the reporting period; and the monthly average for the reporting period of all loyalty marketing members who have...

  • Page 40
    ... a user returned to the Web sites during the period. We believe the actual number of Classmates Media segment active accounts for the quarter ended December 31, 2007 was approximately 12.8 million, although a technical reporting issue interfered with our ability to collect certain visit data for...

  • Page 41
    ...pay accounts are recorded on the consolidated balance sheets as deferred revenue. We offer alternative payment methods to credit cards for certain pay service plans. These alternative payment methods currently include ACH, payment by personal check or money order or through a local telephone company...

  • Page 42
    ...when members complete online transactions. Each of these activities is a discrete, independent activity, which generally is specified in the sales agreement for each advertising customer. As the earning activities take place, activity measurement data (examples include the number of emails delivered...

  • Page 43
    ... units constitutes a business for which discrete financial information is available. We performed step one of our annual goodwill impairment test in the fourth quarter of 2007 and determined that the fair value of our Classmates, The Names Database, MyPoints, and Web hosting services reporting units...

  • Page 44
    ... the market value of an asset, significant underperformance relative to expected historical or projected future operating results, a change in the extent or manner in which an asset is used, significant declines in our stock price for a sustained period, shifts in technology, loss of key management...

  • Page 45
    ..., redemption activities and individual member account activity, in accordance with EITF Issue No. 00-22, Accounting for Points and Certain Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products and Services to be Delivered in the Future . MyPoints' historical analysis takes...

  • Page 46
    ... Corporation, or CMC, was formed in August 2007 for the purposes of consolidating our Classmates, The Names Database and MyPoints business units and initiating a public equity offering. The businesses were contributed to CMC by us on August 9, 2007. In August 2007, CMC filed a Form S-1 registration...

  • Page 47
    ... included elsewhere in this Annual Report on Form 10-K. Consolidated information was as follows (in thousands): Year Ended December 31, 2007 2006 2005 Billable services Advertising Total revenues Operating expenses: Cost of revenues Sales and marketing Product development General and administrative...

  • Page 48
    ... accounts for our billable services. Classmates Media billable services revenues consist of amounts charged to pay accounts for social networking services. Communications billable services revenues consist of amounts charged to pay accounts for Internet access, email, Web hosting, Internet security...

  • Page 49

  • Page 50
    ... Communications pay accounts and, potentially, ARPU which will result in continued declines in Communications billable services revenues. Advertising Revenues We provide advertising solutions to marketers with both brand and direct response objectives through a full suite of display, search, email...

  • Page 51
    ... solutions. Our social networking services generate advertising revenues primarily from display advertisements and from post-transaction sales. Advertising inventory on our social networking Web sites includes text and graphic placements on the user home page, profile page, class list page, and...

  • Page 52
    ...members of our loyalty marketing service; personnel- and overhead-related costs associated with operating our networks and data centers; depreciation of network computers and equipment; email technical support and license fees; costs related to providing telephone technical support; customer billing...

  • Page 53
    ... revenues. Expenses associated with promoting our services include advertising and promotion expenses; fees paid to distribution partners, third-party advertising networks and co-registration partners to acquire new pay and free accounts; personnel and overhead-related expenses for marketing...

  • Page 54
    ... costs related to acquiring new free social networking members, a $2.6 million increase in personnel- and overhead-related expenses associated with our social networking services as a result of growth in our business and a $0.4 million increase in stock-based compensation. Communications Sales...

  • Page 55
    ... include personnel-related expenses for executive, finance, legal, human resources, facilities, and internal customer support personnel. In addition, general and administrative expenses include professional fees for legal, accounting and financial services; office relocation costs; non-income taxes...

  • Page 56
    ... better align the segment's cost structure within a mature business for dial-up Internet access services. In addition, we recognized $0.4 million in restructuring charges in the year ended December 31, 2007 for termination benefits paid to certain employees associated with our Web hosting and photo...

  • Page 57
    In February 2008, we communicated our intentions to close our Orem, Utah facility and consolidate these functions into our operations at our corporate headquarters. We believe these activities will result in restructuring charges, comprised largely of employee termination benefits, during 2008, of ...

  • Page 58
    ... to 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, we used the Black-Scholes option-pricing model for valuation of share-based awards for our pro forma information. Upon...

  • Page 59
    ... employee service period. In December 2005, our Compensation Committee of the Board of Directors approved the acceleration of vesting of all options to purchase our common stock with exercise prices in excess of $16.00. These options were granted to executive officers and other employees. Options to...

  • Page 60
    ... decline in ARPU for our dial-up Internet access services due to increased use of free months of service and promotional and retention pricing to obtain or retain dial-up Internet access pay accounts. Advertising Revenues Consolidated Advertising Revenues. Consolidated advertising revenues increased...

  • Page 61
    decline in advertising revenues generated from our social networking services. As a result of our decision in the second quarter of 2006 to enhance the user experience by significantly decreasing the number of advertising placements on our social networking Web sites, advertising revenues for our ...

  • Page 62
    ... million increase in marketing costs related to acquiring new free social networking members, a $2.0 million increase in personnel- and overhead-related expenses related to increased headcount associated with our social networking services and a $0.6 million increase in stock-based compensation in...

  • Page 63
    ... million related to our photo sharing service within the Communications segment. The $3.0 million intangible assets impairment charge was comprised of $2.9 million of acquired software technology and $0.1 million of acquired pay accounts, proprietary rights and domain names. We determined the amount...

  • Page 64
    ... 2006 quarter, we recognized asset impairment charges of $4.5 million attributable to certain assets of our VoIP services within the Communications segment. As a result of slower than expected growth of the VoIP market in the United States, current period operating losses and projected continuing...

  • Page 65
    ... of cash acquired; we acquired The Names Database in March 2006 for $9.5 million, net of cash acquired; and we paid the remaining $1.5 million due in connection with the acquisition of our photo sharing business in March 2006. We have invested significantly in our network infrastructure, software...

  • Page 66
    ... share of common stock. The record date for the dividend was February 14, 2008 and the dividend will be paid on February 29, 2008. The payment of future dividends is discretionary and is subject to determination by our Board of Directors each quarter following its review of our financial performance...

  • Page 67
    ... existing cash balances and future cash generated from operations to fund, among other things, dividend payments, if declared by our Board of Directors; to develop and acquire other services, businesses or technologies; to repurchase shares of our common stock if we believe market conditions to be...

  • Page 68
    ... photo sharing service in March 2006 compared to the initial payment of $8.6 million in March 2005; a $31.6 million net decrease in proceeds from maturities and sales of short-term investments; a $4.8 million escrow deposit for the settlement of a pre-acquisition liability related to our Juno Online...

  • Page 69
    ... former officers, directors and employees of acquired companies, in certain circumstances. It is not possible to determine the maximum potential amount of exposure under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances...

  • Page 70
    ... 2007, the FASB issued SFAS No. 141(R), Business Combinations . SFAS No. 141(R) requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value...

  • Page 71
    ... in principal by selling securities which have declined in market value due to changes in interest rates. Our short-term investments at December 31, 2007 consisted solely of municipal securities. As a result of the recent adverse conditions in the U.S. credit markets, we liquidated, without any...

  • Page 72
    ... effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, as appropriate to...

  • Page 73
    ...at December 31, 2007 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein. Changes in Internal Control Over Financial Reporting There have not been any changes in the Company's internal control over financial...

  • Page 74
    PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 is hereby incorporated by reference to our definitive proxy statement relating to our 2008 annual meeting of stockholders to be filed with the SEC within 120 days after the end of our fiscal ...

  • Page 75
    ... are filed as part of this report: 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 76
    ... Stock Plan Form of Option Agreement for Classmates Online, Inc. 2004 Stock Plan United Online, Inc. 2007 Management Bonus Plan Employment Agreement between the Registrant and Mark R. Goldston First Amendment to Employment Agreement between the Registrant and Mark R. Goldston Employment Agreement...

  • Page 77
    ... of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibits X X X X 000-33367 000-33367 000-33367 000-33367 2/20/2008 2/20/2008 2/20/2008 2/20/2008 (b) The exhibits filed as part of this report are listed in Item 15(a)(3) of this Annual Report on Form 10...

  • Page 78
    ... Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on February 20, 2008. UNITED ONLINE, INC. By: /s/ MARK R. GOLDSTON Mark R. Goldston Chairman, President and Chief Executive Officer KNOW ALL PERSONS BY THESE...

  • Page 79
    /s/ KENNETH L. COLEMAN Director Kenneth L. Coleman /s/ DENNIS HOLT Director Dennis Holt /s/ CAROL A. SCOTT Director Carol A. Scott 76 February 20, 2008 February 20, 2008 February 20, 2008

  • Page 80
    ..., 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. 2007 Management Bonus Plan Employment Agreement between the Registrant and Mark R. Goldston 77 8-K 10-K 10-K 10-K 10-K 000...

  • Page 81
    ... the Registrant and Robert J. Taragan Employment Agreement between the Registrant and Matthew J. Wisk 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...

  • Page 82
    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 83
    Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of United Online, Inc.: In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of ...

  • Page 84
    ... Member redemption liability Deferred revenue Capital leases Other liabilities Total liabilities Commitments and contingencies (see Note 13) Stockholders' equity: Preferred stock, $0.0001 par value; 5,000 shares authorized; no shares issued or outstanding at December 31, 2007 and 2006 Common stock...

  • Page 85
    UNITED ONLINE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) Year Ended December 31, 2007 2006 2005 Revenues Operating expenses: Cost of revenues (including stock-based compensation, see Note 5) Sales and marketing (including stock-based compensation, see Note ...

  • Page 86
    UNITED ONLINE, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) Year Ended December 31, 2007 2006 2005 Net income Change in unrealized gain (loss) on short-term investments, net of tax of $184, $120 and $(193) for the years ended December 31, 2007, 2006 and 2005 Change in ...

  • Page 87
    UNITED ONLINE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands) Common Stock Shares Balance at January 1, 2005 Issuance of common stock through employee stock purchase plan Exercises of stock options Repurchases of common stock Issuance of restricted stock units Cancellation of ...

  • Page 88
    ... of cash acquired Payment for settlement of pre-acquisition liability Proceeds from sales of assets, net Net cash provided by (used for) investing activities Cash flows from financing activities: Payments on term loan Payments on capital leases Proceeds from exercises of stock options Proceeds from...

  • Page 89
    Reduction in goodwill in connection with a release of a portion of the deferred tax valuation allowance $ 375 $ - $ - The accompanying notes are an integral part of these consolidated financial statements. F-7

  • Page 90
    ...Communications services are Internet access and email. On a combined basis, the Company's Web properties attract a significant number of Internet users each month and the Company offers a broad array of Internet marketing products and services for advertisers. United Online is a Delaware corporation...

  • Page 91
    ... have declined in market value due to changes in interest rates. The Company classifies all of its short-term investments as available-for-sale. Available-for-sale securities are carried at fair value, with changes in unrealized gains and losses, net of taxes, reported in the consolidated statements...

  • Page 92
    ... consist of cash and cash equivalents, short-term investments and accounts receivable. The Company's accounts receivable are derived primarily from revenue earned from advertising customers located in the United States and pay accounts. The Company extends credit based upon an evaluation of the...

  • Page 93
    ..., addresses financial accounting and reporting requirements for acquired goodwill and other intangible assets. SFAS No. 142 requires goodwill to be carried at cost, prohibits the amortization of goodwill and requires the Company to test goodwill for impairment at least annually at the reporting unit...

  • Page 94
    ... future cash flows (including timing); discount rate reflecting the risk inherent in the future cash flows; terminal growth rate; subscriber churn; terminal value; determination of appropriate market comparables; and the determination of whether a premium or a discount should be applied to market...

  • Page 95
    ... display of third-party registration offers at the end of Classmates' pay account registration process, amounts generated from other display advertisements, and amounts generated from referring members to third-party Web sites or services. The Company recognizes advertising revenues in the period in...

  • Page 96
    ...members of our loyalty marketing service; personnel- and overhead-related costs associated with operating our networks and data centers; depreciation of network computers and equipment; email technical support and license fees; costs related to providing telephone technical support; customer billing...

  • Page 97
    ... fees for legal, accounting and financial services; office relocation costs; non-income taxes; insurance; occupancy and other overhead-related costs; and expenses incurred and credits received as a result of certain legal settlements. Stock-Based Compensation- On January 1, 2006, the Company adopted...

  • Page 98
    ... companies to estimate the fair value of share-based payment awards on the grant date using an option-pricing model. Under SFAS No. 123, Accounting for Stock-Based Compensation , the Company used the Black-Scholes option-pricing model for valuation of share-based awards for its pro forma information...

  • Page 99
    UNITED ONLINE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, ACCOUNTING POLICIES, AND RECENT ACCOUNTING PRONOUNCEMENTS (Continued) In November 2005, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position ("FSP") ...

  • Page 100
    ... & Media segment that no longer will be reported. The new Classmates Media segment includes the Company's online social networking and online loyalty marketing operations, which had formerly been part of the Content & Media segment. Web hosting and photo sharing, which also had formerly been part of...

  • Page 101
    ... 2007, the FASB issued SFAS No. 141(R), Business Combinations . SFAS No. 141(R) requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value...

  • Page 102
    ... 2006, the Company acquired MyPoints.com, Inc. for approximately $56.6 million in cash, including acquisition costs. MyPoints is a leading provider of online loyalty marketing services. The acquisition was accounted for under the purchase method in accordance with SFAS No. 141, Business Combinations...

  • Page 103
    ... approximately $10.1 million in cash, including acquisition costs. The Names Database is a global social networking service that acts as an intermediary between members, allowing them to send messages through the Web site to one another. The acquisition was accounted for under the purchase method in...

  • Page 104
    ... March 2005, the Company acquired certain assets related to PhotoSite, an online digital photo sharing service for approximately $10.1 million in cash, including acquisition costs, and entered into a related licensing and support agreement with the seller. The acquisition was accounted for under the...

  • Page 105
    ... acquired is tax deductible. The pro forma effect of the transaction is immaterial to the consolidated financial statements. In the December 2006 quarter, the Company recorded impairment charges totaling $8.8 million related to its photo sharing service (see Note 6). We made the decision during 2007...

  • Page 106
    UNITED ONLINE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. BALANCE SHEET COMPONENTS Short-Term Investments Due to the lack of liquidity and other concerns related to the U.S. credit markets, the Company has liquidated much of its short-term investments portfolio and converted it ...

  • Page 107
    UNITED ONLINE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. BALANCE SHEET COMPONENTS (Continued) Maturities of short-term investments were as follows (in thousands): December 31, 2007 Amortized Cost Estimated Fair Value Maturing within 1 year Maturing between 1 year and 4 years ...

  • Page 108
    ... assets consisted of the following (in thousands): December 31, 2007 Accumulated Amortization Cost Net Pay accounts and free accounts Trademarks and trade names Advertising contracts and related relationships Software and technology Patents, domain names and other Total $ 107,958 25,786 7,229...

  • Page 109
    UNITED ONLINE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. BALANCE SHEET COMPONENTS (Continued) December 31, 2006 Accumulated Amortization Cost Net Pay accounts and free accounts Trademarks and trade names Advertising contracts and related relationships Software and technology...

  • Page 110
    ... at the close of business on that date. Each right entitles the registered holder to purchase from the Company one unit consisting of one one-thousandth of a share of its Series A junior participating preferred stock at a price of $25 per unit. On April 29, 2003, the Board of Directors voted to...

  • Page 111
    ... of common stock. The record date for the dividend was February 14, 2008 and is payable on February 29, 2008. The payment of future dividends is discretionary and is subject to determination by the Company's Board of Directors each quarter following its review of the Company's financial performance...

  • Page 112
    ... unless canceled earlier due to termination of employment or Board of Directors service. Certain stock option grants are immediately exercisable for unvested shares of common stock, with the unvested portion of the shares remaining subject to repurchase by the Company at the exercise price until...

  • Page 113
    ... annual dividend by the closing market price of United Online common stock at the date of grant. The following table summarizes the assumptions used in the Black-Scholes option-pricing model. The assumptions represent the weighted average of the applicable assumption used to value stock options...

  • Page 114
    ... Committee of the Board of Directors approved the acceleration of vesting of all options to purchase the Company's common stock with exercise prices in excess of $16.00. These options were granted to executive officers and other employees of the Company under the Company's 2001 Stock Incentive Plan...

  • Page 115
    ... offered to 315 eligible employees and was accounted for as a modification under SFAS No. 123R in the June 2006 quarter. The number of restricted stock units that were issued in exchange for each tendered Eligible Option was based on the per share exercise price of that option and was, in all events...

  • Page 116
    ... Company's consolidated financial statements from the execution dates of these agreements. Recent Awards Effective February 15, 2008, the Compensation Committee of the Board of Directors approved grants of 0.3 million restricted stock units with a fair value equal to $3.9 million to certain members...

  • Page 117
    ... expected dividend yield percentage by dividing the expected annual dividend by the closing market price of United Online common stock at the date of grant. For the years ended December 31, 2007, 2006 and 2005, the Company recognized approximately $1.7 million, $1.9 million and $0, respectively, of...

  • Page 118
    ... intangible assets impairment charge was comprised of $2.9 million of acquired software technology and $0.1 million of acquired pay accounts, proprietary rights and domain names. The Company determined the amount of the charge based on an estimate of the fair value of the photo sharing assets, using...

  • Page 119
    ... differs from the statutory federal income tax rate primarily due to (1) state income taxes, net of federal benefit; (2) compensation, including stock-based compensation, that is limited under Section 162(m) of the Internal Revenue Code (the "Code"); (3) foreign losses, the benefit of which is not...

  • Page 120
    ... tax assets, including a change in New York State tax law. Components of net deferred tax assets at December 31, 2007 and 2006 are as follows (in thousands): December 31, 2007 2006 Deferred tax assets: Net operating loss carryforwards Depreciation and amortization Stock-based compensation Other...

  • Page 121
    .... If these earnings were distributed, a U.S. income tax liability would result. At December 31, 2007, the Company had net operating loss and tax credit carryforwards for federal and state income tax purposes of approximately $163 million and $51 million, respectively, which begin to expire in 2018...

  • Page 122
    ... a percentage (not to exceed 40%) of their eligible pre-tax earnings up to the Internal Revenue Service annual contribution limit. All full-time employees on the payroll of the Company are eligible to participate in the Savings Plan. The Company matches 25% of employees' contributions, up to Savings...

  • Page 123
    UNITED ONLINE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 9. EMPLOYEE BENEFIT PLANS (Continued) $0.6 million, respectively, during the years ended December 31, 2007, 2006 and 2005 related to the Company's Savings Plan match. 10. SEGMENT INFORMATION Revenues and income from ...

  • Page 124
    ...October 2007, the Company eliminated 69 positions and recorded restructuring charges totaling $3.0 million for employee termination benefits within its Communications segment to better align the segment's cost structure within a mature business for dial-up Internet access services. All costs related...

  • Page 125
    ... of consolidating our Classmates, The Names Database and MyPoints business units and initiating a public equity offering. The businesses were contributed to CMC by the Company on August 9, 2007. In August 2007, CMC filed a Form S-1 registration statement with the SEC for the IPO of its common stock...

  • Page 126
    .... Such indemnification agreements may not be subject to maximum loss clauses. Legal Contingencies In April 2001 and in May 2001, lawsuits were filed in the United States District Court for the Southern District of New York against NetZero, Inc. ("NetZero"), certain officers and directors of F-44

  • Page 127
    ..., plaintiff Anthony Piercy 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. On July 27, 2006, plaintiff...

  • Page 128
    ... is subject to various other legal proceedings and claims that arise in the ordinary course of business. Management believes the amount and ultimate liability, if any, with respect to these actions will not materially affect the Company's business, financial position, results of operations or cash...

  • Page 129
    UNITED ONLINE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 14. QUARTERLY FINANCIAL DATA (UNAUDITED) (in thousands, except per share data) Quarter Ended December 31, September 30, June 30, March 31, Year ended December 31, 2007: Revenues Restructuring charges Operating income Net ...

  • Page 130
    UNITED ONLINE, INC. SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS (in thousands) Balance at Beginning of Period Additions Charged (Credited) to Expense Charged to Other Accounts Charges Utilized (Write-offs) Balance at End of Period Allowance for doubtful accounts: Year ended December 31, 2007 Year...

  • Page 131
    ...SUPPLEMENTARY DATA ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ITEM 9A. CONTROLS AND PROCEDURES ITEM 9B. OTHER INFORMATION PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP...

  • Page 132
    ... by the Board of Directors or set forth herein, your bonus awards will be paid only if you are employed by and in good standing with the Company at the time of bonus payments. 4. Restricted Stock Units. Contingent on the effectiveness of an initial public offering of securities of Classmates...

  • Page 133
    ... of the closing selling prices of a share of United Online common stock during the month of December 2007, such closing selling prices as reported by the National Association of Securities Dealers on the Nasdaq Stock Market (the "UOL Restricted Stock Units"). The CMC Restricted Stock Units and the...

  • Page 134
    ... policies and procedures applicable to you, may change from time to time, the "at will" nature of your employment may only be changed in an express written agreement signed by you and the Chief Executive Officer of the Company and approved by the Board of Directors. 7. Termination of Employment...

  • Page 135
    ... four (24) months after such termination with the first such payment commencing upon the expiration of all applicable review and revocation periods applicable to the Release as statutorily required by law. Upon termination of your employment by the Company "without cause," other than the obligations...

  • Page 136
    ... Separation Payment, you will not, at any place in any county, city or other political subdivision of the United States in which the Company (or its parent or any subsidiary thereof) is engaged in business or providing its services: a. directly or indirectly design, develop, manufacture, market or...

  • Page 137
    ... by signing and dating this letter. If you have any questions, please call the undersigned. Very truly yours, CLASSMATES ONLINE, INC. By: Name: Title: I have read the foregoing and accept the terms set forth in this letter: /s/ MARK R. GOLDSTON Mark R. Goldston Chairman & Chief Executive Officer...

  • Page 138
    ... all of the assets or voting stock of United Online, Inc. which shall by appropriate action adopt the Corporation's 2001 Stock Incentive Plan, as amended and restated. "Board" shall mean the Corporation's Board of Directors. "1934 Act" shall mean the Securities Exchange Act of 1934, as amended...

  • Page 139
    ... of the Board members described in clause (A) who were still in office at the time the Board approved such election or nomination. In no event, however, shall a Change in Control be deemed to occur as a result of a spin-off distribution by United Online, Inc. of all or any portion of the Corporation...

  • Page 140
    Appendix B [Proprietary Information and Inventions Agreement] 9

  • Page 141
    QuickLinks Exhibit 10.16

  • Page 142
    ...Washington corporation United Online Web Services, Inc., a Delaware corporation (dba 50 Megs, Bizhosting, Freeservers, GlobalServers, and MySite) United Online Advertising Network, Inc., a Delaware corporation (dba United Online Media Group) United Online Communications, Inc., a Delaware corporation...

  • Page 143
    QuickLinks Exhibit 21.1

  • Page 144
    ....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, 333-123392 and 333-140999) of United Online, Inc. of our report dated February 18...

  • Page 145
    QuickLinks Exhibit 23.1

  • Page 146
    ...; 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: February 20, 2008 /s/ MARK R. GOLDSTON Mark R. Goldston Chairman, President and Chief Executive Officer

  • Page 147
    QuickLinks Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECURITIES EXCHANGE ACT RULES 13A-14 AND 15D-14 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

  • Page 148
    ... 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: February 20, 2008 /s/ SCOTT H. RAY Scott H. Ray Executive Vice President and Chief Financial Officer

  • Page 149
    QuickLinks Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECURITIES EXCHANGE ACT RULES 13A-14 AND 15D-14 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

  • Page 150
    ... Exchange Act of 1934; and The information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company. (b) Date: February 20, 2008 /s/ MARK R. GOLDSTON Mark R. Goldston Chairman, President and Chief Executive Officer

  • Page 151
    QuickLinks Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

  • Page 152
    ... Securities Exchange Act of 1934; and The information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company. (b) Date: February 20, 2008 /s/ SCOTT H. RAY Scott H. Ray Executive Vice President and Chief Financial Officer

  • Page 153
    QuickLinks Exhibit 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002