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

Table of contents

  • Page 1
    ...) Filed 02/05/04 for the Period Ending 12/31/03 Address Telephone CIK Symbol SIC Code Industry Sector Fiscal Year 21301 BURBANK BOULEVARD WOODLAND HILLS, CA 91367 8182873000 0001142701 UNTD 7370 - Computer Programming, Data Processing, And Computer Services Technology 12/31 http://www.edgar-online...

  • Page 2
    ... Preferred Stock Purchase Rights 77-0575839 (I.R.S. Employer Identification No.) 91361 (Zip Code) Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months...

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

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

  • Page 5
    ... also offer additional fee-based products and services, such as our recently launched premium email services, as well as a wide range of discounted metered plans and promotions, such as one or more free months of service or discounted rates for an initial or prepaid period. Advertising and Commerce...

  • Page 6
    ... significant marketing resources on our free access and email services since the Merger and have experienced a decrease both in our active free user base and in the number of people signing up for free services, our free user base continues to be a significant source of new pay access subscribers...

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

  • Page 8
    ... do not charge an additional monthly fee for their accelerated dial-up service. In particular, AOL recently began offering services priced at $9.95 per month under its Netscape Online brand that are designed to compete directly with our standard offering. A certain number of our new subscribers are...

  • Page 9
    ... with employees to be good. Web Availability of Reports Our corporate Web site is www.untd.com. On this Web site, we make available, free of charge, our annual, quarterly and current reports, changes in the stock ownership of our directors and executive officers, and other documents filed with...

  • Page 10
    ... and customer support facility Customer support and technology facility Westlake Village, CA New York, NY Westlake Village, CA Hyderabad, India 49,000 23,000 19,000 28,000 2009 2010 2006 2005 Our corporate headquarters are located in Westlake Village, California and we also maintain offices in...

  • Page 11
    ... affect our business, financial condition, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We did not submit any matters to a vote of security holders during the quarter ended December 31, 2003. 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON...

  • Page 12
    ... BlueLight Internet brands, are available in more than 6,500 cities across the United States and Canada. In addition, we offer marketers numerous online advertising products as well as online market research. At December 31, 2003, we had approximately 2.9 million subscribers to our pay services and...

  • Page 13
    ... Web pages to download to users' computers when compared to our standard dial-up access services. At December 31, 2003, subscribers to our accelerated dial-up services comprised approximately 22% of our total pay subscriber base. Recently, NetZero and Juno began offering two premium email services...

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

  • Page 15
    ... pay access subscribers as a percentage of total hours used by our active users. Direct costs consist of costs related to providing technical support, customer billing and billing support to our pay subscribers. Allocated costs consist primarily of telecommunications and data center costs, personnel...

  • Page 16
    ... advertising efforts and our distribution channels, which may result in increased fees paid to distribution partners to acquire new pay subscribers. In August 2003, we entered into a three-year agreement with Best Buy Co, Inc. to distribute the NetZero and Juno pay access services in Best Buy...

  • Page 17
    ...-related expenses for executive, finance, legal, human resources and internal customer support personnel. In addition, general and administrative expenses include fees for professional legal and accounting services, nonincome taxes, insurance, and occupancy and other overhead-related costs, as well...

  • Page 18
    .... For the six months ended December 31, 2003, we recorded a tax provision of $1.7 million on pre-tax income of $35.0 million, resulting in an effective tax rate of 4.9%. The effective tax rate differs from the statutory tax rate primarily due to the release of valuation allowance attributable to the...

  • Page 19
    ...partially offset by a decrease in advertising inventory available for sale as a result of a decrease in our active free user base and the use of available inventory for the promotion of our pay services to our free users. Cost of Billable Services Cost of billable services increased by $15.1 million...

  • Page 20
    ... and compensation costs in our sales and marketing department. These increases were partially offset by a $0.7 million decrease in costs directly associated with our former RocketCash subsidiary, which was sold in August 2001, and a $0.5 million decrease in stock-based charges. Product Development...

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

  • Page 22
    ...decrease in average monthly usage per free user and a decrease in the number of active free users as a result of limitations imposed on our free services, a decrease in average hourly telecommunications costs, a decrease in customer support costs for free users, a decrease in stock-based charges and...

  • Page 23
    ...-related costs, which included a charge of approximately $1.4 million to write off leasehold improvements associated with our former offices in New York and Rhode Island. In an effort to streamline our operations in response to changing market conditions, we reduced our workforce by 101 employees...

  • Page 24
    ... stock if we believe market conditions to be favorable; to acquire complimentary services, businesses or technologies; and to fund future capital expenditures. Net cash used for investing activities increased by $25.2 million to $33.1 million for the six months ended December 31, 2003, compared...

  • Page 25
    ... of credit. We may raise additional capital for a variety of reasons including, without limitation, expanding our marketing activities, developing new or enhancing existing services or products, repurchasing our common stock, acquiring complementary services, businesses or technologies or funding...

  • Page 26
    ... revenue. We offer alternative payment methods to credit cards for certain pay service plans. These alternative payment methods currently include payment by electronic check, or "ACH", personal check or money order and through a pay subscriber's local telephone company. In circumstances where...

  • Page 27
    .... The Company recorded a $1.4 million reduction in goodwill during the December 2003 quarter in connection with the release of the deferred tax valuation allowance (see Note 4 to the consolidated financial statements). Business Combinations Our acquisitions to date have all been accounted for as...

  • Page 28
    ... accounting policy decisions with respect to stock-based employee compensation. This Statement also amends Accounting Principles Board ("APB") Opinion No. 28, Interim Financial Reporting, to require disclosure about those effects in interim financial information. SFAS No. 148 is effective for annual...

  • Page 29
    ... our pay subscriber and free user bases, including fluctuations caused by seasonality, churn and the impact of marketing; changes in the mix of our pay subscriber base, particularly changes in the number of subscribers to our accelerated dial-up services; fluctuations in our average monthly revenue...

  • Page 30
    ... per month, or if we are unable to attract new pay subscribers in numbers sufficient to increase our overall pay subscriber base, our business, financial position, results of operations and cash flows will be adversely affected. In addition, the number of active users of our free services has...

  • Page 31
    ... undertaken by competitors cause attrition in our user base, our business, financial position, results of operations and cash flows could be adversely affected. 39 We may not successfully develop and market new products in a timely or cost-effective manner; consumers or advertisers may not accept...

  • Page 32
    ... have caused Internet advertising rates to decline, and it is possible that rates will decline in the future. Many of our advertising competitors have longer operating histories, greater name recognition, larger user bases, significantly greater financial, technical, sales, development and marketing...

  • Page 33
    ...us could materially and adversely affect our business, financial position, results of operations and cash flows. Our business is highly dependent on our billing and customer support systems, which are based on a combination of third-party software and internally developed software. The software that...

  • Page 34
    ... the Portal, Remedy or internally developed software to operate accurately, problems with our credit card processor or other billing and support vendors and any other failures or errors in our billing and support systems could materially and adversely affect our business, financial position, results...

  • Page 35
    ... our Internet access software for free, we are extremely susceptible to various forms of unauthorized use of our software. These actions could adversely affect our brand names. Our technology collects and utilizes data derived from user activity. This data is used for advertisement targeting and...

  • Page 36
    ... of our ongoing business and diversion of resources and management time; unforeseen obligations or liabilities; difficulty assimilating the acquired customer bases, technologies, operations and personnel; risks of entering markets in which we have little or no direct prior experience; potential...

  • Page 37
    ...or notices regarding, among other things, the cost of its Internet access services, its cancellation terms and local versus longdistance charges, as well as the requirement to provide adequate customer support to process cancellations. Various state agencies as well as individuals have also asserted...

  • Page 38
    ... the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective. (b) Internal Controls Over Financial Reporting. There have not been...

  • Page 39
    ... to our 2004 annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year. 50 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND CURRENT REPORTS ON FORM 8-K (a) The following documents are filed as part of this...

  • Page 40
    ...of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on February 5, 2004. UNITED ONLINE, INC. By: /s/ MARK R. GOLDSTON Mark R. Goldston Chairman, Chief Executive Officer and President

  • Page 41
    ..., Chief Executive Officer, President and Director (Principal Executive Officer and Director) Executive Vice President, Finance and Chief Financial Officer (Principal Financial Officer) Senior Vice President, Finance Treasurer and Chief Accounting Officer (Principal Accounting Officer) February...

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

  • Page 43
    ... the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PRICEWATERHOUSECOOPERS LLP Los Angeles, California February 2, 2004 F-2 UNITED ONLINE...

  • Page 44
    ...Billable services Advertising and commerce Total revenues Operating expenses: Cost of billable services (including stock-based charges, see Note 10) Cost of free services (including stock-based charges, see Note 10) Sales and marketing (including stock-based charges, see Note 10) Product development...

  • Page 45
    ...integral part of these consolidated financial statements. F-4 UNITED ONLINE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands) Common Stock Shares Balance at July 1, 2000 Issuance of common stock and warrants for marketing agreements Issuance of common stock through employee stock...

  • Page 46
    ...) 18,286 33,327 237,824 The accompanying notes are an integral part of these consolidated financial statements. F-6 UNITED ONLINE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended June 30, Six Months Ended December 31, 2003 Cash flows from operating activities: Net income (loss...

  • Page 47
    ... cost-basis investment Cash paid for acquisitions, net of cash acquired Net cash used for investing activities Cash flows from financing activities: Payments on capital leases Payments on notes payable Repayment of notes receivable from stockholders Proceeds from exercises of stock options Proceeds...

  • Page 48
    ... on the pay access services. United Online does not currently offer free access services under the BlueLight Internet brand. United Online's standard pay access services are offered through various pricing plans, generally $9.95 per month. The Company also offers accelerated dial-up services for an...

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

  • Page 50
    ... the six months ended December 31, 2003. The Company recorded a $1.4 million reduction in goodwill during the December 2003 quarter in connection with the release of the deferred tax valuation allowance (see Note 4). Business Combinations -All of the Company's acquisitions have been accounted for as...

  • Page 51
    ... of free services includes direct costs incurred in providing certain technical and customer support services to free access users as well as costs that have been allocated to free services based on the aggregate hourly usage of free access users as a percentage of total hours used by the Company...

  • Page 52
    Stock-Based Compensation -The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees , Financial Accounting Standards Board ("FASB") Interpretation No. ("FIN...

  • Page 53
    ...any impact on the Company's financial position, results of operations or cash flows because the Company has elected not to adopt the fair value-based method of accounting for stock-based employee compensation. In January 2003, the EITF issued EITF Issue No. 00-21, Accounting for Revenue Arrangements...

  • Page 54
    ... on the Company's financial position, results of operations or cash flows. F-16 2. ACQUISITIONS Simpli.com, Inc. In August 2000, the Company acquired Simpli.com, Inc. ("Simpli") in a stock and cash transaction. Simpli was a targeted marketing infrastructure and search technology company. Pursuant...

  • Page 55
    ...to create a lower cost structure for providing Internet access and to create a more attractive base of users for advertising customers. Under the terms of the merger agreement, entered into on June 7, 2001, NetZero common stockholders received 0.2000 of a share of United Online common stock for each...

  • Page 56
    ... 2002, the Company acquired the Internet access assets of BlueLight. The acquisition has been accounted for under the purchase method in accordance with SFAS No. 141. The primary reason for the acquisition was to acquire BlueLight's pay user base in order to accelerate the Company's pay user growth...

  • Page 57
    ...fees Total $ 3,844 2,301 1,833 7,978 $ Immediately following the Merger, United Online reduced Juno's workforce by 49 employees and recorded employee termination benefit charges of $3.8 million. Of the 49 employees terminated, 35 were in general and administrative, 11 were in sales and marketing...

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

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

  • Page 60
    ... free Internet access service. The market data indicated a substantial and sustained decrease in market valuations for publicly traded Internet-related companies. Market data related to private company transactions indicated a substantial decrease in both the average transaction price and the number...

  • Page 61
    ...24 Line of Credit In December 2003, United Online obtained a one-year $25 million unsecured revolving line of credit from a bank that expires in December 2004. This facility is available for general corporate purposes and the interest rates on borrowings are based on current market rates. The line...

  • Page 62
    ... through May 31, 2003. On July 29, 2003, the Board of Directors extended the share repurchase program to $100 million through July 31, 2004. The Company may repurchase shares of its common stock through open market or privately negotiated transactions based on prevailing market conditions and other...

  • Page 63
    ... the Savings Plan. 9. INCOME TAXES For the six months ended December 31, 2003, the Company recorded a tax provision of $1.7 million on pre-tax income of $35.0 million, resulting in an effective tax rate of 4.9%. The effective tax rate differs from the statutory tax rate primarily due to the release...

  • Page 64
    ...Company's effective income tax rate (in thousands): Six Months Ended December 31, 2003 Year Ended June 30, 2003 2002 2001 Taxes on income at the statutory federal rate State income taxes, net of federal tax benefits Non-deductible acquisition-related costs Other differences, net Change in valuation...

  • Page 65
    ... direct stock issuances may be made to employees of the Company (or any parent or subsidiary corporation) who are neither officers, nor Board members at the time of the option grant or direct issuance. The 2001 SSIP, in general, provides for the issuance of stock and stock options at the fair market...

  • Page 66
    ... vest over a nine-month to three-year period, either monthly or annually. Option grants expire after ten years unless cancelled earlier due to termination of employment or Board service. Certain grants are immediately exercisable for unvested shares of common stock, with the unvested portion...

  • Page 67
    ... included in the following captions for each of the periods presented (in thousands): Year Ended June 30, 2003 2002 2001 Operating expenses: Cost of billable services Cost of free services Sales and marketing Product development General and administrative Total stock-based charges $ 8 - 20 6 73...

  • Page 68
    ... will record deferred stock-based compensation of $11.4 million, which will be amortized on a straight-line basis over a four-year period. In January 2004, the Compensation Committee of the Board of Directors approved stock option grants of 1.2 million shares to the Company's executive officers. The...

  • Page 69
    ... one month of free use. Plaintiff is seeking damages, injunctive relief and attorneys' fees. The court has entered an order granting preliminary approval of a settlement agreement. F-34 On December 19, 2002, plaintiff William Kleen filed a lawsuit in the Supreme Court of the State of New York for...

  • Page 70
    ... in the December 31, 2003 Transition Report on Form 10-K of United Online, Inc. also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set...

  • Page 71
    ... by and between United Online, Inc., a Delaware corporation (the "Company"), with principal corporate offices at 2555 Townsgate Road, Westlake Village, California 91361, and Mark Goldston, whose address is 14139 Beresford Road, Beverly Hills, California 90210 ("Employee"). WHEREAS, the Employee had...

  • Page 72
    ... and reasonable executive duties as are usually performed by the Chief Executive Officer and Chairman, including such duties as are delegated to him from time to time by the Board of Directors of the Company or a committee thereof (the "Board"). Employee shall report directly to the Company's Board...

  • Page 73
    ...title and/or responsibilities if Employee is not offered and provided the position of Chairman and Chief Executive Officer of the Company or its successor as well as the acquiring and ultimate parent entity, if any, following a Corporate Transaction), (b) a decrease in pay and/or benefits from those...

  • Page 74
    ... paid by the Company and reasonably acceptable to the Employee. The Auditor shall be a nationally recognized United States public accounting firm. For purposes of determining the amount of the Gross-Up Payment, the Employee shall be deemed to pay income tax at the highest marginal rates of federal...

  • Page 75
    ... between United Online, Inc., a Delaware corporation (the "Company"), with principal corporate offices at 2555 Townsgate Road, Westlake Village, California 91361, and Charles S. Hilliard, whose address is 2112 Marsh Brook Road, Lake Sherwood, California 91361 ("Employee"). WHEREAS, the Employee had...

  • Page 76
    ... reasonable executive duties as are usually performed by the Chief Financial Officer, including such duties as are delegated to him from time to time by the Board of Directors of the Company or a committee thereof (the "Board"). Employee shall report directly to the Company's Chief Executive Officer...

  • Page 77
    ... and/or responsibilities if Employee is not offered the position of Executive Vice President, Finance and Chief Financial Officer of the Company or its successor as well as the acquiring and ultimate parent entity, if any, following the Corporate Transaction), (b) a decrease in pay and/or benefits...

  • Page 78
    ... paid by the Company and reasonably acceptable to the Employee. The Auditor shall be a nationally recognized United States public accounting firm. For purposes of determining the amount of the Gross-Up Payment, the Employee shall be deemed to pay income tax at the highest marginal rates of federal...

  • Page 79
    ..., by and between United Online, Inc., a Delaware corporation (the "Company"), with principal corporate offices at 2555 Townsgate Road, Westlake Village, California 91361, and Frederic A. Randall, Jr., whose address is 432 Isabella Terrace, Corona del Mar, California 92625 ("Employee"). WHEREAS, the...

  • Page 80
    ... and reasonable executive duties as are usually performed by the General Counsel, including such duties as are delegated to him from time to time by the Board of Directors of the Company or a committee thereof (the "Board"). Employee shall report directly to the Company's Chief Executive Officer...

  • Page 81
    ... of the work week consistent with past practices or otherwise as agreed by Employee and the Chief Executive Officer. 3.7 4. Termination . 4.1 Termination for Cause . (a) Termination "for cause" is defined as follows: the Company terminates Employee's employment with the Company (1) if Employee is...

  • Page 82
    ... by the Company and reasonably acceptable to the Employee. The Auditor shall be a nationally recognized United States public accounting firm. For purposes of determining the amount of the Gross-Up Payment, the Employee 4 6. shall be deemed to pay income tax at the highest marginal rates of federal...

  • Page 83
    ...well as any acquiring or ultimate parent entity, if any, following any Corporate Transaction. 8. Miscellaneous . 8.1 This Agreement supersedes any and all other agreements, either oral or in writing, between the parties hereto with respect to the employment of Employee by the Company, other than the...

  • Page 84
    ... reasonable executive duties as are usually performed by the Chief Marketing Officer, including such duties as are delegated to him from time to time by the Board of Directors of the Company or a committee thereof (the "Board"). Employee shall report directly to the Company's Chief Executive Officer...

  • Page 85
    ... termination without cause. In addition, if Employee's employment is terminated without cause (other than if Employee is Involuntarily Terminated), Employee will be credited with an additional twelve (12) months of service toward vesting in all stock options then held by Employee (the "Option Shares...

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

  • Page 87
    ...as well as any acquiring or ultimate parent entity, if any, following any Corporate Transaction. Miscellaneous . 8.1 This Agreement supersedes any and all other agreements, either oral or in writing, between the parties hereto with respect to the employment of Employee by the Company, other than the...

  • Page 88
    ... this document Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Mark R. Goldston, certify that: 1. I have reviewed this transition report of United Online, Inc.;

  • Page 89
    ...in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who...

  • Page 90
    ...in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who...

  • Page 91
    ... Financial Officer of United Online, Inc. (the "Company"), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (a) the Transition Report on Form 10-K of the Company for the period ended December 31, 2003, as filed...