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UNITED ONLINE INC
FORM 10-K
(Annual Report)
Filed 03/16/05 for the Period Ending 12/31/04
Address 21301 BURBANK BOULEVARD
WOODLAND HILLS, CA 91367
Telephone 8182873000
CIK 0001142701
Symbol UNTD
SIC Code 7370 - Computer Programming, Data Processing, And
Industry Computer Services
Sector Technology
Fiscal Year 12/31
http://www.edgar-online.com
© Copyright 2008, EDGAR Online, Inc. All Rights Reserved.
Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.

Table of contents

  • Page 1
    UNITED ONLINE INC FORM 10-K (Annual Report) Filed 03/16/05 for the Period Ending 12/31/04 Address Telephone CIK Symbol SIC Code Industry Sector Fiscal Year 21301 BURBANK BOULEVARD WOODLAND HILLS, CA 91367 8182873000 0001142701 UNTD 7370 - Computer Programming, Data Processing, And Computer ...

  • Page 2
    ... from to Commission file number 000-33367 UNITED ONLINE, INC. (Exact 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...

  • Page 3
    ... Exchange Act). Yes 1 No 3 At June 30, 2004, the aggregate market value of voting stock held by non-affiliates of the registrant, based on the last reported sales price of the registrant's common stock on such date reported by the Nasdaq National Market, was $1,075,067,572 (calculated by excluding...

  • Page 4
    ... About Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information 18 19 20 58 59 59 59 60 Directors and Executive Officers of the Registrant Executive Compensation Security...

  • Page 5
    ..., and the Web-hosting and domain name registration business of About Web Services, Inc. Our corporate headquarters are located in Woodland Hills, California. Consumer Brands and Services We offer a variety of consumer Internet services under a number of brands, both free of charge and subscription...

  • Page 6
    ..., we offer advertisers sophisticated market research capabilities through our CyberTarget Division, which can design and execute customized, real-time market research in an Internet environment and help advertisers better understand their target audience. INDUSTRY BACKGROUND Internet Access Analysts...

  • Page 7
    ...a number of providers offer much more aggressive pricing and discounted packages, particularly when their access offerings are combined with other services including telephone and television. As the Internet evolves, many analysts believe that the convergence of data, voice and video services, among...

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

  • Page 9
    ... promotions, such as one or more free months of service or discounted rates for an initial period or an extended commitment. Advertising and Commerce Revenues We are able to designate the initial Web site displayed to users of our access services during an Internet session. This Web site, or "start...

  • Page 10
    ... their computers. Our traditional marketing activities are designed to drive prospective accounts to either visit our main Web sites and download our software, to call our toll free numbers to purchase our services or order a CD containing our access software. We have also entered into a variety of...

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

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

  • Page 13
    ... based on offering dial-up Internet access services at prices below the standard monthly pricing of the premium dial-up services of most of our major competitors. Competition from broadband providers and value-priced providers such as United Online has resulted in significant declines in the number...

  • Page 14
    ...market is intense and rapidly evolving. Classmates competes directly against a small number of companies, including Reunion.com and Monster.com's Military.com service, offering similar online social networking services based on work, school and military communities. Classmates also competes directly...

  • Page 15
    ...to obtain new Classmates' pay and free accounts would be adversely impacted. Competition in Additional Service Markets One element of our strategy is to offer a variety of subscription services in addition to Internet access and community-based networking services. We currently offer Web-hosting and...

  • Page 16
    ..., social networking Web sites, and various other companies that facilitate Internet advertising. Many of our competitors have longer operating histories, greater name recognition, larger user bases and significantly greater financial, technical and sales and marketing resources than we do. This...

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

  • Page 18
    ... himself and all others similarly situated, filed a lawsuit in the United States District Court for the Southern District of New York against NetZero, certain officers and directors of NetZero and the underwriters of NetZero's initial public offering, Goldman Sachs Group, Inc., BancBoston Robertson...

  • Page 19
    ...reflected in our consolidated financial statements. We cannot ...business. We believe the amount, and ultimate liability, if any, with respect to these actions will not materially affect our business, financial...not be material and will not adversely affect our business, financial condition, results...

  • Page 20
    ... shares of our common stock through open market or privately negotiated transactions based on prevailing market conditions and other factors. From time to time, the Board of Directors has increased the amount authorized for repurchase under this program. On April 22, 2004, the Board of Directors...

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

  • Page 22
    ..., Juno, and Classmates Online. Our pay services include dial-up Internet access, community-based networking, personal Web-hosting, and premium email services, among others. We also offer, at no charge, advertising-supported versions of certain of our services. In addition, we offer marketers a broad...

  • Page 23
    ... of a Web hosting business in April 2004, our acquisition of Classmates in November 2004, and our introduction of non-access services, including premium email and premium content. We intend to continue to either develop or acquire new services and have announced our intention to develop and market...

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

  • Page 25
    ... number of pay accounts by 726,000; increased spending on marketing and promotion of our pay services, particularly our accelerator services; the introduction of new pay services, particularly our premium email services; an expansion of our online and offline distribution channels; our Web-hosting...

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

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

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

  • Page 29
    ... free accounts, acquired trademarks and trade names, purchased technologies and other identifiable intangible assets. At December 31, 2004, we had approximately $70.6 million in net identifiable intangible assets resulting primarily from the acquisition of Classmates, the acquisition of the Internet...

  • Page 30
    ... of Classmates and the acquisition of the Web-hosting assets of About, Inc. 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...

  • Page 31
    ... of factors including increased marketing and promotion of our pay services, the acquisition of approximately 174,000 pay accounts from BlueLight in November 2002 and a significant number of our free users upgrading to our pay access services. ARPU was $10.27 for the six months ended December 31...

  • Page 32
    ... pricing obtained from our primary customer support vendor; decreased depreciation expense; and a slight decrease in average hourly usage per pay access account. Cost of Free Services Cost of free services decreased by $2.9 million, or 43%, to $4.0 million for the six months ended December 31, 2003...

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

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

  • Page 35
    ... in modem port utilization, consolidation of our network data centers and better pricing obtained from our managed modem vendors. Telecommunication hours allocated to our pay account base increased to approximately 85% of total telecommunications hours purchased during the year ended June 30, 2003...

  • Page 36
    ... 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 37
    ..., 43 were in sales and marketing, 26 were in general and administrative, 23 were in product development, 6 were at RocketCash and 3 were in network operations. In addition, we closed regional offices in San Francisco, California and Providence, Rhode Island and combined our New York offices into one...

  • Page 38
    ... limitations under Section 382 of the Code resulting from the Merger and are also subject to annual usage limitations. We have received income tax deductions resulting from the exercise of certain stock options and the related sale of common stock by employees. Tax benefits resulting from these...

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

  • Page 40
    ... in the near term. We intend to use our existing cash balances and future cash generated from operations to acquire complementary services, businesses or technologies; to repurchase shares of our common stock if we believe market conditions to be favorable; to make payments on our term loan; and to...

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

  • Page 42
    ... for Form 10-K and Article 10 of Regulation S-X issued by the Securities and Exchange Commission ("SEC"). The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of...

  • Page 43
    ...are recorded on the balance sheet as deferred revenue. We offer alternative payment methods to credit cards for certain pay service plans. These alternative payment methods currently include payment by electronic check, or "ACH", personal check or money order or through a local telephone company. In...

  • Page 44
    ... 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 purchase business combinations. Under the purchase method of accounting, the cost, including transaction costs, is...

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

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

  • Page 47
    ... of their offerings in response to competition from broadband and valuepriced providers. In particular, many premium-services include at no additional charge telephone technical support, proprietary content, parental controls, multiple accounts and email addresses, increased email storage, virus...

  • Page 48
    ...to obtain new Classmates' pay and free accounts would be adversely impacted. Competition in Additional Service Markets One element of our strategy is to offer a variety of subscription services in addition to Internet access and community-based networking services. We currently offer Web-hosting and...

  • Page 49
    ..., social networking Web sites, and various other companies that facilitate Internet advertising. Many of our competitors have longer operating histories, greater name recognition, larger user bases and significantly greater financial, technical and sales and marketing resources than we do. This...

  • Page 50
    ... of changes in the mix of pay accounts to a larger percentage of lower priced services, particularly as a result the acquisition of Classmates and the introduction of premium email services, and increased use of promotional pricing and discounted plans for our access services. Changes in ARPU in the...

  • Page 51
    ... customer bases, technologies and operations; difficulty assimilating and retaining employees from the acquired business; risks of entering markets in which we have little or no direct prior experience; lack of controls, policies and procedures appropriate for a public company, and the time and cost...

  • Page 52
    ... services accounts. In addition, the churn of Classmates' pay accounts has historically been higher than the churn of our access accounts, and the Classmates' churn has fluctuated significantly from quarter to quarter due to seasonality issues and the timing of termination of multi-month programs...

  • Page 53
    ... customers. If our access accounts usage increases or our telecommunications costs increase, our business may suffer. Other than sales and marketing, our telecommunications costs are our largest expense. If the average monthly usage of our pay access subscribers increases, or if our average hourly...

  • Page 54
    ...us in the market to provide consumer Internet access. As a result, any or all of our current telecommunications service providers could discontinue providing us with service at rates acceptable to us, or at all, which could materially and adversely affect our business, financial position, results of...

  • Page 55
    ... our billing and support systems. Issues associated with these systems could cause a variety of problems including the failure to bill and collect from users on a timely basis, over-charging or under-charging users, inaccurate financial and customer data, excessive credit card chargebacks or refunds...

  • Page 56
    ... development resources. We have experienced technical and customer support issues associated with our services and software releases. These issues have resulted in users discontinuing their service and have adversely impacted our revenues. A number of our material technologies and systems are based...

  • Page 57
    ... to attempt to minimize the spread of harmful programs could adversely impact our users' ability to utilize our services. Our failure to protect our proprietary rights could harm our business. Our trademarks, patents, copyrights, domain names and trade secrets are important to the success of our...

  • Page 58
    ...or retain other qualified employees could seriously harm our business and prospects. We do not carry key man life insurance on any of our employees. Government regulation or taxation of the provision of Internet access and other services could decrease our revenues and increase our costs. Changes in...

  • Page 59
    ... in India. We have a significant number of employees located in our India office. Our operations in India primarily handle email customer support, product development and quality assurance. A portion of our outsourced customer support is also based in India. Our product development, customer support...

  • Page 60
    ... National Market, where most publicly held Internet companies are traded, has experienced substantial price and volume fluctuations. These broad market and industry factors may harm the market price of our common stock, regardless of our actual operating performance, and for this or other reasons we...

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

  • Page 62
    ...31, 2004, the Company's internal control over financial reporting was effective. Management has excluded Classmates Online, Inc. and its subsidiaries from its assessment of internal control over financial reporting as of December 31, 2004 because it was acquired by the Company in a purchase business...

  • Page 63
    ... of Option Agreement for 2001 Stock Incentive Plan 2001 Supplemental 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 United Online, Inc. 2004 Management Bonus...

  • Page 64
    ..., dated as of December 3, 2004, among United Online, the Lenders party thereto from time to time, Deutsche Bank Trust Company Americas, as Administrative Agent, and Deutsche Bank Securities Inc., as Lead Arranger (the "Credit Agreement") First Amendment to Credit Agreement, dated as of December...

  • Page 65
    ... of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 16, 2005. UNITED ONLINE, INC. By: /s/ MARK R. GOLDSTON Mark R. Goldston Chairman, Chief Executive Officer and President KNOW ALL PERSONS BY THESE PRESENT, that each...

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

  • Page 67
    ... of Option Agreement for 2001 Stock Incentive Plan 2001 Supplemental 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 United Online, Inc. 2004 Management Bonus...

  • Page 68
    ... 13, 2004, among United Online, the lenders from time to time party to the Credit Agreement and Deutsche Bank Trust Company Americas, as Administrative Agent Second Amendment to Credit Agreement, dated as of March 11, 2005 List of Subsidiaries Consent of Independent Registered Public Accounting Firm...

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

  • Page 70
    ... REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of United Online, Inc.: We have completed an integrated audit of United Online, Inc.'s (the "Company") 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and...

  • Page 71
    ... "Management's Report on Internal Control Over Financial Reporting", management has excluded Classmates Online, Inc. and its subsidiaries from its assessment of internal control over financial reporting as of December 31, 2004 because it was acquired by the Company in a purchase business combination...

  • Page 72
    ... par value; 300,000 shares authorized; 61,074 and 63,944 shares issued and outstanding at December 31, 2004 and 2003, respectively Additional paid-in capital Deferred stock-based charges Accumulated other comprehensive income (loss) Accumulated deficit Total stockholders' equity Total liabilities...

  • Page 73
    ... stock-based charges, see Note 9) Cost of free services (including stock-based charges, see Note 9) Sales and marketing (including stock-based charges, see Note 9) Product development (including stock-based charges, see Note 9) General and administrative (including stock-based charges, see Note...

  • Page 74
    UNITED ONLINE, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) Six Months Ended December 31, 2003 Year Ended June 30, Year Ended December 31, 2004...1,429 - 29,221 $ 148 - (47,662) The accompanying notes are an integral part of these consolidated financial statements. F-6

  • Page 75
    ... 30, 2002 Issuance of common stock through employee stock purchase plan Exercises of stock options Repurchases of common stock Stock-based charges Unrealized gain on short-term investments, net of tax Tax benefits from stock options Interest earned on notes receivable from stockholders Repayments of...

  • Page 76
    ...acquired Net cash used for investing activities Cash flows from financing activities: Payments on capital leases Proceeds from term loan and line of credit, net Repayment of line of credit Repayment of notes receivable from stockholders Proceeds from exercises of stock options Proceeds from employee...

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

  • Page 78
    ... Online. The Company's pay services include dial-up Internet access, community-based networking, personal Web-hosting, and premium email services, among others. The Company also offers, at no charge, advertising-supported versions of certain of its services. In addition, the Company offers marketers...

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

  • Page 80
    ... market prices or appraised values, depending on the nature of the assets. Goodwill- The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets , on July 1, 2002. Under SFAS No. 142, goodwill is not amortized, but is tested for impairment at a reporting unit level on an annual basis...

  • Page 81
    ...see Note 2). The Company recorded reductions in goodwill of $9.5 million and $1.4 million during the December 2004 and 2003 quarters, respectively, in connection with the release of the deferred tax valuation allowance. Business Combinations -All of the Company's acquisitions have been accounted for...

  • Page 82
    ... Internet access costs that have been allocated to billable services based on the aggregate hourly usage of pay accounts as a percentage of total hours used by active accounts. Direct costs consist of costs related to providing technical support, customer billing and billing support to pay accounts...

  • Page 83
    ... free services includes direct costs incurred in providing certain technical and customer support services to free access accounts as well as costs that have been allocated to free services based on the aggregate hourly usage of free access accounts as a percentage of total hours used by the Company...

  • Page 84
    ... EITF Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services . Compensation expense is recorded in accordance with FIN 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or...

  • Page 85
    ... Online. The Company's pay services include dial-up Internet access, community-based networking, personal Web-hosting, and premium email services, among others. The Company also offers, at no charge, advertising supported versions of certain of its services. In addition, the Company offers marketers...

  • Page 86
    ... method in accordance with SFAS No. 141, Business Combinations . The primary reason for the acquisition was to acquire Classmates' services and account base to continue to expand the Company's subscription offerings. Classmates' results of operations are included in the consolidated financial...

  • Page 87
    ... Other assets Accounts payable and accrued liabilities Deferred revenue Deferred income taxes Capital leases Other long-term liabilities Total net liabilities assumed Intangible assets acquired: Trademark and trade name Advertising contracts and related relationships Pay accounts Free accounts Other...

  • Page 88
    ... business offers consumers Web-site services, including hosting, domain and email services. The acquisition has been accounted for under the purchase method in accordance with SFAS No. 141. The primary reason for the acquisition was to acquire About, Inc.'s Web-hosting services and account base in...

  • Page 89
    .... The primary reasons for the Merger were to accelerate the Company's growth in pay accounts, leverage NetZero's and Juno's operating and cost infrastructures to create a lower cost structure for providing Internet access and to create a more attractive base of users for advertising customers. Juno...

  • Page 90
    ...$ $ 195,423 (49,553) (1.27) In September 2000, the Company acquired RocketCash Corporation ("RocketCash"), an online commerce company, in a stock-for-stock transaction. In August 2001, the Company completed the sale of substantially all of the remaining assets related to the RocketCash acquisition...

  • Page 91
    ..., 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. In April 2002, the Company sold the remaining assets related to the Simpli acquisition for a 9.9% equity interest in...

  • Page 92
    ... of short-term investments in the year ended December 31, 2004. The Company had no material realized gains or losses from the sale of short-term investments in the six months ended December 31, 2003 and the years ended June 30, 2003 and 2002. Maturities of short-term investments were as follows (in...

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

  • Page 94
    ... Line of Credit In December 2003, United Online obtained a one-year $25 million unsecured revolving line of credit from a bank that was to expire in December 2004. This facility was available for general corporate purposes and the interest rates on borrowings were based on current market rates. The...

  • Page 95
    ... 31, 2004, the Company maintained the $100 million in a base rate loan bearing interest at 7.25%. In January 2005, the Company converted the base rate loan into multiple Eurodollar loans with staggered interest periods. The Company may make optional prepayments of the term loan, in whole or in part...

  • Page 96
    ... into an option to purchase that number of United Online shares of common stock equal to the product of 0.2000 and 0.3570, respectively, multiplied by the number of shares of common stock underlying the option. Given that NetZero is the Company's predecessor for financial reporting purposes, all...

  • Page 97
    ... the Company to repurchase shares of its common stock through open market or privately negotiated transactions based on prevailing market conditions and other factors. From time to time, the Board of Directors has increased the amount authorized for repurchase under this program. On April 22, 2004...

  • Page 98
    ...the year ended December 31, 2004, the six months ended December 31, 2003 and the years ended June... Stock options, restricted shares, warrants and employee stock... exclude options, unvested common stock and warrants, which are antidilutive. The number of antidilutive shares at December 31, 2004 and 2003...

  • Page 99
    .... 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 of the valuation allowance F-30

  • Page 100
    ... ended June 30, 2003, the Company recorded a tax benefit of $1.8 million on pre-tax income of $26.0 million for an effective tax rate benefit of 6.8%. The effective tax rate benefit differs from the statutory tax rate primarily due to the release of the valuation allowance attributable to the actual...

  • Page 101
    ... to reflect limitations under Section 382 of the Code. The Company has also claimed income tax deductions from the exercise of certain stock options and the related sale of common stock by employees, and for the year ended December 31, 2004, the six months ended December 31, 2003 and the years ended...

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

  • Page 103
    ...months ended December 31, 2003 and the year ended December 31, 2004 (in thousands, except per share amounts): Number of Shares Price Per Share Weighted Average Exercise Price Options...01 66.05 12.98 $ $ The number of option shares exercisable at December 31, 2004 and 2003 and June 30, 2003 and ...

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

  • Page 105
    ...Company recorded deferred stock-based compensation of $11.4 million, which is being amortized on a straight-line basis over the four-year vesting period. In December 2004, the Company repurchased 0.1 million restricted shares of common stock in connection with the resignation of an executive officer...

  • Page 106
    ... himself and all others similarly situated, filed a lawsuit in the United States District Court for the Southern District of New York against NetZero, certain officers and directors of NetZero and the underwriters of NetZero's initial public offering, Goldman Sachs Group, Inc., BancBoston Robertson...

  • Page 107
    ..., however, that such actions will not be material or adversely affect the Company's business, financial position, results of operations or cash flows. 11. TRANSITION PERIOD COMPARATIVE DATA The following table presents certain financial information for the six months ended December 31, 2003 and 2002...

  • Page 108
    12. QUARTERLY FINANCIAL DATA (UNAUDITED) (in thousands, except per share data) Year ended December 31, 2004: Quarter Ended... 12,310 0.20 0.19 $ $ $ $ $ 107,675 19,930 12,361 0.20 0.18 Six Months Ended December 31, 2003 and Year Ended June 30, 2003: Quarter Ended December 31, 2003 September 30, 2003...

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

  • Page 110
    ... ITEM 9A. CONTROLS AND PROCEDURES ITEM 9B. OTHER INFORMATION PART III ITEMS 10, 11, 12, 13 and 14 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES UNITED ONLINE, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM UNITED ONLINE, INC...

  • Page 111
    ... UNITED ONLINE, INC., a Delaware corporation (the " Borrower "), certain pledgors party to the Pledge Agreement referred to below party (each, a " Pledgor " and, collectively, the " Pledgors "), various Lenders party to the Credit Agreement referred to below, DEUTSCHE BANK TRUST COMPANY AMERICAS...

  • Page 112
    ...material respects only as of such specific date). 2. This Amendment is limited as specified and shall not constitute a modification, acceptance or waiver of any other provision of the Credit Agreement, the Pledge Agreement or any other Credit Document. 3. This Amendment may be executed in any number...

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

  • Page 114
    .... UNITED ONLINE, INC. By: /s/ CHARLES S. HILLIARD Name: Charles S. Hilliard Title: Executive Vice President, Finance and Chief Financial Officer NETZERO, INC., as a Pledgor By: /s/ CHARLES S. HILLIARD Name: Charles S. Hilliard Title: Executive Vice President, Finance and Chief Financial Officer JUNO...

  • Page 115
    ... S. Hilliard Title: Executive Vice President, Finance and Chief Financial Officer CLASSMATES MEDIA, INC., as a Pledgor By: /s/ CHARLES S. HILLIARD Name: Charles S. Hilliard Title: Executive Vice President, Finance and Chief Financial Officer DEUTSCHE BANK TRUST COMPANY AMERICAS, Individually, as...

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

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

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

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

  • Page 120
    ...LLC By: /s/ MEREDITH J. KOSLICK Name: Meredith J. Koslick Title: Assistant Vice President SANTA BARBARA BANK & TRUST By: /s/ IRIS L. SIEGEL Name: Iris L. Siegel Title: Vice President 10 SILICON VALLEY BANK By: /s/ BOB MULLER Name: Bob Muller Title: Senior Relationship Manager ULT CBNA Loan Funding...

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

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

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

  • Page 124
    QuickLinks Exhibit 21.1

  • Page 125
    ...-121217) of United Online, Inc. of our report dated March 15, 2005 relating to the financial statements, financial statement schedule, management's assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which...

  • Page 126
    QuickLinks CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

  • Page 127
    ... fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of...

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

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

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

  • Page 131
    ... Officer and President of United Online, Inc. (the "Company"), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (a) the Annual Report on Form 10-K of the Company for the year ended December 31, 2004, as filed...

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

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

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