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UNITED ONLINE INC
FORM 10-K
(Annual Report)
Filed 03/01/07 for the Period Ending 12/31/06
Address 21301 BURBANK BOULEVARD
WOODLAND HILLS, CA 91367
Telephone 8182873000
CIK 0001142701
Symbol UNTD
SIC Code 7370 - Computer Programming, Data Processing, And
Industry Computer Services
Sector Technology
Fiscal Year 12/31
http://www.edgar-online.com
© Copyright 2008, EDGAR Online, Inc. All Rights Reserved.
Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.

Table of contents

  • Page 1
    ...FORM 10-K (Annual Report) Filed 03/01/07 for the Period Ending 12/31/06 Address Telephone CIK Symbol SIC Code Industry Sector Fiscal Year 21301 BURBANK BOULEVARD WOODLAND HILLS, CA 91367 8182873000 0001142701 UNTD 7370 - Computer Programming, Data Processing, And Computer Services Technology 12/31...

  • Page 2
    ... period 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) 77-0575839...

  • Page 3
    ..., but are not limited to, statements about the markets in which we compete, our pay accounts and subscriptions, our product and service offerings, the advertising market, operating expenses, operating efficiencies, revenues, capital requirements, tax payments and our cash position. In addition, any...

  • Page 4
    ...important risk factors that may affect our business, financial position, results of operations and cash flows. Statements indicating factors that we believe may impact our results are not intended to be exclusive. We undertake no obligation to revise or update publicly any forward-looking statements...

  • Page 5
    ... our businesses, through internal development and acquisitions, beyond dial-up Internet access while managing our declining dial-up access services for profitability. United Online, Inc., a Delaware corporation headquartered in Woodland Hills, California, commenced operations in 2001 following the...

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

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

  • Page 8
    ...form of redeemable points for purchasing products and services from specified vendors. There are only a limited number of companies that have designed points-based loyalty rewards program specifically for Internet-related activities. It is estimated that revenues from online advertising will grow to...

  • Page 9
    ... such members for targeted offers, clicking or shopping through emails, or shopping through the MyPoints Web site. MARKETING AND NEW ACCOUNT ACQUISITION Our marketing efforts are focused primarily on attracting free and pay accounts, building our brands and cross-selling existing and new services to...

  • Page 10
    ...major Internet service providers, content providers, large Web publishers, Web search engine and portal companies, Internet advertising providers, content aggregation companies, social-networking Web sites, direct marketing businesses, and various other companies that facilitate Internet advertising...

  • Page 11
    ... 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 access accounts that elect to pay with a personal check or money order are not provisioned...

  • Page 12
    ... relationships with employees to be good. AVAILABLE INFORMATION Our corporate Web site is www.unitedonline.com. On this Web site, we make available, free of charge, our annual, quarterly and current reports, changes in the stock ownership of our directors and executive officers, our code of ethics...

  • Page 13
    ... deem immaterial may also affect us. If any of these risks actually materialize, our business, financial position, results of operations and cash flows could be adversely impacted. In that event, the market price of our common stock could decline and you may lose all or part of your investment. Our...

  • Page 14
    ... financial, marketing and other resources than we do. In addition, we have relied extensively on Internet advertising through portals and other Internet service providers, including AOL, MSN and Yahoo!, to grow our free and pay accounts. A number of these companies are competitors of United Online...

  • Page 15
    ...-networking Web sites, direct marketing businesses, 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...

  • Page 16
    ...by the financial analysts. In the event we do not achieve such expectations or projections, the price of our common stock could be adversely affected. Our marketing activities may not be successful. We spend significant funds to market our services. From time to time, we may allocate our advertising...

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

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

  • Page 19
    ... developed software applications, our credit card processors, our outsourced customer service vendors, other customer billing and support vendors, and any other failures or errors in our customer billing and service systems, could materially and adversely affect our business, financial position...

  • Page 20
    ..., without limitation, claims for defamation, negligence, trademark infringement, copyright infringement, and privacy matters. Various governmental agencies may also assert claims or institute investigations relating to our business practices, such as our marketing, billing, customer retention...

  • Page 21
    ... our business and prospects. We do not carry key person life insurance on any of our employees. Government laws and regulation changes and new laws and regulations. We are subject to a variety of international, federal, state and local laws and regulations, including those relating to issues such...

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

  • Page 23
    ..., customer support and technology centers or for any additional sales offices. ITEM 3. LEGAL PROCEEDINGS On April 20, 2001, Jodi Bernstein, on behalf of himself and all others similarly situated, filed a lawsuit in the United States District Court for the Southern District of New York against...

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

  • Page 25
    ... to the lawsuit denying the material allegations of the complaint. On January 29, 2007, counsel for Mr. Ewart advised the trial court that Mr. Ewart would be withdrawing from the action as a class representative and that counsel would seek permission from the court to add one or more new class...

  • Page 26
    ... the General Corporation Law of the State of Delaware. Common Stock Repurchases Our Board of Directors authorized a common stock repurchase program that allows us to repurchase shares of our common stock through open market or privately negotiated transactions based on prevailing market conditions...

  • Page 27
    .... The Company then pays the applicable withholding taxes in cash, which is accounted for as a repurchase of common stock. Common stock repurchases at December 31, 2006 were as follows (in thousands, except per share amounts): Maximum Approximate Total Number of Shares Purchased as Part of a Publicly...

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

  • Page 29
    ..., in the December 2006 quarter, we recorded a $13.3 million ($8.0 million, net of tax), impairment of goodwill, intangible assets and long-lived assets. In May, August and October of 2005, our Board of Directors declared a quarterly cash dividend of $0.20 per share of common stock. In February, May...

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

  • Page 31
    ..." accounts include total pay accounts as well as free users who have logged onto our access, social-networking, email or VoIP services during the preceding 31 days. Active accounts also include those free hosted Web sites that have received at least one visit during the preceding 90 days; the number...

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

  • Page 33
    ... 2006, we adopted Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004), Share-Based Payment , which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options, restricted...

  • Page 34
    ... exercise price of our stock options granted to employees and directors equaled the fair market value of the underlying stock at the grant date. Stock-based compensation expense recognized during the current period is based on the value of the portion of share-based payment awards that is ultimately...

  • Page 35
    ... their related pricing plans; the use of promotions, such as one or more free months of service, and discounted pricing plans to obtain or retain subscribers; increases or decreases in the price of our services; the number of services subscribed to by each pay account; pricing and success of new pay...

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

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

  • Page 38
    ..., performance fees paid to distribution partners to acquire new accounts, personnel-related expenses for sales and marketing personnel and telemarketing costs incurred to acquire and retain pay accounts and up-sell pay accounts to additional services. Marketing and advertising costs to promote our...

  • Page 39
    ... expenses include personnel-related expenses for executive, finance, legal, human resources and internal customer support personnel. In addition, general and administrative expenses include fees for professional legal, accounting and financial services; office relocation costs; non-income taxes...

  • Page 40
    ... of $3.0 million related to our photo-sharing service within the Content & Media 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...

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

  • Page 42
    ... have been adjusted to reflect our estimate of limitations under Section 382 of the Code. We have also claimed income tax deductions from the exercise of certain stock options and the related sale of common stock by employees, and, in 2006, the deduction includes the excess deduction for vested...

  • Page 43
    ... was primarily related to costs associated with the acquisition of Classmates in the December 2004 quarter, and to a lesser extent, increased costs associated with our Web-hosting service. Sales and Marketing Consolidated Sales and Marketing Expenses. Consolidated sales and marketing expenses...

  • Page 44
    ...related to our access services, the majority of which was due to reductions in media and other advertising costs, and a $1.8 million decrease in personnel and overhead-related expenses. These decreases were partially offset by a $3.6 million increase in VoIP marketing expenses. Content & Media Sales...

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

  • Page 46
    ...to compensation, including stock-based compensation, that was limited under Section 162(m) of the Code; foreign losses, the benefit of which is not currently recognizable due to uncertainty regarding realization; and the re-measurement of net deferred tax assets, including a change in New York state...

  • Page 47
    ..., without limitation, potential future acquisitions and new business initiatives, which are difficult to predict and could change significantly over time. Additionally, technological advances may require us to make capital expenditures to develop or acquire new equipment or technology in order to...

  • Page 48
    ... reasons including, without limitation, developing new or enhancing existing services or products, repurchasing our common stock, acquiring complementary services, businesses or technologies or funding significant capital expenditures. If we need to raise additional capital through public or private...

  • Page 49
    ... in capital equipment purchases and capitalized software costs in connection with the development of new products and the ongoing operations of our business; and • a $4.6 million increase in purchases of rights, patents and trademarks, primarily related to the purchase of proprietary rights...

  • Page 50
    ... payments from subscribers 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 ACH, payment by personal check or money order or through a local telephone company...

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

  • Page 52
    ... intangible assets such as our pay account base, software and technology and patents and trademarks. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to the excess. Business Combinations- All of our...

  • Page 53
    ... implementation of SFAS No. 154 did not have a material impact on our financial position, results of operations or cash flows. Accounting for Uncertainty in Income Taxes In July 2006, the FASB issued FASB Interpretation No. ("FIN") 48, Accounting for Uncertainty in Income Taxes-an interpretation of...

  • Page 54
    ...did not have a material impact on our financial position, results of operations or cash flows. Fair Value Measurements In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements , which clarifies the definition of fair value, establishes guidelines for measuring fair value, and expands...

  • Page 55
    ... 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 in recording, processing, summarizing and reporting, on a timely basis, information...

  • Page 56
    ....com, Inc. ("MyPoints"), a wholly-owned subsidiary of the Company, because MyPoints was acquired by the Company in a purchase business combination in April 2006. Subsequent to the acquisition, certain elements of the acquired business' internal control over financial reporting and related processes...

  • Page 57
    ... by Reference to Form File No. Date Filed 2.1 Stock Purchase Agreement, dated as of April 9, 2006, by and between United Online, Inc. and UAL Corporation Amended and Restated Certificate of Incorporation Amended and Restated Bylaws Certificate of Designation for Series A Junior Participating...

  • Page 58
    ... Plan Form of Option Agreement for 2001 Supplemental Stock Incentive Plan Classmates Online, Inc. Amended and Restated 1999 Stock Plan Classmates Online, Inc. 2004 Stock Plan Form of Option Agreement for Classmates Online, Inc. 2004 Stock Plan United Online, Inc. 2006 Management Bonus Plan Amended...

  • Page 59
    ...Lease between LNR Warner Center, LLC and NetZero, Inc. List of Subsidiaries Consent of Independent Registered Public Accounting Firm Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certification of the Chief Financial Officer pursuant to Section...

  • Page 60
    ...has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 1, 2007. UNITED ONLINE, INC. By: /s/ MARK R. GOLDSTON Mark R. Goldston Chairman and Chief Executive Officer KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below...

  • Page 61
    ... Purchase Agreement, dated as of April 9, 2006, by and between United Online, Inc. and UAL Corporation Amended and Restated Certificate of Incorporation Amended and Restated Bylaws Certificate of Designation for Series A Junior Participating Preferred Stock (included in exhibit 4.1 below) Rights...

  • Page 62
    ...Center, LLC and NetZero, Inc. List of Subsidiaries Consent of Independent Registered Public Accounting Firm Certification of the Chief Executive Officer pursuant to Section 302 of the SarbanesOxley Act of 2002 Certification of the Chief Financial Officer...2005 8/9/2006 5/3/2004 3/1/2007 3/1/2007 X...

  • Page 63
    UNITED ONLINE, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Comprehensive Income Consolidated Statements of Stockholders' Equity Consolidated ...

  • Page 64
    .... We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for stock-based compensation in 2006. Internal control over financial reporting Also, in our opinion...

  • Page 65
    ... of MyPoints.com, Inc. ("MyPoints"), a wholly-owned subsidiary, because MyPoints was acquired by the Company in a purchase business combination during 2006. Subsequent to the acquisition, certain elements of the acquired business' internal control over financial reporting and related processes were...

  • Page 66
    ...65,805 and 62,606 shares issued and outstanding at December 31, 2006 and 2005, respectively Additional paid-in capital Deferred stock-based compensation Accumulated other comprehensive loss Accumulated deficit Total stockholders' equity Total liabilities and stockholders' equity $ 19,252 143,110 32...

  • Page 67
    ..., except per share amounts) Year Ended December 31, 2005 2006 2004 Revenues Operating expenses: Cost of revenues (including stock-based compensation, see Note 5) Sales and marketing (including stock-based compensation, see Note 5) Product development (including stock-based compensation, see Note...

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

  • Page 69
    ... of accounting change, net of tax Balance at January 1, 2006 Reversal of deferred stock-based compensation Exercises of stock options Issuance of common stock through employee stock purchase plan Vesting of restricted stock units Repurchases of common stock Dividends paid on shares outstanding and...

  • Page 70
    ... on term loan Repayment of line of credit Payments on capital leases Proceeds from exercises of stock options Proceeds from employee stock purchase plan Repurchases of common stock Payments for dividends Excess tax benefits from stock-based compensation Net cash provided by (used for) financing...

  • Page 71
    ...combined basis, the Company's Web properties attract a significant number of Internet users each month and the Company offers marketers a broad array of Internet advertising products and services as well as online market research and measurement services. United Online is a Delaware corporation that...

  • Page 72
    ... 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, collateral is not required. The Company maintains an allowance for doubtful accounts based upon the expected collectibility...

  • Page 73
    ... of the cost of an acquired entity over the fair value of the acquired net assets. The Company accounts for goodwill in accordance with SFAS No. 142, Goodwill and Other Intangible Assets , which among other things, addresses financial accounting and reporting requirements for acquired goodwill and...

  • Page 74
    ...points expected to expire prior to redemption. Such members' points may be converted by enrolled members into various third-party gift certificates, frequent travel programs, coupons or other rewards. Points are granted to members when they respond to direct marketing offers delivered by the Company...

  • Page 75
    ... subscribers are recorded on the balance sheet as deferred revenue. The Company offers 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. In...

  • Page 76
    ... related to providing telephone technical support; customer billing and billing support to our pay accounts; domain name registration fees; and costs of providing rewards to members of our loyalty marketing service. Sales and Marketing- Sales and marketing expenses include advertising and promotion...

  • Page 77
    ... Company adopted SFAS No. 123 (revised 2004), Share-Based Payment , which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options, restricted stock awards and employee stock purchases related...

  • Page 78
    ...straight-line basis (net of estimated forfeitures) over the employee service period. In November 2005, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position ("FSP") No. SFAS 123(R)-3, Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards . The...

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

  • Page 80
    ... of SFAS No. 154 did not have a material impact on the Company's financial position, results of operations or cash flows. Accounting for Uncertainty in Income Taxes In July 2006, the FASB issued FASB Interpretation No. ("FIN") 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB...

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

  • Page 82
    ... $ 42,559 $ $ $ $ 0.65 0.66 0.63 0.64 $ 563,343 $ 48,540 $ 48,540 $ $ $ $ 0.79 0.79 0.76 0.76 In March 2006, the Company acquired The Names Database for approximately $10.1 million in cash, including acquisition costs. The Names Database is a global social-networking service that acts as an F- 20

  • Page 83
    ... a related licensing and support agreement with Homestead Technologies. The acquisition was accounted for under the purchase method in accordance with SFAS No. 141, Business Combinations . The primary reason for the acquisition was to acquire PhotoSite's software and services to enhance the Company...

  • Page 84
    ... 2006 quarter, the Company recorded impairment charges totaling $8.8 million related to its photo-sharing service (see Note 6). Classmates Online, Inc. In November 2004, the Company acquired Classmates, which operates Classmates.com (www.classmates.com), connecting millions of members throughout...

  • Page 85
    ... 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 intangibles Total intangible assets acquired Goodwill Total purchase price $ 30,350 3,396 9,700 2,384...

  • Page 86
    ... per share-diluted About Web Services $ 513,300 $ 111,882 $ 1.82 $ 1.70 In April 2004, the Company acquired substantially all of the assets associated with the Web-hosting business of About, Inc. The business offers consumers Web-site services, including hosting, domain and email services. The...

  • Page 87
    ... COMPONENTS Short-Term Investments Short-term investments consist of the following (in thousands): December 31, 2006 Gross Gross Unrealized Unrealized Amortized Cost Gains Losses Estimated Fair Value U.S. corporate notes Government agencies Total $ 2,500 140,822 $ 143,322 $- 15 $ 15 $ - (227...

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

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

  • Page 90
    ... and $30 million in year four, payable in quarterly installments. Any voluntarily prepayments made by the Company reduced, on a pro-rata basis, the remaining outstanding amortization payments. The Company had the option to maintain the term loan as either base rate loans or Eurodollar loans, but at...

  • Page 91
    ... of one preferred share purchase right for each outstanding share of its common stock. The dividend was paid on November 26, 2001 to the stockholders of record at the close of business on that date. Each right entitles the registered holder to purchase from the Company one unit consisting of one...

  • Page 92
    ... vested in order to pay the applicable employee withholding taxes. Dividends Dividends are paid on common shares and RSUs outstanding as of the record date. In May, August and October of 2005, the Company's Board of Directors declared a quarterly cash dividend of $0.20 per share of common stock. The...

  • Page 93
    ... stock, common shares are issued from authorized but unissued shares. At December 31, 2006, an aggregate of 27.6 million shares were reserved under the Company's plans, of which 4.0 million shares were available for issuance at December 31, 2006. Stock-Based Compensation Recognized The following...

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

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

  • Page 96
    ...Awards On February 15, 2007, the Compensation Committee of the Board of Directors approved grants of 0.6 million RSUs with a fair value equal to $8.2 million to the Company's executive officers. Each RSU entitles the officers to receive one share of the Company's common stock upon vesting. The units...

  • Page 97
    ... million related to its photo-sharing service within the Content & Media 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. The Company determined...

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

  • Page 99
    ... have been adjusted to reflect the Company's estimate of 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, in 2006, the deduction includes the excess...

  • Page 100
    ... share computations exclude stock options, unvested common stock and RSUs, which are antidilutive. The number of antidilutive shares at December 31, 2006, 2005 and 2004 was 3.0 million, 6.8 million and 6.4 million, respectively. 9. EMPLOYEE BENEFIT PLANS The Company has a savings plan (the "Savings...

  • Page 101
    ... All of these charges are included in the Company's operating expenses. A reconciliation of segment income from operations (which excludes corporate expenses, depreciation, amortization of intangible assets and stock-based compensation) to consolidated operating income, is as follows for each period...

  • Page 102
    ... 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 103
    ...the complaint. On July 27, 2006, plaintiff Donald E. Ewart filed a purported consumer class action lawsuit in the Superior Court of the State of California, County of Los Angeles, against NetZero claiming that NetZero continues to charge consumers fees after they cancel their Internet access account...

  • Page 104
    ... FINANCIAL DATA (UNAUDITED) (in thousands, except per share data) Year ended December 31, 2006: December 31, Quarter Ended September 30, June 30, March 31, Revenues Impairment of goodwill, intangible assets and long-lived assets Operating income Income before cumulative effect of accounting...

  • Page 105
    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, 2006 Year ended...

  • Page 106
    ... in Title 8 of the Delaware Code (as amended from time to time, the "DGCL"). ARTICLE 4 The total number of shares of capital stock which the Corporation shall have authority to issue is 305,000,000 shares, divided into the following classes: 300,000,000 shares of Common Stock having a par value of...

  • Page 107
    ARTICLE 5 The following provisions are inserted for the management of the business and the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the powers of the Corporation and of its directors and stockholders: a. The business and affairs of the ...

  • Page 108
    ... the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws. Any action required or permitted to be taken by the stockholders of the Corporation may only be effected at a duly called annual or special meeting of the stockholders of...

  • Page 109
    ...Certificate of Incorporation shall be effective unless approved by sixty-six and two-thirds percent of the outstanding shares of voting stock of the Corporation then entitled to vote on the election of directors of the Corporation. ARTICLE 8 The Corporation shall indemnify its directors and officers...

  • Page 110
    ... business may be transacted at the annual meeting of stockholders. Section 2.3 Special Meetings. Unless otherwise required by law or by the certificate of incorporation of the Corporation (as amended from time to time and including any certificates of designation with respect to any preferred stock...

  • Page 111
    ... may be effected only at a duly called annual or special meeting of such holders and may not be effected by consent by such holders in lieu of such a meeting. Section 2.8 Voting List. The officer who has charge of the stock ledger of the Corporation shall prepare and make, or cause a third party to...

  • Page 112
    ... as a director (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by the person that would be...

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

  • Page 114
    ... and at such place as may from time to time be determined by the Board of Directors. Special meetings of the Board of Directors may be called by the Chairman of the Board or the chief executive officer on two hours' notice to each director by phone, fax or electronic mail; special meetings shall be...

  • Page 115
    ... and shall receive such compensation for their services as directors as shall be determined by the Board of Directors. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be...

  • Page 116
    ... director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his, her or its address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be...

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

  • Page 118
    ...chief financial officer of the Corporation, shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit...

  • Page 119
    .... Certificates for shares of capital stock of the Corporation shall be signed by, or in the name of the Corporation by, (a) the Chairman of the Board, the Vice Chairman of the Board, the Chief Executive Officer, the President or any Executive Vice President, and (b) the Chief Financial Officer...

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

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

  • Page 122
    ..., to have had no reasonable cause to believe such person's conduct was unlawful, if such person's action is based on the records or books of account of the Corporation or another enterprise, or on information supplied to such person by the officers of the Corporation or another enterprise in the...

  • Page 123
    ...and officers of the Corporation. ARTICLE 9 AMENDMENTS Section 9.1 Amendments. Except as otherwise provided in the Certificate of Incorporation, the Bylaws may be altered, amended or repealed, or new Bylaws may be adopted, by (a) the holders of a majority of the outstanding shares of voting stock of...

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

  • Page 125
    ... and Destruction of Rights Certificates Reservation and Availability of Preferred Stock. Preferred Stock Record Date Adjustment of Purchase Price, Number of Shares or Number of Rights Certificate of Adjusted Purchase Price or Number of Shares Consolidation, Merger or Sale or Transfer of Assets...

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

  • Page 127
    ... additional shares of Common Stock of the Company (other than as a result of a stock dividend, stock split or similar transaction effected by the Company in which all holders of Common Stock of the Company are treated equally), then such Person shall be deemed to be an "Acquiring Person" hereunder...

  • Page 128
    ... not then actually issued and outstanding which such Person would be deemed to beneficially own hereunder. "Business Day" shall mean any day other than a Saturday, a Sunday, or a day on which banking institutions in The City of New York are authorized or obligated by law or executive order to close...

  • Page 129
    ... City time, on the next succeeding Business Day. "Common Stock" when used with reference to the Company shall mean the shares of Common Stock, par value $0.0001, of the Company. "Common Stock" when used with reference to any Person other than the Company shall mean the capital stock (or other equity...

  • Page 130

  • Page 131
    ... holding shares of Common Stock for or pursuant to the terms of any such plan) is commenced within the meaning of Rule 14d-2(a) of the Exchange Act Regulations or of the first public announcement of the intention of any Person (other than the Company, any Subsidiary of the Company, any employee...

  • Page 132
    ... rule or regulation of any stock exchange or transaction reporting system on which the Rights may from time to time be listed or traded, or to conform to usage. Subject to the provisions of Sections 11 and 22, the Rights Certificates shall entitle the holders thereof to purchase the number of Units...

  • Page 133
    ... and issued and delivered by the Company with the same force and effect as though the person who signed such Rights Certificates had not ceased to be such officer of the Company. Any Rights Certificate may be signed on behalf of the Company by any person who, at the actual date of the execution of...

  • Page 134
    ..., registered in such name or names as may be designated by such holder; and (iv) when appropriate, after receipt thereof, deliver such cash to or upon the order of the registered holder of such Rights Certificate. If the Company is obligated to issue other securities of the Company, pay cash and/or...

  • Page 135
    ... for another purpose a number of shares that will be sufficient to permit the exercise in full of all outstanding Rights. Upon the occurrence of any events resulting in an increase in the aggregate number of shares of Preferred Stock (or other equity securities of the Company) issuable upon exercise...

  • Page 136
    ...has been established to the Company's reasonable satisfaction that no such tax is due. Section 10. Preferred Stock Record Date. Each person in whose name any certificate for Units of Preferred Stock (or, following the occurrence of a Triggering Event, other securities) is issued upon the exercise of...

  • Page 137
    ... the event the Company shall at any time after the date of this Agreement (A) declare a dividend on the Preferred Stock payable in shares of Preferred Stock, (B) subdivide the outstanding shares of Preferred Stock, (C) combine the outstanding Preferred Stock into a smaller number of shares Preferred...

  • Page 138
    ... the proportionate share of the outstanding shares of any class of equity securities of the Company or any of its Subsidiaries that is directly or indirectly beneficially owned by any Acquiring Person or any Person or any Associate or Affiliate of any Acquiring Person; then promptly following the...

  • Page 139
    ... purchase at such Current Per Share Market Price and the denominator of which shall be the sum of the number of Units of Preferred Stock outstanding on such record date plus the number of additional Units of Preferred Stock and/or Equivalent Preferred Stock to be offered for subscription or purchase...

  • Page 140
    ... security selected by the board of directors of the Company. If on any such date no market maker is making a market in the security, the Current Per Share Market Price of such security on such date shall mean the fair value per share or other trading unit as determined in good faith by the board of...

  • Page 141
    ... or the Preferred Stock are publicly held or so listed or traded, "Current Per Share Market Price" of the Preferred Stock shall mean the fair value per share as determined in good faith by the board of directors of the Company, whose determination shall be described in a statement filed with the...

  • Page 142
    ... the number of Units of Preferred Stock issuable upon exercise of the Rights, the Company shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable number of Units of Preferred Stock at...

  • Page 143
    ...shares of Common Stock of the Company or Units of Preferred Stock a copy of such certificate and (c) mail a brief summary thereof to each holder of a Rights Certificate in accordance with Section 25 hereof. Notwithstanding the foregoing sentence, the failure by the Company to make such certification...

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

  • Page 145
    ... Per Share Market Price; and (4) if the Common Stock of such Person is not Registered Common Stock or such Person is not a corporation, and such Person is directly or indirectly controlled by more than one Person, and none of such other Persons has Registered Common Stock outstanding, "Principal...

  • Page 146
    ... Per Share Market Price of a whole Right shall be the closing price per share of a whole Right on the Trading Day immediately prior to the date on which such fractional Rights would have been otherwise issuable. (b) The Company shall not be required to issue fractions of Preferred Stock (other...

  • Page 147
    ... under this Agreement by reason of any preliminary or permanent injunction or other order, decree or ruling issued by a court of competent jurisdiction or by a governmental, regulatory or administrative agency or commission, or any statute, rule, regulation or executive order promulgated or enacted...

  • Page 148
    ... for Units of Preferred Stock or for other securities of the Company, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement, or other paper or document believed by it to be genuine and to be signed, executed and...

  • Page 149
    ... of any Units of Preferred Stock or other securities to be issued upon the exercise of any Rights or as to whether any such security will, when issued, be validly authorized and issued, fully paid and nonassessable. (f) The Company agrees that it will perform, execute, acknowledge and deliver or...

  • Page 150
    ... Agent, whether appointed by the Company or by such a court, shall be a corporation organized and doing business under the laws of the United States or of any state of the United States, in good standing, authorized under such laws to exercise corporate trust or stock transfer powers, and subject to...

  • Page 151
    ...of or result in material adverse tax consequences to the Company or the Person to whom such Rights Certificate would be issued or would create a significant risk of or result in such options' or employee plans' or arrangements' failing to qualify for otherwise available special tax treatment and (ii...

  • Page 152
    ... stock splits, stock dividends and similar transactions occurring after the date hereof, that number obtained by dividing the Purchase Price by the then Current Per Share Market Price per Unit of Preferred Stock on the earlier of (i) the date on which any Person becomes an Acquiring Person and...

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

  • Page 154
    ... of any Rights Certificate to or on the Rights Agent shall be sent by registered or certified mail and shall be deemed given upon receipt and addressed (until another address is filed in writing by the Rights Agent with the Company) as follows: U.S. Stock Transfer Corporation 1745 Gardena Avenue...

  • Page 155
    ... in this Agreement shall be construed to give to any person or corporation other than the Company, the Rights Agent and the registered holders of the Rights Certificates (and, prior to the Distribution Date, shares of Common Stock of the Company) any legal or equitable right, remedy or claim under...

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

  • Page 157
    ... than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series A Preferred Stock. Section 2. Dividends and...

  • Page 158
    ... the stockholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise...

  • Page 159
    ...or winding up. In the event the Corporation shall at any time after November 26, 2001 declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise...

  • Page 160
    to such event. A-2

  • Page 161
    ... the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares...

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

  • Page 163
    ... ARE SUBJECT TO REDEMPTION AT THE OPTION OF THE COMPANY AT $0.001 PER RIGHT AND TO EXCHANGE ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN...

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

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

  • Page 166
    Form of Reverse Side of Rights Certificate FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer the Rights Certificate.) FOR VALUE RECEIVED unto (Please print name and address of transferee) this Rights Certificate, together with all right, title and ...

  • Page 167
    ... set forth above in the Form of Assignment is not completed, the Company and the Rights Agent will deem the beneficial owner of the Rights evidenced by this Rights Certificate to be an Acquiring Person or an Affiliate or Associate thereof (each as defined in the Rights Agreement) and such...

  • Page 168
    ... security or other identifying number (Please print name and address) If such number of Rights shall not be all the Rights evidenced by this Rights Certificate, a new Rights Certificate for the balance remaining of such Rights shall be registered in the name of and delivered to: Please insert social...

  • Page 169
    ...the Form of Election to Purchase, as the case may be, is not completed, the Company and the Rights Agent will deem the beneficial owner of the Rights evidenced by this Rights Certificate to be an Acquiring Person or an Affiliate or Associate thereof (each as defined in the Rights Agreement) and such...

  • Page 170
    ... MySite) United Online Advertising Network, Inc., a Delaware corporation (dba United Online Media Group) United Online Communications, Inc., a Delaware corporation (dba NetZero Voice) Juno Online Services Development Private Limited, a corporation organized under the laws of India MyPoints.com, Inc...

  • Page 171
    ...123392) of United Online, Inc. of our report dated February 28, 2007 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 172
    ...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 173
    ...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 174
    ... Chief Executive 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, 2006, as filed...

  • Page 175
    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 I, Charles S. Hilliard, President and Chief Financial Officer of United Online, Inc. (the "Company"), certify, pursuant to 18 U.S.C. Section ...