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UNITED ONLINE INC
FORM 10-K
(Annual Report)
Filed 02/20/08 for the Period Ending 12/31/07
Address 21301 BURBANK BOULEVARD
WOODLAND HILLS, CA 91367
Telephone 8182873000
CIK 0001142701
Symbol UNTD
SIC Code 7370 - Computer Programming, Data Processing, And
Industry Computer Services
Sector Technology
Fiscal Year 12/31
http://www.edgar-online.com
© Copyright 2008, EDGAR Online, Inc. All Rights Reserved.
Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.

Table of contents

  • Page 1
    ...FORM 10-K (Annual Report) Filed 02/20/08 for the Period Ending 12/31/07 Address Telephone CIK Symbol SIC Code Industry Sector Fiscal Year 21301 BURBANK BOULEVARD WOODLAND HILLS, CA 91367 8182873000 0001142701 UNTD 7370 - Computer Programming, Data Processing, And Computer Services Technology 12/31...

  • Page 2
    ...: Title of Each Class Name of Exchange on Which Registered 77-0575839 (I.R.S. Employer Identification No.) 91367 (Zip Code) Common Stock, par value $0.0001 per share Preferred Stock Purchase Rights The Nasdaq Stock Market LLC (Nasdaq Global Select Market) Indicate by check mark if the Registrant...

  • Page 3
    ... stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III of this annual report, to the extent not set forth herein, is incorporated herein by reference to the Registrant's definitive proxy statement relating to the 2008 annual meeting of stockholders to be filed...

  • Page 4
    ... in which we compete, our pay accounts, our product and service offerings, the advertising market, operating expenses, operating efficiencies, revenues, dividends, capital requirements, capital expenditures, tax payments, stock-based compensation, restructuring charges, and our cash position. In...

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

  • Page 6
    ... spend an increasing amount of time online, view social networking Web sites as an attractive marketing medium for their products and services. According to eMarketer, an independent Internet industry research firm, advertising spending on social networking Web sites in the United States is expected...

  • Page 7
    ... rates on display advertising and response rates to email campaigns, providing rapid feedback for advertisers that can be used to identify potential customers and create new targeted offers. In addition, an online loyalty marketing program that has attracted a large, responsive and loyal member base...

  • Page 8
    ..., which appears in Part II, Item 8 of this Annual Report on Form 10-K. Online Social Networking On our social networking Web sites, we enable users to locate and interact with acquaintances from school, work and the military. Led by our flagship Classmates Web site ( www.classmates.com ) that serves...

  • Page 9
    ... Search. Free members can use our search feature to locate individuals within communities of interest and to browse our member database which is currently differentiated by high school, college, workplace or military unit. Our school communities are further subdivided into new members, teachers and...

  • Page 10
    ... a free service and users need only provide their name, zip code, gender, date of birth, and an email address to register. Members register to receive direct email marketing and other online loyalty promotions, and earn points for responding to email offers, taking market research surveys, shopping...

  • Page 11
    ... MyPoints branded toolbar; acquiring and using a MyPoints branded credit card; and playing MyPoints branded online games. Our strategy for our online loyalty marketing service includes the following key elements: enhance the member experience and engagement on our Web site by developing new features...

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

  • Page 13
    ... to emails and when members complete online transactions. We sell marketing solutions to advertisers with both brand and direct response objectives through a full suite of display, email and other advertising opportunities. We also use targeting technologies and Web site integrations in order to...

  • Page 14
    ...in the online advertising market. These activities and strategies can cause our advertising expenses to vary significantly from period to period. Our traditional marketing activities for our Internet access services are designed to drive prospective accounts to call our toll free numbers to purchase...

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

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

  • Page 17
    ..., Web site content, and general consumer protection and contract laws. Laws and regulations have been adopted, including the ones described below, and may be adopted in the future, that address Internet-related issues, including online content, privacy and data protection, security, online marketing...

  • Page 18
    .... Available Information Our corporate Web site is www.unitedonline.com . On this Web site, we make available, free of charge, our annual, quarterly and current reports, changes in the stock ownership of our directors and executive officers, our code of ethics, and other documents filed with, or...

  • Page 19
    ... a number of specialty Web sites, including LinkedIn, Reunion.com and Monster.com's Military.com service, that offer online social networking services based on school, work or military communities; and an increasing number of schools, employers and associations that maintain their own Internet-based...

  • Page 20
    ... business, our ability to implement our strategies, and our financial results. We use online advertising to promote our social networking services to potential new free members. Most of our online advertising arrangements are structured such that we pay a fee for each new free account registration...

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

  • Page 22
    ... could negatively affect our international operations, our number of pay accounts and our financial results. RISKS RELATING TO OUR COMMUNICATIONS SEGMENT Our business will suffer if we are unable to compete successfully. Our principal Communications services, our Internet access services, compete...

  • Page 23
    ... per Internet access pay account. We may also have to allocate more marketing resources toward our Internet access services than we anticipate. All of the foregoing could adversely affect the profitability of our Internet access services which could materially and adversely impact our financial...

  • Page 24
    ...result of expected continued decreases in our dial-up Internet access pay accounts and, potentially, the average monthly revenue per pay account, we expect that our Communications billable services revenues and the profitability of this segment will continue to decline over time. The rate of decline...

  • Page 25
    ... successfully complete acquisitions. 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...

  • Page 26
    ... and other uses; unforeseen obligations or liabilities; difficulty assimilating the acquired 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...

  • Page 27
    ..., without limitation, our internal operations, our billing and customer support, our accelerated dial-up Internet access services, and our advertising products and services. Any significant failure of this software could materially and adversely affect our business, financial position, results...

  • Page 28
    ... defamation, negligence, trademark infringement, copyright infringement, and privacy matters. Various governmental agencies may also assert claims or institute legal actions, inquiries or investigations relating to our business practices, such as our marketing, billing, customer retention, renewal...

  • Page 29
    ... regulations may adversely affect our results of operations. We are subject to a variety of international, federal, state, and local laws and regulations, including those relating to issues such as user privacy and data protection, defamation, pricing, advertising, taxation, sweepstakes, promotions...

  • Page 30
    ... events which cause interruptions in our services. Our business could be severely impacted due to political instability or other factors in India or the Philippines. We have a significant number of employees located in our India office. In addition, a significant portion of our customer support is...

  • Page 31
    ...subsidiary, Classmates Media Corporation, or CMC, filed a registration statement relating to the initial public offering, or IPO, of CMC's Class A common stock. The registration statement was withdrawn in December of 2007 due to then-current market conditions. It is still our strategy to complete an...

  • Page 32
    ...our corporate and operations facilities, customer support and technology centers or for any additional sales offices. For additional information regarding our obligations under leases, see Note 13-"Commitments and Contingencies" to our Consolidated Financial Statements included in this Annual Report...

  • Page 33
    ... injunctive and declaratory relief and damages. NetZero filed a response to both lawsuits denying the material allegations of the complaints. Both Messrs. Piercy and Ewart subsequently withdrew from the actions as class representatives. On March 16, 2007, Barbara Rasnake and Robert Du Verger were...

  • Page 34
    ... of Directors authorized a common stock repurchase program (the "program") that allows us to repurchase shares of our common stock through open market or privately negotiated transactions based on prevailing market conditions and other factors. From time to time, our Board of Directors has increased...

  • Page 35
    ... of the employee withholding taxes due. We then pay the applicable withholding taxes in cash. Common stock repurchases through December 31, 2007 were as follows (in thousands, except per share amounts): Total Number of Shares Purchased as Part of a Publicly Announced Program Maximum Approximate...

  • Page 36
    ...year period ended December 31, 2007, the cumulative total stockholder return for the Company's common stock, the Nasdaq Stock Market (U.S. companies) Index (the "Nasdaq Composite") and the Morgan Stanley Internet Index ("MS Internet Index"). Measurement points are the last trading day of each of the...

  • Page 37
    ...2003 and are derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K. The following amounts are in thousands, except per share data: Year Ended December 31, 2007(5) 2006(4) 2005 2004(3) Six Months Ended December 31, 2003(2) Year Ended June...

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

  • Page 39
    ... of all loyalty marketing members who have earned or redeemed points during such period. Active Communications segment accounts include all segment pay accounts as of the date presented and the number of free Internet access and email accounts that logged on to the Company's services at least once...

  • Page 40
    ... the account uses the same member identifier. As a result, total active accounts may not represent total unique users. At any point in time, our pay account base includes a number of accounts receiving a free period of service as either a promotion or retention tool and a number of accounts that...

  • Page 41
    ... partner Internet search services, amounts generated from the display of third-party registration offers at the end of Classmates' pay account registration process, amounts generated from other display advertisements, and amounts generated from referring members to third-party Web sites or services...

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

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

  • Page 44
    ...outstanding points accumulated by its loyalty marketing members as well as those points purchased by its advertisers for use in such advertisers' promotion campaigns as they have been earned by MyPoints' members, less an allowance for points expected to expire prior to redemption. The estimated cost...

  • Page 45
    ... gift cards and other awards from merchants at a discount and sets redemption levels for its members. MyPoints has the ability to adjust the number of points required to redeem awards to reflect changes in the cost of awards. On a monthly basis, MyPoints accounts for and reduces the gross points...

  • Page 46
    ... of a subsidiary initial public offering, or IPO. Classmates Media Corporation, or CMC, was formed in August 2007 for the purposes of consolidating our Classmates, The Names Database and MyPoints business units and initiating a public equity offering. The businesses were contributed to CMC...

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

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

  • Page 49

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

  • Page 51
    ... to emails and when members complete online transactions. We sell marketing solutions to advertisers with both brand and direct response objectives through a full suite of display, email and other advertising opportunities. We also use targeting technologies and Web site integrations in order to...

  • Page 52
    ...costs related to providing telephone technical support; customer billing and billing support to our pay accounts; fees associated with the storage and processing of customer credit cards and associated bank fees; and domain name registration fees. Historically, the costs that comprise our Classmates...

  • Page 53
    ... services include advertising and promotion expenses; fees paid to distribution partners, third-party advertising networks and co-registration partners to acquire new pay and free accounts; personnel and overhead-related expenses for marketing personnel; and telemarketing costs incurred to acquire...

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

  • Page 55
    ... internal customer support personnel. In addition, general and administrative expenses include professional fees for legal, accounting and financial services; office relocation costs; non-income taxes; insurance; occupancy and other overhead-related costs; and expenses incurred and credits received...

  • Page 56
    ...for dial-up Internet access services. In addition, we recognized $0.4 million in restructuring charges in the year ended December 31, 2007 for termination benefits paid to certain employees associated with our Web hosting and photo sharing businesses. In the year ended December 31, 2006, we recorded...

  • Page 57
    ... compensation, including stock-based compensation, that is limited under Section 162(m) of the Code; (3) foreign losses, the benefit of which is not currently recognizable due to uncertainty regarding realization; (4) the re-measurement of certain deferred tax assets in New York; (5) employee stock...

  • Page 58
    ... options granted to employees and directors equaled the fair market value of the underlying stock at the grant date. SFAS No. 123R requires forfeitures to be estimated at the time of grant in order to calculate the amount of share-based payment awards ultimately expected to vest. The forfeiture rate...

  • Page 59
    ... 123R, we treat such awards as a single award and recognize stock-based compensation on a straight-line basis (net of estimated forfeitures) over the employee service period. In December 2005, our Compensation Committee of the Board of Directors approved the acceleration of vesting of all options to...

  • Page 60
    ... in ARPU for our dial-up Internet access services due to increased use of free months of service and promotional and retention pricing to obtain or retain dial-up Internet access pay accounts. Advertising Revenues Consolidated Advertising Revenues. Consolidated advertising revenues increased by $40...

  • Page 61
    ... in customer support and billing-related costs as a result of a decrease in the number of pay Internet access accounts. These decreases were partially offset by an increase of $3.8 million in costs associated with our VoIP services, a $0.7 million increase in network and other overhead-related costs...

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

  • Page 63
    ...-related costs associated with our loyalty marketing service which we acquired in April 2006, a $1.3 million increase in professional fees, facilities costs and other overhead-related costs associated with our social networking services, and a $0.9 million increase in stock-based compensation...

  • Page 64
    ...; (2) compensation, including stock-based compensation, that is limited under Section 162(m) of the Code; (3) foreign losses, the benefit of which is not currently recognizable due to uncertainty regarding realization; (4) the re-measurement of deferred tax assets in New York; and (5) employee stock...

  • Page 65
    ... limitation, potential future acquisitions and new business initiatives, which are difficult to predict and which 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 66
    ... may also be affected by our repurchases of our common stock. Our Board of Directors authorized a common stock repurchase program (the "program") that allows us to repurchase shares of our common stock through open market or privately negotiated transactions based on prevailing market conditions and...

  • Page 67
    ...; to develop and acquire other services, businesses or technologies; to repurchase shares of our common stock if we believe market conditions to be favorable and it to be in our strategic interests; to repurchase our common stock underlying restricted stock units and pay the employee withholding...

  • Page 68
    ... increases in uses of cash were offset by an $11.5 million decrease in repurchases of common stock; a $5.4 million increase in proceeds from exercises of stock options and the employee stock purchase plan; and a $3.9 million increase in excess tax benefits from stock-based compensation as a result...

  • Page 69
    ... that material payments will be required as a result of our secondary responsibilities. At December 31, 2007, we had gross unrealized tax benefits of approximately $10.3 million, all of which, if recognized, would have an impact on our effective tax rate. Commitments under standby letters of credit...

  • Page 70
    .... We do not expect the adoption of SFAS No. 159 to have a material impact on our financial position, results of operations and cash flows. Business Combinations In December 2007, the FASB issued SFAS No. 141(R), Business Combinations . SFAS No. 141(R) requires an acquirer to measure the identifiable...

  • Page 71
    ...credit rating of A1 and P1. Furthermore, by policy, we limit the amount of credit exposure to any one issuer. Our short-term investments, at times in both fixed-rate and variable-rate interest-earning instruments, carry a degree of interest rate risk. Fixed-rate securities may have their fair market...

  • Page 72
    ... 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...

  • Page 73
    ... the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial...

  • Page 74
    ... after the end of our fiscal year. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by Item 14 is hereby incorporated by reference to our definitive proxy statement relating to our 2008 annual meeting of stockholders to be filed with the SEC within 120 days after the end of...

  • Page 75
    ... 15. (a) 1. EXHIBITS, FINANCIAL STATEMENT SCHEDULES The following documents are filed as part of this report: Consolidated Financial Statements: Page Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements...

  • Page 76
    ... 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. 2007 Management Bonus Plan Employment Agreement between the...

  • Page 77
    ...The exhibits filed as part of this report are listed in Item 15(a)(3) of this Annual Report on Form 10-K. (c) Financial Statement Schedules The financial statement schedules required by Regulation S-X and Item 8 of this Annual Report on Form 10-K are listed in Item 15(a)(2) of this Annual Report on...

  • Page 78
    ...caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on February 20, 2008. UNITED ONLINE, INC. By: /s/ MARK R. GOLDSTON Mark R. Goldston Chairman, President and Chief Executive Officer... to sign any amendment to this Annual Report on Form 10-K, and to file the ...

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

  • Page 80
    ... 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. 2007 Management Bonus Plan Employment Agreement between the...

  • Page 81
    ...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 82
    UNITED ONLINE, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Comprehensive Income Consolidated Statements of Stockholders' Equity Consolidated ...

  • Page 83
    ... accounts for stock-based compensation in 2006. As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for uncertain tax positions in 2007. A company's internal control over financial reporting is a process designed to provide reasonable...

  • Page 84
    UNITED ONLINE, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) December 31, 2007 2006 Assets Current assets: Cash and cash equivalents Short-term investments Accounts receivable, net of allowance for doubtful accounts of $2,378 and $1,324 at December 31, 2007 and 2006, ...

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

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

  • Page 87
    ... 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 88
    ... 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 equity awards Net cash used for financing activities Effect of exchange rate changes on cash and cash equivalents Change...

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

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

  • Page 91
    .... Furthermore, by policy, the Company limits the amount of credit exposure to any one issuer. The Company's investments, at times in both fixed-rate and variable-rate interest-earning instruments, carry a degree of interest rate risk. Fixed-rate securities may have their fair market value adversely...

  • Page 92
    ... from advertising customers located in the United States and pay accounts. 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 receivable based upon the expected...

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

  • Page 94
    ... to redemption. MyPoints members may redeem points for third-party gift cards and other rewards. Members earn points when they respond to direct marketing offers delivered by MyPoints, purchase goods or services from advertisers, engage in certain promotional campaigns of advertisers or engage in...

  • Page 95
    ... partner Internet search services, amounts generated from the display of third-party registration offers at the end of Classmates' pay account registration process, amounts generated from other display advertisements, and amounts generated from referring members to third-party Web sites or services...

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

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

  • Page 98
    ... options granted to employees and directors equaled the fair market value of the underlying stock at the grant date. SFAS No. 123R requires forfeitures to be estimated at the time of grant in order to calculate the amount of share-based payment awards ultimately expected to vest. The forfeiture rate...

  • Page 99
    ..., 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 alternative transition method includes simplified methods to establish the beginning balance of the...

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

  • Page 101
    ... 2008. The Company does not expect the adoption of SFAS No. 159 to have a material impact on its financial position, results of operations and cash flows. Business Combinations In December 2007, the FASB issued SFAS No. 141(R), Business Combinations . SFAS No. 141(R) requires an acquirer to measure...

  • Page 102
    ... costs. MyPoints is a leading provider of online loyalty marketing services. The acquisition was accounted for under the purchase method in accordance with SFAS No. 141, Business Combinations . The primary reason for the acquisition was to expand the Company's Classmates Media business offerings...

  • Page 103
    ... site to one another. The acquisition was accounted for under the purchase method in accordance with SFAS No. 141. The primary reason for the acquisition was to acquire The Names Database's member relationships and software, which had the effect of expanding the Company's social networking services...

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

  • Page 105
    ... is immaterial to the consolidated financial statements. In the December 2006 quarter, the Company recorded impairment charges totaling $8.8 million related to its photo sharing service (see Note 6). We made the decision during 2007 to exit our photo sharing business and we have entered into...

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

  • Page 107
    ...,665 - 68,800 $ $ Other Current Assets Other current assets consisted of the following (in thousands): December 31, 2007 December 31, 2006 Prepaid expenses Income taxes receivable Gift cards related to member redemption liability Interest receivable Other Total $ 8,198 4,878 3,653 1,448 1,815...

  • Page 108
    ...31, 2006 Classmates Media Communications Total $ $ 124,863 7,489 132,352 $ $ 125,529 7,489 133,018 Intangible assets consisted of the following (in thousands): December 31, 2007 Accumulated Amortization Cost Net Pay accounts and free accounts Trademarks and trade names Advertising contracts...

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

  • Page 110
    ...employee withholding taxes of $1.5 million were paid. Common Stock Repurchases The Company's Board of Directors authorized a common stock repurchase program (the "program") that allows the Company to repurchase shares of its common stock through open market or privately negotiated transactions based...

  • Page 111
    ... 2007 and 2006, approximately 390,000 and 215,000 shares, respectively, were withheld from restricted stock units that vested in order to pay the applicable employee withholding taxes. Dividends Dividends are paid on common shares and unvested restricted stock units outstanding as of the record date...

  • Page 112
    ... schedules. Stock options granted to non-employee directors generally vest over a nine-month to three-year period, either monthly or annually. Stock option grants expire after ten years unless canceled earlier due to termination of employment or Board of Directors service. Certain stock option...

  • Page 113
    ...free interest rate assumed in valuing the options is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option. The Company determines the expected dividend yield percentage by dividing the expected annual dividend by the closing market price of United...

  • Page 114
    ... CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. STOCK-BASED COMPENSATION PLANS (Continued) The following table summarizes activity during the years ended December 31, 2005, 2006 and 2007: WeightedAverage Exercise Price WeightedAverage Remaining Contractual Life (in years) Options Outstanding (in...

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

  • Page 116
    ... stock units that vested during the year ended December 31, 2006 was approximately $7.6 million. Classmates Media Corporation Equity Awards In connection with the Company's Classmates Media Corporation ("CMC") subsidiary initial public offering ("IPO") process, employment agreements were signed...

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

  • Page 118
    ... of acquired software technology and $0.1 million of acquired pay accounts, proprietary rights and domain names. The Company determined the amount of the charge based on an estimate of the fair value of the photo sharing assets, using the income approach, discounted cash flow method. The Company...

  • Page 119
    ... stock-based compensation, that is limited under Section 162(m) of the Internal Revenue Code (the "Code"); (3) foreign losses, the benefit of which is not currently recognizable due to uncertainty regarding realization; (4) the re-measurement of certain deferred tax assets in New York; (5) employee...

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

  • Page 121
    ... CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. INCOME TAXES (Continued) compensation that is expected to be limited under Section 162(m) of the Code and to foreign losses due to uncertainty regarding realization. The Company adopted the provisions of FIN 48 on January 1, 2007. The implementation...

  • Page 122
    ...0.74 The diluted per share computations exclude stock options which are antidilutive. The number of antidilutive shares at December 31, 2007, 2006 and 2005 was 2.4 million, 3.0 million and 6.8 million, respectively. 9. EMPLOYEE BENEFIT PLANS The Company has a savings plan (the "Savings Plan") that...

  • Page 123
    ...December 31, 2007, 2006 and 2005 related to the Company's Savings Plan match. 10. SEGMENT INFORMATION Revenues and income from operations by segment are as follows (in thousands): Year Ended December 31, 2007 Classmates Media Communications Total Billable services Advertising Total revenues Segment...

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

  • Page 125
    ... PUBLIC OFFERING OF CLASSMATES MEDIA CORPORATION In May 2007, the Company announced its intention to explore the possibility of a subsidiary IPO. CMC was formed in August 2007 for the purposes of consolidating our Classmates, The Names Database and MyPoints business units and initiating a public...

  • Page 126
    UNITED ONLINE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 13. COMMITMENTS AND CONTINGENCIES (Continued) consolidated balance sheets at December 31, 2007 and 2006, respectively. Commitments under standby letters of credit at December 31, 2007 are scheduled to expire as follows (in ...

  • Page 127
    ..., County of Los Angeles, against NetZero claiming that NetZero continues to charge consumers fees after they cancel their Internet access account. On July 27, 2006, plaintiff Donald E. Ewart filed a purported consumer class action lawsuit in the Superior Court of the State of California, County of...

  • Page 128
    ..., with respect to these actions will not materially affect the Company's business, financial position, results of operations or cash flows. There can be no assurance, however, that such actions will not materially and adversely affect the Company's business, financial position, results of operations...

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

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

  • Page 131
    ...ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES SIGNATURES EXHIBIT INDEX UNITED ONLINE, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm UNITED ONLINE, INC. CONSOLIDATED BALANCE SHEETS (in...

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

  • Page 133
    ... vesting of your outstanding Restricted Stock Units will be accelerated by the additional number of shares in which you would have been vested at the time of such termination if you had completed an additional twelve (12) months of service, calculated as if such units vest on a monthly basis. Such...

  • Page 134
    ... of your outstanding Restricted Stock Units will be accelerated by the additional number of shares in which you would have been vested at the time of such termination if you had completed an additional twelve (12) months of service (calculated as if such units vest on a monthly basis); provided...

  • Page 135
    ... rules or regulations of any governmental or regulatory body that is or is reasonably expected to be injurious to the Company or its parent or any subsidiary thereof; the use of alcohol, narcotics or other controlled substances to the extent that it prevents you from efficiently performing services...

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

  • Page 137
    ... have any questions, please call the undersigned. Very truly yours, CLASSMATES ONLINE, INC. By: Name: Title: I have read the foregoing and accept the terms set forth in this letter: /s/ MARK R. GOLDSTON Mark R. Goldston Chairman & Chief Executive Officer /s/ STEVE MCARTHUR Dated: 13 August, 2007 6

  • Page 138
    ... voting stock of Classmates Media Corporation which shall by appropriate action adopt the 2007 Incentive Compensation Plan of Classmates Media Corporation. "Board" shall mean the Corporation's Board of Directors. "1934 Act" shall mean the Securities Exchange Act of 1934, as amended from time to time...

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

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

  • Page 141
    QuickLinks Exhibit 10.16

  • Page 142
    ... Online Media Group) United Online Communications, Inc., a Delaware corporation (dba NetZero Voice) United Online Software Development (India) Private Limited, a corporation organized under the laws of India MyPoints.com, Inc., a Delaware corporation Opobox, Inc., a Delaware corporation Classmates...

  • Page 143
    QuickLinks Exhibit 21.1

  • Page 144
    ..., 333-121217, 333-123392 and 333-140999) of United Online, Inc. of our report dated February 18, 2008 relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP...

  • Page 145
    QuickLinks Exhibit 23.1

  • Page 146
    ...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 147
    QuickLinks Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECURITIES EXCHANGE ACT RULES 13A-14 AND 15D-14 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

  • Page 148
    ...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 149
    QuickLinks Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECURITIES EXCHANGE ACT RULES 13A-14 AND 15D-14 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

  • Page 150
    ... 10-K of United Online, Inc. for the year ended December 31, 2007, as filed with the Securities and Exchange Commission fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in such report fairly presents, in all material...

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

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

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