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

  • Page 2
    ... 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2007 Or 3 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 000-33367 UNITED ONLINE, INC. (Exact name of...

  • Page 3
    ...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 with the Securities and Exchange Commission not...

  • Page 4
    ...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 addition, any...

  • Page 5
    ... operations were focused on providing value-priced dial-up Internet access services in the United States and Canada. In 2004, our dial-up Internet access revenues began to decline and we began diversifying our business to include other Internet consumer offerings in an effort to provide new growth...

  • Page 6
    ... 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 to increase...

  • Page 7
    ... for members to update their personal interest profiles, helping advertisers target consumers interested in purchasing their products and services. Online loyalty marketing programs can also easily measure click-through rates on display advertising and response rates to email campaigns, providing...

  • Page 8
    ... social networking pay accounts at December 31, 2007. During the quarter ended December 31, 2007, our average monthly revenue per social networking pay account was $3.26 per month. Basic Membership. Basic membership on our Classmates Web site is free and provides members with access to a number of...

  • Page 9
    ...or her profile. Email. Paying members have the ability to send double-blind emails through our Web site to other Classmates members and respond to email messages from any other Classmates member, whether a free member or a paying subscriber. Post to message boards. In addition to reading information...

  • Page 10
    ... surveys, exchange party ideas on private message boards, and share pictures in photo albums devoted to the reunion event. • • We are currently developing a number of new free and pay features on our Classmates Web site that we believe will enhance the member experience while providing an...

  • Page 11
    ... offer several additional pay services, such as Internet security services, Web hosting services and premium email, but these additional services and brands do not generate significant revenues. In total, we had 2.2 million Communications pay accounts at December 31, 2007. For additional information...

  • Page 12
    ... of amounts charged to pay accounts for Internet access, Web hosting, email, Internet security, and other services, with substantially all of such revenues generated from Internet access. Our billable services revenues are primarily dependent on two factors: the average number of pay accounts for...

  • Page 13
    ...search agreement with Yahoo!, from display advertisements, from referring members to third-party Web sites or services, and from online market research. Substantially all of our Communications advertising revenues are generated from our Internet access services. We host and customize the initial Web...

  • Page 14
    ....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 alumni information services. We also compete with a wide variety of Web sites that provide...

  • Page 15
    ... limitations on the coverage area of our broadband services and, potentially, price, may put us at a disadvantage with respect to certain other broadband providers. Online Advertising We believe the primary competitive factors for Internet advertising include: size of user base; the amount of time...

  • 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
    ... and managed modem services. We license a number of our software applications and components, including applications for our billing, customer support, advertising and database systems, our client and server applications, and portions of our dial-up Internet access accelerator services. These...

  • Page 18
    ..." of this Annual Report on Form 10-K for information about executive officers of the Registrant. Available Information Our corporate Web site is www.unitedonline.com . On this Web site, we make available, free of charge, our annual, quarterly and current reports, changes in the stock ownership of...

  • Page 19
    ....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 alumni information services. We also compete with a wide variety of Web sites that provide...

  • Page 20
    ... effect on our 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...

  • Page 21
    ... affect our results of operations. Our businesses are highly dependent upon email. Our emails generate the majority of the traffic on our social networking Web sites and are the most important driver of member activity for our loyalty marketing service. Each month, a significant number of 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
    ... on offering dial-up Internet access services at prices lower than the prices of our principal competitors. However, in the last few years the market has changed dramatically due to a variety of factors including increased availability of broadband services, decreases in broadband pricing and...

  • Page 24
    ... month, a significant number of free dial-up Internet access accounts become inactive and it is likely that we will continue to experience declines in the number of active free accounts. Our Internet access business is dependent on our ability to effectively manage our telecommunications and network...

  • Page 25
    ... 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 of earnings, revenues, operating income...

  • Page 26
    ..., including risks associated with potentially unfamiliar economic, political and regulatory environments and integration difficulties due to language, cultural and geographic differences. We may not successfully develop or acquire and market new services and features in a timely or cost-effective...

  • Page 27
    ... including, 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...

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

  • Page 29
    ...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, billing, content...

  • Page 30
    ... period of time would likely have a material adverse effect on our ability to service our customers and develop our products and services. If we or our customer support vendor were to cease operations in India or the Philippines and transfer these operations to another geographic area, such change...

  • 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
    ..., that such actions will not materially and adversely affect our business, financial position, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We did not submit any matters to a vote of security holders during the quarter ended December 31, 2007. 31

  • Page 34
    PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock has been quoted on the Nasdaq Stock Market ("NASDAQ") under the symbol "UNTD" since September 26, 2001. Prior to that, NetZero common stock had been quoted on...

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

  • Page 36
    ... any filing of United Online under the Securities Act of 1933, as amended, or the Exchange Act. The following graph compares, for the five-year period ended December 31, 2007, the cumulative total stockholder return for the Company's common stock, the Nasdaq Stock Market (U.S. companies) Index (the...

  • Page 37
    ... statements and related notes and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Annual Report on Form 10-K. The following table presents the consolidated statements of operations data for the years ended December 31, 2007, 2006 and...

  • Page 38
    ...: Segment Internet Services Classmates Media Communications Social networking and loyalty marketing Internet access, email, Internet security, and Web hosting We have modified our segment reporting structure during 2007 to establish Classmates Media as a separate operating segment in the place of...

  • Page 39
    ...reporting period 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...

  • Page 40
    ... exit our photo sharing business. Growth in pay accounts during the quarter ended December 31, 2007 includes a loss of 6,000 pay accounts resulting from the Company's decision to exit our VoIP business. Excluding the loss of photo sharing and VoIP customers related to the Company's decisions to exit...

  • 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
    ... when emails are transmitted 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...

  • Page 43
    ... 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 exceeded their net book values. Our analysis included...

  • Page 44
    ... may not be recoverable. Events or circumstances that may indicate that an asset is impaired include, but are not limited to, significant decreases in the market value of an asset, significant underperformance relative to expected historical or projected future operating results, a change in the...

  • Page 45
    ... 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 other specified activities. The...

  • Page 46
    ...31, 2006 Year Ended December 31, 2007 Beginning balance Accruals for points earned Reduction for redeemed points Changes in allowance for points expected to expire and weighted-average cost of points Revaluation of member redemption liability in connection with purchase accounting Imputed interest...

  • Page 47
    ... 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 Product development General...

  • Page 48
    ...2005 2007 Communications Year Ended December 31, 2006 2005 Billable services Advertising Total revenues Operating expenses: Cost of revenues Sales and marketing Product development General and administrative Restructuring charges Impairment of goodwill, intangible assets and long-lived assets Total...

  • Page 49

  • Page 50
    ... in our average number of pay accounts from 3.0 million for the year ended December 31, 2006 to 2.4 million for the year ended December 31, 2007. The decrease in the average number of pay accounts was substantially attributable to a decrease in the number of dial-up Internet access pay accounts. In...

  • Page 51
    ...search agreement with Yahoo!, from display advertisements, from referring members to third-party Web sites or services, and from online market research. Substantially all of our Communications advertising revenues are generated from our Internet access services. We host and customize the initial Web...

  • Page 52
    ... of network 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; fees associated with the storage and processing of customer credit cards and associated bank fees...

  • Page 53
    ... acquire new pay and free accounts; personnel and overhead-related expenses for marketing personnel; and telemarketing costs incurred to acquire and retain pay accounts and up-sell pay accounts to additional services. Expenses associated with generating advertising revenues include sales commissions...

  • Page 54
    ... to develop new product features related to our social networking services. In addition, a portion of the increase was related to expenses associated with our loyalty marketing service, which we acquired in April 2006 and which was included in our results of operations for the full year ended...

  • Page 55
    ... 2008; and the effect of restricted stock units awarded in 2007 to members of senior management in connection with the renewal of employment agreements. Also, the resignation of an executive officer in 2007 resulted in the reversal in 2007 of stock-based compensation recorded in prior periods which...

  • 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
    ... deferred tax assets in New York; (5) employee stock purchase plan compensation, the benefit of which is not currently recognized under SFAS No. 123R but which is recognized upon a disqualified disposition; and (6) the benefit of federal tax exempt interest income. For the year ended December 31...

  • Page 58
    ... time of grant in order to calculate the amount of share-based payment awards ultimately expected to vest. The forfeiture rate is based on historical rates. Stock-based compensation recognized in our consolidated statement of operations for the year ended December 31, 2006 includes (i) compensation...

  • Page 59
    ...2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R. As stock-based compensation recognized in the consolidated statements of operations for the years ended December 31, 2007 and 2006 is based on equity awards ultimately expected to vest, it has been...

  • Page 60
    ... the year ended December 31, 2006. The decrease in ARPU was primarily attributable to a decline in ARPU for our dial-up Internet access services due to increased use of free months of service and promotional and retention pricing to obtain or retain dial-up Internet access pay accounts. Advertising...

  • 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
    ... the year ended December 31, 2005. The increase was primarily related to $12.2 million of costs associated with our loyalty marketing service, which we acquired in April 2006, and, to a lesser extent, a $2.8 million increase in marketing costs related to acquiring new free social networking members...

  • Page 63
    ... customer billing system, projects adding new features and functionality to our VoIP products and the preparation of our software for the anticipated release of Microsoft's newest operating system. The increase was partially offset by capitalized compensation costs in 2005 related to the development...

  • Page 64
    ... tax assets in New York; and (5) employee stock purchase plan compensation, the benefit of which is not recognized under SFAS No. 123R but which is recognized upon a disqualified disposition. This increase was completely offset by the benefit of federal tax exempt interest income. For the year ended...

  • Page 65
    ... year ended December 31, 2007 compared to the year ended December 31, 2006. Cash provided by operating activities is driven by our net income adjusted for non-cash items, including, but not limited to, depreciation and amortization, stock-based compensation, impairment of goodwill, intangible assets...

  • Page 66
    ... an annual rate of 9.625%, payable quarterly in arrears. No principal is due on the Notes until maturity on August 31, 2013, but the Notes may be repaid in whole or in part at any time prior to maturity without penalty. Historically, our net cash provided by operating activities has been positively...

  • Page 67
    ... year ended December 31, 2005. Cash provided by operating activities is driven by our net income adjusted for non-cash items, including depreciation and amortization, stock-based compensation, impairment of goodwill, intangible assets and long-lived assets, deferred taxes, tax benefits from equity...

  • Page 68
    ...January 2006. We have invested significantly in our network infrastructure, software licenses, leasehold improvements, and computer equipment and we will need to make further significant investments in the future. Capital expenditures for the year ended December 31, 2006 were $24.3 million. Net cash...

  • Page 69
    ... obligations at December 31, 2007 were as follows (in thousands): Less than 1 Year 1 Year to Less than 3 Years 3 Years to Less than 5 Years More than 5 Years Total Capital leases(1) Operating leases(2) Telecommunications purchases Media purchases Member redemption liability, long-term Total $ 14...

  • Page 70
    ... not have a material impact during the years ended December 31, 2007, 2006 and 2005, and we do not currently anticipate that inflation will have a material impact on our results of operations for fiscal year 2008. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to...

  • Page 71
    ...and variable-rate interest-earning instruments, carry a degree of interest rate risk. Fixed-rate securities may have their fair market value adversely impacted due to a rise in interest rates, while variable-rate securities may produce less income than expected if interest rates fall. Due in part to...

  • Page 72
    ... 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 required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and are...

  • Page 73
    ..., management has determined that, at December 31, 2007, the Company's internal control over financial reporting was effective. The Company's internal control over financial reporting at December 31, 2007 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm...

  • Page 74
    ...days after the end of our fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by Item 12 is hereby incorporated by reference to our definitive proxy statement relating to our 2008 annual meeting of stockholders...

  • Page 75
    ... 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 of Comprehensive Income Consolidated Statements of Stockholders...

  • Page 76
    ... Classmates Online, Inc. 2004 Stock Plan United Online, Inc. 2007 Management Bonus Plan Employment Agreement between the Registrant and Mark R. Goldston First Amendment to Employment Agreement between the Registrant and Mark R. Goldston Employment Agreement between Classmates Media Corporation and...

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

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

  • 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
    ...Employment Agreement between the Registrant and Matthew J. Wisk Office Lease between LNR Warner Center, LLC and NetZero, Inc. List of Subsidiaries Consent of Independent Registered Public Accounting...-33367 10/30/2007 2/20/2008 10/30/2007 10/30/2007 10/30/2007 10/30/2007 10/30/2007 5/3/2004 2/20/2008...

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

  • Page 85
    ... 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 5) Product development (including stock-based compensation, see Note 5) General and...

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

  • Page 87
    ...equity awards Net income Balance at December 31, 2005 Cumulative effect 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...

  • Page 88
    UNITED ONLINE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 2007 2006 2005 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Stock-based compensation ...

  • 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
    ... number of Internet users each month and the Company offers a broad array of Internet marketing products and services for advertisers. United Online is a Delaware corporation that commenced operations in 2001 following the merger of Internet access providers NetZero, Inc. and Juno Online Services...

  • Page 91
    ... management's strategies. The Company's short-term investments at December 31, 2007 consisted of municipal securities, and at December 31, 2006, U.S. corporate notes, U.S. Government agencies, and municipal securities, including auction rate securities. Auction rate securities have long-term...

  • Page 92
    ...down to its market value at the end of the period in which it is determined that an other-than-temporary decline has occurred. During the years ended December 31, 2007, 2006 and 2005, the Company did not record any such impairment charges. Restricted Cash- Restricted cash, which is included in other...

  • Page 93
    ... include, but are not limited to, significant decreases in the market value of an asset, significant underperformance relative to expected historical or projected future operating results, a change in the extent or manner in which an asset is used, significant declines in the Company's stock price...

  • Page 94
    ... 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 other specified activities. The...

  • 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
    ... customer billing and billing support costs per pay account. Sales and Marketing- Sales and marketing expenses include expenses associated with promoting the Company's services and with generating advertising revenues. Expenses associated with promoting the Company's services include advertising...

  • Page 97
    ... and the development of new or improved software and technology, including personnel-related expenses for the software engineering department and the costs associated with operating the Company's facility in India. Costs incurred by the Company to manage and monitor the Company's product development...

  • Page 98
    ... amount of share-based payment awards ultimately expected to vest. The forfeiture rate is based on historical rates. Stock-based compensation recognized in the Company's consolidated statements of operations for the years ended December 31, 2007 and 2006 includes (i) compensation expense for share...

  • Page 99
    ... amounts) the effect on net income and earnings per share in the year ended December 31, 2005 as if the Company had applied the fair value recognition provisions of SFAS No. 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure . Year Ended December 31...

  • Page 100
    ... 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 sharing, which also had formerly been...

  • Page 101
    UNITED ONLINE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, ACCOUNTING POLICIES, AND RECENT ACCOUNTING PRONOUNCEMENTS (Continued) income from operations, which excludes depreciation and amortization of intangible assets, is the ...

  • Page 102
    ...Media business offerings. This factor contributed to a purchase price in excess of the fair value of MyPoints' net liabilities assumed and intangible assets acquired, and, as a result, the Company has recorded goodwill in connection with this transaction. MyPoints' results of operations are included...

  • Page 103
    ... and software, which had the effect of expanding the Company's social networking services. This factor contributed to a purchase price in excess of the fair value of The Names Database's net liabilities assumed and intangible assets acquired, and, as a result, the Company has recorded goodwill...

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

  • Page 105
    ... assumed: Property and equipment Deferred revenue Total net liabilities assumed Intangible assets acquired: Pay accounts Proprietary rights Software and technology Total intangible assets acquired Goodwill Total purchase price $ 4 (190) (186) 330 20 4,200 4,550 5,738 2 years 5 years 5 years $ 10...

  • 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
    ... the years ended December 31, 2007, 2006 and 2005 was $20.2 million, $21.3 million, and $15.5 million, respectively. Assets under capital leases are included in computer software and equipment. At December 31, 2007, the amount capitalized under capital leases and the related accumulated depreciation...

  • Page 108
    UNITED ONLINE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. BALANCE SHEET COMPONENTS (Continued) Goodwill and Intangible Assets The changes in goodwill for the years ended December 31, 2006 and 2007 were as follows (in thousands): Balance at January 1, 2006 Goodwill recorded in ...

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

  • Page 110
    ... at $0.0007 per right at any time until 10 days after a public announcement that a 15% position in the Company's common stock has been acquired or that a tender or exchange offer which would result in a person or group owning 15% or more of the Company's common stock has commenced. The rights expire...

  • Page 111
    ... market value equal to the amount of the employee withholding taxes due, which is accounted for as a repurchase of common stock. The Company then pays the applicable withholding taxes in cash. The first restricted stock unit vest occurred in February 2006. In the years ended December 31, 2007 and...

  • Page 112
    ... that has been included in the following captions within the consolidated statements of operations for each of the periods presented (in thousands): Year Ended December 31, 2007 2006 2005 Operating expenses: Cost of revenues Sales and marketing Product development General and administrative...

  • Page 113
    ... 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 Online...

  • Page 114
    UNITED ONLINE, INC. NOTES TO 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 ...

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

  • Page 116
    ...The fair value of restricted 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...

  • Page 117
    ... effect at the time of grant for the expected term. The Company determines the expected dividend yield percentage by dividing the expected annual dividend by the closing market price of United Online common stock at the date of grant. For the years ended December 31, 2007, 2006 and 2005, the Company...

  • Page 118
    ... 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 determined that its goodwill was not impaired based on its annual tests during the year ended December 31, 2007 and the year ended December 31...

  • Page 119
    ...New York; (5) employee stock purchase plan compensation, the benefit of which is not currently recognized under SFAS No. 123R but which is recognized upon a disqualified disposition; and (6) the benefit of federal tax exempt interest income. For the year ended December 31, 2006, the Company recorded...

  • Page 120
    ...New York; (5) employee stock purchase plan compensation, the benefit of which is not currently recognized under SFAS No. 123R but which is recognized upon a disqualified disposition; and (6) the benefit of federal tax exempt interest income. For the year ended December 31, 2005, the Company recorded...

  • Page 121
    ..., of which $0.4 million was earned during the year ended December 31, 2007. If these earnings were distributed, a U.S. income tax liability would result. At December 31, 2007, the Company had net operating loss and tax credit carryforwards for federal and state income tax purposes of approximately...

  • Page 122
    UNITED ONLINE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 8. NET INCOME PER SHARE The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share amounts): Year Ended December 31, 2007 2006 2005 Numerator: Income before ...

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

  • Page 124
    ...provided geographic financial information because the vast majority of the Company's revenues and related results of operations and assets are in the United States and geographic financial information is thus not material nor meaningful. 11. RESTRUCTURING CHARGES In the year ended December 31, 2007...

  • Page 125
    ...a public equity offering. The businesses were contributed to CMC by the Company on August 9, 2007. In August 2007, CMC filed a Form S-1 registration statement with the SEC for the IPO of its common stock. In December 2007, the Company determined that proceeding with the IPO under then-current market...

  • Page 126
    ...and terms to customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company's breach of such agreements, services to be provided by the Company, or from intellectual property infringement claims made...

  • Page 127
    ... Angeles, against NetZero claiming that NetZero continues to charge consumers fees after they cancel their Internet access account. On July ...effect on its business, financial position, results of operations or cash flows, the results of litigation are inherently uncertain and the Company can provide...

  • Page 128
    ... and claims that arise in the ordinary course of business. Management believes the amount and ultimate liability, if any, with respect to these actions will not materially affect the Company's business, financial position, results of operations or cash flows. There can be no assurance, however...

  • 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
    ... OF SECURITY HOLDERS PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES ITEM 6. SELECTED FINANCIAL DATA ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Year Ended December 31, 2007...

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

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

  • Page 134
    ...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 however, that in no event...

  • Page 135
    ... of performance of services for the Company or its parent or any subsidiary thereof; (viii)disclosing to a competitor or other unauthorized persons confidential or proprietary information or secrets of the Company or its parent or any subsidiary thereof; (ix) solicitation of business on behalf...

  • Page 136
    ... associated with or render advisory, consulting or other services (including but not limited to services in research) to any person or entity, or subsidiary, subdivision, division or joint venture of such entity in connection with the design, development, manufacture, marketing or sale of a product...

  • Page 137
    ... thereof or to successors in interest to the Company or its lines of business. 11. Amendment and Governing Law. This letter may not be amended or modified except by an express written agreement signed by you and the Chief Executive Officer of the Company. The terms of this letter and the resolution...

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

  • Page 139
    ... 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's outstanding securities held by United Online, Inc...

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

  • Page 141
    QuickLinks Exhibit 10.16

  • Page 142
    ...GlobalServers, and MySite) United Online Advertising Network, Inc., a Delaware corporation (dba United 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...

  • Page 143
    QuickLinks Exhibit 21.1

  • Page 144
    ... REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-70532, 333-88766, 333-106003, 333-114919, 333-121217, 333-123392 and 333-140999) of United Online, Inc. of our report dated February 18, 2008 relating to...

  • Page 145
    QuickLinks Exhibit 23.1

  • Page 146
    ...31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECURITIES EXCHANGE ACT RULES 13A-14 AND 15D-14 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Mark R. Goldston, certify that: 1. I have reviewed this Annual Report on Form 10-K of United Online, Inc.; 2. Based on my...

  • 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
    ... 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 I, Scott H. Ray, certify that: 1. I have reviewed this Annual Report on Form 10-K of United Online, Inc.; 2. Based on my...

  • 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
    ... The Annual Report on Form 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...

  • 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
    ... The Annual Report on Form 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...

  • 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