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

Table of contents

  • Page 1
    UNITED ONLINE INC FORM 10-KT (Annual Transition Report) Filed 02/05/04 for the Period Ending 12/31/03 Address Telephone CIK Symbol SIC Code Industry Sector Fiscal Year 21301 BURBANK BOULEVARD WOODLAND HILLS, CA 91367 8182873000 0001142701 UNTD 7370 - Computer Programming, Data Processing, And ...

  • Page 2
    ...of principal executive office) (805) 418-2000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.0001 per share Preferred Stock Purchase Rights 77...

  • Page 3
    ... Relationships and Related Party Transactions Principal Accounting Fees and Services 50 50 50 50 50 Exhibits, Financial Statement Schedules and Current Reports on Form 8-K 51 53 In this document, "United Online," the "Company," "we," "us" and "our" collectively refer to United Online, Inc. and...

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

  • Page 5
    ...monthly fees charged to subscribers for Internet access and, to a lesser extent, fees charged to users for live telephone technical support and premium email. Our pay services have been offered under a number of pricing plans. Currently, our most common pricing plan for our standard dial-up Internet...

  • Page 6
    ... their local telephone company. Subscribers who elect to pay with a personal check or money order are not provisioned until their payment is received and they are required to sign-up for one of 5 our prepaid multi-month billing plans. Fees charged to users for live telephone technical support are...

  • Page 7
    ... and verifying billing information, downloading and operating our software and setting up their email accounts. In addition, we provide traditional email support where our personnel generally respond to users within a day of receiving an inquiry. We offer live telephone technical support billed on...

  • Page 8
    ... as personal computers, bundled with, or as promotions for, Internet access services. We believe that the primary competitive factors determining success in the market for Internet access users include price, speed, a reputation for reliability of service, effective customer support, easy to use and...

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

  • Page 10
    ... and deceptive business practices and breach of contract. Specifically, plaintiff alleges that Juno was unjustly enriched and deceived consumers by: (i) advertising "free" Internet access services and limiting the usage of heavier users of the service, and (ii) advertising a free trial month for its...

  • Page 11
    ... the 0.20 shares of our common stock exchanged for each share of NetZero common stock in connection with the Merger) prior to September 26, 2001 as reported on the NASDAQ. Prices have been adjusted to reflect the 3-for-2 stock dividend that occurred on October 31, 2003: High Low Year Ended June 30...

  • Page 12
    ...leading provider of value-priced Internet access services. Our access services, currently offered through the NetZero, Juno and BlueLight Internet brands, are available in more than 6,500 cities across the United States and Canada. In addition, we offer marketers numerous online advertising products...

  • Page 13
    ..., subscribers to our accelerated dial-up services comprised approximately 22% of our total pay subscriber base. Recently, NetZero and Juno began offering two premium email services with expanded features and storage capabilities for $9.95 or $24.95 per year. 14 United Online commenced operations in...

  • Page 14
    ...fees charged to users for live telephone technical support and premium email services. Our pay Internet access services have been offered under a number of pricing plans, generally ranging from $1.95 to $29.95 per month. Currently, our most common pricing plan for our standard dialup Internet access...

  • Page 15
    ... direct costs of billable services and costs that have been allocated to billable services based on the aggregate hourly usage of our pay access subscribers as a percentage of total hours used by our active users. Direct costs consist of costs related to providing technical support, customer billing...

  • Page 16
    ... partners to acquire new pay subscribers, personnel-related expenses for sales and marketing personnel and telemarketing costs incurred to acquire and retain pay subscribers and up sell pay subscribers to add-on services, such as our accelerated dial-up and premium email services. We have expended...

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

  • Page 18
    ...the deferred tax assets acquired in connection with the Merger. For the six months ended December 31, 2003, we recorded a tax provision of $1.7 million on pre-tax income of $35.0 million, resulting in an effective tax rate of 4.9%. The effective tax rate differs from the statutory tax rate primarily...

  • Page 19
    ... the year ended June 30, 2002. Network personnel and overhead-related costs allocated to billable services increased due to the increase in telecommunications hours utilized by pay subscribers as a percentage of total telecommunications hours purchased. Customer support and billing-related costs...

  • Page 20
    ... with our former offices in New York and Rhode Island. In an effort to streamline our operations in response to changing market conditions, we reduced our workforce by 101 employees during the year ended June 30, 2002. Of the 101 employees terminated, 43 were in sales and marketing, 26 were in...

  • Page 21
    ... million for the year ended June 30, 2001. The increase was a result of the Merger in September 2001, which increased our pay subscriber base by over 875,000 users, and the launch of NetZero's $9.95 per month billable service plan and limitations imposed on NetZero's free services during the March...

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

  • Page 23
    ... with our former offices in New York and Rhode Island. In an effort to streamline our operations in response to changing market conditions, we reduced our workforce by 101 employees during the year ended June 30, 2002. Of the 101 employees terminated, 43 were in sales and marketing, 26 were in...

  • Page 24
    ...increases in accounts payable as a result of better payment terms obtained from certain vendors and increased marketing and telecommunications expenditures as a result of the growth in the business; and increases in deferred revenue due to an increase in the number of pay subscribers to our services...

  • Page 25
    ... the line of credit in order to provide us with additional financial flexibility with respect to short-term working capital requirements and to support the company's overall business strategy. At December 31, 2003, a $0.7 million letter of credit in connection with one of our leased facilities was...

  • Page 26
    ... related services are provided. Advance payments from users are recorded on the balance sheet as deferred revenue. We offer alternative payment methods to credit cards for certain pay service plans. These alternative payment methods currently include payment by electronic check, or "ACH", personal...

  • Page 27
    ...historical information. Income Taxes Income taxes are accounted for under SFAS No. 109. Under SFAS No. 109, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and...

  • Page 28
    ...to provide alternative methods of transition for an entity that voluntarily changes to the fair value-based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of...

  • Page 29
    ... for subscriber acquisition; changes in terms, including pricing, with our telecommunications providers; the effect of acquisitions; 36 conditions or trends in the Internet services industry generally; changes in the demand and market rates for Internet advertising; increases or reductions in...

  • Page 30
    ... number of unique free users in our active free user base may be lower than we expect. If we experience a significant decrease in our active free user base or an increase in our rate of cancellations for our pay services, particularly for our accelerated dial up services, our business, financial...

  • Page 31
    ...may not successfully develop and market new products in a timely or cost-effective manner; consumers or advertisers may not accept our new products, including our accelerated dial-up services. We may not be able to compete effectively if we are not able to adapt to changes in technology and industry...

  • Page 32
    ... increases or our telecommunications costs increase, our business may suffer. An increasing percentage of our total pay subscribers use our accelerated services, and these subscribers have a higher average monthly usage than our standard dial-up users. An increase in Internet usage by our pay access...

  • Page 33
    ... services used in our business have declined significantly in recent years. We do not anticipate that such rates will continue to decline at the same rate in the future, if at all. General market forces, the failure of providers, regulatory issues and other factors could result in increased rates...

  • Page 34
    ... service providers, providers of customer support services and other vendors. Unauthorized or inappropriate access to, or use of, our network, computer systems and services could potentially jeopardize the security of confidential information, including credit card information, of our users...

  • Page 35
    ... have from time to time been disseminated through the Internet and have caused significant disruption to Internet users. Certain of these programs have disabled the ability of computers to access the Internet, requiring users to obtain technical support in order to gain access to the Internet. Other...

  • Page 36
    ... other telecommunications common carriers do not apply to us. As information service providers, we also operate under an exemption from the access charges that are assessed by local telephone companies on their customers for providing access to their network. We are also not required to contribute a

  • Page 37
    ... disclosure practices. Juno and the FTC entered into a consent agreement, which was approved by the FTC on June 29, 2001, that provides for redress payments and specific disclosures or notices regarding, among other things, the cost of its Internet access services, its cancellation terms and local...

  • Page 38
    ... plan, which is an anti-takeover measure that will cause substantial dilution to a person who attempts to acquire the company on terms not approved by our board of directors. Our stock price has been highly volatile. The market price of our common stock has fluctuated significantly since our stock...

  • Page 39
    ... Restated Bylaws Certificate of Designation for Series A Junior Participating Preferred Stock (included in exhibit 4.1 below) Rights Agreement, dated as of November 15, 2001, between the Company and U.S. Stock Transfer Corporation, which includes the form of Certificate of Designation for the Series...

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

  • Page 41
    ...of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities indicated on February 5, 2004. Signature Title Date /s/ MARK R. GOLDSTON Mark R. Goldston /s/ CHARLES S. HILLIARD Charles S. Hilliard /s/ NEIL P. EDWARDS...

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

  • Page 43
    ..., California February 2, 2004 F-2 UNITED ONLINE, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) December 31, 2003 June 30, 2003 June 30, 2002 Assets Current assets: Cash and cash equivalents Short-term investments Restricted cash Accounts receivable, net of allowance for...

  • Page 44
    ... F-3 UNITED ONLINE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (in thousands, except per share amounts) Six Months Ended December 31, 2003 Year Ended June 30, 2003 2002 2001 Revenues: Billable services Advertising and commerce Total revenues Operating expenses: Cost...

  • Page 45
    ... shares to employees Stock-based charges Cancellation of previously issued equity awards Unrealized gain on short-term investments, net of tax Interest earned on notes receivable from stockholders Net loss Balance at June 30, 2001 Issuance of common stock through employee stock purchase plan...

  • Page 46
    ... financial statements. F-6 UNITED ONLINE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended June 30, Six Months Ended December 31, 2003 Cash flows from operating activities: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating...

  • Page 47
    ... ACCOUNTING PRONOUNCEMENTS Description of Business United Online, Inc. ("United Online" or the "Company") is the nation's leading provider of value-priced Internet access services. The Company's access services, currently offered through the NetZero, Juno and BlueLight Internet brands, are available...

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

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

  • Page 50
    ...For purposes of financial reporting and impairment testing in accordance with SFAS No. 142, the Company operates in one principal business segment, a provider of Internet access services. In testing for a potential impairment of goodwill, the estimated fair value of the Company is compared with book...

  • Page 51
    ... overhead-related costs associated with operating the Company's network and data centers, and depreciation of network computers and equipment. Cost of Free Services -Cost of free services includes direct costs incurred in providing certain technical and customer support services to free access users...

  • Page 52
    ... share amounts): Year Ended June 30, Six Months Ended December 31, 2003 2003 2002 2001 Net income (loss), as reported Add: Stock-based charges included in net income (loss) Deduct: Total stock-based charges determined under fair value-based method for all awards, net of tax Pro forma net income...

  • Page 53
    ... operates in one principal business segment, a provider of Internet access services. Substantially all of the Company's sales and related results of operations and identifiable assets are in the United States of America. Stock Splits -On September 24, 2003, the Company announced that its Board...

  • Page 54
    ... acquired RocketCash Corporation ("RocketCash"), an online commerce company, in a stock-for-stock transaction. Pursuant to the terms of the agreement, the Company issued approximately 1.5 million shares of common stock and options to purchase common stock. The transaction was accounted for under...

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

  • Page 56
    ...the Internet access assets of BlueLight since the pro forma effect of that transaction is immaterial. Year Ended June 30, 2002 (unaudited) Revenues Net loss Net loss per share F-19 $ $ $ 195,423 (49,553) (1.27) 3. ACQUISITION AND RESTRUCTURING COSTS In connection with the Merger, United Online...

  • Page 57
    ... the Company closed its regional offices in San Francisco, California and Providence, Rhode Island and combined NetZero's and Juno's New York offices into one facility. At June 30, 2003, all acquisition and restructuring costs were paid. 4. BALANCE SHEET COMPONENTS Short-Term Investments Short-term...

  • Page 58
    ... Company had no material realized gains or losses from the sale of investments in the six months ended December 31, 2003 and the years ended June 30, 2003, 2002 and 2001. Maturities of short-term investments were as follows (in thousands): December 31, 2003 Amortized Cost Estimated Fair Value June...

  • Page 59
    ...655 $ Cost Net Pay subscribers and free users Software and technology Patents, trademarks and other Total $ 53,700 $ 3,600 4,404 61,704 $ (12,712) $ (600) (1,213) (14,525) $ 40,988 3,000 3,191 47,179 $ Amortization expense for the six months ended December 31, 2003 and the years ended June...

  • Page 60
    ... business strategy focused on attracting and monetizing pay subscribers. As a result, the number of active free users would be significantly less than previous projections. F-23 • • • The Company's intention to continue to limit the amount of Internet access time per month available to free...

  • Page 61
    ...of common stock underlying the option. Given that NetZero is the Company's predecessor for financial reporting purposes, all prior period NetZero numbers of shares and per share price amounts herein have been restated to account for the NetZero conversion ratio. Stockholders' Rights Plan On November...

  • Page 62
    ... NET INCOME (LOSS) PER SHARE The following table sets forth the computation of basic and diluted net income (loss) per share for the six months ended December 31, 2003 and the years ended June 30, 2003, 2002 and 2001 (in thousands, except per share amounts): Six Months Ended December 31, 2003 Year...

  • Page 63
    ... Service annual contribution limit. All full-time employees on the payroll of the Company are eligible to participate in the Plan. The Company is not required to contribute to the Savings Plan and has made no contributions since the inception of the Savings Plan. 9. INCOME TAXES For the six months...

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

  • Page 65
    ... directly to additional paid-in capital. 10. STOCK OPTIONS AND STOCK ISSUANCE PLANS In connection with the Merger, each outstanding stock option of NetZero and Juno was converted into an option to purchase that number of United Online common stock shares equal to the product of 0.2000 and 0.3570...

  • Page 66
    ... under the Plans during the six months ended December 31, 2003 and the years ended June 30, 2003, 2002 and 2001 (in thousands, except per share amounts): Number of Shares Price Per Share Weighted Average Exercise Price Options outstanding at July 1, 2000 Assumed in connection with acquisitions...

  • Page 67
    ... sale of Simpli (see Note 2). In connection with this acceleration, the Company recorded a stock-based charge of $0.6 million. Employee Stock Purchase Plan The Company has a 2001 Employee Stock Purchase Plan ("ESPP"), which expires in the year 2011, and under which an aggregate of 3.0 million shares...

  • Page 68
    ...Board of Directors issued 575,000 restricted stock shares at par value to certain of the Company's executive officers. The shares vest entirely at the end of the four-year period from the date of grant. In connection with these shares, the Company will record deferred stock-based compensation of $11...

  • Page 69
    ... and deceptive business practices and breach of contract. Specifically, plaintiff alleges that Juno was unjustly enriched and deceived consumers by: (a) advertising "free" Internet access services and limiting the usage of heavier users of the service, and (b) advertising a free trial month for its...

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

  • Page 71
    ... as of the 27 th day of January 2004 by and between United Online, Inc., a Delaware corporation (the "Company"), with principal corporate offices at 2555 Townsgate Road, Westlake Village, California 91361, and Mark Goldston, whose address is 14139 Beresford Road, Beverly Hills, California 90210...

  • Page 72
    ..., the Company shall deliver to Employee a stock certificate representing such Released Shares, less a number of Released Shares (calculated based on the fair market value thereof as of such date) equal to the minimum amount of withholding as may be required by law. The terms and conditions of the...

  • Page 73
    ... (1) year period following the date of termination, and the Repurchase Option will lapse with respect to all Restricted Shares. As used in this Section 4.3, Employee shall be deemed terminated without cause if Employee resigns following a breach by the Company of its obligations hereunder; provided...

  • Page 74
    ... dial-up Internet access services (free or pay). The term "Restricted Territory" shall mean each and every county, city or other political subdivision of the United States in which the Company is engaged in business or providing its services. The Company agrees that providing services to a company...

  • Page 75
    ...date written above. UNITED ONLINE, INC. By: /s/ FREDERIC A. RANDALL, JR. Frederic A. Randall, Jr. Executive Vice President and General Counsel /s/ MARK GOLDSTON Mark Goldston...by and between United Online, Inc., a Delaware corporation (the "Company"), with principal corporate offices at 2555 Townsgate...

  • Page 76
    ..., the Company shall deliver to Employee a stock certificate representing such Released Shares, less a number of Released Shares (calculated based on the fair market value thereof as of such date) equal to the minimum amount of withholding as may be required by law. The terms and conditions of the...

  • Page 77
    ... twelve (12) months of service toward vesting in all stock options then held by Employee (the "Option Shares") in addition to the service he has accrued toward vesting through the date of termination, and the Repurchase Option will lapse with respect to a number of Restricted Shares equal to (x) the...

  • Page 78
    ... dial-up Internet access services (free or pay). The term "Restricted Territory" shall mean each and every county, city or other political subdivision of the United States in which the Company is engaged in business or providing its services. The Company agrees that providing services to a company...

  • Page 79
    ... courier service, and addressed to the receiving party at the respective address set forth in...date written above. UNITED ONLINE, INC. By: /s/ MARK GOLDSTON Mark Goldston, Chief Executive Officer... between United Online, Inc., a Delaware corporation (the "Company"), with principal corporate offices at ...

  • Page 80
    ..., the Company shall deliver to Employee a stock certificate representing such Released Shares, less a number of Released Shares (calculated based on the fair market value thereof as of such date) equal to the minimum amount of withholding as may be required by law. The terms and conditions of the...

  • Page 81
    ... twelve (12) months of service toward vesting in all stock options then held by Employee (the "Option Shares") in addition to the service he has accrued toward vesting through the date of termination, and the Repurchase Option will lapse with respect to a number of Restricted Shares equal to (x) the...

  • Page 82
    ... dial-up Internet access services (free or pay). The term "Restricted Territory" shall mean each and every county, city or other political subdivision of the United States in which the Company is engaged in business or providing its services. The Company agrees that providing services to a company...

  • Page 83
    ...signed by each of the parties hereto and which is authorized by the Company...Company that there is no restriction or limitation...service, and addressed to the receiving party at the respective address set...date written above. UNITED ONLINE, INC. By: /s/ MARK GOLDSTON Mark Goldston, Chief Executive Officer...

  • Page 84
    ... to purchase 100,000 shares of the Company's common stock, par value $0.0001 per share (the "Restricted Shares") at par value for an aggregate cash purchase price of Ten Dollars ($10.00). Except as otherwise provided in Section 4.2, in the event of a termination of Employee's employment before...

  • Page 85
    ... based on the fair market value thereof as of such date) equal to the minimum amount of withholding as may be required by law. The terms and conditions of the Restricted Shares purchase and the Repurchase Option shall be set forth in greater detail in a restricted stock purchase agreement (mutually...

  • Page 86
    ... dial-up Internet access services (free or pay). The term "Restricted Territory" shall mean each and every county, city or other political subdivision of the United States in which the Company is engaged in business or providing its services. The Company agrees that providing services to a company...

  • Page 87
    ...of the rate provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the...

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

  • Page 89
    ...financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 5, 2004 /s/ MARK R. GOLDSTON Mark R. Goldston Chairman, Chief Executive Officer and...

  • Page 90
    ... TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Mark R. Goldston, Chairman, Chief Executive Officer and President of United Online, Inc. (the "Company"), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes...

  • Page 91
    (b) the information contained in such report fairly presents, in all material respects, the financial condition and result of operations of the Company. Dated: February 5, 2004 /s/ MARK R. GOLDSTON Mark R. Goldston Chairman, Chief Executive Officer and President QuickLinks Exhibit 32.1 ...