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

Table of contents

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

  • Page 2
    ...UNITED ONLINE, INC. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 21301 Burbank Boulevard Woodland Hills, California (Address of principal executive office) (818) 287-3000 (Registrant's telephone number, including area...

  • Page 3
    ... non-affiliates of the registrant, based on the last reported sales price of the registrant's common stock on such date reported by the Nasdaq National Market, was $1,075,067,572 (calculated by excluding shares beneficially owned by directors and officers). At March 9, 2005, there were a total of 60...

  • Page 4
    ...," "intend," "plan," "believe," "may," "will" or similar expressions constitute forward-looking statements. These forward-looking statements include, but are not limited to, statements about the markets in which we compete, our pay accounts and subscriptions, our product and service offerings, the...

  • Page 5
    ... a leading provider of consumer Internet subscription services through a number of brands, including NetZero, Juno, and Classmates Online. Our pay services include dial-up Internet access, community-based networking, personal Web-hosting, and premium email services, among others. We also offer, at...

  • Page 6
    ... years, while the number using dial-up has declined. This decline has resulted primarily from users of premium-priced dial-up access migrating to broadband services. Additionally, there has been a migration of premium-priced dial-up users to value-priced services, like those offered by United Online...

  • Page 7
    ...-priced access services through alternative brands. Providers of broadband access, which includes cable, digital subscriber lines ("DSL"), satellite and wireless, generally offer users faster connections and download speeds than dial-up for higher prices. It has been estimated that, as of early 2004...

  • Page 8
    ... Through 2003, virtually all of United Online's operations were focused on providing value-priced dial-up Internet access services in the U.S. and Canada. While we believe that value-priced access will continue to be a growth segment of the domestic Internet market, competitive factors have recently...

  • Page 9
    ..., pay account acquisition, conversion rates of free accounts to pay accounts and retention rates. We intend to regularly evaluate the desirability and effectiveness of our pricing plans and may, in the future, make changes to these plans. We may also offer additional fee-based products and services...

  • Page 10
    ...We also view our free community-based networking and consumer Web-hosting services as important sources of pay subscribers. We seek to up-sell the free account bases of these services to pay versions of each service, as well as to Internet access and other pay services. Our marketing efforts to date...

  • Page 11
    ... 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 for our access services...

  • Page 12
    ... Corporation; local telephone companies; and regional and local commercial ISPs. 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, ease of use...

  • Page 13
    ... number of U.S. households using broadband has grown significantly over the last few years and is expected to continue to grow. Broadband access, which includes cable, DSL, satellite and wireless, generally offers users faster connection and download speeds than dial-up access for a higher monthly...

  • Page 14
    ..., many premium-services include at no additional charge telephone technical support, proprietary content, parental controls, multiple accounts and email addresses, increased email storage, virus protection, firewalls, spyware protection and accelerated dial-up functionality. Some providers of value...

  • Page 15
    ...has relied extensively on Internet advertising through portals and other Internet service providers, including AOL, MSN and Yahoo!, to grow its base of free and pay accounts. A number of these companies are competitors of United Online with respect to Internet access and other services, and they may...

  • Page 16
    ...use information about our users to improve the quality of our services and the effectiveness of advertising by our advertising customers. SEASONALITY We have experienced seasonal trends in connection with our access services. In general, we have experienced increased Internet usage and increased pay...

  • Page 17
    ...our relationships with employees to be good. AVAILABLE INFORMATION 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 18
    ... behalf of himself and all others similarly situated, filed a lawsuit in the United States District Court for the Southern District of New York against NetZero, certain officers and directors of NetZero and the underwriters of NetZero's initial public offering, Goldman Sachs Group, Inc., BancBoston...

  • Page 19
    ... and claims that arise in the ordinary course of business. We believe the amount, and ultimate liability, if any, with ..., that such actions will not be material and will not adversely affect our business, financial condition, results of operations or cash flows. ITEM 4. SUBMISSION OF ...

  • Page 20
    ... Market ("NASDAQ") under the symbol "UNTD" since September 26, 2001. Prior to that, NetZero common stock had been quoted on the NASDAQ under the symbol "NZRO" since September 23, 1999. The following table sets forth, for the quarters indicated, the high and low prices per share of our common stock...

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

  • Page 22
    ... a leading provider of consumer Internet subscription services through a number of brands, including NetZero, Juno, and Classmates Online. Our pay services include dial-up Internet access, community-based networking, personal Web-hosting, and premium email services, among others. We also offer, at...

  • Page 23
    ... new pay services. United Online is a Delaware corporation that commenced operations in 2001 following the merger of Internet access providers NetZero, Inc. and Juno Online Services, Inc. During 2004, we completed the acquisitions of Classmates, a leading provider of community-based networking...

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

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

  • Page 26
    ... used by free Web-hosting accounts. Costs associated with our community-based networking services are allocated based on the number of Web site visits by pay accounts relative to the total number of visits. Cost of billable services increased by $2.2 million, or 2%, to $95.0 million for the year...

  • Page 27
    ... pay account base subscribing to higher margin services including our Web-hosting and community-based networking services, or if due to competitive or other factors we decrease the pricing for our access or other services or increase the use of promotions such as one or more free months of service...

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

  • Page 29
    ... executive, finance, legal, human resources and internal customer support personnel. In addition, general and administrative expenses include fees for professional legal, accounting and financial services, office relocation costs, non-income taxes, insurance, and occupancy and other overhead-related...

  • Page 30
    ...certain of our short-term investments. Other income consists of realized gains and losses recognized in connection with the sale of short-term investments. Interest and other income, net decreased by $0.7 million, or 15%, to $3.9 million for the year ended December 31, 2004, compared to $4.6 million...

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

  • Page 32
    ... by pay access accounts as a percentage of total telecommunications hours purchased. Customer support and billing-related costs increased as a result of the increase in the average number of pay access accounts. Depreciation expense allocated to billable services has decreased due to network assets...

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

  • Page 34
    ...SFAS No. 109, including current and historical results of operations, the annual limitation on utilization of net operating loss carryforwards pursuant to Section 382 of the Code, future income projections and potential tax-planning strategies. Based upon our assessment of all available evidence, we...

  • Page 35
    ...year ended June 30, 2002. The increase in our average number of pay accounts resulted from a number of factors, including the Merger in September 2001, which increased our pay account base by over 875,000 users, a significant number of our free accounts upgrading to pay services, increased marketing...

  • Page 36
    ... support costs per pay account decreased as a result of cost savings gained through the consolidation of NetZero's and Juno's customer billing and support functions, which resulted in better pricing from our primary customer support vendor as a result of increased call volumes. Cost of Free Services...

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

  • Page 38
    ... change in the valuation allowance of approximately $15 million was primarily due to the release of valuation allowance associated with actual and expected utilization of net operating loss and tax credit carryforwards in 2003 and 2004, respectively. Our effective income tax rate for the year ended...

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

  • Page 40
    ... in December 2004 through a four-year term loan facility, which is discussed more fully below under Financial Commitments. The term loan was set up in connection with a modified Dutch auction tender offer to repurchase up to 14.3 million shares of our common stock. The tender offer was completed...

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

  • Page 42
    ...default had occurred. Future minimum principal payments are as follows at December 31, 2004 (in thousands): Year Ending December 31, 2005 2006 2007 2008 Total $ 23,333 23,333 23,334 30,000 100,000 $ In March 2005, we made a $25 million voluntary prepayment on the term loan. The $25 million will...

  • Page 43
    ... in which the related services are provided. Advance payments from pay accounts 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...

  • Page 44
    ... to date have all been accounted for as purchase business combinations. Under the purchase method of accounting, the cost, including transaction costs, is allocated to the underlying net assets, based on their respective estimated fair values. The excess of the purchase price over the estimated fair...

  • Page 45
    ...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 46
    ... on offering dial-up Internet access services at prices below the standard monthly pricing of the premium dial-up services of most of our major competitors. Competition from broadband providers and value-priced providers such as United Online has resulted in significant declines in the number of...

  • Page 47
    ..., many premium-services include at no additional charge telephone technical support, proprietary content, parental controls, multiple accounts and email addresses, increased email storage, virus protection, firewalls, spyware protection and accelerated dial-up functionality. Some providers of value...

  • Page 48
    ...has relied extensively on Internet advertising through portals and other Internet service providers, including AOL, MSN and Yahoo!, to grow its base of free and pay accounts. A number of these companies are competitors of United Online with respect to Internet access and other services, and they may...

  • Page 49
    ... include established telecommunications and cable companies as well as a number of new companies that offer VoIP based services as their primary business. We cannot assure you that our new services will be competitive or will generate growth in pay accounts. Competition for Advertising Customers...

  • Page 50
    ... including changes in the mix of pay subscriptions and their related pricing plans; the use of promotions, such as one or more free months of service, and discounted pricing plans to obtain or retain subscribers; increases or decreases in the price of our services; the number of services subscribed...

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

  • Page 52
    ... to attract advertisers, on the number of advertising impressions we have available to sell, and on how many pay subscriptions we can potentially acquire through marketing our pay services to our active free accounts. Each month, a significant number of free accounts become inactive and we may...

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

  • Page 54
    ... 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 55
    ... systems upon which we rely. In addition, our ability to offer new pay services or alternative payment plans is dependent on our ability to customize our billing and support systems. Issues associated with these systems could cause a variety of problems including the failure to bill and collect from...

  • Page 56
    ...terminate their relationships with us. Our business and financial results depend, in part, on the availability and quality of our customer support services. We outsource a majority of the live technical and billing support functions to ClientLogic Corporation pursuant to an agreement that terminates...

  • Page 57
    ... 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 58
    ... of the provision of Internet access and other services could decrease our revenues and increase our costs. Changes in the regulatory environment regarding the Internet could decrease our revenues and increase our costs. Currently, ISPs are considered "information service" providers rather than...

  • Page 59
    ... are not applicable to us. If the regulatory status of ISPs changes or if we offer new services that subject us to new laws and regulations, our business may be adversely affected. Although the Internet Tax Freedom Act, which placed a moratorium on new state and local taxes on Internet commerce, has...

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

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

  • Page 62
    ... amounts as of and for the year ended December 31, 2004. Management's assessment of the effectiveness of the Company's internal control over financial reporting at December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their...

  • Page 63
    ... for 2001 Supplemental Stock Incentive Plan Classmates Online, Inc. Amended and Restated 1999 Stock Plan Classmates Online, Inc. 2004 Stock Plan United Online, Inc. 2004 Management Bonus Plan Amended and Restated Employment Agreement between the Registrant and Mark R. Goldston Amended and Restated...

  • Page 64
    ...2004, among United Online, the Lenders party thereto from time to time, Deutsche Bank Trust Company...Public Accounting Firm Power of Attorney (see Power of Attorney in the signature page hereto) Certification of the Chief Executive Officer... filed as part of this report are listed in Item 15(a)(3)...

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

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

  • Page 67
    ... for 2001 Supplemental Stock Incentive Plan Classmates Online, Inc. Amended and Restated 1999 Stock Plan Classmates Online, Inc. 2004 Stock Plan United Online, Inc. 2004 Management Bonus Plan Amended and Restated Employment Agreement between the Registrant and Mark R. Goldston Amended and Restated...

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

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

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

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

  • Page 72
    UNITED ONLINE, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) December 31, 2004 2003 Assets Current assets: Cash and cash equivalents Short-term investments Accounts receivable, net of allowance for doubtful accounts of $647 and $288 at December 31, 2004 and 2003, ...

  • Page 73
    ...31, 2004 Six Months Ended December 31, 2003 2003 2002 Revenues: Billable services Advertising and commerce Total revenues Operating expenses: Cost of billable services (including stock-based charges, see Note 9) Cost of free services (including stock-based charges, see Note 9) Sales and marketing...

  • Page 74
    UNITED ONLINE, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) Six Months Ended December 31, 2003 Year Ended June 30, Year Ended December 31, 2004 2003 2002 Net income (loss) Unrealized gain (loss) on short-term investments, net of tax of $(452), $(553), $992 and $0 ...

  • Page 75
    ...of common stock Issuance of restricted stock Repurchase of restricted stock Options assumed in connection with acquisition Stock-based charges Unrealized loss on short-term investments, net of tax Foreign currency translation Tax benefits from stock options Net income Balance at December 31, 2004 37...

  • Page 76
    ... Year Ended December 31, 2004 2003 2002 Cash flows from operating activities: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization Allowance for doubtful accounts Stock-based charges Deferred taxes Tax...

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

  • Page 78
    ... Online, Inc. ("United Online" or the "Company") is a leading provider of consumer Internet subscription services through a number of brands, including NetZero, Juno, and Classmates Online. The Company's pay services include dial-up Internet access, community-based networking, personal Web-hosting...

  • Page 79
    ...credit rating of A1 and P1. The Company's short-term investments are reported at fair value, with unrealized gains and losses, net of taxes, recorded in the consolidated statements of comprehensive income (loss). Realized gains or losses and permanent declines in value, if any, on available-for-sale...

  • Page 80
    ...useful lives, ranging from one to ten years. The Company's intangible assets were acquired primarily in connection with business combinations (see Note 2). The Company assesses the impairment of long-lived assets, which include property and equipment and intangible assets, whenever events or changes...

  • Page 81
    ... connection with the release of the deferred tax valuation allowance. Business Combinations -All of the Company's acquisitions have been accounted for as purchase business combinations. Under the purchase method of accounting, the cost, including transaction costs, is allocated to the underlying net...

  • Page 82
    ... Web hosting between billable services and free services based on estimated bandwidth used by pay Web-hosting accounts relative to estimated bandwidth used by free Web-hosting accounts. Costs associated with the Company's community-based networking services are allocated based on the number of Web...

  • Page 83
    ... pay services and free services based on estimated bandwidth used by free Web-hosting accounts. Costs associated with the Company's communitybased networking services are allocated based on the number of Web site visits by free accounts relative to the total number of visits. Sales and Marketing...

  • Page 84
    ... statements. Comprehensive income (loss), as defined, includes all changes in equity (net assets) during a period from non-owner sources. For the Company, comprehensive income (loss) consists of its reported net income (loss), the net unrealized gains or losses on short-term investments and foreign...

  • Page 85
    ... services through a number of brands, including NetZero, Juno, and Classmates Online. The Company's pay services include dial-up Internet access, community-based networking, personal Web-hosting, and premium email services, among others. The Company also offers, at no charge, advertising supported...

  • Page 86
    ... held by employee share ownership plans. This statement also establishes fair value as the measurement objective for transactions in which an entity acquires goods or services from nonemployees in share-based payment transactions. This statement uses the terms compensation and payment in their...

  • Page 87
    ... income taxes Capital leases Other long-term liabilities Total net liabilities assumed Intangible assets acquired: Trademark and trade name Advertising contracts and related relationships Pay accounts Free accounts Other intangibles Total intangible assets acquired Goodwill Total purchase price...

  • Page 88
    About Web Services In April 2004, the Company acquired substantially all of the assets associated with the Web-hosting business of About, Inc. The business offers consumers Web-site services, including hosting, domain and email services. The acquisition has been accounted for under the purchase ...

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

  • Page 90
    ..., except per share amounts). Year Ended June 30, 2002 (unaudited) Revenues Net loss Net loss per share RocketCash Corporation $ $ $ 195,423 (49,553) (1.27) In September 2000, the Company acquired RocketCash Corporation ("RocketCash"), an online commerce company, in a stock-for-stock transaction...

  • Page 91
    ... 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 92
    ...gains and losses are presented net of tax in accumulated other comprehensive income (loss) on the consolidated balance sheets. The Company recognized $0.1 million of realized gains from the sale of short-term investments in the year ended December 31, 2004. The Company had no material realized gains...

  • Page 93
    ....2 million during the December 2004 quarter in connection with the release of the deferred tax valuation allowance. Intangible assets consist of the following (in thousands): December 31, 2004 Accumulated Amortization Cost Net Pay accounts and free accounts Trademarks and trade names Advertising...

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

  • Page 95
    ... purchase shares tendered pursuant to the Company's tender offer and pay related fees and expenses. Going forward, the funds will be used for general corporate purposes, stock repurchases and acquisitions, subject to certain limitations. The term loan matures in four years and amortizes in an annual...

  • Page 96
    ... stock option of NetZero and Juno was converted into an option to purchase that number of United Online shares of common stock equal to the product of 0.2000 and 0.3570, respectively, multiplied by the number of shares of common stock underlying the option. Given that NetZero is the Company...

  • Page 97
    ... 2004, the Company commenced a modified Dutch auction tender offer to repurchase up to 14.3 million shares of its common stock at a price ranging from $9.00 to $10.50 per share. The tender offer expired in December 2004, and the Company repurchased 37,754 shares at $10.50 per share, excluding fees...

  • Page 98
    ...1,429 2,444 (796) 1,648 (1,657) $ (18) $ $ (9) 6. NET INCOME (LOSS) PER SHARE The following table sets forth the computation of basic and diluted net income (loss) per share for the year ended December 31, 2004, the six months ended December 31, 2003 and the years ended June 30, 2003 and 2002...

  • Page 99
    ...tax rate to the Company's effective income tax rate (in thousands): Six Months Ended December 31, 2003 Year Ended June 30, Year Ended December 31, 2004 2003 2002 Taxes on income at the statutory federal rate State income taxes, net of federal tax benefits Non-deductible acquisition-related costs...

  • Page 100
    ... in connection with the acquisition of Classmates. The increase in the Company's net deferred tax assets during the six months ended December 31, 2003 of $18.3 million is primarily attributable to additional net operating loss carryforwards that are available to offset future taxable income as...

  • Page 101
    ...were credited to stockholders' equity. 9. STOCK OPTIONS AND STOCK ISSUANCE PLANS NetZero and Juno Merger 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...

  • Page 102
    ...monthly or annually. Option grants expire after ten years unless cancelled earlier due to termination of employment or Board service. Certain grants are immediately exercisable for unvested shares of common stock, with the unvested portion of the shares remaining subject to repurchase by the Company...

  • Page 103
    ... 2003, the six months ended December 31, 2003 and the year ended December 31, 2004 (in thousands, except per share amounts): Number of Shares Price Per Share Weighted Average Exercise Price Options outstanding at July 1, 2001 Assumed in connection with acquisition Granted Exercised Canceled Options...

  • Page 104
    ... been included in the following captions for each of the periods presented (in thousands): Year Ended June 30, Year Ended December 31, 2004 Six Months Ended December 31, 2003 2003 2002 Operating expenses: Cost of billable services Cost of free services Sales and marketing Product development...

  • Page 105
    ...Commitments The Company has entered into certain noncancelable lease obligations for computer and office equipment. The future minimum lease payments are discounted using varying rates over the lease terms. Future minimum lease payments at December 31, 2004 are as follows (in thousands): Year Ending...

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

  • Page 107
    ...): Six Months Ended December 31, 2003 2002 (unaudited) Revenues Income before income taxes Provision for income taxes Net income Net income per share-basic Net income per share-diluted Shares used to calculate basic net income per share Shares used to calculate diluted net income per share F-38...

  • Page 108
    ...20 0.18 Six Months Ended December 31, 2003 and Year Ended June 30, 2003: Quarter Ended December 31, 2003 September 30, 2003 June 30, 2003 March 31, 2003 December 31, 2002 September 30, 2002 Revenues Operating income Net income Net income per share-basic Net income per share-diluted $ $ $ $ $ 96...

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

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

  • Page 111
    ...COMPANY AMERICAS, as Collateral Agent under the Pledge Agreement (in such capacity, the " Collateral Agent "). Unless otherwise indicated, all capitalized terms used herein and not otherwise defined shall have the respective meanings provided such terms... on the shares of Juno India in favor of the...

  • Page 112
    ...of said Section: "; provided that (A) no such notification...Company Interest not then subject to a securities account... be executed in any number of counterparts and by ...same instrument. A complete set of counterparts shall be ...BY THE LAW OF THE STATE OF NEW YORK. 5. This Amendment shall become effective...

  • Page 113
    (whether the same or different counterparts) and shall have delivered (including by way of facsimile transmission) the same to the Administrative Agent at its Notice Office. 6. From and after the Amendment Effective Date, all references in the Credit Agreement and each of the other Credit Documents ...

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

  • Page 115
    ...Financial Officer JUNO INTERNET SERVICES, ...INC., as a Pledgor By: /s/ CHARLES S. HILLIARD Name: Charles S. Hilliard Title: Executive Vice President, Finance and Chief Financial Officer CLASSMATES ONLINE... Financial Officer CLASSMATES ... Chief Financial Officer CLASSMATES MEDIA...

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

  • Page 117
    ...UNITED ONLINE, INC., CERTAIN PLEDGORS PARTY TO THE PLEDGE AGREEMENT, VARIOUS LENDERS PARTY TO THE CREDIT AGREEMENT, AND DEUTSCHE BANK TRUST COMPANY AMERICAS, AS ADMINISTRATIVE AGENT AND AS COLLATERAL AGENT NAME OF INSTITUTION: ACA Management... Title: Senior Portfolio Manager Bushnell CBNA Loan Funding...

  • Page 118
    ... Vice President Olympic CLO I By: /s/ JOHN M. COGEDIAN Name: John M. Cogedian Title: Chief Operating Officer, LLC (Manager) Sankaty Advisors, LLC as Collateral Manager for AVERY POINT CLO, LTD. as Term Lender By: /s/ JEFFREY HAWKINS Name: Jeffrey Hawkins Title: Senior Vice President Sankaty Advisors...

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

  • Page 120
    Sankaty Advisors LLC as Collateral Manager for Race Point II CLO Limited, as Term Lender By: /s/ JEFFREY HAWKINS Name...President 10 SILICON VALLEY BANK By: /s/ BOB MULLER Name: Bob Muller Title: Senior Relationship Manager ULT CBNA Loan Funding LLC, for itself or as agent for ULT CFPI Loan Funding ...

  • Page 121
    ... CLO, Ltd. By: Stanfield Capital Partners LLC As its Collateral Manager By: /s/ CHRISTOPHER E. JENSEN Name: Christopher E. Jensen Title: Managing Partner WhiteHorse II, Ltd. By: WhiteHorse Capital Partners, L.P. As Collateral Manager By: /s/ ETHAN UNDERWOOD Name: Ethan Underwood Title: Portfolio...

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

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

  • Page 124
    QuickLinks Exhibit 21.1

  • Page 125
    ... Exhibit 23.1 CONSENT OF INDEPENDENT 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 and 333-121217) of United Online, Inc. of our report dated March 15, 2005 relating...

  • Page 126
    QuickLinks CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

  • Page 127
    ...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: March 16, 2005 /s/ MARK R. GOLDSTON Mark R. Goldston Chairman, Chief Executive Officer and...

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

  • Page 129
    ... 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 I, Charles S. Hilliard, certify that: 1. I have reviewed this annual report of United Online, Inc.; 2. Based on my...

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

  • Page 131
    ...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-Oxley Act of 2002, that, to my knowledge: (a) the Annual Report on Form 10-K of the Company for the year ended December 31, 2004, as...

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

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

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