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

Table of contents

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

  • Page 2
    ..., 2006, the aggregate market value of voting stock held by 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 Stock Market, was $759,960,060 (calculated by excluding shares beneficially owned by directors and...

  • Page 3
    ...-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 advertising market, operating expenses, operating efficiencies, revenues, capital requirements, tax payments and our...

  • Page 4
    ... "Risk Factors" in this Annual Report on Form 10-K and our other filings with the SEC set forth some of the important risk factors that may affect our business, financial position, results of operations and cash flows. Statements indicating factors that we believe may impact our results are not...

  • Page 5
    ...a significant number of Internet users each month and we offer marketers a broad array of Internet advertising products and services as well as online market research and measurement services. Historically, our operations were focused on providing value-priced dial-up Internet access services in the...

  • Page 6
    ... and other limitations. Basic pay dial-up access services include Internet access and an email account, although we also offer an enhanced email service as a standalone pay service. In addition, we offer accelerated dial-up access services which reduce the time for certain Web pages to download when...

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

  • Page 8
    ..., 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 9
    ... for our access services. We seek to up-sell the free account bases of these services to pay versions of each service. Our marketing efforts to date for social networking have been comprised almost entirely of Internet advertising designed to increase our free member base, with most payments to the...

  • Page 10
    ... area of our broadband services and, potentially, price, may put us at a disadvantage with respect to certain other broadband providers. Social Networking Our social-networking services compete for members directly against a small number of companies, including Reunion.com, offering similar online...

  • Page 11
    ...software and setting up their accounts. We also offer live telephone technical support for our access services billed on a per-minute basis and telephone billing support for free. We monitor the effectiveness of our user support functions and measure performance metrics such as average hold time and...

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

  • Page 13
    ...Internet access subscribers has been based primarily on offering dial-up 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...

  • Page 14
    ...we have relied extensively on Internet advertising through portals and other Internet service providers, including AOL, MSN and Yahoo!, to grow our free and pay accounts. A number of these companies are competitors of United Online with respect to Internet access and other services, and they may not...

  • Page 15
    ... decreases in our pay access accounts and, potentially, the average monthly revenue per pay account, we expect that our Communications billable services revenues and the profitability of this segment will decline over time. The rate of decline in billable services revenues has accelerated in some...

  • Page 16
    ...or if the cost to acquire new accounts increases, our financial results could be materially and adversely impacted. If we are unable to retain users, our business and financial results will suffer. Historically, we have lost an average of four to five percent of our pay accounts each month, which we...

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

  • Page 18
    ... lead-time requirements. Only a small number of telecommunications providers offer the network and data services we currently require, and we purchase most of our telecommunications services from a few providers. Some of our telecommunications services are provided pursuant to short-term agreements...

  • Page 19
    ... a number of difficulties, errors, failures and unanticipated costs. In addition, our business relies on third-party software for various applications including, without limitation, our internal operations, our billing and customer support, our accelerated services, and our advertising products and...

  • Page 20
    ... or inappropriate access to, or use of, our networks, computer systems and services could potentially jeopardize the security of confidential information, including credit card information, of our users and of third parties. Third parties have in the past used our networks, services and brand...

  • Page 21
    ... occur or circumstances change that would more indicate the fair value of a reporting unit below its carrying value amount. Goodwill is required to be tested for impairment at least annually. Certain of our services are relatively new and have not generated significant revenues. We have capitalized...

  • Page 22
    ... Communications Commission and state regulation as Internet access services and telecommunications services converge. If the regulatory status of ISPs changes, our business may be adversely affected. The Internet Tax Freedom Act, which placed a moratorium on new state and local taxes on Internet...

  • Page 23
    ... declines in our dial-up Internet access business, the payment of income taxes and other factors, and our cash balances will decline if we use our cash to acquire businesses or technologies, repurchase stock or for other purposes. A change in our business needs, including working capital and funding...

  • Page 24
    ... NetZero shares to those customers in the offering in exchange for which the customers agreed to purchase additional NetZero shares in the aftermarket at pre-determined prices. Plaintiffs are seeking injunctive relief and damages. Additional lawsuits setting forth substantially similar allegations...

  • Page 25
    ... actions will not be material and will not adversely affect our business, financial condition, 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, 2006. 24

  • Page 26
    ... 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 as reported on the NASDAQ. 2005 High Low High 2006 Low First Quarter...

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

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

  • Page 29
    ... of United Online. The results of Juno are included in our consolidated results of operations from the date of the Merger. Net income included tax benefits of $4.3 million for the year ended June 30, 2003 for the realization of net operating loss ("NOL") carryforward benefits due to a change in...

  • Page 30
    ...Internet access and email. Our primary Content & Media services include social networking and online loyalty marketing. On a combined basis, our Web properties attract a significant number of Internet users each month and we offer marketers a broad array of Internet advertising products and services...

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

  • Page 32
    ... other income, net Interest expense Income before income taxes Provision for income taxes Income before cumulative effect of accounting change Cumulative effect of accounting change, net of tax Net income Information for our two key segments is as follows: Communications Year Ended December 31, 2006...

  • Page 33
    ...of compensation expense for all share-based payment awards made to employees and directors including employee stock options, restricted stock awards and employee stock purchases related to the Employee Stock Purchase Plan ("employee stock purchases") based on the grant date fair values of the awards...

  • Page 34
    ... rates. Stock-based compensation expense recognized in our consolidated statement of operations for the year ended December 31, 2006 includes (i) compensation expense for share-based payment awards granted prior to, but not yet vested at, December 31, 2005 based on the grant-date fair value...

  • Page 35
    ...services revenues for a period by the average number of pay accounts for that period. ARPU may fluctuate from period to period as a result of a variety of factors including changes in the mix of pay subscriptions and their related pricing plans; the use of promotions, such as one or more free months...

  • Page 36
    ... 2006 quarter. Advertising Revenues We connect advertisers to consumers through a variety of online marketing initiatives integrated throughout our services and Web properties, including advertising and search placements, email campaigns and user registration placements. In addition, we offer...

  • Page 37
    ... 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; domain name registration fees; and costs of providing rewards to members of our loyalty marketing service...

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

  • Page 39
    ..., 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 costs, as well as the...

  • Page 40
    ... million for the year ended December 31, 2005. The increase was primarily due to increases in compensation costs, facilities and other overhead-related costs related to our loyalty marketing service which was acquired in April 2006. Unallocated Corporate Expenses. Excluding stock-based compensation...

  • Page 41
    ... of net deferred tax assets in New York. Additionally, in 2006, the effective rate was increased due to employee stock purchase plan compensation, the benefit of which is not recognized under SFAS No. 123R. This increase was completely offset by the benefit of federal exempt interest income. For...

  • Page 42
    ... a decline in ARPU for our access services due to increased use of free months of service and promotional pricing to obtain or retain pay access accounts. This decrease was partially offset by a 4% increase in our average number of pay accounts from 3,098,000 for the year ended December 31, 2004 to...

  • Page 43
    ... in customer support and billing-related costs. These decreases were partially offset by an increase of $1.3 million in network and overhead-related costs and $1.2 million in costs associated with our VoIP service. Content & Media Cost of Revenues. Content & Media cost of revenues increased by...

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

  • Page 45
    ...acquisition of our Web-hosting services in April 2004. Certain of the acquired intangible assets are amortized on an accelerated basis to better match the expense to the expected cash flows from those assets. Interest and Other Income, Net Interest and other income, net increased by $1.7 million, or...

  • Page 46
    ... increase in net amortization on short-term investments; and • a $37.7 million net decrease in working capital accounts, including a $28.9 million decrease in accounts payable and accrued liabilities, a $6.2 million decrease in deferred revenue primarily due to decreases in pay access accounts...

  • Page 47
    ... million, net of cash acquired; and we paid the remaining $1.5 million due in connection with the acquisition of our photo-sharing service in March 2006 compared to the initial payment of $8.6 million in March 2005; • a $31.6 million net decrease in proceeds from maturities and sales of short-term...

  • Page 48
    ... fund dividend payments, if declared by the Board; to develop and acquire complementary services, businesses or technologies; to repurchase shares of our common stock if we believe market conditions to be favorable; to repurchase the common stock underlying RSUs and pay the withholding taxes due on...

  • Page 49
    The year-over-year increase was primarily the result of a $15.0 million net increase in working capital accounts due to increases in revenues and operating expenses and the timing of related cash receipts and payments, including an $8.7 million increase in income taxes payable. Net cash used for ...

  • Page 50
    ... Internet search services, fees generated by users viewing and clicking on third-party Web site banners and text-link advertisements, fees generated by enabling customer registrations for partners and fees from referring users to, or from users making purchases on, sponsors' Web sites. Revenues...

  • Page 51
    ... our stock price for a sustained period, shifts in technology, loss of key management or personnel, changes in our operating model or strategy and competitive forces. Goodwill- Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. We account...

  • Page 52
    ...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 values of the net assets acquired is...

  • Page 53
    ...the requirements for the accounting for and reporting of a change in accounting principle and applies to all voluntary changes in accounting principle. APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of...

  • Page 54
    ... to certain market risks arising from transactions in the normal course of business, principally risk associated with interest rate and foreign currency fluctuations. Interest Rate Risk We have interest rate risk primarily related to our investment portfolio. We maintain a short-term investment...

  • Page 55
    ... by the Company in the reports that it files or submits under the Exchange Act is accumulated 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. CHANGES IN...

  • Page 56
    ...because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company's internal control over financial reporting at December 31, 2006. In making this assessment, management used the criteria set forth...

  • Page 57
    ... 2.1 Stock Purchase Agreement, dated as of April 9, 2006, by and between United Online, Inc. and UAL Corporation Amended and Restated Certificate of Incorporation Amended and Restated Bylaws Certificate of Designation for Series A Junior Participating Preferred Stock (included in exhibit 4.1 below...

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

  • Page 59
    ... Employment Agreement between the Registrant and Jeremy Helfand Office Lease between LNR Warner Center, LLC and NetZero, Inc. List of Subsidiaries Consent of Independent Registered Public Accounting Firm Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley...

  • Page 60
    ... 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 March 1, 2007. UNITED ONLINE, INC. By: /s/ MARK R. GOLDSTON Mark R. Goldston Chairman and Chief Executive Officer KNOW ALL PERSONS BY THESE...

  • Page 61
    ...10.8 10.9 10.10 Stock Purchase Agreement, dated as of April 9, 2006, by and between United Online, Inc. and UAL Corporation Amended and Restated Certificate of Incorporation Amended and Restated Bylaws Certificate of Designation for Series A Junior Participating Preferred Stock (included in exhibit...

  • Page 62
    ...Office Lease between LNR Warner Center, LLC and NetZero, Inc. List of Subsidiaries Consent of Independent Registered Public Accounting Firm Certification of the Chief Executive Officer...2005 8/8/2005 8/8/2005 8/8/2005 8/8/2005 8/9/2006 5/3/2004 3/1/2007 3/1/2007 X 000-33367 3/1/2007 X 000-...

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

  • Page 64
    ... Board of Directors and Stockholders of United Online, Inc.: We have completed integrated audits of United Online, Inc.'s consolidated financial statements and of its internal control over financial reporting as of December 31, 2006, in accordance with the standards of the Public Company Accounting...

  • Page 65
    ... over financial reporting of the acquired business from our audit of the Company's internal control over financial reporting. The excluded elements represent controls over accounts of approximately 4% of the Company's consolidated assets at December 31, 2006 and 8% of consolidated revenue for the...

  • Page 66
    ...in thousands, except per share amounts) December 31, 2006 2005 Assets Current assets: Cash and cash equivalents Short-term investments Accounts receivable, net of allowance for doubtful accounts of $1,324 and $1,325 at December 31, 2006 and 2005, respectively Deferred tax assets, net Other current...

  • Page 67
    UNITED ONLINE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) Year Ended December 31, 2005 2006 2004 Revenues Operating expenses: Cost of revenues (including stock-based compensation, see Note 5) Sales and marketing (including stock-based compensation, see ...

  • Page 68
    ...) Year Ended December 31, 2006 2005 2004 Net income Unrealized gain (loss) on short-term investments, net of tax of $120, $(193) and $(452) for the years ended December 31, 2006, 2005 and 2004 Unrealized gain (loss) on derivative, net of tax of $(60) and $60 for the years ended December 31, 2006...

  • Page 69
    ...stock options 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 70
    ... exercises of stock options Proceeds from employee stock purchase plan Repurchases of common stock Payments for dividends Excess tax benefits from stock-based compensation Net cash provided by (used for) financing activities Effect of exchange rate changes on cash and cash equivalents Change in cash...

  • Page 71
    ... users each month and the Company offers marketers a broad array of Internet advertising products and services as well as online market research and measurement services. United Online is a Delaware corporation that commenced operations in 2001 following the merger of Internet access providers...

  • Page 72
    ..., short-term investments and accounts receivable. The Company's accounts receivable are derived primarily from revenue earned from pay accounts and advertising customers located in the United States. The Company extends credit based upon an evaluation of the customer's financial condition and...

  • Page 73
    ... ranging from two to ten years. The Company's intangible assets were acquired primarily in connection with business combinations. Goodwill- Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. The Company accounts for goodwill in accordance...

  • Page 74
    ...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 values of the net assets acquired is...

  • Page 75
    ... Internet search services, fees generated by users viewing and clicking on third-party Web site banners and text-link advertisements, fees generated by enabling customer registrations for partners and fees from referring users to, or from users making purchases on, sponsors' Web sites. Revenues...

  • Page 76
    ...billing support to our pay accounts; domain name registration fees; and costs of providing rewards to members of our loyalty marketing service. Sales and Marketing- Sales and marketing expenses include advertising and promotion expenses, fees paid to distribution partners to acquire new pay and free...

  • Page 77
    ... the exercise price of the Company's stock options granted to employees and directors equaled the fair market value of the underlying stock at the grant date. Stock-based compensation expense recognized during the current period is based on the value of the portion of share-based payment awards that...

  • Page 78
    ... of accounting change: Year Ended December 31, 2006 Operating expenses: Cost of revenues Sales and marketing Product development General and administrative Stock-based compensation Tax benefit recognized Stock-based compensation, net of tax Stock-based compensation, net of tax per common share...

  • Page 79
    ...a number of brands, including NetZero, Juno and Classmates. Effective in the March 2006 quarter, the Company is operating in two reportable segments: Communications-consisting of its Internet access, email and VoIP services; and Content & Media-consisting of its social-networking, Web-hosting, photo...

  • Page 80
    ... not included in the initial lease term. Reclassifications- Certain prior year amounts have been reclassified to conform to current year presentation. These changes had no impact on previously reported results of operations or stockholders' equity. Recent Accounting Pronouncements Accounting Changes...

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

  • Page 82
    ...is tax deductible. The following summarized unaudited pro forma information assumes that the acquisition of MyPoints had occurred at January 1, 2006 and 2005 (in thousands, except per share amounts): Year Ended December 31, 2006 2005 Revenues Income before cumulative effect of accounting change Net...

  • Page 83
    ... Estimated Fair Value Estimated Amortizable Life Description Net liabilities assumed: Cash Accounts receivable Accounts payable and accrued liabilities Deferred revenue Deferred income taxes Total net liabilities assumed Intangible assets acquired: Pay accounts Free accounts Advertising contracts...

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

  • Page 85
    ... 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 86
    ... except per share amounts). Year Ended December 31, 2004 Revenues Net income Net income per share-basic Net income per share-diluted About Web Services $ 513,300 $ 111,882 $ 1.82 $ 1.70 In April 2004, the Company acquired substantially all of the assets associated with the Web-hosting business of...

  • Page 87
    ... gains and losses are presented net of tax in accumulated other comprehensive income on the consolidated balance sheets. The Company had no material realized gains or losses from the sale of short-term investments in the years ended December 31, 2006 and 2005. The Company recognized $0.1 million of...

  • Page 88
    ... to the Company's photo-sharing service (see Note 6) Reduction of acquired deferred tax assets Balance at December 31, 2006 $ 76,458 (1,697 ) 5,738 80,499 9,092 49,122 184 (5,738 ) (141 ) $ 133,018 The adjustment to Classmates' goodwill is primarily due to an increase in deferred tax assets for...

  • Page 89
    ...562 ) $ (97,200 ) December 31, 2005 Accumulated $ 31,093 18,947 1,099 481 2,033 $ 53,653 Cost Amortization Net Pay accounts and free accounts Trademarks and trade names Advertising contracts and related relationships Software and technology Patents, domain names and other Total $ 98,732 21,952...

  • Page 90
    ... the proceeds of the term loan facility were used to purchase shares tendered pursuant to the Company's tender offer and to pay related fees and expenses. The funds were available for general corporate purposes, stock repurchases and acquisitions, subject to certain limitations. The term loan was to...

  • Page 91
    ... $25 per unit. On April 29, 2003, the Board of Directors voted to amend the purchase price per unit from $25 to $140. The rights generally will be exercisable only if a person or group acquires beneficial ownership of 15% or more of the Company's common stock or announces a tender or exchange offer...

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

  • Page 93
    ... to directors generally vest over a nine-month to three-year period, either monthly or annually. Stock option grants expire after ten years unless cancelled earlier due to termination of employment or Board service. Certain stock option grants are immediately exercisable for unvested shares of...

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

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

  • Page 96
    ... of the Board of Directors approved grants of 0.6 million RSUs with a fair value equal to $8.2 million to the Company's executive officers. Each RSU entitles the officers to receive one share of the Company's common stock upon vesting. The units vest one third annually over the three-year period...

  • Page 97
    ... assumptions used to value ESPP shares. The Company calculates expected volatility based on historical volatility of the Company's common stock. The expected term represents the amount of time remaining in the 24-month offering period. The risk-free rate assumed in valuing the ESPP shares is...

  • Page 98
    ... tax assets in New York. Additionally, in 2006, the effective rate was increased due to the employee stock purchase plan compensation, the benefit which is not currently recognized under SFAS No. 123R. This increase was completely offset by the benefit of federal exempt interest income. For the year...

  • Page 99
    ... of the Code. The Company has also claimed income tax deductions from the exercise of certain stock options and the related sale of common stock by employees, and, in 2006, the deduction includes the excess deduction for vested restricted stock. For the years ended December 31, 2006, 2005 and 2004...

  • Page 100
    ... stock and employee stock purchase plan shares Shares used to calculate diluted net income per share Basic net income per share: Income before cumulative effect of accounting change Cumulative effect of accounting change, net of tax Basic net income per share Diluted net income per share: Income...

  • Page 101
    10. SEGMENT INFORMATION Revenue and income from operations by segment are as follows (in thousands): Year Ended December 31, 2006 Communications Content & Media Total Billable services Advertising Total revenues Segment income from operations $ 336,924 39,013 $ 375,937 $ 132,839 $ 86,641 60,076 $...

  • Page 102
    ... NetZero shares to those customers in the offering in exchange for which the customers agreed to purchase additional NetZero shares in the aftermarket at pre-determined prices. Plaintiffs are seeking injunctive relief and damages. Additional lawsuits setting forth substantially similar allegations...

  • Page 103
    ... Eastern District of Texas against NetZero, Juno, NetBrands, America Online, Inc., AT&T, EarthLink, Inc., SBC Communications, Inc., and Verizon Communications, Inc. alleging infringement of plaintiff's patent which purported to cover user access to a computer network. Plaintiff sought injunctive and...

  • Page 104
    ..., 2006: December 31, Quarter Ended September 30, June 30, March 31, Revenues Impairment of goodwill, intangible assets and long-lived assets Operating income Income before cumulative effect of accounting change Cumulative effect of accounting change, net of tax Net income Basic net income per share...

  • Page 105
    ... that were considered to be uncollectible. Represents allowance for doubtful accounts acquired in connection with the acquisition of Classmates. Represents the increase in valuation allowance primarily due to executive compensation that is limited under Section 162(m) of the Code and foreign losses...

  • Page 106
    ...,000 shares of Common Stock having a par value of $0.0001 per share (the "Common Stock"); 5,000,000 shares of Preferred Stock, having a par value of $0.0001 per share (the "Preferred Stock"). The board of directors of the Corporation (the "Board of Directors") is expressly authorized to provide for...

  • Page 107
    ... resolution of the Board of Directors. At the first annual meeting of stockholders following the closing of the transactions set forth in the Agreement and Plan of Merger, dated as of June 7, 2001 (the "Merger Agreement"), by and among NetZero, Inc., a Delaware corporation, Juno Online Services, Inc...

  • Page 108
    ... shares of voting stock of the Corporation entitled to vote on the election of directors; provided that such removal may be made only for cause. g. No director shall be personally liable to the Corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director...

  • Page 109
    ... the extent authorized from time to time by the Board of Directors, provide rights to indemnification and to the advancement of expenses to employees and agents of the Corporation similar to those conferred in this Article 8 to directors and officers of the Corporation. The rights to indemnification...

  • Page 110
    ... 1.1 Offices. United Online, Inc., a Delaware corporation (the "Corporation"), may have offices at such places both within and without the State of Delaware as the board of directors of the Corporation (the "Board of Directors") may from time to time determine or the business of the Corporation may...

  • Page 111
    ... provided in the Certificate of Incorporation with respect to the right of holders of preferred stock of the Corporation to nominate and elect a specified number of directors in certain circumstances. Nominations of persons for election to the Board of Directors may be made at any annual meeting...

  • Page 112
    ... proposes to nominate for election as a director (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of...

  • Page 113
    ... or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by such stockholder, (iv) a description of all arrangements or understandings between such stockholder and any other person or persons (including their names) in connection with the proposal...

  • Page 114
    ... of stock of the Corporation. Section 3.2 Election and Term of Office of Directors. Except as provided in the Certificate of Incorporation or the Bylaws, directors shall be classified, with respect to the time for which they severally hold office, into three classes, as nearly equal in number as...

  • Page 115
    ...all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it. Each committee (including, but not limited to, each standing committee described in...

  • Page 116
    ... it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail or, by a form of electronic transmission consented to by stockholder or director to whom notice is given. An...

  • Page 117
    ... from time to time, assigned to him by the Board of Directors as may be provided by law. Section 5.7 The Chief Executive Officer, President and Senior Vice-Presidents. The chief executive officer of the Corporation shall have general and active management of the business of the Corporation and shall...

  • Page 118
    ... render to the chief executive officer and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as Chief Financial Officer and of the financial condition of the Corporation. If required by the Board of Directors, he/she shall...

  • Page 119
    ... the Board of Directors adopts a resolution permitting shares to be uncertificated. Certificates for shares of capital stock of the Corporation shall be signed by, or in the name of the Corporation by, (a) the Chairman of the Board, the Vice Chairman of the Board, the Chief Executive Officer, the...

  • Page 120
    ..., and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the Corporation. Section 7.6 Representation of Shares of Other Corporations. Any officer of the Corporation is authorized to vote, represent...

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

  • Page 122
    ... enterprise. The term "another enterprise" as used in this Section 8.4 shall mean any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise of which such person is or was serving at the request of the Corporation as a director, officer, employee or...

  • Page 123
    ... excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director or officer...

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

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

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

  • Page 127
    ...shares of Common Stock of the Company for or pursuant to the terms of any such plan. Notwithstanding the foregoing: (i) no Person shall become an "Acquiring Person" as the result of an acquisition of shares of Common Stock by the Company which, by reducing the number of shares outstanding, increases...

  • Page 128
    ...with and between underwriters and selling group members with respect to a bona fide public offering of securities), or upon the exercise of conversion rights, exchange rights, rights (other than the Rights), warrants or options, or otherwise; provided, however , that a Person shall not be deemed the...

  • Page 129
    ... 5:00 p.m., New York City time, on such date; provided , however , that if such date is not a Business Day it shall mean 5:00 p.m., New York City time, on the next succeeding Business Day. "Common Stock" when used with reference to the Company shall mean the shares of Common Stock, par value $0.0001...

  • Page 130

  • Page 131
    ... the tenth Business Day (or such later date as may be determined by action of the Company's board of directors prior to such time as any Person becomes an Acquiring Person and of which the Company will give the Rights Agent prompt written notice) after the date that a tender or exchange offer by any...

  • Page 132
    ... per Unit of Preferred Stock set forth therein, but the number of such Units of Preferred Stock and the Purchase Price shall be subject to adjustment as provided herein. (b) Any Rights Certificate issued pursuant to this Agreement that represents Rights beneficially owned by: (i) an Acquiring Person...

  • Page 133
    ... or were beneficially owned by a Person who was or became an Acquiring Person or an Affiliate or Associate of an Acquiring Person (as such terms are defined in the Rights Agreement by and between United Online, Inc. and U.S. Stock Transfer Corporation, as Rights Agent, dated as of November 15, 2001...

  • Page 134
    ... Rights are redeemed as provided in Section 23 (the "Redemption Date"), and (iii) the time at which such Rights are exchanged as provided in Section 24 (the earliest of (i), (ii) and (iii) being the "Expiration Date"). (b) The Purchase Price for each Unit of Preferred Stock pursuant to the exercise...

  • Page 135
    ... 9. Reservation and Availability of Preferred Stock. (a) The Company covenants and agrees that it will use its best efforts to cause to be reserved and kept available out of and to the extent of its authorized and unissued Preferred Stock not reserved for another purpose a number of shares that will...

  • Page 136
    ... the Purchase Price (and any applicable transfer taxes) was made; provided , however , that if the date of such surrender and payment is a date upon which the Preferred Stock (or, following the occurrence of a Triggering Event, other securities) transfer books of the Company are closed, such person...

  • Page 137
    ... exercisable for or convertible into such equity securities (other than pursuant to a pro rata distribution to all holders of shares of Common Stock of the Company), (3) sell, purchase, lease, exchange, mortgage, pledge, transfer or otherwise acquire or dispose of, in one transaction or a series...

  • Page 138
    ... in, as of the date hereof, by the Company and such Acquiring Person or such Associate or Affiliate), assets (including securities or intangible assets) having an aggregate fair market value of more than $5,000,000, other than pursuant to a transaction set forth in Section 13(a), (5) receive, or any...

  • Page 139
    ... the Purchase Price, (3) other equity securities of the Company (including, without limitation, Common Stock of the Company or shares or units of shares of any series of preferred stock which the board of directors of the Company shall have conclusively deemed to have the same value as the Units of...

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

  • Page 141
    ... Price of Common Stock of the Company. If no shares of the Common Stock of the Company or the Preferred Stock are publicly held or so listed or traded, "Current Per Share Market Price" of the Preferred Stock shall mean the fair value per share as determined in good faith by the board of directors...

  • Page 142
    ...of any Unit of Preferred Stock at less than the Current Per Share Market Price, (iii) issuance wholly for cash of Preferred Stock or securities which by their terms are convertible into or exchangeable for Preferred Stock, (iv) dividends on Preferred Stock payable in Preferred Stock, or (v) issuance...

  • Page 143
    .... Section 12. Certificate of Adjusted Purchase Price or Number of Shares. Whenever an adjustment is made as provided in Sections 11 and 13, the Company shall promptly (a) prepare a certificate setting forth such adjustment, and a brief statement of the facts accounting for such adjustment, (b) file...

  • Page 144
    ...corporation of such consolidation or merger and, in connection with such consolidation or merger, all or part of the shares of Common Stock of the Company shall be changed into or exchanged for stock or other securities of any other Person or cash or any other property, or (z) the Company shall sell...

  • Page 145
    ... Current Per Share Market Price or securities exercisable for, or convertible into, shares of Common Stock of such Principal Party at less than the Current Per Share Market Price (other than to holders of Rights pursuant to this Section 13) or (ii) providing for any special payment, tax or similar...

  • Page 146
    ...one onethousandth of a share of Preferred Stock, the Company shall pay to the registered holders of Rights Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the Current Per Share Market Price of one share of Preferred Stock. (c) The...

  • Page 147
    .... No holder, as such, of any Rights Certificate shall be entitled to vote, receive dividends or be deemed for any purpose the holder of the Units of Preferred Stock or any other securities of the Company which may at any time be issuable upon the exercise of the Rights represented thereby, nor shall...

  • Page 148
    ... be genuine and to be signed, executed and, where necessary, verified or acknowledged, by the proper person or persons, or otherwise upon the advice of counsel as set forth in Section 20. Section 19. Merger or Consolidation or Change of Name of Rights Agent. (a) Any corporation into which the Rights...

  • Page 149
    ... shall have received written instructions in response to such application specifying the action to be taken or omitted. (h) The Rights Agent and any stockholder, director, officer or employee of the Rights Agent may buy, sell or deal in any of the Rights or other securities of the Company or become...

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

  • Page 151
    ... or change in the Purchase Price and the number or kind or class of shares or other securities or property purchasable under the Rights Certificates made in accordance with the provisions of this Agreement. In addition, in connection with the issuance or sale of shares of Common Stock of the Company...

  • Page 152
    ..., that number obtained by dividing the Purchase Price by the then Current Per Share Market Price per Unit of Preferred Stock on the earlier of (i) the date on which any Person becomes an Acquiring Person and (ii) the date on which a tender or exchange offer by any Person (other than the Company, any...

  • Page 153
    ... than a regular quarterly cash dividend), (ii) to offer to the holders of its Preferred Stock rights or warrants to subscribe for or to purchase any additional Units of Preferred Stock or shares of stock of any class or any other securities, rights or options, (iii) to effect any reclassification...

  • Page 154
    ... of an Acquiring Person), including, without limitation, to change the Purchase Price, the Redemption Price, any time periods herein specified, and any other term hereof, any such supplement or amendment to be evidenced by a writing signed by the Company and the Rights Agent; provided , however...

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

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

  • Page 157
    ...the Corporation, and of any other junior stock, shall be entitled to receive, when declared by the Board out of funds legally available for the purpose, dividends in an amount per share (rounded to the nearest cent) equal to, subject to the provision for adjustment hereinafter set forth, 1,000 times...

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

  • Page 159
    ..., dissolution or winding up) to the Series A Preferred Stock; provided , that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution...

  • Page 160
    to such event. A-2

  • Page 161
    ... converted or changed into other stock or securities, cash and/or any other property (or into the right to receive any of the foregoing), then in any such case each share of Series A Preferred Stock shall at the same time be similarly exchanged, converted or changed into an amount per share, subject...

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

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

  • Page 164
    ... Stock, par value $0.0001 per share (the "Series A Preferred Stock") of the Company, at a purchase price of $25.00 per Unit of Series A Preferred Stock (the "Purchase Price"), upon presentation and surrender of this Rights Certificate with the Form of Election to Purchase duly executed. The number...

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

  • Page 166
    ...be executed by the registered holder if such holder desires to transfer the Rights Certificate.) FOR VALUE RECEIVED unto...Company, with full power of substitution. DATED: Signature hereby sells, assigns and transfers Signature Guaranteed: Signatures must be guaranteed by a participant in a Securities...

  • Page 167
    ... or enlargement or any change whatsoever. In the event the certification set forth above in the Form of Assignment is not completed, the Company and the Rights Agent will deem the beneficial owner of the Rights evidenced by this Rights Certificate to be an Acquiring Person or an Affiliate or...

  • Page 168
    FORM OF ELECTION TO PURCHASE (To be executed if holder desires to exercise the Rights Certificate.) To United Online, Inc. The undersigned hereby irrevocably elects to exercise Rights represented by this Rights Certificate to purchase the Units of Series A Preferred Stock issuable upon the exercise ...

  • Page 169
    ... or any change whatsoever. In the event the certification set forth above in the Form of Election to Purchase, as the case may be, is not completed, the Company and the Rights Agent will deem the beneficial owner of the Rights evidenced by this Rights Certificate to be an Acquiring Person or an...

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

  • Page 171
    ...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, 333-121217 and 333-123392) of United Online, Inc. of our report dated February 28, 2007 relating...

  • Page 172
    ... 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 of United Online, Inc.; 2. Based on my knowledge, this report does not...

  • Page 173
    ... 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 knowledge...

  • Page 174
    ... 15(d) of the Securities Exchange Act of 1934; and (b) the information contained in such report fairly presents, in all material respects, the financial condition and result of operations of the Company. Dated: March 1, 2007 /s/ MARK R. GOLDSTON Mark R. Goldston Chairman and Chief Executive Officer

  • Page 175
    ... my knowledge: (a) the Annual Report on Form 10-K of the Company for the year ended December 31, 2006, 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 (b) the information contained in such...