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

Table of contents

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

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

  • Page 3
    ... directly or indirectly held by directors and officers). At February 8, 2008, there were a total of 67,891,680 shares of the Registrant's common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III of this annual report, to the extent not set forth herein, is...

  • Page 4
    ..., but are not limited to, statements about the markets in which we compete, our pay accounts, our product and service offerings, the advertising market, operating expenses, operating efficiencies, revenues, dividends, capital requirements, capital expenditures, tax payments, stock-based compensation...

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

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

  • Page 7
    .... Communications Segment The U.S. consumer Internet access service market has evolved from one where the Internet was accessed primarily through dial-up access to one in which consumers can access the Internet through dial-up or a variety of high-speed, or broadband, connection methods including...

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

  • Page 9
    ..., years at such affiliation), and an email address. Free members are required to affiliate with at least one high school, college, work or military community. In addition, free members can elect to provide information about their personal interests and post photos. Free members have free access to...

  • Page 10
    ... of our social networking Web sites by marketing our pay account services to our free members; increase our advertising revenues; and evaluate further opportunities to expand internationally. Online Loyalty Marketing MyPoints connects advertisers with our members by allowing members to earn rewards...

  • Page 11
    ... advertising campaigns for our loyalty marketing members that are specifically tailored to an individual's personal interests, purchasing behavior and demographic profile. Communications Our Communications pay services principally include consumer dial-up Internet access and email under the NetZero...

  • Page 12
    ... dial-up Internet access services include Internet access and an email account, although we also offer an enhanced email service as a stand-alone pay service. In addition, we offer accelerated dial-up Internet access services which can significantly reduce the time for certain Web pages to download...

  • Page 13
    ... members to third-party Web sites or services, and from online market research. Substantially all of our Communications advertising revenues are generated from our Internet access services. We host and customize the initial Web site displayed to users of our Internet access services. This Web site...

  • Page 14
    ....com service, that offer online social networking services based on school, work or military communities; and an increasing number of schools, employers and associations that maintain their own Internet-based alumni information services. We also compete with a wide variety of Web sites that provide...

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

  • Page 16
    ...and setting up their accounts. We also offer live telephone technical support for our Internet 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 17
    ... our services, including connectivity, Web services, billing, email, customer support, customer loyalty applications, and targeted advertising. We maintain data centers in multiple locations around the country with, in many cases, redundant systems to provide high levels of service availability and...

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

  • Page 19
    ....com service, that offer online social networking services based on school, work or military communities; and an increasing number of schools, employers and associations that maintain their own Internet-based alumni information services. We also compete with a wide variety of Web sites that provide...

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

  • Page 21
    ... of operations. Our businesses are highly dependent upon email. Our emails generate the majority of the traffic on our social networking Web sites and are the most important driver of member activity for our loyalty marketing service. Each month, a significant number of email addresses for our...

  • Page 22
    ... number of pay accounts and our financial results. RISKS RELATING TO OUR COMMUNICATIONS SEGMENT Our business will suffer if we are unable to compete successfully. Our principal Communications services, our Internet access services, compete with many emerging and seasoned competitors, including the...

  • Page 23
    ... introductory rates, offer additional free periods of service, offer additional features at little or no additional cost to the consumer, and/or reduce the standard pricing of our services. Measures such as these could decrease our revenues and our average revenue per Internet access pay account. We...

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

  • Page 25
    ... merger and acquisition market for companies offering Internet services is extremely competitive, particularly for companies who have demonstrated a profitable business model with long-term growth potential. Companies with these characteristics trade publicly or are privately valued at multiples of...

  • Page 26
    ... and customer support; our business may suffer if these systems do not function and we cannot perform and provide these services. Customer billing and service are highly complex processes, and our systems must efficiently interface with other third-parties' systems such as the systems of credit card...

  • Page 27
    ..., 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 dial-up Internet access services, and our advertising products and services. Any...

  • Page 28
    ... have from time to time been disseminated through the Internet and have caused significant disruption to Internet users. Certain of these programs have disabled the ability of computers to access the Internet, requiring users to obtain technical support in order to gain access to the Internet. Other...

  • Page 29
    ..., and local laws and regulations, including those relating to issues such as user privacy and data protection, defamation, pricing, advertising, taxation, sweepstakes, promotions, billing, content regulation, bulk email or "spam," anti-spyware initiatives, security breaches, and consumer protection...

  • Page 30
    ..., ISPs are considered "information service" providers and regulations that apply to telephone companies and other telecommunications common carriers do not apply to our Internet access services. However, our Internet access services could become subject to Federal Communications Commission and state...

  • Page 31
    ... if we use our cash to acquire businesses, services or technologies, repurchase our common stock or for other purposes. A change in our business needs, including working capital and funding for acquisitions, or a change in tax laws relating to dividends, among other factors, could cause our Board of...

  • Page 32
    ... Financial Statements included in this Annual Report on Form 10-K. ITEM 3. LEGAL PROCEEDINGS In April, 2001 and in May 2001, lawsuits were filed in the United States District Court for the Southern District of New York against NetZero, Inc. ("NetZero"), certain officers and directors of NetZero and...

  • Page 33
    ...consumer class action lawsuit in the Superior Court of the State of California, County of Los Angeles, against NetZero containing substantially similar... 2007, we had not established allowances for losses relating to any of the matters described above, with the exception of the Rasnake v. NetZero ...

  • Page 34
    ... 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 sales prices per share of our common stock as reported on the NASDAQ. 2006 High Low High 2007 Low First Quarter...

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

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

  • Page 37
    ... consolidated financial statements that are not included in this Annual Report on Form 10-K. The following amounts are in thousands, except per share data: Year Ended December 31, 2007(5) 2006(4) 2005 2004(3) Six Months Ended December 31, 2003(2) Year Ended June 30, 2003(1) Consolidated Statements...

  • Page 38
    ... provider of consumer Internet and media services through a number of brands including Classmates, MyPoints, NetZero, and Juno. Our Classmates Media segment services are online social networking and online loyalty marketing. Our primary Communications segment services are Internet access and email...

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

  • Page 40
    ...point in time, our pay account base includes a number of accounts receiving a free period of service as either a promotion or retention tool and a number of accounts that have notified us that they are terminating their service but whose service remains in effect. The following table sets forth, for...

  • Page 41
    ... revenue. We offer alternative payment methods to credit cards for certain pay service plans. These alternative payment methods currently include ACH, payment by personal check or money order or through a local telephone company. In circumstances where payment is not received in advance, revenue...

  • Page 42
    ... assumptions are made based on available historical and market information. Goodwill Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. We account for goodwill in accordance with Statement of Financial Accounting Standards, or SFAS, No...

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

  • Page 44
    ... useful lives, ranging from two to ten years. Our identifiable intangible assets were acquired primarily in connection with business combinations. We have no indefinite-lived intangible assets at December 31, 2007. Member Redemption Liability Member redemption liability for loyalty marketing...

  • Page 45
    ... to direct marketing offers delivered by MyPoints, purchase goods or services from advertisers, engage in certain promotional campaigns of advertisers or engage in other specified activities. The member redemption liability is estimated based upon the weighted-average cost and number of points...

  • Page 46
    ... cost of points Revaluation of member redemption liability in connection with purchase accounting Imputed interest on acquired member redemption liability Ending balance $ 19,989 $ 23,745 (18,857) (633) - 316 18,497 14,103 (11,892) (404) (771) 456 $ 24,560 $ 19,989 Income Taxes Income taxes...

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

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

  • Page 49

  • Page 50
    ... plans. The decrease in dial-up billable services revenues was partially offset by a $6.3 million increase in 2007 versus 2006 in revenues from our DSL Internet access service, which was launched in the December 2006 quarter. We anticipate continued declines in our Communications pay accounts...

  • Page 51
    ... members to third-party Web sites or services, and from online market research. Substantially all of our Communications advertising revenues are generated from our Internet access services. We host and customize the initial Web site displayed to users of our Internet access services. This Web site...

  • Page 52
    ...; depreciation of network computers and equipment; email technical support and license fees; costs related to providing telephone technical support; customer billing and billing support to our pay accounts; fees associated with the storage and processing of customer credit cards and associated bank...

  • Page 53
    ... of pay accounts, a decrease in hourly usage per pay account as well as lower average hourly telecommunications costs. In addition, customer support and billing-related costs decreased by $5.4 million in 2007 versus 2006 as a result of a decrease in the number of dial-up Internet access pay accounts...

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

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

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

  • Page 57
    ...77.5 million, resulting in an effective tax rate of 46.8%. The effective tax rate differs from the statutory federal income tax rate primarily due to (1) state income taxes, net of federal benefit; (2) compensation, including stock-based compensation, that is limited under Section 162(m) of the Code...

  • Page 58
    ... payment awards made to employees and directors including employee stock options, stock awards and employee stock purchases related to our employee stock purchase plan based on the grantdate fair values of the awards. SFAS No. 123R supersedes our previous accounting under Accounting Principles Board...

  • Page 59
    ...the term loan was used to purchase shares tendered pursuant to a tender offer of our common stock initiated by us in 2004 and to pay related fees and expenses. The funds were available for general corporate purposes, stock repurchases and acquisitions, subject to certain limitations. In January 2006...

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

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

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

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

  • Page 64
    ...77.5 million, resulting in an effective tax rate of 46.8%. The effective tax rate differs from the statutory federal income tax rate primarily due to (1) state income taxes, net of federal benefit; (2) compensation, including stock-based compensation, that is limited under Section 162(m) of the Code...

  • Page 65
    ..., or 25%, for the year ended December 31, 2007 compared to the year ended December 31, 2006. Cash provided by operating activities is driven by our net income adjusted for non-cash items, including, but not limited to, depreciation and amortization, stock-based compensation, impairment of goodwill...

  • Page 66
    ... in the payment of dividends and a $2.9 million increase in repurchases of common stock in connection with shares withheld upon vesting of restricted stock units to pay applicable employee withholding taxes. In February, April, July, and October 2007, our Board of Directors declared a quarterly...

  • Page 67
    ... member redemption liability related to our loyalty marketing service, which we acquired in April 2006. The negative impact on working capital from the change in accounts payable and accrued liabilities balances was due to a $9.1 million yearover-year reduction in the change in income taxes payable...

  • Page 68
    ...$9.5 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 69
    ... by reason of their status or service as directors, officers or employees. We have also agreed to indemnify certain former officers, directors and employees of acquired companies in connection with the acquisition of such companies. We maintain director and officer insurance, which may cover certain...

  • Page 70
    ...our results of operations for fiscal year 2008. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to certain market risks arising from transactions in the normal course of business, principally risk associated with interest rate and foreign currency fluctuations. 67

  • Page 71
    ... in auction rate securities and did not hold any auction rate securities in our portfolio as of December 31, 2007. We classify all of our short-term investments as available-for-sale. Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax, reported in...

  • Page 72
    ... and communicated to the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management's Report on Internal Control Over Financial Reporting Management of United Online, Inc...

  • Page 73
    ... control over financial reporting was effective. The Company's internal control over financial reporting at December 31, 2007 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein. Changes in Internal Control...

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

  • Page 75
    ... 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) Rights Agreement, dated as of November 15, 2001, between the Company...

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

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

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

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

  • Page 80
    ... 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) Rights Agreement, dated as of November 15, 2001, between the Company...

  • Page 81
    ...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...-33367 000-33367 10/30/2007 2/20/2008 10/30/2007 10/30/2007 10/30/2007 10/30/2007 10/30/2007 5/3/2004 2/20/2008 2/20...

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

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

  • Page 84
    ...(in thousands, except per share amounts) December 31, 2007 2006 Assets Current assets: Cash and cash equivalents Short-term investments Accounts receivable, net of allowance for doubtful accounts of $2,378 and $1,324 at December 31, 2007 and 2006, respectively Deferred tax assets, net Other current...

  • Page 85
    ...77 - 0.77 Diluted net income per share: Income before cumulative effect of accounting change Cumulative effect of accounting change, net of tax Diluted net income per share Shares used to calculate basic net income per share Shares used to calculate diluted net income per share $ $ 0.83 - 0.83 66...

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

  • Page 87
    ... stock units Stock-based compensation Unrealized loss on short-term investments, net of tax Unrealized gain on derivative, net of tax Foreign currency translation Tax benefits from equity awards Net income Balance at December 31, 2005 Cumulative effect of accounting change, net of tax Balance...

  • Page 88
    ... Purchases of short-term investments Proceeds from maturities of short-term investments Proceeds from sales of short-term investments Cash paid for acquisitions, net of cash acquired Payment for settlement of pre-acquisition liability Proceeds from sales of assets, net Net cash provided by (used...

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

  • Page 90
    ... number of Internet users each month and the Company offers a broad array of Internet marketing products and services for advertisers. United Online is a Delaware corporation that commenced operations in 2001 following the merger of Internet access providers NetZero, Inc. and Juno Online Services...

  • Page 91
    ... by selling securities which have declined in market value due to changes in interest rates. The Company classifies all of its short-term investments as available-for-sale. Available-for-sale securities are carried at fair value, with changes in unrealized gains and losses, net of taxes, reported in...

  • Page 92
    ... consist of cash and cash equivalents, short-term investments and accounts receivable. The Company's accounts receivable are derived primarily from revenue earned from advertising customers located in the United States and pay accounts. The Company extends credit based upon an evaluation of the...

  • Page 93
    ... fair market value of the assets. Definite-lived intangible assets are amortized on either a straight-line basis or an accelerated basis over their estimated useful lives, ranging from two to ten years. The Company's identifiable intangible assets were acquired primarily in connection with business...

  • Page 94
    ... Company's acquisitions have been accounted for as purchase business combinations. Under the purchase method of accounting, the costs, including transaction costs, are allocated to the underlying net assets acquired, based on their respective estimated fair values. The excess of the purchase price...

  • Page 95
    ... revenue. The Company offers alternative payment methods to credit cards for certain pay service plans. These alternative payment methods currently include ACH, payment by personal check or money order or through a local telephone company. In circumstances where payment is not received in advance...

  • Page 96
    ...; depreciation of network computers and equipment; email technical support and license fees; costs related to providing telephone technical support; customer billing and billing support to our pay accounts; fees associated with the storage and processing of customer credit cards and associated bank...

  • Page 97
    ... internal customer support personnel. In addition, general and administrative expenses include professional fees for legal, accounting and financial services; office relocation costs; non-income taxes; insurance; occupancy and other overhead-related costs; and expenses incurred and credits received...

  • Page 98
    ... the year ended December 31, 2005 was $10.0 million, which was primarily related to restricted stock. SFAS No. 123R requires companies to estimate the fair value of share-based payment awards on the grant date using an option-pricing model. Under SFAS No. 123, Accounting for Stock-Based Compensation...

  • Page 99
    ...before income taxes and net income for the year ended December 31, 2006 were $7.0 million and $5.1 million lower, respectively, than if the Company had continued to account for stock-based compensation under APB Opinion No. 25. Basic net income per share and diluted net income per share for the year...

  • Page 100
    ... stock, restricted stock units, and convertible securities, if any. Diluted net income per share is computed using the weighted-average number of common stock and common stock equivalent shares outstanding (including the effect of restricted stock) during the period. Common stock equivalent shares...

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

  • Page 102
    ... 2006, the Company acquired MyPoints.com, Inc. for approximately $56.6 million in cash, including acquisition costs. MyPoints is a leading provider of online loyalty marketing services. The acquisition was accounted for under the purchase method in accordance with SFAS No. 141, Business Combinations...

  • Page 103
    ...In March 2006, the Company acquired The Names Database for approximately $10.1 million in cash, including acquisition costs. The Names Database is a global social networking service that acts as an intermediary between members, allowing them to send messages through the Web site to one another. The...

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

  • Page 105
    ... acquired is tax deductible. The pro forma effect of the transaction is immaterial to the consolidated financial statements. In the December 2006 quarter, the Company recorded impairment charges totaling $8.8 million related to its photo sharing service (see Note 6). We made the decision during 2007...

  • Page 106
    ... and losses are presented net of tax in accumulated other comprehensive income (loss) 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, 2007, 2006 and 2005. The Company did not have any...

  • Page 107
    ...1 year and 4 years Maturing after 4 years Total $ 39,103 29,443 - 68,546 $ 39,135 29,665 - 68,800 $ $ Other Current Assets Other current assets consisted of the following (in thousands): December 31, 2007 December 31, 2006 Prepaid expenses Income taxes receivable Gift cards related to member...

  • Page 108
    ... Goodwill recorded in connection with other acquisitions Impairment of goodwill related to the Company's photo sharing service (see Note 6) Increase in acquired deferred tax assets Balance at December 31, 2006 Increase in acquired deferred tax assets and other Balance at December 31, 2007 $ $ 80,499...

  • Page 109
    ... loan was used to purchase shares tendered pursuant to a tender offer of the Company's common stock initiated by the Company in 2004 and to pay related fees and expenses. The funds were available for general corporate purposes, stock repurchases and acquisitions, subject to certain limitations. F-27

  • Page 110
    ... $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 111
    ... market value equal to the amount of the employee withholding taxes due, which is accounted for as a repurchase of common stock. The Company then pays the applicable withholding taxes in cash. The first restricted stock unit vest occurred in February 2006. In the years ended December 31, 2007 and...

  • Page 112
    ...over a nine-month to three-year period, either monthly or annually. Stock option grants expire after ten years unless canceled earlier due to termination of employment or Board of Directors service. Certain stock option grants are immediately exercisable for unvested shares of common stock, with the...

  • Page 113
    ... at the time of grant for the expected term of the option. The Company determines the expected dividend yield percentage by dividing the expected annual dividend by the closing market price of United Online common stock at the date of grant. The following table summarizes the assumptions used in the...

  • Page 114
    ... of the Board of Directors approved the acceleration of vesting of all options to purchase the Company's common stock with exercise prices in excess of $16.00. These options were granted to executive officers and other employees of the Company under the Company's 2001 Stock Incentive Plan and 2001...

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

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

  • Page 117
    ... offering period has a 24-month duration and purchase intervals of six months. The fair value of employee stock purchase plan shares was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions: Year Ended December 31, 2007 2006 Risk-free interest rate...

  • Page 118
    ... based on an estimate of the fair value of the photo sharing assets, using the income approach, discounted cash flow method. The Company determined that its goodwill was not impaired based on its annual tests during the year ended December 31, 2007 and the year ended December 31, 2005. The following...

  • Page 119
    ... is a reconciliation of the statutory federal income tax rate to the Company's effective income tax rate (in thousands): Year Ended December 31, 2007 2006 2005 Taxes on income at the statutory federal income tax rate of 35% State income taxes, net of federal tax benefits Re-measurement of deferred...

  • Page 120
    UNITED ONLINE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. INCOME TAXES (Continued) regarding realization; (4) the re-measurement of deferred tax assets in New York; (5) employee stock purchase plan compensation, the benefit of which is not currently recognized under SFAS No. ...

  • Page 121
    ... Company's effective tax rate. The Company recognizes interest and penalties for uncertain tax positions in income tax expense. The Company had approximately $1.3 million accrued for interest and penalties relating to uncertain tax positions at December 31, 2007, all of which is included in income...

  • Page 122
    ... PER SHARE The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share amounts): Year Ended December 31, 2007 2006 2005 Numerator: Income before cumulative effect of accounting change Cumulative effect of accounting change, net of tax Net...

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

  • Page 124
    ...mature business for dial-up Internet access services. All costs related to the elimination of these positions were recognized and incurred in the December 2007 quarter. In addition, the Company recognized restructuring charges totaling $0.4 million in the year ended December 31, 2007 for termination...

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

  • Page 126
    ... course of business, the Company may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company's breach of such agreements, services to be...

  • Page 127
    ... number of NetZero shares issued in connection with the offering; and (ii) the underwriters had entered into agreements with customers whereby the underwriters agreed to allocate NetZero shares to those customers in the offering in exchange for which the customers agreed to purchase additional...

  • Page 128
    UNITED ONLINE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 13. COMMITMENTS AND CONTINGENCIES (Continued) Company had not established allowances for losses relating to any of the matters described above, with the exception of the Rasnake v. NetZero matter. The Company is subject to ...

  • Page 129
    ... Ended Year ended December 31, 2006: Revenues Impairment of goodwill, intangible assets and long-lived assets Operating income Income before cumulative effect of accounting change, net of tax Cumulative effect of accounting change, net of tax Net income Basic net income per share: Income before...

  • Page 130
    ... (Credited) to Expense Charged to Other Accounts Charges Utilized (Write-offs) Balance at End of Period Allowance for doubtful accounts: Year ended December 31, 2007 Year ended December 31, 2006 Year ended December 31, 2005 Valuation allowance for deferred tax assets: Year ended December 31, 2007...

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

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

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

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

  • Page 135
    ... applicable review and revocation periods applicable to the Release as statutorily required by law. Upon termination of your employment by the Company "without cause," other than the obligations set forth in the first sentence of Section 7(a) above and the acceleration of vesting provided in Section...

  • Page 136
    ..., city or other political subdivision of the United States in which the Company (or its parent or any subsidiary thereof) is engaged in business or providing its services: a. directly or indirectly design, develop, manufacture, market or sell any product or service which is in competition with the...

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

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

  • Page 139
    ... still in office at the time the Board approved such election or nomination. In no event, however, shall a Change in Control be deemed to occur as a result of a spin-off distribution by United Online, Inc. of all or any portion of the Corporation's outstanding securities held by United Online, Inc...

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

  • Page 141
    QuickLinks Exhibit 10.16

  • Page 142
    ... Online Web Services, Inc., a Delaware corporation (dba 50 Megs, Bizhosting, Freeservers, GlobalServers, and MySite) United Online Advertising Network, Inc., a Delaware corporation (dba United Online Media Group) United Online Communications, Inc., a Delaware corporation (dba NetZero Voice) United...

  • Page 143
    QuickLinks Exhibit 21.1

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

  • Page 145
    QuickLinks Exhibit 23.1

  • Page 146
    ...OFFICER PURSUANT TO SECURITIES EXCHANGE ACT RULES 13A-14 AND 15D-14 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Mark R. Goldston, certify that: 1. I have reviewed this Annual Report on Form 10-K of United Online...material information relating to the Registrant, including ...

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

  • Page 148
    ...OFFICER PURSUANT TO SECURITIES EXCHANGE ACT RULES 13A-14 AND 15D-14 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Scott H. Ray, certify that: 1. I have reviewed this Annual Report on Form 10-K of United Online... material information relating to the Registrant, including its ...

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

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

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

  • Page 152
    ... The Annual Report on Form 10-K of United Online, Inc. for the year ended December 31, 2007, as filed with the Securities and Exchange Commission fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in such report fairly...

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