Juno 2003 Annual Report Download

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

Table of contents

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

  • Page 2
    ...EXCHANGE ACT OF 1934 For the Fiscal Year Ended or 12 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from July 1, 2003 to December 31, 2003 Commission file number 000-33367 UNITED ONLINE, INC. (Exact name of registrant as specified...

  • Page 3
    ... Owners and Management and Related Stockholder Matters Certain Relationships and Related Party Transactions Principal Accounting Fees and Services 50 50 50 50 50 Exhibits, Financial Statement Schedules and Current Reports on Form 8-K 51 53 In this document, "United Online," the "Company," "we...

  • Page 4
    ...offices in San Francisco, California; New York, New York; and Hyderabad, India. Our access services, currently offered through the NetZero, Juno and BlueLight Internet brands, are available in more than 6,500 cities across the United States and Canada. In addition, we offer marketers numerous online...

  • Page 5
    ...of the U.S. Internet access market, at least in the near term. In 2003, a number of ISPs, including NetZero and Juno, began offering accelerated dial-up Internet access services. These services operate using a standard dial-up Internet connection and enable users to download certain Web pages faster...

  • Page 6
    ... significant marketing resources on our free access and email services since the Merger and have experienced a decrease both in our active free user base and in the number of people signing up for free services, our free user base continues to be a significant source of new pay access subscribers...

  • Page 7
    ... managed modem services. We have integrated many aspects of the NetZero, Juno and BlueLight Internet access services, which has enabled us to provide higher levels of service to our users while reducing per-user telecommunications and network operating costs. In order to utilize our access services...

  • Page 8
    ...in the market for Internet access users include price, speed, a reputation for reliability of service, effective customer support, easy to use and reliable software, geographic coverage and scope of services. Other important factors include the timing and introduction of new products and services as...

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

  • Page 10
    .... On August 21, 2001, Juno commenced an adversary proceeding in U.S. Bankruptcy Court in the Southern District of New York against Smart World Technologies, LLC, dba "Freewwweb," (the "Debtor"), a provider of free Internet access that had elected to cease operations and had sought the protection of...

  • Page 11
    ... for each share of NetZero common stock in connection with the Merger) prior to September 26, 2001 as reported on the NASDAQ. Prices have been adjusted to reflect the 3-for-2 stock dividend that occurred on October 31, 2003: High Low Year Ended June 30, 2002 Quarter ended September 30, 2001 Quarter...

  • Page 12
    ... 2,140 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We are the nation's leading provider of value-priced Internet access services. Our access services, currently offered through the NetZero, Juno and BlueLight Internet brands, are available...

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

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

  • Page 15
    ... hours purchased. Customer support and billing-related costs increased as a result of the increase in the average number of pay access subscribers. Depreciation expense allocated to billable services has decreased due to network assets placed in service in prior years becoming fully depreciated...

  • Page 16
    ... in active free access users has resulted primarily from active free access users upgrading to our pay services and fewer new users signing up for our free access services. Depreciation expense allocated to free access services has decreased due to assets placed in service in prior years becoming...

  • Page 17
    ... between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value amount. Amortization of intangible assets decreased by $0.6 million, or 7%, to $7.9 million for the six months ended December 31, 2003...

  • Page 18
    ... that suspend the utilization of net operating loss carryforwards to offset current taxable income for a two-year period beginning in the year ended June 30, 2003. As a result, we recorded a California state income tax provision for the period. For the six months ended December 31, 2002, we recorded...

  • Page 19
    ...'s and Juno's customer billing and support functions, which resulted in better pricing from our primary customer support vendor as a result of increased call volumes. 23 Cost of Free Services Cost of free services decreased by $20.5 million, or 62%, to $12.6 million for the year ended June 30, 2003...

  • Page 20
    ... at RocketCash and 3 were in network operations. In addition, we closed regional offices in San Francisco, California and Providence, Rhode Island and combined our New York offices into one facility. At June 30, 2003, all amounts recorded in prior years for restructuring charges were paid, and we...

  • Page 21
    ... tax credit carryforwards in 2003 and 2004, respectively. Our effective income tax rate for the year ended June 30, 2003 differed from the statutory rate primarily as a result of the tax benefit recognized from the release of a portion of the valuation allowance against deferred tax assets relating...

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

  • Page 23
    ..., California and Providence, Rhode Island and combined our New York offices into one facility. At June 30, 2002, accrued liabilities associated with restructuring costs were $0.6 million. We did not record any restructuring costs in the year ended June 30, 2001. Interest Income, Net Interest income...

  • Page 24
    ... six months ended December 31, 2003 compared to the six months ended December 31, 2002 as a result of overall improvements in our business; the utilization of net operating loss and tax credit carryforwards and income tax deductions resulting from the exercise of stock options and the related sale...

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

  • Page 26
    ... market value of an asset, significant underperformance relative to expected historical or projected future results of operations, a change in the extent or manner in which an asset is used, significant declines in our stock price for a sustained period, shifts in technology, loss of key management...

  • Page 27
    ... positive and negative evidence pursuant to the requirements of SFAS No. 109, including current and historical results of operations, the annual limitation on utilization of 34 net operating loss carryforwards pursuant to Section 382 of the Code, future income projections and potential tax-planning...

  • Page 28
    .... FIN No. 46 is effective for reporting periods ending after December 15, 2003. The adoption of FIN No. 46 in the December 2003 quarter did not have any impact on our financial position, results of operations or cash flows. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial...

  • Page 29
    ... changes in, or the effect of, accounting rules, such as recording expenses for restricted stock and stock option grants or the realization of our deferred tax assets. In addition, the number of pay subscribers and free users on our services, and the mix in our pay subscriber base, from period to...

  • Page 30
    ... to focus all of our marketing efforts on our pay services or impose additional limitations on our free services. In addition, there may be a significant overlap between NetZero's and Juno's active free user bases, so the actual number of unique free users in our active free user base may be lower...

  • Page 31
    ... marketing campaigns, or if marketing campaigns undertaken by competitors cause attrition in our user base, our business, financial position, results of operations and cash flows could be adversely affected. 39 We may not successfully develop and market new products in a timely or cost-effective...

  • Page 32
    ...a variety of factors including, without limitation, changes in the online advertising market, decreases in capital available to Internet companies, changes in our advertising inventory and the effect of key advertising relationships. 40 A small number of customers have accounted for, and may in the...

  • Page 33
    ... in increased rates. Any increase in market rates would increase the cost of providing our services and, if significant, could have a material adverse effect on our business, financial position, results of operations and cash flows. If we fail to manage our telecommunications or our internal network...

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

  • Page 35
    ... or other equitable relief that could effectively block our ability to use our products in the United States or abroad. If a third party asserts a claim relating to proprietary technology or information against us, we may seek licenses to the intellectual property from the third party. We cannot...

  • Page 36
    ... govern businesses generally, such as regulations related to consumer protection. Accordingly, regulations that apply to telephone companies and other telecommunications common carriers do not apply to us. As information service providers, we also operate under an exemption from the access charges...

  • Page 37
    ... changes or if access, universal service, or other charges are imposed on ISPs or on dial-up consumers to access the Internet, our business may be adversely affected. 47 In addition, the tax treatment of activities on or relating to the Internet is currently unsettled. A number of proposals have...

  • Page 38
    ... fluctuations. The Nasdaq National Market, where most publicly held Internet companies are traded, has experienced substantial price and volume fluctuations. These broad market and industry factors may harm the market price of our common stock, regardless of our actual operating performance, and for...

  • Page 39
    ... our definitive proxy statement relating to our 2004 annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year. 50 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND CURRENT REPORTS ON FORM 8-K (a) The following...

  • Page 40
    ...2001 Stock Incentive Plan 2001 Supplemental Stock Incentive Plan 51 10-K 10-Q 10-Q 000-33367 000-33367 000-33367 8/1/2003 11/14/2001 11/14/2001 10.6 10.7 10.8 10.9 10.10 21.1 23.1 24.1 31.1 31.2 32.1 32.2 United Online, Inc. Fiscal Year 2004 Management Bonus Plan Amended and Restated Employment...

  • Page 41
    ... report has been signed below by the following persons on behalf of the Company and in the capacities indicated on February 5, 2004. Signature Title Date ...Stock (included in exhibit 4.1 below) Rights Agreement, dated as of November 15, 2001, between the Company and U.S. Stock Transfer Corporation...

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

  • Page 43
    ..., the financial position of United Online, Inc. and its subsidiaries (the "Company") at December 31, 2003 and June 30, 2003 and 2002, and the results of their operations and their cash flows for the six months ended December 31, 2003 and each of the three years in the period ended June 30, 2003 in...

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

  • Page 45
    ... statements. F-4 UNITED ONLINE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands) Common Stock Shares Balance at July 1, 2000 Issuance of common stock and warrants for marketing agreements Issuance of common stock through employee stock purchase plan Exercises of stock options...

  • Page 46
    ...Six Months Ended December 31, 2003 Cash flows from operating activities: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization Allowance for doubtful accounts Stock-based charges Deferred taxes Tax benefits...

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

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

  • Page 49
    ...their services. Although management believes that alternate telecommunications providers could be found in a timely manner, any disruption of these services could have a material adverse effect on the Company's financial position, results of operations and cash flows. Long-Lived Assets- Property and...

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

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

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

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

  • Page 54
    ... 46 is effective for reporting periods ending after December 15, 2003. The adoption of FIN No. 46 in the December 2003 quarter did not have any impact on the Company's financial position, results of operations or cash flows. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial...

  • Page 55
    ... for the Merger were to accelerate the Company's growth in pay subscribers, leverage NetZero's and Juno's operating and cost infrastructures to create a lower cost structure for providing Internet access and to create a more attractive base of users for advertising customers. Under the terms of the...

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

  • Page 57
    ...and 3 were in network operations. In addition, the Company closed its regional offices in San Francisco, California and Providence, Rhode Island and combined NetZero's and Juno's New York offices into one facility. At June 30, 2003, all acquisition and restructuring costs were paid. 4. BALANCE SHEET...

  • Page 58
    ... gains 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 investments in the six months ended December 31, 2003 and the years ended June 30, 2003, 2002 and 2001. Maturities of...

  • Page 59
    ...in thousands): Year Ending December 31, 2004 2005 2006 2007 Total $ 15,855 12,438 2,146 288 30,727 $ F-22 Intangible assets at December 31, 2003 consist primarily of pay subscribers and software and technology related to the Merger and the acquisition of the Internet access assets of BlueLight...

  • Page 60
    ... in the fair value of goodwill and other identifiable intangible assets associated with the Company's free Internet access service. The market data indicated a substantial and sustained decrease in market valuations for publicly traded Internet-related companies. Market data related to private...

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

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

  • Page 63
    ... of net operating loss carryforwards to offset current taxable income for a two-year period beginning in the year ended June 30, 2003. As a result, the Company recorded a California state income tax provision for the period. F-27 For the year ended June 30, 2003, the Company recorded a tax benefit...

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

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

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

  • Page 67
    ... captions for each of the periods presented (in thousands): Year Ended June 30, 2003 2002 2001 Operating expenses: Cost of billable services Cost of free services Sales and marketing Product development General and administrative Total stock-based charges $ 8 - 20 6 73 107 $ 99 60 548 1,785...

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

  • Page 69
    ... the Company's business, financial position, results of operations or cash flows. F-35 12. QUARTERLY FINANCIAL DATA (UNAUDITED) Quarter Ended June 30, March 31, December 31, September 30, (in thousands) Six months ended December 31, 2003: Net revenues Operating income Net income Net income per...

  • Page 70
    ... of Period Charged/(Credited) to Expense Charges Utilized/ Write offs Balance at End of Period Allowance for doubtful accounts Six months ended December 31, 2003 Year ended June 30, 2003 Year ended June 30, 2002 Year ended June 30, 2001 Valuation allowance for deferred tax assets $ 288 333 354...

  • Page 71
    ... and Restated Employment Agreement (the "Agreement") is made and entered into effective as of the 27 th day of January 2004 by and between United Online, Inc., a Delaware corporation (the "Company"), with principal corporate offices at 2555 Townsgate Road, Westlake Village, California 91361, and...

  • Page 72
    ... of the Restricted Shares from the Repurchase Option, the Company shall deliver to Employee a stock certificate representing such Released Shares, less a number of Released Shares (calculated based on the fair market value thereof as of such date) equal to the minimum amount of withholding as may...

  • Page 73
    ...is not offered and provided the position of Chairman and Chief Executive Officer of the Company or its successor as well as the acquiring and ultimate parent entity, if any, following a Corporate Transaction), (b) a decrease in pay and/or benefits from those provided by the Company immediately prior...

  • Page 74
    ... shall terminate if the Company terminates operations or if the Company no longer engages in any Competitive Business Activity. The term "Competitive Business Activity" shall mean the business of providing consumers with dial-up Internet access services (free or pay). The term "Restricted Territory...

  • Page 75
    ... and Restated Employment Agreement (the "Agreement") is made and entered into effective as of the 27 th day of January 2004, by and between United Online, Inc., a Delaware corporation (the "Company"), with principal corporate offices at 2555 Townsgate Road, Westlake Village, California 91361, and...

  • Page 76
    ... of the Restricted Shares from the Repurchase Option, the Company shall deliver to Employee a stock certificate representing such Released Shares, less a number of Released Shares (calculated based on the fair market value thereof as of such date) equal to the minimum amount of withholding as may...

  • Page 77
    ...if Employee is not offered the position of Executive Vice President, Finance and Chief Financial Officer of the Company or its successor as well as the acquiring and ultimate parent entity, if any, following the Corporate Transaction), (b) a decrease in pay and/or benefits from those provided by the...

  • Page 78
    ... shall terminate if the Company terminates operations or if the Company no longer engages in any Competitive Business Activity. The term "Competitive Business Activity" shall mean the business of providing consumers with dial-up Internet access services (free or pay). The term "Restricted Territory...

  • Page 79
    ... and Restated Employment Agreement (the "Agreement") is made and entered into effective as of the 27 th day of January 2004, by and between United Online, Inc., a Delaware corporation (the "Company"), with principal corporate offices at 2555 Townsgate Road, Westlake Village, California 91361, and...

  • Page 80
    ... of the Restricted Shares from the Repurchase Option, the Company shall deliver to Employee a stock certificate representing such Released Shares, less a number of Released Shares (calculated based on the fair market value thereof as of such date) equal to the minimum amount of withholding as may...

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

  • Page 82
    ... shall terminate if the Company terminates operations or if the Company no longer engages in any Competitive Business Activity. The term "Competitive Business Activity" shall mean the business of providing consumers with dial-up Internet access services (free or pay). The term "Restricted Territory...

  • Page 83
    ... or extended, except by written agreement which expressly refers to this Agreement, which is signed by each of the parties hereto and which is authorized by the Company's Board. This Agreement is made in and shall be governed by the laws of California, without giving effect to its conflicts-of-law...

  • Page 84
    ... and Restated Employment Agreement (the "Agreement") is made and entered into effective as of the 27 th day of January 2004, by and between United Online, Inc., a Delaware corporation (the "Company"), with principal corporate offices at 2555 Townsgate Road, Westlake Village, California 91361, and...

  • Page 85
    ...will be credited with an additional twelve (12) months of service toward vesting in all stock options then held by Employee (the "Option Shares") in addition to the service he has accrued toward vesting through the date of termination, and the Repurchase Option will lapse with respect to a number of...

  • Page 86
    ... shall terminate if the Company terminates operations or if the Company no longer engages in any Competitive Business Activity. The term "Competitive Business Activity" shall mean the business of providing consumers with dial-up Internet access services (free or pay). The term "Restricted Territory...

  • Page 87
    ... excess) within five (5) business days following the time that the amount of such excess is finally determined. The Employee and the Company shall cooperate with each other in connection with any proceeding or claim relating to the existence or amount of liability for Excise Tax, and all expenses...

  • Page 88
    ...10 AMENDED AND RESTATED EMPLOYMENT AGREEMENT QuickLinks -- Click here to rapidly navigate through this document Exhibit 21.1 List of Subsidiaries NetZero, Inc., a Delaware corporation Juno Online Services, Inc., a Delaware corporation NetBrands, Inc., a California corporation QuickLinks Exhibit 21...

  • Page 89
    ...in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who...

  • Page 90
    ... and President of United Online, Inc. (the "Company"), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (a) the Transition Report on Form 10-K of the Company for the period ended December 31, 2003, as filed with...

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