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

Table of contents

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

  • Page 2
    ... SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2004 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 ONLINE, INC. (Exact name of registrant as specified...

  • Page 3
    ... to this Form 10-K. 3 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes 1 No 3 At June 30, 2004, the aggregate market value of voting stock held by non-affiliates of the registrant, based on the last reported sales price of the...

  • Page 4
    ...-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 and our cash position. In...

  • Page 5
    ...include those free hosted Web sites that have received at least one visit during the preceding 90 days. United Online is a Delaware corporation that commenced operations in 2001 following the merger of Internet access providers NetZero, Inc. and Juno Online Services, Inc. (the "Merger"). During 2004...

  • Page 6
    ... through various pricing plans, generally $7.99 per month. Our pay Web-hosting services differ primarily from our free Web-hosting services in that the free service requires the Web site to incorporate advertising placements. Premium Email NetZero and Juno offer premium email services with expanded...

  • Page 7
    ...major value-priced providers, including United Online, charge an additional fee for accelerated dial-up, with $5 being a typical price point. However, AOL's Netscape subsidiary recently began marketing accelerator at no extra charge with their $9.95 per month standard access service, and a number of...

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

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

  • Page 10
    ... access services by either downloading it from the Internet or by using a compact disc ("CD") to install it on their computers. Our traditional marketing activities are designed to drive prospective accounts to either visit our main Web sites and download our software, to call our toll free numbers...

  • Page 11
    ... billing information, downloading and operating our software and setting up their email accounts. In addition, we provide traditional email support where our personnel generally respond to users within a day of receiving an inquiry. We offer live telephone technical support for our access services...

  • Page 12
    ... Communications Corporation; local telephone companies; and regional and local commercial ISPs. We believe that the primary competitive factors determining success in the market for Internet access users include price, speed, a reputation for reliability of service, effective customer support, ease...

  • Page 13
    ... and music downloads, which depend upon connections that provide significant bandwidth. We currently offer a broadband service in Nashville and Indianapolis through Comcast Corporation's cable systems. The service, however, is not value-priced and we have had a minimal number of subscribers sign up...

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

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

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

  • Page 17
    ... with employees to be good. AVAILABLE INFORMATION Our corporate Web site is www.untd.com. On this Web site, we make available, free of charge, our annual, quarterly and current reports, changes in the stock ownership of our directors and executive officers, and other documents filed with, or...

  • Page 18
    .... 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 19
    ...business. We believe the amount, and ultimate liability, if any, with respect to these actions will not materially affect our business, financial condition, results of operations...be material and will not adversely affect our business, financial condition, results of operations or cash flows. ITEM 4....

  • Page 20
    ... following table sets forth, for the quarters indicated, the high and low prices per share of our common stock 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, 2003 Quarter ended September 30...

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

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

  • Page 23
    ... revenues or in successfully commercializing or growing new pay services. United Online is a Delaware corporation that commenced operations in 2001 following the merger of Internet access providers NetZero, Inc. and Juno Online Services, Inc. During 2004, we completed the acquisitions of Classmates...

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

  • Page 25
    ... email services; an expansion of our online and offline distribution channels; our Web-hosting acquisition in April 2004; and a significant number of our free accounts upgrading to our pay services. However, we experienced limited growth in the June 2004 and September 2004 quarters in pay access...

  • Page 26
    ... the years ended December 31, 2004 and 2003, respectively. Cost of Billable Services Cost of billable services includes direct costs of billable services and costs that have been allocated to billable services. Direct costs consist of costs related to providing telephone technical support, customer...

  • Page 27
    ... year ended December 31, 2004, compared to 30.3% in the year ended December 31, 2003. The decrease resulted from a decrease in average hourly telecommunications costs per pay access account; decreased customer billing and support costs per pay account primarily as a result of better pricing obtained...

  • Page 28
    ... the number of pay accounts, the introduction of new services and the impact of such activities on our results of operations. While we anticipate that sales and marketing expenses as a percent of revenues in 2005 will be approximately equal to 2004 without taking into account the effect of increased...

  • Page 29
    ... 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 expenses incurred and credits...

  • Page 30
    ... and December 2003 quarters from the release of a portion of the valuation allowance against deferred tax assets relating primarily to the actual and expected utilization of net operating loss and credit carryforwards in the years ending December 31, 2004 and 2005, offset by state income taxes. 28

  • Page 31
    ... a valuation allowance related to our deferred tax assets at December 31, 2004, we reviewed both positive and negative evidence pursuant to the requirements of SFAS No. 109, Accounting for Income Taxes , including current and historical results of operations, the annual limitation on utilization of...

  • Page 32
    ... of better pricing obtained from our primary customer support vendor; decreased depreciation expense; and a slight decrease in average hourly usage per pay access account. Cost of Free Services Cost of free services decreased by $2.9 million, or 43%, to $4.0 million for the six months ended December...

  • Page 33
    ... for the six months ended December 31, 2002. The increase is primarily attributable to a $29.9 million increase in marketing and promotion costs as a result of an expansion in marketing activities that focus on increasing our pay account base, promoting our accelerated dialup services and building...

  • Page 34
    ...The effective tax rate differs from the statutory tax rate primarily due to the release of valuation allowance attributable to the expected utilization of net operating loss and tax credit carryforwards in the years ending December 31, 2004 and 2005, offset by current California state income tax. In...

  • Page 35
    ... year ended June 30, 2002. Network personnel and overhead-related costs allocated to billable services increased due to the increase in telecommunications hours utilized by pay accounts as a percentage of total telecommunications hours purchased. Customer support and billing-related costs increased...

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

  • Page 37
    ...to write off leasehold improvements associated with our former offices in New York and Rhode Island. In an effort to streamline our operations in response to changing market conditions, we reduced our workforce by 101 employees during the year ended June 30, 2002. Of the 101 employees terminated, 43...

  • Page 38
    ...relating primarily to the actual and expected utilization of net operating loss and tax credit carryforwards for the years ended June 30, 2003 and 2004 as discussed above, offset to a lesser extent by state income taxes. We recorded a current provision for income taxes of $2.6 million for California...

  • Page 39
    ... in our business; the utilization of net operating loss and tax credit carryforwards and income tax deductions resulting from the exercise of stock options by employees, which have reduced payments for income taxes. We currently anticipate that our net operating loss and tax credit carryforwards...

  • Page 40
    ...function of our stock price, the number of vested and in-themoney options outstanding and the timing of employee exercises. • • We previously had access to a $25 million unsecured revolving line of credit with Silicon Valley Bank, which was canceled in December 2004 in connection with our $100...

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

  • Page 42
    ... the operating results for a full year. The following is a discussion of the accounting policies and related estimates that we believe are most critical to understanding our consolidated financial statements, financial position and results of operations and which require complex management judgments...

  • Page 43
    ... period in which the related services are provided. Advance payments from pay accounts are recorded on the balance sheet as deferred revenue. We offer alternative payment methods to credit cards for certain pay service plans. These alternative payment methods currently include payment by electronic...

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

  • Page 45
    ...both 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 net operating loss carryforwards pursuant to Section 382 of the Code, future income projections and potential tax-planning...

  • Page 46
    ... and music downloads, which depend upon connections that provide significant bandwidth. We currently offer a broadband service in Nashville and Indianapolis through Comcast Corporation's cable systems. The service, however, is not value-priced and we have had a minimal number of subscribers sign up...

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

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

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

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

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

  • Page 52
    ... in most cases the number of accounts held by an individual. As such, the actual number of unique individuals using our services may be much lower than our total number of accounts. We may not successfully develop and market new services in a timely or cost-effective manner; consumers or advertisers...

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

  • Page 54
    ...us in the market to provide consumer Internet access. As a result, any or all of our current telecommunications service providers could discontinue providing us with service at rates acceptable to us, or at all, which could materially and adversely affect our business, financial position, results of...

  • Page 55
    ... customer data, excessive credit card chargebacks or refunds, delays in new product or payment plan introductions and other billing-related errors. Such problems could lead to inaccurate reporting from time to time, which could adversely affect our business, financial position, results of operations...

  • Page 56
    ... a number of difficulties, errors, failures and unanticipated costs. In addition, our business relies on third-party software including, without limitation, software licensed from Oracle for our internal operations, software licensed from Portal and Remedy for billing and customer support, and...

  • Page 57
    ... 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 58
    ... that apply to telephone companies and other telecommunications common carriers currently do not apply to us. However, we could become subject to FCC and state regulation as Internet access services and telecommunications services converge. Moreover, if we offer new services that are subject...

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

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

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

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

  • Page 63
    ... for 2001 Stock Incentive Plan 2001 Supplemental Stock Incentive Plan Form of Option Agreement for 2001 Supplemental Stock Incentive Plan Classmates Online, Inc. Amended and Restated 1999 Stock Plan Classmates Online, Inc. 2004 Stock Plan United Online, Inc. 2004 Management Bonus Plan Amended and...

  • Page 64
    ..., dated as of December 3, 2004, among United Online, the Lenders party thereto from time to time, Deutsche Bank Trust Company Americas, as Administrative Agent, and Deutsche Bank Securities Inc., as Lead Arranger (the "Credit Agreement") First Amendment to Credit Agreement, dated as of December...

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

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

  • Page 67
    ... for 2001 Stock Incentive Plan 2001 Supplemental Stock Incentive Plan Form of Option Agreement for 2001 Supplemental Stock Incentive Plan Classmates Online, Inc. Amended and Restated 1999 Stock Plan Classmates Online, Inc. 2004 Stock Plan United Online, Inc. 2004 Management Bonus Plan Amended and...

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

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

  • Page 70
    ... position of the Company and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for the year ended December 31, 2004, the six months ended December 31, 2003, and the years ended June 30, 2003 and 2002 in conformity with accounting principles...

  • Page 71
    ... over financial reporting. Classmates Online, Inc. is a wholly-owned subsidiary of the Company whose total assets and total revenues represent 31% and 2%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2004. /s/ PricewaterhouseCoopers...

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

  • Page 73
    ...) Year Ended June 30, Year Ended December 31, 2004 Six Months Ended December 31, 2003 2003 2002 Revenues: Billable services Advertising and commerce Total revenues Operating expenses: Cost of billable services (including stock-based charges, see Note 9) Cost of free services (including stock...

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

  • Page 75
    ...term investments, net of tax Tax benefits from stock options Interest earned on notes receivable from stockholders Repayments of notes receivable from stockholders Net income Balance at June 30, 2003 Issuance of common stock through employee stock purchase plan Exercises of stock options Exercise of...

  • Page 76
    UNITED ONLINE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Six Months Ended December 31, 2003 Year Ended June 30, Year Ended December 31, 2004 2003 2002 Cash flows from operating activities: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by (used ...

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

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

  • Page 79
    ... is included in other current assets and other assets, consists of certificates of deposit and, in general, collateralizes the Company's obligations for operating leases and amounts held in escrow related to certain of the Company's merchant services agreements. Concentrations of Credit and Business...

  • Page 80
    ... or to continue to offer their services. Any material 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 equipment are stated at historical cost less accumulated depreciation...

  • Page 81
    ... or projected future results of operations. In testing for a potential impairment of goodwill, the estimated fair values of the Company's reporting units are compared with their respective book values, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to...

  • Page 82
    ... in which the related services are provided. Advance payments from users are recorded on the balance sheet as deferred revenue. The Company offers alternative payment methods to credit cards for certain pay service plans. These alternative payment methods currently include electronic check payment...

  • Page 83
    ... to acquire new pay and free accounts, personnel-related expenses for sales and marketing personnel and telemarketing costs incurred to acquire pay accounts, retain pay accounts and up-sell pay accounts to additional services, such as the Company's accelerated dial-up services. The Company has...

  • Page 84
    ...): Six Months Ended December 31, 2003 Year Ended June 30, Year Ended December 31, 2004 2003 2002 Net income (loss), as reported Add: Stock-based charges included in net income (loss) Deduct: Total stock-based charges determined under fair value-based method for all awards, net of tax Pro forma...

  • Page 85
    ... Enterprise and Related Information , the Company operates in one principal operating segment, a provider of consumer Internet subscription services through a number of brands, including NetZero, Juno, and Classmates Online. The Company's pay services include dial-up Internet access, community-based...

  • Page 86
    ... the grant-date fair value of those awards as calculated for either recognition or pro forma disclosures under SFAS No. 123. 2. ACQUISITIONS Classmates Online, Inc. In November 2004, the Company acquired Classmates, which operates Classmates.com (www.classmates.com), connecting millions of members...

  • Page 87
    ... and related relationships Pay accounts Free accounts Other intangibles Total intangible assets acquired Goodwill Total purchase price $ 30,350 3,397 9,700 2,384 (6,713) (23,757) (15,897) (1,485) (286) (2,307) 13,800 7,200 21,700 21,500 536 64,736 68,969 10 years 3.5 years 4 years 10 years 7 years...

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

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

  • Page 90
    ... Year Ended June 30, 2002 (unaudited) Revenues Net loss Net loss per share RocketCash Corporation $ $ $ 195,423 (49,553) (1.27) In September 2000, the Company acquired RocketCash Corporation ("RocketCash"), an online commerce company, in a stock-for-stock transaction. In August 2001, the Company...

  • Page 91
    ...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 92
    ... Company had no material realized gains or losses from the sale of short-term investments in the six months ended December 31, 2003 and the years ended June 30, 2003 and 2002. Maturities of short-term investments were as follows (in thousands): December 31, 2004 Estimated Fair Value Amortized Cost...

  • Page 93
    ... allowance. Intangible assets consist of the following (in thousands): December 31, 2004 Accumulated Amortization Cost Net Pay accounts and free accounts Trademarks and trade names Advertising contracts and related relationships Software and technology Patents, domain names and other Total $ 98...

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

  • Page 95
    ... the Company's tender offer and pay related fees and expenses. Going forward, the funds will be used for general corporate purposes, stock repurchases and acquisitions, subject to certain limitations. The term loan matures in four years and amortizes in an annual amount of $23.3 million in years one...

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

  • Page 97
    ... the Company to repurchase shares of its common stock through open market or privately negotiated transactions based on prevailing market conditions and other factors. From time to time, the Board of Directors has increased the amount authorized for repurchase under this program. On April 22, 2004...

  • Page 98
    ... sets forth the computation of basic and diluted net income (loss) per share for the year ended December 31, 2004, the six months ended December 31, 2003 and the years ended June 30, 2003 and 2002 (in thousands, except per share amounts): Six Months Ended December 31, 2003 Year Ended June 30, Year...

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

  • Page 100
    ... been previously recognized, as well as the expected utilization of net operating loss and tax credit carryforwards in the period ended June 30, 2004, offset by state income taxes. In the year ended June 30, 2002, the Company generated a pre-tax loss of $47.8 million and, as a result, did not record...

  • Page 101
    ...need for a valuation allowance related to the Company's deferred tax assets at December 31, 2004, the Company reviewed both 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 net...

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

  • Page 103
    ... the Plans during the years ended June 30, 2002 and 2003, the six months ended December 31, 2003 and the year ended December 31, 2004 (in thousands, except per share amounts): Number of Shares Price Per Share Weighted Average Exercise Price Options outstanding at July 1, 2001 Assumed in connection...

  • Page 104
    ...periods presented (in thousands): Year Ended June 30, Year Ended December 31, 2004 Six Months Ended December 31, 2003 2003 2002 Operating expenses: Cost of billable services Cost of free services Sales and marketing Product development General and administrative Total stock-based charges $ 16...

  • Page 105
    ... In January 2004, the Board of Directors issued 575,000 restricted shares of common stock 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 recorded deferred...

  • Page 106
    .... 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 107
    ... actions will not be material or adversely affect the Company's business, financial position, results of operations or cash flows. 11. TRANSITION PERIOD COMPARATIVE DATA The following table presents certain financial information for the six months ended December 31, 2003 and 2002, respectively (in...

  • Page 108
    .... QUARTERLY FINANCIAL DATA (UNAUDITED) (in thousands, except per share data) Year ended December 31, 2004: Quarter Ended December 31, September 30, June 30, March 31, Revenues Operating income Net income Net income per share-basic Net income per share-diluted $ $ $ $ $ 119,620 19,036 80,189 1.33...

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

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

  • Page 111
    ... UNITED ONLINE, INC., a Delaware corporation (the " Borrower "), certain pledgors party to the Pledge Agreement referred to below party (each, a " Pledgor " and, collectively, the " Pledgors "), various Lenders party to the Credit Agreement referred to below, DEUTSCHE BANK TRUST COMPANY AMERICAS...

  • Page 112
    ...semi-colon at the end of said Section: "; provided that (A) no such notification shall be required to be given in the case of a Certificated Security, Uncertificated Security, Partnership Interest or Limited Liability Company Interest which is then subject to a securities account "control" agreement...

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

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

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

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

  • Page 117
    ... AS OF MARCH 11, 2005, AMONG UNITED ONLINE, INC., CERTAIN PLEDGORS PARTY TO THE PLEDGE AGREEMENT, VARIOUS LENDERS PARTY TO THE CREDIT AGREEMENT, AND DEUTSCHE BANK TRUST COMPANY AMERICAS, AS ADMINISTRATIVE AGENT AND AS COLLATERAL AGENT NAME OF INSTITUTION: ACA Management, LLC as Advisor to ACA CLO...

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

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

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

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

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

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

  • Page 124
    QuickLinks Exhibit 21.1

  • Page 125
    ... 333-114919 and 333-121217) of United Online, Inc. of our report dated March 15, 2005 relating to the financial statements, financial statement schedule, management's assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial...

  • Page 126
    QuickLinks CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

  • Page 127
    ...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 128
    QuickLinks Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

  • Page 129
    ...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 130
    QuickLinks Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

  • Page 131
    ...Executive Officer and President of United Online, Inc. (the "Company"), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (a) the Annual Report on Form 10-K of the Company for the year ended December 31, 2004, as...

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

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

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