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

Table of contents

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

  • Page 2
    ... 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2006 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...

  • Page 3
    ... These forward-looking statements include, but are not limited to, statements about the markets in which we compete, our pay accounts and subscriptions, our product and service offerings, the advertising market, operating expenses, operating efficiencies, revenues, capital requirements, tax payments...

  • Page 4
    ... The section entitled "Risk Factors" in this Annual Report on Form 10-K and our other filings with the SEC set forth some of the important risk factors that may affect our business, financial position, results of operations and cash flows. Statements indicating factors that we believe may impact our...

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

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

  • Page 7
    ... well as personals and dating services such as Yahoo! Personals and Match.com. A number of general services, as well as services dedicated to specific interests such as cars, music and business, continue to be developed. Many social-networking services are free and dependent on advertising revenues...

  • Page 8
    ...also offer additional fee-based products and services as well as a wide range of discounted metered plans and promotions, such as one or more free months of service or discounted rates for an initial period or an extended commitment. Advertising Revenues We provide advertising solutions to marketers...

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

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

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

  • Page 12
    ...bandwidth and managed modem services. We license a number of our software applications and components, including the applications for our billing, customer support, advertising and database systems, our client and server applications, and the applications for our accelerator services. These licenses...

  • Page 13
    ... position, results of operations and cash flows could be adversely impacted. In that event, the market price of our common stock could decline and you may lose all or part of your investment. Our business will suffer if we are unable to compete effectively. Competition for Internet Access Services...

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

  • Page 15
    ... and new members to actively participate in our programs, our business may be harmed. If the perceived value of our points decreases, we may be required to offer more points to generate the same revenue, which could adversely affect our results of operations relating to these services. A significant...

  • Page 16
    ... by our management or by the financial analysts. In the event we do not achieve such expectations or projections, the price of our common stock could be adversely affected. Our marketing activities may not be successful. We spend significant funds to market our services. From time to time, we may...

  • Page 17
    ...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 earnings...

  • Page 18
    ... the third party providers of our telecommunications services, or to secure new or alternative arrangements with other providers, to provide the scope, quantity, quality, type and pricing of services to meet our current and future needs, our business, financial position, results of operations and...

  • Page 19
    ... developed software applications, our credit card processors, our outsourced customer service vendors, other customer billing and support vendors, and any other failures or errors in our customer billing and service systems, could materially and adversely affect our business, financial position...

  • Page 20
    ... in preventing these types of activities. We also cannot assure you that the security measures of our third-party network providers, providers of customer and billing support services or other vendors will be adequate. In addition to potential legal liability, these activities may adversely impact...

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

  • Page 22
    ... on the sending of emails could materially and adversely affect our business. Our social-networking services and loyalty marketing business deliver a significant number of emails to our members. In addition to any government laws and regulations, voluntary actions by third parties to block, impose...

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

  • Page 24
    ... 300 issuers that conducted their initial public offerings between 1998 and 2000, their underwriters and an unspecified number of their individual corporate officers and directors. The majority of issuers, including NetZero, and their insurers have approved a settlement agreement. The district court...

  • Page 25
    ... actions will not be material and will not adversely affect our business, financial condition, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We did not submit any matters to a vote of security holders during the quarter ended December 31, 2006. 24

  • Page 26
    ... Prior to that, NetZero common stock had been quoted on the NASDAQ under the symbol "NZRO" since September 23, 1999. The following table sets forth, for the quarters indicated, the high and low prices per share of our common stock as reported on the NASDAQ. 2005 High Low High 2006 Low First Quarter...

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

  • Page 28
    ... statements 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 years ended December 31, 2006, 2005 and...

  • Page 29
    ...in our consolidated results of operations from the date of acquisition. See Note 2 of the consolidated financial statements. Net income included NOL tax benefits of $68.6 million for the year ended December 31, 2004. In April 2006, we acquired MyPoints.com, Inc. ("MyPoints"). The results of MyPoints...

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

  • Page 31
    ...with a customer who subscribes to one or more of our pay services. "Active" accounts include total pay accounts as well as free users who have logged onto our access, social-networking, email or VoIP services during the preceding 31 days. Active accounts also include those free hosted Web sites that...

  • Page 32
    ... Year Ended December 31, 2006 2005 2004 Billable services Advertising Total revenues Operating expenses: Cost of revenues Sales and marketing Product development General and administrative Impairment of goodwill, intangible assets and long-lived assets Total operating expenses Segment income from...

  • Page 33
    ... No. 123R for the year ended December 31, 2006 was $19.2 million, which was primarily related to stock options, restricted stock and the discount on employee stock purchases. Stock-based compensation expense, recorded in accordance with APB Opinion No. 25, for the years ended December 31, 2005 and...

  • Page 34
    ... price of our stock options granted to employees and directors equaled the fair market value of the underlying stock at the grant date. Stock-based compensation expense recognized during the current period is based on the value of the portion of share-based payment awards that is ultimately expected...

  • Page 35
    ... of fees charged to pay accounts for access, email, Internet security and other services, with substantially all generated from access. Communications billable services revenues decreased by $59.4 million, or 15%, to $336.9 million for the year ended December 31, 2006, compared to $396.3 million for...

  • Page 36
    ... accounts for social-networking, Web-hosting and other services, with substantially all generated from social-networking. Content & Media billable services revenues increased by $17.0 million, or 24%, to $86.6 million for the year ended December 31, 2006, compared to $69.6 million for the year ended...

  • Page 37
    ... of network computers and equipment; email technical support and license fees; costs related to providing telephone technical support; customer billing and billing support to our pay accounts; domain name registration fees; and costs of providing rewards to members of our loyalty marketing service...

  • Page 38
    ... marketing expenses are associated with performance-based advertising arrangements. Product Development Product development expenses include expenses for the maintenance of existing software and technology and the development of new or improved software and technology, including personnel-related...

  • Page 39
    ... of Juno's New York office to New Jersey. Capitalized compensation costs were $7.3 million and $4.0 million in the years ended December 31, 2006 and 2005, respectively. The increase in capitalized compensation costs was due to projects associated with an upgrade to our customer billing system...

  • Page 40
    ... between annual tests if an event occurs or circumstances change that would indicate the fair value of a reporting unit below its carrying value amount. Consolidated amortization of intangible assets decreased by $4.2 million, or 19%, to $17.6 million for the year ended December 31, 2006, compared...

  • Page 41
    ...assets, including a change in New York state tax law. This remeasurement resulted in an increase to the tax provision for the year ended December 31, 2005 by approximately $2.5 million, or 2.8%. At December 31, 2006, we had net operating loss and tax credit carryforwards for federal and state income...

  • Page 42
    ... of limitations under Section 382 of the Code. We have also claimed income tax deductions from the exercise of certain stock options and the related sale of common stock by employees, and, in 2006, the deduction includes the excess deduction for vested restricted stock. For the years ended December...

  • Page 43
    ...for the year ended December 31, 2004. The increase was primarily related to costs associated with the acquisition of Classmates in the December 2004 quarter, and to a lesser extent, increased costs associated with our Web-hosting service. Sales and Marketing Consolidated Sales and Marketing Expenses...

  • Page 44
    .... The majority of the capitalized compensation costs in the year ended December 31, 2005 related to the development of our VoIP service and the new version of our accelerator service. Content & Media Product Development Expenses. Content & Media product development expenses increased by $6.5 million...

  • Page 45
    ...and the Web-hosting and photo-sharing services. In accordance with the provisions set forth in SFAS No. 142, Goodwill and Other Intangible Assets , goodwill is not being amortized but is tested for impairment at a reporting unit level on an annual basis and between annual tests if an event occurs or...

  • Page 46
    ...year ended December 31, 2006 compared to the year ended December 31, 2005. Cash provided by operating activities is driven by our net income adjusted for non-cash items, including depreciation and amortization, stock-based compensation, impairment of goodwill, intangible assets and long-lived assets...

  • Page 47
    ...a number of factors including, without limitation, potential future acquisitions and new business initiatives, which are difficult to predict and could change significantly over time. Additionally, technological advances may require us to make capital expenditures to develop or acquire new equipment...

  • Page 48
    ... of reasons including, without limitation, developing new or enhancing existing services or products, repurchasing our common stock, acquiring complementary services, businesses or technologies or funding significant capital expenditures. If we need to raise additional capital through public or...

  • Page 49
    ...year ended December 31, 2005 compared to the year ended December 31, 2004. These decreases were partially offset by: • a $9.1 million increase in capital equipment purchases and capitalized software costs in connection with the development of new products and the ongoing operations of our business...

  • Page 50
    ... 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 ACH, payment by personal check or money order or through a local telephone company. In circumstances where payment is not...

  • Page 51
    ... activities take place, activity measurement data (e.g., number of emails delivered and number of responses received) is accumulated and the related revenue is recorded. Revenue from the sale of points to MyPoints' advertisers is deferred over a fifteen-month period, which is the expected time that...

  • Page 52
    ... business combinations. Under the purchase method of accounting, the cost, including transaction costs, is allocated to the underlying net assets, based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded...

  • Page 53
    ... have a material impact on our retained earnings at the time of adoption. Effects of Prior Year Misstatements In September 2006, the SEC issued SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements , in order to address...

  • Page 54
    ..., SAB No. 108 permits existing public companies to record the cumulative effect of initially applying the "dual approach" in the first year ending after November 15, 2006 by recording the necessary "correcting" adjustments to the carrying values of assets and liabilities as of the beginning...

  • Page 55
    ... be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure...

  • Page 56
    ... and 8% of consolidated revenue for the year then ended. Management's assessment of the effectiveness of the Company's internal control over financial reporting at December 31, 2006 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their...

  • Page 57
    ... Securities and Exchange Commission within 120 days after the end of our fiscal year. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) The following documents are filed as part of this report: 1. Consolidated Financial Statements: Page Report of Independent Registered Public Accounting...

  • Page 58
    ... 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 Form of Option Agreement for Classmates Online, Inc. 2004 Stock Plan United Online, Inc. 2006 Management Bonus Plan Amended and...

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

  • Page 60
    ... of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 1, 2007. UNITED ONLINE, INC. By: /s/ MARK R. GOLDSTON Mark R. Goldston Chairman and Chief Executive Officer KNOW ALL PERSONS BY THESE...

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

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

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

  • Page 64
    ... provide a reasonable basis for our opinion. As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for stock-based compensation in 2006. Internal control over financial reporting Also, in our opinion, management's assessment, included...

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

  • Page 66
    UNITED ONLINE, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) December 31, 2006 2005 Assets Current assets: Cash and cash equivalents Short-term investments Accounts receivable, net of allowance for doubtful accounts of $1,324 and $1,325 at December 31, 2006 and 2005, ...

  • Page 67
    ... share amounts) Year Ended December 31, 2005 2006 2004 Revenues Operating expenses: Cost of revenues (including stock-based compensation, see Note 5) Sales and marketing (including stock-based compensation, see Note 5) Product development (including stock-based compensation, see Note 5) General...

  • Page 68
    UNITED ONLINE, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) Year Ended December 31, 2006 2005 2004 Net income Unrealized gain (loss) on short-term investments, net of tax of $120, $(193) and $(452) for the years ended December 31, 2006, 2005 and 2004 Unrealized gain (loss) on...

  • Page 69
    ...from stock options Net income Balance at December 31, 2004 Issuance of common stock through employee stock purchase plan Exercises of stock options Repurchases of common stock Issuance of restricted stock units Cancellation of restricted stock units Cancellation of options assumed in connection with...

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

  • Page 71
    ...'s Web properties attract a significant number of Internet users each month and the Company offers marketers a broad array of Internet advertising products and services as well as online market research and measurement services. United Online is a Delaware corporation that commenced operations in...

  • Page 72
    ... 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 73
    ... ranging from two to ten years. The Company's intangible assets were acquired primarily in connection with business combinations. Goodwill- Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. The Company accounts for goodwill in accordance...

  • Page 74
    ... third-party gift certificates, frequent travel programs, coupons or other rewards. Points are granted to members when they respond to direct marketing offers delivered by the Company, purchase goods from advertisers or engage in other specified activities. The Company is liable for providing the...

  • Page 75
    ... 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 ACH, payment by personal check or money order or through a local telephone company. In circumstances where payment is...

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

  • Page 77
    ... than as related to acquisitions, because the exercise price of the Company's stock options granted to employees and directors equaled the fair market value of the underlying stock at the grant date. Stock-based compensation expense recognized during the current period is based on the value of the...

  • Page 78
    ... expense reduced the Company's results of operations as follows (in thousands, except per share amounts), excluding the cumulative effect of accounting change: Year Ended December 31, 2006 Operating expenses: Cost of revenues Sales and marketing Product development General and administrative...

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

  • Page 80
    .... 154 is effective for accounting changes and corrections of errors made beginning in the March 2006 quarter. The implementation of SFAS No. 154 did not have a material impact on the Company's financial position, results of operations or cash flows. Accounting for Uncertainty in Income Taxes In July...

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

  • Page 82
    ... acquired in connection with the acquisition (in thousands): Estimated Fair Value Estimated Amortizable Life Description Net liabilities assumed: Cash Accounts receivable Other current assets Property and equipment Other assets Accounts payable and accrued liabilities Deferred revenue Member...

  • Page 83
    ... to acquire The Names Database's member relationships and software, which had the effect of expanding the Company's social-networking services. The Names Database's results of operations are included in the Company's consolidated financial statements from the date of acquisition. The purchase price...

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

  • Page 85
    ...assets acquired, including identifiable intangible assets, was recorded as goodwill. The Company assumed 0.5 million unvested options as of the acquisition date, and the fair value of the options assumed was determined based on the Black-Scholes option pricing model using a weighted-average expected...

  • Page 86
    ... 1.82 $ 1.70 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 method in...

  • Page 87
    ...gains from the sale of short-term investments in the year ended December 31, 2004. The following table summarizes the fair value and gross unrealized losses on the Company's short-term investments, aggregated by type of investment instrument and length of time that individual securities have been in...

  • Page 88
    ... Database acquisition Goodwill recorded in connection with MyPoints acquisition Goodwill recorded in connection with Trombi acquisition Impairment of goodwill related to the Company's photo-sharing service (see Note 6) Reduction of acquired deferred tax assets Balance at December 31, 2006 $ 76,458...

  • Page 89
    ... thousands): December 31, 2006 2005 Employee compensation and related expenses Income taxes payable Subscriber referral fees Other Total Line of Credit $ 27,061 9,305 250 2,931 $ 39,547 $ 20,353 9,769 4,281 1,846 $ 36,249 In December 2003, United Online obtained a one-year $25 million unsecured...

  • Page 90
    ... additional working capital to support the Company's growth and overall business strategy. In November 2004, the Company borrowed $10.3 million from the line of credit and repaid the amount on the same business day. The line of credit was canceled in December 2004 in connection with the signing of...

  • Page 91
    ...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 which...

  • Page 92
    ... with a fair market value equal to the amount of the withholding taxes due. The Company then pays the applicable withholding taxes in cash, which is accounted for as a repurchase of common stock. The first RSU vest occurred in February 2006. In the year ended December 31, 2006, approximately 215,000...

  • Page 93
    ... Recognized The following table summarizes the stock-based compensation that has been included in the following captions for each of the periods presented (in thousands): Year Ended December 31, 2006 2005 2004 Operating expenses: Cost of revenues Sales and marketing Product development General and...

  • Page 94
    ... effect 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 market price of United Online common stock at the date of grant. Year Ended December 31, 2006 2005 2004 Risk-free interest...

  • Page 95
    ... 5% vesting within approximately 2.5 years from the date of acceleration. The Company also believed that because the options to be accelerated had exercise prices in excess of the then current market value of the Company's common stock, the options had limited economic value and were not fully...

  • Page 96
    ... vested during the year ended December 31, 2006 was approximately $7.6 million. Recent Awards On February 15, 2007, the Compensation Committee of the Board of Directors approved grants of 0.6 million RSUs with a fair value equal to $8.2 million to the Company's executive officers. Each RSU entitles...

  • Page 97
    ... by dividing the expected annual dividend by the market price of United Online common stock at the date of grant. For the year ended December 31, 2006, the Company recognized approximately $1.9 million of stock-based compensation expense related to the ESPP. For the years ended December 31, 2005...

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

  • Page 99
    ... of limitations under Section 382 of the Code. The Company has also claimed income tax deductions from the exercise of certain stock options and the related sale of common stock by employees, and, in 2006, the deduction includes the excess deduction for vested restricted stock. For the years ended...

  • Page 100
    ... INCOME PER SHARE The following table sets forth the computation of basic and diluted net income per share for the years ended December 31, 2006, 2005 and 2004 (in thousands, except per share amounts): Year Ended December 31, 2006 2005 2004 Numerator: Income before cumulative effect of accounting...

  • Page 101
    ... the year ended December 31, 2006 included impairment charges of $8.8 million. All of these charges are included in the Company's operating expenses. A reconciliation of segment income from operations (which excludes corporate expenses, depreciation, amortization of intangible assets and stock-based...

  • Page 102
    ...all others similarly situated, filed a lawsuit in the United States District Court for the Southern District of New York against NetZero, certain officers and directors of NetZero and the underwriters of NetZero's initial public offering, Goldman Sachs Group, Inc., BancBoston Robertson Stephens, Inc...

  • Page 103
    ... adverse effect on its business, financial position, results of operations or cash flows, the results of litigation are inherently uncertain and the Company can provide no assurance that it will not be materially and adversely impacted by the results of such proceedings. At December 31, 2006, other...

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

  • Page 105
    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, 2006 Year ended...

  • Page 106
    ... adopted by the Board of Directors providing for the issuance of such series and as may be permitted by the DGCL, including, without limitation, the authority to provide that any such class or series may be (i) subject to redemption at any time or times and at such price or prices; (ii) entitled to...

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

  • Page 108
    ...Bylaws may provide. Special meetings of stockholders, for any purpose or purposes may only be called by the Chairman of the Board of Directors or by a majority of the members of the Board of Directors. Only the business stated in the notice of a special meeting of stockholders of the Corporation may...

  • Page 109
    ...Certificate of Incorporation shall be effective unless approved by sixty-six and two-thirds percent of the outstanding shares of voting stock of the Corporation then entitled to vote on the election of directors of the Corporation. ARTICLE 8 The Corporation shall indemnify its directors and officers...

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

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

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

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

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

  • Page 115
    ... a director is effective at a future time, the board of directors may elect a successor to take office when the resignation becomes effective. Unless otherwise provided in the Certificate of Incorporation, vacancies and newly created directorships resulting from any increase in the authorized number...

  • Page 116
    .... Notice to directors may also be given by telephone, facsimile, telegram or electronic transmission. Section 4.2 Waiver. Whenever notice is required to be given under applicable law, the Certificate of Incorporation or the Bylaws, a written waiver, signed by the person or persons entitled to said...

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

  • Page 118
    ... as the board of directors may from time to time prescribe. Section 5.9 The Chief Financial Officer. The chief financial officer shall be the chief financial officer of the Corporation, shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts...

  • Page 119
    ...same effect as if such person were such officer, transfer agent or registrar at the date of issue. Section 6.3 Lost Certificates. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged...

  • Page 120
    ... Checks. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. Section 7.3 Fiscal Year. The fiscal year of the Corporation shall be fixed by resolution of the...

  • Page 121
    ... from time to time, indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was a director or officer of...

  • Page 122
    ... at the request of the Corporation as a director, officer, employee or agent. The provisions of this Section 8.4 shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth in Section 8.1 or...

  • Page 123
    ... officer in connection with a proceeding (or part thereof) initiated by such person unless such proceeding (or part thereof) was authorized or consented to by the Board of Directors. Section 8.12 Indemnification of Employees and Agents. The Corporation may, to the extent authorized from time to time...

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

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

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

  • Page 127
    ...by and between United Online, Inc., a Delaware corporation (the "Company"), and U.S. Stock Transfer Corporation, a California corporation (the "Rights Agent"). WHEREAS, effective November 15, 2001 (the "Rights Dividend Declaration Date"), the board of directors of the Company authorized and declared...

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

  • Page 129
    ...00 p.m., New York City time, on the next succeeding Business Day. "Common Stock" when used with reference to the Company shall mean the shares of Common Stock, par value $0.0001, of the Company. "Common Stock" when used with reference to any Person other than the Company shall mean the capital stock...

  • Page 130

  • Page 131
    ...the first date of public announcement (which, for purposes of this definition, shall include, without limitation, a report filed pursuant to Section 13(d) of the Exchange Act) by the Company or an Acquiring Person that an Acquiring Person has become such. "Spread" shall have the meaning set forth in...

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

  • Page 133
    ..., split up, combined or exchanged for another Rights Certificate or Rights Certificates evidencing exercisable Rights, entitling the registered holder to purchase a like number of Units of Preferred Stock (or, following a Triggering Event, other securities, cash or other assets, as the case may be...

  • Page 134
    ... thereby (except as otherwise provided in this Agreement) in whole or in part at any time after the Distribution Date upon surrender of the Rights Certificate, with the form of election to purchase and the related certification duly executed, to the Rights Agent at the office of the Rights Agent...

  • Page 135
    ... whom the Acquiring Person has any continuing agreement, arrangement or understanding regarding the transferred Rights or (B) a transfer which the board of directors of the Company has determined is part of a plan, arrangement or understanding which has as a primary purpose or effect the avoidance...

  • Page 136
    ... payment is a date upon which the Preferred Stock (or, following the occurrence of a Triggering Event, other securities) transfer books of the Company are closed, such person shall be deemed to have become the record holder of such shares at the Close of Business on, and such certificate shall be 9

  • Page 137
    ...of the Preferred Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), except as otherwise provided in this Section 11(a), the Purchase Price in effect at the time of the record date for such dividend...

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

  • Page 139
    ... conversion price of the convertible securities so to be offered) would purchase at such Current Per Share Market Price and the denominator of which shall be the sum of the number of Units of Preferred Stock outstanding on such record date plus the number of additional Units of Preferred Stock and...

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

  • Page 141
    ... date of this Agreement) multiplied by the Current Per Share Market Price of Common Stock of the Company. If no shares of the Common Stock of the Company or the Preferred Stock are publicly held or so listed or traded, "Current Per Share Market Price" of the Preferred Stock shall mean the fair value...

  • Page 142
    ... Purchase Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event the issuing to the holder of any Rights exercised after such record date of that number of Units of Preferred Stock and other capital stock or securities of...

  • Page 143
    ... certificate. Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power. (a) In the event that, following a Share Acquisition Date, directly or indirectly, (x) the Company shall consolidate with, or merge with and into, any other Person (other than a Subsidiary of the Company...

  • Page 144
    ... portion of the assets or earning power cannot be determined, whichever Person whose outstanding shares of Common Stock have the greatest aggregate Current Per Share Market Price; provided , however , that in any such case, (1) if the Common Stock of such Person is not at such time and has not...

  • Page 145
    ... have the effect of (i) causing such Principal Party to issue, in connection with, or as a consequence of, the consummation of a transaction referred to in this Section 13, shares of Common Stock of such Principal Party at less than the Current Per Share Market Price or securities exercisable for...

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

  • Page 147
    ...Stockholder. No holder, as such, of any Rights Certificate shall be entitled to vote, receive dividends or be deemed for any purpose the holder of the Units of Preferred Stock or any other securities of the Company which may at any time be issuable upon the exercise of the Rights represented thereby...

  • Page 148
    ...suffered or omitted by it in connection with, its administration of this Agreement and the exercise and performance of its duties hereunder in reliance upon any Rights Certificate or certificate for Units of Preferred Stock or for other securities of the Company, instrument of assignment or transfer...

  • Page 149
    ... in such application (which date shall not be less than five Business Days after the date any officer of the Company actually received such application, unless any such officer shall have consented in writing to an earlier date) unless, prior to taking any such action (or the effective date in the...

  • Page 150
    ... holder of any Rights Certificate may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, shall be a corporation organized and doing business under the laws of the United States or of...

  • Page 151
    ... 23. Redemption and Termination. (a) The Company may, at its option, upon approval by the board of directors, at any time on or prior to the Close of Business (or such later date as may be determined by its board of directors) on the earlier of (i) the Distribution Date or (ii) the Final Expiration...

  • Page 152
    ...debt securities of the Company, (4) other assets, or (5) any combination of the foregoing, having an aggregate value equal to the aggregate Current Per Share Market Price of the Units of Preferred Stock that would otherwise be issuable in such exchange, all as determined by the board of directors of...

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

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

  • Page 155
    ...adversely affect the purpose or effect of this Agreement and the right of redemption set forth in Section 23 shall have expired, such right shall be reinstated and shall not expire until the tenth Business Day following the date of such determination by the board of directors of the Company. Section...

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

  • Page 157
    ... to and vested in the board of directors of the Corporation (hereinafter the "Board") in accordance with the provisions of the certificate of incorporation of the Corporation, as currently in effect, the Board hereby creates a series of Preferred Stock, par value $0.0001per share (the "Preferred...

  • Page 158
    ... on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common...

  • Page 159
    ... event. (b) Except as otherwise provided herein, in any other Certificate of Designation creating a series of Preferred Stock or any similar stock, or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Corporation...

  • Page 160
    to such event. A-2

  • Page 161
    ... hereinafter set forth, equal to 1,000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is converted, changed or exchanged. In the event the Corporation shall at any time declare...

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

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

  • Page 164
    ... United Online, Inc., a Delaware corporation (the "Company"), and U.S. Stock Transfer Corporation, as Rights Agent (the "Rights Agent"), to purchase from the Company at any time after the Distribution Date (as such term is defined in the Rights Agreement) and prior to 5:00 p.m., New York City time...

  • Page 165
    ... Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Rights Agent. WITNESS the signature of the proper officers of the Company and its corporate seal. Dated as of UNITED ONLINE, INC. By : Name Title Countersigned: U.S. Stock Transfer Corporation...

  • Page 166
    ..., to transfer the within Rights Certificate on the books of the within-named Company, with full power of substitution. DATED: Signature hereby sells, assigns and transfers Signature Guaranteed: Signatures must be guaranteed by a participant in a Securities Transfer Association Inc. recognized...

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

  • Page 168
    ... represented by this Rights Certificate to purchase the Units of Series A Preferred Stock issuable upon the exercise of such Rights and requests that certificates for such Series A Preferred Stock be issued in the name of: Please insert social security or other identifying number (Please print name...

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

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

  • Page 171
    ...-121217 and 333-123392) of United Online, Inc. of our report dated February 28, 2007 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 172
    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 I, Mark R. Goldston, certify that: 1. I have reviewed this annual report of United Online, Inc.; 2. Based on my ...

  • Page 173
    Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Charles S. Hilliard, certify that: 1. I have reviewed this annual report of United Online, Inc.; 2. Based on my ...

  • Page 174
    ... Chief Executive 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, 2006, as filed...

  • Page 175
    ... 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, 2006, as filed...