UNITED ONLINE INC - 10-K Annual Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o

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 registrant's common stock on such date reported by the Nasdaq National Market, was $1,075,067,572 (calculated by excluding shares beneficially owned by directors and officers).

At March 9, 2005, there were a total of 60,591,925 shares of the registrant's common stock outstanding.

The information required by Part III of this annual report, to the extent not set forth herein, is incorporated herein by reference to the registrant's definitive proxy statement relating to the 2005 annual meeting of stockholders to be filed with the Securities and Exchange Commission not later than 120 days after the end of the registrant's fiscal year.

		Page
PART I.
Item 1.	Business	3
Item 2.	Properties	15
Item 3.	Legal Proceedings	16
Item 4.	Submission of Matters to a Vote of Security Holders	17
PART II.
Item 5.	Market for Registrant's Common Equity and Related Stockholder Matters	18
Item 6.	Selected Financial Data	19
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	58
Item 8.	Financial Statements and Supplementary Data	59
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	59
Item 9A.	Controls and Procedures	59
Item 9B.	Other Information	60
PART III.
Item 10.	Directors and Executive Officers of the Registrant	60
Item 11.	Executive Compensation	60
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	60
Item 13.	Certain Relationships and Related Party Transactions	60
Item 14.	Principal Accounting Fees and Services	60
PART IV.
Item 15.	Exhibits, Financial Statement Schedules	60
Signatures	63

In this document, "United Online," the "Company," "we," "us" and "our" refer to United Online, Inc. and its wholly-owned subsidiaries.

This Annual Report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements based on our current expectations, estimates and projections about our operations, industry, financial condition and liquidity. Statements containing words such as "anticipate," "expect," "intend," "plan," "believe," "may," "will" or similar expressions constitute forward-looking statements. 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 and our cash position. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Such statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. 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 results are not intended to be exclusive. We undertake no obligation to revise or update publicly any forward-looking statements, other than as required by law.

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 also offer, at no charge, advertising-supported versions of certain of our services. In addition, we offer marketers a broad array of Internet advertising products, including online market research and measurement services.

At December 31, 2004, we had approximately 4.8 million pay accounts representing approximately 6.0 million total subscriptions, and approximately 15.2 million active accounts. A pay account represents a unique billing relationship 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, community-based networking or email services during the preceding 31 days. Active accounts also include those free hosted Web sites that have received at least one visit during the preceding 90 days.

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, we completed the acquisitions of Classmates Online, Inc. ("Classmates"), a leading provider of community-based networking services, and the Web-hosting and domain name registration business of About Web Services, Inc. Our corporate headquarters are located in Woodland Hills, California.

We offer a variety of consumer Internet services under a number of brands, both free of charge and subscription-based, which include the following:

Our standard pay access services include Internet access and an email account and are offered through various pricing plans, generally $9.95 per month. We also offer "accelerated" access services, generally for an additional $5.00 per month, or a total monthly charge of $14.95. Our accelerated access services utilize compression, caching and other technologies that reduce the time for certain Web pages to download to users' computers when compared to our standard access services. The price for our accelerated access services also includes certain additional benefits such as pop-up blocking capabilities and enhanced email storage when compared to our standard services. Internet access comprised approximately 3.1 million of our pay accounts at December 31, 2004, of which approximately 36% also subscribed to our accelerator services. We count a subscriber to our accelerator services as one pay account and two subscriptions, one for the Internet access and another for the accelerator. The NetZero and Juno pay access services differ from their respective free access services in that the hourly and certain other limitations set for the free services do not apply. In addition, the free access services incorporate certain advertising initiatives, including a persistent advertising banner, not present on the pay services. We do not offer free access services under the BlueLight brand. Our access services are available in more than 8,200 cities across the United States and Canada.

Connecting millions of users primarily across the United States and, to a lesser extent, Canada, Germany and Sweden, our community-based networking services provide a platform to acquire, organize and present user-generated content. Membership in our networking service is free and allows users to post a personal profile, access and search our database of other registered members and conveniently search and review personally relevant online communities from school, work and the military. Our pay service also enables subscribers to communicate with other members and is offered through various pricing plans, generally $39.00 per year or $15.00 for three months. Our community-based networking properties also contain several advertising initiatives throughout their Web sites.

Our Web-hosting services, which include domain name registration services, are offered 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.

NetZero and Juno offer premium email services with expanded features and storage capabilities through various pricing plans, generally $9.95 per year. We also offer personalized, vanity email services with enhanced features and storage for $1.99 per month.

We connect advertisers to consumers through a variety of online marketing properties integrated throughout our services. Our advertising and e-commerce products include a broad range of targeting techniques for online advertising, email campaigns, start-page placements and channel sponsorship opportunities, and the ability to deliver video commercials online. We also provide consumers convenient access to third party Internet search services throughout many of our Web properties and services and generate a significant portion of our advertising and commerce revenues from our users utilizing such search services. In addition, we offer advertisers sophisticated market research capabilities through our CyberTarget Division, which can design and execute customized, real-time market research in an Internet environment and help advertisers better understand their target audience.

Analysts' estimates indicate that, as of the end of 2004, approximately 73 million U.S. households had some form of Internet access, representing about 70% of U.S. households. Of these "Internet households," analysts' estimates indicate that approximately 45 million use dial-up access, 27 million use broadband access and a small percentage use both dial-up and broadband. The number of households using broadband has grown significantly over the last few years, while the number using dial-up has declined. This decline has resulted primarily from users of premium-priced dial-up access migrating to broadband services. Additionally, there has been a migration of premium-priced dial-up users to value-priced services, like those offered by United Online. Although long-term projections vary greatly, most analysts expect these trends to continue.

There are several thousand dial-up access providers in the U.S., with a small number of nationwide providers dominating the competitive landscape. The top four providers, including United Online, currently account for a significant majority of the U.S. dial-up market. All of these providers, except United Online, offer premium-priced services as their primary offering, and two of them, America

Online ("AOL") and EarthLink, have also begun marketing value-priced access services through alternative brands. Providers of broadband access, which includes cable, digital subscriber lines ("DSL"), satellite and wireless, generally offer users faster connections and download speeds than dial-up for higher prices. It has been estimated that, as of early 2004, the average pricing for broadband was approximately $44 per month. However, broadband pricing has been declining and a number of providers offer much more aggressive pricing and discounted packages, particularly when their access offerings are combined with other services including telephone and television. As the Internet evolves, many analysts believe that the convergence of data, voice and video services, among others, will increasingly differentiate broadband from dial-up beyond just faster connection speeds. These trends, along with changes in broadband pricing, will have a significant impact on the rate of broadband adoption in the future and the rate of decline of the dial-up market.

Monthly standard pricing for unlimited dial-up Internet access generally ranges from approximately $7 to $24 per month. Providers distinguish their offerings through a variety of factors. The major premium-priced offerings generally provide, among other features, some or all of the following at no additional cost: telephone technical support, proprietary content, parental controls, spam controls, pop-up blocking capability, multiple account names and email addresses, enhanced email storage, virus protection, firewalls, spyware protection, and accelerator functionality. Accelerator functionality enables users to view certain Web pages more quickly, but it does not offer a faster connection or improve download speeds. In contrast, most of the value-priced offerings offer none or only a few of these features as part of their standard offering and charge an additional fee for specific features. In particular, many 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 smaller providers are also incorporating accelerator into their standard offering at a similar price.

Competitive pressures from both broadband and value-priced services have resulted in significant declines in subscribers to premium-priced dial-up access services. In response, premium-priced services have become increasingly aggressive in both introductory offers and in pricing concessions to obtain and retain subscribers, with some services offering up to six months free in particular market channels. In addition, providers are including enhanced features in their premium-priced services at no additional cost, and AOL and EarthLink, through their Netscape and People PC subsidiaries, have become much more aggressive in marketing their value-priced services. While we believe that the value-priced dial-up access segment will continue to grow in the near term, future declines in broadband pricing, declines in pricing for premium-priced offerings, and enhanced functionality of premium-priced offerings could slow the growth of the value-priced segment, increase the pressure of add-on pricing for accelerator or other services, or cause the segment to decline in the future. These factors could also result in price declines in the value-priced segment, as well as increased use of free months and other discounts.

We believe that future growth of value-priced dial-up access will depend largely on continued consumer price sensitivity as well as from potential changes in user demographics. It is estimated that a significant majority of U.S. dial-up households currently subscribe to dial-up services priced above $15 per month. We believe that the future growth of value-priced dial-up access will be driven, in part, by subscribers of premium-priced services continuing to switch to lower-priced services. We also believe an increase in lower-income households accessing the Internet, where penetration rates have historically been lowest, will also contribute to growth of the value-priced segment. Based on U.S. Census data for 2003, less than 46% of U.S. households making under $35,000 per year had Internet access, whereas Internet penetration in households making more than $100,000 per year was over 90%. We believe these trends, combined with declining average pricing for personal computers, position the value-priced dial-up access segment to grow and increase its share of the U.S. Internet access market, at least in the near term.

Classmates is part of the "online relationships market," which is based on user-generated content and includes personals, dating services and community-based networks. The online relationships market serves consumers who are seeking to create and strengthen relationships with friends, relatives, and acquaintances with common interests or past experiences, and potential romantic partners, or advance their careers through business networking. A recent survey estimated that one-third of Internet users have expressed a strong interest in social and business networking, and we believe that Classmates' business effectively serves a segment of these interests. It is estimated that the online relationships market represented a $537 million market in 2003.

We believe that consumer interest in the online relationships market will be fueled by a number of factors, including increased willingness of consumers to purchase online content, increased consumer awareness of the types of services offered within the online relationships market, and a continued influx of new potential subscribers. There are several trends that we believe could indicate growth opportunities for the segment of the online relationships market in which Classmates participates, including a continual stream of graduates from high schools and colleges. The number of high school students graduating annually in the U.S. is expected to increase from 2.9 million in 2001 to 3.2 million by 2013. Population relocation could also contribute to consumer demand for community-based networks like Classmates. It is estimated that 2.6 million businesses and 41 million people relocate annually within the U.S. and that Americans change jobs an average of eleven times during their lives.

We believe that the online relationships market presents an attractive growth opportunity, both domestically and internationally, and that the addition of Classmates to our family of consumer Internet services positions United Online to capitalize on that opportunity.

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 impacted our ability to grow our revenues in this segment. While we intend to continue to focus our efforts on attempting to grow our Internet access business, we also believe that non-access consumer Internet services present new opportunities to expand our business. As such, during 2004 we began to diversify our business beyond dial-up access through the acquisition of a Web-hosting business and through the acquisition of Classmates. We also developed and launched other new non-access services, including our premium email and premium content services. Additionally, with the recent recovery and growth of Internet advertising, we have begun to focus additional resources toward addressing the online advertising market.

We believe our assets and core competencies, including our brands, consumer and advertiser relationships, customer billing relationships, technologies, database capabilities, internal network infrastructure and personnel, can be leveraged to develop or acquire, market and grow a variety of non-access related services. As such, we actively review a variety of businesses, product lines and technologies which we believe may provide us with the opportunity to leverage our assets and core competencies or which may otherwise be complementary to our existing businesses. In general, we have focused our attention on consumer offerings that are billed and delivered over the Internet and which are recurring subscriptions, although we may pursue opportunities that do not involve these characteristics such as advertising-supported business models. We recently announced our intention to offer a voice over Internet protocol ("VoIP") telephony service by the end of 2005. While we believe that expanding our business into additional non-access Internet services will effectively utilize our existing resources and broaden our market opportunity, we cannot assure you that we will be successful

in developing or acquiring new service offerings, or that any new offerings acquired or developed will be commercially successful.

We generate revenue from billable services and advertising and commerce transactions.

In general, we charge our pay accounts in advance of providing a service, which results in the deferral of billable services revenue to the period in which the services are provided. We have experimented with a variety of pricing plans, both in connection with offers extended to some of our existing accounts and through external marketing channels. We may continue testing a variety of pricing plans in the future to determine their impact on profitability, 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 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.

We are able to designate the initial Web site displayed to users of our access services during an Internet session. This Web site, or "start page," displays sponsored links to a variety of content, products and services, including Internet search. In addition, a significant portion of the Web pages for our free community-based networking and consumer Web-hosting services are dedicated to advertising partners. We also display a toolbar on access users' screens throughout their online access sessions that is always visible regardless of the particular Web site they visit. The toolbar contains Internet search functionality and a variety of buttons, icons and drop-down menus. On our free access services, the toolbar is larger than on our pay access services and also contains banner advertisements. We generate revenues from the start page and the toolbar by displaying, or users clicking on, banner, text-link and other advertisements that are linked to advertisers' and sponsors' Web sites, or by users utilizing functionality offerings such as Internet search services.

We also generate advertising and commerce revenues by users clicking on, or by displaying, rich media advertisements in a small window on the computer screens of certain access users while they initially make a dial-up Internet connection and immediately prior to terminating their connection; by delivering email messages on behalf of advertisers or by users clicking on such messages and being referred to sponsors' Web sites; by enabling customer registrations for partners; and by providing third parties with data analysis capabilities and other market research services, such as surveys and questionnaires.

Our marketing efforts are focused primarily on attracting free and pay accounts, building our brands and up-selling existing free accounts and pay accounts to new and additional pay services. These efforts include television, Internet, sponsorships, radio, print and outdoor advertising as well as a variety of distribution initiatives with partners including retailers, personal computer manufacturers and software providers. We also devote a significant portion of our own advertising inventory to up-sell and cross-sell our pay services. Our internal marketing resources consist of marketing management, media, creative services, Web development, strategic alliance and business development personnel. We produce a significant amount of our marketing materials in-house, using state-of-the-art design computers and graphics program techniques.

In addition to our traditional marketing activities, we view our free services as an effective component of our pay account acquisition strategy. While we have not spent significant marketing resources on our free access services since the Merger and have experienced a decrease both in our active free access account base and in the number of people signing up for free access services, our free access account base continues to be a significant source of new pay access accounts. Our active free access account base and the number of users who convert from our free access services to our pay access services may continue to decrease, particularly if we do not actively promote our free access services or if we impose additional limitations on our free access services in the future.

We also view our free community-based networking and consumer Web-hosting services as important sources of pay subscribers. We seek to up-sell the free account bases of these services to pay versions of each service, as well as to Internet access and other pay services. Our marketing efforts to date for community-based networking and consumer Web hosting have been comprised almost entirely of Internet advertising and paid search.

We use a variety of marketing channels to promote our pay access services. Prospective users can obtain the software necessary to run our 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 to purchase our services or order a CD containing our access software.

We have also entered into a variety of distribution relationships where third parties assist in the marketing of our software and services. Such arrangements include distribution of our Internet access software on CDs at retail locations, the preloading of our software on personal computers and partner CDs, and links to our services on partner Web sites. In most cases we pay a per pay account acquisition fee to these distributors. We intend to continue to evaluate and engage in a variety of distribution channels to enable us to make our services better known and available to a large population of potential users.

We have an internal sales force dedicated to selling our Internet advertising products and services. While we derive a significant portion of our advertising revenues from transactions directly with advertising customers, we also sell a portion of our advertising inventory through wholesale resellers. We have an agreement with Yahoo's Overture subsidiary to place search boxes and links to their search services on certain of our Web properties, and substantially all of our search revenues are derived from this agreement. We have an advertising operations group that works with our sales force to serve and monitor the performance of all of our advertising inventory. In addition, we allocate a portion of our advertising inventory for the purpose of marketing and selling our own services.

The vast majority of our pay accounts pay for our services in advance with a credit card. Other payment options for some of our pay services include electronic check payment, or "ACH", personal check or money order, or via their local telephone bill. Pay access accounts that elect to pay with a personal check or money order are not provisioned until their payment is received and they are required to sign-up for one of our prepaid multi-month billing plans. Fees charged to accounts for live telephone technical support are generally billed to a credit card and are charged on a per-minute basis.

We utilize a combination of third-party and internally developed software applications for customer billing. Customer billing is a complex process and our billing systems must efficiently interface with third-parties' systems, such as our credit card, ACH and telephone bill processors' systems. Our ability to accurately and efficiently bill and collect payment from our accounts is dependent on the successful

operation of our billing systems and various third-party processors. In addition, our ability to offer new pay services or alternative payment plans is dependent on our ability to customize our billing systems.

Our customer relationship management and support infrastructure includes employees at our facilities in Hyderabad, India; Renton, Washington; and Orem, Utah. However, we outsource substantially all of our telephone support to a third party. We offer a variety of online and offline "self-help" tools for our access services, including our offline "Quick Help" software that is loaded onto a user's computer when the access service is initially installed. This tool can be accessed without connecting to our access services and provides valuable troubleshooting for connection-related inquiries. Our Web site, automated email response system and self-help tools are all designed to provide comprehensive tutorials, advice, tips, step-by-step solutions and answers to many frequently asked questions. These self-help tools are also designed to assist users in updating and verifying 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 billed on a per-minute basis and telephone billing support for free. We monitor the effectiveness of our user support functions and measure performance metrics such as average hold time and first call resolution and abandonment rates. Communications with accounts are logged and categorized to enable us to recognize and act on trends. An internal quality assurance team monitors the performance of our vendors and provides feedback to improve their skills and establish consistency throughout our customer support functions.

Our access services are provided through a combination of internally developed and third-party software, industry standard hardware and outsourced network services. We have developed software to enhance the functionality of certain components of our services, including connectivity, Web services, billing, email, customer support and targeted advertising. We maintain data centers in multiple locations around the country with, in many cases, redundant systems to provide high levels of service availability and connectivity. We host the majority of our data center services in third-party co-location facilities and outsource all of our bandwidth and managed modem services.

In order to utilize our access services, accounts are required to install our access client software onto their computers. This software allows us to manage and enhance connection quality, deliver important messages and upgrade accounts with new features and functionality. We also use our client software to collect important data regarding the quality of access connections so that we can quickly resolve network problems that may occur. The client software also contains our internally developed "autodialer" technology that presents accounts with a list of telephone numbers for their area and helps to ensure they are connected to a cost-effective and reliable network. Our client software also enables us to deliver targeted advertising and collect other data.

One key feature of our access client software is the initial download size. We have developed an initial client application that can download to a computer in less than two minutes over a standard dial-up connection. Once installed, a user can create an account with us and connect to the Internet. The remaining portion of our client software is, in certain cases, downloaded to the computer over time during future Internet sessions. Our access client software currently operates on the Windows 95, Windows 98, Windows 2000, Windows ME, Windows XP, Windows NT 4.x, Mac OS IX and X and Lindows operating systems. Our accelerator client software currently operates on each of these platforms with the exception of Mac OS IX and X and Lindows operating systems.

Another major component of our access technology is our server software, written primarily in the Java and C++ development languages, which consists of a group of software applications running on multiple servers that manage each user's account and online sessions. Our server software interacts with the access client software to send and receive information such as authentication data, telephone lists, advertisements and usage data. Database servers store session information, account information and advertisement data. Advertisement targeting servers manage advertising inventory and determine which advertisements accounts will view and which will be downloaded to computers during online sessions. Other major server software systems include our email server software, our accelerated dial-up services server software and our billing server software.

We license a number of our software applications and components. Our principal billing system is based on a software application that is licensed from Portal Software, Inc. and our customer support system utilizes a software application that is licensed from Remedy, a BMC Software, Inc. company. The majority of our database systems run on Oracle database applications and we use Oracle financial and human resources management applications for internal administrative purposes. We license Sun Microsystem's Java technology for our client and server software applications. Our accelerator services use software technology components licensed from SlipStream Data Inc. These licenses generally have terms ranging from at least three additional years to perpetual.

Support for our community-based networking business and its Web services is provided by a combination of open source, internally developed, and licensed software. One of the principal internally developed applications uses Art Technology Group's Dynamo software environment, which we license. Internally developed software is principally written in C++ and, in some cases, Perl. Billing is done by internally developed software. Web pages are served via the Apache open source software system. User information is stored in an Oracle database, which is also used to support Web sites, target advertising, and prepare email campaigns.

Our trademarks, patents, copyrights, domain names and trade secrets are important to the success of our business. We principally rely upon patent, trademark, copyright, trade secret and contract laws to protect our proprietary technology. We have filed numerous patent applications relating to a variety of business methods and technologies. We generally enter into confidentiality or license agreements with our employees, consultants and corporate partners, and generally control access to, and distribution of, our technologies, documentation and other proprietary information. We consider our NetZero, Juno and Classmates trademarks to be very valuable assets, and we have registered all of these trademarks in the United States and certain of them in some other countries.

Competition in the Internet access market is intense. We compete with established online service and content providers such as AOL, AOL's Netscape subsidiary and MSN; independent national ISPs such as EarthLink and its PeoplePC subsidiary; companies combining their resources to offer Internet access in conjunction with other services such as Yahoo! and SBC Internet Services, and AOL and Walmart.com; national communications companies and local exchange carriers such as AT&T WorldNet, Qwest Communications International, Inc. and Verizon; cable companies such as Comcast Corporation, Cox Communications, Inc., Charter Communications, Inc. and Adelphia 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 of use and reliability of software, geographic coverage and scope of features. Other important factors

include a company's ability to dedicate significant resources to market its services, a company's ability to develop and introduce new features and services, and general economic trends affecting the industry. While we believe that we compete favorably with respect to price and many of these other factors, many of our competitors have an advantage over us with respect to specific factors, particularly customer support and scope of features.

The number of U.S. households using broadband has grown significantly over the last few years and is expected to continue to grow. Broadband access, which includes cable, DSL, satellite and wireless, generally offers users faster connection and download speeds than dial-up access for a higher monthly fee, currently ranging from an estimated $27 to $55 per month, although offers for promotional periods have been as low as $10 per month. Pricing for broadband services, particularly for introductory promotional periods, services bundled with cable and telephone services, and services with slower speeds, has been declining and the pricing gap between broadband and premium dial-up access services has been narrowing. As a result of broadband adoption, the total number of dial-up accounts in the U.S. has declined and industry analysts predict that it will continue to decline. The decline in the size of the dial-up market could accelerate significantly if broadband services become widely available at lower prices or if there is significant consumer adoption of broadband applications, such as online video, telephony 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 for it. While we review the possibility of offering broadband services from time to time, we currently do not plan to offer broadband services on a significant scale, which will adversely impact our ability to compete for new subscribers and to retain existing subscribers.

Our success historically has been based on offering dial-up Internet access services at prices below the standard monthly pricing of the premium dial-up services of most of our major competitors. Competition from broadband providers and value-priced providers such as United Online has resulted in significant declines in the number of subscribers to premium priced dial-up services over the last few years. In response to this competition, many competitors have engaged, and are likely to continue to engage, in more aggressive pricing of their dial-up services under their premium-priced brands to obtain and retain users, such as offering up to six free months of service or extended periods of free or discounted pricing. AOL, through its Netscape subsidiary, EarthLink, through its PeoplePC subsidiary, and a number of small providers now offer value-priced services at prices similar to our prices and which are, in some cases, priced below the prices of our services. Partially in response to this competition, we have become more aggressive in offering discounted services and one or more free months of services in order to obtain and retain pay access accounts. Despite these measures, our growth in pay access accounts was limited during the June and September 2004 quarters and our number of access accounts declined in the December 2004 quarter. We believe increased competition, including pricing competition, has adversely impacted our ability to obtain new pay access accounts and to retain our existing accounts, is likely to adversely impact our ability to maintain or grow our pay access account base in the future and may make it more difficult to maintain the current pricing of our services.

Price competition is particularly relevant to our ability to maintain or grow our accelerator subscription base. A significant portion of our growth in revenues and profitability since early 2003 has been attributable to new subscribers to our accelerator services. When we began offering this service in early 2003, many of our competitors either did not offer a similar service or charged substantially more than we charge for a similar service. Since that time, most of our competitors have started offering a similar service, and several competitors have either decreased their price for these services or have bundled these services into their premium services with no additional fee. Many competitors now market these services as a feature of their value-priced services at no additional cost and these services are now offered, in certain cases, at a price point similar to or lower than our standard price. In

particular, Netscape recently began including accelerator functionality in their standard $9.95 offering and PeoplePC has offered their accelerator service combined with their standard value-priced offering at $7.97 per month for introductory periods of up to six months. Increased competition for subscribers to accelerated services could adversely impact our ability to grow or maintain our accelerator subscription base, or could cause us to lower or eliminate our pricing for these services, which would adversely impact our revenues and profits. The growth in the number of subscriptions to this service has been decreasing and is likely to continue to decrease. We cannot assure you that we will be able to continue to maintain or grow our accelerator subscription base at current price levels, or at all.

Premium-priced Internet access services, in general, include a much wider variety of features than are included in value-priced services, and providers of premium-priced services continue to enhance the features of their offerings in response to competition from broadband and value-priced providers. In particular, many 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 offerings are also incorporating certain of these features into their offerings either at no charge or for an incremental fee. While we offer some additional features to users at no charge or for an incremental fee, we do not offer the range of features included in premium-priced services and, in some cases, included in value-priced services. In particular, we do not offer our own proprietary content. In addition, the incremental fees that we charge for certain features are, in some cases, higher than the incremental fee, if any, charged by other value-priced providers for comparable features. Our decision not to offer a broader variety of features and our charges for additional services or features, particularly accelerated functionality and telephone technical support, may adversely impact our ability to compete and undermine our position as a value-priced provider.

Many of our competitors have significantly greater brand recognition than we do and spend significantly more on marketing their services than we spend. As a result, we have not participated as extensively as our major competitors in a variety of large distribution channels, such as being pre-bundled on branded computers or being offered at retail outlets of many different major franchises. To the extent our competitors spend significantly more than we do in these and other channels, we may be at a competitive disadvantage. We cannot assure you that our marketing resources will be sufficient for us to continue to compete effectively with our major competitors.

We expect competition for pay access accounts to continue to intensify and cannot assure you that we will be able to compete successfully. Our inability to compete effectively could require us to make significant revisions to our services and pricing strategies, which could result in increased costs, decreased revenues and the loss of pay access accounts, all of which could materially and adversely impact our financial condition, results of operations and cash flows.

Competition for subscribers in the online relationships market is intense and rapidly evolving. Classmates competes directly against a small number of companies, including Reunion.com and Monster.com's Military.com service, offering similar online social networking services based on work, school and military communities. Classmates also competes directly with many schools, employers, websites, and associations that maintain their own Internet-based alumni information services. In addition to this direct competition, Classmates competes for subscribers with companies offering a wide variety of social networking services including Web portals such as Yahoo! and MSN that maintain chat rooms and other community-based Web sites and personal networking communities such as Friendster and Myspace. Many of these companies offer a wide variety of services in addition to their social networking services, which may provide them with a competitive advantage in obtaining and retaining subscribers. Many consumers maintain simultaneous relationships with multiple communities, including Internet alumni networks and offline associations, and can easily shift their interest or their spending

from one online or offline provider to another. Competitors may be able to launch new businesses serving various communities at relatively low cost. Competitors may be able to hold themselves out as specialists in single communities, making them more appealing to consumers or giving them a perceived competitive advantage. In addition, many social networking services are free or only require payment if certain additional functionality is desired by the user. The continued prevalence of free services could adversely impact our ability to market both our free and pay services.

We believe that the primary competitive factors determining success in the online relationships market include price; the size and demographics of the user base; the ability to attract users who will be of interest to other users; the availability, type and scope of user-generated content on the Web site; scope of services offered; the ease with which users can identify and communicate with other users with particular interests or backgrounds; and a company's ability to dedicate significant resources to market its services. We believe that we compete favorably with respect to most of these factors.

Many competitors in this market have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we do. In addition, Classmates 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 not be willing to retain the same advertising relationship going forward. To the extent we are not able to maintain advertising relationships with these companies, our ability to obtain new Classmates' pay and free accounts would be adversely impacted.

One element of our strategy is to offer a variety of subscription services in addition to Internet access and community-based networking services. We currently offer Web-hosting and domain registration services, as well as standalone premium email services, a broadband accelerator product and prepackaged premium content offering. While these services do not generate a significant portion of our revenues, we are actively investing substantial resources in certain of these services. Competition for users of premium email services is intense. The companies we compete with for Internet access subscribers also compete with us for subscribers to email services. In addition, a number of companies, including Yahoo!, MSN and Google, offer premium email services, in certain cases, for free. The market for premium email services is evolving at a rapid pace and we cannot assure you that our offerings will be competitive or commercially viable. While the personal Web-hosting business is fragmented, a number of significant companies, including Yahoo!, currently compete actively for these users. In addition, the personal Web-hosting industry is very application specific, with many of the competitors focusing on specific applications, such as photo sharing, to generate additional users. We cannot assure you that our premium email offerings or our Web-hosting offerings will be competitive or will generate growth in pay accounts.

In addition, we have evaluated, and expect to continue to evaluate, the development or acquisition of new subscription services. New services may subject us to competition from companies that have more experience with such services, more established brands, and greater financial, marketing and other resources to devote to such services. For example, we intend to develop a new consumer VoIP telephony service. The market for consumer telephone services is extremely competitive and the emergence of VoIP based services will result in increased competition. If we were to offer a VoIP service, our competitors would 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.

We are dependent upon advertising revenues for a significant portion of our revenues and profits. We compete for advertising revenues with major ISPs, content providers, large Web publishers, Web search engine and portal companies, Internet advertising providers, content aggregation companies, social networking Web sites, and various other companies that facilitate Internet advertising. Many of our competitors have longer operating histories, greater name recognition, larger user bases and significantly greater financial, technical and sales and marketing resources than we do. This may allow them to devote greater resources to the development, promotion and sale of their products and services. These competitors may also engage in more extensive research and development, undertake more far-reaching marketing campaigns and adopt more aggressive pricing policies. We also compete with television, radio, cable and print media for a share of advertisers' total advertising budgets. In certain instances, we generate advertising revenues from companies who are also our competitors. In particular, we generate significant advertising revenues from Overture. Overture is a subsidiary of Yahoo! and we compete directly with Yahoo! for Internet access, email and Web-hosting subscribers and indirectly for subscribers to our social networking services. To the extent competitors who are also sources of significant advertising revenue cease to do business with us, our revenues and profits could suffer.

We believe that the primary competitive factors determining success in the market for advertising revenues include the size and demographics of the user base, the ability to efficiently service a large number of advertisers; price and scope of advertising products, the ability to demographically or geographically target users and the reputation and reliability of the underlying service. While we compete favorably with respect to many of these factors, certain of our competitors have an advantage over us with respect to specific factors, particularly the size of user base and ability to efficiently service a large number of advertisers.

We believe that issues relating to the privacy of Internet users and the use of personal information about these users are critically important as commercial uses of the Internet grow. We have adopted and disclosed to our accounts detailed policies outlining the permissible uses of information about users and the extent to which such information may be shared with others. Our users must acknowledge and agree to these policies when registering to use our services. We do not sell or license to third parties any personally identifiable information of users unless they specifically authorize us to do so. However, we use information about our users to improve the quality of our services and the effectiveness of advertising by our advertising customers.

We have experienced seasonal trends in connection with our access services. In general, we have experienced increased Internet usage and increased pay access account subscriptions in the fall and winter when compared to the summer. These trends have had some impact on our advertising revenues, with lower revenues in periods of lower usage, and on our cost of billable services, with telecommunications cost per user lower in periods of lower usage. We do not know if these seasonal trends will continue.

We have foreign operations in India, Sweden and Germany. We have a significant number of employees located in our India office. Our operations in India primarily handle email customer support, product development and quality assurance. A portion of our outsourced customer support is also based in India. Our operations in Sweden and Germany provide community-based networking

services similar to those provided by Classmates. The revenues generated by our operations in Sweden and Germany constitute a very small portion of our total revenues and we do not generate revenues directly from our operations in India. We are dependent, however, upon our internal and outsourced operations in India, and our product development, customer support and quality assurance operations would be severely disrupted if telecommunications issues, political instability or other factors adversely impacted these operations or our ability to communicate with these operations. Any disruption that continued for an extended period of time would likely have a material adverse effect on our ability to service our customers and develop our products since it would take a significant period of time to transition these operations internally or to an outside vendor. If we were to cease our operations in India and transfer these operations to another geographic area, such change could result in increased overhead costs, which could materially and adversely impact our results of operations.

At December 31, 2004, we had 742 employees, 569 of which were located in the United States, 170 of which were located in Hyderabad, India and 3 of which were located in Europe. We had 374 employees in product development, including all employees located in our Hyderabad office, 153 employees in general and administrative, 139 employees in sales and marketing, and 76 employees in network operations. None of these employees is subject to a collective bargaining agreement, and we consider our relationships with employees to be good.

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 furnished to, the SEC as soon as reasonably practicable after such documents are filed with, or furnished to, the SEC.

The public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information filed electronically at www.sec.gov.

Facilities	Location	Approximate Square Feet	Lease Expiration
Principal executive and corporate offices	Woodland Hills, California	112,000	2014
Operations facility	Renton, Washington	61,000	2009
Customer support and technology facility	Hyderabad, India	28,000	2005, 2006
Operations and technology facility	New York, New York	23,000	2010
Operations facility	Orem, Utah	8,000	2007

Our corporate headquarters are located in Woodland Hills, California, and we also maintain offices in Renton, Washington; New York, New York; San Francisco, California; Orem, Utah; Hyderabad, India; Munich, Germany; and Järfälla, Sweden. We believe that our existing facilities are adequate to meet our current requirements and that suitable additional or substitute space will be available as needed to accommodate any physical expansion of our corporate and operations facilities, customer support and technology centers or for any additional sales offices.

On April 20, 2001, Jodi Bernstein, on behalf of himself and 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. and Salomon Smith Barney, Inc. The complaint alleges that the prospectus through which NetZero conducted its initial public offering in September 1999 was materially false and misleading because it failed to disclose, among other things, that (i) the underwriters had solicited and received excessive and undisclosed commissions from certain investors in exchange for which the underwriters allocated to those investors material portions of the restricted number of NetZero shares issued in connection with the offering; and (ii) the underwriters had entered into agreements with customers whereby the underwriters agreed to allocate NetZero shares to those customers in the offering in exchange for which the customers agreed to purchase additional NetZero shares in the aftermarket at pre-determined prices. Plaintiffs are seeking injunctive relief and damages. Additional lawsuits setting forth substantially similar allegations were also served against NetZero on behalf of additional plaintiffs in April and May 2001. The case against NetZero was consolidated with approximately 300 other suits filed against more than 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. In a court order dated February 15, 2005, the Court granted preliminary approval of the issuer defendants' proposed settlement.

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 Chapter 11 of the Bankruptcy Code. The adversary proceeding arose out of a subscriber referral agreement between Juno and the Debtor. In response to the commencement of the adversary proceeding, the Debtor and its principals filed a pleading with the Bankruptcy Court asserting that Juno is obligated to pay compensation in an amount in excess of $80 million as a result of Juno's conduct in connection with the subscriber referral agreement. In addition, a dispute arose between Juno and UUNET Technologies, Inc., an affiliate of MCI WorldCom Network Services, Inc., regarding the value of services provided by UUNET, with UUNET claiming in excess of $1.0 million and Juno claiming less than $0.3 million. On April 25, 2003, Juno, the Committee of Unsecured Creditors, WorldCom and UUNET (allegedly the largest secured creditor) entered into a Stipulation of Settlement. The Stipulation of Settlement provides for the payment by Juno of $5.5 million in final settlement of all claims against Juno, and we have reserved $5.5 million in connection with this proceeding. On September 11, 2003, the court issued an order approving the Stipulation of Settlement. The Debtor has filed a Notice of Appeal of the district court order upholding the decision of the Bankruptcy Court approving the Stipulation of Settlement in the Second Circuit Court of Appeals. The appeal was argued on March 8, 2005 and the parties are awaiting a decision from the court.

On April 27, 2004, plaintiff MyMail Ltd. filed a lawsuit in the United States District Court for the Eastern District of Texas against NetZero, Juno, NetBrands, America Online, Inc., AT&T, EarthLink, Inc., SBC Communications, Inc., and Verizon Communications, Inc. alleging infringement of plaintiff's patent which purports to cover user access to a computer network. An answer and affirmative defenses have been served on behalf of NetZero, Juno and NetBrands. Discovery is continuing and the court has set several dates for the parties to submit briefs on claim construction issues. Trial has been scheduled for October 2005.

The pending lawsuits involve complex questions of fact and law and may require the expenditure of significant funds and the diversion of other resources to defend. Although we do not believe the outcome of the above outstanding legal proceedings, claims and litigation will have a material adverse effect on our business, financial condition, results of operations or cash flows, the results of litigation are inherently uncertain and we cannot assure you that we will not be materially and adversely

impacted by the results of such proceedings. We have established a reserve for the Freewwweb matter discussed above and such reserve is reflected in our consolidated financial statements. We cannot assure you, however, that any of the reserves that have been established for outstanding litigation is sufficient to cover the possible losses from such litigation.

We are subject to various other legal proceedings and claims that arise in the ordinary course of 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 or cash flows. We cannot assure you, however, that such actions will not be material and will not adversely affect our business, financial condition, results of operations or cash flows.

We did not submit any matters to a vote of security holders during the quarter ended December 31, 2004.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock has been quoted on the Nasdaq National Market ("NASDAQ") under the symbol "UNTD" since September 26, 2001. 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. 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, 2002	$	9.19	$	4.75
Quarter ended December 31, 2002		11.69		6.01
Quarter ended March 31, 2003		12.77		8.47
Quarter ended June 30, 2003		18.57		11.41
Six Months Ended December 31, 2003
Quarter ended September 30, 2003	$	29.09	$	16.59
Quarter ended December 31, 2003		24.10		15.71
Year Ended December 31, 2004
Quarter ended March 31, 2004	$	20.97	$	14.93
Quarter ended June 30, 2004		20.75		15.76
Quarter ended September 30, 2004		17.47		8.59
Quarter ended December 31, 2004		12.00		9.10
Period from January 1, 2005 through March 9, 2005	$	11.85	$	9.75

Our Board of Directors authorized a common stock repurchase program that allows us to repurchase shares of our 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, the Board of Directors authorized us to purchase up to an additional $100 million of our common stock through May 31, 2005 under the program, bringing the total amount authorized under the program to $200 million. At December 31, 2004, we had repurchased $125 million of our common stock under the program.

Share repurchases executed under the common stock repurchase program at December 31, 2004 were as follows (in thousands, except per share amounts):

In February 2005, we repurchased 1.3 million shares of our common stock for approximately $14.2 million.

In November 2004, we commenced a modified Dutch auction tender offer to repurchase up to 14.3 million shares of our common stock at a price ranging from $9.00 to $10.50 per share. The tender offer expired in December 2004, and we repurchased 37,754 shares at $10.50 per share, excluding fees and expenses.

The following selected consolidated financial data should be read in conjunction with our consolidated financial 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 year ended December 31, 2004, the six months ended December 31, 2003, and the years ended June 30, 2003 and 2002, and the consolidated balance sheet data at December 31, 2004 and 2003 and June 30, 2003. Such financial data are derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The consolidated statements of operations data for the years ended June 30, 2001 and 2000 and the consolidated balance sheet data at June 30, 2002, 2001 and 2000 are derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K.

			Six Months Ended December 31, 2003(2)		Year Ended June 30,
	Year Ended December 31, 2004(1)
	2003(3)		2002(4)		2001(5)	2000
Consolidated Statements of Operations Data:
Total revenues	$	448,617		$	185,738	$	277,295	$	167,515		$	57,217		$	55,506
Operating income (loss)	$	79,493		$	32,639	$	21,721	$	(53,946	)	$	(215,087	)	$	(98,099	)
Net income (loss)	$	117,480		$	33,327	$	27,792	$	(47,810	)	$	(205,756	)	$	(91,286	)
Net income (loss) per share—basic	$	1.91		$	0.52	$	0.45	$	(0.90	)	$	(6.03	)	$	(4.11	)
Net income (loss) per share—diluted	$	1.81		$	0.48	$	0.41	$	(0.90	)	$	(6.03	)	$	(4.11	)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

community-based networking or email services during the preceding 31 days. Active accounts also include those free hosted Web sites that have received at least one visit during the preceding 90 days.

The following table sets forth (in thousands, except percentages), for the periods presented, an analysis of our pay accounts and subscriptions. A pay account represents a unique billing relationship with a customer who subscribes to one or more of our services. A subscription represents a unique subscription to any individual pay service offered by us including Internet access, community-based networking, accelerator services, premium email, Web-hosting and domain name registration, and premium content subscriptions. Internet access and accelerator are counted as two subscriptions, although most subscribers to the accelerated service currently purchase it bundled with our standard Internet access. Accelerator penetration percentage is calculated by dividing accelerator subscriptions by Internet access subscriptions.

(Mark One)
ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2004
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Delaware		77-0575839
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
21301 Burbank Boulevard Woodland Hills, California		91367
(Address of principal executive office)		(Zip Code)
(818) 287-3000 (Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.0001 per share Preferred Stock Purchase Rights

Period		Shares Repurchased(1)	Average Price Paid per Share		Maximum Approximate Dollar Value that May Yet be Purchased Under the Program
August 2001		138	$	1.67	$	9,770
November 2001		469		1.77		8,940
February 2002		727		3.38		6,485
August 2002		288		7.51		27,820
February 2003		193		9.43		26,005
May 2003		281		13.51		22,207
November 2003		2,024		19.76		48,706
February 2004		2,887		16.86		—
May 2004		—		—		100,000
August 2004		2,657		9.41		74,989

	Total	9,664	$	12.94

	December 31,				June 30,
	2004		2003		2003		2002		2001		2000
Consolidated Balance Sheet Data:
Total assets	$	519,852	$	307,879	$	280,676	$	233,593	$	183,863	$	325,958
Non-current liabilities	$	81,207	$	—	$	—	$	—	$	3,314	$	10,278