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TABLE OF CONTENTS

Table of Contents

 

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



FORM 10-Q

(Mark One)

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2015
Or
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                        to                         

Commission file number 000-33367



UNITED ONLINE, INC.
(Exact name of Registrant as specified in its charter)

Delaware   77-0575839
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer Identification No.)

21255 Burbank Boulevard, Suite 400
Woodland Hills, California
(Address of principal executive office)

 

91367
(Zip Code)

(818) 287-3000
(Registrant's telephone number, including area code)

Not applicable
(Former name, former address and former fiscal year, if changed since last report)



        Indicate by check mark whether the registrant (1) has filed all 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 whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o   Accelerated filer ý   Non-accelerated filer o
(Do not check if a smaller
reporting company)
  Smaller reporting company o

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

        There were 14,818,359 shares of the Registrant's common stock outstanding at October 30, 2015.


Table of Contents


UNITED ONLINE, INC.

INDEX TO FORM 10-Q

For the Quarter Ended September 30, 2015

 
   
   
  Page  

PART I.

     

FINANCIAL INFORMATION

    4  



 


Item 1.


 


Unaudited Condensed Consolidated Financial Statements:


 

 


4

 



 

 

 


Unaudited Condensed Consolidated Balance Sheets at September 30, 2015 and December 31, 2014


 

 


4

 



 

 

 


Unaudited Condensed Consolidated Statements of Operations for the Quarters and Nine Months Ended September 30, 2015 and 2014


 

 


5

 



 

 

 


Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the Quarters and Nine Months Ended September 30, 2015 and 2014


 

 


6

 



 

 

 


Unaudited Condensed Consolidated Statement of Stockholders' Equity for the Nine Months Ended September 30, 2015


 

 


7

 



 

 

 


Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014


 

 


8

 



 

 

 


Notes to Unaudited Condensed Consolidated Financial Statements


 

 


9

 



 


Item 2.


 


Management's Discussion and Analysis of Financial Condition and Results of Operations


 

 


29

 



 


Item 3.


 


Quantitative and Qualitative Disclosures About Market Risk


 

 


51

 



 


Item 4.


 


Controls and Procedures


 

 


52

 


PART II.


 

 

 


OTHER INFORMATION


 

 


53

 



 


Item 1.


 


Legal Proceedings


 

 


53

 



 


Item 1A.


 


Risk Factors


 

 


53

 



 


Item 2.


 


Unregistered Sales of Equity Securities and Use of Proceeds


 

 


54

 



 


Item 3.


 


Defaults Upon Senior Securities


 

 


55

 



 


Item 4.


 


Mine Safety Disclosures


 

 


55

 



 


Item 5.


 


Other Information


 

 


55

 



 


Item 6.


 


Exhibits


 

 


55

 


SIGNATURES


 

 


56

 

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

        This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the United States Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the "safe harbor" created by those sections. Forward-looking statements are based on our current expectations, estimates and projections about our operations, industry, financial condition, performance, results of operations, and liquidity. Statements containing words such as "may," "believe," "anticipate," "expect," "intend," "plan," "project,"

2


Table of Contents

"projections," "business outlook," "estimate," or similar expressions constitute forward-looking statements. These forward-looking statements include, but are not limited to, statements about the expected benefits of our acquisitions or divestitures; our strategies; our pursuit of long-term growth initiatives; our future financial performance and results, revenues, segment metrics, operating expenses, market trends, liquidity, cash flows and uses of cash, dividends, capital expenditures, depreciation and amortization, tax payments, foreign currency exchange rates, and hedging arrangements; our ability to invest in initiatives; our plans for services and products, pricing, and marketing efforts; competition; litigation and investigations and potential settlements thereof; and the impact of accounting pronouncements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance, time frames or achievements to be materially different from those set forth or contemplated in the forward-looking statements, including, among others, the factors disclosed in the section entitled "Risk Factors" in this Quarterly Report on Form 10-Q and in the section entitled "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2014 and additional factors that accompany the related forward-looking statements in this Quarterly Report on Form 10-Q and our other filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect our estimates and assumptions only as of the date hereof. Such forward-looking statements are not guarantees of future performance or results and reported results should not be considered an indication of future performance. We undertake no obligation to update these forward-looking statements to reflect the impact of events or circumstances arising after the date hereof, unless required by law.

3


Table of Contents

PART I—FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

        


UNITED ONLINE, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

 
  September 30,
2015
  December 31,
2014
 

Assets

             

Current assets:

             

Cash and cash equivalents

  $ 99,650   $ 78,634  

Accounts receivable, net of allowance

    10,567     14,112  

Inventories, net

    7,985     5,413  

Deferred tax assets, net

    186     192  

Other current assets

    13,074     6,415  

Assets of discontinued operations

        5,672  

Total current assets

    131,462     110,438  

Property and equipment, net

    13,724     15,040  

Deferred tax assets, net

    1,349     1,549  

Goodwill

    47,143     46,862  

Intangible assets, net

    428     734  

Other assets

    1,082     1,161  

Assets of discontinued operations

        32,811  

Total assets

  $ 195,188   $ 208,595  

Liabilities and Stockholders' Equity

             

Current liabilities:

             

Accounts payable

  $ 10,161   $ 9,707  

Accrued liabilities

    9,871     18,545  

Member redemption liability

    7,070     7,287  

Deferred revenue

    14,142     16,168  

Deferred tax liabilities, net

    344     529  

Liabilities of discontinued operations

        31,545  

Total current liabilities

    41,588     83,781  

Member redemption liability

    10,994     11,360  

Deferred revenue

    17     17  

Deferred tax liabilities, net

    1,623     805  

Other liabilities

    6,017     5,766  

Liabilities of discontinued operations

        5,153  

Total liabilities

    60,239     106,882  

Commitments and contingencies

             

Stockholders' equity:

             

Common stock

    1     1  

Additional paid-in capital

    221,257     215,302  

Accumulated other comprehensive loss

    (3,326 )   (3,158 )

Accumulated deficit

    (82,983 )   (110,432 )

Total stockholders' equity

    134,949     101,713  

Total liabilities and stockholders' equity

  $ 195,188   $ 208,595  

   

The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.

4


Table of Contents


UNITED ONLINE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 
  Quarter Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2015   2014   2015   2014  

Revenues

  $ 36,289   $ 39,989   $ 111,011   $ 123,906  

Operating expenses:

                         

Cost of revenues

    14,735     14,615     44,389     45,849  

Sales and marketing

    6,586     6,621     21,098     24,005  

Technology and development

    3,330     3,963     11,562     13,251  

General and administrative

    8,861     11,991     28,667     37,300  

Amortization of intangible assets

    102     105     308     317  

Restructuring and other exit costs

    (20 )   521     944     2,744  

Total operating expenses

    33,594     37,816     106,968     123,466  

Operating income

    2,695     2,173     4,043     440  

Interest income

    150     101     331     292  

Other income, net

    320     257     390     324  

Income before income taxes

    3,165     2,531     4,764     1,056  

Provision for income taxes

    1,284     1,542     2,439     5,346  

Income (loss) from continuing operations

    1,881     989     2,325     (4,290 )

Income (loss) from discontinued operations, net of tax

    24,070     (783 )   25,124     (8,141 )

Net income (loss)

  $ 25,951   $ 206   $ 27,449   $ (12,431 )

Income allocated to participating securities

    (962 )   (12 )   (1,139 )    

Net income (loss) attributable to common stockholders

  $ 24,989   $ 194   $ 26,310   $ (12,431 )

Basic net income (loss) per common share:

                         

Continuing operations

  $ 0.06   $ 0.07   $ 0.08   $ (0.30 )

Discontinued operations

    1.63     (0.06 )   1.72     (0.58 )

Basic net income (loss) per common share

  $ 1.69   $ 0.01   $ 1.80   $ (0.88 )

Shares used to calculate basic net income (loss) per common share

    14,770     14,178     14,622     14,069  

Diluted net income (loss) per common share:

                         

Continuing operations

  $ 0.06   $ 0.07   $ 0.08   $ (0.30 )

Discontinued operations

    1.63     (0.06 )   1.71     (0.58 )

Diluted net income (loss) per common share

  $ 1.69   $ 0.01   $ 1.79   $ (0.88 )

Shares used to calculate diluted net income (loss) per common share

    14,789     14,180     14,693     14,069  

   

The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.

5


Table of Contents


UNITED ONLINE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (LOSS)

(in thousands)

 
  Quarter Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2015   2014   2015   2014  

Net income (loss)

  $ 25,951   $ 206   $ 27,449   $ (12,431 )

Other comprehensive income (loss):

                         

Cash flow hedges:

                         

Changes in net gains (losses) on derivatives, net of tax benefit of $0 and $19 for the quarters ended September 30, 2015 and 2014 and $0 and $0 for the nine months ended September 30, 2015 and 2014, respectively

    (3 )   (22 )   4     6  

Derivative settlement (gains) losses reclassified into earnings, net of tax provision of $0 and $1 for the quarters ended September 30, 2015 and 2014 and $0 and $0 for the nine months ended September 30, 2015 and 2014, respectively

    9     (27 )   48     (25 )

Other hedges:

                         

Changes in net gains on derivatives, net of tax benefit of $0 and $3 for the quarters ended September 30, 2015 and 2014 and $0 and $0 for the nine months ended September 30, 2015 and 2014, respectively

        189         193  

Foreign currency translation

    109     (634 )   (220 )   (528 )

Other comprehensive income (loss)

    115     (494 )   (168 )   (354 )

Comprehensive income (loss)

  $ 26,066   $ (288 ) $ 27,281   $ (12,785 )

   

The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.

6


Table of Contents


UNITED ONLINE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(in thousands)

 
  Common Stock    
  Accumulated
Other
Comprehensive
Loss
   
   
 
 
  Additional
Paid-In
Capital
  Accumulated
Deficit
  Total
Stockholders'
Equity
 
 
  Shares   Amount  

Balance at December 31, 2014

    14,289   $ 1   $ 215,302   $ (3,158 ) $ (110,432 ) $ 101,713  

Exercise of stock options

    143         1,693             1,693  

Issuance of common stock through ESPP

    94         936             936  

Vesting of restricted stock units

    254                      

Repurchases of common stock

            (1,433 )               (1,433 )

Stock-based compensation

            4,759             4,759  

Other comprehensive loss

                (168 )       (168 )

Net income

                    27,449     27,449  

Balance at September 30, 2015

    14,780   $ 1   $ 221,257   $ (3,326 ) $ (82,983 ) $ 134,949  

   

The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.

7


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UNITED ONLINE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 
  Nine Months Ended
September 30,
 
 
  2015   2014  

Cash flows from operating activities:

             

Net income (loss)

  $ 27,449   $ (12,431 )

Less: Income (loss) from discontinued operations, net of tax

    25,124     (8,141 )

Income (loss) from continuing operations

    2,325     (4,290 )

Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities:

             

Depreciation and amortization

    4,984     5,276  

Stock-based compensation

    4,595     6,048  

Provision for doubtful accounts receivable

    10     (43 )

Deferred taxes, net

    759     788  

Excess tax benefits from equity awards

        (51 )

Other, net

    287     732  

Changes in operating assets and liabilities, net of effects of acquisitions and discontinued operations:

             

Accounts receivable, net

    3,399     6,070  

Inventories, net

    (2,925 )   3,002  

Other assets

    (3,530 )   580  

Accounts payable and accrued liabilities

    (7,575 )   1,620  

Member redemption liability

    (583 )   (2,055 )

Deferred revenue

    (1,171 )   (1,327 )

Other liabilities

    251     (1,306 )

Net cash provided by operating activities from continuing operations

    826     15,044  

Cash flows from investing activities:

             

Purchases of property and equipment

    (4,260 )   (5,306 )

Purchases of investments

        (44 )

Proceeds from sales of investments

    186     126  

Proceeds from sales of assets, net

        30  

Net cash used for investing activities from continuing operations

    (4,074 )   (5,194 )

Cash flows from financing activities:

             

Proceeds from exercises of stock options

    1,693      

Proceeds from employee stock purchase plans

    936     826  

Repurchases of common stock

    (1,433 )   (2,380 )

Excess tax benefits from equity awards

        51  

Net cash provided by (used for) financing activities from continuing operations

    1,196     (1,503 )

Effect of foreign currency exchange rate changes on cash and cash equivalents

    (969 )   (1,173 )

Net cash provided by (used for) discontinued operations:

             

Operating activities

    (2,198 )   5,246  

Investing activities

    26,075     (4,392 )

Financing activities

        5  

Effect of a change in cash and cash equivalents on discontinued operations

    160     (81 )

Net cash from discontinued operations

    24,037     778  

Change in cash and cash equivalents

    21,016     7,952  

Cash and cash equivalents, beginning of period

    78,634     68,047  

Cash and cash equivalents, end of period

  $ 99,650   $ 75,999  

   

The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.

8


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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, ACCOUNTING POLICIES, AND RECENT ACCOUNTING PRONOUNCEMENTS

Description of Business

        United Online, Inc. (together with its subsidiaries, "United Online" or the "Company"), through its operating subsidiaries, provides consumer services and products over the Internet under a number of brands, including NetZero, Juno, MyPoints, StayFriends, and Trombi.

        Effective in the first quarter of 2015, the Company modified how it reports segment information to the Company's Chief Operating Decision Maker ("CODM") because the information regularly reviewed by the CODM had changed. As a result of the changes, the Company now reports three operating segments to the CODM, including the Communications segment, as well as separately reporting the operating results of the Commerce & Loyalty and Social Media segments (which in prior periods were reported to the CODM together as the Content & Media segment). This change has been reflected through a retroactive revision of prior-period segment information to conform to the newly-defined segment information.

        As discussed above, the Company reports its business in three reportable segments: Communications, Commerce & Loyalty and Social Media. The Company's primary Communications service is Internet access. The Company's Commerce & Loyalty segment promotes commerce and user engagement through its loyalty marketing service and provides a complete web, browser and mobile shopping experience through a portfolio of online portals, apps, and browser extensions. The Company's Social Media segment provides social networking services and products. On a combined basis, the Company's web properties attract a significant number of Internet users and the Company offers a broad array of Internet marketing services for advertisers.

        In August 2015, the Company consummated the sale of its Classmates domestic business unit to Intelius Holdings, Inc. The purchase price received for Classmates domestic business unit was approximately $30 million in cash, subject to a post-closing working capital adjustment. The Stock Purchase Agreement for the sale included customary representations, warranties and covenants of each party, some of which survive the closing of the transaction for a period of time. Accordingly, the results of operations, the financial condition and the cash flows of Classmates domestic business unit have been presented as discontinued operations for all periods presented.

        The Company's corporate headquarters are located in Woodland Hills, California, and the Company also maintains offices in San Francisco, California; Schaumburg, Illinois; Fort Lee, New Jersey; Erlangen, Germany; Berlin, Germany; and Hyderabad, India.

Basis of Presentation

        The Company's unaudited condensed consolidated financial statements for the quarters and nine months ended September 30, 2015 and 2014 have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), including those for interim financial information, and with the instructions for Quarterly Reports on Form 10-Q and Article 10 of Regulation S-X issued by the Securities and Exchange Commission (the "SEC"). Accordingly, such financial statements do not include all of the information and note disclosures required by GAAP for complete financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are

9


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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, ACCOUNTING POLICIES, AND RECENT ACCOUNTING PRONOUNCEMENTS (Continued)

necessary for a fair statement of the results for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for any future periods. The unaudited condensed consolidated balance sheet at December 31, 2014 was derived from the Company's audited consolidated financial statements, filed on March 2, 2015, with the SEC in the Company's Annual Report on Form 10- K for the year ended December 31, 2014, but does not include all of the disclosures required by GAAP. The unaudited condensed consolidated balance sheet at December 31, 2014 was revised for the purposes of discontinued operations presentation.

        The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities and the reported amounts of revenues and expenses. Actual results could differ from these estimates and assumptions. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2014 included in the Company's Annual Report on Form 10-K.

        The most significant areas of the unaudited condensed consolidated financial statements that require management judgment include the Company's revenue recognition, goodwill, definite-lived intangible assets and other long-lived assets, member redemption liability, income taxes, and legal contingencies.

        The Company believes that its existing cash and cash equivalents and cash generated from operations will be sufficient to fund its working capital requirements, capital expenditures and other obligations through at least the next 12 months.

Accounting Policies

        Refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2014 for a discussion of the Company's significant accounting policies.

Recent Accounting Pronouncements

        In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-08, Presentation of Financial Statements and Property, Plant and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The core principle of the guidance raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the new definition of a discontinued operation. The amendments in this ASU are effective prospectively for disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The Company adopted the standard with no material impact on its consolidated financial statements.

        In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in this ASU will be effective

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, ACCOUNTING POLICIES, AND RECENT ACCOUNTING PRONOUNCEMENTS (Continued)

for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The amendments should be applied retrospectively. In July 2015, the FASB approved a one-year deferral of the effective date with early adoption permitted. The Company intends to adopt the standard effective January 1, 2018 and is currently assessing the impact of this update on its consolidated financial statements.

        In June 2014, the FASB issued ASU No. 2014-12, Compensation—Stock Compensation: Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The core principle of the guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period should be treated as a performance condition. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. Entities may apply the amendments in ASU No. 2014-12 either: (a) prospectively to all awards granted or modified after the effective date; or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The Company does not expect this update to have a material impact on its consolidated financial statements.

        In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. The update provides GAAP guidance on management's responsibility in evaluating whether there is substantial doubt about a company's ability to continue as a going concern and about related footnote disclosures. The amendments in this update are effective for annual periods ending after December 15, 2016, and for annual periods and interim periods thereafter. Early adoption is permitted. The Company does not expect this update to have a material impact on its consolidated financial statements.

        In April 2015, the FASB issued ASU No. 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. The update provides GAAP guidance on evaluating the accounting for fees paid by a customer in a cloud computing arrangement. The amendments in this update also provide a basis for evaluating whether a cloud computing arrangement includes a software license. The amendments in this update are effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. The Company is currently assessing the impact of this update on its consolidated financial statements.

        In June 2015, the FASB issued ASU No. 2015-10, Technical Corrections and Improvements. The update contains amendments that will affect a wide variety of topics in the Codification. The amendments in this update represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The Company does not expect this update to have a material impact on its consolidated financial statements.

        In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. The amendments in this update more closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards (IFRS). The

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, ACCOUNTING POLICIES, AND RECENT ACCOUNTING PRONOUNCEMENTS (Continued)

amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments in this update should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently assessing the impact of this update on its consolidated financial statements.

2. SEGMENT INFORMATION

        Effective in the first quarter of 2015, the Company modified how it reports segment information to the Company's CODM as the information regularly reviewed by the CODM had changed. As a result of the changes, the Company now reports three operating segments to the CODM, including the Communications segment, as well as separately reporting the operating results of the Commerce & Loyalty and Social Media segments (which, in prior periods, were reported to the CODM together as the Content & Media segment). Further, as a result of the sale of Classmates domestic business unit, the Social Media segment results exclude the Classmates domestic business unit (which, in prior periods, was reported as part of the Social Media segment). These changes have been reflected through a retroactive revision of prior-period segment information to conform to the newly-defined segment information.

        Segment revenues and segment income (loss) from operations (which excludes depreciation and amortization of intangible assets) were as follows (in thousands):

 
  Quarter Ended September 30, 2015  
 
  Communications   Commerce & Loyalty   Social Media   Total  

Services revenues

  $ 15,201   $   $ 5,332   $ 20,533  

Products revenues

    959         130     1,089  

Advertising and other revenues

    5,306     9,175     186     14,667  

Total segment revenues

  $ 21,466   $ 9,175   $ 5,648   $ 36,289  

Segment income (loss) from operations

  $ 7,339   $ (219 ) $ 2,355   $ 9,475  

 

 
  Quarter Ended September 30, 2014  
 
  Communications   Commerce & Loyalty   Social Media   Total  

Services revenues

  $ 17,097   $   $ 6,908   $ 24,005  

Products revenues

    1,397         266     1,663  

Advertising and other revenues

    6,801     7,166     354     14,321  

Total segment revenues

  $ 25,295   $ 7,166   $ 7,528   $ 39,989  

Segment income from operations

  $ 7,309   $ 263   $ 3,746   $ 11,318  

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SEGMENT INFORMATION (Continued)


 
  Nine Months Ended September 30, 2015  
 
  Communications   Commerce & Loyalty   Social Media   Total  

Services revenues

  $ 48,592   $   $ 16,157   $ 64,749  

Products revenues

    3,734         661     4,395  

Advertising and other revenues

    16,612     24,580     675     41,867  

Total segment revenues

  $ 68,938   $ 24,580   $ 17,493   $ 111,011  

Segment income (loss) from operations

  $ 18,798   $ (216 ) $ 7,197   $ 25,779  

 

 
  Nine Months Ended September 30, 2014  
 
  Communications   Commerce & Loyalty   Social Media   Total  

Services revenues

  $ 51,874   $   $ 21,576   $ 73,450  

Products revenues

    4,838         758     5,596  

Advertising and other revenues

    20,452     23,120     1,188     44,760  

Total segment revenues

  $ 77,164   $ 23,120   $ 23,522   $ 123,806  

Segment income (loss) from operations

  $ 21,262   $ (1,272 ) $ 10,342   $ 30,332  

        A reconciliation of segment revenues to consolidated revenues was as follows (in thousands):

 
  Quarter Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2015   2014   2015   2014  

Segment revenues:

                         

Communications

  $ 21,466   $ 25,295   $ 68,938   $ 77,164  

Commerce & Loyalty

    9,175     7,166     24,580     23,120  

Social Media

    5,648     7,528     17,493     23,522  

Total segment revenues

    36,289     39,989     111,011     123,806  

Corporate revenues

                100  

Consolidated revenues

  $ 36,289   $ 39,989   $ 111,011   $ 123,906  

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SEGMENT INFORMATION (Continued)

        A reconciliation of segment operating expenses (which excludes depreciation and amortization of intangible assets) to consolidated operating expenses was as follows (in thousands):

 
  Quarter Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2015   2014   2015   2014  

Segment operating expenses:

                         

Communications

  $ 14,127   $ 17,986   $ 50,140   $ 55,902  

Commerce & Loyalty

    9,394     6,903     24,796     24,392  

Social Media

    3,293     3,782     10,296     13,180  

Total segment operating expenses

    26,814     28,671     85,232     93,474  

Depreciation

    1,487     1,601     4,676     4,959  

Amortization of intangible assets

    102     105     308     317  

Unallocated corporate expenses

    5,191     7,439     16,752     24,716  

Consolidated operating expenses

  $ 33,594   $ 37,816   $ 106,968   $ 123,466  

        A reconciliation of segment income (loss) from operations (which excludes depreciation and amortization of intangible assets) to consolidated income before income taxes was as follows (in thousands):

 
  Quarter Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2015   2014   2015   2014  

Segment income (loss) from operations:

                         

Communications

  $ 7,339   $ 7,309   $ 18,798   $ 21,262  

Commerce & Loyalty

    (219 )   263     (216 )   (1,272 )

Social Media

    2,355     3,746     7,197     10,342  

Total segment income from operations

    9,475     11,318     25,779     30,332  

Corporate revenues

                100  

Depreciation

    (1,487 )   (1,601 )   (4,676 )   (4,959 )

Amortization of intangible assets

    (102 )   (105 )   (308 )   (317 )

Unallocated corporate expenses

    (5,191 )   (7,439 )   (16,752 )   (24,716 )

Interest income

    150     101     331     292  

Other income, net

    320     257     390     324  

Income before income taxes

  $ 3,165   $ 2,531   $ 4,764   $ 1,056  

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SEGMENT INFORMATION (Continued)

        Depreciation expense by segment was as follows (in thousands):

 
  Quarter Ended
September 30,
  Nine Months
Ended
September 30,
 
 
  2015   2014   2015   2014  

Communications

  $ 633   $ 767   $ 2,097   $ 2,248  

Commerce & Loyalty

    376     344     1,102     1,260  

Social Media

    315     393     978     1,149  

Unallocated corporate

    163     97     499     302  

Total depreciation expense

  $ 1,487   $ 1,601   $ 4,676   $ 4,959  

        Amortization of intangible assets by segment was as follows (in thousands):

 
  Quarter Ended
September 30,
  Nine Months
Ended
September 30,
 
 
  2015   2014   2015   2014  

Commerce & Loyalty

  $ 71   $ 71   $ 214   $ 213  

Social Media

    31     34     94     104  

Total amortization expense

  $ 102   $ 105   $ 308   $ 317  

        Geographic revenues are attributed to countries based on the principal location of the Company's entities from which those revenues were generated. Geographic information for revenues was as follows (in thousands):

 
  Quarter Ended
September 30,
  Nine Months
Ended
September 30,
 
 
  2015   2014   2015   2014  

United States

  $ 30,640   $ 32,460   $ 93,515   $ 100,382  

Germany

    4,670     6,160     14,482     19,118  

Europe, excluding Germany

    979     1,369     3,014     4,406  

Consolidated revenues

  $ 36,289   $ 39,989   $ 111,011   $ 123,906  

        Geographic information for long-lived assets, which consist of property and equipment and other assets, was as follows (in thousands):

 
  September 30,
2015
  December 31,
2014
 

United States

  $ 11,775   $ 13,042  

Germany

    2,922     2,928  

Other

    109     231  

Total long-lived assets

  $ 14,806   $ 16,201  

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SEGMENT INFORMATION (Continued)

        Segment assets are not reported to, or used by, the Company's CODM to allocate resources to, or assess performance of, the segments and therefore, total segment assets have not been disclosed.

3. BALANCE SHEET COMPONENTS

Inventories, Net

        Inventories, net, consisted of the following (in thousands):

 
  September 30,
2015
  December 31,
2014
 

Work-in-process

  $   $ 411  

Finished goods

    7,985     5,002  

Total

  $ 7,985   $ 5,413  

Other Current Assets

        Other current assets consisted of the following (in thousands):

 
  September 30,
2015
  December 31,
2014
 

Insurance recovery receivable

  $ 4,247   $  

Income taxes receivable

    2,945     881  

Prepaid expenses

    2,853     2,154  

Prepaid insurance

    181     1,319  

Other

    2,848     2,061  

Total

  $ 13,074   $ 6,415  

Accrued Liabilities

        Accrued liabilities consisted of the following (in thousands):

 
  September 30,
2015
  December 31,
2014
 

Employee compensation and related liabilities

  $ 7,529   $ 10,927  

Non-income taxes payable

    505     527  

Income taxes payable

    418     5,204  

Customer deposits

    159     79  

Reserve for legal settlements

    110     30  

Separation payments for an executive officer

        859  

Accrued restructuring and other exit costs

        200  

Other

    1,150     719  

Total

  $ 9,871   $ 18,545  

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. BALANCE SHEET COMPONENTS (Continued)

Other Liabilities

        Other liabilities consisted of the following (in thousands):

 
  September 30,
2015
  December 31,
2014
 

Income taxes payable

  $ 3,717   $ 3,571  

Other

    2,300     2,195  

Total

  $ 6,017   $ 5,766  

Accumulated Other Comprehensive Loss

        The components of accumulated other comprehensive loss were as follows (in thousands):

 
  Gains (Losses)
on Cash Flow
Hedging
Instruments,
Net of Tax
  Gains on
Other
Hedging
Instruments,
Net of Tax
  Foreign
Currency
Translation
  Accumulated
Other
Comprehensive
Loss
 

Balance at December 31, 2014

  $ (49 ) $ 168   $ (3,277 ) $ (3,158 )

Other comprehensive income (loss) before reclassifications

    4         (220 )   (216 )

Amounts reclassified from accumulated other comprehensive loss

    48             48  

Other comprehensive income (loss)          

    52         (220 )   (168 )

Balance at September 30, 2015

  $ 3   $ 168   $ (3,497 ) $ (3,326 )

        All amounts reclassified from accumulated other comprehensive loss were related to losses on derivatives classified as cash flow hedges. These reclassifications impacted technology and development expenses in the unaudited consolidated statement of operations.

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. GOODWILL, INTANGIBLE ASSETS AND OTHER LONG-LIVED ASSETS

Goodwill

        The changes in goodwill by reportable segment were as follows (in thousands):

 
  Communications   Commerce &
Loyalty
  Social
Media
  Total  

Balance at December 31, 2014:

                         

Goodwill (excluding impairment charges)

  $ 13,227   $ 49,122   $ 54,613   $ 116,962  

Accumulated impairment charges

    (5,738 )   (26,606 )   (37,756 )   (70,100 )

Goodwill at December 31, 2014

    7,489     22,516     16,857     46,862  

Foreign currency translation

            281     281  

Balance at September 30, 2015:

                         

Goodwill (excluding impairment charges)

    13,227     49,122     54,894     117,243  

Accumulated impairment charges

    (5,738 )   (26,606 )   (37,756 )   (70,100 )

Goodwill at September 30, 2015

  $ 7,489   $ 22,516   $ 17,138   $ 47,143  

Intangible Assets, Net

        Intangible assets, net, consisted of the following (in thousands):

 
  September 30, 2015  
 
  Gross Value   Accumulated
Amortization
  Net  

Pay accounts and free accounts

  $ 56,455   $ (56,170 ) $ 285  

Customer contracts and relationships

    7,900     (7,900 )    

Trademarks and trade names

    11,548     (11,405 )   143  

Software and technology

    5,072     (5,072 )    

Rights, content and intellectual property

    2,694     (2,694 )    

Total

  $ 83,669   $ (83,241 ) $ 428  

 

 
  December 31, 2014  
 
  Gross Value   Accumulated
Amortization
  Net  

Pay accounts and free accounts

  $ 56,473   $ (56,096 ) $ 377  

Customer contracts and relationships

    7,900     (7,900 )    

Trademarks and trade names

    11,548     (11,191 )   357  

Software and technology

    5,079     (5,079 )    

Rights, content and intellectual property

    2,703     (2,703 )    

Total

  $ 83,703   $ (82,969 ) $ 734  

        Amortization expense related to intangible assets for the quarter and nine months ended September 30, 2015 was $0.1 million and $0.3 million, respectively. Amortization expense related to intangible assets for the quarter and nine months ended September 30, 2014 was $0.1 million and $0.3 million, respectively.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. GOODWILL, INTANGIBLE ASSETS AND OTHER LONG-LIVED ASSETS (Continued)

        Estimated future intangible assets amortization expense at September 30, 2015 was as follows (in thousands):

 
   
   
  Year Ending
December 31,
 
 
   
  Oct-Dec
2015
 
 
  Total   2016   2017   2018  

Estimated amortization of intangible assets

  $ 428   $ 101   $ 183   $ 83   $ 61  

5. DERIVATIVE INSTRUMENTS

        The fair and notional values of outstanding derivative instruments were as follows (in thousands):

 
   
  Fair Value of
Derivative Instruments
  Notional Value of
Derivative Instruments
 
 
  Balance Sheet Location   September 30,
2015
  December 31,
2014
  September 30,
2015
  December 31,
2014
 

Derivative assets

  Other current assets   $ 61   $ 149   $ 341   $ 1,594  

Derivative liabilities

  Accrued liabilities   $   $ 18   $   $ 867  

6. FAIR VALUE MEASUREMENTS

Financial Assets and Derivative Instruments

        The following table presents information about financial assets and derivative instruments that were required to be measured at fair value on a recurring basis (in thousands):

 
  Estimated Fair Value  
 
  September 30, 2015  
Description
  Level 1   Level 2   Total  

Assets:

                   

Money market funds

  $ 65,772   $   $ 65,772  

Time deposits

        6,706     6,706  

Derivative assets

        61     61  

Total

  $ 65,772   $ 6,767   $ 72,539  

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. FAIR VALUE MEASUREMENTS (Continued)


 
  Estimated Fair Value  
 
  December 31, 2014  
Description
  Level 1   Level 2   Total  

Assets:

                   

Money market funds

  $ 42,741   $   $ 42,741  

Time deposits

        8,041     8,041  

Derivative assets

        149     149  

Total

  $ 42,741   $ 8,190   $ 50,931  

Liabilities:

                   

Derivative liabilities

  $   $ 18   $ 18  

Total

  $   $ 18   $ 18  

7. STOCKHOLDERS' EQUITY

Common Stock Repurchases

        In May 2001, the Company's Board of Directors authorized a common stock repurchase program (the "Program") that allows the Company to repurchase shares of its common stock through open market or privately negotiated transactions based on prevailing market conditions and other factors. From time to time since then, the Board of Directors has increased the amount authorized for repurchase under this Program and has extended the Program, which is currently extended through December 31, 2015. From August 2001 through December 2014, the Company had repurchased $150.2 million of its common stock under the Program. There were no repurchases under the Program during the nine months ended September 30, 2015 and, at September 30, 2015, the authorization remaining under the Program was $80.0 million.

        Shares withheld upon the vesting of restricted stock units and upon the issuance of stock awards to pay minimum statutory employee withholding taxes are considered common stock repurchases, but are not counted as purchases against the Program. Upon vesting of most restricted stock units or issuance of stock awards, we currently do not collect the minimum statutory withholding taxes from employees. Instead, we automatically withhold, from the restricted stock units that vest and from the stock awards that are issued, the portion of those shares with a fair market value equal to the amount of the minimum statutory employee withholding taxes due, which is accounted for as a repurchase of common stock. We then pay the minimum statutory employee withholding taxes in cash. The amounts remitted in the nine months ended September 30, 2015 and 2014 were $1.4 million and $2.4 million, respectively, for which the Company withheld 0.1 million and 0.2 million shares of common stock, respectively, that were underlying the restricted stock units that vested.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. STOCK-BASED COMPENSATION PLANS

Stock-Based Compensation

        The following table summarizes the stock-based compensation that has been included in the following line items within the unaudited condensed consolidated statements of operations (in thousands):

 
  Quarter Ended
September 30,
  Nine Months
Ended
September 30,
 
 
  2015   2014   2015   2014  

Operating expenses:

                         

Cost of revenues

  $ 44   $ 69   $ 155   $ 153  

Sales and marketing

    125     121     365     387  

Technology and development

    159     215     592     638  

General and administrative

    1,185     1,432     3,483     4,870  

Total stock-based compensation

  $ 1,513   $ 1,837   $ 4,595   $ 6,048  

Restricted Stock Units

        The following table summarizes activity for restricted stock units (in thousands):

Nonvested at December 31, 2014

    805  

Granted

    271  

Vested

    (357 )

Forfeited/canceled

    (174 )

Nonvested at September 30, 2015

    545  

Stock Options

        The following table summarizes activity for stock options (in thousands):

Outstanding at December 31, 2014

    947  

Granted

    545  

Exercised

    (143 )

Forfeited/canceled

    (338 )

Outstanding at September 30, 2015

    1,011  

9. INCOME TAXES

        The Company's provision for income taxes for the quarter ended September 30, 2015 differed from the U.S. federal statutory tax rate of 34% primarily due to a provision for income taxes related to the Company's foreign operations, an income tax accrual related to certain goodwill assets and a tax accrual related to reserves for uncertain tax positions. For the quarter and nine months ended September 30, 2015, the Company utilized the actual effective tax rate (discrete method) in determining the domestic income tax expense, rather than the annual effective tax rate method, as

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. INCOME TAXES (Continued)

allowed under Accounting Standards Codification ("ASC") 740-270-30-36, Income Taxes—Interim Reporting.

        The Company's tax provision has an unusual relationship to domestic pre-tax loss primarily due to the existence of a full deferred tax asset valuation allowance. This circumstance generally results in a zero net tax provision since the income tax expense or benefit that would otherwise be recognized is offset by the change in the valuation allowance. However, the tax expense recorded in the quarter and nine months ended September 30, 2015 included an accrual of a non-cash tax expense of approximately $0.3 million and $1.0 million respectively, in connection with the tax amortization of certain goodwill assets that is not available to offset existing deferred tax assets (termed "naked credits"). Specifically, the Company does not consider the deferred tax liabilities related to certain goodwill assets when determining the need for a valuation allowance.

        In March 2015, the Company reached an audit settlement with the Internal Revenue Service related to tax years 2009 through 2012 and, in connection with such settlement, the Company remitted approximately $6.4 million to the Internal Revenue Service in the quarter ended June 30, 2015, for which the Company had previously established a reserve.

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. NET INCOME (LOSS) PER COMMON SHARE

        The following table sets forth the computation of basic and diluted net income (loss) per common share (in thousands, except per share amounts):

 
  Quarter Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2015   2014   2015   2014  

Numerator:

                         

Income (loss) from continuing operations

  $ 1,881   $ 989   $ 2,325   $ (4,290 )

Income allocated to participating securities

    (962 )   (12 )   (1,139 )    

Income (loss) from continuing operations available to common stockholders

    919     977     1,186     (4,290 )

Income (loss) from discontinued operations, net of tax, available to common stockholders

    24,070     (783 )   25,124     (8,141 )

Net income (loss) attributable to common stockholders

  $ 24,989   $ 194   $ 26,310   $ (12,431 )

Denominator:

                         

Weighted-average common shares

    14,770     14,178     14,622     14,069  

Add: Dilutive effect of non-participating securities

    19     2     71      

Shares used to calculate diluted net income (loss) per common share

    14,789     14,180     14,693     14,069  

Basic net income (loss) per common share:

                         

Continuing operations

  $ 0.06   $ 0.07   $ 0.08   $ (0.30 )

Discontinued operations

    1.63     (0.06 )   1.72     (0.58 )

Basic net income (loss) per common share

  $ 1.69   $ 0.01   $ 1.80   $ (0.88 )

Diluted net income (loss) per common share:

                         

Continuing operations

  $ 0.06   $ 0.07   $ 0.08   $ (0.30 )

Discontinued operations

    1.63     (0.06 )   1.71     (0.58 )

Diluted net income (loss) per common share

  $ 1.69   $ 0.01   $ 1.79   $ (0.88 )

        The diluted net income (loss) per common share computations exclude stock options and restricted stock units that are antidilutive. Weighted-average antidilutive shares for the quarter and nine months ended September 30, 2015 were 0.9 million and 1.1 million, respectively. Weighted-average antidilutive shares for the quarter and nine months ended September 30, 2014 were 1.2 million and 1.3 million, respectively.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. RESTRUCTURING AND OTHER EXIT COSTS

        Restructuring and other exit costs were a result of management's decision to streamline operations, prioritize resources for growth initiatives and increase profitability. The following tables summarize restructuring and other exit costs (in thousands):

Accrued restructuring and other exit costs at December 31, 2014

  $ 200  

Restructuring and other exit costs

    944  

Cash paid for restructuring and other exit costs

    (1,144 )

Accrued restructuring and other exit costs at September 30, 2015

  $  

 

 
  Nine Months Ended September 30, 2015  
 
  Communications   Commerce &
Loyalty
  Corporate   Total  

Restructuring and other exit costs:

                         

Employee termination costs

  $ 913   $ (2 ) $ 33   $ 944  

Total restructuring and other exit costs

  $ 913   $ (2 ) $ 33   $ 944  

 

 
  Nine Months Ended September 30, 2014  
 
  Communications   Commerce &
Loyalty
  Corporate   Total  

Restructuring and other exit costs:

                         

Employee termination costs

  $ 262   $ 1,093   $ 1,022   $ 2,377  

Facility closure and relocation costs

    9     358         367  

Total restructuring and other exit costs

  $ 271   $ 1,451   $ 1,022   $ 2,744  

12. CONTINGENCIES—LEGAL MATTERS

        In June 2011, Memory Lane, Inc., a California corporation, filed a complaint in United States District Court, Central District of California, against Classmates International, Inc., Classmates Online, Inc. and Classmates, Inc. (then known as Memory Lane, Inc.) ("Classmates"), alleging false designation of origin under the Lanham Act, 15 U.S.C. section 1125, and state and common law unfair competition. The complaint included requests for an award of damages and for preliminary and permanent injunctive relief. Notwithstanding the request for preliminary injunctive relief, no motion for such relief was filed. Classmates responded to the complaint in September 2011. In October 2011, the plaintiff amended its complaint to, among other things, dismiss Classmates International, Inc. and add United Online, Inc. as a defendant. In February 2014, the jury issued a verdict for the defendants, concluding that the defendants did not infringe plaintiff's trademark and the court entered judgment in favor of the defendants. In March 2014 plaintiff filed a notice of appeal of the judgment in favor of defendants. The plaintiff's appeal brief was filed in November 2014. Classmates' opposition brief was filed in December 2014. Plaintiff's reply brief was filed in March 2015. Classmates' reply brief was filed in April 2015.

        In 2010, Classmates, Inc., and Florists' Transworld Delivery, Inc. and FTD.COM Inc. (together, the "FTD Parties") received subpoenas from the Attorney General for the State of Kansas and the Attorney General for the State of Maryland, respectively. These subpoenas were issued on behalf of a

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. CONTINGENCIES—LEGAL MATTERS (Continued)

Multistate Work Group that consists of the Attorneys General for the following states: Alabama, Alaska, Delaware, Florida, Idaho, Illinois, Kansas, Maine, Maryland, Michigan, Nebraska, New Mexico, New Jersey, North Dakota, Ohio, Oregon, Pennsylvania, South Dakota, Texas, Vermont, Washington and Wisconsin (the "Multistate Work Group"). The inquiry concerned certain post-transaction sales practices in which these companies previously engaged with certain third-party vendors and certain auto-renewal practices of Classmates, Inc. In May 2015, Classmates, Inc. and the FTD Parties entered into settlement agreements with each member of the Multistate Work Group. Under the terms of the settlement agreements, Classmates, Inc. and the FTD Parties denied all wrong-doing and agreed to certain injunctive relief and to two areas of monetary relief: (1) a payment from Classmates, Inc. and the FTD Parties in the aggregate amount of $8 million to be distributed amongst the states in the Multistate Work Group (with approximately $5.18 million to be paid by Classmates, Inc. and approximately $2.82 million to be paid by the FTD Parties); and (2) Classmates, Inc. funding a $3 million restitution program covering eligible consumers in the states in the Multistate Work Group, with any restitution not paid to consumers being paid to such states. The Classmates, Inc. portion of the payments described above relating to the settlement agreements was paid by Classmates, Inc. in July 2015. In October 2015, the Company received insurance proceeds in the amount of $4.2 million related to the Multistate Work Group inquiry and accompanying legal fees. Of this amount, $2.8 million was allocated to United Online, Inc. and $1.4 million was allocated to FTD, which was remitted to FTD in October 2015.

        In November 2013, we consummated the separation of our company into two independent, publicly-traded companies: United Online, Inc., which continues to operate our current business segments, and FTD Companies, Inc., which includes the domestic and international operations of our former FTD segment (the "FTD Spin-Off Transaction"). Prior to the completion of the FTD Spin-Off Transaction, the Company and FTD Companies, Inc. entered into a Separation and Distribution Agreement (as amended, the "Separation Agreement"). The Separation Agreement addresses, among other things, the control and settlement of certain litigation matters that relate to the Company (and certain subsidiaries) and FTD Companies, Inc. (and certain subsidiaries), including the matters related to the Multistate Work Group investigation. The Separation Agreement also provides for the allocation of liabilities and expenses between the Company and FTD Companies, Inc. with respect to these matters. It also establishes procedures with respect to claims subject to indemnification, insurance claims and related matters.

        In August 2015, the Company consummated the sale of its Classmates domestic business unit. Pursuant to the Stock Purchase Agreement for the disposition, the Company retains some liability for certain legal matters relating to the Classmates domestic business unit, including matters related to the Multistate Work Group investigation and the Memory Lane, Inc. lawsuit.

        The Company cannot predict the outcome of these or any other legal actions or governmental investigations or their potential implications for its business. In addition, the Company, at times, has negotiated resolutions related to certain legal actions and governmental investigations. There are no assurances that additional legal actions or governmental investigations will not be instituted in connection with the Company's current or former business practices.

        The Company records a liability when it believes that it is both probable that a loss will be incurred, and the amount of loss can be reasonably estimated. The Company evaluates, at least quarterly, developments in its legal matters that could affect the amount of liability that has been

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. CONTINGENCIES—LEGAL MATTERS (Continued)

previously accrued, and makes adjustments as appropriate. Significant judgment is required to determine both probability and the estimated amount. The Company may be unable to estimate a possible loss or range of possible loss due to various reasons, including, among others: (i) if the damages sought are indeterminate; (ii) if the proceedings are in early stages; (iii) if there is uncertainty as to the outcome of pending appeals, motions, or settlements; (iv) if there are significant factual issues to be determined or resolved; and (v) if there are novel or unsettled legal theories presented. In such instances, there is considerable uncertainty regarding the ultimate resolution of such matters, including a possible eventual loss, if any. At September 30, 2015, the Company had reserves totaling $0.1 million for estimated losses related to legal matters. With respect to the legal matters described above that are ongoing, the Company has determined, based on its current knowledge, that the amount of possible loss or range of loss, including any reasonably possible losses in excess of amounts already accrued, is not reasonably estimable. However, legal matters are inherently unpredictable and subject to significant uncertainties, some of which are beyond the Company's control. As such, even though the Company intends to vigorously defend itself with respect to its legal matters, there can be no assurance that the final outcome of these matters will not materially and adversely affect the Company's business, financial condition, results of operations, or cash flows.

13. DISCONTINUED OPERATIONS

Sale of Classmates Domestic Business Unit

        In August 2015, the Company consummated the sale of its Classmates domestic business unit to Intelius Holdings, Inc. The Classmates domestic business unit was previously included as part of the Social Media segment results. Accordingly, the results of operations, financial condition and cash flows of the Classmates domestic business unit have been presented as discontinued operations for all periods presented.

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. DISCONTINUED OPERATIONS (Continued)

        Revenues and income from discontinued operations related to the Classmates domestic business unit were as follows (in thousands):

 
  Quarter Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2015   2014   2015   2014  

Revenues

  $ 5,755   $ 13,094   $ 31,523   $ 39,605  

Operating expenses:

                         

Cost of revenues

    963     2,347     5,488     7,582  

Sales and marketing

    2,162     4,669     12,696     15,686  

Technology and development

    754     2,563     5,678     8,113  

General and administrative

    (1,924 )   2,886     1,514     11,934  

Amortization of intangible assets

    186     1,455     987     4,006  

Restructuring and other exit costs

        11     3     375  

Total operating expenses

    2,141     13,931     26,366     47,696  

Operating income (loss)

    3,614     (837 )   5,157     (8,091 )

Other income, net

        (88 )       (88 )

Gain on disposal of discontinued operations

    20,787         20,787      

Income (loss) from discontinued operations before income taxes

    24,401     (925 )   25,944     (8,179 )

Provision for (benefit from) income taxes

    331     (142 )   820     (38 )

Income (loss) from discontinued operations, net of tax

  $ 24,070   $ (783 ) $ 25,124   $ (8,141 )

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. DISCONTINUED OPERATIONS (Continued)

        The major classes of assets and liabilities included in discontinued operations related to the Classmates domestic business unit were as follows (in thousands):

 
  December 31,
2014
 

Assets

       

Current assets:

       

Cash and cash equivalents

  $ 161  

Accounts receivable, net

    397  

Inventory, net

    3  

Deferred tax assets

    3,746  

Other current assets

    1,365  

Total current assets

    5,672  

Property and equipment, net

    7,740  

Goodwill

    16,152  

Intangible assets, net

    8,714  

Other assets

    205  

Total assets

  $ 38,483  

Liabilities

       

Current liabilities:

       

Accounts payable

  $ 2,591  

Accrued liabilities

    12,284  

Deferred revenue

    16,670  

Total current liabilities

    31,545  

Deferred revenue

    1,897  

Deferred tax liabilities, net

    3,256  

Total liabilities

  $ 36,698  

        The Company recorded $0.2 million and $0.3 million of transaction-related costs in the quarter and nine months ended September 30, 2015, respectively, in connection with the sale of the Classmates domestic business unit, which was included in discontinued operations in the unaudited condensed consolidated statements of operations. During the quarter ended September 30, 2015, the Company recorded an insurance recovery gain of $2.8 million related to the Classmates' portion of the Multistate Work Group inquiry and accompanying legal fees, which was included in discontinued operations in the consolidated statements of operations.

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ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Overview

        United Online, through its operating subsidiaries, provides consumer services and products over the Internet under a number of brands, including NetZero, Juno, MyPoints, StayFriends, and Trombi.

        Effective in the first quarter of 2015, we modified how we report segment information to our Chief Operating Decision Maker ("CODM") as the information regularly reviewed by the CODM had changed. As a result of the changes, we now report three operating segments to the CODM, including the Communications segment, as well as separately reporting the operating results of the Commerce & Loyalty and Social Media segments (which, in prior periods, were reported to the CODM together as the Content & Media segment). This change has been reflected through a retroactive revision of prior-period segment information to conform to the newly-defined segment information.

        On August 11, 2015, we completed the sale of all of the stock of our wholly-owned subsidiary, Classmates, Inc. to Intelius Holdings, Inc. The purchase price received for the Classmates domestic business unit was approximately $30 million in cash, subject to a post-closing working capital adjustment. The Stock Purchase Agreement for the sale included customary representations, warranties and covenants of each party, some of which survive the closing of the transaction for a period of time. Accordingly, the results of operations, the financial condition and the cash flows of the Classmates domestic business unit have been presented as discontinued operations for all periods presented. In October 2015, we initiated a process to sell StayFriends, our European websites for social networking products and services. In line with the strategy to sell our former Classmates domestic business unit, StayFriends is not aligned with our longer-term objective to return United Online to growth.

        Our three reportable segments consist of the following:

Segment
  Services and Products
Communications   Internet access services and devices, including dial-up, mobile broadband, DSL, email, Internet security, web hosting, and voice services

Commerce & Loyalty

 

Loyalty marketing service, shopping through online portals, apps and browser extensions

Social Media

 

Social networking services and products

        We generate revenues from three primary sources:

    Services revenues.  Services revenues in our Communications and Social Media segments are derived from selling subscriptions to consumers, who are typically billed in advance for the entire subscription term.

    Products revenues.  Products revenues in our Communications segment are derived from the sale of mobile broadband devices and mobile phones, as well as the related shipping and handling fees. Products revenues in our Social Media segment are derived from the sale of yearbooks, including the related shipping and handling fees.

    Advertising and other revenues.  Advertising and other revenues are primarily derived from various advertising, marketing and media-related initiatives in all of our segments. Commerce & Loyalty

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      segment revenues include fees generated when members complete online transactions, when emails are transmitted to members and when members respond to emails. Commerce & Loyalty segment revenues also include revenues from the sale of physical gift cards and electronic gift codes.

Key Business Metrics

        We review a number of key business metrics to help us monitor our performance and trends affecting our businesses, and to develop forecasts and budgets. These key measures include the following:

        Pay Accounts.    We generate a significant portion of our revenues from our pay accounts, which represent one of the most important drivers of our business model. A pay account is defined as a member who has paid for a subscription to a Communications or Social Media service, and whose subscription has not terminated or expired. A subscription provides the member with access to our service for a specific term (for example, a month or a year) and may be renewed upon the expiration of each term. One-time purchases of our services, with the exception of our free and prepaid mobile broadband service, are not considered subscriptions and thus, are not included in the pay accounts metric. A pay account does not equate to a unique subscriber because one subscriber could have several pay accounts. In addition, at any point in time, our pay account base includes customers who previously purchased prepaid mobile broadband service and have been inactive for 90 days or less, as well as a number of accounts receiving a free period of service as either a promotion or retention tool, such as the subscribers receiving our free mobile broadband service, and a number of accounts that have notified us that they are terminating their service but whose service remains in effect. In general, the key business metrics that affect our revenues from our pay accounts base include the number of pay accounts and the average monthly revenue per pay account. A pay account generally becomes a free account following the expiration or termination of the related subscription.

        ARPU.    We monitor average monthly revenue per pay account ("ARPU"), which is calculated by dividing services revenues generated from the pay accounts of our Communications or Social Media segment, as applicable, for a period (after translation into U.S. Dollars) by the average number of segment pay accounts for that period, divided by the number of months in that period. The average number of pay accounts is the simple average of the number of pay accounts at the beginning and the end of a period. ARPU may fluctuate significantly from period to period as a result of a variety of factors, including, but not limited to, the extent to which promotional, discounted or retention pricing is used to attract new, or retain existing, paying subscribers; changes in the mix of pay services and the related pricing plans; increases or decreases in the price of our services; the timing of pay accounts being added or removed during a period; and for the Social Media segment, the average foreign currency exchange rate between the U.S. Dollar and the Euro.

        Churn.    To evaluate the retention characteristics of our membership base, we also monitor the percentage of pay accounts that terminate or expire, which we refer to as our average monthly churn rate. Our average monthly churn rate for a period is calculated as the total number of pay accounts that terminated or expired in a period divided by the average number of pay accounts for that period, divided by the number of months in that period. Our average monthly churn percentage may fluctuate from period to period due to our mix of subscription terms, which affects the timing of subscription expirations, and other factors. We make certain normalizing adjustments to the calculation of our churn percentage for periods in which we add a significant number of pay accounts due to acquisitions. For our Communications segment, our churn calculation does not include accounts canceled during the first 30 days of service other than dial-up accounts that have upgraded from free accounts, but the calculation does include customers who previously purchased prepaid mobile broadband service and, at any time during the period, reached 90 consecutive days of inactivity. A number of such accounts

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nevertheless will be included in our pay account totals at any given measurement date. Subscribers who cancel one pay service but subscribe to another pay service are not necessarily considered to have canceled a pay account depending on the services and, as such, our segment churn rates are not necessarily indicative of the percentage of subscribers canceling any particular service.

        Active Accounts.    We monitor the number of active accounts among our membership base. Communications segment active accounts include all Communications segment pay accounts as of the date presented combined with the number of free dial-up Internet access and email accounts that logged on to our services at least once during the preceding 31 days. Social Media segment active accounts are defined as the sum of all pay accounts as of the date presented; and the monthly average for the period of all free accounts who have visited our social networking websites at least once during the period. Segment active accounts for six-month, nine-month and annual periods are calculated as a simple average of the quarterly active accounts for each respective segment.

        In general, we count and track pay accounts and free accounts by unique member identifiers. Users have the ability to register for separate services under separate brands and member identifiers independently. We do not track whether a pay account has purchased more than one of our services unless the account uses the same member identifier. As a result, total active accounts may not represent total unique users.

        The pay accounts, churn and ARPU metrics for the Communications segment may fluctuate significantly from period to period due to various factors, including, but not limited to, the number of mobile broadband pay accounts, which have a higher churn rate and ARPU.

        The pay accounts and ARPU metrics for the Social Media segment may fluctuate significantly from period to period due to various factors, including, but not limited to, the extent to which discounted pricing is offered in prior and current periods, and the churn rate.

        Gross Merchandise Sales.    Gross merchandise sales is the total dollar value of Commerce & Loyalty member purchases during the reporting period, excluding applicable taxes and net of refunds, directly on the MyPoints site, on third-party sites accessed through the MyPoints portal, or on other Commerce & Loyalty properties. We include the purchases and refunds that are reported by our partners on or before the 15th calendar day following the end of the reporting period, to allow our partners to report purchases completed within the reporting period. We consider this metric to be an important indicator of member engagement with our Commerce & Loyalty properties.

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        The following table sets forth our key business metrics:

 
  Quarter Ended   Nine Months Ended
September 30,
 
 
  September 30,
2015
  June 30,
2015
  March 31,
2015
  December 31,
2014
  September 30,
2014
 
 
  2015   2014  

Consolidated:

                                           

Revenues (in thousands)

  $ 36,289   $ 37,562   $ 37,160   $ 41,813   $ 39,989   $ 111,011   $ 123,906  

Communications:

                                           

Segment revenues (in thousands)

  $ 21,466   $ 23,208   $ 24,264   $ 26,001   $ 25,295   $ 68,938   $ 77,164  

% of consolidated revenues

    59 %   62 %   65 %   62 %   63 %   62 %   62 %

Pay accounts (in thousands):

                                           

Internet access

    256     274     294     301     314     256     314  

Other

    177     179     184     189     193     177     193  

Total pay accounts

    433     453     478     490     507     433     507  

Segment churn

    2.8 %   3.0 %   3.1 %   2.8 %   2.8 %   3.0 %   3.0 %

ARPU

  $ 11.30   $ 11.54   $ 11.56   $ 11.14   $ 10.91   $ 11.55   $ 10.74  

Segment active accounts (in millions)

    1.0     1.0     1.0     1.0     1.1     1.0     1.1  

Commerce & Loyalty:

                                           

Segment revenues (in thousands)

  $ 9,175   $ 8,260   $ 7,145   $ 9,098   $ 7,166   $ 24,580   $ 23,120  

% of consolidated revenues

    25 %   22 %   19 %   22 %   18 %   22 %   19 %

Gross merchandise sales (in thousands)

    52,771   $ 54,436   $ 50,669   $ 68,284   $ 47,793   $ 157,876   $ 142,646  

Social Media:

                                           

Segment revenues (in thousands)

  $ 5,648   $ 6,094   $ 5,751   $ 6,714   $ 7,528   $ 17,493   $ 23,522  

% of consolidated revenues

    16 %   16 %   15 %   16 %   19 %   16 %   19 %

Pay accounts (in thousands)

    1,063     1,095     1,127     1,162     1,200     1,063     1,200  

Segment churn

    1.9 %   2.0 %   2.3 %   2.1 %   1.9 %   2.1 %   2.2 %

ARPU

  $ 1.65   $ 1.60   $ 1.60   $ 1.79   $ 1.90   $ 1.61   $ 1.93  

Segment active accounts (in millions)

    2.9     3.2     3.3     3.2     3.4     3.1     3.9  

Average currency exchange rate:

                                           

EUR to USD

    1.11     1.11     1.13     1.25     1.33     1.12     1.36  

Results of Operations

        The following tables set forth selected historical unaudited condensed consolidated statements of operations and segment information data, which should be read in conjunction with Liquidity and Capital Resources, Contractual Obligations, and Other Commitments included in this Item 2, as well as Quantitative and Qualitative Disclosures About Market Risk and the unaudited condensed consolidated financial statements and Notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

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Quarter and Nine Months Ended September 30, 2015 compared to Quarter and Nine Months Ended September 30, 2014

Consolidated Results

        Unaudited condensed consolidated statement of operations information was as follows (in thousands):

 
  Quarter Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2015   2014   2015   2014  

Revenues

  $ 36,289   $ 39,989   $ 111,011   $ 123,906  

Operating expenses:

                         

Cost of revenues

    14,735     14,615     44,389     45,849  

Sales and marketing

    6,586     6,621     21,098     24,005  

Technology and development

    3,330     3,963     11,562     13,251  

General and administrative

    8,861     11,991     28,667     37,300  

Amortization of intangible assets

    102     105     308     317  

Restructuring and other exit costs

    (20 )   521     944     2,744  

Total operating expenses

    33,594     37,816     106,968     123,466  

Operating income

    2,695     2,173     4,043     440  

Interest income

    150     101     331     292  

Other income, net

    320     257     390     324  

Income before income taxes

    3,165     2,531     4,764     1,056  

Provision for income taxes

    1,284     1,542     2,439     5,346  

Income (loss) from continuing operations

    1,881     989     2,325     (4,290 )

Income (loss) from discontinued operations, net of tax

    24,070     (783 )   25,124     (8,141 )

Net income (loss)

  $ 25,951   $ 206   $ 27,449   $ (12,431 )

Revenues

 
  Quarter Ended
September 30,
  Change   Nine Months Ended
September 30,
  Change  
 
  2015   2014   $   %   2015   2014   $   %  
 
  (in thousands, except percentages)
 

Revenues

  $ 36,289   $ 39,989   $ (3,700 )   (9 )% $ 111,011   $ 123,906   $ (12,895 )   (10 )%

Revenues as a percentage of total segment revenues:

                                                 

Communications

    59.2 %   63.3 %               62.1 %   62.3 %            

Commerce & Loyalty

    25.3 %   17.9 %               22.1 %   18.7 %            

Social Media

    15.6 %   18.8 %               15.8 %   19.0 %            

        The decrease in consolidated revenues for the quarter ended September 30, 2015, compared to the quarter ended September 30, 2014, was primarily due to a $3.8 million decrease in revenues from our Communications segment and a $1.9 million decrease in revenues from our Social Media segment, partially offset by a $2.0 million increase in revenues from our Commerce & Loyalty segment.

        The decrease in consolidated revenues for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014, was primarily due to an $8.2 million decrease in revenues from our Communications segment and a $6.0 million decrease in revenues from our Social Media segment, partially offset by a $1.5 million increase in revenues from our Commerce & Loyalty segment.

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Cost of Revenues

 
  Quarter Ended
September 30,
  Change   Nine Months
Ended
September 30,
  Change  
 
  2015   2014   $   %   2015   2014   $   %  
 
  (in thousands, except percentages)
 

Cost of revenues

  $ 14,735   $ 14,615   $ 120     1 % $ 44,389   $ 45,849   $ (1,460 )   (3 )%

Cost of revenues as a percentage of total segment cost of revenues:

                                                 

Communications

    57.0 %   72.8 %               64.5 %   70.6 %            

Commerce & Loyalty

    39.9 %   22.4 %               31.8 %   24.5 %            

Social Media

    3.1 %   4.8 %               3.7 %   4.9 %            

        The increase in consolidated cost of revenues for the quarter ended September 30, 2015, compared to the quarter ended September 30, 2014, was due to a $2.6 million increase in cost of revenues associated with our Commerce & Loyalty segment, largely offset by a $2.0 million decrease in cost of revenues associated with our Communications segment and a $0.2 million decrease in cost of revenues associated with our Social Media segment.

        The decrease in consolidated cost of revenues for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014, was primarily due to a $3.2 million decrease in cost of revenues associated with our Communications segment, a $0.5 million decrease in cost of revenues associated with our Social Media segment and a $0.5 million decrease in depreciation expense. These decreases were partially offset by a $2.9 million increase in cost of revenues associated with our Commerce & Loyalty segment.

Sales and Marketing

 
  Quarter Ended
September 30,
  Change   Nine Months
Ended
September 30,
  Change  
 
  2015   2014   $   %   2015   2014   $   %  
 
  (in thousands, except percentages)
 

Sales and marketing

  $ 6,586   $ 6,621   $ (35 )   (1 )% $ 21,098   $ 24,005   $ (2,907 )   (12 )%

Sales and marketing expenses as a percentage of total segment sales and marketing expenses:

                                                 

Communications

    45.6 %   47.5 %               47.1 %   45.4 %            

Commerce & Loyalty

    34.0 %   28.5 %               31.4 %   28.9 %            

Social Media

    20.4 %   24.0 %               21.5 %   25.7 %            

        Consolidated sales and marketing expenses was relatively flat for the quarter ended September 30, 2015, compared to the quarter ended September 30, 2014.

        The decrease in consolidated sales and marketing expenses for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014, was primarily due to a $1.6 million decrease in sales and marketing expenses associated with our Social Media segment, a $1.0 million decrease in sales and marketing expenses associated with our Communications segment and a $0.3 million decrease in sales and marketing expenses associated with our Commerce & Loyalty segment.

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Technology and Development

 
  Quarter Ended
September 30,
  Change   Nine Months
Ended
September 30,
  Change  
 
  2015   2014   $   %   2015   2014   $   %  
 
  (in thousands, except percentages)
 

Technology and development

  $ 3,330   $ 3,963   $ (633 )   (16 )% $ 11,562   $ 13,251   $ (1,689 )   (13 )%

Technology and development expenses as a percentage of total segment technology and development expenses:

                                                 

Communications

    52.3 %   63.8 %               63.0 %   60.7 %            

Commerce & Loyalty

    23.1 %   19.5 %               19.5 %   20.9 %            

Social Media

    24.6 %   16.7 %               17.5 %   18.5 %            

        The decrease in consolidated technology and development expenses for the quarter ended September 30, 2015, compared to the quarter ended September 30, 2014, was primarily due to a decrease in technology and development expenses associated with our Communications segment.

        The decrease in consolidated technology and development expenses for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014, was primarily due to a $0.7 million decrease in technology and development expenses associated with our Communications segment, a $0.4 million decrease in technology and development expenses associated with our Commerce & Loyalty segment and a $0.4 million decrease in technology and development expenses associated with our Social Media segment.

General and Administrative

 
  Quarter Ended
September 30,
  Change   Nine Months
Ended
September 30,
  Change  
 
  2015   2014   $   %   2015   2014   $   %  
 
  (in thousands, except percentages)
 

General and administrative

  $ 8,861   $ 11,991   $ (3,130 )   (26 )% $ 28,667   $ 37,300   $ (8,633 )   (23 )%

General and administrative expenses as a percentage of total segment general and administrative expenses:

                                                 

Communications

    49.2 %   57.8 %               52.8 %   55.6 %            

Commerce & Loyalty

    25.7 %   20.4 %               24.6 %   22.8 %            

Social Media

    25.2 %   21.8 %               22.6 %   21.6 %            

        The decrease in consolidated general and administrative expenses for the quarter ended September 30, 2015, compared to the quarter ended September 30, 2014, was primarily due to a $2.1 million decrease in unallocated corporate expenses and a $0.9 million decrease in general and administrative expenses associated with our Communications segment.

        The decrease in consolidated general and administrative expenses for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014, was primarily due to a $6.9 million decrease in unallocated corporate expenses, a $1.5 million decrease in general and administrative expenses associated with our Communications segment, a $0.3 million decrease in general and administrative expenses associated with our Social Media segment, and a $0.3 million decrease in general and administrative expenses associated with our Commerce & Loyalty segment. These decreases were partially offset by a $0.4 million increase in depreciation expense.

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Amortization of Intangible Assets

 
  Quarter
Ended
September 30,
  Change   Nine Months
Ended
September 30,
  Change  
 
  2015   2014   $   %   2015   2014   $   %  
 
  (in thousands, except percentages)
 

Amortization of intangible assets

  $ 102   $ 105   $ (3 )   (3 )% $ 308   $ 317   $ (9 )   (3 )%

        Amortization of intangible assets was essentially flat for the quarter ended September 30, 2015, compared to the quarter ended September 30, 2014, as well as for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014.

Restructuring and Other Exit Costs

 
  Quarter
Ended
September 30,
  Change   Nine Months
Ended
September 30,
  Change  
 
  2015   2014   $   %   2015   2014   $   %  
 
  (in thousands, except percentages)
 

Restructuring and other exit costs

  $ (20 ) $ 521   $ (541 )   (104 )% $ 944   $ 2,744   $ (1,800 )   (66 )%

        Consolidated restructuring and other exit costs for the quarter ended September 30, 2014 included $0.4 million of facility closure and relocation costs in our Commerce & Loyalty segment, $0.1 million of unallocated corporate employee termination costs and $0.1 million of employee termination costs in our Communications segment.

        Consolidated restructuring and other exit costs for the nine months ended September 30, 2014 primarily included $1.1 million and $0.3 million of employee termination costs in our Commerce & Loyalty and Communications segments, respectively, as well as $1.0 million of unallocated corporate employee termination costs, and $0.4 million of facility closure and relocation costs in our Commerce & Loyalty segment. Consolidated restructuring and other exit costs for the nine months ended September 30, 2015 were primarily related to employee termination costs in our Communications segment.

Interest Income

 
  Quarter
Ended
September 30,
  Change   Nine Months
Ended
September 30,
  Change  
 
  2015   2014   $   %   2015   2014   $   %  
 
  (in thousands, except percentages)
 

Interest income

  $ 150   $ 101   $ 49     49 % $ 331   $ 292   $ 39     13 %

        Interest income was relatively flat for the quarter ended September 30, 2015, compared to the quarter ended September 30, 2014, as well as for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014.

Other Income, Net

 
  Quarter
Ended
September 30,
  Change   Nine Months
Ended
September 30,
  Change  
 
  2015   2014   $   %   2015   2014   $   %  
 
  (in thousands, except percentages)
 

Other income, net

  $ 320   $ 257   $ 63     25 % $ 390   $ 324   $ 66     20 %

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        The increase in other income, net, for the quarter and nine months ended September 30, 2015, compared to the quarter and nine months ended September 30, 2014, was due to $0.3 million of transition services income earned in the quarter and nine months ended September 30, 2015, partially offset by decreases in gains related to forward foreign currency exchange contracts.

Provision for Income Taxes

 
  Quarter Ended
September 30,
  Nine Months
Ended
September 30,
 
 
  2015   2014   2015   2014  
 
  (in thousands, except percentages)
 

Provision for income taxes

  $ 1,284   $ 1,542   $ 2,439   $ 5,346  

Effective income tax rate

    40.6 %   60.9 %   51.2 %   506.3 %

        For the quarter ended September 30, 2015, we utilized the actual effective tax rate (discrete method) in determining the domestic income tax expense, rather than the annual effective tax rate method, as allowed under Accounting Standards Codification ("ASC") 740-270-30-36, Income Taxes—Interim Reporting. For the quarter ended September 30, 2015, we recorded a provision for income taxes totaling $1.3 million on pre-tax income of $3.2 million, compared to a provision for income taxes totaling $1.5 million on a pre-tax income of $2.5 million for the quarter ended September 30, 2014. Our effective income tax rate of 40.6% for the quarter ended September 30, 2015 was higher than the statutory tax rate primarily due to a provision for income taxes related to our foreign operations, an income tax accrual related to certain goodwill assets and a tax accrual related to reserves for uncertain tax positions. The change in our effective income tax rate for the quarter ended September 30, 2015, compared to the quarter ended September 30, 2014, was primarily due an income tax accrual related to certain goodwill assets, tax benefits related to federal and various state audit settlements for tax years 2009 through 2012, and a decrease in foreign taxes.

        For the nine months ended September 30, 2015, we recorded a provision for income taxes totaling $2.4 million on pre-tax income of $4.8 million, compared to a provision for income taxes totaling $5.3 million on a pre-tax income of $1.1 million for the nine months ended September 30, 2014. Our effective income tax rate of 51.2% for the nine months ended September 30, 2015 was higher than the statutory tax rate primarily due to a provision for income taxes related to our foreign operations, an income tax accrual related to certain goodwill assets, tax benefits related to federal and various state audit settlements for tax years 2009 through 2012, benefits related to the reallocation of pro forma taxes to discontinued operations, and the release of reserves for uncertain tax positions taken in prior periods. The change in our effective income tax rate for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014, was primarily due to tax benefits related to federal and various state audit settlements for tax years 2009 through 2012, a decrease in foreign taxes, benefits related to the reallocation of pro forma taxes to discontinued operations, an income tax benefit related to certain goodwill assets, and the release of reserves for uncertain tax positions taken in prior periods.

        Our tax provision has an unusual relationship to domestic pre-tax loss primarily due to the existence of a full deferred tax asset valuation allowance. This circumstance generally results in a zero net tax provision since the income tax expense or benefit that would otherwise be recognized is offset by the change in the valuation allowance. However, the tax expense recorded in the quarter and nine months ended September 30, 2015 included an accrual of a non-cash tax expense of approximately $0.3 million and $1.0 million respectively, in connection with the tax amortization of certain goodwill assets that is not available to offset existing deferred tax assets (termed "naked credits"). The tax provision recorded in the quarter and nine months ended September 30, 2014 included an accrual of a non-cash tax benefit and non-cash tax expense of approximately $0.4 million and $1.3 million

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respectively, in connection with naked credits. Specifically, we do not consider the deferred tax liabilities related to certain goodwill assets when determining the need for a valuation allowance.

Segment Results

        Information for our reportable segments, which excludes depreciation and amortization of intangible assets, was as follows (in thousands):

 
  Communications   Commerce &
Loyalty
  Social Media  
 
  Quarter Ended
September 30,
  Quarter Ended
September 30,
  Quarter Ended
September 30,
 
 
  2015   2014   2015   2014   2015   2014  

Revenues

  $ 21,466   $ 25,295   $ 9,175   $ 7,166   $ 5,648   $ 7,528  

Operating expenses:

                                     

Cost of revenues

    8,108     10,110     5,677     3,115     446     669  

Sales and marketing

    3,002     3,146     2,235     1,886     1,346     1,588  

Technology and development

    1,293     1,955     572     598     608     513  

General and administrative

    1,744     2,683     910     946     893     1,012  

Restructuring and other exit costs

    (20 )   92         358          

Total operating expenses

    14,127     17,986     9,394     6,903     3,293     3,782  

Segment income (loss) from operations

  $ 7,339   $ 7,309   $ (219 ) $ 263   $ 2,355   $ 3,746  

 

 
  Communications   Commerce &
Loyalty
  Social Media  
 
  Nine Months Ended
September 30,
  Nine Months Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2015   2014   2015   2014   2015   2014  

Revenues

  $ 68,938   $ 77,164   $ 24,580   $ 23,120   $ 17,493   $ 23,522  

Operating expenses:

                                     

Cost of revenues

    27,575     30,781     13,584     10,687     1,580     2,122  

Sales and marketing

    9,927     10,896     6,622     6,941     4,542     6,164  

Technology and development

    5,585     6,305     1,727     2,170     1,548     1,919  

General and administrative

    6,141     7,649     2,865     3,143     2,626     2,975  

Restructuring and other exit costs

    912     271     (2 )   1,451          

Total operating expenses

    50,140     55,902     24,796     24,392     10,296     13,180  

Segment income (loss) from operations

  $ 18,798   $ 21,262   $ (216 ) $ (1,272 ) $ 7,197   $ 10,342  

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Communications Segment Results

Communications Revenues

 
  Quarter Ended
September 30,
  Change   Nine Months Ended
September 30,
  Change  
 
  2015   2014   $   %   2015   2014   $   %  
 
  (in thousands, except percentages and ARPU)
 

Services

  $ 15,201   $ 17,097   $ (1,896 )   (11 )% $ 48,592   $ 51,874   $ (3,282 )   (6 )%

Products

    959     1,397     (438 )   (31 )%   3,734     4,838     (1,104 )   (23 )%

Advertising

    5,306     6,801     (1,495 )   (22 )%   16,612     20,452     (3,840 )   (19 )%

Total Communications Revenues

  $ 21,466   $ 25,295   $ (3,829 )   (15 )% $ 68,938   $ 77,164   $ (8,226 )   (11 )%

ARPU

  $ 11.30   $ 10.91   $ 0.39     4 % $ 11.55   $ 10.74   $ 0.81     8 %

Average number of pay accounts

    443     516     (73 )   (14 )%   461     530     (69 )   (13 )%

        The decrease in Communications services revenues for the quarter and nine months ended September 30, 2015, compared to the quarter and nine months ended September 30, 2014, was due to decreases in dial-up and DSL revenues attributed to lower dial-up and DSL subscribers, partially offset by an increase in ARPU for these services. The decreases in Communications services revenues for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014, were partially offset by increases in mobile broadband revenues due to increases in mobile broadband subscribers. The decreases in Communications advertising revenues were due to decreases in advertising impressions from the decline in active accounts. The decreases in Communications products revenues were due to lower mobile broadband signs-ups. We anticipate pay accounts will continue to decline year over year in 2015.

Communications Cost of Revenues

 
  Quarter Ended
September 30,
  Change   Nine Months
Ended
September 30,
  Change  
 
  2015   2014   $   %   2015   2014   $   %  
 
  (in thousands, except percentages)
 

Communications cost of revenues

  $ 8,108   $ 10,110   $ (2,002 )   (20 )% $ 27,575   $ 30,781   $ (3,206 )   (10 )%

Communications cost of revenues as a percentage of Communications revenues

    37.8 %   40.0 %               40.0 %   39.9 %            

        The decrease in Communications cost of revenues for the quarter ended September 30, 2015, compared to the quarter ended September 30, 2014, was primarily due to a $0.9 million decrease in costs associated with our mobile broadband services attributable to lower sign-ups and lower wireless device costs, a $0.5 million decrease in costs associated with our advertising sales primarily due to a performance credit from an advertising services provider, a $0.4 million decrease in costs associated with our dial-up and DSL service attributable to lower dial-up and DSL subscribers, and a $0.2 million decrease in personnel and overhead-related costs.

        The decrease in Communications cost of revenues for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014, was primarily due to a $1.5 million decrease in costs due to lower DSL and dial-up subscribers, a $1.0 million decrease attributable to lower mobile broadband sign ups and lower wireless device costs, a $0.4 million decrease in costs associated with our advertising sales attributable to a decrease in advertising impressions delivered and a performance

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credit from an advertising services provider, a $0.3 million decrease in personnel and overhead-related costs, and a $0.2 million decrease in costs of add-on services of dial-up and DSL subscribers.

Communications Sales and Marketing

 
  Quarter Ended
September 30,
  Change   Nine Months
Ended
September 30,
  Change  
 
  2015   2014   $   %   2015   2014   $   %  
 
  (in thousands, except percentages)
 

Communications sales and marketing

  $ 3,002   $ 3,146   $ (144 )   (5 )% $ 9,927   $ 10,896   $ (969 )   (9 )%

Communications sales and marketing expenses as a percentage of Communications revenues

    14.0 %   12.4 %               14.4 %   14.1 %            

        Communications sales and marketing expenses were relatively flat for the quarter ended September 30, 2015, compared to the quarter ended September 30, 2014.

        The decrease in Communications sales and marketing expenses for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014, was primarily due to a $0.4 million decrease in personnel and overhead-related costs as a result of restructuring initiatives, a $0.3 million decrease in mobile broadband advertising expenses resulting from cost savings initiatives and a $0.2 million decrease in customer relationship management costs attributable to our dial-up and DSL services.

Communications Technology and Development

 
  Quarter Ended
September 30,
  Change   Nine Months
Ended
September 30,
  Change  
 
  2015   2014   $   %   2015   2014   $   %  
 
  (in thousands, except percentages)
 

Communications technology and development

  $ 1,293   $ 1,955   $ (662 )   (34 )% $ 5,585   $ 6,305   $ (720 )   (11 )%

Communications technology and development expenses as a percentage of Communications revenues

    6.0 %   7.7 %               8.1 %   8.2 %            

        The decrease in Communications technology and development expenses for the quarter and nine months ended September 30, 2015, compared to the quarter and nine months ended September 30, 2014, was primarily due to a decrease in personnel and overhead-related costs as a result of restructuring initiatives.

Communications General and Administrative

 
  Quarter Ended
September 30,
  Change   Nine Months
Ended
September 30,
  Change  
 
  2015   2014   $   %   2015   2014   $   %  
 
  (in thousands, except percentages)
 

Communications general and administrative

  $ 1,744   $ 2,683   $ (939 )   (35 )% $ 6,141   $ 7,649   $ (1,508 )   (20 )%

Communications general and administrative expenses as a percentage of Communications revenues

    8.1 %   10.6 %               8.9 %   9.9 %            

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        The decrease in Communications general and administrative expenses for the quarter ended September 30, 2015, compared to the quarter ended September 30, 2014, was primarily due to a $0.6 million decrease in personnel and overhead-related costs as a result of restructuring initiatives, as well as a $0.2 million decrease in professional services and consulting fees.

        The decrease in Communications general and administrative expenses for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014, was primarily due to a $1.3 million decrease in personnel and overhead-related costs as a result of restructuring initiatives, as well as a $0.2 million decrease in professional services and consulting fees.

Communications Restructuring and Other Exit Costs

 
  Quarter
Ended
September 30,
  Change   Nine Months
Ended
September 30,
  Change  
 
  2015   2014   $   %   2015   2014   $   %  
 
  (in thousands, except percentages)
 

Communications restructuring and other exit costs

  $ (20 ) $ 92   $ (112 )   (122 )% $ 912   $ 271   $ 641     237 %

        Communications restructuring and other exit costs for the nine months ended September 30, 2015 and 2014 consisted primarily of employee termination costs. These restructuring charges were a result of management's decision to streamline operations, prioritize resources for growth initiatives and increase profitability.

Commerce & Loyalty Segment Results

Commerce & Loyalty Revenues

 
  Quarter Ended
September 30,
  Change   Nine Months
Ended
September 30,
  Change  
 
  2015   2014   $   %   2015   2014   $   %  
 
  (in thousands, except percentages)
 

Advertising and other revenues

  $ 9,175   $ 7,166   $ 2,009     28 % $ 24,580   $ 23,120   $ 1,460     6 %

        The increase in Commerce & Loyalty revenues for the quarter ended September 30, 2015, compared to the quarter ended September 30, 2014, was primarily due to a $2.1 million increase in gift card revenues and the Swappable gift card desktop and mobile app revenues.

        The increase in Commerce & Loyalty revenues for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014, was primarily due to a $2.6 million increase in gift card revenues and the Swappable gift card desktop and mobile app revenues. This increase was partially offset by a $0.5 million decrease in display advertising revenues, as well as a $0.4 million decrease in market research revenues.

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Commerce & Loyalty Cost of Revenues

 
  Quarter Ended
September 30,
  Change   Nine Months
Ended
September 30,
  Change  
 
  2015   2014   $   %   2015   2014   $   %  
 
  (in thousands, except percentages)
 

Commerce & Loyalty cost of revenues

  $ 5,677   $ 3,115   $ 2,562     82 % $ 13,584   $ 10,687   $ 2,897     27 %

Commerce & Loyalty cost of revenues as a percentage of Commerce & Loyalty revenues

    61.9 %   43.5 %               55.3 %   46.2 %            

        The increase in Commerce & Loyalty cost of revenues for the quarter ended September 30, 2015, compared to the quarter ended September 30, 2014, was primarily due to a $2.4 million increase in costs related to the sale of gift cards and a $0.3 million increase in point costs across other revenue channels primarily as a result of changes in the estimated future points to be redeemed.

        The increase in Commerce & Loyalty cost of revenues for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014, was primarily due to a $3.1 million increase in costs related to the sale of gift cards and a $0.6 million increase in point costs across other revenue channels primarily as a result of changes in the estimated future points to be redeemed, partially offset by a $0.5 million decrease in personnel and overhead-related costs due to our restructuring initiatives in April 2014 and a $0.3 million decrease in hosting and software-related fees.

Commerce & Loyalty Sales and Marketing

 
  Quarter Ended
September 30,
  Change   Nine Months
Ended
September 30,
  Change  
 
  2015   2014   $   %   2015   2014   $   %  
 
  (in thousands, except percentages)
 

Commerce & Loyalty sales and marketing

  $ 2,235   $ 1,886   $ 349     19 % $ 6,622   $ 6,941   $ (319 )   (5 )%

Commerce & Loyalty sales and marketing expenses as a percentage of Commerce & Loyalty revenues

    24.4 %   26.3 %               26.9 %   30.0 %            

        The increase in Commerce & Loyalty sales and marketing expenses for the quarter ended September 30, 2015, compared to the quarter ended September 30, 2014, was primarily due to an increase in loyalty marketing spend due to increased promotions for the Swappable gift card app.

        The decrease in Commerce & Loyalty sales and marketing expenses for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014, was primarily due to a $0.7 million decrease in personnel and overhead-related costs as a result of our restructuring initiatives in April 2014, partially offset by a $0.3 million increase in loyalty marketing spend due to increased promotions for the Swappable gift card app.

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Commerce & Loyalty Technology and Development

 
  Quarter
Ended
September 30,
  Change   Nine Months
Ended
September 30,
  Change  
 
  2015   2014   $   %   2015   2014   $   %  
 
  (in thousands, except percentages)
 

Commerce & Loyalty technology and development

  $ 572   $ 598   $ (26 )   (4 )% $ 1,727   $ 2,170   $ (443 )   (20 )%

Commerce & Loyalty technology and development expenses as a percentage of Commerce & Loyalty revenues

    6.2 %   8.3 %               7.0 %   9.4 %            

        Commerce & Loyalty technology and development expenses were relatively flat for the quarter ended September 30, 2015, compared to the quarter ended September 30, 2014.

        The decrease in Commerce & Loyalty technology and development expenses for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014, was primarily due to a decrease in personnel and overhead-related costs as a result of our restructuring initiatives in April 2014.

Commerce & Loyalty General and Administrative

 
  Quarter
Ended
September 30,
  Change   Nine Months
Ended
September 30,
  Change  
 
  2015   2014   $   %   2015   2014   $   %  
 
  (in thousands, except percentages)
 

Commerce & Loyalty general and administrative

  $ 910   $ 946   $ (36 )   (4 )% $ 2,865   $ 3,143   $ (278 )   (9 )%

Commerce & Loyalty general and administrative expenses as a percentage of Commerce & Loyalty revenues

    9.9 %   13.2 %               11.7 %   13.6 %            

        Commerce & Loyalty general and administrative expenses were relatively flat for the quarter ended September 30, 2015, compared to the quarter ended September 30, 2014.

        The decrease in Commerce & Loyalty general and administrative expenses for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014, was primarily due to a decrease in personnel and overhead-related costs as a result of our restructuring initiatives in April 2014.

Commerce & Loyalty Restructuring and Other Exit Costs

 
  Quarter
Ended
September 30,
  Change   Nine Months
Ended
September 30,
  Change  
 
  2015   2014   $   %   2015   2014   $   %  
 
  (in thousands, except percentages)
 

Commerce & Loyalty restructuring and other exit costs

  $   $ 358   $ (358 )   (100 )% $ (2 ) $ 1,451   $ (1,453 )   (100 )%

        Commerce & Loyalty restructuring and other exit costs for the quarter ended September 30, 2014 consisted primarily of facility closure and relocation costs. Restructuring and other exit costs for the nine months ended September 30, 2014 consisted primarily of employee termination costs and facility

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closure and relocation costs. These restructuring charges were a result of management's decision to streamline operations, prioritize resources for growth initiatives and increase profitability.

Social Media Segment Results

Social Media Revenues

 
  Quarter
Ended
September 30,
  Change   Nine Months
Ended
September 30,
  Change  
 
  2015   2014   $   %   2015   2014   $   %  
 
  (in thousands, except percentages and ARPU)
 

Services

  $ 5,332   $ 6,908   $ (1,576 )   (23 )% $ 16,157   $ 21,576   $ (5,419 )   (25 )%

Products

    130     266     (136 )   (51 )%   661     758     (97 )   (13 )%

Advertising

    186     354     (168 )   (47 )%   675     1,188     (513 )   (43 )%

Total Social Media Revenues

  $ 5,648   $ 7,528   $ (1,880 )   (25 )% $ 17,493   $ 23,522   $ (6,029 )   (26 )%

ARPU

  $ 1.65   $ 1.90   $ (0.25 )   (13 )% $ 1.61   $ 1.93   $ (0.32 )   (17 )%

Average pay accounts

    1,079     1,213     (134 )   (11 )%   1,113     1,244     (131 )   (11 )%

        The decrease in Social Media services revenues for the quarter and nine months ended September 30, 2015, compared to the quarter and nine months ended September 30, 2014, was primarily due to a decrease in ARPU primarily due to a weaker Euro versus the U.S. Dollar, as well as a decrease in average pay accounts. The decrease in Social Media advertising revenues was attributable to lower active accounts and a decrease in advertising impressions delivered. Adjusting for the unfavorable impact of foreign currency exchange rates due to a weaker Euro versus the U.S. Dollar, Social Media revenues decreased by $0.8 million, or 11% for the quarter ended September 30, 2015, compared to the quarter ended September 30, 2014. Adjusting for the unfavorable impact of foreign currency exchange rates due to a weaker Euro versus the U.S. Dollar, Social Media revenues decreased by $2.3 million, or 10% for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014. We anticipate revenues and pay accounts will continue to decline year over year in 2015. We anticipate ARPU will continue to decline year over year in 2015 as a result of the unfavorable impact of foreign currency exchange rates.

Social Media Cost of Revenues

 
  Quarter
Ended
September 30,
  Change   Nine Months
Ended
September 30,
  Change  
 
  2015   2014   $   %   2015   2014   $   %  
 
  (in thousands, except percentages)
 

Social Media cost of revenues

  $ 446   $ 669   $ (223 )   (33 )% $ 1,580   $ 2,122   $ (542 )   (26 )%

Social Media cost of revenues as a percentage of Social Media revenues

    7.9 %   8.9 %               9.0 %   9.0 %            

        Adjusting for the favorable impact of foreign currency exchange rates due to a weaker Euro versus the U.S. Dollar, Social Media cost of revenues decreased by $0.1 million, or 20%.

        The decrease in Social Media cost of revenues for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014, was primarily due to a $0.3 million decrease in hosting and software-related fees. Adjusting for the favorable impact of foreign currency exchange rates due to a weaker Euro versus the U.S. Dollar, Social Media cost of revenues decreased by $0.2 million, or 9%.

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Social Media Sales and Marketing

 
  Quarter Ended
September 30,
  Change   Nine Months
Ended
September 30,
  Change  
 
  2015   2014   $   %   2015   2014   $   %  
 
  (in thousands, except percentages)
 

Social Media sales and marketing

  $ 1,346   $ 1,588   $ (242 )   (15 )% $ 4,542   $ 6,164   $ (1,622 )   (26 )%

Social Media sales and marketing expenses as a percentage of Social Media revenues

    23.8 %   21.1 %               26.0 %   26.2 %            

        Adjusting for the favorable impact of foreign currency exchange rates due to a weaker Euro versus the U.S. Dollar, Social Media sales and marketing expenses were relatively flat for the quarter ended September 30, 2015, compared to the quarter ended September 30, 2014.

        The decrease in Social Media sales and marketing expenses for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014, was primarily due to reduced spending on customer acquisition. Adjusting for the favorable impact of foreign currency exchange rates due to a weaker Euro versus the U.S. Dollar, Social Media sales and marketing expenses decreased by $0.6 million, or 10% for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014.

Social Media Technology and Development

 
  Quarter
Ended
September 30,
  Change   Nine Months
Ended
September 30,
  Change  
 
  2015   2014   $   %   2015   2014   $   %  
 
  (in thousands, except percentages)
 

Social Media technology and development

  $ 608   $ 513   $ 95     19 % $ 1,548   $ 1,919   $ (371 )   (19 )%

Social Media technology and development expenses as a percentage of Social Media revenues

    10.8 %   6.8 %               8.8 %   8.2 %            

        Adjusting for the favorable impact of foreign currency exchange rates due to a weaker Euro versus the U.S. Dollar, Social Media technology and development expenses increased by $0.2 million, or 40% for the quarter ended September 30, 2015, compared to the quarter ended September 30, 2014.

        The decrease in Social Media technology and development expenses for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014, was due to a decrease in personnel and overhead-related costs. Adjusting for the favorable impact of foreign currency exchange rates due to a weaker Euro versus the U.S. Dollar, Social Media technology and development expenses were relatively flat for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014.

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Social Media General and Administrative

 
  Quarter Ended
September 30,
  Change   Nine Months
Ended
September 30,
  Change  
 
  2015   2014   $   %   2015   2014   $   %  
 
  (in thousands, except percentages)
 

Social Media general and administrative

  $ 893   $ 1,012   $ (119 )   (12 )% $ 2,626   $ 2,975   $ (349 )   (12 )%

Social Media general and administrative expenses as a percentage of Social Media revenues

    15.8 %   13.4 %               15.0 %   12.6 %            

        Social Media general and administrative expenses were relatively flat for the quarter ended September 30, 2015, compared to the quarter ended September 30, 2014.

        The decrease in Social Media general and administrative expenses for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014, was primarily due to a $0.4 million decrease in personnel and overhead-related costs. Adjusting for the favorable impact of foreign currency exchange rates due to a weaker Euro versus the U.S. Dollar, Social Media general and administrative expenses increased by $0.2 million, or 7%.

Unallocated Corporate Results

Corporate Revenues

 
  Quarter
Ended
September 30,
  Change   Nine Months
Ended
September 30,
  Change  
 
  2015   2014   $   %   2015   2014   $   %  
 
  (in thousands, except percentages)
 

Corporate revenues

  $   $   $     % $   $ 100   $ (100 )   (100 )%

        Corporate revenues for the nine months ended September 30, 2014 were related to transition services provided to FTD in connection with the FTD Spin-Off Transaction.

Unallocated Corporate Cost of Revenues

 
  Quarter
Ended
September 30,
  Change   Nine Months
Ended
September 30,
  Change  
 
  2015   2014   $   %   2015   2014   $   %  
 
  (in thousands, except percentages)
 

Unallocated corporate cost of revenues

  $ 18   $ 57   $ (39 )   (68 )% $ 56   $ 173   $ (117 )   (68 )%

        Unallocated corporate cost of revenues consist of indirect cost of revenues associated with our former Classmates domestic business unit, which were not included in the results of discontinued operations. Unallocated corporate cost of revenues were relatively flat for the quarter ended September 30, 2015, compared to the quarter ended September 30, 2014, as well as the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014.

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Unallocated Corporate Technology and Development Expenses

 
  Quarter Ended
September 30,
  Change   Nine Months
Ended
September 30,
  Change  
 
  2015   2014   $   %   2015   2014   $   %  
 
  (in thousands, except percentages)
 

Unallocated corporate technology and development expenses

  $ 221   $ 217   $ 4     2 % $ 742   $ 685   $ 57     8 %

        Unallocated corporate technology and development expenses consist of indirect technology and development associated with our former Classmates domestic business unit, which were not included in the results of discontinued operations. Unallocated corporate technology and development expenses were relatively flat for the quarter ended September 30, 2015, compared to the quarter ended September 30, 2014, as well as the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014.

Unallocated Corporate General and Administrative Expenses

 
  Quarter Ended
September 30,
  Change   Nine Months
Ended
September 30,
  Change  
 
  2015   2014   $   %   2015   2014   $   %  
 
  (in thousands, except percentages)
 

Unallocated corporate general and administrative expenses

  $ 4,952   $ 7,094   $ (2,142 )   (30 )% $ 15,920   $ 22,836   $ (6,916 )   (30 )%

        Unallocated corporate general and administrative expenses include general and administrative expenses associated with our former Classmates domestic business unit, which were not included in the results of discontinued operations. The decrease in unallocated corporate general and administrative expenses for the quarter ended September 30, 2015, compared to the quarter ended September 30, 2014, was primarily due to a $1.3 million decrease in personnel and overhead-related costs and a $0.9 million decrease in professional services and consulting fees. Unallocated corporate general and administrative expenses associated with our former Classmates domestic business unit totaled $0.2 million and $0.5 million for the quarters ended September 30, 2015 and 2014, respectively.

        The decrease in unallocated corporate general and administrative expenses for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014, was primarily due to a $5.0 million decrease in personnel and overhead-related costs due to our restructuring initiatives, including lower facilities-related costs in connection with moving our corporate headquarters, a $1.8 million decrease in professional services and consulting fees and a $0.3 million decrease in reserves recorded for legal settlements. These decreases were partially offset by a $0.3 million increase in transaction-related costs. Unallocated corporate general and administrative expenses associated with our former Classmates domestic business unit totaled $1.3 million and $1.5 million for the nine months ended September 30, 2015 and 2014, respectively. We anticipate unallocated corporate general and administrative expenses will continue to decline year over year in 2015.

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Unallocated Corporate Restructuring and Other Exit Costs

 
  Quarter
Ended
September 30,
  Change   Nine Months
Ended
September 30,
  Change  
 
  2015   2014   $   %   2015   2014   $   %  
 
  (in thousands, except percentages)
 

Unallocated corporate restructuring and other exit costs

  $   $ 71   $ (71 )   (100 )% $ 34   $ 1,022   $ (988 )   (97 )%

        Unallocated corporate restructuring and other exit costs for the quarters and nine months ended September 30, 2015 and 2014 consisted of employee termination costs.

Liquidity and Capital Resources

Nine Months Ended September 30, 2015 compared to Nine Months Ended September 30, 2014

        Our total cash and cash equivalents balance increased by $21.0 million, or 27%, to $99.7 million at September 30, 2015, compared to $78.6 million at December 31, 2014. Our summary cash flows for the periods presented were as follows (in thousands):

 
  Nine Months Ended
September 30,
 
 
  2015   2014  

Net cash provided by operating activities

  $ 826   $ 15,044  

Net cash used for investing activities

  $ (4,074 ) $ (5,194 )

Net cash provided by (used for) financing activities

  $ 1,196   $ (1,503 )

        Net cash provided by operating activities decreased by $14.2 million, or 95%. The decrease was primarily driven by:

    a $9.2 million unfavorable change in accounts payable and accrued liabilities due to a $6.4 million payment made in the nine months ended September 30, 2015 for a settlement with the Internal Revenue Service; and decreases in liabilities related to personnel-related expenses due to our restructuring initiatives, as well as a separation payment made to an executive officer in the nine months ended September 30, 2015;

    a $5.9 million unfavorable change in inventories due to an increase in purchases of gift cards for our Commerce & Loyalty segment and, to a lesser extent, an increase in purchases of mobile broadband devices for our Communications segment in the nine months ended September 30, 2015;

    a $4.1 million unfavorable change in other assets primarily due to an increase in income taxes receivable and a receivable related to an insurance recovery;

    a $2.7 million unfavorable change in accounts receivable due to a decline in Commerce & Loyalty revenues in 2014 primarily as a result of our restructuring initiatives in the nine months ended September 30, 2014;

    a $1.6 million favorable change in other liabilities due to an increase in reserves for uncertain tax positions in the nine months ended September 30, 2014; and

    a $1.5 million favorable change in member redemption liability increased primarily due to a decline in Commerce & Loyalty revenues in 2014 primarily as a result of our restructuring initiatives in the nine months ended September 30, 2014.

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        The decrease in cash provided by operating activities was partially offset by a $4.5 million increase in income from continuing operations, net of non-cash reconciling items.

        Net cash used for investing decreased by $1.1 million, or 22%. The decrease was primarily due a decrease in purchases of property and equipment.

        Capital expenditures for the nine months ended September 30, 2015 totaled $4.3 million. Property and equipment that was not yet paid for and was included in accounts payable in the consolidated balance sheets was immaterial at September 30, 2015. At December 31, 2014, we had $2.6 million of property and equipment that was not yet paid for and was included in accounts payable in the consolidated balance sheets. We currently anticipate that our total capital expenditures for 2015 will be in the range of $5.0 million to $6.0 million. The actual amount of future capital expenditures may fluctuate due to a number of factors, including, without limitation, potential future acquisitions and new business initiatives, which are difficult to predict and which could change significantly over time. Additionally, technological advances may require us to make capital expenditures to develop or acquire new equipment or technology in order to replace aging or technologically obsolete equipment.

        Net cash provided by financing activities increased by $2.7 million, or 180%. The increase was primarily due to a $1.8 million increase in proceeds from exercises of stock options and sales under our employee stock purchase plan and a $0.9 million decrease in repurchases of common stock.

        Future cash flows from financing activities may also be affected by our repurchases of shares of our common stock. Our Board of Directors authorized a common stock repurchase program (the "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. Our Board of Directors has approved and ratified the Program through December 31, 2015. There were no repurchases under the Program during the nine months ended September 30, 2015 and, at September 30, 2015, the authorization remaining under the Program was $80.0 million.

        Cash flows from financing activities may also be negatively impacted by the withholding of a portion of shares underlying the restricted stock units we grant to employees. In general, we currently do not collect the minimum statutory employee withholding taxes from employees upon vesting of restricted stock units. Instead, we automatically withhold, from the restricted stock units that vest, the portion of those shares with a fair market value equal to the amount of the minimum statutory employee withholding taxes due. We then pay the minimum statutory withholding taxes in cash. The withholding of these shares, although accounted for as a common stock repurchase, does not reduce the amount available under the Program. Similar to repurchases of common stock under the Program, the net effect of such withholding will adversely impact our cash flows from financing activities. The amounts remitted in the nine months ended September 30, 2015 and 2014 were $1.4 million and $2.4 million, respectively, for which we withheld 0.1 million and 0.2 million shares of common stock, respectively, that were underlying the restricted stock units that vested. The amount we pay in future periods will vary based on our stock price and the number of applicable restricted stock units vesting during the period.

        On an ongoing basis, we assess opportunities for improved operational effectiveness and efficiency, which may result in restructuring. Although restructuring efforts may reduce expenses and generate improved operating efficiencies, there can be no assurances that our restructuring efforts will be successful. In addition, past restructuring activities may not be a good indication of future restructuring opportunities, and any restructuring of our businesses may leave us with reduced financial and marketing resources to develop products and services to compete against our competitors. We recorded $0.9 million of restructuring and other exit costs in the nine months ended September 30, 2015, which consisted of employee termination costs. During the nine months ended September 30, 2015, we paid $1.1 million of restructuring and other exit costs. At September 30, 2015, there were no accrued restructuring and other exit costs.

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        Based on our current projections, we expect to continue to generate positive cash flows from operations, at least for the next 12 months. We may use our existing cash balances and future cash generated from operations to fund, among other things, long-term growth initiatives, which may include optimizing our current product offerings to enhance our consumer value proposition, expanding new product development efforts to drive new revenue growth, and pursuing acquisitions, new strategic partnerships and other opportunities to expand our scope and reach; the repurchase of our common stock underlying restricted stock units to pay the minimum statutory employee withholding taxes due on vested restricted stock units; the repurchase of our common stock under the Program; future capital expenditures; and future acquisitions of intangible assets, including rights, content and intellectual property.

        In March 2015, we reached an audit settlement with the Internal Revenue Service and, in connection with such settlement, we remitted $6.4 million to the Internal Revenue Service in the quarter ended June 30, 2015, for which we had previously established a reserve. Additionally, as discussed in Note 12, "Contingencies—Legal Matters" of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, Classmates, Inc. cooperated with a Multistate Work Group of Attorneys General in connection with their investigations of our former post-transaction sales practices and certain other current or former business practices. In May 2015, Classmates, Inc. executed settlement agreements with each member of the Multistate Work Group, and in July 2015, we remitted $8.2 million in connection with the settlements. In October 2015, we received insurance proceeds in the amount of $4.2 million related to the Multistate Work Group inquiry and accompanying legal fees. Of this amount, $2.8 million was allocated to United Online, Inc. and $1.4 million was allocated to FTD, which was remitted to FTD in October 2015.

        If we need to raise additional capital through public or private debt or equity financings, strategic relationships or other arrangements, this capital might not be available to us in a timely manner, on acceptable terms, or at all. Our failure to raise sufficient capital when needed could severely constrain or prevent us from, among other factors, future acquisitions of other businesses or intangible assets, including rights, content and intellectual property, and may have a material adverse effect on our business, financial position, results of operations, and cash flows. If additional funds were raised through the issuance of equity or convertible debt securities, the percentage of stock owned by the then- current stockholders could be reduced. Furthermore, such equity or any debt securities that we issue might have rights, preferences or privileges senior to holders of our common stock. In addition, trends in the securities and credit markets may restrict our ability to raise any such additional funds, at least in the near term.

Contractual Obligations

        There were no material changes to our contractual obligations during the quarter ended September 30, 2015, with the exception of liabilities for uncertain tax positions. At September 30, 2015, we had liabilities for uncertain tax positions totaling $4.8 million, of which $1.0 million was expected to be due in less than one year. We are not able to reasonably estimate when or if cash payments for long-term liabilities related to uncertain tax positions will occur.

Other Commitments

        In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, sureties and insurance companies, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of such agreements, services to be provided by us, or from intellectual property infringement claims made by third parties. For example, we agreed to indemnify the purchaser of our former Classmates domestic business unit for certain liabilities and have retained responsibility for certain legal proceedings relating

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to the Classmates domestic business unit. In addition, we have entered into indemnification agreements with our directors and certain of our officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. We have also agreed to indemnify certain former officers, directors and employees of acquired companies in connection with the acquisition of such companies. We maintain director and officer insurance, which may cover certain liabilities, including those arising from our obligation to indemnify our directors and certain of our officers and employees, and former officers, directors and employees of acquired companies, in certain circumstances.

        It is not possible to determine the maximum potential amount of exposure under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Such indemnification agreements may not be subject to maximum loss clauses.

Off-Balance Sheet Arrangements

        At September 30, 2015, we did not have any off-balance sheet arrangements (as defined in Item 303(a)(4)(ii) of Regulation S-K) that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures, or capital resources.

Recent Accounting Pronouncements

        See Note 1, "Description of Business, Basis of Presentation, Accounting Policies, and Recent Accounting Pronouncements" of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on our financial condition, results of operations and cash flows.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        We are exposed to certain market risks arising from transactions in the normal course of business, principally risk associated with interest rate and foreign currency exchange rate fluctuations.

Interest Rate Risk

        While we do not currently maintain any short-term investments, we do invest in money market funds and time deposits, which are classified as cash and cash equivalents in our consolidated balance sheets. Therefore, our interest income is sensitive to changes in the general level of U.S. and certain foreign interest rates. At September 30, 2015, we did not have any fixed or floating rate debt obligations.

Foreign Currency Exchange Risk

        We transact business in foreign currencies, and we are exposed to risk resulting from fluctuations in foreign currency exchange rates, particularly the Euro ("EUR") and the Indian Rupee ("INR") and, to a much lesser extent, the Swedish Krona ("SEK") and the Swiss Franc ("CHF"), which may result in gains or losses reported in our results of operations. The volatilities in EUR, INR, SEK, and CHF (and all other applicable foreign currencies) are monitored by us throughout the year. We face two risks related to foreign currency exchange rates—translation risk and transaction risk. Amounts invested in our foreign operations are translated into U.S. Dollars using the current rate method. The resulting translation adjustments are recorded as a component of accumulated other comprehensive loss in the unaudited condensed consolidated balance sheets. Revenues and expenses in foreign currencies translate into higher or lower revenues and expenses in U.S. Dollars as the U.S. Dollar weakens or

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strengthens against other currencies. Substantially all of the revenues of our foreign subsidiaries are received, and substantially all expenses are incurred, in currencies other than the U.S. Dollar, which increases or decreases the related U.S. Dollar-reported revenues and expenses depending on the exchange rate trend in currencies. Therefore, changes in foreign currency exchange rates may negatively affect our consolidated revenues and net income (loss).

        We utilize forward foreign currency exchange contracts to protect the value of our net investments in certain foreign subsidiaries and certain forecasted cash flows denominated in currencies other than the U.S. Dollar. These contracts are designated as hedges of net investments in foreign entities and hedges of cash flows. At September 30, 2015, we did not have any open forward foreign currency exchange contracts accounted for as net investment hedges or cash flow hedges.

        We considered the historical trends in currency exchange rates and determined that it was reasonably possible that changes in exchange rates of 10% for our foreign currency exchange contracts could be experienced in the near term. If the U.S. dollar weakened or strengthened by 10%, the impact on accumulated other comprehensive loss would be immaterial at September 30, 2015.

        Periodically, we enter into forward foreign currency exchange contracts, which are not designated as hedging instruments for accounting purposes. We enter into these derivative instruments to hedge intercompany transactions and partially offset the economic effect of fluctuations in foreign currency exchange rates. At September 30, 2015, the notional value of open forward foreign currency exchange contracts that did not qualify for hedge accounting treatment totaled $0.3 million. If the U.S. dollar weakened or strengthened by 10%, the impact on other income, net, would have been immaterial for the nine months ended September 30, 2015.

        We may, in the future and in accordance with our investment and foreign exchange policies, also use other derivative financial instruments, if it is determined that such hedging activities are appropriate to reduce risk.

ITEM 4.    CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

        Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing, and reporting, within the time periods specified in the SEC's rules and forms, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and are effective in ensuring that information required to 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.

Changes in Internal Control Over Financial Reporting

        There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

        For a description of our material pending legal proceedings, please refer to Note 12, "Contingencies—Legal Matters" of the Notes to the Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

ITEM 1A.    RISK FACTORS

        There are certain risks and uncertainties in our business that could cause our actual results to differ materially from those anticipated. A detailed discussion of our risk factors was included in Part I, Item 1A, "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2014, and has been made available at www.sec.gov and at www.unitedonline.com. These risk factors should be read carefully in connection with evaluating our business and in connection with the forward-looking statements and other information contained in this Quarterly Report on Form 10-Q. Any of the risks described in the Annual Report on Form 10-K for the year ended December 31, 2014 could materially affect our business, financial condition or future results and the actual outcome of matters as to which forward-looking statements are made. There were no material changes to the risk factors during the nine months ended September 30, 2015, compared to the risk factors set forth in the Annual Report on Form 10-K for the year ended December 31, 2014, other than with respect to the risk factors described below. In addition, for clarity, the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014 under the heading "Additional Risks Relating to our Content & Media Segment" apply to our Commerce & Loyalty and Social Media segments, and may also apply, depending on the risk factor, to our Communications segment.


RISKS RELATING TO OUR BUSINESS GENERALLY

Divestitures or other dispositions could negatively impact our business.

        On an ongoing basis, we assess opportunities for improved operational effectiveness and efficiency and may divest, spin-off, split-off, or otherwise dispose of businesses that are deemed not to fit with our strategic plan or are not achieving the desired return on investment. For example, we completed the spin-off of FTD in November 2013 and sold our Classmates domestic business unit in August 2015. These transactions pose risks and challenges that could negatively impact our business. For example, when we decide to sell or otherwise dispose of a business or assets, the sale is typically subject to satisfaction of pre-closing conditions which may not become satisfied. In addition, divestitures or other dispositions may dilute our earnings per share, have other adverse financial and accounting impacts, distract management, disrupt our business, negatively impact market perception of our prospects and involve the loss of key employees, and disputes may arise with buyers. In addition, we have retained responsibility for and/or have agreed to indemnify buyers against some known and unknown contingent liabilities related to a number of businesses we have sold or disposed, which could have a material effect on our financial statements. In addition, divestitures may result in significant asset impairment charges, including those related to goodwill and other intangible assets, which could have a material adverse effect on our financial condition and results of operations. We cannot assure you that divestiture or other disposition efforts will be successful in generating improved operating efficiencies. In addition, past disposition activities may not be a good indication of future disposition opportunities, and any divestiture or other disposition of any business may leave us with reduced financial and marketing resources to develop products and services to compete against our competitors.

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There are a number of risks associated with our sale of Classmates and they may have a material and adverse impact on our business, financial condition, results of operations, and cash flows.

        On August 11, 2015, we completed the sale of our Classmates business unit. There are a number of risks associated with the sale of the Classmates domestic business unit, including, without limitation, the following:

    we are smaller and less diversified as compared to immediately prior to the consummation of the sale of the Classmates domestic business unit. This could cause our cash flow and growth prospects to be more volatile and make us more vulnerable to focused competition;

    the sale of the Classmates domestic business unit reduces revenues, operating income and cash flows. With this reduction in revenues and cash flows, the sale could also have an adverse effect on our results of operations and financial position;

    we agreed to indemnify the purchaser for certain liabilities, and have retained responsibility for certain legal proceedings relating to the Classmates domestic business unit. Certain indemnities that we provided to the purchaser are not subject to any limits on the aggregate amount of the liability, may be significant and could negatively impact our business.

        Any of the foregoing, in addition to any other risks related to the transaction that are not specifically described above, could materially and adversely affect our business, financial condition, results of operations, and cash flows.

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) - (b) Not applicable

(c)   Repurchases

        In May 2001, the Company's Board of Directors authorized a common stock repurchase program (the "Program") that allows the Company to repurchase shares of its common stock through open market or privately negotiated transactions based on prevailing market conditions and other factors. From time to time since then, the Board of Directors has increased the amount authorized for repurchase under this Program and has extended the Program, which is currently extended through December 31, 2015. From August 2001 through December 2014, the Company had repurchased $150.2 million of its common stock under the Program. There were no repurchases under the Program during the nine months ended September 30, 2015 and, at September 30, 2015, the authorization remaining under the Program was $80.0 million.

        Shares withheld upon the vesting of restricted stock units and upon the issuance of stock awards to pay minimum statutory employee withholding taxes are considered common stock repurchases, but are not counted as purchases against the Program. Upon vesting of most restricted stock units or issuance of stock awards, we currently do not collect the minimum statutory withholding taxes from employees. Instead, we automatically withhold, from the restricted stock units that vest and from the stock awards that are issued, the portion of those shares with a fair market value equal to the amount of the minimum statutory employee withholding taxes due, which is accounted for as a repurchase of common stock. We then pay the minimum statutory employee withholding taxes in cash.

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        Common stock repurchases during the quarter ended September 30, 2015 were as follows (in thousands, except per share amounts):

Period
  Total Number of
Shares Purchased
  Average Price
Paid per Share
  Total Number of
Shares Purchased as
Part of a Publicly
Announced Program
  Maximum Approximate
Dollar Value that
May Yet be Purchased
Under the Program
 

July 1 - July 31, 2015

    5   $ 15.32       $ 80,000  

August 1 - August 31, 2015

    4   $ 12.13       $ 80,000  

September 1 - September 30, 2015

      $       $ 80,000  

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

        Not applicable.

ITEM 4.    MINE SAFETY DISCLOSURES

        Not applicable.

ITEM 5.    OTHER INFORMATION

        Not applicable.

ITEM 6.    EXHIBITS

        See the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q for a list of exhibits filed or furnished with this report, which Exhibit Index is incorporated herein by reference.

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SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: November 6, 2015

  UNITED ONLINE, INC. (Registrant)

 

By:

 

/s/ EDWARD K. ZINSER


Edward K. Zinser
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)

Date: November 6, 2015

 

UNITED ONLINE, INC. (Registrant)

 

By:

 

/s/ MICHELLE D. STALICK


Michelle D. Stalick
Senior Vice President and
Chief Accounting Officer
(Principal Accounting Officer)

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EXHIBIT INDEX

 
   
   
   
  Incorporated by Reference to
 
   
  Filed
with this
Form 10-Q
   
No.   Exhibit Description   Form   Exhibit No.   File No.   Date Filed
 

2.1

 

Separation and Distribution Agreement by and between United Online, Inc. and FTD Companies, Inc., dated as of October 31, 2013

      8-K     2.1   000-33367   11/6/2013
 

2.2

 

Amendment No. 1 to Separation and Distribution Agreement by and between United Online, Inc. and FTD Companies,  Inc., dated as of May 20, 2015

     
10-Q
   
2.1
 
000-33367
 
8/6/2015
 

2.3

 

Stock Purchase Agreement by and among Intelius Holdings, Inc., the Registrant and Classmates Media Corporation, dated as of August 11, 2015

 

X

                 
 

3.1

 

Amended and Restated Certificate of Incorporation (As Amended Effective October 31, 2013)

     
10-K
   
3.1
 
000-33367
 
3/13/2014
 

3.2

 

Amended and Restated Bylaws (As Amended Effective December 17, 2013)

     
10-K
   
3.2
 
000-33367
 
3/13/2014
 

10.1

 

Offer Letter between the Registrant and Mark Harrington, dated as of July 20, 2015

 

X

                 
 

31.1

 

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

X

                 
 

31.2

 

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

X

                 
 

32.1

 

Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

X

                 
 

32.2

 

Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

X

                 
 

101.INS

 

XBRL Instance Document

 

X

                 

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  Incorporated by Reference to
 
   
  Filed
with this
Form 10-Q
   
No.   Exhibit Description   Form   Exhibit No.   File No.   Date Filed
 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

X

                 
 

101.CAL

 

XBRL Taxonomy Calculation Linkbase Document

 

X

                 
 

101.LAB

 

XBRL Taxonomy Label Linkbase Document

 

X

                 
 

101.PRE

 

XBRL Taxonomy Presentation Linkbase Document

 

X

                 
 

101.DEF

 

XBRL Taxonomy Extension Definition Document

 

X

                 

58