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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, 2011
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.)

21301 Burbank Boulevard,
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   Smaller reporting company o
        (Do not check if a smaller
reporting company)
   

        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 89,166,751 shares of the Registrant's common stock outstanding at November 1, 2011.


Table of Contents

UNITED ONLINE, INC.
INDEX TO FORM 10-Q
For the Quarter Ended September 30, 2011

          Page 

PART I.

     

FINANCIAL INFORMATION

  4

 

Item 1.

 

Financial Statements:

 
4

     

Unaudited Condensed Consolidated Balance Sheets at September 30, 2011 and December 31, 2010

 
4

     

Unaudited Condensed Consolidated Statements of Operations for the Quarters and Nine Months Ended September 30, 2011 and 2010

 
5

     

Unaudited Condensed Consolidated Statements of Comprehensive Income for the Quarters and Nine Months Ended September 30, 2011 and 2010

 
6

     

Unaudited Condensed Consolidated Statement of Stockholders' Equity for the Nine Months Ended September 30, 2011

 
7

     

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010

 
8

     

Notes to Unaudited Condensed Consolidated Financial Statements

 
9

 

Item 2.

 

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

 
26

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 
53

 

Item 4.

 

Controls and Procedures

 
54

PART II.

     

OTHER INFORMATION

 
55

 

Item 1.

 

Legal Proceedings

 
55

 

Item 1A.

 

Risk Factors

 
57

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 
75

 

Item 6.

 

Exhibits

 
76

SIGNATURES

 
77

        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 and the documents incorporated herein by reference contain forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, as amended, 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," "projections," "business outlook," "estimate," or similar expressions constitute forward-looking statements. These forward-looking statements include, but are not limited to, statements about new business initiatives, products, services, features, and functionality; future financial performance; revenues; segment metrics; operating expenses; market trends, including those in the markets in which we compete; liquidity; cash flows and uses of cash; dividends; capital expenditures; depreciation and amortization; tax payments; foreign currency exchange rates; hedging arrangements; our ability to repay indebtedness, pay dividends and invest in

2


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initiatives; our products and services; pricing; competition; and strategies. Potential factors that could affect the matters about which the forward-looking statements are made include, among others, the factors disclosed in the section entitled "Risk Factors" in this Quarterly Report on Form 10-Q 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 management's analysis only as the date hereof. Any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that may cause actual performance and results to differ materially from those predicted. Reported results should not be considered an indication of future performance. Except as required by law, we undertake no obligation to publicly release the results of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

3


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PART I—FINANCIAL INFORMATION

        

ITEM 1.    FINANCIAL STATEMENTS

        


UNITED ONLINE, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

 
  September 30,
2011
  December 31,
2010
 

Assets

             

Current assets:

             
 

Cash and cash equivalents

  $ 112,842   $ 100,264  
 

Accounts receivable, net of allowance for doubtful accounts

    38,230     49,797  
 

Deferred tax assets, net

    14,346     14,200  
 

Other current assets

    25,060     28,494  
           
   

Total current assets

    190,478     192,755  

Property and equipment, net

    63,977     63,893  

Goodwill

    459,171     459,409  

Intangible assets, net

    242,071     262,775  

Other assets

    12,928     13,326  
           
   

Total assets

  $ 968,625   $ 992,158  
           

Liabilities and Stockholders' Equity

             

Current liabilities:

             
 

Accounts payable

  $ 48,769   $ 71,659  
 

Accrued liabilities

    44,915     48,881  
 

Member redemption liability

    18,214     19,899  
 

Deferred revenue

    60,747     71,673  
 

Current portion of long-term debt

    2,650      
           
   

Total current liabilities

    175,295     212,112  

Member redemption liability

    4,584     4,967  

Deferred revenue

    2,331     3,021  

Long-term debt, net of discounts

    259,034     258,084  

Deferred tax liabilities, net

    42,481     42,677  

Other liabilities

    11,055     16,816  
           
   

Total liabilities

    494,780     537,677  
           

Commitments and contingencies

             

Stockholders' equity:

             
 

Common stock

    9     9  
 

Additional paid-in capital

    493,065     493,387  
 

Accumulated other comprehensive loss

    (34,282 )   (33,628 )
 

Retained earnings (accumulated deficit)

    15,053     (5,287 )
           
   

Total stockholders' equity

    473,845     454,481  
           
   

Total liabilities and stockholders' equity

  $ 968,625   $ 992,158  
           

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

4


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UNITED ONLINE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 
  Quarter Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2011   2010   2011   2010  

Revenues:

                         
 

Products

  $ 82,794   $ 77,760   $ 357,712   $ 324,218  
 

Services

    99,900     115,781     322,052     363,734  
                   
   

Total revenues

    182,694     193,541     679,764     687,952  

Operating expenses:

                         
 

Cost of revenues—products

    61,744     59,386     266,536     244,799  
 

Cost of revenues—services

    21,057     25,008     69,033     75,688  
 

Sales and marketing

    33,315     34,783     130,261     133,926  
 

Technology and development

    13,158     14,334     39,176     42,329  
 

General and administrative

    25,552     26,333     80,465     84,576  
 

Amortization of intangible assets

    7,571     8,020     22,914     24,298  
 

Restructuring charges

    74     70     751     1,061  
                   
   

Total operating expenses

    162,471     167,934     609,136     606,677  
                   

Operating income

    20,223     25,607     70,628     81,275  

Interest income

    308     382     1,140     1,259  

Interest expense

    (3,747 )   (5,471 )   (19,564 )   (18,934 )

Other income (expense), net

    512     (40 )   2,217     95  
                   

Income before income taxes

    17,296     20,478     54,421     63,695  

Provision for income taxes

    5,380     8,319     15,556     26,358  
                   

Net income

  $ 11,916   $ 12,159   $ 38,865   $ 37,337  
                   
 

Income allocated to participating securities

    (467 )   (747 )   (1,602 )   (2,334 )
                   

Net income attributable to common stockholders

  $ 11,449   $ 11,412   $ 37,263   $ 35,003  
                   

Basic net income per common share

  $ 0.13   $ 0.13   $ 0.42   $ 0.40  
                   

Shares used to calculate basic net income per common share

    88,773     86,649     88,237     86,479  
                   

Diluted net income per common share

  $ 0.13   $ 0.13   $ 0.42   $ 0.40  
                   

Shares used to calculate diluted net income per common share

    88,812     87,069     88,423     87,134  
                   

Dividends paid per common share

  $ 0.10   $ 0.10   $ 0.30   $ 0.30  
                   

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

5


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UNITED ONLINE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 
  Quarter Ended September 30,   Nine Months Ended September 30,  
 
  2011   2010   2011   2010  

Net income

  $ 11,916   $ 12,159   $ 38,865   $ 37,337  
 

Change in gains on derivative instruments, net of tax of $60 and $48 for the quarter and nine months ended September 30, 2011

    92         72      
 

Foreign currency translation

    (6,226 )   8,862     (726 )   (5,705 )
                   

Comprehensive income

  $ 5,782   $ 21,021   $ 38,211   $ 31,632  
                   

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

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UNITED ONLINE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(in thousands)

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

Balance at January 1, 2011

    86,745   $ 9   $ 493,387   $ (33,628 ) $ (5,287 ) $ 454,481  
 

Exercises of stock options

    20         33             33  
 

Issuance of common stock through employee stock purchase plan

    517         2,349             2,349  
 

Vesting of restricted stock units

    1,573                      
 

Repurchases of common stock

            (6,979 )           (6,979 )
 

Dividends and dividend equivalents paid on shares outstanding and restricted stock units

            (9,141 )       (18,525 )   (27,666 )
 

Change in dividend equivalents payable on restricted stock units

            174             174  
 

Stock-based compensation

            13,514             13,514  
 

Change in gains on derivative instruments, net of tax

                72         72  
 

Foreign currency translation

                (726 )       (726 )
 

Tax shortfalls from equity awards

            (272 )           (272 )
 

Net income

                    38,865     38,865  
                           

Balance at September 30, 2011

    88,855   $ 9   $ 493,065   $ (34,282 ) $ 15,053   $ 473,845  
                           

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

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UNITED ONLINE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 
  Nine Months Ended
September 30,
 
 
  2011   2010  

Cash flows from operating activities:

             
 

Net income

  $ 38,865   $ 37,337  
 

Adjustments to reconcile net income to net cash provided by operating activities:

             
   

Depreciation and amortization

    42,764     44,503  
   

Stock-based compensation

    13,514     20,913  
   

Provision for doubtful accounts receivable

    1,794     4,070  
   

Accretion of discounts and amortization of debt issue costs

    1,281     3,337  
   

Loss on extinguishment of debt

    6,078      
   

Deferred taxes, net

    (720 )   (4,513 )
   

Tax shortfalls from equity awards

    (143 )   (521 )
   

Excess tax benefits from equity awards

    (265 )   (442 )
   

Other

    (238 )   399  
 

Changes in operating assets and liabilities:

             
   

Accounts receivable, net

    9,817     6,414  
   

Other assets

    4,903     7,280  
   

Accounts payable and accrued liabilities

    (26,433 )   (20,504 )
   

Member redemption liability

    (2,068 )   (1,681 )
   

Deferred revenue

    (11,655 )   (1,624 )
   

Other liabilities

    (5,760 )   453  
           
     

Net cash provided by operating activities

    71,734     95,421  
           

Cash flows from investing activities:

             
 

Purchases of property and equipment

    (19,211 )   (19,064 )
 

Purchases of rights, content and intellectual property

    (2,905 )   (2,205 )
 

Proceeds from sales of assets, net

    221     219  
           
     

Net cash used for investing activities

    (21,895 )   (21,050 )
           

Cash flows from financing activities:

             
 

Proceeds from term loan

    261,325      
 

Payments on term loans

    (265,288 )   (54,819 )
 

Payments for debt issuance costs

    (778 )    
 

Proceeds from exercises of stock options

    33     254  
 

Proceeds from employee stock purchase plan

    2,349     2,612  
 

Repurchases of common stock

    (6,979 )   (19,125 )
 

Dividends and dividend equivalents paid on outstanding shares and restricted stock units

    (27,946 )   (27,804 )
 

Excess tax benefits from equity awards

    265     442  
           
     

Net cash used for financing activities

    (37,019 )   (98,440 )
           

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

    (242 )   (1,760 )

Change in cash and cash equivalents

    12,578     (25,829 )

Cash and cash equivalents, beginning of period

    100,264     115,509  
           

Cash and cash equivalents, end of period

  $ 112,842   $ 89,680  
           

Supplemental disclosure of non-cash investing and financing activities:

             
 

Decrease in dividend equivalents payable on restricted stock units

  $ (174 ) $ (173 )

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

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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, is a leading provider of consumer products and services over the Internet through a number of brands, including FTD, Interflora, Memory Lane, Classmates, StayFriends, MyPoints, and NetZero. On August 26, 2008, the Company completed its acquisition of 100% of the capital stock of FTD Group, Inc. (together with its subsidiaries, "FTD"). The Company reports its business in three reportable segments: FTD, Content & Media and Communications. The Company's FTD segment provides floral and related products and services to consumers and retail florists, as well as to other retail locations offering floral and related products and services. The Company's Content & Media segment provides online nostalgia products and services and online loyalty marketing services. The Company's primary Communications service is Internet access. 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.

Basis of Presentation

        The Company's unaudited condensed consolidated financial statements for the quarters and nine months ended September 30, 2011 and 2010 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 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 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 information at December 31, 2010 is derived from the Company's audited consolidated financial statements, filed on February 28, 2011 with the SEC in the Company's Annual Report on Form 10-K for the year ended December 31, 2010, but does not include all of the disclosures required by GAAP.

        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, 2010 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, allocation of purchase price in business combinations, goodwill and indefinite-lived intangible assets, definite-lived intangible assets and other long-lived assets, member redemption liability, income taxes, and legal contingencies.

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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)

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

        Reclassifications—Certain prior period amounts have been reclassified to conform to the current period presentation. These changes had no impact on the previously reported consolidated results of operations or stockholders' equity.

Accounting Policies

        Segments—The operating segments identified in Note 2 below are the segments of the Company for which separate financial information is available and for which segment results are regularly reviewed by the Company's chief operating decision maker in deciding how to allocate resources and assess performance. Effective in the first quarter of 2011, the Company modified how it reports segment information to the chief operating decision maker. The Company's segment reporting now separately reports unallocated corporate expenses. Historically, such expenses were fully allocated to the Company's reportable segments. The Company has revised prior period results to conform to the current year presentation.

        Derivative Instruments—From time to time, the Company utilizes forward foreign currency exchange contracts to protect the value of its net investments in certain foreign subsidiaries. For derivative instruments that are designated and qualify as a hedge of a net investment, the gain or loss is reported in accumulated other comprehensive loss in the unaudited condensed consolidated statement of stockholders' equity to the extent the hedge is effective, with the related amounts due to or from counterparties included in other current assets or accrued liabilities. The Company utilizes the forward-rate method of assessing hedge effectiveness. Gains or losses related to any ineffective portions of net investment hedges are recognized in the unaudited condensed consolidated statements of operations. There was no ineffectiveness related to the Company's foreign currency net investment hedges for the quarter and nine months ended September 30, 2011. These forward foreign currency exchange contracts do not contain any credit risk-related contingent features as defined by Accounting Standards Codification ("ASC") 815, Derivatives and Hedging.

        In addition, the Company periodically enters into forward foreign currency exchange contracts which are not designated as hedging instruments for accounting purposes. The Company enters into these derivative instruments to partially offset the economic effect of fluctuations in foreign currency exchange rates.

Recent Accounting Pronouncements

        Comprehensive Income—In June 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-05, Presentation of Comprehensive Income, as codified in ASC 220, Comprehensive Income. The amendments in this update require that all nonowner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and

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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)

the total of comprehensive income. Additionally, the amendments in this update require that reclassification adjustments from other comprehensive income to net income be shown on the face of the statement of comprehensive income. The amendments in this update should be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company does not expect this update to have a material impact on its consolidated financial statements.

        Intangibles—Goodwill and Other—In September 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment, as codified in ASC 350, Intangibles—Goodwill and Other. The amendments in this update allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The amendments in this update are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity's financial statements for the most recent annual or interim period have not yet been issued. The Company performs its annual impairment assessment in the fourth quarter and expects to adopt this update in the quarter ending December 31, 2011. The Company does not expect this update to have a material impact on its consolidated financial statements.

2. SEGMENT INFORMATION

        Segment revenues and segment income from operations were as follows (in thousands):

 
  Quarter Ended September 30, 2011  
 
  FTD   Content & Media   Communications   Total  

Products

  $ 82,447   $ 347   $   $ 82,794  

Services

    26,300     30,826     24,158     81,284  

Advertising

        12,897     6,102     18,999  
                   
 

Total segment revenues

  $ 108,747   $ 44,070   $ 30,260   $ 183,077  
                   

Segment income from operations

  $ 15,526   $ 11,526   $ 14,622   $ 41,674  
                   

 

 
  Quarter Ended September 30, 2010  
 
  FTD   Content & Media   Communications   Total  

Products

  $ 77,760   $   $   $ 77,760  

Services

    27,145     33,203     32,896     93,244  

Advertising

    141     15,902     7,269     23,312  
                   
 

Total segment revenues

  $ 105,046   $ 49,105   $ 40,165   $ 194,316  
                   

Segment income from operations

  $ 14,889   $ 14,144   $ 18,812   $ 47,845  
                   

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SEGMENT INFORMATION (Continued)

 

 
  Nine Months Ended September 30, 2011  
 
  FTD   Content & Media   Communications   Total  

Products

  $ 357,365   $ 347   $   $ 357,712  

Services

    86,558     95,604     78,149     260,311  

Advertising

    22     43,859     19,088     62,969  
                   
 

Total segment revenues

  $ 443,945   $ 139,810   $ 97,237   $ 680,992  
                   

Segment income from operations

  $ 58,781   $ 30,857   $ 47,112   $ 136,750  
                   

 

 
  Nine Months Ended September 30, 2010  
 
  FTD   Content & Media   Communications   Total  

Products

  $ 324,218   $   $   $ 324,218  

Services

    89,421     100,368     105,179     294,968  

Advertising

    763     48,023     22,266     71,052  
                   
 

Total segment revenues

  $ 414,402   $ 148,391   $ 127,445   $ 690,238  
                   

Segment income from operations

  $ 51,882   $ 40,798   $ 58,509   $ 151,189  
                   

        A reconciliation of segment revenues to consolidated revenues was as follows for each period presented (in thousands):

 
  Quarter Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2011   2010   2011   2010  

Segment revenues:

                         
 

FTD

  $ 108,747   $ 105,046   $ 443,945   $ 414,402  
 

Content & Media

    44,070     49,105     139,810     148,391  
 

Communications

    30,260     40,165     97,237     127,445  
                   

Total segment revenues

    183,077     194,316     680,992     690,238  
 

Intersegment eliminations

    (383 )   (775 )   (1,228 )   (2,286 )
                   

Consolidated revenues

  $ 182,694   $ 193,541   $ 679,764   $ 687,952  
                   

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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 for each period presented (in thousands):

 
  Quarter Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2011   2010   2011   2010  

Segment operating expenses:

                         
 

FTD

  $ 93,221   $ 90,157   $ 385,164   $ 362,520  
 

Content & Media

    32,544     34,961     108,953     107,593  
 

Communications

    15,638     21,353     50,125     68,936  
                   

Total segment operating expenses

    141,403     146,471     544,242     539,049  
 

Depreciation

    6,564     6,604     19,118     20,168  
 

Amortization of intangible assets

    7,870     8,054     23,646     24,335  
 

Unallocated corporate expenses

    7,017     7,580     23,358     25,411  
 

Intersegment eliminations

    (383 )   (775 )   (1,228 )   (2,286 )
                   

Consolidated operating expenses

  $ 162,471   $ 167,934   $ 609,136   $ 606,677  
                   

        A reconciliation of segment income from operations (which excludes depreciation and amortization of intangible assets) to consolidated operating income was as follows for each period presented (in thousands):

 
  Quarter Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2011   2010   2011   2010  

Segment income from operations:

                         
 

FTD

  $ 15,526   $ 14,889   $ 58,781   $ 51,882  
 

Content & Media

    11,526     14,144     30,857     40,798  
 

Communications

    14,622     18,812     47,112     58,509  
                   

Total segment income from operations

    41,674     47,845     136,750     151,189  
 

Depreciation

    (6,564 )   (6,604 )   (19,118 )   (20,168 )
 

Amortization of intangible assets

    (7,870 )   (8,054 )   (23,646 )   (24,335 )
 

Unallocated corporate expenses

    (7,017 )   (7,580 )   (23,358 )   (25,411 )
                   

Consolidated operating income

  $ 20,223   $ 25,607   $ 70,628   $ 81,275  
                   

        International revenues are generated by the Company's operations in Europe. International revenues totaled $41.7 million and $147.1 million for the quarter and nine months ended September 30, 2011, respectively. International revenues totaled $39.1 million and $132.4 million for the quarter and nine months ended September 30, 2010, respectively.

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SEGMENT INFORMATION (Continued)

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

 
  September 30,
2011
  December 31,
2010
 

United States

  $ 67,596   $ 68,222  

Europe

    9,309     8,997  
           
 

Total long-lived assets

  $ 76,905   $ 77,219  
           

        Segment assets are not reported to, or used by, the Company's chief operating decision maker to allocate resources to, or assess performance of, the segments and therefore, pursuant to ASC 280, Segment Reporting, total segment assets have not been disclosed.

3. BALANCE SHEET COMPONENTS

Financing Receivables

        Credit quality of financing receivables was as follows (in thousands):

 
  September 30,
2011
  December 31,
2010
 

Current

  $ 14,010   $ 16,625  

Past due

    3,700     3,705  
           
 

Total

  $ 17,710   $ 20,330  
           

        A significant majority of the past due financing receivables at September 30, 2011 and December 31, 2010 were 120 days or more past due. Financing receivables on nonaccrual status at September 30, 2011 and December 31, 2010 totaled $3.8 million and $4.0 million, respectively.

        The changes in allowance for credit losses related to financing receivables for the nine months ended September 30, 2011 were as follows (in thousands):

Balance at January 1, 2011:

  $ 3,597  
 

Current period provision

    513  
 

Write-offs charged against allowance

    (484 )
       

Balance at September 30, 2011

  $ 3,626  
       

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. BALANCE SHEET COMPONENTS (Continued)

Other Current Assets

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

 
  September 30,
2011
  December 31,
2010
 

Prepaid expenses—other

  $ 9,312   $ 9,185  

Floral-related inventories

    3,773     5,321  

Income taxes receivable

    1,376     3,962  

Gift cards related to member redemption liability

    2,966     2,973  

Prepaid advertising and promotions

    1,233     1,855  

Prepaid floral catalog expenses

    1,539     1,305  

Prepaid insurance

    1,924     1,248  

Other

    2,937     2,645  
           
 

Total

  $ 25,060   $ 28,494  
           

Accrued Liabilities

        Accrued liabilities consisted of the following (in thousands):

 
  September 30,
2011
  December 31,
2010
 

Employee compensation and related expenses

  $ 25,868   $ 23,411  

Income taxes payable

    1,736     5,987  

Non-income taxes payable

    4,134     5,527  

Customer deposits

    2,067     2,608  

Reserve for pending legal settlement

    5,075     2,161  

Other

    6,035     9,187  
           
 

Total

  $ 44,915   $ 48,881  
           

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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 for the nine months ended September 30, 2011 were as follows (in thousands):

 
  FTD   Content & Media   Communications   Total  

Balance at January 1, 2011:

                         
 

Goodwill (excluding impairment charges)

  $ 441,202   $ 124,718   $ 13,227   $ 579,147  
 

Accumulated impairment charges

    (114,000 )       (5,738 )   (119,738 )
                   
   

Goodwill at January 1, 2011

    327,202     124,718     7,489     459,409  
 

Foreign currency translation

    (238 )           (238 )
                   

Balance at September 30, 2011:

                         
 

Goodwill (excluding impairment charges)

    440,964     124,718     13,227     578,909  
 

Accumulated impairment charges

    (114,000 )       (5,738 )   (119,738 )
                   
   

Goodwill at September 30, 2011

  $ 326,964   $ 124,718   $ 7,489   $ 459,171  
                   

Intangible Assets

        Intangible assets consisted of the following (in thousands):

 
  September 30, 2011  
 
  Gross
Value
  Accumulated
Amortization
  Net  

Pay accounts and free accounts

  $ 100,898   $ (93,044 ) $ 7,854  

Customer contracts and relationships

    111,880     (63,019 )   48,861  

Trademarks and trade names

    182,384     (19,577 )   162,807  

Software and technology

    46,499     (30,717 )   15,782  

Rights, content and intellectual property

    10,641     (3,874 )   6,767  
               
 

Total

  $ 452,302   $ (210,231 ) $ 242,071  
               

 

 
  December 31, 2010  
 
  Gross
Value
  Accumulated
Amortization
  Net  

Pay accounts and free accounts

  $ 100,873   $ (91,278 ) $ 9,595  

Customer contracts and relationships

    111,913     (50,273 )   61,640  

Trademarks and trade names

    182,463     (17,603 )   164,860  

Software and technology

    46,513     (24,527 )   21,986  

Rights, content and intellectual property

    7,735     (3,041 )   4,694  
               
 

Total

  $ 449,497   $ (186,722 ) $ 262,775  
               

        The Company's acquired trademarks and trade names related to the acquisition by the Company of FTD in August 2008, are indefinite-lived and, accordingly, there is no associated amortization expense or accumulated amortization. At September 30, 2011 and December 31, 2010, the FTD trademarks and trade names after impairment and foreign currency translation adjustments totaled $156.6 million and $156.7 million, respectively.

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. LONG-TERM DEBT

        In connection with the FTD acquisition in August 2008, UNOLA Corp., which was then an indirect wholly-owned subsidiary of United Online, Inc., and which subsequently merged into FTD Group, Inc., entered into a $425 million senior secured credit agreement with Wells Fargo Bank, National Association, as Administrative Agent (the "2008 Credit Agreement"), consisting of (i) a term loan A facility of $75 million, (ii) a term loan B facility of $300 million, and (iii) a revolving credit facility of up to $50 million. On June 10, 2011, FTD Group, Inc. entered into a new credit agreement (the "Credit Agreement") with Wells Fargo Bank, National Association, as Administrative Agent for the lenders, to refinance the 2008 Credit Agreement. The Credit Agreement provides FTD Group, Inc. with a $315 million senior secured credit facility consisting of (i) a $265 million seven-year term loan (the "Term Loan") and (ii) a $50 million five-year revolving credit facility (the "Revolving Credit Facility" and together with the Term Loan, the "Credit Facilities"), and certain other financial accommodations, including letters of credit.

        On June 10, 2011, FTD Group, Inc. repaid in full all outstanding indebtedness under the 2008 Credit Agreement. No penalties were paid in connection with such repayment. The repayment of obligations under the 2008 Credit Agreement was financed with the proceeds of the $265 million of term loan borrowings under the Credit Agreement and FTD's available cash. No funds were borrowed under the Revolving Credit Facility at closing.

        The obligations under the Credit Agreement are guaranteed by the parent of FTD Group, Inc., UNOL Intermediate, Inc. ("Holdings"), and certain of the wholly-owned domestic subsidiaries of FTD Group, Inc. (the "Subsidiary Guarantors"). In addition, the obligations under the Credit Agreement are secured by a lien on substantially all of the assets of FTD Group, Inc., Holdings and the Subsidiary Guarantors (collectively, the "Loan Parties"), including a pledge of all (except with respect to foreign subsidiaries, in which case such pledge shall be limited to 66%) of the outstanding capital stock of certain direct subsidiaries of the Loan Parties.

        The interest rates on both the Term Loan and the Revolving Credit Facility are either a base rate plus 2.5% per annum, or LIBOR plus 3.5% per annum (with a LIBOR floor of 1.25% in the case of the Term Loan). In addition, there is a commitment fee equal to 0.50% per annum (with step-downs in the commitment fee depending on FTD's net leverage ratio) on the unused portion of the Revolving Credit Facility. The Credit Agreement contains customary representations and warranties, events of default, affirmative covenants, and negative covenants, that require, among other things, FTD to maintain compliance with a maximum net leverage ratio and a minimum fixed-charge coverage ratio, and impose restrictions and limitations on, among other things, capital expenditures, investments, dividends, asset sales, and incurrence of additional debt or liens by Holdings, FTD Group, Inc. and their subsidiaries. The Credit Agreement also provides for an additional $100 million in borrowing, subject to certain conditions, including compliance with covenants and approval by the lender group.

        The refinancing of the Credit Facilities was accounted for in accordance with ASC 470, Debt. A significant portion of the debt under the 2008 Credit Agreement was considered to be extinguished, and the Company recorded a $6.1 million loss on extinguishment of debt in connection with the refinancing, which was recorded in interest expense for the nine months ended September 30, 2011.

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. LONG-TERM DEBT (Continued)

        The changes in the Company's debt balances, net of discounts, for the nine months ended September 30, 2011 under the 2008 Credit Agreement were as follows (in thousands):

 
  Balance at
January 1,
2011
  Repayments
of Debt
  Accretion
of Discounts
  Write-Off
of Discounts
  Balance at
September 30,
2011
 

2008 Credit Agreement, term loan A

  $ 49,446   $ (50,258 ) $ 143   $ 669   $  

2008 Credit Agreement, term loan B

    208,638     (214,367 )   697     5,032      

2008 Credit Agreement, revolving credit facility

                     
                       
 

Total

  $ 258,084   $ (264,625 ) $ 840   $ 5,701   $  
                       

        The changes in the Company's debt balances, net of discounts, for the nine months ended September 30, 2011 under the Credit Agreement were as follows (in thousands):

 
  Balance at
January 1,
2011
  Draw Down
of Debt
  Repayments
of Debt
  Discounts   Accretion
of Discounts
  Balance at
September 30,
2011
 

Credit Agreement, Term Loan

  $   $ 265,000   $ (663 ) $ (2,780 ) $ 127   $ 261,684  

Credit Agreement, Revolving Credit Facility

                         
                           
 

Total

  $   $ 265,000   $ (663 ) $ (2,780 ) $ 127   $ 261,684  
                           

        Future minimum principal payments based upon scheduled mandatory debt payments under the Credit Agreement, excluding required repayments based on excess cash flows, were as follows at September 30, 2011 (in thousands):

 
   
   
  Year Ending December 31,    
 
 
  Total
Gross
Debt
  Oct-Dec
2011
   
 
 
  2012   2013   2014   2015   2016   Thereafter  

Credit Agreement, Term Loan

  $ 264,337   $ 662   $ 2,650   $ 2,650   $ 2,650   $ 2,650   $ 2,650   $ 250,425  

        At September 30, 2011, the borrowing capacity under the Revolving Credit Facility, which was reduced by $1.1 million in outstanding letters of credit, was $48.9 million.

        Commencing in April 2013 for fiscal year 2012, subject to certain exceptions, FTD Group, Inc. will be required to make annual repayments of a portion of the Term Loan under the Credit Agreement based on excess cash flow as defined in the Credit Agreement.

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. DERIVATIVE FINANCIAL INSTRUMENTS

        The fair value of outstanding derivative instruments was as follows (in thousands):

 
   
  Fair Value of
Derivative Instruments
  Notional Value of
Derivative Instruments
 
Derivative Instruments
  Balance Sheet Location   September 30,
2011
  December 31,
2010
  September 30,
2011
  December 31,
2010
 

Derivative assets designated as hedging instruments:

                             
 

Forward foreign currency exchange contracts

  Other current assets   $ 144   $   $ 3,375   $  

Derivative assets not designated as hedging instruments:

                             
 

Forward foreign currency exchange contracts

  Other current assets   $ 248   $   $ 4,130   $  

        The effect of derivatives designated as net investment hedging instruments on other comprehensive loss was as follows (in thousands):

 
  Change in Gains Recognized in
Accumulated Other
Comprehensive Loss on
Derivatives Before Tax
 
Derivatives Designated as Net Investment Hedging Instruments
  Quarter
Ended
September 30,
2011
  Nine Months
Ended
September 30,
2011
 

Forward foreign currency exchange contracts

  $ 152   $ 120  

        The effect of derivative instruments not designated as hedging instruments on income was as follows (in thousands):

 
  Gains Recognized in Income on Derivatives  
Derivatives Not Designated as Hedging Instruments
  Location   Quarter
Ended
September 30,
2011
  Nine Months
Ended
September 30,
2011
 

Forward foreign currency exchange contracts

  Other income (expense), net   $ 469   $ 358  

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. FAIR VALUE MEASUREMENTS

        The following table presents information about assets at September 30, 2011 that are required to be measured at fair value on a recurring basis (in thousands):

Description
  Total
Fair Value
  Level 1
Fair Value
  Level 2
Fair Value
 

Money market funds

  $ 76,096   $ 76,096   $  

Derivative assets

    392         392  
               

  $ 76,488   $ 76,096   $ 392  
               

        The following table presents information about assets at December 31, 2010 that are required to be measured at fair value on a recurring basis (in thousands):

Description
  Total
Fair Value
  Level 1
Fair Value
 

Money market funds

  $ 67,150   $ 67,150  

        The Company estimated the fair value of its long-term debt using a discounted cash flow technique that incorporates a market interest yield curve with adjustments for duration and risk profile. In determining the market interest yield curve, the Company considered, among other factors, its estimate of its credit rating. The Company estimated its credit rating as BB+/BB- for the long-term debt associated with the Credit Agreement, resulting in a discount rate of 7%. The table below summarizes the fair value estimates for long-term debt, net of discounts, including the current portion, at September 30, 2011, as defined by ASC 825, Disclosures about Fair Value of Financial Instruments (in thousands):

 
  Carrying
Amount
  Estimated
Fair Value
 

Long-term debt, net of discounts, including current portion

  $ 261,684   $ 248,747  

8. STOCKHOLDERS' EQUITY

Common Stock Repurchases

        United Online, Inc.'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 August 2001 through December 31, 2010, the Company had repurchased $150.2 million of its common stock under the Program, leaving $49.8 million of authorization remaining under the Program at December 31, 2010. In February 2011, the Board of Directors extended the Program through December 31, 2011 and increased the amount authorized to $80.0 million. There were no repurchases under the Program in the nine months ended September 30, 2011.

        Shares withheld upon the vesting of restricted stock units and upon the issuance of stock awards to pay applicable required employee withholding taxes are considered common stock repurchases, but are not counted as purchases against the Program. Upon vesting of restricted stock units or issuance of stock awards, the Company currently does not collect the applicable required employee withholding taxes from employees. Instead, the Company automatically withholds, from the restricted stock units

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. STOCKHOLDERS' EQUITY (Continued)


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 required employee withholding taxes due, which is accounted for as a repurchase of common stock. The Company then pays the applicable withholding taxes in cash. The amounts remitted in the nine months ended September 30, 2011 and 2010 were $7.0 million and $8.2 million, respectively, for which the Company withheld 1.0 million and 1.4 million shares of common stock, respectively, that were underlying the restricted stock units which vested and stock awards that were issued. For information regarding the common stock repurchases consummated during the quarter ended September 30, 2011, see "Item 2. Unregistered Sales of Equity Securities and Use of Proceeds," which appears elsewhere in this Quarterly Report on Form 10-Q.

Dividends

        Dividends are paid on shares of common stock outstanding as of the record date. In addition, dividend equivalents are generally paid on nonvested restricted stock units as of the record date.

        In January, April and July 2011, the Board of Directors declared quarterly cash dividends of $0.10 per share of common stock. The dividends were paid on February 28, 2011, May 31, 2011 and August 31, 2011 and totaled $9.4 million, $9.3 million and $9.3 million respectively, including dividend equivalents paid on nonvested restricted stock units.

        In October 2011, the Board of Directors declared a quarterly cash dividend of $0.10 per share of common stock. The record date for the dividend is November 14, 2011 and the dividend will be paid on November 30, 2011.

        The payment of future dividends is discretionary and is subject to determination by United Online, Inc.'s Board of Directors each quarter following its review of the Company's financial performance and other factors. Dividends that are declared by the Board of Directors are currently paid out of the Company's surplus, as defined and computed in accordance with the General Corporation Law of the State of Delaware.

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. 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 for each of the periods presented (in thousands):

 
  Quarter Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2011   2010   2011   2010  

Operating expenses:

                         

Cost of revenues-products

  $ 16   $ 7   $ 37   $ 37  

Cost of revenues-services

    101     112     283     426  

Sales and marketing

    660     976     1,767     3,179  

Technology and development

    564     722     1,694     2,550  

General and administrative

    2,952     4,875     9,733     14,721  
                   
 

Total stock-based compensation

  $ 4,293   $ 6,692   $ 13,514   $ 20,913  
                   

Recent Awards

        Effective February 15, 2011, the Secondary Compensation Committee of the Board of Directors of United Online, Inc. approved grants of 1.3 million restricted stock units with a grant-date fair value equal to $9.3 million to certain of the Company's non-executive officer employees. The restricted stock units will vest as to twenty-five percent of the total number of units awarded annually over a four-year period beginning February 15, 2011.

        Effective February 15, 2011, the Compensation Committee of the Board of Directors of United Online, Inc. approved grants of 2.4 million stock options with a grant-date fair value equal to $4.7 million to certain members of the Company's senior management. Each stock option entitles the recipient to receive one share of United Online, Inc.'s common stock upon exercise of the vested award. The stock options will vest as to one-third of the total number of options awarded annually over a three-year period beginning February 15, 2011.

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. NET INCOME PER COMMON SHARE

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

 
  Quarter Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2011   2010   2011   2010  

Numerator:

                         

Net income

  $ 11,916   $ 12,159   $ 38,865   $ 37,337  
 

Income allocated to participating securities

    (467 )   (747 )   (1,602 )   (2,334 )
                   

Net income attributable to common stockholders

  $ 11,449   $ 11,412   $ 37,263   $ 35,003  
                   

Denominator:

                         

Shares used to calculate basic net income per common share

    88,773     86,649     88,237     86,479  
                   
 

Add: Dilutive effect of non-participating securities

    39     420     186     655  
                   

Shares used to calculate diluted net income per common share

    88,812     87,069     88,423     87,134  
                   

Basic net income per common share

  $ 0.13   $ 0.13   $ 0.42   $ 0.40  
                   

Diluted net income per common share

  $ 0.13   $ 0.13   $ 0.42   $ 0.40  
                   

        The diluted net income per common share computations exclude restricted stock units and stock options that were antidilutive. Weighted-average antidilutive shares for the quarter and nine months ended September 30, 2011 were 5.5 million and 4.5 million, respectively. Weighted-average antidilutive shares for the quarter and nine months ended September 30, 2010 were 3.0 million and 2.6 million, respectively.

11. RESTRUCTURING CHARGES

        For the quarter and nine months ended September 30, 2011, the Company recorded restructuring charges related to its Communications segment totaling $0.1 million and $0.8 million, respectively, primarily related to employee termination benefits and contract termination costs. For the quarter and nine months ended September 30, 2010, the Company recorded restructuring charges of $0.1 million and $1.1 million, respectively, primarily related to the closure of certain FTD call center facilities in the United States and the United Kingdom, which included lease termination costs and employee termination benefits.

12. LEGAL CONTINGENCIES

        In April 2001 and in May 2001, lawsuits were filed in the United States District Court for the Southern District of New York against NetZero, Inc. ("NetZero"), certain officers and directors of NetZero and the underwriters of NetZero's initial public offering, Goldman Sachs Group, Inc., BancBoston Robertson Stephens, Inc. and Salomon Smith Barney, Inc. A consolidated amended complaint was filed in April 2002. The complaint alleges that the prospectus through which NetZero conducted its initial public offering in September 1999 was materially false and misleading because it failed to disclose, among other things, that (i) the underwriters had solicited and received excessive and undisclosed commissions from certain investors in exchange for which the underwriters allocated to those investors material portions of the restricted number of NetZero shares issued in connection with

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. LEGAL CONTINGENCIES (Continued)


the offering; and (ii) the underwriters had entered into agreements with customers whereby the underwriters agreed to allocate NetZero shares to those customers in the offering in exchange for which the customers agreed to purchase additional NetZero shares in the aftermarket at pre-determined prices. Plaintiffs are seeking injunctive relief and damages. The case against NetZero was coordinated with approximately 300 other suits filed against more than 300 issuers that conducted their initial public offerings between 1998 and 2000, their underwriters and an unspecified number of their individual corporate officers and directors. The parties in the approximately 300 coordinated class actions, including NetZero, the underwriter defendants in the NetZero class action, and the plaintiff class in the NetZero action, have reached an agreement in principle under which the insurers for the issuer defendants in the coordinated cases will make a settlement payment on behalf of the issuers, including NetZero. On October 5, 2009, the district court issued an order granting final approval of the settlement and certifying the settlement class. Two individuals appealed the October 5, 2009 order and plaintiffs filed a motion to dismiss the appeals. One of the appeals has been dismissed and the other appeal is pending before the United States Court of Appeals for the Second Circuit.

        On October 30, 2008, Anthony Michaels filed a purported class action complaint against Classmates Online, Inc., now known as Memory Lane, Inc., Classmates Media Corporation and United Online, Inc. in Superior Court of the State of California, County of Los Angeles, alleging causes of action for intentional misrepresentation, negligent misrepresentation, negligence, fraudulent concealment, and for violations of California Business and Professions Code sections 17200 and 17500 et seq. On December 19, 2008, Xavier Vasquez filed a purported class action complaint against Classmates Online, Inc., Classmates Media Corporation and United Online, Inc. in Superior Court of Washington, Kings County, alleging causes of action for violation of the Washington Consumer Protection Act, violation of California's Unfair Competition Law, violation of California's Consumer Legal Remedies Act, unjust enrichment and violation of California Civil Code section 1694, dealing with dating services contracts. In both actions, the plaintiffs are seeking injunctive relief and damages. On April 30, 2009, the United States District Court of the Western District of Washington consolidated the Michaels and the Vasquez actions and designated the Michaels action as the lead case. On March 12, 2010, the parties entered into a comprehensive class action settlement agreement. On December 16, 2010, the court conducted a final approval hearing on the settlement. On February 22, 2011, the court issued an order formally denying final approval of the settlement. On March 24, 2011, the parties entered into a revised settlement agreement, and on March 25, 2011, plaintiffs filed a motion for preliminary approval of the revised settlement. On July 8, 2011, the court issued an order granting preliminary approval of the revised settlement agreement, establishing a schedule for providing notice to class members and setting December 15, 2011 as the date for the hearing to determine the final approval of the settlement. On July 27, 2011, the court entered an order approving a revised individual notice to the settlement class and, thereafter, the parties entered into a revised settlement agreement effective as of August 1, 2011 that included the revised notice and minor court-approved changes. The notices have been sent to the settlement class and the deadline to submit all claims and objections or to opt-out of the settlement class is November 18, 2011.

        The Company has been cooperating with certain governmental authorities in connection with their respective investigations of the Company's former post-transaction sales practices and certain other current or former business practices:

    In 2010, FTD.com Inc. and Classmates Online, Inc. received subpoenas from the Attorney General for the State of Kansas and the Attorney General for the State of Maryland,

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. LEGAL CONTINGENCIES (Continued)

      respectively. These subpoenas were issued on behalf of a Multistate Work Group that consists of the Attorneys General for the following states: Alaska, Delaware, Florida, Idaho, Illinois, Kansas, Maine, Maryland, Michigan, New Mexico, New Jersey, North Dakota, Ohio, Oregon, Pennsylvania, South Dakota, Texas, and Vermont. Based on the subpoenas, the Company believes that the primary focus of the inquiry concerns certain post-transaction sales practices in which these subsidiaries previously engaged with certain third-party vendors.

    In 2010, Classmates Online, Inc. received a subpoena from the Attorney General for the District of Columbia regarding the subsidiary's marketing, billing, and renewal practices, including, without limitation, its former post-transaction sales practices.

    In July 2011, United Online, Inc. received a civil investigative demand from the Federal Trade Commission regarding certain post-transaction sales practices in which the Company previously engaged with a certain third- party vendor.

    In July 2011, Classmates Online, Inc. received a civil investigative demand from the Attorney General for the State of Washington regarding its marketing, refund, cancelation and renewal practices. In 2009, Classmates Online, Inc. had received a civil investigative demand from the Attorney General for the State of Washington regarding certain post-transaction sales practices in which it had previously engaged with certain third-party vendors.

        The Company cannot predict the outcome of these or any other governmental investigations or other legal actions or their potential implications for its business. There are no assurances that additional governmental investigations or other legal actions will not be instituted in connection with the Company's former post-transaction sales practices or other 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 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, 2011, the Company had a reserve of $5.1 million for a pending legal settlement. With respect to the other legal matters described above, 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, 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.

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

Forward-Looking Statements

        This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, as amended, 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," "projections," "business outlook," "estimate," or similar expressions constitute forward-looking statements. These forward-looking statements include, but are not limited to, statements about new business initiatives, products, services, features, and functionality; future financial performance; revenues; segment metrics; operating expenses; market trends, including those in the markets in which we compete; liquidity; cash flows and uses of cash; dividends; capital expenditures; depreciation and amortization; tax payments; foreign currency exchange rates; hedging arrangements; our ability to repay indebtedness, pay dividends and invest in initiatives; our products and services; pricing; competition; and strategies. Potential factors that could affect the matters about which the forward-looking statements are made include, among others, the factors disclosed in the section entitled "Risk Factors" in this Quarterly Report on Form 10-Q 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 management's analysis only as the date hereof. Any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that may cause actual performance and results to differ materially from those predicted. Reported results should not be considered an indication of future performance. Except as required by law, we undertake no obligation to publicly release the results of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Overview

        We are a leading provider of consumer products and services over the Internet through a number of brands including FTD, Interflora, Memory Lane, Classmates, MyPoints, and NetZero. Our FTD segment provides floral and related products and services to consumers and retail florists, as well as to other retail locations offering floral and related products and services. Our Content & Media segment provides online nostalgia products and services and online loyalty marketing services. Our primary Communications segment service is Internet access. On a combined basis, our web properties attract a significant number of Internet users, and we offer a broad range of Internet marketing services for advertisers.

Segment Definitions

        We report our businesses in three reportable segments:

Segment
  Products and Services
FTD   Floral and related products and services for consumers, retail florists and other retail locations

Content & Media

 

Online nostalgia products and services and online loyalty marketing services

Communications

 

Internet access, email, Internet security, and web hosting services

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Segment Services

FTD

        FTD Group, Inc. (together with its subsidiaries, "FTD") is a leading provider of floral and related products and services to consumers and retail florists, as well as to other retail locations offering floral and related products and services, in the United States ("U.S."), Canada, the United Kingdom ("U.K."), and the Republic of Ireland. The business uses the highly recognized FTD and Interflora brands, both supported by the Mercury Man logo. FTD is a floral mass marketer, which we refer to as FTD's consumer business, and a provider of floral network services, which we refer to as FTD's floral network business. These businesses are complementary, as the majority of floral orders generated by the consumer business are fulfilled and hand-delivered by the members of the FTD floral network, with the remaining orders delivered via direct shipment. FTD does not own or operate any retail locations.

        Consumer Business.    FTD is a leading marketer of flowers and gift items to consumers. FTD operates in the U.S. and Canada, primarily through the www.ftd.com website and 1-800-SEND-FTD telephone number, and in the U.K. and the Republic of Ireland through the www.interflora.co.uk and www.interflora.ie websites and various telephone numbers. FTD also operates mobile websites that are optimized for mobile devices with Internet connections. While floral arrangements and plants are FTD's primary offerings, FTD also markets and sells gift items including: special occasion gifts, bath and beauty products, jewelry, wine, fruit and other gift baskets, chocolates, and stuffed animals.

        Floral Network Business.    FTD provides a comprehensive suite of products and services that promote revenue growth and enhance the operating efficiencies of its floral network members, including services that enable such members to receive, send and deliver floral orders. Floral network members include traditional retail florists, as well as other retailers offering floral and related products and services, that are located primarily in the U.S., Canada, the U.K., and the Republic of Ireland. The large networks of floral network members provide an order fulfillment vehicle for our consumer business and allows FTD to offer same-day delivery capability (subject to certain limitations) to populations throughout the U.S., Canada, the U.K., and the Republic of Ireland.

Content & Media

        Our Content & Media segment provides online nostalgia products and services under the Memory Lane, Classmates, StayFriends, and Trombi brands. Our Content & Media services also include online loyalty marketing under the MyPoints brand.

        Online Nostalgia Products and Services.    Our nostalgia products and services are led by our Memory Lane website, which includes our Classmates service and serves the U.S. and Canada. We have historically operated our nostalgia services as a platform to enable users to locate and interact with acquaintances from their past, with high school affiliations as the primary focus. Our Memory Lane website now also features nostalgic content, including digitized versions of high school yearbooks, photographic images, vintage music samples, iconic magazines, and video content such as historic newsreels, classic movie trailers, sports clips, and television commercials. Visitors to the website can engage with a significantly broader range of available content than before, and members can further engage in new forms of social interaction, such as sharing memorable content with friends and acquaintances or posting comments on the website after viewing the nostalgic content.

        In addition to our Memory Lane website, we operate five international websites that offer nostalgia services, primarily as a social networking platform to reconnect friends and acquaintances from high school. We operate StayFriends in Sweden, Germany, Austria, and Switzerland (www.stayfriends.se, www.stayfriends.de, www.stayfriends.at, and www.stayfriends.ch, respectively), and Trombi in France (www.trombi.com). Similar to the Memory Lane website, each international website

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includes free and pay memberships, although the features of our international pay services differ from those of the Memory Lane pay services.

        Online Loyalty Marketing Services.    MyPoints connects advertisers with its members by allowing members to earn rewards points for engaging in online activities. MyPoints is a free service for consumers who need only provide their name, zip code, gender, date of birth, and an email address to register. Members register to receive direct email marketing and other online loyalty promotions, and earn points for responding to email offers, taking market research companies' surveys, shopping online at the MyPoints website (www.mypoints.com) which serves as a shopping portal, searching the Internet through a MyPoints branded toolbar, playing MyPoints branded online games, and engaging in other online activities. Rewards points are redeemable primarily in the form of third- party gift cards from over 75 merchants, including, among others, retailers, theaters, restaurants, airlines, and hotels.

Communications

        Our principal Communications pay service is dial-up Internet access, offered under the NetZero and Juno brands. We also offer broadband services, email, Internet security services, and web hosting services. Most of our Communications revenues are derived from dial-up Internet access pay accounts.

        Internet Access Services.    Our Internet access services consist of dial-up and, to a much lesser extent, broadband services. Our dial-up Internet access services are provided on both a free and pay basis, with the free services subject to hourly and other limitations. Basic pay dial-up Internet access services include Internet access and an email account, although we also offer an enhanced email service as a stand-alone pay service. In addition, we offer accelerated dial-up Internet access services which can significantly reduce the time for certain web pages to download when compared to our basic dial-up Internet access services. Our accelerated dial-up Internet access services are also bundled with additional benefits including pop-up blocking, antivirus software and enhanced email storage. Our dial-up Internet access services are available in more than 12,000 cities across the U.S. and Canada.

        Our broadband Internet access services consist of digital subscriber lines (also known as "DSL") services that we purchase from third parties and resell under our own brands. These services are primarily used as a means to retain users who are leaving our dial-up Internet access services and we have conducted very limited marketing of our broadband Internet access services to the general public.

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 are:

FTD Segment Metrics

        Consumer Orders.    We monitor the number of consumer orders for floral and gift products during a given period. Consumer orders are orders delivered during the period that originated in the U.S. and Canada, primarily from the www.ftd.com website and the 1-800-SEND-FTD telephone number, and in the U.K. and the Republic of Ireland, primarily from the www.interflora.co.uk and www.interflora.ie websites and various telephone numbers. The number of consumer orders is not adjusted for non-delivered orders that are refunded after the scheduled delivery. Orders originating with a florist or other retail location for delivery to consumers are not included. The number of consumer orders received may fluctuate significantly from period to period due to seasonality resulting from the timing of key holidays; general economic conditions; fluctuations in marketing expenditures on initiatives designed to attract new and retain existing customers; changes in pricing for our floral, plant and gift products or competitive offerings; new or terminated partnerships; and changing consumer preferences, among other factors.

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        Average Order Value.    We monitor the average value for consumer orders delivered in a given period, which we refer to as the average order value. Average order value represents the average U.S. Dollar amount received for consumer orders delivered during a period. This average U.S. Dollar amount is determined after translating local currency amounts received for orders delivered principally in the U.K. and the Republic of Ireland into U.S. Dollars. Average order value includes merchandise revenue and shipping and service fees paid by the consumer, less discounts and refunds. Average order values may fluctuate from period to period based on the average foreign currency exchange rates; product mix; changes in merchandise pricing, shipping and service fees; levels of refunds issued; and discounts, among other factors.

Content & Media and Communications Segment Metrics

        Pay Accounts.    We generate a significant portion of our revenues from our pay accounts and they 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 Content & Media or Communications 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, such as Memory Lane's one-day All-Access Pass, are not considered subscriptions and thus, are not included in the pay accounts metric. A pay account does not equate to a unique subscriber since one subscriber could have several pay accounts. At any point in time, our pay account base includes a number of accounts receiving a free period of service as either a promotion or retention tool 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 metrics that affect our revenues from our pay accounts base include the number of pay accounts and the average monthly revenue per pay account ("ARPU"). A pay account generally becomes a free account following the expiration or termination of the related subscription.

        ARPU.    We monitor ARPU, which is a monthly measure calculated by dividing services revenues generated from the pay accounts of our Content & Media or Communications 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 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 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 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 pay accounts, we do not include in our churn calculation those accounts canceled during the first 30 days of service unless the accounts have upgraded from free accounts, although a number of such accounts will be included in our 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.

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        Active Accounts.    We monitor the number of active accounts among our membership base. Content & Media segment active accounts are defined as the sum of all pay accounts as of the date presented; the monthly average for the period of all free accounts who have visited our domestic or international online nostalgia websites (excluding The Names Database) at least once during the period; and the monthly average for the period of all online loyalty marketing members who have earned or redeemed points during such period. Communications segment active accounts include all Communications segment pay accounts as of the date presented combined with the number of free Internet access and email accounts that logged on to our services at least once during the preceding 31 days. Content & Media segment and Communications segment active accounts for the six-month, nine-month and annual periods, as applicable, 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 table below sets forth, for the periods presented, as applicable, our consolidated revenues, segment revenues, consumer orders, average order value, average currency exchange rate, pay accounts, segment churn, ARPU, and segment active accounts.

        Revenues and operating results from our FTD segment are impacted by seasonal holiday timing variations and fluctuations in foreign currency exchange rates. As such, we believe that comparisons of our FTD segment's revenues and operating results for any period with those of the immediately preceding period or, in some instances, the same period of the preceding fiscal year, may be of limited relevance in evaluating its historical financial performance and predicting its future financial performance.

        The pay accounts and ARPU metrics for our Content & 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, the percentage of pay accounts being

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represented by international pay accounts which, on average, have lower-priced subscription plans compared to U.S. pay accounts, and the churn rate.

 
  Quarter Ended   Nine Months Ended September 30,  
 
  September 30,
2011
  June 30,
2011
  March 31,
2011
  December 31,
2010
  September 30,
2010
 
 
  2011   2010  

Consolidated:

                                           
 

Revenues (in thousands)

  $ 182,694   $ 255,565   $ 241,505   $ 232,601   $ 193,541   $ 679,764   $ 687,952  

FTD:

                                           
 

Segment revenues (in thousands)

  $ 108,747   $ 176,299   $ 158,899   $ 140,174   $ 105,046   $ 443,945   $ 414,402  
   

% of consolidated revenues

    60 %   69 %   66 %   60 %   54 %   65 %   60 %
 

Consumer orders (in thousands)

    1,104     2,167     1,742     1,612     1,085     5,013     4,749  
 

Average order value

  $ 63.46   $ 60.45   $ 63.28   $ 60.43   $ 60.77   $ 62.10   $ 59.47  
 

Average currency exchange rate: GBP to USD

    1.61     1.63     1.61     1.58     1.55     1.62     1.53  

Content & Media:

                                           
 

Segment revenues (in thousands)

  $ 44,070   $ 47,427   $ 48,313   $ 53,253   $ 49,105   $ 139,810   $ 148,391  
   

% of consolidated revenues

    24 %   19 %   20 %   23 %   25 %   21 %   22 %
 

Pay accounts (in thousands)

    3,780     4,007     4,260     4,499     4,795     3,780     4,795  
 

Segment churn

    3.9 %   3.8 %   3.9 %   4.1 %   3.5 %   3.9 %   3.3 %
 

ARPU

  $ 2.64   $ 2.60   $ 2.47   $ 2.42   $ 2.26   $ 2.57   $ 2.30  
 

Segment active accounts (in millions)

    11.9     12.5     13.6     13.7     15.0     12.7     16.2  

Communications:

                                           
 

Segment revenues (in thousands)

  $ 30,260   $ 32,279   $ 34,698   $ 39,708   $ 40,165   $ 97,237   $ 127,445  
   

% of consolidated revenues

    17 %   13 %   14 %   17 %   21 %   14 %   19 %
 

Pay accounts (in thousands):

                                           
   

Access

    577     622     675     732     801     577     801  
   

Other

    266     272     279     288     295     266     295  
                               
     

Total pay accounts

    843     894     954     1,020     1,096     843     1,096  
 

Segment churn

    3.4 %   3.5 %   3.8 %   3.8 %   4.0 %   3.6 %   4.2 %
 

ARPU

  $ 9.14   $ 9.28   $ 9.33   $ 9.46   $ 9.58   $ 9.21   $ 9.53  
 

Segment active accounts (in millions)

    1.6     1.7     1.7     1.8     1.9     1.7     2.0  

Financial Statement Presentation

Revenues

Products Revenues

    FTD

        Products revenues consist of merchandise revenue and related shipping and service fees, less discounts and refunds, for FTD consumer orders as well as revenues generated from sales of containers, software and hardware systems, cut flowers, packaging and promotional products, and a wide variety of other floral- related supplies to floral network members.

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    Content & Media

        Products revenues consist of revenue generated from the sale of yearbook copies and related shipping fees.

    Communications

        We do not currently generate products revenues from our Communications segment.

Services Revenues

    FTD

        FTD services revenues consist of fees charged to its floral network members for access to the FTD and Interflora brands and the Mercury Man logo; access to the floral networks; credit card processing services; e-commerce website services; online advertising tools; and telephone answering, order taking, order transmission, and clearing-house services.

    Content & Media and Communications

        Content & Media services revenues consist of amounts charged to pay accounts for online nostalgia services. Communications services revenues consist of amounts charged to pay accounts for Internet access, email, web hosting, Internet security, and other services, with substantially all of such revenues associated with Internet access. Our Content & Media and Communications services revenues are primarily dependent on two factors: the average number of pay accounts for a period and the ARPU. In general, we charge our pay accounts in advance of providing a service, which results in the deferral of services revenue to the period in which the services are provided. Communications services revenues also include revenues generated from the resale of telecommunications to third parties.

Advertising Revenues

        We provide advertising opportunities to marketers with both brand and direct response objectives through a full suite of display, search, email, and text-link opportunities across our various properties. We also offer targeting technologies, website sponsorships and website integrations.

    FTD

        FTD has historically generated advertising revenues primarily from post-transaction sales generated when FTD and Interflora consumers were presented with third-party offers immediately after completing a purchase on the www.ftd.com and www.interflora.co.uk websites. FTD has not had a domestic post-transaction sales agreement since January 2010 and terminated its U.K. post-transaction sales agreement in January 2011.

    Content & Media

        Our online nostalgia services generate advertising revenues primarily from display advertisements. Advertising inventory on our online nostalgia websites includes text and graphic placements on the user home page, profile page, class list page, and most other pages on our websites.

        Our online loyalty marketing service revenues are derived from advertising fees, consisting primarily of fees based on performance measures, that are generated when emails are transmitted to members, when members respond to emails, when members complete online transactions, and when members engage in a variety of other online activities including, but not limited to, games, Internet searches and market research surveys.

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    Communications

        Our Communications services generate advertising revenues from search placements, display advertisements and online market research associated with our Internet access and email services. Advertising revenues also include intercompany commissions from our Content & Media segment which are included in reported segment results and are eliminated upon consolidation.

Cost of Revenues

FTD

        FTD cost of revenues includes product costs; shipping and delivery costs; costs associated with taking orders; printing and postage costs; costs related to FTD's product quality guarantee; systems installation, training and support costs; data center costs; depreciation of network computers and equipment; license fees; costs related to customer billing and billing support for floral network members; fees associated with the storage and processing of customer credit cards and associated bank fees; and domain name registration fees.

Content & Media

        Content & Media cost of revenues includes costs of points earned by members of our online loyalty marketing service; data center costs; personnel- and overhead-related costs associated with operating our networks and data centers; depreciation of network computers and equipment; amortization of content purchases; license fees; costs related to providing customer support; costs related to customer billing and billing support for our pay accounts; fees associated with the storage and processing of customer credit cards and associated bank fees; domain name registration fees; and costs associated with the sale of yearbook copies and related shipping costs.

Communications

        Communications cost of revenues includes telecommunications and data center costs; personnel- and overhead-related costs associated with operating our networks and data centers; depreciation of network computers and equipment; license fees; costs related to providing customer support; costs related to customer billing and billing support for our pay accounts; fees associated with the storage and processing of customer credit cards and associated bank fees; and domain name registration fees.

Sales and Marketing

        Sales and marketing expenses include expenses associated with promoting our brands, products and services and with generating advertising revenues. Expenses associated with promoting our brands, products and services include advertising and promotion expenses; fees paid to distribution partners, third-party advertising networks and co-registration partners to acquire new pay and free accounts; personnel and overhead-related expenses for marketing, merchandising, customer service, and sales personnel; and telemarketing costs incurred to acquire and retain pay accounts and up-sell pay accounts to additional services. Expenses associated with generating advertising revenues include sales commissions and personnel-related expenses. We have expended significant amounts on sales and marketing, including branding and customer acquisition campaigns consisting of television, Internet, sponsorships, print, and outdoor advertising, and on retail and other performance-based distribution relationships. Marketing and advertising costs to promote our products and services are expensed in the period incurred. Advertising and promotion expenses include media, agency and promotion expenses. Media production costs are expensed the first time the advertisement is run. Media and agency costs are expensed over the period the advertising runs.

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Technology and Development

        Technology and development expenses include expenses for product development, maintenance of existing software, technology and websites, and development of new or improved software and technology, including personnel-related expenses for our technology group in various office locations. Costs incurred by us to manage and monitor our technology and development activities are expensed as incurred. Costs relating to the acquisition and development of internal-use software are capitalized when appropriate and depreciated over their estimated useful lives, generally three to five years.

General and Administrative

        General and administrative expenses, which include unallocated corporate expenses, consist of personnel-related expenses for executive, finance, legal, human resources, facilities, internal audit, investor relations, internal customer support personnel and personnel associated with operating our corporate network systems. In addition, general and administrative expenses include, among other costs, professional fees for legal, accounting and financial services; insurance; occupancy and other overhead-related costs; office relocation costs; non-income taxes; gains and losses on the sale of assets; and expenses incurred as a result of settlements, judgments, fines, penalties, assessment, or other resolutions related to litigation, arbitration, investigations, disputes, or similar matters, or reserves for any of the foregoing. General and administrative expenses also include expenses resulting from actual or potential transactions such as business combinations, mergers, acquisitions, and financing transactions, including expenses for advisors and representatives such as investment bankers, consultants, attorneys, and accounting firms.

Amortization of Intangible Assets

        Amortization of intangible assets principally includes amortization of: acquired pay accounts and free accounts; certain acquired trademarks and trade names; purchased software and technology; acquired customer and advertising contracts and related relationships; acquired rights, content and intellectual property; and other acquired identifiable intangible assets. In accordance with the provisions set forth in Accounting Standards Codification ("ASC") 350, Intangibles—Goodwill and Other, goodwill and indefinite-lived intangible assets are not being amortized but are tested for impairment at a reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would indicate the fair value of a reporting unit is below its carrying value.

Restructuring Charges

        Restructuring charges consist of costs associated with the realignment and reorganization of our operations and generally include severance expenses, facility closure and relocation costs, and contract termination costs.

Interest Income

        Interest income consists primarily of earnings on our cash, cash equivalents and short-term investments held from time to time, and interest on long-term receivables from FTD's technology system sales.

Interest Expense

        Interest expense consists of interest expense on our credit facilities, including accretion of discounts and amortization of debt issue costs, loss on extinguishment of debt and interest expense relating to capital leases and our interest rate cap.

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Other Income (Expense), Net

        Other income (expense), net, generally consists of realized gains and losses recognized in connection with the sale of short-term investments, equity earnings on investments in subsidiaries, and gains and losses on foreign currency exchange rate transactions. Additionally, other income (expense), net, consists of realized and unrealized gains and losses on foreign currency forward contracts and other non-operating income and expenses.

Results of Operations

        The following tables set forth, for the periods presented, selected historical statements of operations data. The information contained in the tables below 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" included in Part I, Item 3 of this Quarterly Report on Form 10-Q, and the unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

        Unaudited condensed consolidated financial information was as follows (in thousands):

 
  Quarter Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2011   2010   2011   2010  

Revenues

  $ 182,694   $ 193,541   $ 679,764   $ 687,952  

Operating expenses:

                         
 

Cost of revenues

    82,801     84,394     335,569     320,487  
 

Sales and marketing

    33,315     34,783     130,261     133,926  
 

Technology and development

    13,158     14,334     39,176     42,329  
 

General and administrative

    25,552     26,333     80,465     84,576  
 

Amortization of intangible assets

    7,571     8,020     22,914     24,298  
 

Restructuring charges

    74     70     751     1,061  
                   
   

Total operating expenses

    162,471     167,934     609,136     606,677  
                   

Operating income

    20,223     25,607     70,628     81,275  

Interest income

    308     382     1,140     1,259  

Interest expense

    (3,747 )   (5,471 )   (19,564 )   (18,934 )

Other income (expense), net

    512     (40 )   2,217     95  
                   

Income before income taxes

    17,296     20,478     54,421     63,695  

Provision for income taxes

    5,380     8,319     15,556     26,358  
                   

Net income

  $ 11,916   $ 12,159   $ 38,865   $ 37,337  
                   

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        Information for our three reportable segments was as follows (in thousands):

 
  FTD   Content & Media   Communications  
 
  Quarter Ended
September 30,
  Quarter Ended
September 30,
  Quarter Ended
September 30,
 
 
  2011   2010   2011   2010   2011   2010  

Revenues

  $ 108,747   $ 105,046   $ 44,070   $ 49,105   $ 30,260   $ 40,165  

Operating expenses:

                                     
 

Cost of revenues

    65,183     63,197     6,430     8,794     8,195     9,867  
 

Sales and marketing

    17,449     16,451     13,701     14,370     2,137     4,201  
 

Technology and development

    2,776     2,608     6,029     6,070     2,113     3,382  
 

General and administrative

    7,813     7,831     6,384     5,727     3,119     3,903  
 

Restructuring charges

        70             74      
                           
   

Total operating expenses

    93,221     90,157     32,544     34,961     15,638     21,353  
                           

Segment income from operations

  $ 15,526   $ 14,889   $ 11,526   $ 14,144   $ 14,622   $ 18,812  
                           

 

 
  FTD   Content & Media   Communications  
 
  Nine Months Ended
September 30,
  Nine Months Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2011   2010   2011   2010   2011   2010  

Revenues

  $ 443,945   $ 414,402   $ 139,810   $ 148,391   $ 97,237   $ 127,445  

Operating expenses:

                                     
 

Cost of revenues

    278,362     257,056     23,185     24,835     25,931     30,415  
 

Sales and marketing

    74,686     71,126     47,429     47,089     8,020     16,363  
 

Technology and development

    8,563     8,505     17,951     17,208     5,951     9,800  
 

General and administrative

    23,553     24,681     20,388     18,552     9,472     12,358  
 

Restructuring charges

        1,152         (91 )   751      
                           
   

Total operating expenses

    385,164     362,520     108,953     107,593     50,125     68,936  
                           

Segment income from operations

  $ 58,781   $ 51,882   $ 30,857   $ 40,798   $ 47,112   $ 58,509  
                           

        A reconciliation of segment revenues to consolidated revenues was as follows for each period presented (in thousands):

 
  Quarter Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2011   2010   2011   2010  

Segment revenues:

                         
 

FTD

  $ 108,747   $ 105,046   $ 443,945   $ 414,402  
 

Content & Media

    44,070     49,105     139,810     148,391  
 

Communications

    30,260     40,165     97,237     127,445  
                   

Total segment revenues

    183,077     194,316     680,992     690,238  
 

Intersegment eliminations

    (383 )   (775 )   (1,228 )   (2,286 )
                   

Consolidated revenues

  $ 182,694   $ 193,541   $ 679,764   $ 687,952  
                   

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

 
  Quarter Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2011   2010   2011   2010  

Segment operating expenses:

                         
 

FTD

  $ 93,221   $ 90,157   $ 385,164   $ 362,520  
 

Content & Media

    32,544     34,961     108,953     107,593  
 

Communications

    15,638     21,353     50,125     68,936  
                   

Total segment operating expenses

    141,403     146,471     544,242     539,049  
 

Depreciation

    6,564     6,604     19,118     20,168  
 

Amortization of intangible assets

    7,870     8,054     23,646     24,335  
 

Unallocated corporate expenses

    7,017     7,580     23,358     25,411  
 

Intersegment eliminations

    (383 )   (775 )   (1,228 )   (2,286 )
                   

Consolidated operating expenses

  $ 162,471   $ 167,934   $ 609,136   $ 606,677  
                   

        A reconciliation of segment income from operations (which excludes depreciation and amortization of intangible assets) to consolidated operating income was as follows for each period presented (in thousands):

 
  Quarter Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2011   2010   2011   2010  

Segment income from operations:

                         
 

FTD

  $ 15,526   $ 14,889   $ 58,781   $ 51,882  
 

Content & Media

    11,526     14,144     30,857     40,798  
 

Communications

    14,622     18,812     47,112     58,509  
                   

Total segment income from operations

    41,674     47,845     136,750     151,189  
 

Depreciation

    (6,564 )   (6,604 )   (19,118 )   (20,168 )
 

Amortization of intangible assets

    (7,870 )   (8,054 )   (23,646 )   (24,335 )
 

Unallocated corporate expenses

    (7,017 )   (7,580 )   (23,358 )   (25,411 )
                   

Consolidated operating income

  $ 20,223   $ 25,607   $ 70,628   $ 81,275  
                   

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Quarter and Nine Months Ended September 30, 2011 compared to Quarter and Nine Months Ended September 30, 2010

        The following table presents our consolidated operating results as a percentage of consolidated revenues for the quarters and nine months ended September 30, 2011 and 2010.

 
  Quarter
Ended
September 30,
  Nine Months
Ended
September 30,
 
 
  2011   2010   2011   2010  

Revenues

    100.0 %   100.0 %   100.0 %   100.0 %

Operating expenses:

                         
 

Cost of revenues

    45.3     43.6     49.4     46.6  
 

Sales and marketing

    18.2     18.0     19.2     19.5  
 

Technology and development

    7.2     7.4     5.8     6.2  
 

General and administrative

    14.0     13.6     11.8     12.3  
 

Amortization of intangible assets

    4.1     4.1     3.4     3.5  
 

Restructuring charges

            0.1     0.2  
                   
   

Total operating expenses

    88.9     86.8     89.6     88.2  
                   

Operating income

    11.1     13.2     10.4     11.8  

Interest income

    0.2     0.2     0.2     0.2  

Interest expense

    (2.1 )   (2.8 )   (2.9 )   (2.8 )

Other income, net

    0.3         0.3      
                   

Income before income taxes

    9.5     10.6     8.0     9.3  

Provision for income taxes

    2.9     4.3     2.3     3.8  
                   

Net income

    6.5 %   6.3 %   5.7 %   5.4 %
                   

Consolidated Results

        Revenues.    Consolidated revenues decreased by $10.8 million, or 6%, to $182.7 million for the quarter ended September 30, 2011, compared to $193.5 million for the quarter ended September 30, 2010. The decrease in consolidated revenues was due to a $9.9 million decrease in revenues from our Communications segment and a $5.0 million decrease in revenues from our Content & Media segment, partially offset by a $3.7 million increase in revenues from our FTD segment. Consolidated revenues related to our FTD, Content & Media and Communications segments constituted 59.4%, 24.1% and 16.5%, respectively, of our total segment revenues for the quarter ended September 30, 2011, compared to 54.1%, 25.3% and 20.7%, respectively, for the quarter ended September 30, 2010.

        Consolidated revenues decreased by $8.2 million, or 1%, to $679.8 million for the nine months ended September 30, 2011, compared to $688.0 million for the nine months ended September 30, 2010. The decrease in consolidated revenues was due to a $30.2 million decrease in revenues from our Communications segment and an $8.6 million decrease in revenues from our Content & Media segment, partially offset by a $29.5 million increase in revenues from our FTD segment. Consolidated revenues related to our FTD, Content & Media and Communications segments constituted 65.2%, 20.5% and 14.3%, respectively, of our total segment revenues for the nine months ended September 30, 2011, compared to 60.0%, 21.5% and 18.5%, respectively, for the nine months ended September 30, 2010.

        Cost of Revenues.    Consolidated cost of revenues decreased by $1.6 million, or 2%, to $82.8 million for the quarter ended September 30, 2011, compared to $84.4 million for the quarter ended September 30, 2010. Consolidated cost of revenues as a percentage of consolidated revenues

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increased to 45.3% for the quarter ended September 30, 2011, compared to 43.6% for the prior-year period. The decrease of $1.6 million was primarily due to a $2.4 million decrease in cost of revenues associated with our Content & Media segment and, to a lesser extent, a $1.7 million decrease in cost of revenues associated with our Communications segment. The decrease was partially offset by a $2.0 million increase in cost of revenues associated with our FTD segment and a $0.3 million increase in content amortization costs. Segment cost of revenues related to our FTD, Content & Media and Communications segments constituted 81.7%, 8.1% and 10.3%, respectively, of our total segment cost of revenues for the quarter ended September 30, 2011, compared to 77.2%, 10.7% and 12.1%, respectively, for the quarter ended September 30, 2010.

        Consolidated cost of revenues increased by $15.1 million, or 5%, to $335.6 million for the nine months ended September 30, 2011, compared to $320.5 million for the nine months ended September 30, 2010. Consolidated cost of revenues as a percentage of consolidated revenues increased to 49.4% for the nine months ended September 30, 2011, compared to 46.6% for the prior-year period. The increase of $15.1 million was primarily due to a $21.3 million increase in cost of revenues associated with our FTD segment and a $0.7 million increase in content amortization costs. The increase was partially offset by a $4.5 million decrease in cost of revenues associated with our Communications segment, a $1.7 million decrease in costs of revenues associated with our Content & Media segment and a $0.7 million decrease in depreciation expense. Segment cost of revenues related to our FTD, Content & Media and Communications segments constituted 85.0%, 7.1% and 7.9%, respectively, of our total segment cost of revenues for the nine months ended September 30, 2011, compared to 82.3%, 8.0% and 9.7%, respectively, for the nine months ended September 30, 2010.

        Sales and Marketing Expenses.    Consolidated sales and marketing expenses decreased by $1.5 million, or 4%, to $33.3 million for the quarter ended September 30, 2011, compared to $34.8 million for the quarter ended September 30, 2010. Consolidated sales and marketing expenses as a percentage of consolidated revenues increased slightly to 18.2% for the quarter ended September 30, 2011, compared to 18.0% for the quarter ended September 30, 2010. The decrease of $1.5 million was primarily due to a $2.1 million decrease in sales and marketing expenses associated with our Communications segment and, to a lesser extent, a $0.7 million decrease in sales and marketing expenses associated with our Content & Media segment. The decrease was partially offset by a $1.0 million increase in sales and marketing expenses associated with our FTD segment. Segment sales and marketing expenses related to our FTD, Content & Media and Communications segments constituted 52.4%, 41.2% and 6.4%, respectively, of total segment sales and marketing expenses for the quarter ended September 30, 2011, compared to 47.0%, 41.0% and 12.0%, respectively, for the quarter ended September 30, 2010.

        Consolidated sales and marketing expenses decreased by $3.7 million, or 3%, to $130.3 million for the nine months ended September 30, 2011, compared to $133.9 million for the nine months ended September 30, 2010. Consolidated sales and marketing expenses as a percentage of consolidated revenues decreased slightly to 19.2% for the nine months ended September 30, 2011, compared to 19.5% for the nine months ended September 30, 2010. The decrease of $3.7 million was primarily due to an $8.3 million decrease in sales and marketing expenses associated with our Communications segment and a $0.4 million decrease in depreciation expense. The decrease was partially offset by a $3.6 million increase in sales and marketing expenses associated with our FTD segment and a $0.3 million increase in sales and marketing expenses associated with our Content & Media segment. Segment sales and marketing expenses related to our FTD, Content & Media and Communications segments constituted 57.4%, 36.4% and 6.2%, respectively, of total segment sales and marketing expenses for the nine months ended September 30, 2011, compared to 52.9%, 35.0% and 12.2%, respectively, for the nine months ended September 30, 2010.

        Technology and Development Expenses.    Consolidated technology and development expenses decreased by $1.2 million, or 8%, to $13.2 million for the quarter ended September 30, 2011, compared

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to $14.3 million for the quarter ended September 30, 2010. Consolidated technology and development expenses as a percentage of consolidated revenues decreased slightly to 7.2% for the quarter ended September 30, 2011, compared to 7.4% for the prior-year period. The decrease of $1.2 million was primarily due to a $1.3 million decrease in technology and development expenses associated with our Communications segment. Segment technology and development expenses related to our FTD, Content & Media and Communications segments constituted 25.4%, 55.2% and 19.4%, respectively, of total segment technology and development expenses for the quarter ended September 30, 2011, compared to 21.6%, 50.3% and 28.0%, respectively, for the quarter ended September 30, 2010.

        Consolidated technology and development expenses decreased by $3.2 million, or 7%, to $39.2 million for the nine months ended September 30, 2011, compared to $42.3 million for the nine months ended September 30, 2010. Consolidated technology and development expenses as a percentage of consolidated revenues decreased slightly to 5.8% for the nine months ended September 30, 2011, compared to 6.2% for the prior-year period. The decrease of $3.2 million was primarily related to a $3.8 million decrease in technology and development expenses associated with our Communications segment, partially offset by a $0.7 million increase in technology and development expenses associated with our Content & Media segment. Segment technology and development expenses related to our FTD, Content & Media and Communications segments constituted 26.4%, 55.3% and 18.3%, respectively, of total segment technology and development expenses for the nine months ended September 30, 2011, compared to 23.9%, 48.5% and 27.6%, respectively, for the nine months ended September 30, 2010.

        General and Administrative Expenses.    Consolidated general and administrative expenses decreased by $0.8 million, or 3%, to $25.6 million for the quarter ended September 30, 2011, compared to $26.3 million for the quarter ended September 30, 2010. Consolidated general and administrative expenses as a percentage of consolidated revenues increased slightly to 14.0% for the quarter ended September 30, 2011, compared to 13.6% for the prior-year period. The decrease of $0.8 million was due to an $0.8 million decrease in general and administrative expenses associated with our Communications segment and a $0.6 million decrease in unallocated corporate expenses, partially offset by a $0.7 million increase in general and administrative expenses associated with our Content & Media segment. Segment general and administrative expenses related to our FTD, Content & Media and Communications segments constituted 45.1%, 36.9% and 18.0%, respectively, of total segment general and administrative expenses for the quarter ended September 30, 2011, compared to 44.8%, 32.8% and 22.4%, respectively, for the quarter ended September 30, 2010.

        Consolidated general and administrative expenses decreased by $4.1 million, or 5%, to $80.5 million for the nine months ended September 30, 2011, compared to $84.6 million for the nine months ended September 30, 2010. Consolidated general and administrative expenses as a percentage of consolidated revenues decreased slightly to 11.8% for the nine months ended September 30, 2011, compared to 12.3% for the prior-year period. The decrease of $4.1 million was due to a $2.9 million decrease in general and administrative expenses associated with our Communications segment, a $2.1 million decrease in unallocated corporate expenses and a $1.1 million decrease in general and administrative expenses associated with our FTD segment. The decrease was partially offset by a $1.8 million increase in general and administrative expenses associated with our Content & Media segment and a $0.4 million increase in depreciation expense. Segment general and administrative expenses related to our FTD, Content & Media and Communications segments constituted 44.1%, 38.2% and 17.7%, respectively, of total segment general and administrative expenses for the nine months ended September 30, 2011, compared to 44.4%, 33.4% and 22.2%, respectively, for the nine months ended September 30, 2010.

        Amortization of Intangible Assets.    Consolidated amortization of intangible assets decreased by $0.4 million, or 6%, to $7.6 million for the quarter ended September 30, 2011, compared to $8.0 million for the quarter ended September 30, 2010. Consolidated amortization of intangible assets

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decreased by $1.4 million, or 6%, to $22.9 million for the nine months ended September 30, 2011, compared to $24.3 million for the nine months ended September 30, 2010. The decreases were primarily due to a decrease in amortization of intangible assets related to our FTD and Content & Media segments.

        Restructuring Charges.    Consolidated restructuring charges were $0.1 million for the quarters ended September 30, 2011 and 2010. Consolidated restructuring charges were $0.8 million for the nine months ended September 30, 2011, compared to $1.1 million for the nine months ended September 30, 2010. For the nine months ended September 30, 2011, the Communications segment eliminated six positions and the Company recorded restructuring charges related to employee termination benefits and contract termination costs. Restructuring charges for the nine months ended September 30, 2010 were primarily related to the closure of certain FTD call center facilities in the U.S. and the U.K. These restructuring charges primarily included lease termination costs and employee termination benefits.

        Interest Income.    Interest income decreased by $0.1 million, or 19%, to $0.3 million for the quarter ended September 30, 2011, compared to $0.4 million for the quarter ended September 30, 2010. Interest income decreased by $0.1 million, or 9%, to $1.1 million for the nine months ended September 30, 2011, compared to $1.3 million for the nine months ended September 30, 2010.

        Interest Expense.    Interest expense decreased by $1.7 million, or 32%, to $3.7 million for the quarter ended September 30, 2011, compared to $5.5 million for the quarter ended September 30, 2010. The decrease of $1.7 million was primarily due to lower interest rates and reduced interest expense as a result of lower average debt balances.

        Interest expense increased by $0.6 million, or 3%, to $19.6 million for the nine months ended September 30, 2011, compared to $18.9 million for the nine months ended September 30, 2010. The increase of $0.6 million was primarily related to a $6.1 million loss on extinguishment of debt, which was recorded in the nine months ended September 30, 2011, related to the refinancing of the 2008 Credit Agreement, partially offset by lower interest rates and reduced interest expense as a result of lower average debt balances.

        Other Income (Expense), Net.    Other income, net increased by $0.6 million, or over 100%, to $0.5 million for the quarter ended September 30, 2011, compared to other expense, net of less than $0.1 million for the quarter ended September 30, 2010. The increase of $0.6 million is primarily due to gains on forward foreign currency exchange contracts.

        Other income, net increased by $2.1 million, or over 100%, to $2.2 million for the nine months ended September 30, 2011, compared to $0.1 million for the nine months ended September 30, 2010. The increase of $2.1 million was due to a $1.1 million non-income tax refund at our FTD segment in the nine months ended September 30, 2011 as well as an increase in gains related to foreign currency.

        Provision for Income Taxes.    For the quarter and nine months ended September 30, 2011, we recorded a provision for income taxes of $5.4 million and $15.6 million, respectively, on pre-tax income of $17.3 million and $54.4 million, respectively, resulting in a year-to-date effective income tax rate of 28.6%. For the quarter and nine months ended September 30, 2010, we recorded a provision for income taxes of $8.3 million and $26.4 million, respectively, on pre-tax income of $20.5 million and $63.7 million, respectively, resulting in a year-to-date effective income tax rate of 41.4%. The year-over-year effective income tax rate declined primarily due to a tax benefit of $4.8 million related to the release of reserves for uncertain tax positions and, to a lesser extent, the benefit from the decrease in non-deductible stock-based compensation, adjustments resulting from a reconciliation of the prior year's income tax return to our provision for income taxes, and an increase in the reduction of the U.K. statutory income tax rate.

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FTD Segment Results

        The following table presents the FTD segment's operating expenses and income from operations as a percentage of FTD revenues for the quarters and nine months ended September 30, 2011 and 2010.

 
  Quarter
Ended
September 30,
  Nine Months
Ended
September 30,
 
 
  2011   2010   2011   2010  

Revenues

    100.0 %   100.0 %   100.0 %   100.0 %

Operating expenses:

                         
 

Cost of revenues

    59.9     60.2     62.7     62.0  
 

Sales and marketing

    16.0     15.7     16.8     17.2  
 

Technology and development

    2.6     2.5     1.9     2.1  
 

General and administrative

    7.2     7.5     5.3     6.0  
 

Restructuring charges

        0.1         0.3  
                   
   

Total operating expenses

    85.7     85.8     86.8     87.5  
                   

Segment income from operations

    14.3 %   14.2 %   13.2 %   12.5 %
                   

        FTD Revenues.    FTD revenues increased by $3.7 million, or 4%, to $108.7 million for the quarter ended September 30, 2011, compared to $105.0 million for the quarter ended September 30, 2010. Excluding the impact of foreign currency exchange rates of $1.1 million due to a stronger British Pound versus the U.S. Dollar, revenues increased by $2.6 million, or 2%, compared to the prior-year period. The increase was primarily due to a 4% increase in average order value (3% increase excluding the impact of foreign currency exchange rates) from $60.77 for the quarter ended September 30, 2010 to $63.46 for the quarter ended September 30, 2011 and a 2% increase in consumer orders.

        FTD revenues increased by $29.5 million, or 7%, to $443.9 million for the nine months ended September 30, 2011, compared to $414.4 million for the nine months ended September 30, 2010. Excluding the impact of foreign currency exchange rates of $5.7 million due to a stronger British Pound versus the U.S. Dollar, revenues increased by $23.8 million, or 6%, compared to the prior-year period. The increase was primarily due to a 4% increase in average order value (3% increase excluding the impact of foreign currency exchange rates) from $59.47 for the nine months ended September 30, 2010 to $62.10 for the nine months ended September 30, 2011 and a 6% increase in consumer orders from 4.7 million for the nine months ended September 30, 2010 to 5.0 million for the nine months ended September 30, 2011.

        FTD Cost of Revenues.    FTD cost of revenues increased by $2.0 million, or 3%, to $65.2 million for the quarter ended September 30, 2011, compared to $63.2 million for the quarter ended September 30, 2010. Excluding the impact of foreign currency exchange rates of $0.7 million, cost of revenues increased by $1.2 million, or 2% compared to the prior-year period. FTD cost of revenues as a percentage of revenues decreased to 59.9% for the quarter ended September 30, 2011, compared to 60.2% for the prior-year period. Cost of revenues as a percentage of revenues was positively impacted by a shift in the mix of products and services sold.

        FTD cost of revenues increased by $21.3 million, or 8%, to $278.4 million for the nine months ended September 30, 2011, compared to $257.1 million for the nine months ended September 30, 2010. Excluding the impact of foreign currency exchange rates of $4.0 million, cost of revenues increased by $17.3 million, or 7%, compared to the prior-year period. FTD cost of revenues as a percentage of revenues increased to 62.7% for the nine months ended September 30, 2011, compared to 62.0% for the prior-year period. Cost of revenues as a percentage of revenues was negatively impacted by a shift

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in the mix of products and services sold, higher shipping costs and a decrease in post-transaction sales, which have minimal cost of revenues.

        FTD Sales and Marketing Expenses.    FTD sales and marketing expenses increased by $1.0 million, or 6%, to $17.4 million for the quarter ended September 30, 2011, compared to $16.5 million for the quarter ended September 30, 2010. FTD sales and marketing expenses as a percentage of revenues increased to 16.0% for the quarter ended September 30, 2011, compared to 15.7% for the prior-year period. The increase was primarily due to increased marketing expenses.

        FTD sales and marketing expenses increased by $3.6 million, or 5%, to $74.7 million for the nine months ended September 30, 2011, compared to $71.1 million for the nine months ended September 30, 2010. FTD sales and marketing expenses as a percentage of revenues decreased to 16.8% for the nine months ended September 30, 2011, compared to 17.2% for the prior-year period. Excluding the impact of foreign currency exchange rates of $0.7 million, sales and marketing expenses increased by $2.8 million, or 4%, compared to the prior-year period. The increase was primarily due to higher marketing expenditures related to television advertising in the U.K., partially offset by decreased marketing expenditures related to television advertising in the U.S., in each case, leading up to their respective holidays, and increased marketing costs, including those related to group-buying initiatives.

        FTD Technology and Development Expenses.    FTD technology and development expenses increased by $0.2 million, or 6%, to $2.8 million for the quarter ended September 30, 2011, compared to $2.6 million for the quarter ended September 30, 2010. FTD technology and development expenses as a percentage of revenues remained relatively flat at 2.6% for the quarter ended September 30, 2011, compared to 2.5% for the prior-year period.

        FTD technology and development expenses increased by $0.1 million, or 1%, to $8.6 million for the nine months ended September 30, 2011, compared to $8.5 million for the nine months ended September 30, 2010. FTD technology and development expenses as a percentage of revenues decreased slightly to 1.9% for the nine months ended September 30, 2011, compared to 2.1% for the prior-year period.

        FTD General and Administrative Expenses.    FTD general and administrative expenses remained flat at $7.8 million for the quarter ended September 30, 2011, compared to the quarter ended September 30, 2010. FTD general and administrative expenses as a percentage of revenues decreased to 7.2% for the quarter ended September 30, 2011, compared to 7.5% for the prior-year period. General and administrative expenses reflect a decrease in bad debt expense, offset by increases in legal and personnel-related costs.

        FTD general and administrative expenses decreased by $1.1 million, or 5%, to $23.6 million for the nine months ended September 30, 2011, compared to $24.7 million for the nine months ended September 30, 2010. FTD general and administrative expenses as a percentage of revenues decreased to 5.3% for the nine months ended September 30, 2011, compared to 6.0% for the prior-year period. The decrease in general and administrative expenses was largely attributable to a decrease in bad debt expense and a $0.4 million increase in a reserve for a legal settlement in 2010, partially offset by an increase in personnel-related costs.

        FTD Restructuring Charges.    The FTD segment recorded restructuring charges of $1.2 million for the nine months ended September 30, 2010. These charges were primarily related to the closure of certain call center facilities in the U.S. and the U.K. There were no restructuring charges for the FTD segment for the nine months ended September 30, 2011.

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Content & Media Segment Results

        The following table presents the Content & Media segment's operating expenses and income from operations as a percentage of Content & Media revenues for the quarters and nine months ended September 30, 2011 and 2010.

 
  Quarter
Ended
September 30,
  Nine Months
Ended
September 30,
 
 
  2011   2010   2011   2010  

Revenues

    100.0 %   100.0 %   100.0 %   100.0 %

Operating expenses:

                         
 

Cost of revenues

    14.6     17.9     16.6     16.7  
 

Sales and marketing

    31.1     29.3     33.9     31.7  
 

Technology and development

    13.7     12.4     12.8     11.6  
 

General and administrative

    14.5     11.7     14.6     12.5  
 

Restructuring charges

                (0.1 )
                   
   

Total operating expenses

    73.8     71.2     77.9     72.5  
                   

Segment income from operations

    26.2 %   28.8 %   22.1 %   27.5 %
                   

        Content & Media Revenues.    Content & Media revenues decreased by $5.0 million, or 10%, to $44.1 million for the quarter ended September 30, 2011, compared to $49.1 million for the quarter ended September 30, 2010. The decrease was due to a $3.0 million decrease in advertising revenues primarily related to a decrease in revenues generated by our online loyalty marketing service due to a number of factors, including the loss of a major customer and, to a lesser extent, a decrease in the number of segment active accounts as well as a decrease in available advertising inventory on the Memory Lane website. In addition, Content & Media services revenues decreased by $2.4 million for the quarter ended September 30, 2011 compared to the quarter ended September 30, 2010 as a result of a 20% decrease in our average number of pay accounts from 4.9 million for the quarter ended September 30, 2010 to 3.9 million for the quarter ended September 30, 2011, partially offset by a 23% increase in ARPU from $2.26 for the quarter ended September 30, 2010 to $2.64 for the quarter ended September 30, 2011. The increase in ARPU was primarily attributable to an overall decrease in the percentage of pay accounts on discounted plans and a higher percentage of domestic pay accounts on shorter-term subscription plans, which have higher ARPUs. The decrease in revenues was partially offset by $0.3 million in products revenues generated in the quarter ended September 30, 2011. We anticipate that Content & Media pay accounts and revenues will continue to decline, at least in the near term.

        Content & Media revenues decreased by $8.6 million, or 6%, to $139.8 million for the nine months ended September 30, 2011, compared to $148.4 million for the nine months ended September 30, 2010. The decrease was due to a $4.8 million decrease in services revenues. Services revenues decreased primarily as a result of a 15% decrease in our average number of pay accounts from 4.8 million for the nine months ended September 30, 2010 to 4.1 million for the nine months ended September 30, 2011, partially offset by an 11% increase in ARPU from $2.30 for the nine months ended September 30, 2010 to $2.57 for the nine months ended September 30, 2011. The increase in ARPU was primarily attributable to an overall decrease in the percentage of pay accounts on discounted plans and a higher percentage of domestic pay accounts on shorter-term subscription plans, which have higher ARPUs. In addition, Content & Media advertising revenues decreased by $4.2 million for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010, primarily related to a decrease in revenues generated by our online loyalty marketing service due to a number of factors, including the loss of a major customer and, to a lesser extent, a decrease in the number of segment active accounts as well as a decrease in available

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advertising inventory on the Memory Lane website. The decrease in revenues was partially offset by $0.3 million in products revenues generated in the nine months ended September 30, 2011.

        Content & Media Cost of Revenues.    Content & Media cost of revenues decreased by $2.4 million, or 27%, to $6.4 million for the quarter ended September 30, 2011, compared to $8.8 million for the quarter ended September 30, 2010. Content & Media cost of revenues as a percentage of Content & Media revenues decreased to 14.6% for the quarter ended September 30, 2011, compared to 17.9% for the prior-year period. The decrease of $2.4 million was primarily due to a $1.5 million decrease in the cost of points earned by members of our online loyalty marketing service, a $0.5 million decrease in overhead-related costs and a $0.4 million decrease in customer support costs.

        Content & Media cost of revenues decreased by $1.7 million, or 7%, to $23.2 million for the nine months ended September 30, 2011, compared to $24.8 million for the nine months ended September 30, 2010. Content & Media cost of revenues as a percentage of Content & Media revenues decreased slightly to 16.6% for the nine months ended September 30, 2011, compared to 16.7% for the prior-year period. The decrease of $1.7 million was due to a $1.0 million decrease in personnel- and overhead-related costs and a $0.4 million decrease in customer support costs.

        Content & Media Sales and Marketing Expenses.    Content & Media sales and marketing expenses decreased by $0.7 million, or 5%, to $13.7 million for the quarter ended September 30, 2011, compared to $14.4 million for the quarter ended September 30, 2010. Content & Media sales and marketing expenses as a percentage of Content & Media revenues increased to 31.1% for the quarter ended September 30, 2011, compared to 29.3% for the prior-year period. The decrease of $0.7 million was primarily due to a $0.5 million decrease in personnel- and overhead-related costs.

        Content & Media sales and marketing expenses increased by $0.3 million, or 1%, to $47.4 million for the nine months ended September 30, 2011, compared to $47.1 million for the nine months ended September 30, 2010. Content & Media sales and marketing expenses as a percentage of Content & Media revenues increased to 33.9% for the nine months ended September 30, 2011, compared to 31.7% for the prior-year period. The increase of $0.3 million was due to a $2.8 million increase in marketing costs primarily related to the launch of Memory Lane, partially offset by a $1.5 million decrease in costs to acquire online loyalty marketing members and other sales and marketing costs as well as a $1.0 million decrease in personnel- and overhead-related costs.

        Content & Media Technology and Development Expenses.    Content & Media technology and development expenses decreased by less than $0.1 million, or 1%, to $6.0 million for the quarter ended September 30, 2011, compared to $6.1 million for the quarter ended September 30, 2010. Content & Media technology and development expenses as a percentage of Content & Media revenues increased to 13.7% for the quarter ended September 30, 2011, compared to 12.4% for the prior-year period.

        Content & Media technology and development expenses increased by $0.7 million, or 4%, to $18.0 million for the nine months ended September 30, 2011, compared to $17.2 million for the nine months ended September 30, 2010. Content & Media technology and development expenses as a percentage of Content & Media revenues increased to 12.8% for the nine months ended September 30, 2011, compared to 11.6% for the prior-year period. The $0.7 million increase was primarily due to an increase in personnel- and overhead-related costs.

        Content & Media General and Administrative Expenses.    Content & Media general and administrative expenses increased by $0.7 million, or 11%, to $6.4 million for the quarter ended September 30, 2011, compared to $5.7 million for the quarter ended September 30, 2010. Content & Media general and administrative expenses as a percentage of Content & Media revenues increased to 14.5% for the quarter ended September 30, 2011, compared to 11.7% for the prior-year period. The increase was primarily due to a $0.7 million increase in a reserve for a legal settlement, as well as an

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insurance reimbursement of $0.4 million received in the quarter ended September 30, 2010, partially offset by a $0.5 million decrease in personnel- and overhead-related costs.

        Content & Media general and administrative expenses increased by $1.8 million, or 10%, to $20.4 million for the nine months ended September 30, 2011, compared to $18.6 million for the nine months ended September 30, 2010. Content & Media general and administrative expenses as a percentage of Content & Media revenues increased to 14.6% for the nine months ended September 30, 2011, compared to 12.5% for the prior-year period. The increase of $1.8 million was primarily due to a $2.0 million increase in reserves for legal settlements and a $1.0 million increase in personnel- and overhead-related costs, partially offset by a $1.2 million decrease in professional fees.

        Content & Media Restructuring Charges.    The Content & Media segment recorded a restructuring benefit totaling $0.1 million for the nine months ended September 30, 2010. There were no Content & Media restructuring charges for the quarter and nine months ended September 30, 2011.

Communications Segment Results

        The following table presents the Communications segment's operating expenses and income from operations as a percentage of Communications revenues for the quarters and nine months ended September 30, 2011 and 2010.

 
  Quarter
Ended
September 30,
  Nine Months
Ended
September 30,
 
 
  2011   2010   2011   2010  

Revenues

    100.0 %   100.0 %   100.0 %   100.0 %

Operating expenses:

                         
 

Cost of revenues

    27.1     24.6     26.7     23.9  
 

Sales and marketing

    7.1     10.5     8.2     12.8  
 

Technology and development

    7.0     8.4     6.1     7.7  
 

General and administrative

    10.3     9.7     9.7     9.7  
 

Restructuring charges

    0.2         0.8      
                   
   

Total operating expenses

    51.7     53.2     51.5     54.1  
                   

Segment income from operations

    48.3 %   46.8 %   48.5 %   45.9 %
                   

        Communications Revenues.    Communications revenues decreased by $9.9 million, or 25%, to $30.3 million for the quarter ended September 30, 2011, compared to $40.2 million for the quarter ended September 30, 2010. The decrease was primarily due to an $8.7 million decrease in services revenues as a result of a 30% decrease in our average number of dial-up Internet access pay accounts from 0.8 million for the quarter ended September 30, 2010 to 0.6 million for the quarter ended September 30, 2011, as well as a decrease in ARPU from $9.58 for the quarter ended September 30, 2010 to $9.14 for the quarter ended September 30, 2011. The decrease in ARPU is attributable to a higher percentage of pay accounts on lower-priced or discounted subscription plans or services. The decrease in Communications revenues was also due to a $1.2 million decrease in advertising revenues primarily due to the decrease in pay accounts. We expect that Communications dial-up Internet access pay accounts and services revenues will continue to decline.

        Communications revenues decreased by $30.2 million, or 24%, to $97.2 million for the nine months ended September 30, 2011, compared to $127.4 million for the nine months ended September 30, 2010. The decrease was primarily due to a $27.0 million decrease in services revenues as a result of a 30% decrease in our average number of dial-up Internet access pay accounts from 0.9 million for the nine months ended September 30, 2010 to 0.6 million for the nine months ended

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September 30, 2011, as well as a decrease in ARPU from $9.53 for the nine months ended September 30, 2010 to $9.21 for the nine months ended September 30, 2011. The decrease in ARPU is attributable to a higher percentage of pay accounts on lower-priced or discounted subscription plans or services. The decrease in Communications revenues was also due to a $3.2 million decrease in advertising revenues primarily due to the decrease in pay accounts.

        Communications Cost of Revenues.    Communications cost of revenues decreased by $1.7 million, or 17%, to $8.2 million for the quarter ended September 30, 2011, compared to $9.9 million for the quarter ended September 30, 2010. Communications cost of revenues as a percentage of Communications revenues increased to 27.1% for the quarter ended September 30, 2011, compared to 24.6% for the prior-year period due to a higher percentage of revenues being generated from our broadband services which have a higher cost of revenues than our dial-up Internet access services. The decrease of $1.7 million was due to a $0.6 million decrease in customer support and billing-related costs due to the decrease in the number of dial-up Internet access pay accounts and a $0.5 million decrease in telecommunications costs associated with our dial-up Internet access services due to the decrease in the number of dial-up Internet access pay accounts and a decrease in hourly usage per pay account.

        Communications cost of revenues decreased by $4.5 million, or 15%, to $25.9 million for the nine months ended September 30, 2011, compared to $30.4 million for the nine months ended September 30, 2010. Communications cost of revenues as a percentage of Communications revenues increased to 26.7% for the nine months ended September 30, 2011, compared to 23.9% for the prior-year period due to a higher percentage of revenues being generated from our broadband services which have a higher cost of revenues than our dial-up Internet access services. The decrease of $4.5 million was due to a $1.9 million decrease in customer support and billing-related costs due to the decrease in the number of dial-up Internet access pay accounts and a $1.2 million decrease in telecommunications costs associated with our dial-up Internet access services due to the decrease in the number of dial-up Internet access pay accounts and a decrease in hourly usage per pay account. In addition, Communications cost of revenues decreased due to a $0.7 million decrease in costs associated with our email, Internet security and web hosting services and a $0.5 million decrease in costs associated with our broadband services. We expect cost of revenues as a percentage of revenues to continue to increase as revenues continue to decrease as a result of a higher percentage of fixed costs compared to variable costs, and a higher percentage of pay accounts being represented by broadband pay accounts, which have higher costs of revenues as compared to dial-up pay accounts.

        Communications Sales and Marketing Expenses.    Communications sales and marketing expenses decreased by $2.1 million, or 49%, to $2.1 million for the quarter ended September 30, 2011, compared to $4.2 million for the quarter ended September 30, 2010. Communications sales and marketing expenses as a percentage of Communications revenues decreased to 7.1% for the quarter ended September 30, 2011, compared to 10.5% for the prior-year period. The decrease in expenses reflects the Company's decision to reduce sales and marketing expenses. The decrease of $2.1 million was due to a $1.4 million decrease in personnel- and overhead-related expenses and a $0.7 million decrease in advertising, promotion and distribution costs primarily related to our dial-up Internet access services.

        Communications sales and marketing expenses decreased by $8.3 million, or 51%, to $8.0 million for the nine months ended September 30, 2011, compared to $16.4 million for the nine months ended September 30, 2010. Communications sales and marketing expenses as a percentage of Communications revenues decreased to 8.2% for the nine months ended September 30, 2011, compared to 12.8% for the prior-year period. The decrease in expenses reflects the Company's decision to reduce sales and marketing expenses. The decrease of $8.3 million was primarily attributable to a $4.7 million decrease in advertising, promotion and distribution costs primarily related to our dial-up Internet access services and a $3.7 million decrease in personnel- and overhead-related expenses as a result of reduced headcount.

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        Communications Technology and Development Expenses.    Communications technology and development expenses decreased by $1.3 million, or 38%, to $2.1 million for the quarter ended September 30, 2011, compared to $3.4 million for the quarter ended September 30, 2010. Communications technology and development expenses as a percentage of Communications revenues decreased to 7.0% for the quarter ended September 30, 2011, compared to 8.4% for the prior-year period. The decrease of $1.3 million was the result of a decrease in personnel- and overhead-related expenses as a result of reduced headcount.

        Communications technology and development expenses decreased by $3.8 million, or 39%, to $6.0 million for the nine months ended September 30, 2011, compared to $9.8 million for the nine months ended September 30, 2010. Communications technology and development expenses as a percentage of Communications revenues decreased to 6.1% for the nine months ended September 30, 2011, compared to 7.7% for the prior-year period. The decrease of $3.8 million was the result of a decrease in personnel- and overhead-related expenses as a result of reduced headcount.

        Communications General and Administrative Expenses.    Communications general and administrative expenses decreased by $0.8 million, or 20%, to $3.1 million for the quarter ended September 30, 2011, compared to $3.9 million for the quarter ended September 30, 2010. Communications general and administrative expenses as a percentage of Communications revenues increased to 10.3% for the quarter ended September 30, 2011, compared to 9.7% for the prior-year period. The decrease of $0.8 million was primarily due to a $0.7 million decrease in personnel- and overhead-related costs as a result of reduced headcount.

        Communications general and administrative expenses decreased by $2.9 million, or 23%, to $9.5 million for the nine months ended September 30, 2011, compared to $12.4 million for the nine months ended September 30, 2010. Communications general and administrative expenses as a percentage of Communications revenues remained flat at 9.7% for the nine months ended September 30, 2011, compared to the prior-year period. The decrease of $2.9 million was primarily due to a $2.6 million decrease in personnel- and overhead-related costs as a result of reduced headcount and a $0.4 million decrease in bad debt expense.

        Communications Restructuring Charges.    Communications restructuring charges related to employee termination benefits and contract termination costs were $0.1 million and $0.8 million for the quarter and nine months ended September 30, 2011, respectively. There were no Communications restructuring charges for the quarter and nine months ended September 30, 2010.

Unallocated Corporate Expenses

        Unallocated corporate expenses decreased by $0.6 million, or 7%, to $7.0 million for the quarter ended September 30, 2011, compared to $7.6 million for the quarter ended September 30, 2010 primarily as a result of a $0.4 million decrease in personnel-related costs. Unallocated corporate expenses decreased by $2.1 million, or 8%, to $23.4 million for the nine months ended September 30, 2011, compared to $25.4 million for the nine months ended September 30, 2010. The decrease was primarily due to $2.0 million of expenses recorded in the first quarter of 2010 related to a potential transaction that failed to consummate.

Liquidity and Capital Resources

        In connection with the FTD acquisition in August 2008, UNOLA Corp., which was then an indirect wholly-owned subsidiary of United Online, Inc., and which subsequently merged into FTD Group, Inc., entered into a $425 million senior secured credit agreement with Wells Fargo Bank, National Association, as Administrative Agent (the "2008 Credit Agreement"), consisting of (i) a term loan A facility of $75 million, (ii) a term loan B facility of $300 million, and (iii) a revolving credit facility of up to $50 million. On June 10, 2011, FTD Group, Inc. entered into a new credit agreement

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(the "Credit Agreement") with Wells Fargo Bank, National Association, as Administrative Agent for the lenders, to refinance the 2008 Credit Agreement. The Credit Agreement provides FTD Group, Inc. with a $315 million senior secured credit facility consisting of (i) a $265 million seven-year term loan (the "Term Loan") and (ii) a $50 million five-year revolving credit facility (the "Revolving Credit Facility" and together with the Term Loan, the "Credit Facilities"), and certain other financial accommodations, including letters of credit.

        On June 10, 2011, FTD Group, Inc. repaid in full all outstanding indebtedness under the 2008 Credit Agreement. No penalties were paid in connection with such repayment. The repayment of obligations under the 2008 Credit Agreement was financed with the proceeds of the $265 million of term loan borrowings under the Credit Agreement and FTD's available cash. No funds were borrowed under the Revolving Credit Facility at closing.

        The obligations under the Credit Agreement are guaranteed by FTD's parent, UNOL Intermediate, Inc. ("Holdings"), and certain of the wholly-owned domestic subsidiaries of FTD Group, Inc. (the "Subsidiary Guarantors"). In addition, the obligations under the Credit Agreement are secured by a lien on substantially all of the assets of FTD Group, Inc., Holdings and the Subsidiary Guarantors (collectively, the "Loan Parties"), including a pledge of all (except with respect to foreign subsidiaries, in which case such pledge shall be limited to 66%) of the outstanding capital stock of certain direct subsidiaries of the Loan Parties.

        The interest rates on both the Term Loan and the Revolving Credit Facility are either a base rate plus 2.5% per annum, or LIBOR plus 3.5% per annum (with a LIBOR floor of 1.25% in the case of the Term Loan). In addition, there is a commitment fee equal to 0.50% per annum (with step-downs in the commitment fee depending on FTD's net leverage ratio) on the unused portion of the Revolving Credit Facility. The Credit Agreement contains customary representations and warranties, events of default, affirmative covenants, and negative covenants, that require, among other things, FTD to maintain compliance with a maximum net leverage ratio and a minimum fixed-charge coverage ratio, and impose restrictions and limitations on, among other things, capital expenditures, investments, dividends, asset sales, and incurrence of additional debt or liens by Holdings, FTD Group, Inc. and their subsidiaries. The Credit Agreement also provides for an additional $100 million in borrowing, subject to certain conditions, including compliance with covenants and approval by the lender group.

        Our total cash and cash equivalents balances increased by $12.6 million, or 13%, to $112.8 million at September 30, 2011, compared to $100.3 million at December 31, 2010. Our summary cash flows for the nine months ended September 30, 2011 and 2010 were as follows (in thousands):

 
  Nine Months Ended
September 30,
 
 
  2011   2010  

Net cash provided by operating activities

  $ 71,734   $ 95,421  

Net cash used for investing activities

  $ (21,895 ) $ (21,050 )

Net cash used for financing activities

  $ (37,019 ) $ (98,440 )


Nine Months Ended September 30, 2011 compared to Nine Months Ended September 30, 2010

        Net cash provided by operating activities decreased by $23.7 million, or 25%, for the nine months ended September 30, 2011, compared to the nine months ended September 30, 2010. Net cash provided by operating activities is driven by our net income adjusted for non-cash items and changes in working capital including, but not limited to, depreciation and amortization, stock-based compensation, loss on extinguishment of debt, deferred taxes, and tax benefits (shortfalls) from equity awards. The decrease in net cash provided by operating activities was due to a $21.5 million increase in working capital requirements primarily related to the timing of payments to vendors, changes in tax liabilities and a decline in deferred revenue as a result of a decline in Content & Media pay accounts and, to a lesser

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extent, a $2.2 million decrease in net income, adjusted for non-cash items. Changes in working capital can cause variation in our cash flows provided by operating activities due to seasonality, timing and other factors.

        Net cash used for investing activities increased by $0.8 million, or 4%, for the nine months ended September 30, 2011, compared to the nine months ended September 30, 2010. The increase was primarily due to a $0.7 million increase in purchases of rights, content and intellectual property related to acquiring new content for our domestic online nostalgia services business. We currently anticipate expending between $3 million to $4 million on purchases of rights, content and intellectual property in 2011, primarily for the purpose of adding new content.

        Capital expenditures for the nine months ended September 30, 2011 were $19.2 million. We currently anticipate that our total capital expenditures for 2011 will be in the range of $25 million to $28 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 used for financing activities decreased by $61.4 million, or 62%, for the nine months ended September 30, 2011, compared to the nine months ended September 30, 2010. In the nine months ended September 30, 2010, we repaid $54.8 million on the outstanding balance of the 2008 Credit Agreement. In the nine months ended September 30, 2011, we refinanced the 2008 Credit Agreement and, in connection with the refinancing, we received net proceeds of $261.3 million, which, along with FTD's available cash, were used to repay the outstanding balance on the 2008 Credit Agreement of $264.6 million. Additionally, repurchases of common stock for the nine months ended September 30, 2011 decreased by $12.1 million, compared to the nine months ended September 30, 2010.

        The payment of dividends and dividend equivalents is a cash outflow from financing activities. In January, April and July 2011, United Online, Inc.'s Board of Directors declared quarterly cash dividends of $0.10 per share of common stock. The dividends were paid on February 28, 2011, May 31, 2011 and August 31, 2011 and totaled $9.4 million, $9.3 million and $9.3 million, respectively, including dividend equivalents paid on nonvested restricted stock units. In October 2011, United Online, Inc.'s Board of Directors declared a quarterly cash dividend of $0.10 per share of common stock. The record date for the dividend is November 14, 2011 and the dividend will be paid on November 30, 2011. The payment of future dividends is discretionary and is subject to determination by United Online, Inc.'s Board of Directors each quarter following its review of our financial performance and other factors.

        Future cash flows from financing activities may also be affected by our repurchases of our common stock. United Online, Inc.'s 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. From August 2001 through December 31, 2010, we repurchased a total of $150.2 million of our common stock under the Program and at December 31, 2010, the remaining amount available under the Program was $49.8 million. In February 2011, the Board of Directors extended the Program through December 31, 2011 and increased the amount authorized to $80 million. At September 30, 2011, 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 and stock awards we grant to employees. In general, we currently do not collect the applicable required employee withholding taxes from employees upon vesting of restricted stock units and upon the issuance of stock awards. Instead, we automatically withhold, from the restricted stock units that vest and the stock awards that are issued, the portion of

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those shares with a fair market value equal to the amount of the required employee withholding taxes due. We then pay the applicable 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, 2011 and 2010 were $7.0 million and $8.2 million, respectively, for which we withheld 1.0 million shares and 1.4 million shares of common stock, respectively, that were underlying the restricted stock units which vested and stock awards that were issued. The amount we pay in future periods will vary based on our stock price and the number of applicable restricted stock units vesting and stock awards being issued during the period.

        Based on our current projections, we expect to continue to generate positive cash flows from operations, at least in the next twelve months. We may use our existing cash balances and future cash generated from operations to fund, among other things, both contractual payments and optional prepayments on the outstanding balance under the Credit Agreement; dividend payments, if declared by United Online, Inc.'s Board of Directors; the development and/or acquisition of other services, businesses or technologies; the repurchase of our common stock underlying restricted stock units and stock awards to pay the required employee withholding taxes due on vested restricted stock units and stock awards issued; the repurchase of our common stock under the Program; future capital expenditures and future acquisitions of intangible assets, including rights, content and intellectual property.

        Under the terms of the Credit Agreement, FTD Group, Inc., a subsidiary of United Online, Inc., is generally restricted from transferring funds and other assets to United Online, Inc., with certain exceptions including an annual basket of $15 million (subject to adjustment based on excess cash flow calculations) which may be used to make cash dividends, loans and advances to United Online, Inc., provided certain terms and conditions specified in the Credit Agreement are satisfied. These restrictions have resulted in restricted net assets (as defined in Rule 4-08(e)(3) of Regulation S-X) of FTD Group, Inc. and its subsidiaries totaling $256.2 million at September 30, 2011. The Credit Agreement also includes provisions which require us to make debt prepayments in the event that we generate consolidated excess cash flow, as defined in the Credit Agreement, on an annual basis commencing in April 2013 for fiscal year 2012. The degree to which our assets are leveraged and the terms of our debt could materially and adversely affect our ability to obtain additional capital as well as the terms at which such capital might be offered to us. We currently expect to have sufficient liquidity to fulfill our debt service obligations, at least in the next twelve months. FTD Group, Inc. was in compliance with all covenants under the Credit Agreement at September 30, 2011.

        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, developing new or enhancing existing services or products, repurchasing our common stock, acquiring other services, businesses or technologies or funding significant capital expenditures and/or purchases of intangible assets, including rights, content and intellectual property, and have a material adverse effect on our business, financial position, results of operations, and cash flows as well as impair our ability to pay future dividends and our ability to service our debt obligations. 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.

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Contractual Obligations

        Contractual obligations at September 30, 2011 were as follows (in thousands):

 
  Total   Less than
1 Year
  1 Year to
Less than
3 Years
  3 Years to
Less than
5 Years
  More than
5 Years
 

Debt, including interest

  $ 357,835   $ 15,436   $ 30,599   $ 34,031   $ 277,769  

Member redemption liability

    22,798     18,214     4,584          

Operating leases

    37,492     12,045     17,384     4,588     3,475  

Services and promotional contracts

    4,049     3,068     981          

Telecommunications purchases

    7,083     6,091     992          

Floral-related purchases

    4,824     4,824              

Other long-term liabilities

    3,370     274     2,180     276     640  
                       
 

Total

  $ 437,451   $ 59,952   $ 56,720   $ 38,895   $ 281,884  
                       

        Commitments under letters of credit at September 30, 2011 were scheduled to expire as follows (in thousands):

 
  Total   Less than
1 Year
  1 Year to
Less than
3 Years
 

Letters of credit

  $ 1,464   $ 1,368   $ 96  

        Letters of credit are maintained pursuant to certain of our lease arrangements. The letters of credit remain in effect at declining levels through the terms of the related leases. Standby letters of credit are maintained by FTD to secure credit card processing activity and additional letters of credit are maintained related to inventory purchases.

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. 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 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, 2011, we had no off-balance sheet arrangements 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.

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Recent Accounting Pronouncements

        Comprehensive Income—In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, as codified in ASC 220, Comprehensive Income. The amendments in this update require that all nonowner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. Additionally, the amendments in this update require that reclassification adjustments from other comprehensive income to net income be shown on the face of the statement of comprehensive income. The amendments in this update should be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We do not expect this update to have a material impact on our consolidated financial statements.

        Intangibles—Goodwill and Other—In September 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment, as codified in ASC 350, Intangibles—Goodwill and Other. The amendments in this update allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The amendments in this update are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity's financial statements for the most recent annual or interim period have not yet been issued. We perform our annual impairment assessment in the fourth quarter and expect to adopt this update in the quarter ending December 31, 2011. We do not expect this update to have a material impact on our consolidated financial statements.

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

        We are exposed to interest rate risk on our cash, cash equivalents, and the outstanding balance of the Credit Agreement. The interest rate set forth in the Credit Agreement for the Term Loan and the Revolving Credit Facility is either a base rate plus 2.5% per annum, or LIBOR plus 3.5% per annum (with a LIBOR floor of 1.25% in the case of the Term Loan). A 100 basis point increase in LIBOR rates would result in an estimated annual increase in our interest expense related to the outstanding debt under the Credit Agreement of approximately $0.2 million.

        While we do not currently maintain any short-term investments, we still maintain deposits which are classified as cash equivalents. Therefore, our interest income is sensitive to changes in the general level of U.S. and certain foreign interest rates.

Foreign Currency Risk

        We transact business in foreign currencies and are exposed to risk resulting from fluctuations in foreign currency exchange rates, particularly the British Pound ("GBP") and the Euro ("EUR") and, to a much lesser extent, the Indian Rupee ("INR"), the Swedish Krona ("SEK"), the Swiss Franc ("CHF"), and the Canadian Dollar ("CAD"), which may result in gains or losses reported in our

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results of operations. The volatilities in GBP, EUR, INR, SEK, CHF, and CAD (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 period-end exchange rates. The resulting translation adjustments are recorded as a component of accumulated other comprehensive income (loss) in stockholders' equity. 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 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 trend in currencies. Therefore, changes in foreign currency exchange rates may negatively affect our consolidated revenues and net income. A 1% adverse change in overall foreign currency exchange rates over an entire year would not have a material impact on estimated annual revenues and estimated annual income before income taxes. These estimates assume an adverse shift in all foreign currency exchange rates against the U.S. Dollar, which do not always move in the same direction or in the same degrees, and actual results may differ materially. Net foreign currency transaction gains or losses arising from transactions denominated in currencies other than the local functional currency are included in other income (expense), net in the unaudited condensed consolidated statements of operations.

        We currently utilize forward foreign currency exchange contracts to protect the value of our net investments in certain foreign subsidiaries. These contracts are designated as hedges of net investments in foreign entities, and the gains or losses are reported in accumulated other comprehensive loss to the extent that they are effective. At September 30, 2011, the notional value of open forward foreign currency exchange contracts accounted for as foreign net investment hedges totaled $3.4 million.

        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 partially offset the economic effect of fluctuations in foreign currency exchange rates. At September 30, 2011, the notional value of open forward foreign currency exchange contracts that did not qualify for hedge accounting treatment totaled $4.1 million. We may, in the future, 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 (the "Exchange Act")) 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, on a timely basis, 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 have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II—OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

        In April 2001 and in May 2001, lawsuits were filed in the United States District Court for the Southern District of New York against NetZero, Inc. ("NetZero"), certain officers and directors of NetZero and the underwriters of NetZero's initial public offering, Goldman Sachs Group, Inc., BancBoston Robertson Stephens, Inc. and Salomon Smith Barney, Inc. A consolidated amended complaint was filed in April 2002. The complaint alleges that the prospectus through which NetZero conducted its initial public offering in September 1999 was materially false and misleading because it failed to disclose, among other things, that (i) the underwriters had solicited and received excessive and undisclosed commissions from certain investors in exchange for which the underwriters allocated to those investors material portions of the restricted number of NetZero shares issued in connection with the offering; and (ii) the underwriters had entered into agreements with customers whereby the underwriters agreed to allocate NetZero shares to those customers in the offering in exchange for which the customers agreed to purchase additional NetZero shares in the aftermarket at pre-determined prices. Plaintiffs are seeking injunctive relief and damages. The case against NetZero was coordinated with approximately 300 other suits filed against more than 300 issuers that conducted their initial public offerings between 1998 and 2000, their underwriters and an unspecified number of their individual corporate officers and directors. The parties in the approximately 300 coordinated class actions, including NetZero, the underwriter defendants in the NetZero class action, and the plaintiff class in the NetZero action, have reached an agreement in principle under which the insurers for the issuer defendants in the coordinated cases will make a settlement payment on behalf of the issuers, including NetZero. On October 5, 2009, the district court issued an order granting final approval of the settlement and certifying the settlement class. Two individuals appealed the October 5, 2009 order and plaintiffs filed a motion to dismiss the appeals. One of the appeals has been dismissed and the other appeal is pending before the United States Court of Appeals for the Second Circuit.

        On October 30, 2008, Anthony Michaels filed a purported class action complaint against Classmates Online, Inc., now known as Memory Lane, Inc., Classmates Media Corporation and United Online, Inc. in Superior Court of the State of California, County of Los Angeles, alleging causes of action for intentional misrepresentation, negligent misrepresentation, negligence, fraudulent concealment, and for violations of California Business and Professions Code sections 17200 and 17500 et seq. On December 19, 2008, Xavier Vasquez filed a purported class action complaint against Classmates Online, Inc., Classmates Media Corporation and United Online, Inc. in Superior Court of Washington, Kings County, alleging causes of action for violation of the Washington Consumer Protection Act, violation of California's Unfair Competition Law, violation of California's Consumer Legal Remedies Act, unjust enrichment and violation of California Civil Code section 1694, dealing with dating services contracts. In both actions, the plaintiffs are seeking injunctive relief and damages. On April 30, 2009, the United States District Court of the Western District of Washington consolidated the Michaels and the Vasquez actions and designated the Michaels action as the lead case. On March 12, 2010, the parties entered into a comprehensive class action settlement agreement. On December 16, 2010, the court conducted a final approval hearing on the settlement. On February 22, 2011, the court issued an order formally denying final approval of the settlement. On March 24, 2011, the parties entered into a revised settlement agreement, and on March 25, 2011, plaintiffs filed a motion for preliminary approval of the revised settlement. On July 8, 2011, the court issued an order granting preliminary approval of the revised settlement agreement, establishing a schedule for providing notice to class members and setting December 15, 2011 as the date for the hearing to determine the final approval of the settlement. On July 27, 2011, the court entered an order approving a revised individual notice to the settlement class and, thereafter, the parties entered into a revised settlement agreement effective as of August 1, 2011 that included the revised notice and minor court-approved

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changes. The notices have been sent to the settlement class and the deadline to submit all claims and objections or to opt-out of the settlement class is November 18, 2011.

        We have been cooperating with certain governmental authorities in connection with their respective investigations of our former post-transaction sales practices and certain other current or former business practices:

        We cannot predict the outcome of these or any other governmental investigations or other legal actions or their potential implications for our business. There are no assurances that additional governmental investigations or other legal actions will not be instituted in connection with our former post-transaction sales practices or other current or former business practices.

        We record a liability when we believe that it is both probable that a loss will be incurred, and the amount of loss can be reasonably estimated. We evaluate, at least quarterly, developments in our legal matters that could affect the amount of liability that has been previously accrued, and make adjustments as appropriate. Significant judgment is required to determine both probability and the estimated amount. We 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, 2011, we had a reserve of $5.1 million for a pending legal settlement. With respect to the other legal matters described above, we have determined, based on our 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 our control. As such, there can be no assurance that the final outcome of these matters will not materially and adversely affect our business, financial condition, results of operations, or cash flows.

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ITEM 1A.    RISK FACTORS

        The risk factors set forth below are substantially the same as those included in our Annual Report on Form 10-K for the year ended December 31, 2010, with the exception of, under "Additional Risks Relating to Our Communications Segment," the addition of a risk factor related to the Communications segment's planned NetZero mobile broadband service.


RISKS RELATING TO OUR BUSINESS GENERALLY

Current or future economic conditions may have a material and adverse impact on our business, financial condition, results of operations, and cash flows.

        Economic conditions in the U.S. and the European Union have been depressed and may remain challenging for the foreseeable future. Our products and services are discretionary and dependent upon levels of consumer spending. Consumer spending patterns are difficult to predict and are sensitive to, among other factors, the general economic climate, the consumers' level of disposable income, consumer debt, and overall consumer confidence. The continuing economic conditions have adversely impacted certain aspects of our businesses in a number of ways including reduced demand, more aggressive pricing for similar products and services by our competitors, decreased spending by advertisers, increased credit risks, increased credit card failures, a loss of customers, and increased use of discounted pricing for certain of our products and services. It is likely that these and other factors will continue to adversely impact our businesses, at least in the near term. The continuing economic conditions may adversely impact our key vendors. Such economic conditions and decreased consumer spending have, in certain cases, resulted in, and may in the future result in, a variety of negative effects such as a reduction in revenues, increased costs, lower gross margin and operating margin percentages, increased allowances for doubtful accounts and write-offs of accounts receivable, and recognition of impairments of assets, including goodwill and other intangible and long-lived assets. Any of the above factors could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Our business is subject to fluctuations.

        Our results of operations and changes in our key business metrics from period to period have varied in the past and may fluctuate significantly in the future due to a variety of factors, many of which are outside of our control and difficult to predict. Each of the risk factors discussed in this Item 1A and the other factors described elsewhere in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission may affect us from period to period and may affect our long-term performance. As a result, you should not rely on period-to-period comparisons as an indication of our future performance. In addition, these factors and the challenging economic conditions create difficulties with respect to our ability to forecast our financial performance and business metrics accurately. We believe that these difficulties in forecasting present even greater challenges for financial analysts who publish their own estimates of our future financial results and business metrics. We cannot assure you that we will achieve the expectations of, or projections made by, our management or the financial analysts. In the event we do not achieve such expectations or projections, our financial results and the price of our common stock could be adversely affected.

New business initiatives, products, services, or features may not be successful, which could adversely impact our key metrics and financial results.

        We have expended, and may continue to expend, significant resources in developing and implementing new business initiatives, products, services, and features, such as those related to our Memory Lane website and the planned NetZero mobile broadband service. Such development and implementation involves a number of uncertainties, including unanticipated delays and expenses and

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technological problems. New business initiatives, products, services, or features also may not be accepted by consumers or commercially successful. We cannot assure you that we will be successful in such development and implementation efforts, including those related to the Memory Lane business or the planned NetZero mobile broadband service, or that any new business initiatives, products, services, or features will be accepted by consumers or commercially successful. If our development and implementation efforts are not successful, or such new initiatives, products, services, or features are not accepted by consumers or commercially successful, our key metrics and financial results could be materially and adversely impacted.

Our marketing efforts may not be successful, which could increase our costs and adversely impact our key metrics and financial results.

        We spend significant resources marketing our brands, products and services. We rely on relationships with a wide variety of third parties, including Internet search providers, Internet advertising networks, co-registration partners, retailers, distributors, and direct marketers, to promote or distribute our products and services. In addition, in connection with the launch of new products or services, such as those related to the Memory Lane website and the planned NetZero mobile broadband service, we may spend a significant amount on their marketing, including through television advertising. If our marketing activities are inefficient or unsuccessful, or if important third-party relationships become more expensive or unavailable, our key metrics and financial results could be materially and adversely impacted.

We may be unable to maintain or grow our advertising revenues. Reduced advertising revenues may reduce our profits.

        Advertising revenues are a key component of our revenues and profitability. Factors that have caused, or may cause in the future, our advertising revenues to fluctuate include, without limitation, the effect of, changes to, or terminations of key advertising relationships, changes to our websites and advertising inventory, changes in applicable laws, regulations or business practices, including those related to behavioral or targeted advertising, user privacy and taxation, changes in business models, changes in the online advertising market, changes in the economy, advertisers' budgeting and buying patterns, competition, changes in the number of visitors to our websites, active accounts or consumers purchasing our products and services, and changes in usage of our services. Decreases in our advertising revenues are likely to adversely impact our profitability.

        Advertising revenues generated by our Content & Media and Communications segments generally have been declining, when compared to prior periods, and may continue to decline in the future as a result of various factors, including, without limitation, the risks and uncertainties discussed above, in other risk factors, and elsewhere in this Quarterly Report on Form 10-Q. Any or all of the above factors have caused, and could continue to cause, our advertising revenues and profits to significantly decline in the future.

Changes in foreign currency exchange rates could adversely affect comparisons of our operating results.

        We transact business in different foreign currencies and may be exposed to financial market risk resulting from fluctuations in foreign currency exchange rates, including the British Pound, the Euro, the Indian Rupee, the Swedish Krona, the Swiss Franc, and the Canadian Dollar. 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 strengthens against such 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 trend in foreign currency exchange rates. Certain of our key business

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metrics, such as the FTD segment's average order value, are similarly affected by such foreign currency exchange rate fluctuations. Changes in global economic conditions, market factors, and governmental actions, among other factors, can affect the value of these currencies in relation to the U.S. Dollar. A strengthening of the U.S. Dollar compared to these currencies and, in particular, to the British Pound and the Euro, has had, and in future periods could have, an adverse effect on the comparisons of our revenues and operating income against prior periods. We cannot accurately predict the impact of future foreign currency exchange rate fluctuations on our operating results, and such fluctuations could negatively impact the comparisons of such results against prior periods.

Significant problems with our key systems or those of our third-party vendors could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

        The systems underlying the operations of each of our business segments are complex and diverse, and must efficiently integrate with third-party systems, such as credit card processors. Key systems include, without limitation, order transmission, fulfillment and processing including the system for transmitting orders through the floral network; billing; website and database management; customer support; telecommunications network management; advertisement serving and management systems; and internal financial systems. Some of these systems, such as customer support, are outsourced to third parties, and other systems, such as FTD's order transmission and fulfillment system and the platform for our international online nostalgia websites, are not redundant. We have experienced systems problems in the past, and we or these third parties may experience problems in the future. In addition, if these third parties face financial or other difficulties, our business could be adversely impacted. Any significant errors, failures, interruptions, delays, or other problems with our systems or our third-party vendors or their systems could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

        In addition, our Content & Media and Communications businesses outsource a majority of their live technical and billing support functions. These businesses rely on one customer support vendor, and we maintain only a small number of internal customer support personnel for these businesses. Our internal customer support personnel are not equipped to provide the necessary range of customer support functions in the event that this vendor unexpectedly becomes unable or unwilling to provide these services to us.

Legal actions or investigations could subject us to substantial liability, require us to change our business practices, and adversely affect our business, financial condition, results of operations, and cash flows.

        We are currently, and have been in the past, party to various legal actions and investigations. These actions may include, without limitation, claims by private parties in connection with consumer protection and other laws, claims that we infringe third-party patents, trademarks, copyrights or other intellectual property or proprietary rights, securities laws claims, claims involving marketing practices or unfair competition, claims in connection with employment practices, breach of contract claims, and other business-related claims. The nature of our business could subject us to additional claims for similar matters, as well as a wide variety of other claims including, without limitation, claims for defamation, right of publicity, negligence, and privacy and security matters. The failure to successfully defend against these and other types of claims, including claims relating to our business practices, could result in our incurring significant liabilities related to judgments or settlements or require us to change our business practices. Infringement claims may also result in our being required to obtain licenses from third parties, which licenses may not be available on acceptable terms, if at all. Both the cost of defending claims, as well as the effect of settlements and judgments, could cause our results of operations to fluctuate significantly from period to period and could materially and adversely affect our business, financial condition, results of operations, and cash flows.

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        Various governmental agencies have in the past, and may in the future, assert claims, institute legal actions, inquiries or investigations, or impose obligations relating to our business practices, such as our marketing, billing, customer retention, renewal, cancelation, refund, or disclosure practices. The Federal Trade Commission and certain state agencies have investigated Internet companies, including us, in connection with consumer protection and privacy matters. In addition, we have received civil investigative demands and subpoenas, as applicable, from the Federal Trade Commission and the Attorneys General of various states, primarily regarding their respective investigations into certain post-transaction sales practices and certain of our marketing, billing and renewal practices. We have been cooperating with these investigations. However, the outcome of these or any other governmental investigations or their potential implications for our business are uncertain. We may not prevail in existing or future claims and any judgment against us or settlement or resolution of such claims may involve the payment of significant sums, including damages, fines, penalties, or assessments, or changes to our business practices. Defending against lawsuits, inquiries and investigations involves significant expense and diversion of management's attention and resources from other matters. There are no assurances that additional governmental investigations or other legal actions will not be instituted in connection with our former post-transaction sales practices or other current or former business practices. Enforcement actions or changes in enforcement policies and procedures could result in changes to our business practices as well as significant fines, penalties or assessments, which could decrease our revenues or increase the costs of operating our business. To the extent that our services and business practices change as a result of claims or actions by governmental agencies or private parties, or we are required to pay significant sums, including damages, fines, penalties, or assessments, our business, financial condition, results of operations, and cash flows could be materially and adversely affected.

Our failure to enforce and protect our intellectual property and proprietary rights could harm our business.

        Our trade names, trademarks, service marks, patents, copyrights, domain names, trade secrets, and other intellectual property are important to the success of our businesses. In particular, we view our primary trademarks as critical to our success. We principally rely upon patent, trademark, copyright, trade secret, and domain name laws in the U.S. and similar laws in other countries, as well as licenses and other agreements with our employees, members, consumers, suppliers and other parties, to establish and maintain our intellectual property and proprietary rights in the technology, products, services and content used in our operations. These laws and agreements may not guarantee that our proprietary rights will be protected and our intellectual property and proprietary rights could be challenged or invalidated. We also license some of our intellectual property rights, including the Mercury Man logo, to third parties. The steps we and such third parties have taken to protect our intellectual property and proprietary rights may not be adequate, and other third parties may infringe or misappropriate our intellectual property and proprietary rights. The protection of our intellectual property and proprietary rights may require the expenditure of significant financial and internal resources. We cannot assure you that we have taken adequate steps to prevent infringement or misappropriation of our intellectual property and proprietary rights. Our failure to adequately protect our intellectual property and proprietary rights could adversely affect our brands and could harm our business.

A security breach or inappropriate access to, or use of, our networks, computer systems or services or those of third-party vendors could expose us to liability, claims and a loss of revenue.

        The success of our business depends on the security of our networks and, in part, on the security of the network infrastructures of our third-party vendors. Unauthorized or inappropriate access to, or use of, our networks, computer systems or services, whether intentional, unintentional or as a result of criminal activity, could potentially jeopardize the security of confidential information, including credit

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card information, of our customers and of third parties. We cannot assure you that the security measures we take will be effective in preventing these types of activities. We also cannot assure you that the security measures of our third-party network providers, providers of customer and billing support services or other vendors will be adequate. In addition to potential legal liability, these activities may adversely impact our reputation or our revenues and may interfere with our ability to provide our products and services, all of which could adversely impact our business.

Changes in laws and regulations and new laws and regulations may adversely affect our business, financial condition, results of operations, and cash flows.

        We are subject to a variety of international, federal, state, and local laws and regulations, including, without limitation, those relating to taxation, bulk email or "spam," advertising, including, without limitation, targeted or behavioral advertising, user privacy and data protection, consumer protection, antitrust, and unclaimed property. Compliance with the various laws and regulations, which in many instances are unclear or unsettled, is complex. New laws and regulations, such as those being considered or recently enacted by certain states or the federal government related to automatic-renewal practices, user privacy, targeted or behavioral advertising, floral-related advertising and charges, and taxation, could impact certain of our business practices or those of our advertisers. Any changes in the laws and regulations applicable to us, the enactment of any additional laws or regulations, or the failure to comply with, or increased enforcement activity of, such laws and regulations, could significantly impact our products and services, our costs, or the manner in which we or our advertisers conduct business, all of which could adversely impact our results of operations and cause our business to suffer.

Our online nostalgia and online loyalty marketing services, as well as our FTD segment's consumer business, rely heavily on email campaigns, and any disruptions or restrictions on the sending of emails or increase in the associated costs could adversely affect our business and results of operations.

        Our emails have historically generated the majority of the traffic on our online nostalgia websites and are the most important driver of member activity for our online loyalty marketing service. A significant number of members of our online nostalgia and online loyalty marketing services elect to opt-out of receiving certain types of emails. Without the ability to email these members, we have very limited means of inducing members to return to our websites and utilize our services. In addition, each month, a significant number of email addresses for members of our online nostalgia and online loyalty marketing services become invalid. This disrupts our ability to email these members and also prevents our online nostalgia members from being able to contact these members, which is one of the reasons why members use our online nostalgia services.

        Our FTD segment generates a significant portion of its consumer orders from the emails we send to customers who have previously ordered products from us. We also engage in a number of third-party email marketing campaigns in which such third parties include our marketing offers in the emails they send.

        An increase in the number of members or customers to whom we are not able to send emails, or who elect to not receive, or are unable to receive, our emails could adversely affect our business and results of operations. From time to time, Internet service providers block bulk email transmissions or otherwise experience technical difficulties that result in our inability to successfully deliver emails to our members or customers. Third parties may also block, impose restrictions on, or start to charge for, the delivery of emails through their email systems. Due to the importance of email to our businesses, any disruption or restriction on the distribution of emails or increase in the associated costs could materially and adversely affect our revenues and profitability.

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We may be unsuccessful at acquiring additional businesses, services or technologies. Even if we complete an acquisition, it may not improve our results of operations and may also adversely impact our business, financial condition and cash flows.

        One of our strategic objectives is to acquire businesses, services or technologies that will provide us with an opportunity to diversify the products and services we offer, leverage our assets and core competencies, or expand our geographic reach, or that otherwise may be complementary to our existing businesses. However, acquiring companies is a difficult process with many factors outside of our control. In addition, the Credit Agreement imposes certain restrictions on our ability to complete acquisitions and there is no assurance that we will be successful in completing additional acquisitions.

        We have evaluated and expect to continue to evaluate, a wide variety of potential strategic transactions that we believe may complement our current or future business activities. However, we cannot assure you that the anticipated benefits and synergies of an acquisition will materialize or that any integration attempts will be successful. Acquiring a business, service or technology involves many operational and financial risks, including risks relating to:

        Any of these risks could harm our business, financial condition, results of operations, and cash flows.

        In addition, an acquisition of a foreign business involves risks in addition to those set forth above, including risks associated with foreign currency exchange rates, potentially unfamiliar economic, political and regulatory environments, and integration difficulties due to language, cultural and geographic differences.

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FTD has a substantial amount of indebtedness which could adversely affect our ability to raise additional capital to fund operations, our flexibility in operating our business and our ability to react to changes in the economy or our industry, and prevent us from satisfying our debt obligations.

        FTD has a substantial amount of indebtedness which could have important consequences for our business and financial condition. For example:

        Under the terms of the Credit Agreement, we will be permitted to incur additional indebtedness subject to certain conditions, and the risks described above may be increased if we incur additional indebtedness.

        The Credit Agreement includes guarantees on a joint and several basis by UNOL Intermediate, Inc. and certain of FTD Group, Inc.'s existing and future, direct and indirect domestic

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subsidiaries and is secured by first priority security interests in, and mortgages on, substantially all of the tangible and intangible assets of UNOL Intermediate, Inc., FTD Group, Inc. and certain of FTD Group, Inc.'s direct and indirect subsidiaries and first priority pledges of all the equity interests owned by FTD Group, Inc. in certain of its existing and future direct and indirect subsidiaries (except with respect to foreign subsidiaries in which case such pledges are limited to 66% of the outstanding capital stock). The occurrence of an event of default under the Credit Agreement could permit the lenders to terminate the commitments of such lenders to make further extensions of credit under the Credit Agreement, to call and enforce the guarantees, and to foreclose on the collateral securing such debt.

We may not realize the benefits associated with our assets and may be required to record a significant charge to earnings if we are required to expense certain costs or impair our assets.

        We have capitalized goodwill and identifiable intangible assets in connection with our acquisitions and certain business initiatives such as the content archives on the Memory Lane website. We perform an impairment test of our goodwill and indefinite-lived intangible assets annually during the fourth quarter of our fiscal year or when events occur or circumstances change that would more likely than not indicate that goodwill or any such assets might be permanently impaired. If our acquisitions or business initiatives are not commercially successful or, if due to economic or other conditions, our assumptions regarding the performance of such businesses or business initiatives are not achieved, we would likely be required to record impairment charges which would negatively impact our financial condition and results of operations. We have experienced impairment charges in the past. Given the current economic environment and the uncertainties regarding the impact on our businesses, there can be no assurance that our estimates and assumptions regarding the duration of the challenging economic conditions, or the period or strength of recovery, made for purposes of our goodwill and identifiable intangible assets impairment testing will prove to be accurate predictions of the future. If our assumptions regarding forecasted revenue or growth rates of certain reporting units or other factors are not achieved or are revised downward, we may be required to record additional impairment charges in future periods. In addition, from time to time, we record tangible or intangible assets on our balance sheet that, due to changes in value or in our strategy, may have to be expensed in future periods. Write-downs or impairments of assets, whether tangible or intangible, could adversely and materially impact our financial condition and results of operations.

Our ability to operate our business could be seriously harmed if we lose members of our senior management team or other key employees.

        Our business is largely dependent on the efforts and abilities of our senior management, particularly Mark R. Goldston, our chairman, president and chief executive officer, and other key personnel. Any of our officers or employees can terminate his or her employment relationship at any time. The loss of any of these key employees or our inability to attract or retain other qualified employees could seriously harm our business and prospects. We do not carry key-person life insurance on any of our employees.

Foreign, state and local governments may attempt to impose additional income taxes, sales and use taxes, value added taxes or other taxes on our business activities and Internet-based transactions, including our past sales, which could decrease our ability to compete, reduce our sales, or have a material adverse effect on our business, financial condition, results of operations, and cash flows.

        We are subject to income and various other taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating our consolidated provision for income taxes. During the ordinary course of business, there are many transactions for which the ultimate tax determination is uncertain. In addition, our effective income tax rates could be adversely affected by earnings being less than anticipated in countries where we have lower statutory rates and more (or determined to be more

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by a particular taxing jurisdiction) than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities or by, among other factors, changes in the relevant tax, accounting and other laws, regulations, principles, and interpretations. We are subject to audit in various jurisdictions, and such jurisdictions may assess additional income and other taxes against us. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions, and our historical recognition of other tax matters. The results of an audit or litigation could have a material effect on our business, financial condition, results of operations, and cash flows.

        In connection with our Internet-based transactions, a number of states have been considering or adopting legislation or instituting policy initiatives, including those that would facilitate a finding of nexus to exist between Internet companies with the states, aimed at expanding the reach of sales and use taxes or imposing state income or other taxes on various innovative theories, including agency attribution from independent third-party service providers. Such legislation or initiatives could result in the imposition of additional sales and use taxes, or the payment of state income or other taxes, on certain transactions conducted over the Internet. In addition, advertisers and other third parties may choose to not do business with us in order to avoid nexus with certain states. If such legislation is enacted, or such initiatives are instituted, and upheld by the courts, the legislation or initiatives could subject us to substantially increased tax liabilities for past and future sales or state income or other taxes, require us to collect additional sales and use taxes, cause our future sales to decrease, otherwise negatively impact our businesses, and thus have a material adverse effect on us.

We face risks relating to operating and doing business internationally that could adversely affect our businesses and results of operations.

        Our businesses operate in a number of countries outside the U.S. Conducting international operations involves risks and uncertainties, including:

        The occurrence of any one of these risks could negatively affect our international operations, our key business metrics, and our financial results.

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We may stop paying, or reduce, quarterly cash dividends on our common stock.

        The payment of future dividends is discretionary and is subject to determination by our Board of Directors each quarter following its review of our financial condition, results of operations and cash flows and such other factors as are deemed relevant by our Board of Directors. Commencing with the third quarter of 2008, we have decreased our quarterly cash dividend from $0.20 per share of common stock to $0.10 per share of common stock. A decline in our cash flows, changes in our business needs, including working capital and funding for business initiatives or acquisitions, or a change in tax laws relating to dividends, among other factors, could cause our Board of Directors to decide to cease the payment of, or further reduce, dividends in the future. We cannot assure you that we will not decrease or discontinue quarterly cash dividends, and if we do, our stock price could be negatively impacted.

Our businesses could be shut down or severely impacted by a catastrophic event.

        Our businesses could be materially and adversely affected by a catastrophic event. A disaster such as a fire, earthquake, flood, power loss, terrorism, or other similar event, affecting any of our facilities, data centers or computer systems, or those of our third-party vendors, or a system interruption or delay that slows down the Internet or makes the Internet or our websites temporarily unavailable, could result in a significant and extended disruption of our operations and services. Any prolonged disruption of our services due to these or other events would severely impact our businesses. We do not carry flood insurance for certain of our facilities, and the property, business interruption and other insurance we do carry may not be sufficient to cover, if at all, losses that may occur as a result of any events which cause interruptions in our services.

We cannot predict our future capital needs and we may not be able to secure additional financing which could adversely impact us.

        We may need to raise additional funds in the future to fund our operations, for acquisitions of businesses, services or technologies or for other purposes. Additional financing may not be available in a timely manner, on terms favorable to us, or at all. The terms of FTD's indebtedness in addition to the degree to which we are leveraged, will adversely affect our ability to obtain additional financing. In addition, the current extreme volatility of, and disruption in, the securities and credit markets may restrict our ability to raise any such additional funds. If adequate funds are not available or not available when required and in sufficient amounts or on acceptable terms, our businesses and future prospects may suffer.

Our certificate of incorporation, our bylaws and Delaware law contain provisions that could delay or discourage takeover attempts that stockholders may consider favorable or beneficial.

        Provisions of our certificate of incorporation, our bylaws and Delaware law could make it difficult for our stockholders to elect directors and take other corporate actions. These provisions could have the effect of delaying or discouraging takeover attempts that our stockholders may consider favorable or beneficial because of the premium price that would be offered by a potential acquirer. In addition, although our previous stockholder rights plan expired in February 2011, there are no assurances that our Board of Directors will not implement a new stockholder rights plan in the future.

Our stock price has been highly volatile and may continue to be volatile.

        The market price of our common stock has fluctuated significantly and it may continue to be volatile with extreme trading volume fluctuations. In addition, the Nasdaq Global Select Market has experienced substantial price and trading volume fluctuations. The broad market and industry factors that influence or affect such fluctuations may harm the market price of our common stock, regardless

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of our actual operating performance. As a result of these or other reasons, we have experienced and may continue to experience significant volatility in the market price of our common stock.


ADDITIONAL RISKS RELATING TO OUR FTD SEGMENT

Competition could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

        We compete in the market for flowers and, to a lesser degree, gifts. In the consumer market, consumers are our customers for direct sales of floral products and gifts through our websites and telephone numbers. In the floral network services market, retail florists and supermarkets are our principal customers for memberships and subscriptions to our various floral network services, including access to the FTD and Interflora brands and the Mercury Man logo, access to the floral networks, credit card processing services, e-commerce website services, online advertising tools, telephone answering, order taking, order transmission, and clearing-house services.

        The consumer market for flowers and gifts is highly competitive as consumers can purchase the products we offer from numerous sources, including traditional local retail florists, supermarkets, mass merchants, gift retailers, and floral mass marketers, such as those that use websites, telephone numbers and catalogs. The floral network services market is highly competitive as well, and retail florists and supermarkets may choose from a few floral network service providers that offer similar products and services. In the U.S., our key competitors in the consumer market include 1-800-FLOWERS.COM, Inc., Proflowers.com and Teleflora, and our key competitors in the floral network services market include Teleflora and BloomNet Wire Service, a subsidiary of 1-800-FLOWERS.COM, Inc. International key competitors include Marks & Spencer, NEXT, John Lewis, Teleflorist (also known as eFlorist), Flowers Direct, and Flying Flowers.

        We believe competition in the consumer market will likely continue to intensify. Supermarkets, mass merchants and floral mass marketers have been gaining market share over retail florists as consumers continue to shift more of their floral purchases to these channels. We expect the sales volumes at supermarkets and mass merchants to continue to increase, and other floral mass marketers will continue to increase their competition with us. In particular, the nature of the Internet as a marketplace facilitates competitive entry and comparative shopping, and we have experienced increased competition based on price. Some of our competitors may have significant competitive advantages over us, may engage in more significant discounting, may devote significantly greater resources to marketing campaigns or other aspects of their business or may respond more quickly and effectively than we can to new or changing opportunities or customer requirements.

        We expect competition in the floral network services market to continue to increase as well. We believe we will continue to experience increasing competition from the other floral network services providers. In addition, we expect retail florists likely will continue to lose sales to supermarkets and floral mass marketers, which likely will result in a continuing decrease in their revenues and in the number of retail florists. As the number of retail florists and their revenues decrease, competition for the business of the remaining retail florists will intensify.

        Increased competition in the consumer market or the floral network services market may result in lower revenues, reduced gross margins, loss of market share, and increased marketing expenditures. We cannot provide assurance that we will be able to compete successfully or that competitive pressures will not have a material adverse effect on our business, financial condition, results of operations, and cash flows.

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We are dependent on third parties who fulfill orders and deliver goods and services to our customers and their failure to provide our customers with high-quality products and customer service may harm our brands and could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

        We believe that our success in promoting and enhancing our brands depends on our ability to provide our customers high-quality products and a high level of customer service. Our business depends, in part, on the ability of our independent floral network members and third-party suppliers who fulfill our orders to do so at high-quality levels. We work with our floral network members and third-party suppliers to develop best practices for quality assurance; however, we generally do not directly control or continuously monitor any floral network member or third-party supplier. The failure of our floral network members or third-party suppliers to fulfill orders to our customers' satisfaction, at an acceptable level of quality and within the required timeframe, could adversely impact our brands and cause us to lose customers, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

        Additionally, because we depend upon third parties for the delivery of our products to customers, strikes or other service interruptions affecting these shippers could have an adverse effect on our ability to deliver our products on a timely basis. If any of our shippers are unable or unwilling to deliver our products, we would have to engage alternative shippers which could increase our costs. A disruption in any of our shippers' delivery of our products could cause us to lose customers or could increase our costs, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

The success of our business is dependent on our floral network members and on the financial performance of