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Table of Contents

Table of Contents


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



FORM 10-Q

(Mark One)

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2014
Or
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                    to                 

Commission file number 000-33367



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

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

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

 

91367
(Zip Code)

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

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



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

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

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

Large accelerated filer o   Accelerated filer ý   Non-accelerated filer o   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 14,236,901 shares of the Registrant's common stock outstanding at November 3, 2014.


Table of Contents

UNITED ONLINE, INC.
INDEX TO FORM 10-Q

For the Quarter Ended September 30, 2014

          Page 

PART I.

     

FINANCIAL INFORMATION

   



 


Item 1.


 


Financial Statements:


 


4



 

 

 


Unaudited Condensed Consolidated Balance Sheets at September 30, 2014 and December 31, 2013


 


4



 

 

 


Unaudited Condensed Consolidated Statements of Operations for the Quarters and Nine Months Ended September 30, 2014 and 2013


 


5



 

 

 


Unaudited Condensed Consolidated Statements of Comprehensive Loss for the Quarters and Nine Months Ended September 30, 2014 and 2013


 


6



 

 

 


Unaudited Condensed Consolidated Statement of Stockholders' Equity for the Nine Months Ended September 30, 2014


 


7



 

 

 


Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013


 


8



 

 

 


Notes to Unaudited Condensed Consolidated Financial Statements


 


9



 


Item 2.


 


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


 


29



 


Item 3.


 


Quantitative and Qualitative Disclosures About Market Risk


 


52



 


Item 4.


 


Controls and Procedures


 


53


PART II.


 

 

 


OTHER INFORMATION


 

 



 


Item 1.


 


Legal Proceedings


 


56



 


Item 1A.


 


Risk Factors


 


56



 


Item 2.


 


Unregistered Sales of Equity Securities and Use of Proceeds


 


74



 


Item 3.


 


Defaults Upon Senior Securities


 


74



 


Item 4.


 


Mine Safety Disclosures


 


74



 


Item 5.


 


Other Information


 


75



 


Item 6.


 


Exhibits


 


75


SIGNATURES


 


76

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

        This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the United States Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are subject to the "safe harbor" created by those sections. Forward-looking statements are based on our current expectations, estimates and projections about our operations, industry, financial condition, performance, results of operations, and liquidity. Statements containing words such as "may," "believe," "anticipate," "expect," "intend," "plan," "project," "projections," "business outlook," "estimate," or similar expressions constitute forward-looking statements. These forward-looking statements include, but are not

2


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

3


Table of Contents


PART I—FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

        


UNITED ONLINE, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

 
  September 30,
2014
  December 31,
2013
 

Assets

             

Current assets:

             

Cash and cash equivalents

  $ 76,347   $ 68,314  

Accounts receivable, net of allowance for doubtful accounts

    12,569     19,145  

Inventories, net

    3,500     7,537  

Deferred tax assets, net

    272     291  

Other current assets

    8,750     10,033  
           

Total current assets

    101,438     105,320  

Property and equipment, net

    22,809     21,749  

Deferred tax assets, net

    1,703     1,742  

Goodwill

    63,021     63,035  

Intangible assets, net

    10,843     15,300  

Other assets

    1,380     1,156  
           

Total assets

  $ 201,194   $ 208,302  
           
           

Liabilities and Stockholders' Equity

             

Current liabilities:

             

Accounts payable

  $ 12,123   $ 12,641  

Accrued liabilities

    31,650     25,420  

Member redemption liability

    7,095     7,850  

Deferred revenue

    34,332     38,149  

Deferred tax liabilities, net

    1,273     1,124  
           

Total current liabilities

    86,473     85,184  

Member redemption liability

    11,778     13,077  

Deferred revenue

    1,923     1,764  

Deferred tax liabilities, net

    1,858     1,153  

Other liabilities

    5,528     6,102  
           

Total liabilities

    107,560     107,280  
           

Commitments and contingencies

             

Stockholders' equity:

             

Common stock

    1     1  

Additional paid-in capital

    213,696     208,299  

Accumulated other comprehensive loss

    (2,629 )   (2,275 )

Accumulated deficit

    (117,434 )   (105,003 )
           

Total stockholders' equity

    93,634     101,022  
           

Total liabilities and stockholders' equity

  $ 201,194   $ 208,302  
           
           

   

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

4


Table of Contents


UNITED ONLINE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 
  Quarter Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2014   2013   2014   2013  

Revenues

  $ 52,862   $ 56,239   $ 162,831   $ 170,970  

Operating expenses:

                         

Cost of revenues

    16,950     16,974     53,397     55,321  

Sales and marketing

    11,078     13,038     39,044     42,535  

Technology and development

    6,527     7,777     21,365     24,753  

General and administrative

    14,878     12,162     49,233     42,161  

Amortization of intangible assets

    1,560     1,361     4,324     4,062  

Contingent consideration—fair value adjustment          

                (5,124 )

Restructuring and other exit costs

    533     276     3,120     2,503  

Impairment of goodwill, intangible assets and long-lived assets

        52,762         52,762  
                   

Total operating expenses

    51,526     104,350     170,483     218,973  
                   

Operating income (loss)

    1,336     (48,111 )   (7,652 )   (48,003 )

Interest income

    102     88     293     160  

Other income (expense), net

    257     (64 )   325     247  
                   

Income (loss) before income taxes

    1,695     (48,087 )   (7,034 )   (47,596 )

Provision for (benefit from) income taxes

    1,548     1,924     5,456     (500 )
                   

Income (loss) from continuing operations

    147     (50,011 )   (12,490 )   (47,096 )

Income from discontinued operations, net of tax

    59     275     59     14,124  
                   

Net income (loss)

  $ 206   $ (49,736 ) $ (12,431 ) $ (32,972 )
                   
                   

Income allocated to participating securities

    (12 )   (379 )       (1,015 )
                   

Net income (loss) attributable to common stockholders

  $ 194   $ (50,115 ) $ (12,431 ) $ (33,987 )
                   
                   

Basic net income (loss) per common share:

                         

Continuing operations

  $ 0.01   $ (3.80 ) $ (0.89 ) $ (3.65 )

Discontinued operations

        0.02     0.01     1.07  
                   

Basic net income (loss) per common share

  $ 0.01   $ (3.78 ) $ (0.88 ) $ (2.58 )
                   
                   

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

    14,178     13,252     14,069     13,178  
                   
                   

Diluted net income (loss) per common share:

                         

Continuing operations

  $ 0.01   $ (3.80 ) $ (0.89 ) $ (3.65 )

Discontinued operations

        0.02     0.01     1.07  
                   

Diluted net income (loss) per common share

  $ 0.01   $ (3.78 ) $ (0.88 ) $ (2.58 )
                   
                   

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

    14,180     13,252     14,069     13,178  
                   
                   

Dividends paid per common share

  $   $ 0.70   $   $ 2.10  
                   
                   

   

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 LOSS

(in thousands)

 
  Quarter Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2014   2013   2014   2013  

Net income (loss)

  $ 206   $ (49,736 ) $ (12,431 ) $ (32,972 )

Other comprehensive income (loss):

                         

Cash flow hedges:

                         

Changes in net gains (losses) on derivatives, net of tax provision (benefit) of $(19) and $(197) for the quarters ended September 30, 2014 and 2013 and $0 and $98 for the nine months ended September 30, 2014 and 2013, respectively          

    (22 )   (301 )   6     146  

Derivative settlement (gains) losses reclassified into earnings, net of tax (provision) benefit of $(1) and $54 for the quarters ended September 30, 2014 and 2013 and $0 and $94 for the nine months ended September 30, 2014 and 2013, respectively

    (27 )   88     (25 )   153  

Other hedges:

                         

Changes in net gains (losses) on derivatives, net of tax provision (benefit) of $(3) and $(24) for the quarters ended September 30, 2014 and 2013 and $0 and $39 for the nine months ended September 30, 2014 and 2013, respectively          

    189     (37 )   193     62  

Foreign currency translation

    (634 )   8,236     (528 )   (1,376 )
                   

Other comprehensive income (loss)

    (494 )   7,986     (354 )   (1,015 )
                   

Comprehensive loss

  $ (288 ) $ (41,750 ) $ (12,785 ) $ (33,987 )
                   
                   

   

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

6


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UNITED ONLINE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(in thousands)

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

Balance at December 31, 2013

    13,746   $ 1   $ 208,299   $ (2,275 ) $ (105,003 ) $ 101,022  

Issuance of common stock through employee stock purchase plan

    82         826             826  

Vesting of restricted stock units

    352                      

Repurchases of common stock

            (2,380 )           (2,380 )

Stock-based compensation

            6,953             6,953  

Tax shortfalls from equity awards

            (2 )           (2 )

Other comprehensive loss

                (354 )       (354 )

Net loss

                    (12,431 )   (12,431 )
                           

Balance at September 30, 2014

    14,180   $ 1   $ 213,696   $ (2,629 ) $ (117,434 ) $ 93,634  
                           
                           

   

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

7


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UNITED ONLINE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 
  Nine Months
Ended
September 30,
 
 
  2014   2013  

Cash flows from operating activities:

             

Net loss

  $ (12,431 ) $ (32,972 )

Less: Income from discontinued operations, net of tax

    59     14,124  
           

Loss from continuing operations

    (12,490 )   (47,096 )

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

             

Depreciation and amortization

    15,096     18,082  

Stock-based compensation

    6,953     6,358  

Provision for doubtful accounts receivable

    (43 )   336  

Contingent consideration—fair value adjustment

        (5,124 )

Impairment of goodwill, intangible assets and long-lived assets

        52,762  

Deferred taxes, net

    801     (8,273 )

Tax benefits (shortfalls) from equity awards

    (2 )   454  

Excess tax benefits from equity awards

    (56 )   (213 )

Other, net

    733     225  

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

             

Accounts receivable, net

    6,498     3,045  

Inventories, net

    3,012     293  

Other assets

    644     1,837  

Accounts payable and accrued liabilities

    5,901     4,428  

Member redemption liability

    (2,055 )   (1,579 )

Deferred revenue

    (2,551 )   (3,687 )

Other liabilities

    (2,210 )    
           

Net cash provided by operating activities from continuing operations

    20,231     21,848  
           

Cash flows from investing activities:

             

Purchases of property and equipment

    (8,942 )   (7,771 )

Purchases of rights, content and intellectual property

    (756 )   (919 )

Purchases of investments

    (44 )   (83 )

Proceeds from sales of investments

    126     87  

Proceeds from sales of assets

    30      
           

Net cash used for investing activities from continuing operations

    (9,586 )   (8,686 )
           

Cash flows from financing activities:

             

Proceeds from exercise of stock options

        2,709  

Proceeds from employee stock purchase plans

    826     1,699  

Repurchases of common stock

    (2,380 )   (3,357 )

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

        (28,773 )

Excess tax benefits from equity awards

    56     213  

Cash paid for contingent consideration

        (3,437 )
           

Net cash used for financing activities from continuing operations

    (1,498 )   (30,946 )
           

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

    (1,173 )   (573 )

Net cash provided by (used for) discontinued operations:

             

Operating activities

    59     17,924  

Investing activities

        (6,408 )

Financing activities

        (28,816 )

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

        39,000  
           

Net cash from discontinued operations

    59     21,700  
           

Change in cash and cash equivalents

    8,033     3,343  

Cash and cash equivalents, beginning of period

    68,314     69,097  
           

Cash and cash equivalents, end of period

  $ 76,347   $ 72,440  
           
           

   

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

8


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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Description of Business

        United Online, Inc. (together with its subsidiaries, "United Online" or the "Company"), through its operating subsidiaries, provides consumer services and products over the Internet under a number of brands, including Classmates, StayFriends, Trombi, MyPoints, NetZero, and Juno. The Company reports its business in two reportable segments: Content & Media and Communications. The Company's Content & Media segment provides social networking services and products and a loyalty marketing service. 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. On November 1, 2013, United Online, Inc. consummated the separation of FTD Companies, Inc. (together with its subsidiaries, "FTD") from United Online, Inc. through a tax-free distribution of all FTD Companies, Inc. common stock held by United Online, Inc. to United Online, Inc.'s stockholders. As a result, FTD's financial results are presented as discontinued operations in the Company's unaudited condensed consolidated financial statements.

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

Basis of Presentation

        The Company's unaudited condensed consolidated financial statements for the quarters and nine months ended September 30, 2014 and 2013 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, 2013 was derived from the Company's audited consolidated financial statements, filed on September 4, 2014, with the SEC in the Company's Amendment No.1 to the Annual Report on Form 10-K/A for the year ended December 31, 2013, 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, 2013 included in the Company's Amendment No.1 to the Annual Report on Form 10-K/A.

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

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

Accounting Policies

        Refer to the Company's Amendment No.1 to the Annual Report on Form 10-K/A for the year ended December 31, 2013 for a complete discussion of all significant accounting policies.

        Revision of Previously-Issued Financial Statements—In connection with the preparation of the Company's provision for income taxes for the quarter ended June 30, 2014, the Company determined that the accounting for income taxes in the prior periods needed to be revised. In addition, the revisions in the accounting for income taxes also contributed to an increase to the goodwill impairment charge recorded by its Classmates reporting unit during the quarter ended September 30, 2013. Additionally, the Company revised the current and noncurrent portions of the member redemption liability at December 31, 2013 to correct for a prior-period misclassification. The Company evaluated the cumulative impact of these items, together with other previously-identified uncorrected errors, on prior periods under the guidance in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic No. 250, Accounting Changes and Error Corrections, relating to SEC Staff Accounting Bulletin ("SAB") No. 99, Materiality, and concluded that the errors were not considered to be material, individually or in the aggregate, to any previously-issued quarterly or annual financial statements. The Company also evaluated the impact of correcting these items through an adjustment to its financial statements for the quarter ended June 30, 2014 and concluded, based on the guidance within ASC Topic No. 250 relating to SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, to revise its previously-issued financial statements to reflect the impact of these corrections because the cumulative amount of such corrections is expected to be material to the year ending December 31, 2014. The Company's prior-period financial statements have been revised in connection with the filing of the Company's Amendment No. 1 to the Annual Report on Form 10-K/A for the year ended December 31, 2013 and this Quarterly Report on Form 10-Q and will continue to be revised when presented in future filings.

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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 tables below present the impact of these revisions on the Company's previously-filed financial statements (in thousands, except per share amounts), including certain other adjustments to correct previously-identified uncorrected errors.

 
  Quarter Ended September 30, 2013   Nine Months Ended September 30, 2013  
 
  As
Reported
  Discontinued
Operations &
Reverse Split
Adjustments
  Revision
Adjustments
  As
Revised
  As
Reported
  Discontinued
Operations &
Reverse Split
Adjustments
  Revision
Adjustments
  As
Revised
 

Consolidated statements of operations data:

                                                 

Technology and development

  $ 11,481     (3,868 )   164   $ 7,777   $ 36,406     (11,817 )   164   $ 24,753  

General and administrative

  $ 24,091     (11,929 )     $ 12,162   $ 74,486     (33,027 )   702   $ 42,161  

Impairment of goodwill, intangible assets and long-lived assets

  $ 50,221         2,541   $ 52,762   $ 50,221         2,541   $ 52,762  

Total operating expenses

  $ 216,765     (115,120 )   2,705   $ 104,350   $ 655,863     (440,297 )   3,407   $ 218,973  

Operating loss

  $ (42,052 )   (3,354 )   (2,705 ) $ (48,111 ) $ (12,017 )   (32,579 )   (3,407 ) $ (48,003 )

Interest income

  $ 240     (152 )     $ 88   $ 619     (496 )   37   $ 160  

Other income (expense), net

  $ (38 )   (26 )     $ (64 ) $ 550     (266 )   (37 ) $ 247  

Loss before income taxes

  $ (45,917 )   535     (2,705 ) $ (48,087 ) $ (21,298 )   (22,891 )   (3,407 ) $ (47,596 )

Provision for (benefit from) income taxes

  $ 1,315     810     (201 ) $ 1,924   $ 9,563     (9,149 )   (914 ) $ (500 )

Loss from continuing operations

  $ (47,232 )   (275 )   (2,504 ) $ (50,011 ) $ (30,861 )   (13,742 )   (2,493 ) $ (47,096 )

Income from discontinued operations

  $     275       $ 275   $     13,742     382   $ 14,124  

Net loss

  $ (47,232 )       (2,504 ) $ (49,736 ) $ (30,861 )       (2,111 ) $ (32,972 )

Net loss attributable to common stockholders

  $ (47,611 )       (2,504 ) $ (50,115 ) $ (31,876 )       (2,111 ) $ (33,987 )

Basic net income (loss) per common share:

                                                 

Continuing operations

  $ (0.51 )   (3.10 )   (0.19 ) $ (3.80 ) $ (0.35 )   (3.11 )   (0.19 ) $ (3.65 )

Discontinued operations

        0.02         0.02         1.04     0.03     1.07  
                                   

Basic net income (loss) per common share

  $ (0.51 )   (3.08 )   (0.19 ) $ (3.78 ) $ (0.35 )   (2.07 )   (0.16 ) $ (2.58 )
                                   
                                   

Diluted net income (loss) per common share:

                                                 

Continuing operations

  $ (0.51 )   (3.10 )   (0.19 ) $ (3.80 ) $ (0.35 )   (3.11 )   (0.19 ) $ (3.65 )

Discontinued operations

        0.02         0.02         1.04     0.03     1.07  
                                   

Diluted net income (loss) per common share

  $ (0.51 )   (3.08 )   (0.19 ) $ (3.78 ) $ (0.35 )   (2.07 )   (0.16 ) $ (2.58 )
                                   
                                   

Consolidated statements of comprehensive loss data:

                                                 

Net loss

  $ (47,232 )       (2,504 ) $ (49,736 ) $ (30,861 )       (2,111 ) $ (32,972 )

Foreign currency translation

  $ 16,147         (7,911 ) $ 8,236   $ 3,789         (5,165 ) $ (1,376 )

Other comprehensive income (loss)

  $ 15,897         (7,911 ) $ 7,986   $ 4,150         (5,165 ) $ (1,015 )

Comprehensive loss

  $ (31,335 )       (10,415 ) $ (41,750 ) $ (26,711 )       (7,276 ) $ (33,987 )

Consolidated statement of cash flows data:

                                                 

Net loss

                          $ (30,861 )       (2,111 ) $ (32,972 )

Income from discontinued operations

                          $     13,742     382   $ 14,124  

Loss from continuing operations

                          $ (30,861 )   (13,742 )   (2,493 ) $ (47,096 )

Depreciation and amortization

                          $ 43,069     (25,151 )   164   $ 18,082  

Impairment of goodwill, intangible assets and long-lived assets

                          $ 50,221         2,541   $ 52,762  

Deferred taxes, net

                          $ (14,362 )   6,504     (415 ) $ (8,273 )

Other assets

                          $ 1,355     234     248   $ 1,837  

Accounts payable and accrued liabilities

                          $ (17,888 )   22,383     (67 ) $ 4,428  

Other liabilities

                          $ (501 )   479     22      

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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)

Recent Accounting Pronouncements

        Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists—Effective January 1, 2014, the Company adopted the FASB Accounting Standards Update ("ASU") No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, as codified in ASC Topic No. 740, Income Taxes. The amendments in this update state that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. However, to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This ASU applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. The adoption of this update did not have a material impact on the Company's consolidated financial statements.

        Presentation of Financial Statements and Property, Plant and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity—In April 2014, the FASB issued ASU No. 2014- 08, Presentation of Financial Statements and Property, Plant and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The core principle of the guidance raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the new definition of a discontinued operation. It also allows an entity to present a discontinued operation even when it has continuing cash flows and significant continuing involvement with the disposed component. The amendments in this ASU are effective prospectively for disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The Company does not expect this update to have a material impact on its consolidated financial statements.

        Revenue from Contracts with Customers—In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU applies to all entities that either enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The amendments in this ASU will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The amendments should be applied retrospectively. The Company is currently assessing the impact of this update on its consolidated financial statements.

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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)

        Compensation—Stock Compensation: Accounting for Share- Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period —In June 2014, the FASB issued ASU No. 2014-12, Compensation—Stock Compensation: Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The core principle of the guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period should be treated as a performance condition. A reporting entity should apply existing guidance in ASC Topic No. 718, Compensation—Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. Entities may apply the amendments in ASU No. 2014-12 either: (a) prospectively to all awards granted or modified after the effective date; or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The Company does not expect this update to have a material impact on its consolidated financial statements.

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

2. SEGMENT INFORMATION

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

 
  Quarter Ended September 30, 2014  
 
  Content & Media   Communications   Total  

Services revenues

  $ 18,690   $ 17,097   $ 35,787  

Products revenues

    703     1,397     2,100  

Advertising and other revenues

    8,396     6,801     15,197  
               

Total segment revenues

  $ 27,789   $ 25,295   $ 53,084  
               
               

Segment income from operations

  $ 5,674   $ 7,309   $ 12,983  
               
               

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SEGMENT INFORMATION (Continued)

 

 
  Quarter Ended September 30, 2013  
 
  Content & Media   Communications   Total  

Services revenues

  $ 20,501   $ 16,706   $ 37,207  

Products revenues

    838     778     1,616  

Advertising and other revenues

    10,894     6,870     17,764  
               

Total segment revenues

  $ 32,233   $ 24,354   $ 56,587  
               
               

Segment income (loss) from operations

  $ (43,834 ) $ 8,118   $ (35,716 )
               
               

 

 
  Nine Months Ended September 30, 2014  
 
  Content & Media   Communications   Total  

Services revenues

  $ 57,282   $ 51,874   $ 109,156  

Products revenues

    2,051     4,838     6,889  

Advertising and other revenues

    26,915     20,452     47,367  
               

Total segment revenues

  $ 86,248   $ 77,164   $ 163,412  
               
               

Segment income from operations

  $ 8,471   $ 21,262   $ 29,733  
               
               

 

 
  Nine Months Ended September 30, 2013  
 
  Content & Media   Communications   Total  

Services revenues

  $ 62,256   $ 51,861   $ 114,117  

Products revenues

    2,492     2,730     5,222  

Advertising and other revenues

    33,230     19,338     52,568  
               

Total segment revenues

  $ 97,978   $ 73,929   $ 171,907  
               
               

Segment income (loss) from operations

  $ (32,132 ) $ 23,036   $ (9,096 )
               
               

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

 
  Quarter Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2014   2013   2014   2013  

Segment revenues:

                         

Content & Media

  $ 27,789   $ 32,233   $ 86,248   $ 97,978  

Communications

    25,295     24,354     77,164     73,929  
                   

Total segment revenues

    53,084     56,587     163,412     171,907  

Corporate revenues

            100      

Intersegment eliminations

    (222 )   (348 )   (681 )   (937 )
                   

Consolidated revenues

  $ 52,862   $ 56,239   $ 162,831   $ 170,970  
                   
                   

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SEGMENT INFORMATION (Continued)

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

 
  Quarter Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2014   2013   2014   2013  

Segment operating expenses:

                         

Content & Media

  $ 22,115   $ 76,067   $ 77,777   $ 130,110  

Communications

    17,986     16,236     55,902     50,893  
                   

Total segment operating expenses

    40,101     92,303     133,679     181,003  

Depreciation

    3,103     3,276     9,917     11,162  

Amortization of intangible assets

    1,855     1,613     5,179     6,920  

Unallocated corporate expenses

    6,689     7,506     22,389     20,825  

Intersegment eliminations

    (222 )   (348 )   (681 )   (937 )
                   

Consolidated operating expenses

  $ 51,526   $ 104,350   $ 170,483   $ 218,973  
                   
                   

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

 
  Quarter Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2014   2013   2014   2013  

Segment income (loss) from operations:

                         

Content & Media

  $ 5,674   $ (43,834 ) $ 8,471   $ (32,132 )

Communications

    7,309     8,118     21,262     23,036  
                   

Total segment income (loss) from operations

    12,983     (35,716 )   29,733     (9,096 )

Corporate revenues

            100      

Depreciation

    (3,103 )   (3,276 )   (9,917 )   (11,162 )

Amortization of intangible assets

    (1,855 )   (1,613 )   (5,179 )   (6,920 )

Unallocated corporate expenses

    (6,689 )   (7,506 )   (22,389 )   (20,825 )
                   

Consolidated operating income (loss)

  $ 1,336   $ (48,111 ) $ (7,652 ) $ (48,003 )
                   
                   

        Geographic information for revenues was as follows (in thousands):

 
  Quarter Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2014   2013   2014   2013  

United States

  $ 45,333   $ 47,976   $ 139,307   $ 145,927  

Germany

    6,160     6,670     19,118     20,122  

Europe, excluding Germany

    1,369     1,593     4,406     4,921  
                   

Consolidated revenues

  $ 52,862   $ 56,239   $ 162,831   $ 170,970  
                   
                   

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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,
2014
  December 31,
2013
 

United States

  $ 20,959   $ 19,492  

Europe

    2,985     3,181  

India

    245     232  
           

Total long-lived assets

  $ 24,189   $ 22,905  
           
           

        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, total segment assets have not been disclosed.

3. BALANCE SHEET COMPONENTS

Inventories, Net

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

 
  September 30,
2014
  December 31,
2013
 

Work-in-process

  $ 1,131   $ 2,096  

Finished goods

    2,369     5,441  
           

Total

  $ 3,500   $ 7,537  
           
           

Other Current Assets

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

 
  September 30,
2014
  December 31,
2013
 

Prepaid expenses

  $ 4,986   $ 5,442  

Income taxes receivable

    516     399  

Prepaid insurance

    187     1,537  

Other

    3,061     2,655  
           

Total

  $ 8,750   $ 10,033  
           
           

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. BALANCE SHEET COMPONENTS (Continued)

Accrued Liabilities

        Accrued liabilities consisted of the following (in thousands):

 
  September 30,
2014
  December 31,
2013
 

Employee compensation and related liabilities

  $ 12,783   $ 15,246  

Income taxes payable

    9,658     5,210  

Reserves for legal settlements

    6,580     1,467  

Non-income taxes payable

    759     1,161  

Accrued restructuring and other exit costs

    411     235  

Customer deposits

    145     207  

Other

    1,314     1,894  
           

Total

  $ 31,650   $ 25,420  
           
           

Other Liabilities

        Other liabilities consisted of the following (in thousands):

 
  September 30,
2014
  December 31,
2013
 

Income taxes payable

  $ 3,694   $ 5,367  

Other

    1,834     735  
           

Total

  $ 5,528   $ 6,102  
           
           

Accumulated Other Comprehensive Loss

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

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

Balance at December 31, 2013

  $ 7   $   $ (2,282 ) $ (2,275 )

Other comprehensive loss before reclassifications

    6     193     (528 )   (329 )

Amounts reclassified from accumulated other comprehensive loss

    (25 )           (25 )
                   

Other comprehensive loss

    (19 )   193     (528 )   (354 )
                   

Balance at September 30, 2014

  $ (12 ) $ 193   $ (2,810 ) $ (2,629 )
                   
                   

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

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Goodwill

        The changes in goodwill by reportable segment for the nine months ended September 30, 2014 were as follows (in thousands):

 
  Content & Media   Communications   Total  

Balance at December 31, 2013:

                   

Goodwill (excluding impairment charges)

  $ 137,592   $ 13,227   $ 150,819  

Accumulated impairment charges

    (82,046 )   (5,738 )   (87,784 )
               

Goodwill at December 31, 2013

    55,546     7,489     63,035  

Foreign currency translation

    (14 )       (14 )
               

Balance at September 30, 2014:

                   

Goodwill (excluding impairment charges)

    137,578     13,227     150,805  

Accumulated impairment charges

    (82,046 )   (5,738 )   (87,784 )
               

Goodwill at September 30, 2014

  $ 55,532   $ 7,489   $ 63,021  
               
               

        During the quarter ended March 31, 2014, due to a decline in internal financial projections for the MyPoints reporting unit, the Company performed an interim quantitative goodwill impairment assessment. Step one of the goodwill impairment assessment resulted in the Company's determination that the fair value of the MyPoints reporting unit substantially exceeded its carrying value, including goodwill. Accordingly, no impairment charge was recorded.

Intangible Assets

        Intangible assets consisted of the following (in thousands):

 
  September 30, 2014  
 
  Gross Value   Accumulated
Amortization
  Net  

Pay accounts and free accounts

  $ 103,256   $ (101,165 ) $ 2,091  

Customer contracts and relationships

    7,900     (7,900 )    

Trademarks and trade names

    26,082     (25,203 )   879  

Software and technology

    8,503     (6,752 )   1,751  

Rights, content and intellectual property

    14,491     (8,369 )   6,122  
               

Total

  $ 160,232   $ (149,389 ) $ 10,843  
               
               

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

 

 
  December 31, 2013  
 
  Gross Value   Accumulated
Amortization
  Net  

Pay accounts and free accounts

  $ 103,357   $ (99,109 ) $ 4,248  

Customer contracts and relationships

    7,900     (7,900 )    

Trademarks and trade names

    26,082     (23,760 )   2,322  

Software and technology

    8,518     (6,242 )   2,276  

Rights, content and intellectual property

    13,749     (7,295 )   6,454  
               

Total

  $ 159,606   $ (144,306 ) $ 15,300  
               
               

        Amortization expense related to intangible assets for the quarter and nine months ended September 30, 2014 was $1.9 million and $5.2 million, respectively. Amortization expense related to intangible assets for the quarter and nine months ended September 30, 2013 was $1.6 million and $6.9 million, respectively.

        Estimated future intangible assets amortization expense at September 30, 2014 was as follows (in thousands):

 
   
   
  Year Ending December 31,    
 
 
   
  Oct-Dec
2014
   
 
 
  Total   2015   2016   2017   2018   2019   Thereafter  

Estimated amortization of intangible assets

  $ 10,843   $ 1,605   $ 3,057   $ 2,792   $ 1,848   $ 807   $ 455   $ 279  

5. DERIVATIVE INSTRUMENTS

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

 
   
  Fair Value of Derivative
Instruments
  Notional Value of Derivative
Instruments
 
 
  Balance Sheet Location   September 30,
2014
  December 31,
2013
  September 30,
2014
  December 31,
2013
 

Derivative assets

  Other current assets   $ 388   $ 45   $ 5,700   $ 1,187  

Derivative liabilities

  Accrued liabilities   $ 10   $ 49   $ 869   $ 3,773  

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. FAIR VALUE MEASUREMENTS

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

 
  Estimated Fair Value  
 
  September 30, 2014  
Description
  Level 1   Level 2   Total  

Assets:

                   

Money market funds

  $ 42,734   $   $ 42,734  

Time deposits

        10,189     10,189  

Derivative assets

        388     388  
               

Total

  $ 42,734   $ 10,577   $ 53,311  
               
               

Liabilities:

                   

Derivative liabilities

  $   $ 10   $ 10  
               

Total

  $   $ 10   $ 10  
               
               

 

 
  Estimated Fair Value  
 
  December 31, 2013  
Description
  Level 1   Level 2   Total  

Assets:

                   

Money market funds

  $ 37,715   $   $ 37,715  

Time deposits

        10,971     10,971  

Derivative assets

        45     45  
               

Total

  $ 37,715   $ 11,016   $ 48,731  
               
               

Liabilities:

                   

Derivative liabilities

  $   $ 49   $ 49  
               

Total

  $   $ 49   $ 49  
               
               

7. STOCKHOLDERS' EQUITY

Common Stock

        In May 2001, United Online, Inc.'s Board of Directors authorized a common stock repurchase program (the "Program") that allows United Online, Inc. to repurchase shares of its common stock through open market or privately negotiated transactions based on prevailing market conditions and other factors. From time to time since then, the Board of Directors has increased the amount authorized for repurchase under this Program and has extended the Program. From August 2001 through December 31, 2010, United Online, Inc. had repurchased $150.2 million of its common stock under the Program, leaving $49.8 million of authorization remaining under the Program. In February 2011, the Board of Directors extended the Program through December 31, 2011 and authorized an increase in the $49.8 million authorization remaining to $80.0 million. In December 2011, the Board of Directors extended the Program through December 31, 2012. In January 2013, the Board of Directors approved and ratified the extension of the Program through December 31, 2013, and in September 2013, the Board of Directors further extended the Program through December 31, 2014. In October

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. STOCKHOLDERS' EQUITY (Continued)

2014, the Board of Directors further extended the Program through December 31, 2015. There were no repurchases under the Program during the year ended December 31, 2013 or the nine months ended September 30, 2014 and, at September 30, 2014, the authorization remaining under the Program was $80.0 million through December 31, 2014 (subsequently extended to December 31, 2015).

        Shares withheld upon the vesting of restricted stock units to pay minimum statutory employee withholding taxes are considered common stock repurchases, but are not counted as purchases against the Program. Upon vesting of restricted stock units, the Company currently does not collect the minimum statutory withholding taxes from employees. Instead, the Company automatically withholds, from the restricted stock units that vest, the portion of those shares with a fair market value equal to the amount of the minimum statutory employee withholding taxes due, which is accounted for as a repurchase of common stock. The Company then pays the minimum statutory withholding taxes in cash. The amounts remitted in the nine months ended September 30, 2014 and 2013 were $2.4 million and $3.4 million, respectively, for which the Company withheld 0.2 million and 0.3 million shares of common stock, respectively, that were underlying the restricted stock units that vested.

Dividends

        In January 2014, the Company announced that United Online, Inc.'s Board of Directors determined to discontinue cash dividend payments in order to provide financial flexibility to support anticipated long-term growth initiatives.

8. STOCK-BASED COMPENSATION PLANS

Stock-Based Compensation

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

 
  Quarter
Ended
September 30,
  Nine Months
Ended
September 30,
 
 
  2014   2013   2014   2013  

Operating expenses:

                         

Cost of revenues

  $ 73   $ 32   $ 161   $ 104  

Sales and marketing

    145     175     444     559  

Technology and development

    310     356     899     1,056  

General and administrative

    1,523     1,551     5,449     4,639  
                   

Total stock-based compensation

  $ 2,051   $ 2,114   $ 6,953   $ 6,358  
                   
                   

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. STOCK-BASED COMPENSATION PLANS (Continued)

Restricted Stock Units

        The following table summarizes activity for restricted stock units for the nine months ended September 30, 2014 (in thousands):

Nonvested at December 31, 2013

    1,215  

Granted

    424  

Vested

    (570 )

Forfeited/canceled

    (153 )
       

Nonvested at September 30, 2014

    916  
       
       

Stock Options

        The following table summarizes stock option activity for the nine months ended September 30, 2014 (in thousands):

Outstanding at December 31, 2013

    471  

Granted

    888  

Forfeited/canceled

    (207 )
       

Outstanding at September 30, 2014

    1,152  
       
       

9. INCOME TAXES

        The Company's provision for income taxes for the quarter ended September 30, 2014 differed from the U.S. federal statutory tax rate of 34% primarily due to a provision for income taxes related to our foreign operations and an income tax accrual related to certain goodwill assets. The Company's tax provision has an unusual relationship to pre-tax income primarily due to the existence of a full deferred tax asset valuation allowance. This circumstance generally results in a zero net tax provision since the income tax expense or benefit that would otherwise be recognized is offset by the change in the valuation allowance. However, the tax expense recorded in the quarter ended September 30, 2014 included an accrual of a non-cash tax benefit of approximately $0.3 million in connection with the tax amortization of certain goodwill assets that is not available to offset existing deferred tax assets (termed "naked credits"). Specifically, the Company does not consider the deferred tax liabilities related to certain goodwill assets when determining the need for a valuation allowance.

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. NET INCOME (LOSS) PER COMMON SHARE

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

 
  Quarter Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2014   2013   2014   2013  

Numerator:

                         

Income (loss) from continuing operations

  $ 147   $ (50,011 ) $ (12,490 ) $ (47,096 )

Income allocated to participating securities

    (12 )   (379 )       (1,015 )
                   

Income (loss) from continuing operations available to common stockholders

    135     (50,390 )   (12,490 )   (48,111 )

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

    59     275     59     14,124  
                   

Net income (loss) attributable to common stockholders

  $ 194   $ (50,115 ) $ (12,431 ) $ (33,987 )
                   
                   

Denominator:

                         

Weighted-average common shares

    14,178     13,252     14,069     13,178  

Add: Dilutive effect of non-participating securities          

    2              
                   

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

    14,180     13,252     14,069     13,178  
                   
                   

Basic net income (loss) per common share:

                         

Continuing operations

  $ 0.01   $ (3.80 ) $ (0.89 ) $ (3.65 )

Discontinued operations

        0.02     0.01     1.07  
                   

Basic net income (loss) per common share

  $ 0.01   $ (3.78 ) $ (0.88 ) $ (2.58 )
                   
                   

Diluted net income (loss) per common share:

                         

Continuing operations

  $ 0.01   $ (3.80 ) $ (0.89 ) $ (3.65 )

Discontinued operations

        0.02     0.01     1.07  
                   

Diluted net income (loss) per common share

  $ 0.01   $ (3.78 ) $ (0.88 ) $ (2.58 )
                   
                   

        The diluted net income (loss) per common share computations exclude stock options and restricted stock units that are antidilutive. Weighted-average antidilutive shares for the quarter and nine months ended September 30, 2014 were 1.2 million and 1.6 million, respectively. Weighted-average antidilutive shares for the quarter and nine months ended September 30, 2013 were 1.0 million and 0.6 million, respectively.

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. RESTRUCTURING AND OTHER EXIT COSTS

        Restructuring and other exit costs were as follows (in thousands):

 
  Employee
Termination
Costs
  Facility
Closure and
Relocation
Costs
  Total  

Accrued restructuring and other exit costs at December 31, 2013

  $ 235   $   $ 235  

Restructuring and other exit costs

    2,753     367     3,120  

Cash paid for restructuring and other exit costs

    (2,577 )   (367 )   (2,944 )
               

Accrued restructuring and other exit costs at September 30, 2014

  $ 411   $   $ 411  
               
               

        In the quarter ended September 30, 2014, the Company recorded restructuring and other exit costs totaling $0.5 million, which included $0.4 million of facility closure and relocation costs in the Content & Media segment, $0.1 million of employee termination costs in the Communications segment and $0.1 million of unallocated corporate employee termination costs. In the nine months ended September 30, 2014, the Company recorded restructuring and other exit costs totaling $3.1 million, which included $1.5 million, $1.0 million and $0.3 million of employee termination costs in our Content & Media segment, unallocated corporate expenses and Communications segment, respectively, and $0.4 million of facility closure and relocation costs in our Content and Media segment. These restructuring and other exit costs were a result of management's decision to streamline operations, prioritize resources to growth initiatives and increase profitability. At September 30, 2014, accrued restructuring and other exit costs totaled $0.4 million.

        In the quarter ended September 30, 2013, the Company recorded restructuring and other exit costs totaling $0.3 million, consisting of employee termination costs. In the nine months ended September 30, 2013, the Company recorded restructuring and other exit costs totaling $2.5 million, consisting of $2.3 million and $0.2 million of employee termination costs and contract termination costs, respectively, in the Content & Media segment. These restructuring charges were a result of management's decision to streamline segment operations and increase segment profitability.

12. CONTINGENCIES—LEGAL MATTERS

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

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. CONTINGENCIES—LEGAL MATTERS (Continued)

        In March 2012, Hope Kelm, Barbara Timmcke, Regina Warfel, Brett Reilly, Juan M. Restrepo, and Jennie H. Pham filed a purported class action complaint (the "Kelm Class Action") in United States District Court, District of Connecticut, against multiple defendants, including United Online, Inc., Classmates, Inc., Classmates International, Inc., and FTD Group, Inc. The complaint alleges (1) violations of the Racketeer Influenced Corrupt Organizations Act ("RICO"), and aiding and abetting violations of such act; (2) aiding and abetting violations of federal mail fraud, wire fraud and bank fraud statutes; (3) violations of the Electronic Communications Privacy Act ("ECPA"), and aiding and abetting violations of such act; (4) violations of the Connecticut Unfair Trade Practices Act, and aiding and abetting violations of such act; (5) violation of California Business and Professions Code section 17602; and (6) unjust enrichment.

        In March 2012, Debra Miller and William Thompson filed a purported class action complaint (the "Miller Class Action") in United States District Court, District of Connecticut, against multiple defendants, including Classmates International, Inc., FTD Group, Inc., Classmates, Inc., and United Online, Inc. The complaint alleges (1) violations of RICO, and aiding and abetting violations of such act; (2) aiding and abetting violations of federal mail fraud, wire fraud and bank fraud statutes; (3) violations of the ECPA, and aiding and abetting violations of such act; (4) violations of the Connecticut Unfair Trade Practices Act, and aiding and abetting violations of such act; (5) violation of California Business and Professions Code section 17602; and (6) unjust enrichment. In April 2012, the Kelm Class Action and the Miller Class Action were consolidated with a related case under the case caption In re Trilegiant Corporation, Inc.

        In addition, in December 2012, David Frank filed a purported class action complaint (the "Frank Class Action") in United States District Court, District of Connecticut, against multiple defendants, including Classmates International, Inc., FTD Group, Inc., Classmates, Inc., and United Online, Inc. The complaint alleges (1) violations of RICO, and aiding and abetting violations of such act; (2) aiding and abetting commissions of mail fraud, wire fraud and bank fraud; (3) violation of the ECPA, and aiding and abetting violations of such act; (4) violations of the Connecticut Unfair Trade Practices Act, and aiding and abetting violations of such act; (5) violation of California Business and Professions Code section 17602; and (6) unjust enrichment. In January 2013, the plaintiff moved to consolidate the Frank Class Action with the In re Trilegiant Corporation, Inc. action. In March 2014, the Court granted the motion to consolidate the Frank Class Action with the In re Trilegiant Corporation, Inc. action, with the latter designated as the lead case. The plaintiffs in the Kelm Class Action, the Miller Class Action and the Frank Class Action seek class certification, restitution and disgorgement of all amounts wrongfully charged to and received from the plaintiffs, damages, treble damages, punitive damages, preliminary and permanent injunctive relief, attorneys' fees, costs of suit, and pre- and post-judgment interest on any amounts awarded.

        On March 28, 2014, the Court issued an order in the In re Trilegiant Corporation, Inc. action dismissing for lack of Article III standing, and inadequately pled corporate parent liability for its subsidiary's actions, Plaintiffs' claims against United Online, Inc., Memory Lane, Inc. (subsequently renamed Classmates, Inc.), FTD Group, Inc., and Classmates International, Inc. The Court ruled that because none of the named Plaintiffs alleged they used services from or were otherwise injured by any of those defendants, the claims against them are dismissed. The Court's dismissal was without prejudice. The deadline for Plaintiffs to file a motion for reconsideration of the Court's Order expired on April 11, 2014, without any such motion being filed. On April 28, 2014, the Plaintiffs filed a motion seeking entry of partial final judgment on, and certification for interlocutory appeal of, the Court's

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. CONTINGENCIES—LEGAL MATTERS (Continued)

March 28, 2014 orders dismissing the RICO claims and RICO conspiracy claims, the claims against certain credit card company defendants, the nationwide Connecticut Unfair Trade Practices Act class action allegations, and the claims of plaintiffs Warfel, Reilly, Restrepo and Brian Schnabel based on their participation in a previous class action settlement. On May 5, 2014, the Court summarily granted Plaintiff's motion for entry of partial final judgment and certification for interlocutory appeal, but subsequently vacated that order and set a May 23, 2014 deadline for the remaining defendants to file their oppositions to Plaintiff's motion. On May 23, 2014, the remaining defendants filed their opposition briefs to the motion for interlocutory review and, on June 5, 2014, the Plaintiff filed a reply brief. No date has been set for a hearing on Plaintiff's motion. The Plaintiffs' motion did not seek entry of a partial final judgment on, nor certification for interlocutory review of, the Court's dismissal of Plaintiffs' claims against United Online, Inc., Memory Lane, Inc. (subsequently renamed Classmates, Inc.), FTD Group, Inc., and Classmates International, Inc., for lack of Article III standing and inadequately pled corporate parent liability for its subsidiary's actions.

        In January 2013, Unified Messaging Solutions LLC filed a complaint in United States District Court, Northern District of Illinois, against United Online, Inc., Juno Online Services, Inc., NetZero, Inc. and Memory Lane, Inc. (subsequently renamed Classmates, Inc.) alleging patent infringement of five patents related to email index lists. This case is part of a 58 case multidistrict litigation in Chicago, Illinois with two separate "waves" of defendants. In March 2013, United Online, Inc. was dismissed from the action. In March 2014, the plaintiff agreed to stipulate that the remaining defendants had not infringed, and did not infringe, the asserted claims of the patents, and agreed to consent to the entry of judgment in defendants' favor on that basis without prejudice to plaintiff's right to re-assert its claims against defendants if the United States Court of Appeals for the Federal Circuit reversed or modified, in whole or in part, any of the court's rulings on claim construction. On June 13, 2014, the court entered a final judgment dismissing plaintiff's claims of infringement in favor of defendants Juno Online Services, Inc., NetZero, Inc. and Memory Lane, Inc.

        In March 2014, Modern Telecom Systems LLC filed a complaint in the United States District Court for the Central District of California, Southern Division, against Juno Online Services, Inc. and NetZero, Inc. alleging infringement of certain patents relating to the commercial operation of their dial-up internet services. The complaint seeks an injunction, damages and other relief. On July 10, 2014, Juno Online Services, Inc. and NetZero, Inc. were served with the complaint. On July 23, 2014, Juno Online Services, Inc. and NetZero, Inc. were served with an amended complaint in the same matter. The court has set a trial date of January 26, 2016.

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

    In 2010, Classmates, Inc. and FTD.COM Inc. received subpoenas from the Attorney General for the State of Kansas and the Attorney General for the State of Maryland, respectively. These subpoenas were issued on behalf of a Multistate Work Group that currently consists of the Attorneys General for the following states: Alabama, Alaska, Delaware, Florida, Idaho, Illinois, Kansas, Maine, Maryland, Michigan, Nebraska, New Mexico, New Jersey, North Dakota, Ohio, Oregon, Pennsylvania, South Dakota, Texas, Vermont, Washington and Wisconsin. The inquiry concerns certain post-transaction sales practices in which these companies previously engaged with certain third-party vendors and certain auto-renewal practices of Classmates, Inc. In the

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. CONTINGENCIES—LEGAL MATTERS (Continued)

      second quarter of 2012, the Company received an offer of settlement from the Multistate Work Group consisting of certain injunctive relief and the consideration of two areas of monetary relief: (1) restitution to consumers and (2) a $20 million payment by Classmates, Inc. and FTD.COM for the violations alleged by the Multistate Work Group and to reimburse the Multistate Work Group for its investigation costs. The Company rejected the Multistate Work Group's offer. The Company has since had ongoing discussions with the Multistate Work Group regarding a negotiated resolution. In December 2013, Classmates, Inc. and FTD.COM, Inc. proposed to the Multistate Work Group to resolve the matter without admitting liability by making a settlement payment of $2.2 million. In February 2014, the Multistate Work Group responded to the Company's settlement offer of $2.2 million with a counter offer of (1) $17.5 million plus (2) restitution by Classmates, Inc. to a group of purchasers of its subscription services. The Multistate Work Group did not provide an explanation as to how the $17.5 million was determined or the proposed allocation of such counter offer between Classmates, Inc. and FTD.COM Inc. In addition, the Multistate Work Group did not propose a limit on the amount of such restitution. The parties continued settlement discussions and offers and in June 2014, Classmates, Inc. and FTD.COM, Inc. proposed to the Multistate Work Group to resolve the matter without admitting liability by making a settlement payment of $5 million plus an additional total $1 million payment for making restitution to a group of purchasers of Classmates, Inc.'s subscription services. In July 2014 the Multistate Work Group sent Classmates, Inc. and FTD.COM a revised Consent Decree containing a demand for a cash payment of $12.5 million plus restitution to a group of purchasers of Classmates, Inc.'s subscription services up to a maximum of $5 million as part of the relief provided for. However, to the extent the restitution claims exceed $2 million, the $12.5 million payment would be reduced dollar for dollar up to a maximum credit of $3 million. In September 2014 Classmates, Inc. and FTD.COM provided the Multistate Work Group with a counter-proposal in the amount of $7 million plus a restitution payment to a group of purchasers of Classmates, Inc.'s subscription services of up to $2 million, and to the extent restitution payments to consumers total less than $2 million, then Classmates, Inc. shall remit the balance of the restitution account to the Attorneys General. In October 2014 the Multistate Work Group sent Classmates, Inc. and FTD.COM a revised Consent Decree containing a demand for a cash payment of $9 million plus restitution to a group of purchasers of Classmates, Inc.'s subscription services up to a maximum of $4 million as part of the relief provided for. The Consent Decree further provides that if Classmates, Inc.'s payments to consumers total less than $4 million, then Classmates, Inc. shall, remit the balance of the restitution account to the Attorneys General. While settlement discussions are ongoing, there can be no assurances as to the terms on which the Multistate Work Group and Classmates, Inc. may agree to settle this matter (and how such settlement may affect Classmates, Inc.'s ongoing business), or that any settlement of this matter may be reached. If no settlement is reached, certain Attorneys General of the Multistate Work Group may file litigation against Classmates, Inc. and, in the event of litigation, Classmates, Inc. intends to vigorously defend itself.

    In 2011, Classmates, Inc. received a civil investigative demand from the Attorney General for the State of Washington regarding its marketing, refund, cancelation, and renewal practices. Prior to that, in 2009, Classmates, 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. In 2012, the Attorney General for the

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. CONTINGENCIES—LEGAL MATTERS (Continued)

      State of Washington joined the aforementioned Multistate Work Group. The Company believes that by joining the Multistate Work Group, the Attorney General's investigation may have been consolidated into the Multistate Work Group's inquiry.

        The Company cannot predict the outcome of these or any other governmental investigations or other legal actions or their potential implications for its business. In addition, the Company, at times, has negotiated resolutions related to certain governmental investigations. For example, in 2010, Classmates, Inc. (then known as Classmates Online, Inc.) paid $960,000 to resolve an investigation of the Attorney General for the State of New York related to its former post-transaction sales practices; and in July 2013, Classmates, Inc. (formerly known as Memory Lane, Inc.) paid $300,000 to resolve an investigation of the Attorney General for the District of Columbia related to its former post-transaction sales practices. 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, 2014, the Company had reserves totaling $6.6 million for estimated losses related to certain of the matters noted above. With respect to the legal matters described above, excluding the Multistate Work Group's inquiry of Classmates, Inc., the Company has determined, based on its current knowledge, that the amount of possible loss or range of loss, including any reasonably possible losses in excess of amounts already accrued, is not reasonably estimable. However, legal matters are inherently unpredictable and subject to significant uncertainties, some of which are beyond the Company's control. As such, even though the Company intends to vigorously defend itself with respect to its legal matters, there can be no assurance that the final outcome of these matters will not materially and adversely affect the Company's business, financial condition, results of operations, or cash flows.

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

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

Overview

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

        United Online, Inc. is a Delaware corporation, headquartered in Woodland Hills, California, that commenced operations in 2001 following the merger of dial-up Internet access providers NetZero, Inc. ("NetZero") and Juno Online Services, Inc. ("Juno"). In 2004, we acquired Classmates Online, Inc. (whose name was changed to Classmates, Inc. in December 2013, "Classmates"), a provider of social networking services, and in 2006, we acquired MyPoints.com, Inc. ("MyPoints"), a provider of a loyalty marketing service. In 2008, we acquired FTD Group, Inc., a provider of floral, gift and related products and services to consumers and retail florists, as well as to other retail locations offering floral, gift and related products and services under the FTD and Interflora brands. In June 2012, we acquired schoolFeed, Inc. ("schoolFeed"), an online high school social network that enables members to reconnect and interact with their former classmates. On November 1, 2013, United Online, Inc. consummated the separation of FTD Companies, Inc. (together with its subsidiaries, including FTD Group, Inc., "FTD") from United Online, Inc. through a tax-free distribution of all FTD Companies, Inc. common stock held by United Online, Inc. to United Online, Inc.'s stockholders (the "FTD Spin-Off Transaction"). As a result, FTD's financial results are presented as discontinued operations in our unaudited condensed consolidated financial statements.

        We report our businesses in two reportable segments:

Segment
  Services and Products
Content & Media   Social networking services and products and a loyalty marketing service

Communications

 

Internet access services and devices, including dial-up, mobile broadband, DSL, email, Internet security and web hosting services

        We generate revenues from three primary sources:

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

    Products revenues.  Products revenues in our Content & Media segment are derived from the sale of yearbooks, yearbook reprints and related shipping and handling fees. Products revenues in our Communications segment are derived from the sale of mobile broadband devices and the related shipping and handling fees.

    Advertising and other revenues.  Advertising and other revenues are primarily derived from various advertising, marketing and media-related initiatives in our Content & Media and Communications segments.

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Segment Services

Content & Media

        Our Content & Media segment provides social networking services and products under the Classmates, StayFriends, and Trombi brands. We also 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. Our social networking products primarily consist of yearbooks and yearbook reprints. Our Content & Media segment also offers a loyalty marketing service under the MyPoints brand.

        Social Networking Services.    We operate our social networking 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 domestic and international social networking services comprise a large and diverse population of users, with approximately 100 million registered accounts at September 30, 2014.

        Domestic.    Our Classmates website (www.classmates.com) primarily serves the U.S. and Canada. Visitors to the Classmates website can experience a substantial amount of content free of charge. Members with free accounts can use our search feature to locate individuals in our database or in our collection of yearbooks; post information and view information posted by other members; tag yearbook photos; and organize reunions and engage in other reunion-related activities. To engage in the premium features, a member is required to purchase a paid membership, which is generally available for terms ranging from three months to two years. Revenues from our Classmates website are derived primarily from the sale of these subscriptions and, to a lesser extent, from advertising fees and other transactions on our website, including the sale of yearbook reprints.

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

        Loyalty Marketing.    Our loyalty marketing service, 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 register and provide certain identifying information to receive direct email marketing and other loyalty promotions. Members earn points for responding to email offers, shopping online at the MyPoints website (www.mypoints.com), taking market research companies' surveys, playing MyPoints-branded online games, searching the Internet through a MyPoints branded toolbar, and engaging in other online activities. In addition to these online point earning opportunities, MyPoints also offers a credit card with opportunities to earn points through both online and offline shopping. Rewards points are redeemable primarily in the form of third-party gift cards or electronic codes, currently from approximately 90 merchants, including, among others, leading retailers, restaurants, online payment and prepaid credit card merchants, gas stations, games, airlines, hotels, and theaters. Gift cards are available for purchase on the MyPoints website.

Communications

        Our principal Communications pay service is dial-up Internet access, offered under the NetZero and Juno brands. We also offer mobile broadband, DSL, email, Internet security, web hosting services, and other services. In total, we had 507,000 Communications pay accounts at September 30, 2014, of which 314,000 were Internet access pay accounts and 193,000 were pay accounts subscribed to our other Communications services, including email, Internet security and web hosting services. The majority of our Communications revenues is derived from dial-up Internet access, mobile broadband,

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DSL and other Communications services. In addition, our Communications services generate advertising revenues from search placements, display advertisements and online market research associated with our Internet access and email services.

        Internet Access Services.    Our Internet access services consist of dial-up, mobile broadband and, to a much lesser extent, DSL 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. In addition, we offer accelerated dial-up Internet access services which can significantly reduce the time required for certain web pages to load during Internet browsing when compared to our basic dial-up Internet access services. Our accelerated dial-up Internet access services are also bundled with additional benefits, including antivirus software and enhanced email storage, although we also offer each of these features and certain other value-added features as stand-alone pay services. Our dial-up Internet access services are available in approximately 12,000 cities across the U.S. and Canada. We also generate revenues from the resale of telecommunications to third parties. Our Internet access services have typically experienced a higher rate of subscriber additions during the quarter ending March 31 when compared to other quarters, though there can be no assurance that this seasonal trend will continue in the future.

        In 2012, we began offering our mobile broadband service as part of a wholesale agreement with Clearwire. In January 2014, we expanded the coverage area to include the Sprint 3G network. In May 2014, our mobile broadband products and services became available in up to 1,500 retail locations in Texas, California and Florida. We offer consumers the option to access the service by purchasing either a NetZero USB modem to connect a single device, a NetZero personal hotspot that can connect up to eight Wi-Fi enabled devices simultaneously or a home device that is both a modem and Wi-Fi router. NetZero USB, hotspot or home modem customers are able to connect to our mobile broadband service using a variety of devices, including personal computers, tablets, netbooks, smartphones, and smart televisions.

Key Business Metrics

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

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

        ARPU.    We monitor average monthly revenue per pay account ("ARPU"), which is calculated by dividing services revenues generated from the pay accounts of our Content & Media or

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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 the end of a period. ARPU may fluctuate significantly from period to period as a result of a variety of factors, including, but not limited to, the extent to which promotional, discounted or retention pricing is used to attract new, or retain existing, paying subscribers; changes in the mix of pay services and the related pricing plans; increases or decreases in the price of our services; the timing of pay accounts being added or removed during a period; and for the Content & Media segment the average foreign currency exchange rate between the U.S. Dollar and the Euro.

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

        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 social networking websites (excluding schoolFeed, The Names Database and Yearbook app), at least once during the period; and the monthly average for the period of all 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 dial-up 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 six-month, nine-month and annual periods are calculated as a simple average of the quarterly active accounts for each respective segment.

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

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

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

        The table below sets forth, for the periods presented, as applicable, our consolidated revenues, segment revenues, pay accounts, segment churn, ARPU, average currency exchange rate, and segment active accounts.

 
  Quarter Ended   Nine Months Ended
September 30,
 
 
  September 30,
2014
  June 30,
2014
  March 31,
2014
  December 31,
2013
  September 30,
2013
 
 
  2014   2013  

Consolidated:

                                           

Revenues (in thousands)

  $ 52,862   $ 54,600   $ 55,369   $ 62,644   $ 56,239   $ 162,831   $ 170,970  

Content & Media:

                                           

Segment revenues (in thousands)

  $ 27,789   $ 28,616   $ 29,843   $ 35,869   $ 32,233   $ 86,248   $ 97,978  

% of consolidated revenues

    53 %   52 %   54 %   57 %   57 %   53 %   57 %

Pay accounts (in thousands)

    2,485     2,519     2,574     2,632     2,690     2,485     2,690  

Segment churn

    2.8 %   3.0 %   3.2 %   3.0 %   2.9 %   3.0 %   3.1 %

ARPU

  $ 2.49   $ 2.49   $ 2.49   $ 2.54   $ 2.52   $ 2.48   $ 2.48  

Segment active accounts (in millions)

    9.5     9.8     10.8     10.3     10.3     10.0     10.7  

Average currency exchange rate: EUR to USD

    1.33     1.37     1.37     1.36     1.33     1.36     1.32  

Communications:

                                           

Segment revenues (in thousands)

  $ 25,295   $ 26,195   $ 25,674   $ 26,929   $ 24,354   $ 77,164   $ 73,929  

% of consolidated revenues

    48 %   48 %   46 %   43 %   43 %   47 %   43 %

Pay accounts (in thousands):

                                           

Access

    314     328     343     346     360     314     360  

Other

    193     197     202     207     213     193     213  
                               

Total pay accounts

    507     525     545     553     573     507     573  

Segment churn

    2.8 %   3.0 %   3.1 %<