XNAS:UNTD United Online Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

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



FORM 10-Q

(Mark One)

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2012
Or
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                    to                 

Commission file number 000-33367



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

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

21301 Burbank Boulevard
Woodland Hills, California
(Address of principal executive office)

 

91367
(Zip Code)

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

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



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

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

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

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

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

        There were 90,602,365 shares of the Registrant's common stock outstanding at May 2, 2012.


Table of Contents

UNITED ONLINE, INC.
INDEX TO FORM 10-Q
For the Quarter Ended March 31, 2012

          Page 

PART I.

     

FINANCIAL INFORMATION

  4



 


Item 1.


 


Financial Statements:


 


4



 

 

 


Unaudited Condensed Consolidated Balance Sheets at March 31, 2012 and December 31, 2011


 


4



 

 

 


Unaudited Condensed Consolidated Statements of Operations for the Quarters Ended March 31, 2012 and 2011


 


5



 

 

 


Unaudited Condensed Consolidated Statements of Comprehensive Income for the Quarters Ended March 31, 2012 and 2011


 


6



 

 

 


Unaudited Condensed Consolidated Statement of Stockholders' Equity for the Quarter Ended March 31, 2012


 


7



 

 

 


Unaudited Condensed Consolidated Statements of Cash Flows for the Quarters Ended March 31, 2012 and 2011


 


8



 

 

 


Notes to Unaudited Condensed Consolidated Financial Statements


 


9



 


Item 2.


 


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


 


25



 


Item 3.


 


Quantitative and Qualitative Disclosures About Market Risk


 


49



 


Item 4.


 


Controls and Procedures


 


50


PART II.


 

 

 


OTHER INFORMATION


 


51



 


Item 1.


 


Legal Proceedings


 


51



 


Item 1A.


 


Risk Factors


 


53



 


Item 2.


 


Unregistered Sales of Equity Securities and Use of Proceeds


 


72



 


Item 3.


 


Defaults Upon Senior Securities


 


73



 


Item 4.


 


Mine Safety Disclosures


 


73



 


Item 5.


 


Other Information


 


73



 


Item 6.


 


Exhibits


 


73


SIGNATURES


 


74

        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 and the documents incorporated herein by reference contain forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, as amended, based on our current expectations, estimates and projections about our operations, industry, financial condition, performance, results of operations, and liquidity. Statements containing words such as "may," "believe," "anticipate," "expect," "intend," "plan," "project," "projections," "business outlook," "estimate," or similar expressions constitute forward-looking statements. These forward-looking statements include, but are not limited to, statements about new business initiatives,

2


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products, services, features, applications, and functionality; future financial performance; revenues; segment metrics; operating expenses; market trends, including those in the markets in which we compete; liquidity; cash flows and uses of cash; dividends; capital expenditures; depreciation and amortization; tax payments; foreign currency exchange rates; hedging arrangements; our ability to repay indebtedness, pay dividends and invest in initiatives; our products and services; pricing; competition; and strategies. Potential factors that could affect the matters about which the forward-looking statements are made include, among others, the factors disclosed in the section entitled "Risk Factors" in this Quarterly Report on Form 10-Q and additional factors that accompany the related forward-looking statements in this Quarterly Report on Form 10-Q and our other filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. Any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that may cause actual performance and results to differ materially from those predicted. Reported results should not be considered an indication of future performance. Except as required by law, we undertake no obligation to publicly release the results of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

3


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PART I—FINANCIAL INFORMATION

        

ITEM 1.    FINANCIAL STATEMENTS

        


UNITED ONLINE, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

 
  March 31,
2012
  December 31,
2011
 

Assets

             

Current assets:

             

Cash and cash equivalents

  $ 137,660   $ 136,105  

Accounts receivable, net of allowance for doubtful accounts

    39,547     43,177  

Inventories, net

    10,464     8,832  

Deferred tax assets, net

    15,167     15,587  

Other current assets

    15,638     24,065  
           

Total current assets

    218,476     227,766  

Property and equipment, net

    60,452     62,460  

Goodwill

    462,764     458,818  

Intangible assets, net

    228,850     234,461  

Other assets

    14,540     12,852  
           

Total assets

  $ 985,082   $ 996,357  
           

Liabilities and Stockholders' Equity

             

Current liabilities:

             

Accounts payable

  $ 57,006   $ 64,649  

Accrued liabilities

    44,808     54,850  

Member redemption liability

    17,511     17,934  

Deferred revenue

    56,301     56,047  

Current portion of long-term debt

    2,650     2,650  
           

Total current liabilities

    178,276     196,130  

Member redemption liability

    4,416     4,519  

Deferred revenue

    1,882     1,868  

Long-term debt, net of discounts

    257,913     258,474  

Deferred tax liabilities, net

    42,523     44,098  

Other liabilities

    11,284     11,133  
           

Total liabilities

    496,294     516,222  
           

Commitments and contingencies

             

Stockholders' equity:

             

Common stock

    9     9  

Additional paid-in capital

    497,807     496,868  

Accumulated other comprehensive loss

    (29,948 )   (35,393 )

Retained earnings

    20,920     18,651  
           

Total stockholders' equity

    488,788     480,135  
           

Total liabilities and stockholders' equity

  $ 985,082   $ 996,357  
           

   

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

4


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UNITED ONLINE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 
  Quarter Ended
March 31,
 
 
  2012   2011  

Revenues:

             

Products

  $ 147,012   $ 129,086  

Services

    95,280     112,419  
           

Total revenues

    242,292     241,505  

Operating expenses:

             

Cost of revenues—products

    108,689     96,155  

Cost of revenues—services

    22,476     25,048  

Sales and marketing

    46,759     48,135  

Technology and development

    11,586     12,543  

General and administrative

    24,287     28,729  

Amortization of intangible assets

    7,309     7,745  

Restructuring and other exit costs

    (71 )   534  
           

Total operating expenses

    221,035     218,889  
           

Operating income

    21,257     22,616  

Interest income

    238     549  

Interest expense

    (3,458 )   (5,041 )

Other income, net

    204     1,539  
           

Income before income taxes

    18,241     19,663  

Provision for income taxes

    6,722     7,482  
           

Net income

  $ 11,519   $ 12,181  
           

Income allocated to participating securities

    (336 )   (555 )
           

Net income attributable to common stockholders

  $ 11,183   $ 11,626  
           

Basic net income per common share

  $ 0.12   $ 0.13  
           

Shares used to calculate basic net income per common share

    89,794     87,417  
           

Diluted net income per common share

  $ 0.12   $ 0.13  
           

Shares used to calculate diluted net income per common share

    89,894     87,820  
           

Dividends paid per common share

  $ 0.10   $ 0.10  
           

   

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

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UNITED ONLINE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 
  Quarter Ended
March 31,
 
 
  2012   2011  

Net income

  $ 11,519   $ 12,181  

Other comprehensive income:

             

Cash flow hedges:

             

Change in net losses on derivatives, net of tax of $(31) for the quarter ended March 31, 2012

   
(44

)
 
 

Derivative settlement gains reclassified into earnings, net of tax of $18 for the quarter ended March 31, 2012

   
(30

)
 
 

Other hedges:

             

Changes in net gains (losses) on derivatives, net of tax of $(40) and $47 for the quarters ended March 31, 2012 and 2011, respectively

   
(58

)
 
73
 

Foreign currency translation

   
5,577
   
5,072
 
           

Other comprehensive income

   
5,445
   
5,145
 
           

Comprehensive income

 
$

16,964
 
$

17,326
 
           

   

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
  Retained
Earnings
  Total
Stockholders'
Equity
 
 
  Shares   Amount  

Balance at January 1, 2012

    89,423   $ 9   $ 496,868   $ (35,393 ) $ 18,651   $ 480,135  

Exercises of stock options

    2         4             4  

Vesting of restricted stock units

    731                      

Repurchases of common stock

            (2,082 )           (2,082 )

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

                    (9,250 )   (9,250 )

Stock-based compensation

            3,454             3,454  

Tax shortfalls from equity awards

            (437 )           (437 )

Other comprehensive income

                5,445         5,445  

Net income

                    11,519     11,519  
                           

Balance at March 31, 2012

    90,156   $ 9   $ 497,807   $ (29,948 ) $ 20,920   $ 488,788  
                           

   

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)

 
  Quarter Ended
March 31,
 
 
  2012   2011  

Cash flows from operating activities:

             

Net income

  $ 11,519   $ 12,181  

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

             

Depreciation and amortization

    14,219     14,052  

Stock-based compensation

    3,454     4,726  

Provision for doubtful accounts receivable

    729     705  

Accretion of discounts and amortization of debt issue costs

    202     572  

Deferred taxes, net

    (1,621 )   2,384  

Tax benefits (shortfalls) from equity awards

    (274 )   41  

Excess tax benefits from equity awards

    (13 )   (251 )

Other

    91     23  

Changes in operating assets and liabilities:

             

Accounts receivable, net

    3,077     3,079  

Inventories, net

    (1,614 )   2,426  

Other assets

    6,283     3,603  

Accounts payable and accrued liabilities

    (18,457 )   (24,719 )

Member redemption liability

    (527 )   (490 )

Deferred revenue

    (286 )   9,896  

Other liabilities

    93     (489 )
           

Net cash provided by operating activities

    16,875     27,739  
           

Cash flows from investing activities:

             

Purchases of property and equipment

    (4,212 )   (7,079 )

Purchases of rights, content and intellectual property

    (519 )   (1,222 )

Purchases of investments

    (18 )    

Proceeds from sales of investments

    89      
           

Net cash used for investing activities

    (4,660 )   (8,301 )
           

Cash flows from financing activities:

             

Payments on term loans

    (663 )    

Proceeds from exercises of stock options

    4     17  

Repurchases of common stock

    (2,082 )   (6,163 )

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

    (9,250 )   (9,421 )

Excess tax benefits from equity awards

    13     251  
           

Net cash used for financing activities

    (11,978 )   (15,316 )
           

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

    1,318     1,984  

Change in cash and cash equivalents

    1,555     6,106  

Cash and cash equivalents, beginning of period

    136,105     100,264  
           

Cash and cash equivalents, end of period

  $ 137,660   $ 106,370  
           

Supplemental disclosure of non-cash investing and financing activities:

             

Decrease in dividend equivalents payable on restricted stock units

  $   $ (174 )

   

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 AND ACCOUNTING POLICIES

Description of Business

        United Online, Inc. (together with its subsidiaries, "United Online" or the "Company"), through its operating subsidiaries, is a leading provider of consumer products and services over the Internet under a number of brands, including FTD, Interflora, Memory Lane, Classmates, StayFriends, MyPoints, and NetZero. The Company reports its business in three reportable segments: FTD, Content & Media and Communications. The Company's FTD segment provides 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. The Company's Content & Media segment provides online nostalgia products and services and online loyalty marketing services. The Company's primary Communications service is Internet access. On a combined basis, the Company's web properties attract a significant number of Internet users and the Company offers a broad array of Internet marketing services for advertisers.

        The Company's corporate headquarters are located in Woodland Hills, California, and the Company also maintains offices in Downers Grove, Illinois; Centerbrook, Connecticut; Medford, Oregon; Sleaford, England; Quebec, Canada; 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 ended March 31, 2012 and 2011 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, 2011 is derived from the Company's audited consolidated financial statements, filed on February 28, 2012 with the SEC in the Company's Annual Report on Form 10-K for the year ended December 31, 2011, 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, 2011 included in the Company's Annual Report on Form 10-K.

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

9


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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

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

Accounting Policies

        Refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2011 for a complete discussion of all significant accounting policies.

        Revenue Recognition—The Company applies the provisions of Accounting Standards Codification ("ASC") 605, Revenue Recognition, which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the Securities and Exchange Commission. ASC 605 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. The Company recognizes revenues when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable, no significant Company obligations remain, and collectibility is reasonably assured.

        Service revenues for the Company's online nostalgia services and for its Communications services are derived primarily from fees charged to pay accounts and are recognized in the period in which fees are fixed or determinable and the related services are provided to the customer. The Company's pay accounts generally pay in advance for their services by credit card, and revenues are then recognized ratably over the service period. Advance payments from pay accounts are recorded on the consolidated balance sheets as deferred revenue. The Company offers alternative payment methods to credit cards for certain Communications pay service plans. These alternative payment methods currently include use of automated clearing-house, payment by personal check or money order, or payment through a local telephone company. In circumstances where payment is not received in advance, revenues are only recognized if collectibility is also reasonably assured. The Company's Communications product revenues are generated from the sale of 4G mobile broadband devices and the related shipping and handling fees upon delivery of such devices. Sales of 4G mobile broadband devices bundled with free or paid service plans are allocated using the relative selling price method in accordance with the multiple-element arrangement provisions of ASC 605. The selling prices of the Company's 4G mobile broadband service plans are determined by vendor specific objective evidence, which is based upon the monthly stand-alone selling price of each plan. The selling prices of 4G mobile broadband devices and free service plans are determined by management's best estimate of selling price, which considers market and economic conditions, internal costs, pricing, and discounting practices.

        Probability of collection is assessed based on a number of factors, including past transaction history with the customer and the creditworthiness of the customer. If it is determined that collectibility is not reasonably assured, revenues are not recognized until collectibility becomes reasonably assured, which is generally upon receipt of cash.

10


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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

        Inventories—Inventories consist of finished goods, including floral-related inventories, gift cards related to the Company's member redemption liability, 4G mobile broadband devices, and modems. Inventories are stated at the lower of cost or market value. Inventory is valued using the weighted-average cost method. The Company's management regularly reviews inventory quantities on hand and, if necessary, records a provision for excess and obsolete inventory based primarily on the age of the inventory and forecasts of product demand.

2. SEGMENT INFORMATION

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

 
  Quarter Ended March 31, 2012  
 
  FTD   Content & Media   Communications   Total  

Products

  $ 146,164   $ 551   $ 297   $ 147,012  

Services

    30,224     25,786     21,068     77,078  

Advertising

    59     13,108     5,395     18,562  
                   

Total segment revenues

  $ 176,447   $ 39,445   $ 26,760   $ 242,652  
                   

Segment income from operations

  $ 24,080   $ 7,337   $ 10,365   $ 41,782  
                   

 

 
  Quarter Ended March 31, 2011  
 
  FTD   Content & Media   Communications   Total  

Products

  $ 129,086   $   $     129,086  

Services

    29,791     32,529     27,879     90,199  

Advertising

    22     15,784     6,819     22,625  
                   

Total segment revenues

  $ 158,899   $ 48,313   $ 34,698   $ 241,910  
                   

Segment income from operations

  $ 18,573   $ 10,123   $ 16,625   $ 45,321  
                   

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

 
  Quarter Ended
March 31,
 
 
  2012   2011  

Segment revenues:

             

FTD

  $ 176,447   $ 158,899  

Content & Media

    39,445     48,313  

Communications

    26,760     34,698  
           

Total segment revenues

    242,652     241,910  

Intersegment eliminations

    (360 )   (405 )
           

Consolidated revenues

  $ 242,292   $ 241,505  
           

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SEGMENT INFORMATION (Continued)

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

 
  Quarter Ended
March 31,
 
 
  2012   2011  

Segment operating expenses:

             

FTD

  $ 152,367   $ 140,326  

Content & Media

    32,108     38,190  

Communications

    16,395     18,073  
           

Total segment operating expenses

    200,870     196,589  

Depreciation

    6,475     6,145  

Amortization of intangible assets

    7,744     7,907  

Unallocated corporate expenses

    6,306     8,653  

Intersegment eliminations

    (360 )   (405 )
           

Consolidated operating expenses

  $ 221,035   $ 218,889  
           

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

 
  Quarter Ended
March 31,
 
 
  2012   2011  

Segment income from operations:

             

FTD

  $ 24,080   $ 18,573  

Content & Media

    7,337     10,123  

Communications

    10,365     16,625  
           

Total segment income from operations

    41,782     45,321  

Depreciation

    (6,475 )   (6,145 )

Amortization of intangible assets

    (7,744 )   (7,907 )

Unallocated corporate expenses

    (6,306 )   (8,653 )
           

Consolidated operating income

  $ 21,257   $ 22,616  
           

        International revenues are primarily generated by the Company's operations in Europe. International revenues totaled $62.0 million and $49.8 million for the quarters ended March 31, 2012 and 2011, respectively.

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SEGMENT INFORMATION (Continued)

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

 
  March 31,
2012
  December 31,
2011
 

United States

  $ 64,871   $ 65,291  

Europe

    10,121     10,021  
           

Total long-lived assets

  $ 74,992   $ 75,312  
           

        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

Financing Receivables

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

 
  March 31,
2012
  December 31,
2011
 

Current

  $ 13,244   $ 13,598  

Past due

    3,591     3,725  
           

Total

  $ 16,835   $ 17,323  
           

        A significant majority of the past due financing receivables at March 31, 2012 and December 31, 2011 were 120 days or more past due. Financing receivables on nonaccrual status at March 31, 2012 and December 31, 2011 totaled $3.6 million and $3.8 million, respectively.

        The changes in allowance for credit losses related to financing receivables for the quarters ended March 31, 2012 and 2011 were as follows (in thousands):

 
  Quarter Ended
March 31,
 
 
  2012   2011  

Balance at January 1

  $ 3,655   $ 3,597  

Current period provision

    57     267  

Write-offs charged against allowance

    (218 )   (168 )
           

Balance at March 31

  $ 3,494   $ 3,696  
           

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. BALANCE SHEET COMPONENTS (Continued)

Other Current Assets

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

 
  March 31,
2012
  December 31,
2011
 

Prepaid expenses

  $ 8,652   $ 11,334  

Prepaid floral catalog expenses

    1,357     1,528  

Prepaid advertising and promotion expense

    1,354     1,487  

Income taxes receivable

    1,096     5,704  

Prepaid insurance

    587     1,247  

Other

    2,592     2,765  
           

Total

  $ 15,638   $ 24,065  
           

Accrued Liabilities

        Accrued liabilities consisted of the following (in thousands):

 
  March 31,
2012
  December 31,
2011
 

Employee compensation and related expenses

  $ 17,222   $ 26,621  

Non-income taxes payable

    6,266     4,932  

Income taxes payable

    5,483     4,366  

Reserves for pending legal settlements

    4,728     4,830  

Customer deposits

    1,783     2,004  

Accrued restructuring and other exit costs

    1,510     4,151  

Other

    7,816     7,946  
           

Total

  $ 44,808   $ 54,850  
           

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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 quarter ended March 31, 2012 were as follows (in thousands):

 
  FTD   Content & Media   Communications   Total  

Balance at January 1, 2012:

                         

Goodwill (excluding impairment charges)

  $ 440,617   $ 124,712   $ 13,227   $ 578,556  

Accumulated impairment charges

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

Goodwill at January 1, 2012

    326,617     124,712     7,489     458,818  

Foreign currency translation

    3,941     5         3,946  
                   

Balance at March 31, 2012:

                         

Goodwill (excluding impairment charges)

    444,558     124,717     13,227     582,502  

Accumulated impairment charges

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

Goodwill at March 31, 2012

  $ 330,558   $ 124,717   $ 7,489   $ 462,764  
                   

Intangible Assets

        Intangible assets consisted of the following (in thousands):

 
  March 31, 2012  
 
  Gross
Value
  Accumulated
Amortization
  Net  

Pay accounts and free accounts

  $ 100,902   $ (94,219 ) $ 6,683  

Customer contracts and relationships

    112,383     (71,735 )   40,648  

Trademarks and trade names

    183,568     (20,667 )   162,901  

Software and technology

    46,672     (34,962 )   11,710  

Rights, content and intellectual property

    11,425     (4,517 )   6,908  
               

Total

  $ 454,950   $ (226,100 ) $ 228,850  
               

 

 
  December 31, 2011  
 
  Gross
Value
  Accumulated
Amortization
  Net  

Pay accounts and free accounts

  $ 100,854   $ (93,613 ) $ 7,241  

Customer contracts and relationships

    111,831     (67,199 )   44,632  

Trademarks and trade names

    182,270     (20,230 )   162,040  

Software and technology

    46,483     (32,768 )   13,715  

Rights, content and intellectual property

    10,999     (4,166 )   6,833  
               

Total

  $ 452,437   $ (217,976 ) $ 234,461  
               

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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)

        The Company's acquired trademarks and trade names related to the acquisition by the Company of FTD Group, Inc. and its subsidiaries ("FTD") in August 2008 are indefinite-lived and, accordingly, there is no associated amortization expense or accumulated amortization. At March 31, 2012 and December 31, 2011, such trademarks and trade names after impairment and foreign currency translation adjustments totaled $157.8 million and $156.5 million, respectively.

5. LONG-TERM DEBT

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

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

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

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

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. LONG-TERM DEBT (Continued)

in borrowing, subject to certain conditions, including compliance with covenants and approval by the lender group.

        The changes in the Company's debt balances, net of discounts, for the quarter ended March 31, 2012 under the Credit Agreement were as follows (in thousands):

 
  Balance at
January 1,
2012
  Repayments
of Debt
  Accretion
of Discounts
  Balance at
March 31,
2012
 

Credit Agreement, Term Loan

  $ 261,124   $ (663 ) $ 102   $ 260,563  

Credit Agreement, Revolving Credit Facility

                 
                   

Total

  $ 261,124   $ (663 ) $ 102   $ 260,563  
                   

        Future minimum principal payments based upon scheduled mandatory debt payments under the Credit Agreement, excluding required repayments based on excess cash flows, were as follows at March 31, 2012 (in thousands):

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

Credit Agreement, Term Loan

  $ 263,013   $ 1,988   $ 2,650   $ 2,650   $ 2,650   $ 2,650   $ 250,425  

        At March 31, 2012, the borrowing capacity under the Revolving Credit Facility, which was reduced by $1.1 million in outstanding letters of credit, was $48.9 million.

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

        Under the terms of the Credit Agreement, FTD Group, Inc. is generally restricted from transferring funds to United Online, Inc., with certain exceptions including an annual basket of $15 million (subject to adjustment based on excess cash flow calculations) which may be used to make cash dividends, loans and advances to United Online, Inc., provided certain terms and conditions specified in the Credit Agreement are satisfied. These restrictions have resulted in the restricted net assets (as defined in Rule 4-08(e)(3) of Regulation S-X) of FTD Group Inc. and its subsidiaries totaling $260.1 million and $262.1 million at March 31, 2012 and December 31, 2011, respectively, which exceeded 25% of the consolidated net assets of United Online, Inc. and its subsidiaries. FTD Group, Inc. was in compliance with all covenants under the Credit Agreement at March 31, 2012.

6. DERIVATIVE INSTRUMENTS

        In March 2012, FTD Group, Inc. entered into forward starting interest rate cap instruments based on 3-month LIBOR that are effective from January 2015 to June 2018 and have aggregated notional values totaling $130 million. The interest rate cap instruments are designated as cash flow hedges against expected future cash flows attributable to future 3-month LIBOR interest payments on the outstanding borrowings under the Credit Agreement. The gains or losses on the instruments are reported in other comprehensive income to the extent that they are effective and will be reclassified

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. DERIVATIVE INSTRUMENTS (Continued)

into earnings when the expected future cash flows, beginning in January 2015 through June 2018 and attributable to future 3-month LIBOR interest payments, are recognized in earnings.

        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   March 31,
2012
  December 31,
2011
  March 31,
2012
  December 31,
2011
 

Derivative Assets:

                             

Interest rate caps

  Other assets   $ 1,600   $   $ 130,000   $  

Other derivative assets

  Other current assets   $ 130   $ 372   $ 8,052   $ 6,069  

Derivative Liabilities:

                             

Other derivative liabilities

  Accrued liabilities   $ (102 ) $ (240 ) $ 6,730   $ 5,228  

        The effect of the Company's interest rate caps on accumulated other comprehensive loss was as follows (in thousands):

 
  Change in Losses
Recognized in
Accumulated Other
Comprehensive Loss
on Derivatives
Before Tax
 
 
  Quarter Ended
March 31,
 
 
  2012   2011  

Interest rate caps

  $ (309 ) $  

        At March 31, 2012, the effective portion of the Company's interest rate caps before tax effect was $1.6 million, of which $0 is expected to be reclassified from accumulated other comprehensive loss to interest expense within the next 12 months.

7. 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):

 
  March 31, 2012  
Description
  Total
Fair Value
  Level 1
Fair Value
  Level 2
Fair Value
 

Money market funds

  $ 115,455   $ 105,842   $ 9,613  

Derivative assets

    1,730         1,730  

Derivative liabilities

    (102 )       (102 )
               

  $ 117,083   $ 105,842   $ 11,241  
               

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. FAIR VALUE MEASUREMENTS (Continued)

 

 
  December 31, 2011  
Description
  Total
Fair Value
  Level 1
Fair Value
  Level 2
Fair Value
 

Money market funds

  $ 89,770   $ 89,770   $  

Derivative assets

    372         372  

Derivative liabilities

    (240 )       (240 )
               

  $ 89,902   $ 89,770   $ 132  
               

        The Company estimated the fair value of its long-term debt using a discounted cash flow technique that incorporates a market interest yield curve with adjustments for duration and risk profile. In determining the market interest yield curve, the Company considered, among other factors, its estimate of its credit rating. The Company estimated its credit rating as BB+/BB- for the long-term debt associated with the Credit Agreement, resulting in a discount rate of 5.3%. The table below summarizes the fair value estimates for long-term debt, net of discounts, including the current portion, at March 31, 2012, as defined by ASC 825 (in thousands):

 
  Carrying
Amount
  Estimated
Fair Value
 

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

  $ 260,563   $ 265,235  

8. STOCKHOLDERS' EQUITY

Common Stock Repurchases

        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 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 increased the amount authorized to $80.0 million. In December 2011, the Board of Directors extended the Program through December 31, 2012. There were no repurchases under the Program in the year ended December 31, 2011 or the quarter ended March 31, 2012 and, at March 31, 2012, the authorization remaining under the Program was $80.0 million.

        Shares withheld upon the vesting of restricted stock units and upon the issuance of stock awards to pay applicable required employee withholding taxes are considered common stock repurchases, but are not counted as purchases against the Program. Upon vesting of restricted stock units or issuance of stock awards, the Company currently does not collect the applicable required employee withholding taxes from employees. Instead, the Company automatically withholds, from the restricted stock units that vest, and from the stock awards that are issued, the portion of those shares with a fair market value equal to the amount of the required employee withholding taxes due, which is accounted for as a repurchase of common stock. The Company then pays the applicable withholding taxes in cash. The amounts remitted in the quarters ended March 31, 2012 and 2011 were $2.1 million and $6.2 million, respectively, for which the Company withheld 0.4 million and 0.9 million shares of common stock, respectively, that were underlying the restricted stock units which vested and stock awards that were

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. STOCKHOLDERS' EQUITY (Continued)

issued. For information regarding the common stock repurchases consummated during the quarter ended March 31, 2012, see "Item 2.Unregistered Sales of Equity Securities and Use of Proceeds," which appears elsewhere in this Quarterly Report on Form 10-Q.

Dividends

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

        In January 2012, the Board of Directors declared a quarterly cash dividend of $0.10 per share of common stock. The dividend was paid on February 29, 2012 and totaled $9.3 million, including dividend equivalents paid on nonvested restricted stock units. In April 2012, the Board of Directors declared a quarterly cash dividend of $0.10 per share of common stock. The record date for the dividend is May 14, 2012 and the dividend will be paid on May 31, 2012.

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

9. STOCK-BASED COMPENSATION PLANS

Stock-Based Compensation

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

 
  Quarter Ended
March 31,
 
 
  2012   2011  

Operating expenses:

             

Cost of revenues-products

  $ 8   $ 8  

Cost of revenues-services

    94     82  

Sales and marketing

    583     470  

Technology and development

    498     553  

General and administrative

    2,271     3,613  
           

Total stock-based compensation

  $ 3,454   $ 4,726  
           

Recent Awards

        On February 23, 2012, the Compensation Committee of the Board of Directors of United Online, Inc. approved restricted stock unit grants to certain executive officers totaling 0.4 million shares, which were made and effective February 29, 2012. The restricted stock units will vest as to one-third of the total number of units awarded annually over a three-year period beginning February 15, 2012.

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. STOCK-BASED COMPENSATION PLANS (Continued)

        On February 27, 2012, the Secondary Compensation Committee of the Board of Directors of United Online, Inc. approved restricted stock unit grants to certain non-executive officer employees totaling 1.3 million shares, which were made and effective February 29, 2012. The restricted stock units will vest as to one-quarter of the total number of units awarded annually over a four-year period beginning February 15, 2012.

        On February 23, 2012, the Compensation Committee of the Board of Directors of United Online, Inc. approved stock option grants to certain executive officers totaling 0.6 million shares, which were made and effective February 29, 2012. Each stock option entitles the recipient to receive one share of common stock upon exercise of the vested award and payment of the exercise price. The stock options will vest as to one-third of the total number of options awarded annually over a three-year period beginning February 15, 2012.

10. NET INCOME PER COMMON SHARE

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

 
  Quarter Ended
March 31,
 
 
  2012   2011  

Numerator:

             

Net income

  $ 11,519   $ 12,181  

Income allocated to participating securities

    (336 )   (555 )
           

Net income attributable to common stockholders

  $ 11,183   $ 11,626  
           

Denominator:

             

Weighted-average common shares

    89,794     87,417  
           

Add: Dilutive effect of non-participating securities

    100     403  
           

Shares used to calculate diluted net income per common share

    89,894     87,820  
           

Basic net income per common share

  $ 0.12   $ 0.13  
           

Diluted net income per common share

  $ 0.12   $ 0.13  
           

        The diluted net income per common share computations exclude stock options and restricted stock units which are antidilutive. Weighted-average antidilutive shares for the quarters ended March 31, 2012 and 2011 were 5.5 million and 3.2 million, respectively.

11. LEGAL CONTINGENCIES

        In October 2008, Anthony Michaels filed a purported class action complaint against Classmates Online, Inc., now known as Memory Lane, Inc., Classmates Media Corporation and United Online, Inc. in Superior Court of the State of California, County of Los Angeles, alleging causes of action for intentional misrepresentation, negligent misrepresentation, negligence, fraudulent concealment, and for violations of California Business and Professions Code sections 17200 and 17500 et seq. In December 2008, Xavier Vasquez filed a purported class action complaint against Classmates

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. LEGAL CONTINGENCIES (Continued)

Online, Inc., Classmates Media Corporation and United Online, Inc. in Superior Court of Washington, Kings County, alleging causes of action for violation of the Washington Consumer Protection Act, violation of California's Unfair Competition Law, violation of California's Consumer Legal Remedies Act, unjust enrichment and violation of California Civil Code section 1694, dealing with dating services contracts. In both actions, the plaintiffs are seeking injunctive relief and damages. In April 2009, the United States District Court of the Western District of Washington consolidated the Michaels and the Vasquez actions and designated the Michaels action as the lead case. In March 2010, the parties entered into a comprehensive class action settlement agreement. In February 2011, the court denied final approval of such settlement agreement. In March 2011, the parties entered into a revised settlement agreement and, in July 2011, the court issued an order granting preliminary approval of the revised settlement agreement. The parties subsequently modified the settlement agreement in August 2011. A hearing on plaintiffs' motion for final approval of the revised settlement agreement was held in December 2011. The parties are awaiting the court's ruling on that motion.

        On March 6, 2012, Hope Kelm, Barbara Timmcke, Regina Warfel, Brett Reilly, Juan M. Restrepo and Jennie H. Pham filed a purported class action complaint in United States District Court, District of Connecticut, against the following defendants: (i) Chase Bank USA, N.A., Bank of America, N.A., Capital One Financial Corporation, Citigroup, Inc., and Citibank, N.A. (collectively, the "Credit Card Company Defendants"); (ii) 1-800-Flowers.com, Inc., United Online, Inc., Memory Lane, Inc., Classmates International, Inc., FTD Group, Inc., Days Inns Worldwide, Inc., Wyndham Worldwide Corporation, PeopleFindersPro, Inc., Beckett Media LLC, Buy.com, Inc., Rakuten USA, Inc., IAC/InterActiveCorp, and Shoebuy.com, Inc. (collectively, the "E-Merchant Defendants"); and (iii) Trilegiant Corporation, Inc. ("Trilegiant"), Affinion Group, LLC ("Affinion") and Apollo Global Management, LLC ("Apollo"). The complaint alleges (1) violations of the Racketeer Influenced Corrupt Organizations Act against all defendants, and aiding and abetting violations of such act against the Credit Card Company Defendants; (2) aiding and abetting violations of federal mail fraud, wire fraud and bank fraud statutes against the Credit Card Company Defendants; (3) violations of the Electronic Communications Privacy Act against Trilegiant, Affinion and the E-Merchant Defendants, and aiding and abetting violations of such act against the Credit Card Company Defendants; (4) violations of the Connecticut Unfair Trade Practices Act against Trilegiant, Affinion, Apollo, and the E-Merchant Defendants, and aiding and abetting violations of such act against the Credit Card Company Defendants; (5) violation of California Business and Professions Code section 17602 against Trilegiant, Affinion, Apollo, and the E-Merchant Defendants; and (6) unjust enrichment against all defendants. The plaintiffs seek class certification, restitution and disgorgement of all amounts wrongfully charged to and received from 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 15, 2012, Debra Miller and William Thompson filed a purported class action complaint in United States District Court, District of Connecticut, against the following defendants: (i) Trilegiant, Affinion, Apollo, Vertrue, Inc., Webloyalty.com, Inc., and Adaptive Marketing, LLC (collectively, the "Membership Companies"); (ii) 1-800-Flowers.com, Inc., Beckett Media LLC, Buy.com, Inc., Classmates International, Inc., Days Inn Worldwide, Inc., FTD Group, Inc., IAC/Interactivecorp, Inc., Memory Lane, Inc., Peoplefinderspro, Inc., Rakuten USA, Inc., Shoebuy.com, Inc., United Online, Inc., Wells Fargo & Company, and Wyndham Worldwide Corporation (collectively, the "Marketing Companies"); and (iii) Bank of America, N.A., Capital One Financial Corporation, Chase Bank USA,

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. LEGAL CONTINGENCIES (Continued)

N.A., and Citibank, N.A. (collectively, the "Credit Card Companies"). The complaint alleges (1) violations of the Racketeer Influenced Corrupt Organizations Act against all defendants, and aiding and abetting violations of such act against the Credit Card Companies; (2) aiding and abetting violations of federal mail fraud, wire fraud and bank fraud statutes against the Credit Card Companies; (3) violations of the Electronic Communications Privacy Act against the Membership Companies and the Marketing Companies, and aiding and abetting violations of such act against the Credit Card Companies; (4) violations of the Connecticut Unfair Trade Practices Act against the Membership Companies and the Marketing Companies, and aiding and abetting violations of such act against the Credit Card Companies; (5) violation of California Business and Professions Code section 17602 against the Membership Companies and the Marketing Companies; and (6) unjust enrichment against all defendants. The plaintiffs seek class certification, restitution and disgorgement of all amounts wrongfully charged to and received from 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.

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

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

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

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

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

        The Company records a liability when it believes that it is both probable that a loss will be incurred, and the amount of loss can be reasonably estimated. The Company evaluates, at least

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. LEGAL CONTINGENCIES (Continued)

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 March 31, 2012, the Company had a reserve of $4.7 million for a pending legal settlement. With respect to the other legal matters described above, the Company had determined, based on its current knowledge, that the amount of possible loss or range of loss, including any reasonably possible losses in excess of amounts already accrued, is not reasonably estimable. However, legal matters are inherently unpredictable and subject to significant uncertainties, some of which are beyond the Company's control. As such, there can be no assurance that the final outcome of these matters will not materially and adversely affect the Company's business, financial condition, results of operations, or cash flows.

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

Forward-Looking Statements

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

Overview

        United Online, through its operating subsidiaries, is a leading provider of consumer products and services over the Internet under a number of brands, including FTD, Interflora, Memory Lane, Classmates, StayFriends, MyPoints, and NetZero.

        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, our Internet access revenues began to decline and we began diversifying our business to include other consumer Internet offerings in an effort to provide new growth opportunities for the Company. In November 2004, we acquired Classmates Online, Inc. (whose name was changed to Memory Lane, Inc. in February 2011), a provider of online nostalgia services, and in April 2006, we acquired MyPoints.com, Inc. ("MyPoints"), a provider of online loyalty marketing services. In August 2008, we acquired FTD Group, Inc. (together with its subsidiaries, "FTD"), 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.

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        We report our businesses in three reportable segments:

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

Content & Media

 

Online nostalgia products and services and online loyalty marketing services

Communications

 

Internet access services and devices, including dial-up, 4G mobile broadband, and DSL, and email, Internet security and web hosting services

        We generate revenues from three primary sources:

    Products revenues.  Products revenues in our FTD segment are derived primarily from selling floral, gift and related products to consumers via our Internet websites and telephone numbers and, to a lesser extent, to our floral network members. Products revenues in our Content & Media segment are derived from the sale of yearbook copies and related shipping and handling fees. Products revenues in our Communications segment are derived from the sale of 4G mobile broadband devices and the related shipping and handling fees.

    Services revenues.  Services revenues in our FTD segment are derived from membership fees, order-related fees and services, and subscription and other fees generated from independent members of the FTD and Interflora networks, which we also refer to as our floral network members. Our floral network members include independent traditional retail florists and other retailers. 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.

    Advertising revenues.  Advertising revenues are derived from a wide variety of advertising, marketing and media-related initiatives in each of our operating segments.

Segment Services

FTD

        FTD is a leading 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, in the U.S., Canada, the U.K., and the Republic of Ireland. The business uses the highly recognized FTD and Interflora brands, both supported by the Mercury Man logo. FTD is a floral and gift mass marketer, which we refer to as FTD's consumer business, and a provider of floral network services, which we refer to as FTD's floral network business. These businesses are complementary, as the majority of floral orders generated by the consumer business are fulfilled and hand-delivered by the members of the FTD floral network, with the remaining orders delivered via direct shipment from third-party suppliers. FTD does not currently own or operate any retail locations with the exception of one retail location in the U.K. FTD does not maintain significant physical inventory and generally does not bear the cost of warehousing its consumer product offerings, and FTD generally receives payment from consumers before paying florists or other third parties to fulfill product orders.

        Consumer Business.    FTD is a leading marketer of flowers and gift items to consumers. FTD operates in the U.S. and Canada, primarily through the www.ftd.com and www.ftd.ca websites and the 1-800-SEND-FTD telephone number, and in the U.K. and the Republic of Ireland, primarily through the www.interflora.co.uk and www.interflora.ie websites and various telephone numbers. FTD also operates mobile websites for these same markets that are optimized for mobile phones with Internet

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connections. While floral arrangements and plants are FTD's primary offerings, FTD also markets and sells gift items, including jewelry, chocolates, stuffed animals, wine, fruit, bath and beauty products, and other gift baskets.

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

Content & Media

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

        Online Nostalgia Services.    We operate our nostalgia services as a platform to enable users to locate and interact with acquaintances from their past, with high school affiliations as the primary focus. Led by our Classmates.com website that serves the U.S. and Canada, our nostalgia services comprise a large and diverse population of users, with approximately 55 million registered accounts at March 31, 2012.

        Domestic.    Visitors to the Classmates website can experience a substantial amount of nostalgic 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 learn who has visited his or her profile or yearbook or engage in the other premium features, a member is required to purchase an All-Access Pass, 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 copies.

        International.    In addition to our Classmates website, we operate five international websites that offer nostalgia services, primarily as a social networking platform to reconnect friends and acquaintances from high school. We operate StayFriends in 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 pay memberships, although the features of our international pay services differ from those of the Classmates pay services.

        Online Loyalty Marketing.    Our online 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 online loyalty promotions. The MyPoints website (www.mypoints.com) serves as a shopping portal for our advertising clients and direct sales partners. Members earn points for responding to email offers, taking market research companies' surveys, shopping online at the MyPoints website, searching the Internet through a MyPoints branded toolbar, playing MyPoints branded online games, and engaging in other online activities. In addition to these online point earning opportunities, MyPoints also offers a member credit card with opportunities to earn points through both online and offline shopping. Rewards points are redeemable primarily in the

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form of third-party gift cards currently from over 75 merchants, including, among others, leading retailers, theaters, restaurants, airlines, and hotels.

Communications

        Our principal Communications pay service is dial-up Internet access, offered under the NetZero and Juno brands. We also offer 4G mobile broadband, DSL, email, Internet security services, and web hosting services. In total, we had 0.7 million Communications pay accounts at March 31, 2012, of which 0.5 million were Internet access accounts and 0.2 million were pay accounts subscribed to our other Communications services, including email, Internet security and web hosting services. Most of our Communications revenues are derived from dial-up Internet access pay accounts.

        Internet Access Services.    Our Internet access services consist of dial-up and, to a much lesser extent, our 4G mobile broadband service and DSL service. 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 pop-up blocking, 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 more than 12,500 cities across the U.S. and Canada.

        In March 2012, we began offering 4G mobile broadband service under the NetZero brand as part of a wholesale agreement with Clearwire Corporation ("Clearwire"). We offer consumers the option to access the service by purchasing either a NetZero USB modem to connect a single device such as a PC or a Mac® computer, or purchasing a NetZero personal hotspot that can connect up to eight Wi-Fi enabled devices simultaneously. NetZero USB modem and NetZero hotspot customers are able to connect to the NetZero 4G mobile broadband service within the Clearwire coverage area using a variety of devices, including a PC, Mac® computer, iPad® mobile digital device, and other tablets, netbooks and smartphones. The NetZero 4G mobile broadband service is generally available for use in the home, at the office or on the go by customers across the U.S. within the Clearwire coverage area.

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

Key Business Metrics

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

FTD Segment Metrics

        Consumer Orders.    We monitor the number of consumer orders for floral and gift products during a given period. Consumer orders are orders delivered during the period that originated in the U.S. and Canada, primarily from the www.ftd.com and www.ftd.ca websites and the 1-800-SEND-FTD telephone number, and in the U.K. and the Republic of Ireland, primarily from the www.interflora.co.uk and www.interflora.ie websites and various telephone numbers. The number of consumer orders is not adjusted for non-delivered orders that are refunded after the scheduled delivery. Orders originating with a florist or other retail location for delivery to consumers are not included. The number of consumer orders received may fluctuate significantly from period to period due to seasonality resulting

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from the timing of key holidays; general economic conditions; fluctuations in marketing expenditures on initiatives designed to attract new and retain existing customers; changes in pricing for our floral, plant and gift products or competitive offerings; new or terminated partnerships; and changing consumer preferences, among other factors.

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

Content & Media and Communications Segment Metrics

        Pay Accounts.    We generate a significant portion of our revenues from our pay accounts and they represent one of the most important drivers of our business model. A pay account is defined as a member who has paid for a subscription to a Content & Media or Communications service, and whose subscription has not terminated or expired. A subscription provides the member with access to our service for a specific term (for example, a month or a year) and may be renewed upon the expiration of each term. One time purchases of our services are not considered subscriptions and thus, are not included in the pay accounts metric. A pay account does not equate to a unique subscriber since one subscriber could have several pay accounts. In addition, at any point in time, our pay account base includes a number of accounts receiving a free period of service as either a promotion or retention tool, such as the subscribers receiving our free NetZero 4G 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 metrics that affect our revenues from our pay accounts base include the number of pay accounts and ARPU. A pay account generally becomes a free account following the expiration or termination of the related subscription.

        ARPU.    We monitor ARPU, which is a monthly measure calculated by dividing services revenues generated from the pay accounts of our Content & Media or Communications segment, as applicable, for a period (after translation into U.S. Dollars) by the average number of segment pay accounts for that period, divided by the number of months in that period. The average number of pay accounts is the simple average of the number of pay accounts at the beginning and 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 the average foreign currency exchange rate between the U.S. Dollar and the Euro.

        Churn.    To evaluate the retention characteristics of our membership base, we also monitor the percentage of pay accounts that terminate or expire, which we refer to as our average monthly churn rate. Our average monthly churn rate is calculated as the total number of pay accounts that terminated or expired in a period divided by the average number of pay accounts for that period, divided by the number of months in that period. Our average monthly churn percentage may fluctuate from period to period due to our mix of subscription terms, which affects the timing of subscription expirations, and other factors. We make certain normalizing adjustments to the calculation of our churn percentage for periods in which we add a significant number of pay accounts due to acquisitions. For our

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Communications segment pay accounts, we do not include in our churn calculation those accounts canceled during the first 30 days of service unless the accounts have upgraded from free accounts, although a number of such accounts will be included in our account totals at any given measurement date. Subscribers who cancel one pay service but subscribe to another pay service are not necessarily considered to have canceled a pay account depending on the services and, as such, our segment churn rates are not necessarily indicative of the percentage of subscribers canceling any particular service.

        Active Accounts.    We monitor the number of active accounts among our membership base. Content & Media segment active accounts are defined as the sum of all pay accounts as of the date presented; the monthly average for the period of all free accounts who have visited our domestic or international online nostalgia websites (excluding The Names Database) at least once during the period; and the monthly average for the period of all online loyalty marketing members who have earned or redeemed points during such period. Communications segment active accounts include all Communications segment pay accounts as of the date presented combined with the number of free 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 the six-month, nine-month and annual periods, as applicable, are calculated as a simple average of the quarterly active accounts for each respective segment.

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

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

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

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        The pay accounts and ARPU metrics for our Content & Media segment may fluctuate significantly from period to period due to various factors including, but not limited to, the extent to which discounted pricing is offered in prior and current periods, the percentage of pay accounts being represented by international pay accounts which, on average, have lower-priced subscription plans compared to U.S. pay accounts, and the churn rate.

 
  Quarter Ended  
 
  March 31,
2012
  December 31,
2011
  September 30,
2011
  June 30,
2011
  March 31,
2011
 

Consolidated:

                               

Revenues (in thousands)

  $ 242,292   $ 217,921   $ 182,694   $ 255,565   $ 241,505  

FTD:

                               

Segment revenues (in thousands)

  $ 176,447   $ 143,304   $ 108,747   $ 176,299   $ 158,899  

% of consolidated revenues

    73 %   66 %   60 %   69 %   66 %

Consumer orders (in thousands)

    1,997     1,615     1,104     2,167     1,742  

Average order value

  $ 62.91   $ 62.31   $ 63.46   $ 60.45   $ 63.28  

Average currency exchange rate: GBP to USD

    1.58     1.57     1.61     1.63     1.61  

Content & Media:

                               

Segment revenues (in thousands)

  $ 39,445   $ 45,665   $ 44,070   $ 47,427   $ 48,313  

% of consolidated revenues

    16 %   21 %   24 %   19 %   20 %

Pay accounts (in thousands)

    3,293     3,484     3,780     4,007     4,260  

Segment churn

    3.9 %   4.1 %   3.9 %   3.8 %   3.9 %

ARPU

  $ 2.54   $ 2.60   $ 2.64   $ 2.60   $ 2.47  

Segment active accounts (in millions)

    11.3     10.3     11.9     12.5     13.6  

Average currency exchange rate: EUR to USD

    1.31     1.35     1.41     1.44     1.37  

Communications:

                               

Segment revenues (in thousands)

  $ 26,760   $ 29,295   $ 30,260   $ 32,279   $ 34,698  

% of consolidated revenues

    11 %   13 %   17 %   13 %   14 %

Pay accounts (in thousands):

                               

Access

    498     535     577     622     675  

Other

    249     259     266     272     279  
                       

Total pay accounts

    747     794     843     894     954  

Segment churn

    3.4 %   3.4 %   3.4 %   3.5 %   3.8 %

ARPU

  $ 8.99   $ 9.09   $ 9.14   $ 9.28   $ 9.33  

Segment active accounts (in millions)

    1.5     1.5     1.6     1.7     1.7  

Financial Statement Presentation

Revenues

Products Revenues

    FTD

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

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    Content & Media

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

    Communications

        Products revenues consist of revenues generated from the sale of 4G mobile broadband devices and the related shipping and handling fees.

Services Revenues

    FTD

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

    Content & Media and Communications

        Content & Media services revenues primarily consist of amounts charged to pay accounts for online nostalgia services. Communications services revenues consist of amounts charged to pay accounts for dial-up Internet access, 4G mobile broadband, DSL, email, Internet security, web hosting, and other services, with substantially all of such revenues associated with Internet access. Our Content & Media and Communications services revenues are primarily dependent on two factors: the average number of pay accounts for a period and ARPU. In general, we charge our pay accounts in advance of providing a service, which results in the deferral of services revenue to the period in which the services are provided. Communications services revenues also include revenues generated from the resale of telecommunications to third parties.

Advertising Revenues

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

    FTD

        FTD generates advertising revenues primarily from inclusion of advertisements on order confirmation emails to consumers, for which revenue is recognized when the advertisement is run, and from referrals of customers to third-party websites and services, for which revenue is recognized when the related performance criteria is met.

    Content & Media

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

        Our online loyalty marketing service revenues are derived from advertising fees, consisting primarily of fees based on performance measures, that are generated when emails are transmitted to members, when members respond to emails, when members complete online transactions, and when

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members engage in a variety of other online activities, including, but not limited to, games, Internet searches and market research surveys.

    Communications

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

Cost of Revenues

FTD

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

Content & Media

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

Communications

        Communications cost of revenues includes telecommunications and data center costs; personnel- and overhead-related costs associated with operating our networks and data centers; depreciation of network computers and equipment; license fees; costs related to providing customer support; costs related to customer billing and billing support for our pay accounts; fees associated with the storage and processing of customer credit cards and associated bank fees; domain name registration fees, and the costs associated with the sale of 4G mobile broadband devices, including the related shipping and handling costs.

Sales and Marketing

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

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period incurred. Advertising and promotion expenses include media, agency and promotion expenses. Media production costs are expensed the first time the advertisement is run. Media and agency costs are expensed over the period the advertising runs.

Technology and Development

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

General and Administrative

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

Amortization of Intangible Assets

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

Restructuring and Other Exit Costs

        Restructuring and other exit costs consist of costs associated with the realignment and reorganization of our operations and other employee termination events. Restructuring and other exit costs include employee termination costs, facility closure and relocation costs, and contract termination costs. The timing of associated cash payments is dependent upon the type of exit cost and can extend over a 12-month period. The Company records restructuring and other exit cost liabilities in accrued liabilities in the consolidated balance sheets.

Interest Income

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

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Interest Expense

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

Other Income (Expense), Net

        Other income (expense), net, consists of gains and losses on foreign currency exchange rate transactions; realized and unrealized gains and losses on certain forward foreign currency exchange contracts; equity earnings on investments in subsidiaries; and other non-operating income and expenses.

Results of Operations

        The following tables set forth, for the periods presented, selected historical statements of operations and segment information data. The information contained in the tables below should be read in conjunction with Liquidity and Capital Resources, Contractual Obligations, and Other Commitments included in this Item 2 as well as "Quantitative and Qualitative Disclosures About Market Risk" included in Part I, Item 3 of this Quarterly Report on Form 10-Q, and the unaudited condensed consolidated financial statements and notes thereto included in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

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

 
  Quarter Ended
March 31,
 
 
  2012   2011  

Revenues

  $ 242,292   $ 241,505  

Operating expenses:

             

Cost of revenues

    131,165     121,203  

Sales and marketing

    46,759     48,135  

Technology and development

    11,586     12,543  

General and administrative

    24,287     28,729  

Amortization of intangible assets

    7,309     7,745  

Restructuring and other exit costs

    (71 )   534  
           

Total operating expenses

    221,035     218,889  
           

Operating income

    21,257     22,616  

Interest income

    238     549  

Interest expense

    (3,458 )   (5,041 )

Other income, net

    204     1,539  
           

Income before income taxes

    18,241     19,663  

Provision for income taxes

    6,722     7,482  
           

Net income

  $ 11,519   $ 12,181  
           

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

 
  FTD   Content & Media   Communications  
 
  Quarter Ended
March 31,
  Quarter Ended
March 31,
  Quarter Ended
March 31,
 
 
  2012   2011   2012   2011   2012   2011  

Revenues

  $ 176,447   $ 158,899   $ 39,445   $ 48,313   $ 26,760   $ 34,698  

Operating expenses:

                                     

Cost of revenues

    111,956     100,370     8,248     9,038     7,687     9,172  

Sales and marketing

    28,714     29,352     14,119     15,406     3,908     3,333  

Technology and development

    2,797     2,889     4,409     5,593     1,944     1,843  

General and administrative

    8,900     7,715     5,395     8,153     2,864     3,191  

Restructuring and other exit costs

            (63 )       (8 )   534  
                           

Total operating expenses

    152,367     140,326     32,108     38,190     16,395     18,073  
                           

Segment income from operations

  $ 24,080   $ 18,573   $ 7,337   $ 10,123   $ 10,365   $ 16,625  
                           


Quarter Ended March 31, 2012 compared to Quarter Ended March 31, 2011

Consolidated Results

Revenues

 
  Quarter Ended
March 31,
  Change  
 
  2012   2011   $   %  
 
  (in thousands, except percentages)
 

Revenues

  $ 242,292   $ 241,505   $ 787     %

Revenues as a percentage of total segment revenues:

                         

FTD

    72.7 %   65.7 %            

Content & Media

    16.3 %   20.0 %            

Communications

    11.0 %   14.3 %            

        The increase in consolidated revenues was due to a $17.5 million increase in revenues from our FTD segment, partially offset by an $8.9 million decrease in revenues from our Content & Media segment and a $7.9 million decrease in revenues from our Communications segment.

Cost of Revenues

 
  Quarter Ended
March 31,
  Change  
 
  2012   2011   $   %  
 
  (in thousands, except percentages)
 

Cost of revenues

  $ 131,165   $ 121,203   $ 9,962     8 %

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

                         

FTD

    87.5 %   84.6 %            

Content & Media

    6.4 %   7.6 %            

Communications

    6.0 %   7.7 %            

        The increase in consolidated cost of revenues was due to an $11.6 million increase in cost of revenues associated with our FTD segment and a $0.6 million increase in depreciation and amortization expense. These increases were partially offset by a $1.5 million decrease in cost of revenues associated

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with our Communications segment and a $0.8 million decrease in cost of revenues associated with our Content & Media segment.

Sales and Marketing

 
  Quarter Ended
March 31,
  Change  
 
  2012   2011   $   %  
 
  (in thousands, except percentages)
 

Sales and marketing

  $ 46,759   $ 48,135   $ (1,376 )   (3 )%

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

                         

FTD

    61.4 %   61.0 %            

Content & Media

    30.2 %   32.0 %            

Communications

    8.4 %   6.9 %            

        The decrease in consolidated sales and marketing expenses was due to a $1.3 million decrease in sales and marketing expenses associated with our Content & Media segment and a $0.6 million decrease in sales and marketing expenses associated with our FTD segment. These decreases were partially offset by a $0.6 million increase in sales and marketing expenses associated with our Communications segment.

Technology and Development

 
  Quarter Ended
March 31,
  Change  
 
  2012   2011   $   %  
 
  (in thousands, except percentages)
 

Technology and development

  $ 11,586   $ 12,543   $ (957 )   (8 )%

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

                         

FTD

    30.6 %   28.0 %            

Content & Media

    48.2 %   54.2 %            

Communications

    21.2 %   17.8 %            

        The decrease in consolidated technology and development expenses was primarily due to a $1.2 million decrease in technology and development expenses associated with our Content & Media segment, partially offset by a $0.2 million increase in depreciation expense.

General and Administrative

 
  Quarter Ended
March 31,
  Change  
 
  2012   2011   $   %  
 
  (in thousands, except percentages)
 

General and administrative

  $ 24,287   $ 28,729   $ (4,442 )   (15 )%

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

                         

FTD

    51.9 %   40.5 %            

Content & Media

    31.4 %   42.8 %            

Communications

    16.7 %   16.7 %            

        The decrease in consolidated general and administrative expenses was due to a $2.8 million decrease in general and administrative expenses associated with our Content & Media segment, a

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$2.3 million decrease in unallocated corporate expenses, excluding depreciation, amortization of intangible assets and restructuring and other exit costs, and a $0.3 million decrease in general and administrative expenses associated with our Communications segment. These decreases were partially offset by a $1.2 million increase in general and administrative expenses associated with our FTD segment.

Amortization of Intangible Assets

 
  Quarter Ended
March 31,
  Change  
 
  2012   2011   $   %  
 
  (in thousands, except percentages)
 

Amortization of intangible assets

  $ 7,309   $ 7,745   $ (436 )   (6 )%

        The decrease in consolidated amortization of intangible assets was due to a $0.3 million decrease in amortization of intangible assets due to certain intangible assets associated with our Communications and Content & Media segments becoming fully amortized in prior periods.

Restructuring and Other Exit Costs

 
  Quarter Ended
March 31,
  Change  
 
  2012   2011   $   %  
 
  (in thousands, except percentages)
 

Restructuring and other exit costs

  $ (71 ) $ 534   $ (605 )   (113 )%

        Consolidated restructuring and other exit costs for the quarter ended March 31, 2011 were related to employee termination costs.

Interest Income

 
  Quarter Ended
March 31,
  Change  
 
  2012   2011   $   %  
 
  (in thousands, except percentages)
 

Interest income

  $ 238   $ 549   $ (311 )   (57 )%

        The decrease in consolidated interest income was primarily due to a decrease in interest on long-term receivables from FTD's technology system sales.

Interest Expense

 
  Quarter Ended
March 31,
  Change  
 
  2012   2011   $   %  
 
  (in thousands, except percentages)
 

Interest expense

  $ 3,458   $ 5,041   $ (1,583 )   (31 )%

        The decrease in consolidated interest expense was primarily due to lower interest rates as a result of the June 2011 refinancing of FTD's credit agreement.

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Other Income, Net

 
  Quarter Ended
March 31,
  Change  
 
  2012   2011   $   %  
 
  (in thousands, except percentages)
 

Other income, net

  $ 204   $ 1,539   $ (1,335 )   (87 )%

        The decrease in consolidated other income, net, was primarily due to a $1.1 million non-income tax refund at our FTD segment during the quarter ended March 31, 2011.

Provision for Income Taxes

 
  Quarter Ended
March 31,
 
 
  2012   2011  
 
  (in thousands,
except percentages)

 

Provision for income taxes

  $ 6,722     7,482  

Effective income tax rate

    36.9 %   38.1 %

        The decrease in our effective income tax rate was primarily due to an increase in foreign income, which has a lower overall tax rate, as a percentage of total pre-tax income, partially offset by an increase in non-deductible executive compensation.

FTD Segment Results

FTD Revenues

 
  Quarter Ended
March 31,
  Change  
 
  2012   2011   $   %  
 
  (in thousands, except percentages
and average order value)

 

Products

  $ 146,164   $ 129,086   $ 17,078     13 %

Services

    30,224     29,791     433     1 %

Advertising

    59     22     37     168 %
                     

Total FTD Revenues

  $ 176,447   $ 158,899   $ 17,548     11 %
                     

Consumer orders

    1,997     1,742     255     15 %

Average order value

  $ 62.91   $ 63.28   $ (0.37 )   (1 )%

        Excluding the unfavorable impact of foreign currency exchange rates of $1.1 million due to a weaker British Pound versus the U.S. Dollar, FTD revenues increased by $18.6 million, or 12%, compared to the prior-year period. The increase was primarily due to a 15% increase in consumer orders for the quarter ended March 31, 2012, compared to the prior-year period. The increase in consumer orders was driven primarily by the timing of the U.K. Mother's Day holiday, which occurred in the first quarter in 2012 but occurred in the second quarter in 2011. In 2011, approximately $14 million in revenues related to the U.K. Mother's Day holiday shifted into the second quarter. The increase was also driven by an increase in consumer order volume in the U.S. and the U.K. for the Valentine's Day holiday, partially offset by a 1% decrease in average order value for the quarter ended March 31, 2012, compared to the quarter ended March 31, 2011, due to an increased percentage of orders generated in the U.K. versus the U.S., as orders in the U.K. generally have lower average order values than the U.S.

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FTD Cost of Revenues

 
  Quarter Ended
March 31,
  Change  
 
  2012   2011   $   %  
 
  (in thousands, except percentages)
 

FTD cost of revenues

  $ 111,956   $ 100,370   $ 11,586     12 %

FTD cost of revenues as a percentage of FTD revenues

    63.5 %   63.2 %            

        Excluding the favorable impact of foreign currency exchange rates of $0.7 million, FTD cost of revenues increased by $12.3 million, or 12%, compared to the prior-year period primarily due to higher consumer order volume. Cost of revenues as a percentage of revenues was negatively impacted by a greater percentage of orders generated in the U.K., as compared to the U.S., which generally have lower margins.

FTD Sales and Marketing

 
  Quarter Ended
March 31,
  Change  
 
  2012   2011   $   %  
 
  (in thousands, except percentages)
 

FTD sales and marketing

  $ 28,714   $ 29,352   $ (638 )   (2 )%

FTD sales and marketing expenses as a percentage of FTD revenues

    16.3 %   18.5 %            

        The decrease in FTD sales and marketing expenses was primarily due to the absence of television advertising in the first quarter of 2012, partially offset by increased marketing expenditures in the U.S. in addition to increases in the U.K. related to the timing of the U.K. Mother's Day holiday.

FTD Technology and Development

 
  Quarter Ended
March 31,
  Change  
 
  2012   2011   $   %  
 
  (in thousands, except percentages)
 

FTD technology and development

  $ 2,797   $ 2,889   $ (92 )   (3 )%

FTD technology and development expenses as a percentage of FTD revenues

    1.6 %   1.8 %            

        FTD technology and development expenses remained relatively consistent for the quarter ended March 31, 2012, compared to the quarter ended March 31, 2011.

FTD General and Administrative

 
  Quarter Ended
March 31,
  Change  
 
  2012   2011   $   %  
 
  (in thousands, except percentages)
 

FTD general and administrative

  $ 8,900   $ 7,715   $ 1,185     15 %

FTD general and administrative expenses as a percentage of FTD revenues

    5.0 %   4.9 %            

        The increase in FTD general and administrative expenses was primarily attributable to transaction costs related to a then-pending acquisition and increased legal and personnel-related expenses.

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Content & Media Segment Results

Content & Media Revenues

 
  Quarter Ended
March 31,
  Change  
 
  2012   2011   $   %  
 
  (in thousands, except percentages and ARPU)
 

Products

  $ 551   $   $ 551     N/A  

Services

    25,786     32,529     (6,743 )   (21 )%

Advertising

    13,108     15,784     (2,676 )   (17 )%
                   

Total Content & Media Revenues

  $ 39,445   $ 48,313   $ (8,868 )   (18 )%
                   

ARPU

  $ 2.54   $ 2.47   $ 0.07     3 %

Average pay accounts

    3,389     4,380     (991 )   (23 )%

        The decrease in Content & Media services revenues was a result of a 23% decrease in our average number of pay accounts for the quarter ended March 31, 2012, compared to the quarter ended March 31, 2011, partially offset by a 3% increase in ARPU. The increase in ARPU was primarily attributable to an overall decrease in the percentage of pay accounts on discounted plans and a higher percentage of domestic pay accounts on shorter-term subscription plans, which have higher ARPUs, partially offset by a higher percentage of international pay accounts, which have lower ARPUs. In addition, Content & Media advertising revenues decreased due to a decrease in advertising revenues generated by our online loyalty marketing service due to a number of factors, including the loss of a major customer during the second half of 2011 as well as a decrease in segment active accounts. These decreases were partially offset by $0.6 million in Content & Media products revenues generated in the quarter ended March 31, 2012. We anticipate that Content & Media pay accounts and revenues will continue to decline year over year, at least in the near term.

Content & Media Cost of Revenues

 
  Quarter Ended
March 31,
  Change  
 
  2012   2011   $   %  
 
  (in thousands, except percentages)
 

Content & Media cost of revenues

  $ 8,248   $ 9,038   $ (790 )   (9 )%

Content & Media cost of revenues as a percentage of Content & Media revenues

    20.9 %   18.7 %            

        The decrease in Content & Media cost of revenues was primarily due to a $0.5 million decrease in credit card-related fees due to a decrease in pay accounts and a $0.4 million decrease in the cost of points earned by members of our online loyalty marketing service due to a decrease in advertising revenues.

Content & Media Sales and Marketing

 
  Quarter Ended
March 31,
  Change  
 
  2012   2011   $   %  
 
  (in thousands, except percentages)
 

Content & Media sales and marketing

  $ 14,119   $ 15,406   $ (1,287 )   (8 )%

Content & Media sales and marketing expenses as a percentage of Content & Media revenues

    35.8 %   31.9 %            

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        The decrease in Content & Media sales and marketing expenses was the result of $2.6 million in marketing costs related to television advertising supporting the launch of the Memory Lane website in the quarter ended March 31, 2011, a $1.5 million decrease in personnel- and overhead-related costs and a $0.3 million decrease in marketing costs to acquire new online loyalty marketing members. These decreases were partially offset by a $3.1 million increase in marketing costs primarily related to online marketing costs to acquire new online nostalgia members.

Content & Media Technology and Development

 
  Quarter Ended
March 31,
  Change  
 
  2012   2011   $   %  
 
  (in thousands, except percentages)
 

Content & Media technology and development

  $ 4,409   $ 5,593   $ (1,184 )   (21 )%

Content & Media technology and development expenses as a percentage of Content & Media revenues

    11.2 %   11.6 %            

        The decrease in Content & Media technology and development expenses was the result of a decrease in personnel- and overhead-related expenses as a result of reduced headcount.

Content & Media General and Administrative

 
  Quarter Ended
March 31,
  Change  
 
  2012   2011   $   %  
 
  (in thousands, except percentages)
 

Content & Media general and administrative

  $ 5,395   $ 8,153   $ (2,758 )   (34 )%

Content & Media general and administrative expenses as a percentage of Content & Media revenues

    13.7 %   16.9 %            

        The decrease in Content & Media general and administrative expenses was primarily due to $2.3 million of reserves for legal settlements recorded in the quarter ended March 31, 2011 and a $0.6 million decrease in personnel- and overhead-related costs.

Content & Media Restructuring and Other Exit Costs

 
  Quarter Ended
March 31,
  Change
 
  2012   2011   $   %
 
  (in thousands, except percentages)

Content & Media restructuring and other exit costs

  $ (63 ) $   $ (63 ) N/A

        Content & Media restructuring and other exit costs for the quarter ended March 31, 2012 related to the reversal of accrued employee termination benefits.

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Communications Segment Results

Communications Revenues

 
  Quarter Ended
March 31,
  Change  
 
  2012   2011   $   %  
 
  (in thousands, except percentages and ARPU)
 

Products

  $ 297   $   $ 297     N/A  

Services

    21,068     27,879     (6,811 )   (24 )%

Advertising

    5,395     6,819     (1,424 )   (21 )%
                   

Total Communications Revenues

  $ 26,760   $ 34,698   $ (7,938 )   (23 )%
                   

ARPU

  $ 8.99   $ 9.33   $ (0.34 )   (4 )%

Average number of dial-up Internet access pay accounts

    468     650     (182 )   (28 )%

        The decrease in Communications services revenues was primarily due to a 28% decrease in our average number of dial-up Internet access pay accounts for the quarter ended March 31, 2012, compared to the quarter ended March 31, 2011, as well as a 4% decrease in ARPU. The decrease in ARPU is attributable to a higher percentage of pay accounts on lower-priced or discounted subscription plans or services. The decrease in Communications advertising revenues was primarily due to the decrease in active accounts. These decreases were partially offset by $0.3 million of products revenues related to the sale of 4G mobile broadband devices. We anticipate that Communications pay accounts and revenues will continue to decline year over year.

Communications Cost of Revenues

 
  Quarter Ended
March 31,
  Change  
 
  2012   2011   $   %  
 
  (in thousands, except percentages)
 

Communications cost of revenues

  $ 7,687   $ 9,172   $ (1,485 )   (16 )%

Communications cost of revenues as a percentage of Communications revenues

    28.7 %   26.4 %            

        The decrease in Communications cost of revenues was due to a $0.7 million decrease in telecommunications, customer support and billing-related costs due to a decrease in dial-up Internet access accounts, a $0.4 million decrease in costs associated with our DSL service, and a $0.4 million decrease in costs associated with our advertising network. These decreases were partially offset by $0.4 million of costs associated with our 4G mobile broadband service. We anticipate that Communications cost of revenues will increase in 2012 as compared to 2011 due to the costs that will be incurred in connection with the 4G mobile broadband service.

Communications Sales and Marketing

 
  Quarter Ended
March 31,
  Change  
 
  2012   2011   $   %  
 
  (in thousands, except percentages)
 

Communications sales and marketing

  $ 3,908   $ 3,333   $ 575     17 %

Communications sales and marketing expenses as a percentage of Communications revenues

    14.6 %   9.6 %            

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        The increase in Communications sales and marketing expenses was attributable to $2.1 million in sales and marketing costs associated with the launch of our 4G mobile broadband service. This increase was partially offset by a $0.9 million decrease in personnel- and overhead-related expenses primarily as a result of reduced headcount and a $0.7 million decrease in advertising, promotion and distribution costs primarily related to our dial-up Internet access services. We anticipate that Communications sales and marketing costs will increase in 2012 as compared to 2011 due to the promotion of the 4G mobile broadband service.

Communications Technology and Development

 
  Quarter Ended
March 31,
  Change  
 
  2012   2011   $   %  
 
  (in thousands, except percentages)
 

Communications technology and development

  $ 1,944   $ 1,843   $ 101     5 %

Communications technology and development expenses as a percentage of Communications revenues

    7.3 %   5.3 %            

        The increase in Communications technology and development expenses was primarily due to an increase in personnel- and overhead-related expenses.

Communications General and Administrative

 
  Quarter Ended
March 31,
  Change  
 
  2012   2011   $   %  
 
  (in thousands, except percentages)
 

Communications general and administrative

  $ 2,864   $ 3,191   $ (327 )   (10 )%

Communications general and administrative expenses as a percentage of Communications revenues

    10.7 %   9.2 %            

        The decrease in Communications general and administrative expenses was primarily due to a $0.2 million decrease in personnel- and overhead-related costs as a result of reduced headcount.

Communications Restructuring and Other Exit Costs

 
  Quarter Ended
March 31,
  Change  
 
  2012   2011   $   %  
 
  (in thousands, except percentages)
 

Communications restructuring and other exit costs

  $ (8 ) $ 534   $ (542 )   (101 )%

        Communications restructuring and other exit costs for the quarter ended March 31, 2011 were primarily related to employee termination costs.

Unallocated Corporate Expenses

 
  Quarter Ended
March 31,
  Change  
 
  2012   2011   $   %  
 
  (in thousands, except percentages)
 

Unallocated corporate expenses

  $ 6,306   $ 8,653   $ (2,347 )   27 %

        The decrease in unallocated corporate expenses, excluding depreciation and amortization of intangible assets, was primarily due to a $2.2 million decrease in personnel- and overhead-related costs.

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Liquidity and Capital Resources

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

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

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

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

        Our total cash and cash equivalents balance increased by $1.6 million, or 1%, to $137.7 million at March 31, 2012, compared to $136.1 million at December 31, 2011. Our summary cash flows for the quarters ended March 31, 2012 and 2011 were as follows (in thousands):

 
  Quarter Ended
March 31,
 
 
  2012   2011  

Net cash provided by operating activities

  $ 16,875   $ 27,739  

Net cash used for investing activities

  $ (4,660 ) $ (8,301 )

Net cash used for financing activities

  $ (11,978 ) $ (15,316 )

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Quarter Ended March 31, 2012 compared to Quarter Ended March 31, 2011

        Net cash provided by operating activities decreased by $10.9 million, or 39%, for the quarter ended March 31, 2012, compared to the quarter ended March 31, 2011. Net cash provided by operating activities is driven by our net income adjusted for non-cash items and changes in working capital, including, but not limited to, depreciation and amortization, stock-based compensation, loss on extinguishment of debt, deferred taxes, and tax benefits (shortfalls) from equity awards. The decrease in net cash provided by operating activities was due to a $6.1 million decrease in net income, adjusted for non-cash items primarily related to deferred taxes as well as a $4.7 unfavorable change in working capital. Changes in working capital can cause variation in our cash flows provided by operating activities due to seasonality, timing and other factors.

        Net cash used for investing activities decreased by $3.6 million, or 44%, for the quarter ended March 31, 2012, compared to the quarter ended March 31, 2011. The decrease was primarily due to a $2.9 million decrease in purchases of property and equipment and a $0.7 million decrease in purchases of rights, content and intellectual property related to our online nostalgia services.

        Capital expenditures for the quarter ended March 31, 2012 totaled $4.2 million. We currently anticipate that our total capital expenditures for 2012 will be in the range of $25 million to $30 million. The actual amount of future capital expenditures may fluctuate due to a number of factors, including, without limitation, potential future acquisitions and new business initiatives, which are difficult to predict and which could change significantly over time. Additionally, technological advances may require us to make capital expenditures to develop or acquire new equipment or technology in order to replace aging or technologically obsolete equipment.

        Net cash used for financing activities decreased by $3.3 million, or 22%, for the quarter ended March 31, 2012, compared to the quarter ended March 31, 2011. Repurchases of common stock for the quarter ended March 31, 2012 decreased by $4.1 million, compared to the quarter ended March 31, 2011. Additionally, we repaid $0.7 million on the outstanding Credit Agreement in the quarter ended March 31, 2012.

        The payment of dividends and dividend equivalents is a cash outflow from financing activities. In January 2012, United Online, Inc.'s Board of Directors declared a quarterly cash dividend of $0.10 per share of common stock. The dividend was paid on February 29, 2012 and totaled $9.3 million, including dividend equivalents paid on nonvested restricted stock units. In April 2012, United Online, Inc.'s Board of Directors declared a quarterly cash dividend of $0.10 per share of common stock. The record date for the dividend is May 14, 2012 and the dividend will be paid on May 31, 2012. The payment of future dividends is discretionary and is subject to determination by United Online, Inc.'s Board of Directors each quarter following its review of our financial performance and other factors.

        Future cash flows from financing activities may also be affected by our repurchases of our common stock. United Online, Inc.'s Board of Directors authorized a common stock repurchase program (the "Program") that allows us to repurchase shares of our common stock through open market or privately negotiated transactions based on prevailing market conditions and other factors. From August 2001 through December 31, 2010, we repurchased a total of $150.2 million of our common stock under the Program, 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 increased the amount authorized to $80 million. In December 2011, the Board of Directors extended the Program through December 31, 2012. We did not make any repurchases under the Program during the year ended December 31, 2011 or the quarter ended March 31, 2012 and, at March 31, 2012, the authorization remaining under the Program was $80.0 million.

        Cash flows from financing activities may also be negatively impacted by the withholding of a portion of shares underlying the restricted stock units and stock awards we grant to employees. In

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general, we currently do not collect the applicable required employee withholding taxes from employees upon vesting of restricted stock units and upon the issuance of stock awards. Instead, we automatically withhold, from the restricted stock units that vest and the stock awards that are issued, the portion of those shares with a fair market value equal to the amount of the required employee withholding taxes due. We then pay the applicable withholding taxes in cash. The withholding of these shares, although accounted for as a common stock repurchase, does not reduce the amount available under the Program. Similar to repurchases of common stock under the Program, the net effect of such withholding will adversely impact our cash flows from financing activities. The amounts remitted in the quarters ended March 31, 2012 and 2011 were $2.1 million and $6.2 million, respectively, for which we withheld 0.4 million and 0.9 million shares of common stock, respectively, that were underlying the restricted stock units which vested and stock awards that were issued. The amount we pay in future periods will vary based on our stock price and the number of applicable restricted stock units vesting and stock awards being issued during the period.

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

        Under the terms of the Credit Agreement, FTD Group, Inc., a subsidiary of United Online, Inc., is generally restricted from transferring funds and other assets to United Online, Inc., with certain exceptions including an annual basket of $15 million (subject to adjustment based on excess cash flow calculations) which may be used to make cash dividends, loans and advances to United Online, Inc., provided certain terms and conditions specified in the Credit Agreement are satisfied. These restrictions have resulted in restricted net assets (as defined in Rule 4-08(e)(3) of Regulation S-X) of FTD Group, Inc. and its subsidiaries totaling $260.1 million at March 31, 2012. The Credit Agreement also includes provisions which require us to make debt prepayments in the event that we generate consolidated excess cash flow, as defined in the Credit Agreement, on an annual basis commencing in April 2013 for fiscal year 2012. The degree to which our assets are leveraged and the terms of our debt could materially and adversely affect our ability to obtain additional capital as well as the terms at which such capital might be offered to us. We currently expect to have sufficient liquidity to fulfill our debt service obligations, at least in the next twelve months. FTD Group, Inc. was in compliance with all covenants under the Credit Agreement at March 31, 2012.

        If we need to raise additional capital through public or private debt or equity financings, strategic relationships or other arrangements, this capital might not be available to us in a timely manner, on acceptable terms, or at all. Our failure to raise sufficient capital when needed could severely constrain or prevent us from, among other factors, developing new or enhancing existing services or products, repurchasing our common stock, acquiring other services, businesses or technologies or funding significant capital expenditures and/or purchases of intangible assets, including rights, content and intellectual property, and have a material adverse effect on our business, financial position, results of operations, and cash flows as well as impair our ability to pay future dividends and our ability to service our debt obligations. If additional funds were raised through the issuance of equity or convertible debt securities, the percentage of stock owned by the then-current stockholders could be reduced. Furthermore, such equity or any debt securities that we issue might have rights, preferences or

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privileges senior to holders of our common stock. In addition, trends in the securities and credit markets may restrict our ability to raise any such additional funds, at least in the near term.

Contractual Obligations

        Contractual obligations at March 31, 2012 were as follows (in thousands):

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

Debt, including interest

  $ 349,515   $ 15,346   $ 30,436   $ 34,303   $ 269,430  

Member redemption liability

    21,927     17,511     4,416          

Noncancelable operating leases

    35,952     13,056     15,113     5,050     2,733  

Services and promotional contracts

    7,997     5,621     2,352     24      

Telecommunications purchases

    3,395     3,176     219          

Media purchases

    2,484     2,484              

Floral-related purchases

    6,155     6,155              

Other liabilities

    3,000     194     2,166     190     450  
                       

Total

  $ 430,425   $ 63,543   $ 54,702   $ 39,567   $ 272,613  
                       

        Commitments under letters of credit at March 31, 2012 were scheduled to expire as follows (in thousands):

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

Letters of credit

  $ 1,309   $ 1,051   $ 258  

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

Other Commitments

        In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, sureties and insurance companies, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of such agreements, services to be provided by us, or from intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with our directors and certain of our officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. We have also agreed to indemnify certain former officers, directors and employees of acquired companies in connection with the acquisition of such companies. We maintain director and officer insurance, which may cover certain liabilities, including those arising from our obligation to indemnify our directors and certain of our officers and employees, and former officers, directors and employees of acquired companies, in certain circumstances.

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

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Off-Balance Sheet Arrangements

        At March 31, 2012, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures, or capital resources.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk

        We are exposed to interest rate risk on our cash and cash equivalents and the outstanding balance of the Credit Agreement. The interest rate set forth in the Credit Agreement for the Term Loan and the Revolving Credit Facility is either a base rate plus 2.5% per annum, or LIBOR plus 3.5% per annum (with a LIBOR floor of 1.25% in the case of the Term Loan). In March 2012, FTD Group, Inc. entered into forward starting interest rate cap instruments based on 3-month LIBOR that are effective from January 2015 to June 2018 and have aggregated notional values totaling $130 million. The interest rate cap instruments are designated as cash flow hedges against expected future cash flows attributable to future 3-month LIBOR interest payments on the outstanding borrowings under the Credit Agreement. The gains or losses on the instruments are reported in other comprehensive income to the extent that they are effective and will be reclassified into earnings when the expected future cash flows, beginning in January 2015 through June 2018 and attributable to future 3-month LIBOR interest payments, are recognized in earnings. A 100 basis point increase in LIBOR rates would result in an estimated annual increase in our interest expense related to the outstanding debt under the Credit Agreement of approximately $0.6 million.

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

Foreign Currency Exchange Risk

        We transact business in foreign currencies, and we are exposed to risk resulting from fluctuations in foreign currency exchange rates, particularly the British Pound ("GBP"), the Euro ("EUR") and the Indian Rupee ("INR") and, to a much lesser extent, the Swedish Krona ("SEK"), the Swiss Franc ("CHF") and the Canadian Dollar ("CAD"), which may result in gains or losses reported in our results of operations. The volatilities in GBP, EUR, INR, SEK, CHF, and CAD (and all other applicable foreign currencies) are monitored by us throughout the year. We face two risks related to foreign currency exchange rates—translation risk and transaction risk. Amounts invested in our foreign operations are translated into U.S. Dollars using period-end exchange rates. The resulting translation adjustments are recorded as a component of accumulated other comprehensive loss in the unaudited condensed consolidated balance sheets. Revenues and expenses in foreign currencies translate into higher or lower revenues and expenses in U.S. Dollars as the U.S. Dollar weakens or strengthens against other currencies. Substantially all of the revenues of our foreign subsidiaries are received, and substantially all expenses are incurred, in currencies other than the U.S. Dollar, which increases or decreases the related U.S. Dollar-reported revenues and expenses depending on the trend in currencies. Therefore, changes in foreign currency exchange rates may negatively affect our consolidated revenues and net income. A 1% adverse change in overall foreign currency exchange rates over an entire year would not have a material impact on estimated annual revenues and estimated annual income before income taxes. These estimates assume an adverse shift in all foreign currency exchange rates against the U.S. Dollar, which do not always move in the same direction or in the same degrees, and actual results

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may differ materially. Net foreign currency transaction gains or losses arising from transactions denominated in currencies other than the local functional currency are included in other income, net, in the unaudited condensed consolidated statements of operations.

        We currently utilize forward foreign currency exchange contracts to protect the value of our net investments in certain foreign subsidiaries and certain forecasted cash flows denominated in currencies other than the U.S. Dollar. These contracts are designated as hedges of net investments in foreign entities and hedges of cash flows. At March 31, 2012, the notional value of open forward foreign currency exchange contracts accounted for as net investment and cash flow hedges totaled $2.8 million and $5.3 million, respectively.

        Periodically, we enter into forward foreign currency exchange contracts which are not designated as hedging instruments for accounting purposes. We enter into these derivative instruments to hedge intercompany transactions and partially offset the economic effect of fluctuations in foreign currency exchange rates. At March 31, 2012, the notional value of open forward foreign currency exchange contracts that did not qualify for hedge accounting treatment totaled $6.7 million. We may, in the future, also use other derivative financial instruments, if it is determined that such hedging activities are appropriate to reduce risk.

ITEM 4.    CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

        Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing, and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

        During the quarter ended March 31, 2012, the Company completed the implementation of a new consolidation system. The system change was made to improve the efficiency of the consolidation process and related financial reporting and was not the result of any identified deficiencies in the previous consolidation system. As part of the implementation, the Company modified internal controls where necessary due to the system change. Excluding the consolidation system implementation, there have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II—OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

        In October 2008, Anthony Michaels filed a purported class action complaint against Classmates Online, Inc., now known as Memory Lane, Inc., Classmates Media Corporation and United Online, Inc. in Superior Court of the State of California, County of Los Angeles, alleging causes of action for intentional misrepresentation, negligent misrepresentation, negligence, fraudulent concealment, and for violations of California Business and Professions Code sections 17200 and 17500 et seq. In December 2008, Xavier Vasquez filed a purported class action complaint against Classmates Online, Inc., Classmates Media Corporation and United Online, Inc. in Superior Court of Washington, Kings County, alleging causes of action for violation of the Washington Consumer Protection Act, violation of California's Unfair Competition Law, violation of California's Consumer Legal Remedies Act, unjust enrichment and violation of California Civil Code section 1694, dealing with dating services contracts. In both actions, the plaintiffs are seeking injunctive relief and damages. In April 2009, the United States District Court of the Western District of Washington consolidated the Michaels and the Vasquez actions and designated the Michaels action as the lead case. In March 2010, the parties entered into a comprehensive class action settlement agreement. In February 2011, the court denied final approval of such settlement agreement. In March 2011, the parties entered into a revised settlement agreement and, in July 2011, the court issued an order granting preliminary approval of the revised settlement agreement. The parties subsequently modified the settlement agreement in August 2011. A hearing on plaintiffs' motion for final approval of the revised settlement agreement was held in December 2011. The parties are awaiting the court's ruling on that motion.

        On March 6, 2012, Hope Kelm, Barbara Timmcke, Regina Warfel, Brett Reilly, Juan M. Restrepo and Jennie H. Pham filed a purported class action complaint in United States District Court, District of Connecticut, against the following defendants: (i) Chase Bank USA, N.A., Bank of America, N.A., Capital One Financial Corporation, Citigroup, Inc., and Citibank, N.A. (collectively, the "Credit Card Company Defendants"); (ii) 1-800-Flowers.com, Inc., United Online, Inc., Memory Lane, Inc., Classmates International, Inc., FTD Group, Inc., Days Inns Worldwide, Inc., Wyndham Worldwide Corporation, PeopleFindersPro, Inc., Beckett Media LLC, Buy.com, Inc., Rakuten USA, Inc., IAC/InterActiveCorp, and Shoebuy.com, Inc. (collectively, the "E-Merchant Defendants"); and (iii) Trilegiant Corporation, Inc. ("Trilegiant"), Affinion Group, LLC ("Affinion") and Apollo Global Management, LLC ("Apollo"). The complaint alleges (1) violations of the Racketeer Influenced Corrupt Organizations Act against all defendants, and aiding and abetting violations of such act against the Credit Card Company Defendants; (2) aiding and abetting violations of federal mail fraud, wire fraud and bank fraud statutes against the Credit Card Company Defendants; (3) violations of the Electronic Communications Privacy Act against Trilegiant, Affinion and the E-Merchant Defendants, and aiding and abetting violations of such act against the Credit Card Company Defendants; (4) violations of the Connecticut Unfair Trade Practices Act against Trilegiant, Affinion, Apollo, and the E-Merchant Defendants, and aiding and abetting violations of such act against the Credit Card Company Defendants; (5) violation of California Business and Professions Code section 17602 against Trilegiant, Affinion, Apollo, and the E-Merchant Defendants; and (6) unjust enrichment against all defendants. The plaintiffs seek class certification, restitution and disgorgement of all amounts wrongfully charged to and received from 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 15, 2012, Debra Miller and William Thompson filed a purported class action complaint in United States District Court, District of Connecticut, against the following defendants: (i) Trilegiant, Affinion, Apollo, Vertrue, Inc., Webloyalty.com, Inc., and Adaptive Marketing, LLC (collectively, the "Membership Companies"); (ii) 1-800-Flowers.com, Inc., Beckett Media LLC, Buy.com, Inc., Classmates International, Inc., Days Inn Worldwide, Inc., FTD Group, Inc., IAC/Interactivecorp, Inc.,

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Memory Lane, Inc., Peoplefinderspro, Inc., Rakuten USA, Inc., Shoebuy.com, Inc., United Online, Inc., Wells Fargo & Company, and Wyndham Worldwide Corporation (collectively, the "Marketing Companies"); and (iii) Bank of America, N.A., Capital One Financial Corporation, Chase Bank USA, N.A., and Citibank, N.A. (collectively, the "Credit Card Companies"). The complaint alleges (1) violations of the Racketeer Influenced Corrupt Organizations Act against all defendants, and aiding and abetting violations of such act against the Credit Card Companies; (2) aiding and abetting violations of federal mail fraud, wire fraud and bank fraud statutes against the Credit Card Companies; (3) violations of the Electronic Communications Privacy Act against the Membership Companies and the Marketing Companies, and aiding and abetting violations of such act against the Credit Card Companies; (4) violations of the Connecticut Unfair Trade Practices Act against the Membership Companies and the Marketing Companies, and aiding and abetting violations of such act against the Credit Card Companies; (5) violation of California Business and Professions Code section 17602 against the Membership Companies and the Marketing Companies; and (6) unjust enrichment against all defendants. The plaintiffs seek class certification, restitution and disgorgement of all amounts wrongfully charged to and received from 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.

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

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

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

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

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

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

        We record a liability when we believe that it is both probable that a loss will be incurred, and the amount of loss can be reasonably estimated. We evaluate, at least quarterly, developments in our legal matters that could affect the amount of liability that has been previously accrued, and make adjustments as appropriate. Significant judgment is required to determine both probability and the

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estimated amount. We may be unable to estimate a possible loss or range of possible loss due to various reasons, including, among others: (i) if the damages sought are indeterminate; (ii) if the proceedings are in early stages, (iii) if there is uncertainty as to the outcome of pending appeals, motions or settlements, (iv) if there are significant factual issues to be determined or resolved, and (v) if there are novel or unsettled legal theories presented. In such instances, there is considerable uncertainty regarding the ultimate resolution of such matters, including a possible eventual loss, if any. At March 31, 2012, we had a reserve of $4.7 million for a pending legal settlement. With respect to the other legal matters described above, we have determined, based on our current knowledge, that the amount of possible loss or range of loss, including any reasonably possible losses in excess of amounts already accrued, is not reasonably estimable. However, legal matters are inherently unpredictable and subject to significant uncertainties, some of which are beyond our control. As such, there can be no assurance that the final outcome of these matters will not materially and adversely affect our business, financial condition, results of operations, or cash flows.

ITEM 1A.    RISK FACTORS

        The risk factors set forth below are substantially the same as those included in our Annual Report on Form 10-K for the year ended December 31, 2011.


RISKS RELATING TO OUR BUSINESS GENERALLY

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

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

Our business is subject to fluctuations.

        Our results of operations and changes in our key business metrics from period to period have varied in the past and may fluctuate significantly in the future due to a variety of factors, many of which are outside of our control and difficult to predict. Each of the risk factors discussed in this Item 1A and the other factors described elsewhere in this Quarterly Report on Form 10-Q and in our other filings with the SEC may affect us from period to period and may affect our long-term performance. As a result, you should not rely on period-to-period comparisons as an indication of our future performance. In addition, these factors and the challenging economic conditions create difficulties with respect to our ability to forecast our financial performance and business metrics

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accurately. We believe that these difficulties in forecasting present even greater challenges for financial analysts who publish their own estimates of our future financial results and business metrics. We cannot assure you that we will achieve the expectations of, or projections made by, our management or the financial analysts. In the event we do not achieve such expectations or projections, our financial results and the price of our common stock could be adversely affected.

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

        We have expended, and may continue to expend, significant resources in developing and implementing new business initiatives, products, services, features, applications, and functionality, such as those related to the NetZero 4G mobile broadband service and our high school yearbook initiatives related to the Classmates website. Such development and implementation involves a number of uncertainties, including unanticipated delays and expenses and technological problems. New business initiatives, products, services, features, applications, or functionality also may not be accepted by consumers or commercially successful. We cannot assure you that we will be successful in such development and implementation efforts, including those related to the NetZero 4G mobile broadband service or our high school yearbook initiatives, or that any new business initiatives, products, services, features, applications, or functionality will be accepted by consumers or commercially successful. If our development and implementation efforts are not successful, or such new initiatives, products, services, features, applications, or functionality are not accepted by consumers or commercially successful, our key metrics and financial results could be materially and adversely impacted.

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

        We spend significant resources marketing our brands, products and services. We rely on relationships with a wide variety of third parties, including Internet search providers, Internet advertising networks, co-registration partners, retailers, distributors, and direct marketers, to promote or distribute our products and services. In addition, in connection with the launch of new products or services, such as those related to the NetZero 4G mobile broadband service, we may spend a significant amount on their marketing, including through television advertising. If our marketing activities are inefficient or unsuccessful, or if important third-party relationships become more expensive or unavailable, our key metrics and financial results could be materially and adversely impacted.

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

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

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

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factors have caused, and could continue to cause, our advertising revenues and profits to significantly decline in the future.

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

        We transact business in different foreign currencies and may be exposed to financial market risk resulting from fluctuations in foreign currency exchange rates, including the British Pound, the Euro, the Indian Rupee, the Swedish Krona, the Swiss Franc, and the Canadian Dollar. Revenues and expenses in foreign currencies translate into higher or lower revenues and expenses in U.S. Dollars as the U.S. Dollar weakens or strengthens against such other currencies. Substantially all of the revenues of our foreign subsidiaries are received, and substantially all expenses are incurred, in currencies other than the U.S. Dollar, which increases or decreases the related U.S. Dollar-reported revenues and expenses depending on the trend in foreign currency exchange rates. Certain of our key business metrics, such as the FTD segment's average order value and the Content & Media segment's ARPU, are similarly affected by such foreign currency exchange rate fluctuations. Changes in global economic conditions, market factors, and governmental actions, among other factors, can affect the value of these currencies in relation to the U.S. Dollar. A strengthening of the U.S. Dollar compared to these currencies and, in particular, to the British Pound and the Euro, has had, and in future periods could have, an adverse effect on the comparisons of our revenues and operating income against prior periods. We cannot accurately predict the impact of future foreign currency exchange rate fluctuations on our operating results, and such fluctuations could negatively impact the comparisons of such results against prior periods.

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

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

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

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

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

        Various governmental agencies have in the past, and may in the future, assert claims, institute legal actions, inquiries or investigations, or impose obligations relating to our business practices, such as our marketing, billing, customer retention, renewal, cancelation, refund, or disclosure practices. The Federal Trade Commission and certain state agencies have investigated Internet companies, including us, in connection with consumer protection and privacy matters. In addition, we have received civil investigative demands and subpoenas, as applicable, from the Federal Trade Commission and the Attorneys General of various states, primarily regarding their respective investigations into certain former post-transaction sales practices and certain of our marketing, billing and renewal practices. We have been cooperating with these investigations. However, the outcome of these or any other governmental investigations or their potential implications for our business are uncertain. We may not prevail in existing or future claims and any judgment against us or settlement or resolution of such claims may involve the payment of significant sums, including damages, fines, penalties, or assessments, or changes to our business practices. For example, in 2010, Memory Lane, Inc. (then known as Classmates Online, Inc.) and FTD, Inc. paid $960,000 and $640,000, respectively, to resolve an investigation of the Attorney General for the State of New York related to their former post-transaction sales practices. Defending against lawsuits, inquiries and investigations also involves significant expense and diversion of management's attention and resources from other matters. There are no assurances that additional governmental investigations or other legal actions will not be instituted in connection with our former post-transaction sales practices or other current or former business practices. Enforcement actions or changes in enforcement policies and procedures could result in changes to our business practices as well as significant fines, penalties or assessments, which could decrease our revenues or increase the costs of operating our business. To the extent that our services and business practices change as a result of claims or actions by governmental agencies or private parties, or we are required to pay significant sums, including damages, fines, penalties, or assessments, our business, financial condition, results of operations, and cash flows could be materially and adversely affected.

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

        Our trade names, trademarks, service marks, patents, copyrights, domain names, trade secrets, and other intellectual property are important to the success of our businesses. In particular, we view our

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

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

        The success of our business depends on the security of our networks and, in part, on the security of the network infrastructures of our third-party vendors. In connection with conducting our business in the ordinary course, we store and transmit customer and member information, including personally identifiable information. Unauthorized or inappropriate access to, or use of, our networks, computer systems or services, whether intentional, unintentional or as a result of criminal activity, could potentially jeopardize the security of confidential information, including credit card information, of our customers and of third parties. A number of other websites have publicly disclosed breaches of their security, some of which have involved sophisticated and highly targeted attacks on portions of their sites. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the perception of the effectiveness of our security measures could be harmed and we could lose members, customers or vendors. A party that is able to circumvent our security measures could misappropriate our proprietary information or the information of our members or customers, cause interruption in our operations, or damage our computers or those of our members or customers.

        A significant number of our members and customers authorize us to bill their payment card accounts (credit or debit) directly for all amounts charged by us. These members and customers provide payment card information and other personally identifiable information which, depending on the particular payment plan, may be maintained to facilitate future payment card transactions. We rely on third-party and internally-developed encryption and authentication technology to provide the security and authentication to effectively secure transmission of confidential information, including payment card numbers. Advances in computer capabilities, new discoveries in the field of cryptography or other developments may result in the technology used by us to protect transaction data being breached or compromised. Non-technical means, for example, actions by an employee, can also result in a data breach. Under payment card rules and our contracts with our card processors, if there is a breach of payment card information that we store, we could be liable to the banks that issue the payment cards for their related expenses and penalties. In addition, if we fail to follow payment card industry security standards, even if there is no compromise of customer information, we could incur significant fines or lose our ability to give our members and customers the option of using payment cards. If we were unable to accept payment cards, our businesses would be seriously harmed.

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        We may need to expend significant resources to protect against security breaches or to address problems caused by breaches. Security breaches, including any breach related to us or the parties with which we have commercial relationships, could damage our reputation and expose us to a risk of loss, litigation and possible liability. We cannot assure you that the security measures we take will be effective in preventing these types of activities. We also cannot assure you that the security measures of our third-party vendors, including network providers, providers of customer and billing support services, and other vendors, will be adequate. In addition to potential legal liability, these activities may adversely impact our reputation or our revenues and may interfere with our ability to provide our products and services, all of which could adversely impact our business. In addition, the coverages and/or limits of our insurance policies may not be adequate to reimburse us for losses caused by security breaches.

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

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

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

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

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

        An increase in the number of members or customers to whom we are not able to send emails, or who elect to not receive, or are unable to receive, our emails could adversely affect our business, financial condition, results of operations, and cash flows. From time to time, Internet service providers block bulk email transmissions or otherwise experience technical difficulties that result in our inability

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to successfully deliver emails to our members or customers. Third parties may also block, impose restrictions on, or start to charge for, the delivery of emails through their email systems. Due to the importance of email to our businesses, any disruption or restriction on the distribution of emails or increase in the associated costs could materially and adversely affect our revenues and profitability.

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

        One of our strategic objectives is to acquire businesses, services or technologies that will provide us with an opportunity to diversify the products and services we offer, leverage our assets and core competencies, or expand our geographic reach, or that otherwise may be complementary to our existing businesses. However, acquiring companies is a difficult process with many factors outside of our control. In addition, the credit agreement dated June 10, 2011, between FTD Group, Inc. and Wells Fargo Bank, National Association, as Administrative Agent for the lenders (the "Credit Agreement"), imposes certain restrictions on our ability to complete acquisitions and there is no assurance that we will be successful in completing additional acquisitions.

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

    disruption of our ongoing business and significant diversion of resources and management time from day-to-day responsibilities;

    acquisition financings that involve the issuance of potentially dilutive equity or the incurrence of debt;

    reduction of cash and other resources available for operations and other uses;

    exposure to risks specific to the acquired business, service or technology to which we are not currently exposed;

    risks of entering markets in which we have little or no direct prior experience;

    unforeseen obligations or liabilities;

    difficulty assimilating the acquired customer bases, technologies and operations;

    difficulty assimilating and retaining management and employees of the acquired business;

    potential impairment of relationships with users, customers or vendors as a result of changes in management of the acquired business or other factors;

    large write-offs either at the time of the acquisition or in the future, the incurrence of restructuring and other exit costs, the amortization of identifiable intangible assets, and the impairment of amounts capitalized as goodwill, intangible assets and other long-lived assets; and

    lack of, or inadequate, controls, policies and procedures appropriate for a public company, and the time, cost and difficulties related to the implementation of such controls, policies and procedures or the remediation of any deficiencies.

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

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

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

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

    If we fail to meet payment obligations or otherwise default under the Credit Agreement, the lenders will have the right to accelerate the indebtedness and exercise other rights and remedies against us.

    We will be required to dedicate a substantial portion of FTD's cash flow from operations to payments on the debt, thereby reducing funds available for working capital, capital expenditures, dividends, acquisitions, and other purposes.

    Our ability to obtain additional financing to fund future working capital needs, capital expenditures, additional acquisitions, and other general corporate requirements could be limited.

    The Credit Agreement imposes operating and financial covenants and restrictions on FTD, including limitations on our ability to use FTD cash flow for the benefit of our subsidiaries other than FTD, and compliance with such covenants and restrictions may adversely affect our ability to adequately finance our operations or capital needs in the future, to pursue attractive business opportunities that may arise in the future, to redeem or repurchase capital stock, to pay dividends, to sell assets, and to make capital expenditures.

    Our failure to comply with the covenants in the Credit Agreement, including failure as a result of events beyond our control, could result in an event of default under the Credit Agreement, which could cause all amounts outstanding with respect to that debt to become immediately due and payable and could materially and adversely affect our operating results, financial condition and liquidity.

    We will experience increased vulnerability to, and limited flexibility in planning for, changes to our businesses and adverse economic and industry conditions.

    We could be placed at a competitive disadvantage relative to other companies with less indebtedness.

    Our ability to apply excess FTD cash flow or proceeds from certain types of securities offerings, asset sales and other transactions to purposes other than the repayment of debt, as well as servicing of the debt, could be limited.

    The interest rates under the Credit Agreement will fluctuate and, accordingly, interest expense may increase. The U.S. government's credit rating was downgraded in 2011. Any future downgrade of the U.S. government's credit rating would likely result in an increase in interest rates, which could increase our interest rates under the Credit Agreement and our interest expense.

    If we make voluntary prepayments on our debt, we will have to accelerate the related discount accretion and debt issuance cost amortization, which would impact interest expense, and certain prepayments may be subject to penalties.

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

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

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

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

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

        The payment of future dividends is discretionary and is subject to determination by our Board of Directors each quarter following its review of our financial condition, results of operations and cash flows and such other factors as are deemed relevant by our Board of Directors. Our cash flows have been declining, and we expect our cash flows to continue to decline. Declines in our cash flows, changes in our business needs, including working capital and funding for business initiatives or acquisitions, or changes in tax laws relating to dividends, among other factors, could cause our Board of Directors to decide to reduce or cease the payment of dividends in the future. We cannot assure you that we will not decrease or discontinue quarterly cash dividends, and if we do, our stock price could be negatively impacted.

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

        We have capitalized goodwill and identifiable intangible assets in connection with our acquisitions and certain business initiatives such as the content archives on the Classmates website. We perform an impairment test of our goodwill and indefinite-lived intangible assets annually during the fourth quarter of our fiscal year or when events occur or circumstances change that would more likely than not indicate that goodwill or any such assets might be permanently impaired. If our acquisitions or business initiatives are not commercially successful or, if due to economic or other conditions, our assumptions regarding the performance of such businesses or business initiatives are not achieved, we would likely be required to record impairment charges which would negatively impact our financial condition and results of operations. We have experienced impairment charges in the past. Given the current economic environment and the uncertainties regarding the impact on our businesses, there can be no assurance that our estimates and assumptions regarding the duration of the challenging economic conditions, or the period or strength of recovery, made for purposes of our goodwill and identifiable intangible assets impairment testing will prove to be accurate predictions of the future. If our assumptions regarding

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forecasted revenues or growth rates of certain reporting units or other factors are not achieved or are revised downward, we may be required to record additional impairment charges in future periods. In addition, from time to time, we record tangible or intangible assets on our balance sheet that, due to changes in value or in our strategy, may have to be expensed in future periods. Write-downs or impairments of assets, whether tangible or intangible, could adversely and materially impact our financial condition and results of operations.

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

        We are subject to income and various other taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating our consolidated provision for income taxes. During the ordinary course of business, there are many transactions for which the ultimate tax determination is uncertain. In addition, our effective income tax rates could be adversely affected by earnings being less than anticipated in countries where we have lower statutory rates and more (or determined to be more by a particular taxing jurisdiction) than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities or by, among other factors, changes in the relevant tax, accounting and other laws, regulations, principles, and interpretations. We are subject to audit in various jurisdictions, and such jurisdictions may assess additional income and other taxes against us. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions, and our historical recognition of other tax matters. The results of an audit or litigation could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

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

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

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

    adverse fluctuations in foreign currency exchange rates;

    potentially adverse tax consequences, including the complexities of foreign value added taxes and restrictions on the repatriation of earnings;

    increased financial accounting, tax and reporting burdens and complexities;

    disruption of our ongoing business and significant diversion of management attention from day-to-day responsibilities;

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    localization of our services, including translation into foreign languages and adaptation for local practices and regulatory requirements;

    lack of familiarity with, and unexpected changes in, foreign regulatory requirements;

    potentially longer accounts receivable collection cycles;

    difficulties in managing and staffing international operations;

    the burdens of complying with a wide variety of foreign laws, regulations and legal and regulatory standards;

    political, social and economic instability abroad, terrorist attacks and security concerns in general; and

    reduced or varied protection for intellectual property and proprietary rights.

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

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

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

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

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

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

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

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

        The market price of our common stock has fluctuated significantly and it may continue to be volatile with extreme trading volume fluctuations. In addition, the Nasdaq Global Select Market has experienced substantial price and trading volume fluctuations. The broad market and industry factors that influence or affect such fluctuations may harm the market price of our common stock, regardless of our actual operating performance. As a result of these or other reasons, we have experienced and may continue to experience significant volatility in the market price of our common stock.


ADDITIONAL RISKS RELATING TO OUR FTD SEGMENT

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

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

        The consumer market for flowers and gifts is highly competitive and fragmented as consumers can purchase the products we offer from numerous sources, including traditional local retail florists, supermarkets, mass merchants, gift retailers, and floral mass marketers. The floral network services market is highly competitive as well, and retail florists and supermarkets may choose from a variety of providers that offer similar products and services. In the U.S., our key competitors in the consumer market include online, catalog and specialty floral and gift retailers and mass market retailers with floral departments, including such companies as 1-800-FLOWERS.COM, Inc., Proflowers.com and Teleflora. Our key competitors in the U.S. floral network services market include providers of online or e-commerce services, retailers and wholesalers of floral-related products and other floral network services, such as Teleflora and BloomNet Wire Service, a subsidiary of 1-800-FLOWERS.COM, Inc. International key competitors include mass market retailers, including Asda, Marks & Spencer, NEXT, and Waitrose/John Lewis, as well as other floral network services and online, catalog and specialty gift retailers, such as eFlorist (previously known as Teleflorist) and Serenata Flowers.

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

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

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

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

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

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

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

        A significant portion of our profitability is dependent on our floral network members. We have lost, and may continue to lose, floral network members as a result of both declines in the number of local retail florists as a result of economic factors and competition as well as our members choosing not to do business with us. If we lose a significant number of floral network members, or if we are not able to maintain or increase revenues from our floral network members, our business, financial condition, results of operations, and cash flows could be materially and adversely affected.

Shifts in the mix of products versus services sold, and types of products and services sold, may adversely affect our financial results.

        The cost of revenues associated with our products revenues is generally higher than that associated with our services revenues. In addition, the cost of revenues associated with certain products and services may be higher than that associated with other products and services. As a result, changes in the proportion of FTD segment revenues that is represented by products revenues versus services revenues, and certain types of products and services versus others, may adversely affect our revenues, cost of revenues, cost of revenues as a percentage of revenues, and segment income from operations.

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Shifts in the mix of products and services sold at standard pricing as compared to discounted pricing or the failure to maintain our standard pricing for products and services could have adverse effects on our financial results.

        Due to economic conditions and for competitive and other reasons, we have been offering broader and greater discounts to the consumer, both on a promotional basis to consumers generally as well as through strategic arrangements with third parties that have a fixed, and in certain cases greater, discount or other associated costs. We also offer discounts on our floral network service fees from time to time on a promotional basis. Shifts in the mix of products and services sold that have resulted in increases in the proportion of products and services sold at a discount, and at times at greater discounts, including through such strategic arrangements, have resulted, and may in the future result, in reduced revenues, an increase in cost of revenues as a percentage of revenues, and a decrease in segment income from operations. We currently intend to continue selling a portion of our products and services at a discount, including through such strategic arrangements, and there are no assurances that the portion of products and services sold at a discount will not continue to increase. The continued use of discounts, including through such strategic arrangements, for our products and services may result in our becoming more reliant upon offering discounts in order to sell our products and services, which could result in our having to reduce our standard pricing, and may adversely impact our financial results.

If the supply of flowers becomes limited, the price of these products could rise or these products may become unavailable, which could result in our not being able to meet consumer demand and could have a material effect on our business, financial condition, results of operations, and cash flows.

        Many factors, such as weather conditions, agricultural limitations, restrictions relating to the management of pests and disease, and fair trade and other social or environmental issues, affect the supply of flowers and the price of our floral products. If the supply of flowers available for sale is limited, the wholesale prices of flowers could rise, which would cause us to increase our prices or reduce our profits. An increase in our prices could result in a decline in customer demand for our floral products, which would decrease our revenues.

        Alternatively, we may not be able to obtain high-quality flowers in an amount sufficient to meet customer demand. Even if available, flowers from alternative sources may be of lesser quality or more expensive than those currently offered by us. A large portion of our supply of flowers is sourced from Colombia, Ecuador and Holland.

        The availability and price of our products could be affected by a number of other factors affecting suppliers, including:

    severe weather;

    disease, infestation and other biological problems;

    import duties and quotas;

    time-consuming import regulations or controls at airports;

    changes in trading status;

    economic uncertainties and currency fluctuations, including as a result of the recent volatility and disruptions in the credit markets and general economy;

    foreign government laws and regulations;

    political, social and economic instability, terrorist attacks and security concerns in general;

    fair trade and other social or environmental certifications, requirements or practices;

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    governmental bans or quarantines;

    disruption in transportation and delivery;

    trade restrictions, including U.S. retaliation against foreign trade practices; and

    transportation availability and costs.

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

        In accordance with current industry practice by domestic floral and gift order gatherers and our interpretation of applicable law, our FTD consumer business collects and remits sales and use taxes on orders that are delivered in states where it has a physical presence or other form of jurisdictional nexus, which is a limited number of states. If states successfully challenge this practice and impose sales and use taxes on orders delivered in states where we do not have physical presence or another form of jurisdictional nexus, we could incur substantial tax liabilities for past sales and lose future sales as a result of the increased tax cost that would be borne by the customer. Also, states may seek to reclassify the status of Internet order gatherers, such as our FTD consumer business, as persons that are deemed to fulfill the underlying order, in which case, a state may seek to impose taxes on the receipts generated by our FTD consumer business for orders fulfilled and delivered by florists outside such state. In addition, future changes in the operation of our online and telephonic sales channels could result in the imposition of additional sales and use tax or other tax obligations.

        Additionally, in accordance with current industry practice by international floral and gift direct marketers and our interpretation of applicable law, we collect and remit value added taxes on certain consumer orders placed through Interflora. Future changes in the operation of our business could result in the imposition of additional tax obligations. Moreover, if a foreign taxing authority successfully challenges our current practice or implements new legislative initiatives, additional taxes on consumer sales could be due by us. The imposition of additional tax liabilities for past or future sales could decrease our ability to compete with traditional retailers and reduce our sales, which could have a material adverse effect on our business, financial condition, results of operations, and cash flow.

We utilize outsourced staff and temporary employees, who may not be as well trained or committed to our customers as our permanent employees, and their failure to provide our customers with high-quality customer service may cause our customers not to return, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

        We utilize and rely on a significant number of outsourced staff and temporary employees in addition to our permanent employees, to take orders and respond to customer inquiries. These outsourced staff and temporary employees may not have the same level of commitment to our customers or be as well trained as our permanent employees. In addition, we may not hire enough outsourced staff or temporary employees to adequately handle the increased volume of telephone calls we receive during peak periods. If our customers are dissatisfied with the quality of the customer service they receive, they may not place orders with us again, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

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ADDITIONAL RISKS RELATING TO OUR CONTENT & MEDIA SEGMENT

We face intense competition that could result in the failure of our online nostalgia services to be commercially successful.

        As consumers continue to spend more time and money online, the competition for their time and engagement has continued to intensify. Consumers have a great number of options for online content and entertainment, including, by way of example, games, websites offering news and current events, movies, television shows, videos, information about any and virtually every topic, and the opportunity to communicate, socialize and interact with acquaintances and others. Certain aspects of the value proposition of our online nostalgia services compete with major social networking websites such as Facebook and Google+ as well as Internet search engines such as Google. Many of our competitors offer their content and services free of charge.

        The market for online loyalty marketing services is highly competitive, and we expect competition to significantly increase in the future as loyalty marketing programs continue to grow in popularity. Our MyPoints online loyalty marketing service faces competition for members from other online loyalty marketing programs as well as offline loyalty marketing programs that have a significant online presence, such as those operated by credit card, airline and hotel companies. In addition, we also face competition for members from online providers of discounted offerings and coupons, such as Groupon and LivingSocial.

        Some of our competitors have longer operating histories, greater name and brand recognition, larger user bases, significantly greater financial, technical, sales, and marketing resources, and engage in more extensive research and development than we do. Some of our competitors also have lower customer acquisition costs than we do, offer a wider variety of services, have more compelling websites with more extensive user-generated or third-party content or offer their services or content free to their users. Some of our competitors have been more successful than we have been in attracting and retaining visitors and members, and our ability to attract visitors to our websites and maintain a large and growing member base has been adversely affected by such competition. In particular, Facebook's membership base currently far exceeds that of any of its competitors, and Google+ has been growing its membership base at a rapid pace. We rely on some of our competitors to promote our services and for new member acquisitions, such as our Facebook high school fan pages. If our competitors provide services similar to our online nostalgia services for free, we may not be able to charge for our online nostalgia services. Competition has adversely affected our subscription revenues from online nostalgia services, as well as our advertising revenues from our online nostalgia services and online loyalty marketing services. More intense competition could also require us to increase our marketing or other expenditures. As a result of competition, our key business metrics, revenues, cash flows, and profitability have been adversely affected.

Continued declines in the number of pay accounts for our online nostalgia services could cause our business and financial results, including cash flows, to suffer.

        Pay accounts are critical to our business model. Only a small percentage of users visiting our websites or initially registering for our online nostalgia services sign up for a paid subscription at the time of registration. As a result, our ability to generate subscription revenues is highly dependent on our ability to attract visitors to our websites, register them as free members, encourage them to return to our websites, and convince them to become pay accounts in order to access the pay features of our websites.

        A number of our pay account subscriptions each month are not renewed or are canceled, which, for the Content & Media segment, we refer to as "churn." The level of churn we experience fluctuates from quarter to quarter due to a variety of factors, including our mix of subscription terms, which affects the timing of subscription expirations, as well as the degree of credit card failures. To maintain

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or reduce the level of churn, we must continually add new pay accounts both to replace pay accounts who churn and to grow our business beyond our current pay account base. We expect that our churn rate will continue to fluctuate from period to period. A significant majority of our pay accounts are on plans that automatically renew at the end of their subscription period and we have received complaints with respect to our renewal policies and practices. As discussed in the risk factor related to changes in laws and regulations, the laws being considered or recently enacted by certain states regarding automatic-renewal practices will impact certain of our business practices. We also experience an increase in the percentage of credit card failures from time to time. Any change in our renewal policies or practices, or in the degree of credit card failures, could have a material impact on our churn rate. If we experience a higher than expected level of churn, it will make it more difficult for us to increase or maintain the number of pay accounts, which could reduce our revenues and adversely affect our financial results.

        Pay accounts and free active accounts have been decreasing, and we believe such trend will continue. If we are not able to attract visitors to our websites and convert a significant portion to pay accounts, the number of pay accounts for our online nostalgia services and related advertising revenues will continue to decline and the financial results of the Content & Media segment will be adversely affected. In addition, even if the financial results for our FTD segment were to increase, and there are no assurances that they will, we do not believe that any such increases will be sufficient to fully offset the anticipated declines in our other segments, including the Content & Media segment, and as a result, we expect that our consolidated financial results, including cash flows, will be adversely affected by such anticipated declines.

Failure to increase or maintain the number of visitors to our websites and members for our online nostalgia and online loyalty marketing services or the activity level of these visitors and members could cause our business and financial results to suffer.

        The success of our online nostalgia and online loyalty marketing services depends upon our ability to increase or maintain the number of visitors to our websites, our base of free members and the level of activity of those visitors and members. A decline in the number of visitors, registered or active free online nostalgia members, or a decline in the activity of those members, could result in decreased pay accounts, decreased content on our websites and decreased advertising revenues. A decline in the number of registered or active online loyalty marketing service members could also result in decreased advertising revenues. We have been experiencing a decline in the number of active members, and we believe this trend will continue. The failure to increase or maintain the number of visitors to our websites, our base of free members, or the failure to convince our free members to actively participate in our websites or services, could have a material adverse effect on our business and our financial results.

Failure to maintain our standard pricing could have adverse effects on our financial results.

        Due to economic conditions and for competitive and other reasons, we have been offering a large percentage of discounted pricing plans on a promotional basis. In general, these discounted pricing plans offer a subscription term at a significant discount compared to the standard pricing for such subscription term. Any increases in the percentage of pay accounts under a discounted pricing plan and any increases in the level of the discounts will likely result in a decrease in subscription revenues and ARPU, in particular, if such increases continue. Although these discounted pricing plans, by their terms, renew at the then-current standard pricing for such subscription term upon the expiration of the initial term, there are no assurances as to the number of pay accounts that will renew at the standard pricing. We intend to continue offering discounted pricing plans in the future, and there are no assurances that the volume or level of the discounts offered during a period will not be higher than anticipated. Our continued use of discounted pricing plans has resulted in our becoming dependent on

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offering such plans in order to obtain new pay accounts and retain existing pay accounts and may result in our having to reduce our standard pricing, which would adversely impact our financial results.


ADDITIONAL RISKS RELATING TO OUR COMMUNICATIONS SEGMENT

Our business will suffer if we are unable to compete successfully.

        We compete with numerous providers of broadband services as well as other dial-up Internet access providers. Our principal competitors for 4G mobile broadband and DSL services include, among others, local exchange carriers such as AT&T and Verizon, wireless and satellite service providers, and cable service providers. Our principal dial-up Internet access competitors include established online service and content providers, such as AOL and MSN, and independent national Internet service providers, such as EarthLink and its PeoplePC subsidiary. Dial-up Internet access services do not compete favorably with broadband services with respect to connection speed and do not have a significant, if any, price advantage over certain broadband services. Many broadband providers, including cable companies and local exchange carriers, bundle their offerings with telephone, entertainment or other services, which may result in lower prices than standalone services. Certain portions of the U.S., primarily rural areas, currently have limited or no access to broadband services. However, the U.S. government has indicated its intention to provide broadband services to such rural areas. Such expansion of the availability of broadband services will increase the competition for Internet access subscribers in such areas and will likely adversely affect our business. In addition to competition from broadband providers, competition among dial-up Internet access service providers is intense and neither our pricing nor our features provides us with a significant competitive advantage, if any, over certain of our dial-up Internet access competitors. We expect that competition, particularly with respect to price, both for broadband as well as dial-up Internet access services, will continue. We also expect that our dial-up Internet access subscriber base will continue to decrease, potentially at an increasing rate, and that our broadband services will not experience significant growth.

        In order to compete effectively against other dial-up Internet access providers, we may have to make significant revisions to our pricing and marketing strategies. For example, we may have to lower our introductory rates, offer additional free periods of service, or reduce the standard pricing of our services. Measures such as these would decrease our average revenue per dial-up Internet access pay account and may decrease our revenues. All of the foregoing risks would adversely affect the profitability of our dial-up Internet access services which could materially and adversely impact our business, financial condition, results of operations, and cash flows.

Revenues and profitability of our Communications segment are expected to decrease.

        Most of our Communications revenues and profits come from our dial-up Internet access services. Our dial-up Internet access pay accounts and revenues have been declining and are expected to continue to decline due to the continued maturation of the market for dial-up Internet access. Consumers continue to migrate to broadband access, primarily due to the faster connection and download speeds provided by broadband access. Advanced applications such as online gaming, music downloads and videos require greater bandwidth for optimal performance, which adds to the demand for broadband access. The pricing for basic broadband services has been declining as well, making it a more viable option for consumers. In addition, the popularity of accessing the Internet through tablets and mobile devices has been growing and may accelerate the migration of consumers away from dial-up Internet access. The number of dial-up Internet access pay accounts has been adversely impacted by both a decrease in the number of new pay accounts signing up for our services as well as the impact of subscribers canceling their accounts, which we refer to as "churn." Churn has increased from time to time and may increase in the future. A number of our dial-up Internet access pay accounts are billed through "LEC" billing, pursuant to which the subscriber is billed through a local telephone company account rather than directly from us. We have been notified that certain telephone companies will be

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terminating their LEC billing arrangements in 2012, and if our dial-up Internet access pay accounts that are billed through such LEC billing arrangements terminate their subscriptions rather than select another method of payment, we will experience an increase in our dial-up Internet access churn.

        We expect our dial-up Internet access pay accounts to continue to decline. As a result of expected continuing decreases in our dial-up Internet access pay accounts and, potentially, the average monthly revenue per pay account, we expect that our Communications services revenues, advertising revenues and the profitability of this segment will continue to decline over time. The rate of decline in Communications services revenues has accelerated in some periods and may continue to accelerate. Although we have been reducing our expenses in order to manage the profitability of our Communications segment, we will not be able to continue making the same level of expense reductions in the future. In addition, we anticipate increasing our marketing expenses in 2012 in connection with the launch of the NetZero 4G mobile broadband service, which is subject to a number of risks.

        Continued declines in Communications revenues, particularly if such declines accelerate, will materially and adversely impact the profitability of this segment. In addition, even if the financial results of our FTD segment were to increase, and there are no assurances that they will, we do not believe that any such increases will be sufficient to fully offset the anticipated declines in our other segments, including the Communications segment, and as a result, we expect that our consolidated financial results, including cash flows, will be adversely affected by such anticipated declines.

Our NetZero 4G mobile broadband service may not be commercially successful.

        We recently started to offer a mobile broadband service under the NetZero brand. However, the new service is subject to a number of uncertainties, including unanticipated delays and expenses and technological or other problems on our part as well as the third-party suppliers whose products and services are integral to the service. The new service also may not be accepted by consumers or commercially successful, especially given its dependence on Clearwire's limited coverage areas. Some of our prospective competitors have longer operating histories, greater name and brand recognition, larger user bases, wider coverage areas, and significantly greater financial, technical, sales, and marketing resources than we do. We cannot assure you that we will be successful in the development and implementation of the NetZero 4G mobile broadband service, or that the service will be commercially successful. Delays, additional expenses, the failure to develop and implement the service as planned, or the service's failure to be commercially successful, could materially and adversely impact our business, financial condition, results of operations, and cash flows.

Our Internet access business is dependent on the availability of telecommunications services and compatibility with third-party systems and products.

        Our Internet access business substantially depends on the availability, capacity, affordability, reliability, and security of our telecommunications networks. Only a limited number of telecommunications providers offer the network and data services we currently require, and we purchase most of our telecommunications services from a few providers. In addition, our NetZero 4G mobile broadband service is entirely dependent upon services acquired from Clearwire and is subject to its limited coverage areas. Some of our telecommunications services are provided pursuant to short-term agreements that the providers can terminate or elect not to renew. In addition, some telecommunications providers may cease to offer network services for certain less populated areas, which would reduce the number of providers from which we may purchase services and may entirely eliminate our ability to purchase services for certain areas. If we are unable to maintain, renew or obtain new agreements with telecommunications providers, our business, financial condition, results of operations, and cash flows could be materially and adversely affected.

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        Our dial-up Internet access services also rely on their compatibility with other third-party systems, products and features, including operating systems. Incompatibility with third-party systems and products could adversely affect our ability to deliver our services or a user's ability to access our services and could also adversely impact the distribution channels for our services. Our services are dependent on dial-up modems and an increasing number of computer manufacturers, including certain manufacturers with whom we have distribution relationships, do not pre-load their new computers with dial-up modems, requiring the user to separately acquire a modem to access our services. There can be no assurance that, as the dial-up Internet access market declines and new technologies emerge, we will be able to continue to effectively distribute and deliver our services.

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

(a) - (b) Not applicable

(c) Repurchases

        United Online, Inc.'s Board of Directors authorized a common stock repurchase program (the "Program") that allowed us to repurchase shares of our common stock through open market or privately negotiated transactions based on prevailing market conditions and other factors through December 31, 2009. From time to time, the Board of Directors has increased the amount authorized for repurchase under this Program and has extended the Program. In April 2004, the Board of Directors authorized us to purchase up to an additional $100 million of our common stock under the Program, bringing the total amount authorized under the Program to $200 million. In December 2009, the Board of Directors again further extended the Program through December 31, 2010. From August 2001 through December 31, 2010, we had repurchased $150.2 million of our 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 increased the amount authorized to $80 million. In December 2011, the Board of Directors extended the Program through December 31, 2012. There were no repurchases under the Program during the year ended December 31, 2011 or the quarter ended March 31, 2012 and, at March 31, 2012, the authorization remaining under the Program was $80.0 million.

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

        Common stock repurchases during the quarter ended March 31, 2012 were as follows (in thousands, except per share amounts):

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

January 2012

    1   $ 5.68       $ 80,000  

February 2012

    376   $ 5.52       $ 80,000  

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ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

        Not applicable.

ITEM 4.    MINE SAFETY DISCLOSURES

        Not applicable.

ITEM 5.    OTHER INFORMATION

        Not applicable.

ITEM 6.    EXHIBITS

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

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SIGNATURES

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

Date: May 4, 2012   UNITED ONLINE, INC. (Registrant)

 

 

By:

 

/s/ NEIL P. EDWARDS

Neil P. Edwards
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)

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EXHIBIT INDEX

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

3.1

 

Amended and Restated Certificate of Incorporation

      10-K   000-33367   3/1/2007
 

3.2

 

Amended and Restated Bylaws

     
10-K
 
000-33367
 
3/1/2007
 

10.1

 

2012 Management Bonus Plan

 
X
     
000-33367
 
5/4/2012
 

10.2

 

Amended and Restated United Online, Inc. Severance Benefit Plan

 
X
     
000-33367
 
5/4/2012
 

10.3

 

Post-Employment Consulting Agreement and General Release between the Registrant and Frederic A. Randall, Jr.

 
X
     
000-33367
 
5/4/2012
 

31.1

 

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

 
X
     
000-33367
 
5/4/2012
 

31.2

 

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

 
X
     
000-33367
 
5/4/2012
 

32.1

 

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

 
X
     
000-33367
 
5/4/2012
 

32.2

 

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

 
X
     
000-33367
 
5/4/2012
 

101.INS

 

XBRL Instance Document

 
X
     
000-33367
 
5/4/2012
 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 
X
     
000-33367
 
5/4/2012
 

101.CAL

 

XBRL Taxonomy Calculation Linkbase Document

 
X
     
000-33367
 
5/4/2012
 

101.LAB

 

XBRL Taxonomy Label Linkbase Document

 
X
     
000-33367
 
5/4/2012
 

101.PRE

 

XBRL Taxonomy Presentation Linkbase Document

 
X
     
000-33367
 
5/4/2012
 

101.DEF

 

XBRL Taxonomy Extension Definition Document

 
X
     
000-33367
 
5/4/2012

75



XNAS:UNTD United Online Inc Quarterly Report 10-Q Filling

United Online Inc XNAS:UNTD Stock - Get Quarterly Report SEC Filing of United Online Inc XNAS:UNTD stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

XNAS:UNTD United Online Inc Quarterly Report 10-Q Filing - 3/31/2012
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