e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended: June 30, 2005
or
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o |
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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: 000-50879
PLANETOUT INC.
(Exact Name of Registrant as Specified in Its Charter)
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DELAWARE
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94-3391368 |
(State or Other Jurisdiction of Incorporation or Organization)
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(I.R.S. Employer Identification No.) |
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1355 SANSOME STREET, SAN FRANCISCO, CALIFORNIA
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94111 |
(Address of Principal Executive Offices)
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(Zip Code) |
(415) 834-6500
(Registrants Telephone Number, Including Area Code)
(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. þ Yes o No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). o Yes þ No
The number of shares outstanding of the registrants Common Stock, $0.001 par value, as of
August 8, 2005 was 17,185,090.
PlanetOut Inc.
INDEX
Form 10-Q
For the Quarter ended June 30, 2005
Page 2
PART I
FINANCIAL INFORMATION
PlanetOut Inc.
Item 1. Unaudited Condensed Consolidated Financial Statements
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amount)
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December 31, |
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June 30, |
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2004 |
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2005 |
ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
43,128 |
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$ |
43,229 |
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Accounts receivable, net |
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2,075 |
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2,417 |
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Prepaid expenses and other current assets |
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2,209 |
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2,149 |
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Total current assets |
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47,412 |
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47,795 |
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Property and equipment, net |
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7,011 |
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8,037 |
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Goodwill |
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3,403 |
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3,403 |
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Investment in unconsolidated affiliate |
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57 |
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32 |
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Other assets |
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1,325 |
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1,096 |
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Total assets |
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$ |
59,208 |
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$ |
60,363 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
2,040 |
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$ |
656 |
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Accrued liabilities |
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1,469 |
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2,159 |
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Deferred revenue |
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3,506 |
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4,141 |
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Capital lease obligations, current portion |
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998 |
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525 |
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Notes payable, current portion |
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190 |
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236 |
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Total current liabilities |
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8,203 |
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7,717 |
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Capital lease obligations, less current portion |
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491 |
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320 |
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Notes payable, less current portion |
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142 |
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Deferred rent |
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1,608 |
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1,832 |
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Total liabilities |
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10,444 |
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9,869 |
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Contingencies (Note 5) |
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Stockholders equity: |
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Common stock: $0.001 par value, 100,000 shares authorized, 16,943 and
17,171 shares issued and outstanding at December 31, 2004
and June 30, 2005, respectively |
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17 |
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17 |
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Additional paid-in capital |
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88,387 |
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88,208 |
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Note receivable from stockholder |
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(603 |
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(603 |
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Unearned stock-based compensation |
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(1,619 |
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(891 |
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Accumulated other comprehensive loss |
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(106 |
) |
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(114 |
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Accumulated deficit |
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(37,312 |
) |
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(36,123 |
) |
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Total stockholders equity |
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48,764 |
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50,494 |
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Total liabilities and stockholders equity |
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$ |
59,208 |
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$ |
60,363 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Page 3
PlanetOut Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
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Three months ended June 30, |
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Six months ended June 30, |
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2004 |
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2005 |
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2004 |
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2005 |
Revenue: |
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Subscription services |
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$ |
4,051 |
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$ |
5,172 |
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$ |
7,840 |
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$ |
10,025 |
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Advertising services |
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1,712 |
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2,566 |
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2,809 |
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3,958 |
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Transaction services |
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347 |
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332 |
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901 |
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752 |
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Total revenue |
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6,110 |
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8,070 |
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11,550 |
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14,735 |
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Operating costs and expenses: |
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Cost of revenue (inclusive of stock-based compensation expense of
$202 and $15 for the three months ended June 30, 2004 and 2005, respectively
and $351 and $27 for the six months ended June 30, 2004 and 2005, respectively) |
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2,014 |
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2,320 |
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4,157 |
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4,445 |
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Sales and marketing (inclusive of stock-based compensation expense of
$200 and $18 for the three months ended June 30, 2004 and 2005, respectively
and $287 and $25 for the six months ended June 30, 2004 and 2005, respectively) |
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2,315 |
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2,532 |
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3,987 |
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4,988 |
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General and administrative (inclusive of stock-based compensation expense of
$307 and $109 for the three months ended June 30, 2004 and 2005, respectively
and $550 and $66 for the six months ended June 30, 2004 and 2005, respectively) |
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1,301 |
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1,615 |
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2,596 |
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2,863 |
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Depreciation and amortization |
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559 |
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848 |
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1,029 |
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1,668 |
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Total costs and expenses |
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6,189 |
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7,315 |
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11,769 |
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13,964 |
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Income (loss) from operations |
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(79 |
) |
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755 |
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(219 |
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771 |
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Equity in net loss of unconsolidated affiliate |
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(13 |
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(16 |
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(33 |
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(25 |
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Interest expense |
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(130 |
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(30 |
) |
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(190 |
) |
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(68 |
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Other income (expense), net |
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15 |
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313 |
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31 |
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552 |
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Income (loss) before income taxes |
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(207 |
) |
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1,022 |
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(411 |
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1,230 |
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Provision for income taxes |
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(5 |
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(12 |
) |
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(5 |
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(41 |
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Net income (loss) |
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(212 |
) |
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1,010 |
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(416 |
) |
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1,189 |
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Accretion on redeemable convertible preferred stock |
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(437 |
) |
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(875 |
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Net earnings (loss) attributable to common stockholders |
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$ |
(649 |
) |
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$ |
1,010 |
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$ |
(1,291 |
) |
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$ |
1,189 |
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Net earnings (loss) per share: |
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Basic |
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$ |
(0.37 |
) |
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$ |
0.06 |
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$ |
(0.74 |
) |
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$ |
0.07 |
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Diluted |
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$ |
(0.37 |
) |
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$ |
0.06 |
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$ |
(0.74 |
) |
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$ |
0.07 |
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Weighted-average shares used to compute net earnings per share: |
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Basic |
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1,773 |
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17,092 |
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1,749 |
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17,015 |
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Diluted |
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1,773 |
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18,249 |
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1,749 |
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18,192 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Page 4
PlanetOut Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
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Six months ended June 30, |
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2004 |
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2005 |
Cash flows from operating activities: |
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Net income (loss) |
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$ |
(416 |
) |
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$ |
1,189 |
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Adjustments to reconcile net loss to net cash provided by
operating activities: |
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Depreciation and amortization |
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1,029 |
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|
1,668 |
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Amortization of unearned stock-based compensation, net of cancellation |
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1,137 |
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118 |
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Amortization of deferrred rent |
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224 |
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Issuance of stock options and shares in exchange for services |
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51 |
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Amortization of debt issuance costs |
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16 |
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Loss (gain) on disposal of assets |
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44 |
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(1 |
) |
Equity in net loss of unconsolidated affiliate |
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33 |
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25 |
|
Changes in operating assets and liabilities: |
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Accounts receivable |
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(180 |
) |
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(342 |
) |
Prepaid expenses and other assets |
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(187 |
) |
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|
289 |
|
Accounts payable |
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|
572 |
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(1,384 |
) |
Accrued and other liabilities |
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(1,575 |
) |
|
|
690 |
|
Deferred revenue |
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|
325 |
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|
|
635 |
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Net cash provided by operating activities |
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|
849 |
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|
3,111 |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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(697 |
) |
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(2,659 |
) |
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Net cash used in investing activities |
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(697 |
) |
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(2,659 |
) |
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Cash flows from financing activities: |
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Proceeds from exercise of common stock and preferred stock options and warrants |
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30 |
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|
431 |
|
Repurchase of redeemable convertible preferred stock |
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(16 |
) |
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Principal payments under capital lease obligations and notes payable |
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(621 |
) |
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(774 |
) |
Deferred costs associated with initial public offering |
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|
(419 |
) |
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Proceeds from senor subordinated promissory note, net of issuance costs |
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4,909 |
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Net cash provided by (used in) financing activities |
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3,883 |
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(343 |
) |
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|
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Effect of exchange rate on cash and cash equivalents |
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(15 |
) |
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|
(8 |
) |
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Net increase in cash and cash equivalents |
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|
4,020 |
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|
101 |
|
Cash and cash equivalents, beginning of period |
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|
2,282 |
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|
|
43,128 |
|
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Cash and cash equivalents, end of period |
|
$ |
6,302 |
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|
$ |
43,229 |
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Supplemental disclosure of noncash flow investing and financing activities: |
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Property and equipment and related maintenance acquired under capital leases |
|
$ |
1,013 |
|
|
$ |
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Accretion on redeemable convertible preferred stock |
|
$ |
875 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Unearned stock-based compensation |
|
$ |
3,631 |
|
|
$ |
399 |
|
|
|
|
|
|
|
|
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|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Page 5
PlanetOut Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 The Company
Online Partners.com, Inc. (OLP) was incorporated in Delaware in October 1997 and PlanetOut
Inc. (the Company) was incorporated in Delaware in December 2000 as a wholly owned subsidiary of
OLP for the sole purpose of acquiring all of the capital stock of PlanetOut Corporation (POC).
The transaction was structured in a manner that resulted in OLP and POC becoming wholly owned
subsidiaries of the Company, with the former stockholders of OLP holding a majority of the voting
securities of the Company. Accordingly, for accounting purposes, OLP is the accounting acquirer and
the historical financial statements of the Company are those of OLP.
The Company is an online media company serving the lesbian, gay, bisexual and transgender, or
LGBT, community. Through its Gay.com and PlanetOut.com websites, the Company offers membership
based services and features. The Company generates revenue through subscription fees for premium
membership services on Gay.com and PlanetOut.com, as well as advertising sales and sales of
products and services through its e-commerce site, Kleptomaniac.com.
Note 2 Basis of Presentation and Summary of Significant Accounting Policies
Unaudited Interim Financial Information
The accompanying unaudited condensed consolidated financial statements have been prepared and
reflect all adjustments, consisting only of normal recurring adjustments, which in the opinion of
management are necessary to state fairly the financial position and the results of operations for
the interim periods. The balance sheet at December 31, 2004 has been derived from audited financial
statements at that date. The unaudited condensed consolidated financial statements have been
prepared in accordance with the regulations of the Securities and Exchange Commission, but omit
certain information and footnote disclosure necessary to present the statements in accordance with
generally accepted accounting principles. Results of interim periods are not necessarily indicative
of results for the entire year. These unaudited condensed consolidated financial statements should
be read in conjunction with the Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2004.
As of June 30, 2005, the Company had $43.2 million of cash and cash equivalents. The Company
believes that this cash, coupled with anticipated cash flows generated from operations, will be
sufficient to meet the Companys capital expenditure, working capital and corporate overhead
requirements within the Companys current identified business objectives.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenue and
expenses during the reporting periods. Significant estimates and assumptions made by management
include the assessment of collectibility of accounts receivable, the determination of the allowance
of doubtful accounts, the determination of the fair market value of its preferred and common stock
prior to the Companys initial public offering, the valuation and useful life of its capitalized
software and long-lived assets and the valuation of deferred tax asset balances. Actual results
could differ from those estimates.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation is calculated using the straight line method over the estimated useful lives of the
related assets ranging from three to five years. Leasehold improvements are amortized over the
shorter of their economic lives or lease term, generally ranging from two to seven years.
Maintenance and repairs are charged to expense as incurred. When assets are retired or otherwise
disposed of, the cost and accumulated depreciation and amortization are removed from the accounts
and any resulting gain or loss is reflected in the consolidated statement of operations in the
period realized.
Leasehold improvements made by the Company and reimbursable by the landlord as tenant
incentives are recorded by the Company as leasehold improvement assets and amortized over a term
consistent with the above guidance. The incentives from the landlord are recorded as deferred rent
and amortized as reductions to rent expense over the lease term. During the three and six months
ended June 30, 2005, leasehold improvement allowances totaled $1,360,000. During the three and six
months ended June 30, 2005, the Company
Page 6
amortized $47,000 and $92,000, respectively, to the accompanying unaudited condensed
consolidated statement of operations as a reduction of rent expense, respectively. At December 31,
2004 and June 30, 2005, the deferred rent balance attributable to these incentives totaled
$1,218,000 and $1,231,000, respectively. Future amortization of the balance of these tenant
incentives is estimated to be $94,000 for the six months ended December 31, 2005, $188,000 each
year for 2006 to 2011, and $11,000 in 2012. At December 31, 2004 and June 30, 2005, the Company
had receivable balances for tenant incentives of $1,255,000 and $414,000, respectively, recorded
under prepaid expenses and other current assets and other assets in the accompanying unaudited
condensed consolidated balance sheets.
Internal Use Software and Website Development Costs
The Company capitalizes internally developed software costs in accordance with the Statement
of Position 98-1, Accounting for Costs of Computer Software Developed or Obtained for Internal
Use (SOP 98-1) and Emerging Issues Task Force Abstract No. 00-02, Accounting for Web Site
Development Costs (EITF 00-02). Capitalized costs are amortized on a straight-line basis over
the estimated useful life of the software, generally three years, once it is available for its
intended use. During the three months ended June 30, 2004 and 2005, the Company capitalized costs
of $280,000 and $573,000, respectively, and recorded $37,000 and $207,000 of related amortization
expense, respectively. During the six months ended June 30, 2004 and 2005, the Company capitalized
costs of $485,000 and $1,190,000 respectively, and recorded $129,000 and $381,000 of related
amortization expense, respectively. The capitalized costs for the three and six months ended June
30, 2005 included $316,000 and $715,000, respectively, paid to external consultants and zero for
the three and six months ended June 30, 2004.
Stock-based Compensation
The Company accounts for stock-based employee compensation arrangements in accordance with
provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, (APB No. 25), and related interpretations. The Company follows the disclosure
provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123), and related interpretations. Under APB No. 25, compensation expense
is based on the difference, if any, on the date of the grant, between the fair value of the
Companys stock and the exercise price. Employee stock-based compensation determined under APB No.
25 is recognized using the multiple option method prescribed by the Financial Accounting Standards
Board Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock
Option or Awards Plans (FIN No. 28), over the options vesting period, which is generally two to
four years.
The Company accounts for equity instruments issued to non-employees in accordance with SFAS
No. 123, Emerging Task Force Issue No. 96-18, Accounting for Equity Instruments that are Issued to
Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services (EITF
96-18) and FIN No. 28. Accordingly, as these equity instruments vest, the Company will be required
to remeasure the fair value of the equity instruments at each reporting period prior to vesting and
then finally at the vesting date of the equity instruments.
For the purposes of pro forma disclosures, the estimated fair value of the options granted
under the Companys stock option plans is amortized to expense over the vesting period of the
respective options, which is generally two to four years.
The pro forma disclosures of the difference between compensation cost included in the net loss
and the related cost measured by the fair value method as required by SFAS 123, as amended, are
presented as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
Six months ended June 30, |
|
|
2004 |
|
2005 |
|
2004 |
|
2005 |
|
|
(unaudited) |
|
(unaudited) |
Net earnings (loss) attributable to common stockholders, as reported: |
|
$ |
(649 |
) |
|
$ |
1,010 |
|
|
$ |
(1,291 |
) |
|
$ |
1,189 |
|
Add: Employee stock-based compensation expense included in
reported net income (loss), net of tax |
|
|
686 |
|
|
|
141 |
|
|
|
1,137 |
|
|
|
118 |
|
Less: Total employee stock-based compensation expense
determined under fair value, net of tax |
|
|
(897 |
) |
|
|
(316 |
) |
|
|
(1,358 |
) |
|
|
(401 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net earnings (loss) attributable to common stockholders |
|
$ |
(860 |
) |
|
$ |
835 |
|
|
$ |
(1,512 |
) |
|
$ |
906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share attributable to common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported basic |
|
$ |
(0.37 |
) |
|
$ |
0.06 |
|
|
$ |
(0.74 |
) |
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported diluted |
|
$ |
(0.37 |
) |
|
$ |
0.06 |
|
|
$ |
(0.74 |
) |
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic |
|
$ |
(0.49 |
) |
|
$ |
0.05 |
|
|
$ |
(0.86 |
) |
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma diluted |
|
$ |
(0.49 |
) |
|
$ |
0.05 |
|
|
$ |
(0.86 |
) |
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 7
Prior to the Companys IPO, the fair value of each option grant was determined using the
minimum value method prescribed by SFAS No. 123. Subsequent to the offering, the fair value was
determined using the Black-Scholes model stipulated by SFAS No. 123. The following weighted average
assumptions were included in the estimated grant date fair value calculations for the Companys
stock option awards:
|
|
|
|
|
|
|
Six months ended |
|
|
June 30, |
|
|
2004 |
|
2005 |
Preferred stock options: |
|
|
|
|
Expected lives (in years) |
|
2.5 |
|
|
Risk free interest rates |
|
2.77 - 4.05% |
|
|
Dividend yield |
|
10% |
|
|
Volatility |
|
0% |
|
|
Common stock options: |
|
|
|
|
Expected lives (in years) |
|
5.0 |
|
5.0 |
Risk free interest rates |
|
2.77 - 4.05% |
|
3.59 - 4.13% |
Dividend yield |
|
0% |
|
0% |
Volatility |
|
0% |
|
85% |
Net Income (Loss) Per Share
Basic income (loss) per share (Basic EPS) is computed by dividing net income (loss) available to
common shareholders by the sum of the weighted average number of common shares outstanding during
the period, net of shares subject to repurchase, using the two-class method. The two-class method
is an earnings allocation formula that determines earnings per share for each class of common stock
and participating security according to dividends declared (or accumulated) and participation
rights in undistributed earnings. Under the two-class method, income from continuing operations (or
net income) is reduced by the amount of dividends declared in the current period for each class of
stock and by the contractual amount of dividends (or interest on participating income bonds) that
must be paid for the current period. The remaining earnings are then allocated to common stock and
participating securities to the extent that each security may share in earnings as if all of the
earnings for the period had been distributed. The total earnings allocated to each security are
determined by adding together the amount allocated for dividends and the amount allocated for a
participation feature. The total earnings allocated to each security are then divided by the number
of outstanding shares of the security to which the earnings are allocated to determine the earnings
per share for the security.
Diluted earnings per share (Diluted EPS) gives effect to all dilutive potential common
shares outstanding during the period. The computation of Diluted EPS does not assume conversion,
exercise or contingent exercise of securities that would have an anti-dilutive effect on earnings.
The dilutive effect of outstanding stock options and warrants is computed using the treasury stock
method.
The following table sets forth the computation of basic and diluted net loss attributable to
common stockholders (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
Six months ended June 30, |
|
|
2004 |
|
2005 |
|
2004 |
|
2005 |
|
|
(unaudited) |
|
(unaudited) |
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(212 |
) |
|
$ |
1,010 |
|
|
$ |
(416 |
) |
|
$ |
1,189 |
|
Accretion on redeemable convertible preferred stock |
|
|
(437 |
) |
|
|
|
|
|
|
(875 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to common stockholders |
|
$ |
(649 |
) |
|
$ |
1,010 |
|
|
$ |
(1,291 |
) |
|
$ |
1,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used to compute basic EPS |
|
|
1,773 |
|
|
|
17,092 |
|
|
|
1,749 |
|
|
|
17,015 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive common stock equivalents |
|
|
|
|
|
|
1,157 |
|
|
|
|
|
|
|
1,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares |
|
|
|
|
|
|
1,157 |
|
|
|
|
|
|
|
1,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used to compute diluted EPS |
|
|
1,773 |
|
|
|
18,249 |
|
|
|
1,749 |
|
|
|
18,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.37 |
) |
|
$ |
0.06 |
|
|
$ |
(0.74 |
) |
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.37 |
) |
|
$ |
0.06 |
|
|
$ |
(0.74 |
) |
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 8
The potential shares, which are excluded from the determination of basic and diluted net
loss per share for the six months ended June 30, 2004 and 2005 as their effect is anti-dilutive,
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, |
|
|
2004 |
|
2005 |
|
|
(unaudited) |
Redeemable convertible preferred stock |
|
|
9,273 |
|
|
|
|
|
Redeemable convertible preferred stock options and warrants |
|
|
3,539 |
|
|
|
|
|
Common stock options and warrants |
|
|
2,318 |
|
|
|
741 |
|
Commmon stock subject to repurchase |
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
15,132 |
|
|
|
743 |
|
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements
In April 2005, the SEC amended the compliance dates for SFAS No. 123(R), Shared-Based Payment.
The new rule allows public companies to implement SFAS No. 123(R) at the beginning of their next
fiscal year that begins after June 15, 2005. The Company will be required to adopt SFAS No. 123(R)
in the first quarter of 2006 and begin to recognize stock-based compensation related to employee
equity awards in its condensed consolidated statements of operations using a fair value based
method on a prospective basis. Since the Company currently accounts for equity awards granted to
its employees using the intrinsic value method under APB No. 25, the Company expects the adoption
of SFAS No. 123(R) will have a significant adverse impact on its financial position and results of
operations. The Company is currently in the process of evaluating the extent of such impact.
In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB No. 107). SAB No. 107
covers key topics related to the implementation of SFAS No. 123(R) which include the valuation
models, expected volatility, expected option term, income tax effects of SFAS No. 123(R),
classification of stock-based compensation cost, capitalization of compensation costs, and
disclosure requirements. The Company expects the adoption of SAB No. 107 will have a significant
adverse impact on its financial position and results of operations upon its adoption of SFAS No.
123(R) in the first quarter of 2006. The Company is currently in the process of evaluating the
extent of such impact.
Page 9
Note 3 Other Balance Sheet Components
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
June 30, |
|
|
2004 |
|
2005 |
|
|
|
|
|
|
(unaudited) |
Property and equipment (in thousands): |
|
|
|
|
|
|
|
|
Computer and network equipment |
|
$ |
7,130 |
|
|
$ |
7,608 |
|
Furniture and fixtures |
|
|
918 |
|
|
|
1,139 |
|
Computer software |
|
|
1,683 |
|
|
|
2,301 |
|
Leasehold improvements |
|
|
1,191 |
|
|
|
1,372 |
|
Capitalized software and website development costs |
|
|
2,919 |
|
|
|
4,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
13,841 |
|
|
|
16,529 |
|
Less: Accumulated depreciation and amortization |
|
|
(6,830 |
) |
|
|
(8,492 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
7,011 |
|
|
$ |
8,037 |
|
|
|
|
|
|
|
|
|
|
During the three and six months ended June 30, 2005, depreciation and amortization expense of
property and equipment was $848,000 and $1,668,000, respectively. During the three and six months
ended June 30, 2004, depreciation and amortization expense
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
June 30, |
|
|
2004 |
|
2005 |
|
|
|
|
|
|
(unaudited) |
Prepaid expenses and other current assets (in thousands): |
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets |
|
$ |
1,262 |
|
|
$ |
1,735 |
|
Receivable from landlord for tenant improvement allowance, current portion
(Note 2) |
|
|
947 |
|
|
|
414 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,209 |
|
|
$ |
2,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
June 30, |
|
|
2004 |
|
2005 |
|
|
|
|
|
|
(unaudited) |
Other assets (in thousands): |
|
|
|
|
|
|
|
|
Other assets |
|
$ |
838 |
|
|
$ |
891 |
|
Receivable from landlord for
tenant improvement allowance, less
current portion (Note 2) |
|
|
308 |
|
|
|
|
|
Interest on note receivable from stockholder |
|
|
179 |
|
|
|
205 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,325 |
|
|
$ |
1,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
June 30, |
|
|
2004 |
|
2005 |
|
|
|
|
|
|
(unaudited) |
Accrued liabilities (in thousands): |
|
|
|
|
|
|
|
|
Accrued payroll and related liabilities |
|
$ |
493 |
|
|
$ |
484 |
|
Other accrued liabilities |
|
|
976 |
|
|
|
1,675 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,469 |
|
|
$ |
2,159 |
|
|
|
|
|
|
|
|
|
|
Note 4 Related Party Transactions
Note Receivable
In May 2001, the Company issued a promissory note to an executive of the Company for $603,000
to fund the purchase of Series D redeemable convertible preferred stock. The principal and interest
are due and payable in May 2006. Interest accrues at a rate of 8.5% per annum or the maximum rate
permissible by law, whichever is less and is full recourse. The note is full recourse with respect to $24,000 in principal payment and the remainder of the principal is non-recourse. The note
is collateralized by the shares of common stock and options owned by the executive. Interest
income of $13,000 and $26,000 was recognized in each of the three and six months ended June 30,
2004 and 2005, respectively.
Page 10
Advertising Agreement
In November 2001, the Company entered into an advertising agreement with Gay.it S.p.A., an
unconsolidated affiliate of which the Company owns 45%. Pursuant to this agreement, the Company
received $39,000 and $47,000 of subscription revenue for the three months ended June 30, 2004 and
2005, respectively and $78,000 and $99,000 for the six months ended June 30, 2004 and 2005,
respectively. The Company paid Gay.it S.p.A. a referral fee of $16,000 and $19,000 during the
three months ended June 30, 2004 and 2005, respectively and $31,000 and $41,000 during the six
months ended June 30, 2004 and 2005, respectively.
Note 5 Contingencies
Contingencies
In April 2002, the Company was notified that DIALINK, a French company, had filed a lawsuit in
France against it and its French subsidiary, alleging that the Company had improperly used the
domain names Gay.net, Gay.com and fr.gay.com in France, as DIALINK alleges that it has exclusive
rights to use the word gay as a domain name and trademark in France. On June 30, 2005, the French
court found that although the Company had not infringed DIALINKs trademark, it had damaged DIALINK
through unfair competition. The Court ordered the Company to pay
damages of 50,000 (US $60,000
at June 30, 2005), half to be paid notwithstanding appeal, the other half to be paid after appeal.
The Court also enjoined the Company from using gay as a trademark or domain name for its services
in France and gave the Company approximately two months within which to comply. This injunction
will not prohibit the Company from offering its services to French users, but will force the
Company to at least temporarily change the domain name of its French website, currently
www.fr.gay.com, and may make it more difficult for French users to locate the Companys French
website. The Company has accrued the damage award as of June 30, 2005 and plans to appeal the
French courts decision.
The Company is not currently subject to any additional significant legal proceedings. The
Company may from time to time, however, become a party to various legal proceedings, arising in the
ordinary course of business. The Company may also be indirectly affected by administrative or court
proceedings or actions in which the Company is not involved but which have general applicability to
the Internet industry. The Company does not believe, based on current knowledge, that current legal
proceedings or claims are likely to have a material adverse effect on its financial position,
results of operations or cash flows.
Page 11
Item 2. Managements Discussion and Analysis on Financial Condition and Results of Operations
The following discussion should be read in conjunction with the financial statements and
related notes which appear elsewhere in this document. This discussion contains forward-looking
statements that involve risks and uncertainties. In some cases, you can identify forward-looking
statements by terminology including would, could, may, will, should, expect, intend,
plan, anticipate, believe, estimate, predict, potential or continue, the negative of
these terms or other comparable terminology. These statements are only predictions. Forward-looking
statements include statements about our business strategy, future operating performance and
prospects. You should not place undue reliance on these forward-looking statements. Our actual
results could differ materially from those anticipated in these forward-looking statements as a
result of various factors, including those discussed below and elsewhere in this document and in
our Form 10-K filed March 31, 2005.
Overview
We are a leading global online media company serving the LGBT community. Our network of
websites, including our flagship websites Gay.com and PlanetOut.com, allows our members to connect
with other members of the LGBT community around the world.
Although we had positive net income in the three and six months ended June 30, 2005, we have
incurred significant losses since our inception. As of June 30, 2005, we had an accumulated deficit
of $36.1 million. We expect to incur significant marketing, engineering and technology, general and
administrative and stock-based compensation expenses for the foreseeable future. As a result, we
will need to continue to grow revenue and increase our operating margins to maintain and expand our
profitability.
Results of Operations
The following table sets forth the percentage of total revenue represented by items in our
consolidated statements of operations for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
|
|
2004 |
|
2005 |
|
2004 |
|
2005 |
|
|
(As a percentage of total revenue; unaudited) |
Consolidated statement of operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription services |
|
|
66.3 |
% |
|
|
64.1 |
% |
|
|
67.9 |
% |
|
|
68.0 |
% |
Advertising services |
|
|
28.0 |
|
|
|
31.8 |
|
|
|
24.3 |
|
|
|
26.9 |
|
Transaction services |
|
|
5.7 |
|
|
|
4.1 |
|
|
|
7.8 |
|
|
|
5.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
33.0 |
|
|
|
28.7 |
|
|
|
36.0 |
|
|
|
30.2 |
|
Sales and marketing |
|
|
37.9 |
|
|
|
31.4 |
|
|
|
34.5 |
|
|
|
33.9 |
|
General and administrative |
|
|
21.3 |
|
|
|
20.0 |
|
|
|
22.5 |
|
|
|
19.4 |
|
Depreciation and amortization |
|
|
9.1 |
|
|
|
10.5 |
|
|
|
8.9 |
|
|
|
11.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
101.3 |
|
|
|
90.6 |
|
|
|
101.9 |
|
|
|
94.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(1.3 |
) |
|
|
9.4 |
|
|
|
(1.9 |
) |
|
|
5.2 |
|
Other income (expense), net |
|
|
(2.1 |
) |
|
|
3.3 |
|
|
|
(1.7 |
) |
|
|
3.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(3.4 |
) |
|
|
12.7 |
|
|
|
(3.6 |
) |
|
|
8.4 |
|
Provision for income taxes |
|
|
(0.1 |
) |
|
|
(0.2 |
) |
|
|
|
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(3.5 |
)% |
|
|
12.5 |
% |
|
|
(3.6 |
)% |
|
|
8.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following provides some explanatory information with respect to our consolidated
statements of operations data:
We derive our revenue from three main sources: subscription, advertising and transaction
services. For the foreseeable future, we expect subscription and advertising services to remain our
largest sources of revenue and to be more of a focus for our internal operations than transaction
services.
Subscription Services. We charge for subscriptions to our premium membership services on
Gay.com and PlanetOut.com. On both of these websites, the set of services for which we offer paid
premium memberships includes viewing, searching and replying to profiles, chat, instant messaging
and email. The Gay.com paid premium memberships also include premium chat features, video chat
Page 12
and premium content. We currently offer Gay.com membership services in six languages to members who
identify themselves as residing in more than 100 countries through Gay.com and localized versions
of Gay.com.
During 2003, 2004 and 2005, we have priced our premium membership services as follows,
excluding promotional discounts:
Gay.com Premium Membership
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yearly |
|
Quarterly |
|
Monthly |
|
Trials |
January 2003 to March 2003 |
|
$ |
89.95 |
|
|
$ |
39.95 |
|
|
$ |
16.95 |
|
|
$7.95 7-day trial |
March 2003 to May 2004 |
|
$ |
79.95 |
|
|
$ |
39.95 |
|
|
$ |
16.95 |
|
|
$6.95 7-day trial March 2003 to April 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$9.95 7-day trial April 2004 to May 2004 |
May 2004 to October 2004 |
|
$ |
79.95 |
|
|
$ |
39.95 |
|
|
$ |
17.95 |
|
|
$9.95 7-day trial |
October 2004 to present |
|
$ |
89.95 |
|
|
$ |
42.95 |
|
|
$ |
19.95 |
|
|
$9.95 7-day trial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yearly |
|
Quarterly |
|
Monthly |
|
Trials |
PlanetOut Premium Membership |
|
$ |
69.95 |
|
|
$ |
29.95 |
|
|
$ |
12.95 |
|
|
$4.95 3-day trial December 2002 to present |
Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 13
In managing our premium membership services, we track a number of operating metrics, including the
following:
Premium Membership Service Operating Metrics
(excluding free trial promotions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
2003 |
|
2004 |
|
2005 |
|
|
1Q |
|
2Q |
|
3Q |
|
4Q |
|
FY |
|
1Q |
|
2Q |
|
3Q |
|
4Q |
|
FY |
|
1Q |
|
2Q |
Total Subscribers |
|
|
88,776 |
|
|
|
88,103 |
|
|
|
91,886 |
|
|
|
98,445 |
|
|
|
98,445 |
|
|
|
105,179 |
|
|
|
110,598 |
|
|
|
118,392 |
|
|
|
127,527 |
|
|
|
127,527 |
|
|
|
137,500 |
|
|
|
145,114 |
|
Gross Additions |
|
|
39,053 |
|
|
|
34,305 |
|
|
|
37,167 |
|
|
|
40,721 |
|
|
|
151,246 |
|
|
|
42,635 |
|
|
|
37,582 |
|
|
|
41,082 |
|
|
|
44,219 |
|
|
|
165,518 |
|
|
|
44,245 |
|
|
|
41,370 |
|
Total Churn |
|
|
30,641 |
|
|
|
34,978 |
|
|
|
33,384 |
|
|
|
34,162 |
|
|
|
133,165 |
|
|
|
35,901 |
|
|
|
32,163 |
|
|
|
33,288 |
|
|
|
35,084 |
|
|
|
136,436 |
|
|
|
34,272 |
|
|
|
33,756 |
|
Churn Rate |
|
|
12.1 |
% |
|
|
13.2 |
% |
|
|
12.4 |
% |
|
|
12.0 |
% |
|
|
12.4 |
% |
|
|
11.8 |
% |
|
|
9.9 |
% |
|
|
9.7 |
% |
|
|
9.5 |
% |
|
|
10.1 |
% |
|
|
8.6 |
% |
|
|
8.0 |
% |
Net Additions |
|
|
8,412 |
|
|
|
(673 |
) |
|
|
3,783 |
|
|
|
6,559 |
|
|
|
18,081 |
|
|
|
6,734 |
|
|
|
5,419 |
|
|
|
7,794 |
|
|
|
9,135 |
|
|
|
29,082 |
|
|
|
9,973 |
|
|
|
7,614 |
|
Average Lifetime (months) |
|
|
8.3 |
|
|
|
7.6 |
|
|
|
8.1 |
|
|
|
8.4 |
|
|
|
8.1 |
|
|
|
8.5 |
|
|
|
10.1 |
|
|
|
10.3 |
|
|
|
10.5 |
|
|
|
9.9 |
|
|
|
11.6 |
|
|
|
12.6 |
|
We have calculated these metrics using the following definitions:
|
|
|
Total Subscribers: members with an active, paid subscription plan, excluding paid trial
subscribers, at the end of the period. |
|
|
|
|
Gross Additions: members who initiate a subscription during the period, excluding paid
trial subscriptions. Gross Additions during a period equals Net Additions plus Total Churn
during that period. |
|
|
|
|
Total Churn: total subscription cancellations during the period, including cancellations of
paid promotional subscriptions, but excluding cancellations of paid 3- and 7-day trial
subscriptions and free promotional subscriptions. Subscription cancellations include
subscriptions cancelled due to failed credit cards. |
|
|
|
|
Churn Rate: Total Churn divided by the average of the Total Paid Subscribers measured at
the beginning and end of the period, divided by the number of months in the period. |
|
|
|
|
Net Additions: Total Paid Subscribers at the end of the period minus the Total Paid
Subscribers at the beginning of the period. |
|
|
|
|
Average Lifetime: Average length of a subscription. Average lifetime equals one hundred
percent divided by churn rate for the period. |
Because their terms are generally shorter than the periods that we measure, we exclude paid
trial subscriptions (currently, 3- and 7-day paid trials) from these operating metrics.
We regularly test different promotional offers, including some free trial promotions. Members
who sign up for any of these promotional offers, discounted or free, provide us with payment
information and authorize us to bill them at our then regular premium membership service rates,
unless they cancel their subscriptions prior to the end of their promotional terms. When these
promotional offers are for paid subscriptions to our annual, monthly, or quarterly plans, we
include these cancellations in our churn calculations.
However, because free subscribers do not count toward our definition of Total Paid
Subscribers, we exclude them from our definition of Total Churn.
Currently, we expect to provide quarter-to-quarter information about these operating metrics
through the end of 2005.
In addition to revenue from premium membership services, historically we derived revenue from
subscriptions for print and online versions of our Out&About newsletter. We published the
newsletter ten times a year. December 2004 was the date of the final printed issue and going
forward, we do not expect to produce new print or online editions of the newsletter. Instead, we
intend to offer general travel content on our Gay.com and PlanetOut.com websites and to offer
premium travel content as part of our premium membership services. Revenue from our Out&About newsletter subscriptions was less than 1% of our total
revenue in the three and six months ended June 30, 2004 and there was no revenue for Out&About
subscriptions for the three months and six months ended June 30, 2005.
Page 14
As part of our plan to discontinue publication of the Out&About newsletter, we offered those
subscribers who were still active as of December 31, 2004 the option to receive a Gay.com premium
subscription instead. We provided those subscribers who did not opt to switch to other of our
subscription services a refund of the remaining value of their subscriptions to Out&About. Such
refunds totaled $38,000 through December 31, 2004 and were paid against a reduction of deferred
revenue, and did not reduce already recognized revenue.
For both premium memberships and in the past, Out&About subscriptions, we are paid up-front.
We recognize subscription revenue ratably over the subscription period. As of June 30, 2005,
deferred revenue related to premium membership subscriptions totaled approximately $3.9 million. As
of June 30, 2005, there was no remaining deferred revenue from our Out&About subscriptions. Our
subscription revenue is not subject to sales or use tax in the United States, but is subject to
Value Added Tax, or VAT, in the European Union. Currently, we do not require our subscribers to
reimburse us for VAT and we offset this liability against revenue.
Advertising Services. We derive advertising revenue principally from advertising contracts in
which we typically undertake to deliver a minimum number of impressions to users over a specified
time period for a fixed fee. Advertising rates, measured on a number of bases, including on a cost
per thousand impressions, or CPM, basis, depend on whether the impressions are for general rotation
throughout our network or for targeted audiences through our email newsletters or on our websites.
We recognize advertising revenue ratably in the period in which the advertisement is
displayed, provided that we have no significant obligation remaining and the collection of the
resulting receivable is reasonably assured, at the lesser of the ratio of impressions delivered
over the total number of contracted impressions or the straight-line basis over the term of the
contract. To the extent that we do not provide the contracted number of impressions during a
specific time period, we defer recognition of the corresponding revenue until the thresholds are
achieved.
Throughout 2004 and the first six months of 2005, our primary goals for advertising services
included attracting additional advertisers, diversifying our client base and increasing average
account size. We have succeeded in these efforts and expect to continue to pursue Fortune 1000
companies and other clients and to provide increasingly customized and targeted advertising
campaigns.
In addition to revenue from advertisers who place general online advertisements on our
websites, we derive advertising revenue from the sale of online classified listings, primarily for
travel-related businesses, and, historically, print advertising, as part of or accompanying our
Out&About newsletter. We expect to expand the scope of our online classifieds listings to include
more non-travel-related businesses.
Transaction Services. Our principal source of transaction services revenue is from sales
through Kleptomaniac.com, our e-commerce website and, to a lesser extent, through our other
websites. Through Kleptomaniac.com, we offer hundreds of products, including DVDs, music CDs and
fashion items, some of which we own and some of which are owned by third-parties. Revenue from
Kleptomaniac.com accounted for approximately 53% of our transaction services revenue and
approximately 3% of our overall revenue in 2004 and approximately 53% of our transaction services
revenue and approximately 3% of our overall revenue for the first six months of 2005. For those
items that we own, we recognize revenue when the product is shipped, net of estimated returns. We
recognize commissions for facilitating the sale of third-party products and services when earned,
based on reports provided by the vendors or upon cash receipt if no reports are provided.
Cost of Revenue. Cost of revenue primarily consists of payroll and related benefits associated
with supporting our subscription-based services and producing and maintaining content for our
various websites and newsletters. Other expenses directly related to generating revenue included in
cost of revenue include transaction processing fees, computer maintenance, allocated occupancy
costs, co-location and Internet connectivity fees, purchased content and cost of goods sold.
We research and test potential improvements to our hardware and software systems in an effort
to improve our productivity and enhance our members experience. We expect to continue to invest in
technology and improvements in our websites. We believe costs associated with certain projects have
ongoing benefit. If we believe that capitalization criteria in accordance with SOP 98-1 and EITF
00-02 have been met, we capitalize the development costs related to these projects which are
amortized on a straight-line basis over the estimated three year useful life of the software. The
amortization of capitalized software is included in depreciation and amortization. We expense the
costs associated with these projects only when we believe capitalization criteria have not been
met.
Sales and Marketing. Sales and marketing expense consists of expenses related to selling,
marketing and promoting our products and services. Major expense items include:
Page 15
|
|
|
payroll and related benefits for employees involved in sales, client service, customer
service, corporate marketing and other support functions; |
|
|
|
|
product and service marketing and promotions; |
|
|
|
|
general corporate marketing and promotions; and |
|
|
|
|
allocated occupancy costs. |
General and Administrative. General and administrative expense consists primarily of payroll
and related benefits for executive, finance and administrative personnel, allocated occupancy
costs, professional fees, insurance and other general corporate expenses.
Occupancy Costs. Each of our cost of revenue, sales and marketing and general and
administrative expense categories include occupancy costs. The amount of charges from occupancy
costs allocated to each of these categories is based on the headcount associated with each of these
categories. In addition, we allocate to the general and administrative expense category the costs
of any one-time charges associated with lease terminations.
Stock-based Compensation and Related Charges. Each of our cost of revenue, sales and marketing
and general and administrative expense categories include stock-based compensation charges for
equity instruments issued to employees and in some cases consultants for services. These charges
represent the intrinsic value, if any, between the respective exercise price of stock options or
stock grants and the fair market value of the underlying stock on the date of grant, or on the
reporting date if the option is subject to variable plan accounting.
At June 30, 2005, we had options to acquire 46,394 shares of our capital stock subject to
variable plan accounting which requires us to measure the intrinsic value at each reporting date
until these options expire, or are exercised or forfeited. In any period, variable plan accounting
may result in increases or decreases in stock-based compensation, depending on the estimated fair
market value of our capital stock. We amortize deferred stock-based compensation over the vesting
periods of the individual options, using the multiple option method. Changes in fair market value
will result in stock-based compensation expense or benefit in each period. We recognized total
stock-based compensation expense of $1.2 million in the first six months of 2004 and $118,000 in
the first six months of 2005.
At June 30, 2005, we had unearned stock-based compensation of $891,000, of which $332,000 will
be amortized in the remainder of 2005, $395,000 will be amortized in 2006, $153,000 will be
amortized in 2007 and $11,000 will be amortized in 2008. We may recognize additional stock-based
compensation expense (benefit) in the future if we grant additional options with an exercise price
below the fair market value of our stock.
Comparison of the Three and Six Months Ended June 30, 2005 and June 30, 2004
Revenue
Total revenue increased approximately 32%, from $6.1 million in the three months ended June
30, 2004 to $8.1 million in the three months ended June 30, 2005. Total revenue for the six months
ended June 30, 2004 and 2005 increased 28% from $11.6 million to $14.7 million.
Subscription Services. From June 30, 2004 to June 30, 2005, the number of our subscribers grew
by approximately 31% from approximately 110,600 to approximately 145,100. As a result of this
increase, our subscription revenue for the three months ended June 30, 2004 and 2005 increased
approximately 28%, from $4.1 million to $5.2 million, respectively. Our subscription revenue for
the six months ended June 30, 2004 and 2005 increased approximately 28% from $7.8 million to $10.0
million. Other factors that contributed to this change in revenue included:
|
|
|
new features including the offer of subscriptions to popular magazines with premium
memberships beginning in May 2004, and the expansion and launch of online features such as
expanded messenger services, expanded ad searchable whos online features, and the addition
of Hot and Buddy lists, among others; |
|
|
|
|
the launch of automated credit card updating; |
|
|
|
|
a price increase for our Gay.com membership services in October 2004; |
Page 16
|
|
|
the migration of approximately 1,400 of our Out&About newsletter subscribers to our
premium membership services in December 2004; |
|
|
|
|
an increase in marketing and promotional activities including targeted price discounts
on select subscription plan offerings; |
|
|
|
|
the effect of periods during the fourth quarter of 2004 and the first quarter of 2005,
during which our transaction processing system was not available or did not perform as
expected, in part as a result of adding new transaction processing capabilities, subsequent
to which we have implemented technology upgrades to help address these issues; |
|
|
|
|
delays in new feature rollout for our subscription services, which limited subscriber
and revenue growth; and |
|
|
|
|
a reduction in subscribers and revenue from our PlanetOut.com premium membership
service, as we have concentrated more of our marketing and development activities on our
Gay.com premium membership service. |
Revenue from our premium membership services made up approximately 99% of subscription revenue
in the three months and the six months ended June 30, 2004. Revenue from our premium membership
services made up all of our subscription revenue in the three months and the six months ended June
30, 2005.
Advertising Services. Our advertising services revenue increased approximately 50%, from $1.7
million in the three months ended June 30, 2004 to $2.6 million in the three months ended June 30,
2005. Advertising revenue for the six months ended June 30, 2004 and 2005 increased 41% from $2.8
million to $4.0 million, respectively. The majority of this increase came from increases in online
advertising revenue on our flagship websites, Gay.com and PlanetOut.com. Factors that affected our
advertising revenue for the three months and the six months ended June 30, 2005, as compared to the
three months and the six months ended June 30, 2004, included:
|
|
|
the improvement in the advertising market generally and in the online advertising
market specifically; |
|
|
|
|
the development of new customized sponsorship programs and integrated editorial
programming which increased our CPM rate; |
|
|
|
|
the increasing interest of advertisers in targeting the LGBT community; and |
|
|
|
|
the expansion of our Gay.com local service listings during the first six months of 2005. |
For the foreseeable future, we expect online advertising to grow and remain the largest
portion of our overall advertising services revenue.
Transaction Services. Our transaction services revenue declined 4% from $347,000 in the three
months ended June 30, 2004 to $332,000 in the three months ended June 30, 2005. For the six months
ended June 30, 2004 and 2005, transaction services revenue
declined 17% from $901,000 to $752,000,
respectively. The decline was largely due to the ongoing shift of internal promotional space on our
websites away from Kleptomaniac.com toward our premium membership services and advertising
services. This decline also reflects the effects of a leadership transition in the division in the
first six months of 2005. Revenue from Kleptomaniac.com accounted for approximately 64% and 51% of
transaction services revenue in the three months ended June 30, 2004 and 2005, respectively. For
the six months ended June 30, 2004 and 2005, revenue from Kleptomaniac.com accounted for
approximately 49% and 54% of transaction services revenue. Transaction revenue from sources other
than Kleptomaniac.com, while relatively small in total dollar amounts, increased for the three
months and the six months ended June 30, 2005 as compared to the same periods in 2004.
Operating Costs and Expenses
Total operating expenses grew approximately 18%, from $6.2 million in the three months ended
June 30, 2004 to $7.3 million in the three months ended June 30, 2005. Operating expenses for the
six months ended June 30, 2004 and 2005 increased 19% from $11.8 million to $14.0 million,
respectively. These numbers include stock-based compensation expenses for the three months ended
June 30, 2004 and 2005, of $709,000 and $141,000 respectively, and $1,188,000 and $118,000,
respectively, for the six months ended June 30, 2004 and 2005.
Cost of Revenue. Our cost of revenue increased 15% from $2.0 million in the three months ended
June 30, 2004 to $2.3 million in the three months ended June 30, 2005. This includes an increase of
$150,000 in computer maintenance expenses, an increase of corporate occupancy expenses reflecting
the move to our new corporate headquarters, and a credit to labor expense for capitalized
Page 17
development
costs of $280,000 in the three months ended June 30, 2004
compared to $257,000 in the
three months ended June 30, 2005. For the six months ended June 30, 2004 and 2005, operating cost
of revenue increased 7% from $4.2 million to $4.5 million, respectively. This reflects an increase
in computer maintenance expenses of $253,000 and an increase in corporate occupancy expenses,
offset by a decrease in stock-based compensation expenses of $324,000. For the foreseeable future,
we expect cost of revenue, exclusive of stock-based compensation, to increase in absolute dollars
as our investment in headcount and other expenses grow.
Sales and Marketing. Our sales and marketing expenses increased approximately 9%, from $2.3
million in the three months ended June 30, 2004 to $2.5 million in the three months ended June 30,
2005. This reflects an increase in expenses for marketing and promotion of our subscription services
of $58,000 for the three months ended June 30, 2004 and 2005. For the six months ended June 30,
2004 and 2005, sales and marketing expenses increased 25% from $4.0 million in the six months ended
June 30, 2004 to $5.0 million, respectively. This
principally reflects an increase of $456,000 in
domestic and international expenses for marketing and promotion of our subscription services, an
increase in sales and marketing salaries of $293,000 reflecting both increased salaries and
expanded headcount, and higher occupancy costs due to the relocation of our corporate headquarters.
Sales and marketing expenses include a decrease in stock-based
compensation expense of $182,000 and
$262,000 for the three and six month periods ended June 30, 2005 compared to the same period in
2004. For the foreseeable future, we expect sales and marketing expenses, exclusive of stock-based
compensation, to increase in absolute dollars as we expand our investment in marketing activities.
General and Administrative. Our general and administrative expenses increased approximately
24% from $1.3 million in the three months ended June 30, 2004 to $1.6 million in the three months
ended June 30, 2005. This change principally reflects an
increase of $376,000 in consulting,
insurance and shareholder fees, reflecting the increased costs of being a public company, and an
increase in occupancy expenses of $339,000, reflecting the move to new corporate headquarters.
These increases are partially offset by a decrease of stock-based
compensation expenses of $198,000
for the three months ended June 30, 2005 compared to 2004, and
$484,000 for the six months ended
June 30, 2005 compared to June 30, 2004. For the six months ended June 30, 2004 and 2005, general
and administrative expenses increased 10% from $2.6 million to $2.9 million, respectively. This
principally reflects increases in insurance fees and accounting fees
of $441,000,
reflecting the cost of being a public company, and occupancy expenses
of $533,000, reflecting the
relocation of our corporate headquarters, partially offset by a decrease in stock-based
compensation expenses of $484,000. For the foreseeable future, we expect general and administrative
expenses, exclusive of stock-based compensation, to grow in absolute dollars.
Depreciation and Amortization. Our depreciation and amortization expenses grew by
approximately 52%, from $559,000 to $848,000 in the three months ended June 30, 2004 and June 30,
2005, respectively, and by 62%, from $1.0 million to $1.7 million for the six months ended June 30,
2004 and 2005, respectively, primarily reflecting increased investment in our product development
and technology infrastructure. For the foreseeable future, we expect depreciation and amortization
costs to increase in absolute dollars with the growth of our investment in hardware, software and
capitalized development costs.
Other income and expense. Our other income and expense grew from net expenses of $128,000 to
net income of $267,000 in the three months ended June 30, 2004 and 2005, respectively, and from net
expenses of $192,000 to income of $459,000 in the six months ended June 30, 2004 and 2005,
respectively. This year-over-year change includes the interest income of $313,000 in the three
months ended June 30, 2005 and $552,000 in the six months ended June 30, 2005, based on interest
earned on the proceeds from our October 2004 initial public offering.
Liquidity and Capital Resources
We have historically financed our operations primarily through private sales of equity and
capitalized leases. During the six months ended June 30, 2004, net cash provided by operating
activities was $849,000, and was primarily attributable to the growth of our premium subscription
services, offset by $1.6 million in payments to settle a lease dispute related to our former San
Francisco headquarters facility. During the six months ended June 30, 2005, net cash provided by
operating activities was $3.1 million, and was primarily attributable to cash provided by the
growth of our advertising and premium subscription services and collection of a $1.0 million
receivable for tenant improvements. Cash provided in operating activities for the six months ended
June 30, 2004 was primarily attributable to the growth of our premium subscription services, offset
by $1.6 million in payments for our lease settlement.
Net cash used in investing activities was $697,000 for the six months ended June 30, 2004, and
was primarily attributable to purchases of property and equipment. Net cash used in investing
activities was $2.7 million for the six months ended June 30, 2005, and was primarily attributable to purchases of hardware, software, property and equipment,
including $475,000 for capitalization of internally developed software and $715,000 for
capitalization of external product development. While we expect to continue to invest
Page 18
in development and infrastructure in 2005, we also expect to be able to realize tenant improvement
allowances associated with the move of our corporate headquarters in the third quarter of 2004.
Net cash provided by financing activities in the six months ended June 30, 2004 was $3.9
million and was primarily attributable to the raising of a $5.0 million senior subordinated
promissory note, net of payments of capitalized lease obligations. This note was subsequently
repaid in October 2004, following our initial public offering. Net cash used by financing
activities in the six months ended June 30, 2005 was $343,000 and was primarily attributable to
payments of capital lease obligations offset by interest income on the proceeds from our initial
public offering. As of June 30, 2005, we had cash and cash equivalents of approximately $43.2
million.
We have not allocated a specific portion of our net proceeds from our initial public offering
to any particular purpose, other than the repayment of indebtedness under our senior subordinated
promissory note that occurred in October 2004. The amount and timing of our actual expenditures
will depend on numerous factors, such as the progress of our development and marketing efforts and
the amount of cash used by our other operations. Thus, we retain broad discretion over the use of
the net proceeds from our initial public offering.
Our capital requirements depend on many factors, including growth of our revenue, the
resources we devote to developing, marketing and selling our services, the timing and extent of our
introduction of new features and services, the extent and timing of potential investments or
acquisitions and other factors. In particular, our premium membership services consist of prepaid
subscriptions that provide cash flows in advance of the actual provision of services. We expect to
devote substantial capital resources to expand our product development and marketing efforts, to
expand internationally and for other general corporate activities. In the six months ended June 30,
2005, we devoted approximately $475,000 to capitalized labor and $715,000 to capitalized external
product development as well as $1.6 million to marketing of our products and services both
domestically and internationally.
Based on our current operations and planned growth, we expect that our available funds and
anticipated cash flows from operations, together with the proceeds from our initial public
offering, will be sufficient to meet our expected needs for working capital and capital
expenditures for the next twelve months. Thereafter, if we do not have sufficient cash available to
finance our operations, we may be required to obtain additional public or private debt or equity
financing. We cannot be certain that additional financing will be available to us on favorable
terms when required or at all. If we are unable to raise sufficient funds, we may need to reduce
our planned operations and expansion activities.
Off-balance Sheet Liabilities
We did not have any off-balance sheet liabilities as of June 30, 2005.
Other Contractual Commitments
The following table summarizes our contractual obligations as of June 30, 2005:
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Payments Due by Period |
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Remainder of |
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Total |
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2005 |
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2006-2007 |
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2008-2009 |
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2010 & After |
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(In thousands) |
Contractual obligations: |
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Capital lease obligations |
|
$ |
960 |
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|
$ |
364 |
|
|
$ |
479 |
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|
$ |
116 |
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|
$ |
1 |
|
Operating leases |
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|
11,140 |
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|
|
813 |
|
|
|
3,578 |
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|
|
3,542 |
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|
|
3,207 |
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Purchase obligations |
|
|
475 |
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|
|
333 |
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|
|
142 |
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Total contractual obligations: |
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$ |
12,575 |
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$ |
1,510 |
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$ |
4,199 |
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$ |
3,658 |
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$ |
3,208 |
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Capital Lease Obligations. We hold property and equipment under noncancelable capital
leases with varying maturities.
Operating Leases. We lease or sublease office space and equipment under cancelable and
noncancelable operating leases with various expiration dates through January 20, 2012. In 2002, we
terminated our headquarters lease which resulted in a decrease in our rent expense in 2003 compared
to 2002. In July 2004, we entered into a new lease for our executive headquarters expiring in
January 2012. The new lease is for a larger facility at a higher average cost per square foot and
has resulted in an increase in our current occupancy cost. The future minimum lease payments are $609,000 in 2005; $1.4 million in 2006;
$1.3 million in 2007; $1.4 million in 2008 and $1.4 million in 2009. The lease is cancelable after
2009, with proper notice and payment of a termination fee of $851,000. We entered into a lease for
a new facility for our New York sales office commencing April 1, 2005. The future minimum payments
Page 19
under the terms of this lease are $99,000 for the remainder of 2005, $202,000 for 2006, $206,000
for 2007, $210,000 for 2008, $214,000 for 2009 and $54,000 for 2010. We entered into a lease for a
new facility for our London office commencing in July 2005. The future minimum payments under the
terms of this lease are $86,000 for 2005, $172,000 per year for 2006 through 2009 and $86,000 in
2010.
Purchase Obligations. In January 2002, we entered into a co-location facility agreement with a
third-party service provider. In exchange for providing space for our network servers and committed
levels of telecommunications bandwidth, we pay a minimum monthly fee of $40,000. In the event that
bandwidth exceeds an allowed variance from committed levels, we pay for additional bandwidth at a
set monthly rate. Future total minimum payments under the co-location facility agreement are
$239,000 for 2005.
In addition, in November 2004, we entered into a software maintenance agreement under which we
financed $332,000 with a vendor. This amount is payable in seven quarterly installments beginning
in January 2005. Future total minimum payments under this agreement are $94,000 for the remainder
of 2005 and $142,000 for 2006.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based
upon our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amount of assets, liabilities,
revenue and expenses and related disclosure of contingent assets and liabilities.
We base our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the basis on which we
make judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Because this can vary in each situation, actual results may differ from the
estimates under different assumptions and conditions.
We believe the following critical accounting policies require more significant judgments and
estimates in the preparation of our consolidated financial statements:
Capitalized Website Development Costs. We capitalize the costs of enhancing and developing
features for our websites when we believe that the capitalization criteria for these activities
have been met in accordance with SOP 98-1 and EITF 00-2 and amortize these costs on a straight-line
basis over the estimated useful life of the capitalized application, generally three years. For the
three months ended June 30, 2004 and 2005, we capitalized $280,000 and $573,000, respectively. For
the six months ended June 30, 2004 and 2005, we capitalized $485,000 and $1.2 million,
respectively. We expense the cost of enhancing and developing features for our websites in cost of
revenue only when we believe that capitalization criteria have not been met. We exercise judgment
in determining when to begin capitalizing costs and the period over which we amortize the
capitalized costs. If different judgments were made, it would have an impact on our results of
operations.
There have been no significant changes in our critical accounting policies from those listed
in our Form 10-K for the fiscal year ended December 31, 2004.
Seasonality and Inflation
We anticipate that our business may be affected by the seasonality of certain revenue lines.
For example, print and online advertising buys are usually higher approaching year-end and lower at
the beginning of a new year than at other points during the year, and sales on Kleptomaniac.com are
affected by the holiday season and by the timing of the release of compilations of new seasons of
popular television series.
Inflation has not had a significant effect on our revenue or expenses historically and we do
not expect it to be a significant factor in the short-term. However, inflation may affect our
business in the medium- to long-term. In particular, our operating expenses may be affected by a
tightening of the job market, resulting in increased pressure for salary adjustments for existing
employees and higher cost of replacement for employees that are terminated or resign.
Recent Accounting Pronouncements
In April 2005, the SEC amended the compliance dates for SFAS No. 123(R), Shared-Based Payment.
The new rule allows public companies to implement SFAS No. 123(R) at the beginning of their next
fiscal year that begins after June 15, 2005. The Company will be required to adopt SFAS No. 123(R)
in the first quarter of 2006 and begin to recognize stock-based compensation related to
Page 20
employee equity awards in our condensed consolidated statements of operations using a fair value based
method on a prospective basis. Since we currently account for equity awards granted to our
employees using the intrinsic value method under APB No. 25, we expect the adoption of SFAS No.
123(R) will have a significant adverse impact on our financial position and results of operations.
We are currently in the process of evaluating the extent of such impact.
In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB No. 107). SAB No. 107
covers key topics related to the implementation of SFAS No. 123(R) which include the valuation
models, expected volatility, expected option term, income tax effects of SFAS No. 123(R),
classification of stock-based compensation cost, capitalization of compensation costs, and
disclosure requirements. We expect the adoption of SAB No. 107 will have a significant adverse
impact on our financial position and results of operations upon our adoption of SFAS No. 123(R) in
the first quarter of 2006. We are currently in the process of evaluating the extent of such
impact.
Risk Factors
We have a history of significant losses. If we do not sustain profitability, our financial
condition and stock price could suffer.
We have experienced significant net losses and we may continue to incur losses in the future
given our anticipated increase in sales and marketing expenditures. As of June 30, 2005, our
accumulated deficit was approximately $36.1 million. Although we had positive net income in the
three and six months ended June 30, 2005, we may not be able to sustain or increase profitability
in the near future, causing our financial condition to suffer and our stock price to decline.
If our efforts to attract and retain subscribers are not successful, our revenue will
decrease.
Because most of our revenue is derived from our premium membership services, we must continue
to attract and retain subscribers. Many of our new subscribers originate from word-of-mouth
referrals from existing subscribers within the LGBT community. If our subscribers do not perceive
our service offerings to be of high quality or sufficient breadth, if we introduce new services
that are not favorably received or if we fail to introduce compelling new features or enhance our
existing offerings, we may not be able to attract new subscribers or retain our current
subscribers. Additionally, because our services are technology based, any delay in the development
or integration of new features or enhancements to existing features could slow subscriber growth.
As a result, our revenue would decrease. Our base of likely potential subscribers is also limited
to members of the LGBT community, who collectively comprise a small portion of the general adult
population.
While seeking to add new subscribers, we must also minimize the loss of existing subscribers.
We lose our existing subscribers primarily as a result of cancellations and credit card failures
due to expirations or exceeded credit limits. In the three months ended June 30, 2005, our churn
rates on our premium membership services, which include subscription cancellations and credit card
failures, averaged 8.0% per month excluding cancellations from free trials, or 8.3% including
cancellations from free trials. We calculate our average monthly churn over a particular period by
dividing the sum of the number of cancellations and credit card failures for that period by the
average number of subscribers in that period divided by the number of months in the period. We
calculate the average number of subscribers in a given period by adding the number of subscribers
at the beginning and the end of the period and dividing by two. Subscribers cancel their
subscription to our service for many reasons, including a perception, among some subscribers, that
they do not use the service sufficiently, that the service is a poor value and that customer
service issues are not satisfactorily resolved. Members may decline to subscribe or existing
subscribers may cancel their subscriptions if our websites experience a disruption or degradation
of services, including slow response times or excessive down time due to scheduled or unscheduled
hardware or software maintenance or denial of service attacks. We must continually add new
subscribers both to replace subscribers who cancel or whose subscriptions are not renewed due to
credit card failures and to continue to grow our business beyond our current subscriber base. If
excessive numbers of subscribers cancel our service, we may be required to incur significantly
higher marketing expenditures than we currently anticipate to replace these subscribers with new
subscribers, which will harm our financial condition.
Our limited operating history makes it difficult to evaluate our business.
As a result of our recent growth and limited operating history, it is difficult to forecast
our revenue, gross profit, operating expenses, number of subscribers and other financial and
operating data. Our inability, or the inability of the financial community at large, to accurately
forecast our operating results could cause our subscriber numbers to grow slower or our net losses
to be greater than expected, which could cause a decline in the trading price of our common stock.
Page 21
We expect our operating results to fluctuate, which may lead to volatility in our stock price.
Our operating results have fluctuated in the past and may fluctuate significantly in the
future due to a variety of factors, many of which are outside of our control. As a result, we
believe that period-over-period comparisons of our operating results are not necessarily meaningful
and that you should not rely on the results of one period as an indication of our future or
long-term performance. Our operating results in future quarters may be below the expectations of
public market analysts and investors, which may result in a decline in our stock price.
If we fail to manage our growth, including through acquisitions and our planned international
expansion, our business will suffer.
We have significantly expanded our operations and anticipate that further expansion, including
the possible acquisition of third-party assets, technologies or businesses, will be required to
address potential growth in our customer base and market opportunities. This expansion has placed,
and is expected to continue to place, a significant strain on our management, operational and
financial resources. If we make future acquisitions or continue to expand our marketing efforts, we
may issue shares of stock that dilute the interests of our other stockholders, expend cash, incur
debt, assume contingent liabilities, create additional expenses or face difficulties in integrating
acquired assets or businesses into our operations, any of which might harm our financial condition
or results of operations.
In addition, we offer services and products to the LGBT community outside the United States,
and we intend to continue to expand our international presence, which may be more difficult or take
longer than anticipated especially due to international challenges, such as language barriers,
currency exchange issues and the fact that Internet infrastructure in foreign countries may be less
advanced than Internet infrastructure in the United States. We may consider offering our premium
services for free for a limited time, in some international markets thereby foregoing some short
term revenue in order to develop critical mass in those markets. Expansion into international
markets requires significant resources that we may fail to recover by generating additional
revenue.
If we are unable to successfully expand our international operations, manage growth
effectively or successfully integrate any assets, technologies or businesses that we may acquire,
our revenue may decline and our profit margins will be reduced.
If we do not continue to attract and retain qualified personnel, we may not be able to expand our
business.
Our success depends on the collective experience of our senior executive team and on our
ability to hire, train, retain and manage other highly skilled employees. Disruptions in our senior
executive team could harm our business and financial results or limit our ability to grow and
expand our business. We cannot provide assurance that we will be able to attract and retain a
sufficient number of qualified employees or that we will successfully train and manage the
employees that we do hire.
Our success depends, in part, upon the growth of Internet advertising and upon our ability to
accurately predict the cost of customized campaigns.
We compete with traditional media including television, radio and print, in addition to
high-traffic websites, such as those operated by Yahoo!, Google, AOL and MSN, for a share of
advertisers total online advertising expenditures. We face the risk that advertisers might find
the Internet to be less effective than traditional media in promoting their products or services,
and as a result they may reduce or eliminate their expenditures on Internet advertising. Many
potential advertisers and advertising agencies have only limited experience advertising on the
Internet and historically have not devoted a significant portion of their advertising expenditures
to Internet advertising. Additionally, filter software programs that limit or prevent
advertisements from being displayed on or delivered to a users computer are becoming increasingly
available. If this type of software becomes widely accepted, it would negatively affect Internet
advertising. Our business could be harmed if the market for Internet advertising does not grow.
Currently, we offer advertisers a number of alternatives to advertise their products or
services on our websites and to our members, including banner advertisements, rich media
advertisements, email campaigns, text links and sponsorships of our channels, topic sections,
directories and other online databases and content. Frequently, advertisers request advertising
campaigns consisting of a combination of these offerings, including some that may require custom
development. If we are unable to accurately predict the cost of developing these custom campaigns
for our advertisers, our expenses will increase and our margins will be reduced.
If advertisers do not find the LGBT market to be economically profitable, our business will be
harmed.
We focus our services exclusively on the LGBT community. Advertisers and advertising agencies
may not consider the LGBT community to be a broad enough or profitable enough market for their
advertising budgets, and they may prefer to direct their online advertising expenditures to larger
higher-traffic websites that focus on broader markets. If we are unable to attract new advertisers,
if our advertising campaigns are unsuccessful with the LGBT community or if our existing
advertisers do not renew their contracts with us, our revenue will decrease and operating results
will suffer.
Page 22
Any significant disruption in service on our websites or in our computer and communications
hardware and software systems could harm our business.
Our ability to attract new visitors, members, subscribers, advertisers and other customers to
our websites is critical to our success and largely depends upon the efficient and uninterrupted
operation of our computer and communications hardware and software systems. Our systems and
operations are vulnerable to damage or interruption from power outages, computer and
telecommunications failures, computer viruses, security breaches, catastrophic events and errors in
usage by our employees and customers, which could lead to interruption in our service and
operations, and loss, misuse or theft of data. Our websites could also be targeted by direct
attacks intended to cause a disruption in service or to siphon off customers to other Internet
services. Among other risks, our chat rooms may be vulnerable to infestation by software programs
or scripts that we refer to as adbots. An adbot is a software program that creates a registration
profile, enters a chat room and displays third-party advertisements. Our members email accounts
could be compromised by phishing or other means, and used to send spam email messages clogging our
email servers and disrupting our members ability to send and receive email. Any successful attempt
by hackers to disrupt our websites services or our internal systems could harm our business, be
expensive to remedy and damage our reputation, resulting in a loss of visitors, members,
subscribers, advertisers and other customers.
If we are unable to compete effectively, we may lose market share and our revenue may decline.
Our markets are intensely competitive and subject to rapid change. We compete with a number of
large and small companies, such as vertically integrated Internet portals and specialty focused
media that provide online and offline products and services to the LGBT community. In our
subscription business, we compete with other online services, such as those offered by Match.com
and Yahoo! Personals, as well as an increasing number of other smaller but rapidly growing online
companies focused specifically on the LGBT community. In our online advertising business, we
compete with a broad variety of content providers. We also compete with offline LGBT media
companies, including local newspapers, national and regional magazines, satellite radio and
television shows. If we are unable to successfully compete with current and new competitors, we may
not be able to achieve or maintain adequate market share, increase our revenue or achieve and
maintain profitability.
Some of these competitors have longer operating histories, larger customer bases, greater
brand recognition and significantly greater financial, marketing and other resources than we do.
Some of our competitors have adopted, and may continue to adopt, aggressive pricing policies and
devote substantially more resources to marketing and technology development than we do. The rapid
growth of our online subscription business since our inception may attract direct competition from
larger companies with significantly greater financial resources and national brand recognition,
such as InterActiveCorp, Microsoft, Time Warner, Viacom or Yahoo! which may choose to increase
their focus on the LGBT market. Increased competition may result in reduced operating margins, loss
of market share and reduced revenue.
If we are unable to protect our domain names, our reputation and brand could be harmed if third
parties gain rights to, or use, these domain names in a manner that would confuse or impair our
ability to attract and retain customers.
We have registered various domain names relating to our brand, including Gay.com,
PlanetOut.com, Kleptomaniac.com and OutandAbout.com. If we fail to maintain these registrations, a
third party may be able to gain rights to or cause us to stop using these domain names, which will
make it more difficult for users to find our websites and our service. For example, the injunction
issued in the DIALINK matter will force us to temporarily change our domain name in France,
currently www.fr.gay.com, during our appeal of that decision and may make it more difficult for
French users to find our French website. The acquisition and maintenance of domain names are
generally regulated by governmental agencies and their designees. The regulation of domain names in
the United States may change in the near future. Governing bodies may designate additional
top-level domains, such as .eu, in addition to currently available domains such as .biz, .net or
.tv, for example, appoint additional domain name registrars or modify the requirements for holding
domain names. As a result, we may be unable to acquire or maintain relevant domain names. If a
third party acquires domain names similar to ours and engages in a business that may be harmful to
our reputation or confusing to our subscribers and other customers, our revenue may decline, and we
may incur additional expenses in maintaining our brand and defending our reputation. Furthermore,
the relationship between regulations governing domain names and laws protecting trademarks and
similar proprietary rights is unclear. We may be unable to prevent third parties from acquiring
domain names that are similar to, infringe upon or otherwise decrease the value of our trademarks
and other proprietary rights.
Page 23
If we fail to adequately protect our trademarks and other proprietary rights, or if we get
involved in intellectual property litigation, our revenue may decline and our expenses may
increase.
We rely on a combination of confidentiality and license agreements with our employees,
consultants and third parties with whom we have relationships, as well as trademark, copyright and
trade secret protection laws, to protect our proprietary rights. If the protection of our
proprietary rights is inadequate to prevent use or appropriation by third parties, the value of our
brand and other intangible assets may be diminished, competitors may be able to more effectively
mimic our service and methods of operations, the perception of our business and service to
subscribers and potential subscribers may become confused in the marketplace and our ability to
attract subscribers and other customers may suffer, resulting in loss of revenue.
The Internet content delivery market is characterized by frequent litigation regarding patent
and other intellectual property rights. As a publisher of online content, we face potential
liability for negligence, copyright, patent or trademark infringement or other claims based on the
nature and content of materials that we publish or distribute. For example, we have received, and
may receive in the future, notices or offers from third parties claiming to have intellectual
property rights in technologies that we use in our businesses and inviting us to license those
rights. Litigation may be necessary in the future to enforce our intellectual property rights, to
protect our trade secrets, to determine the validity and scope of the proprietary rights of others
or to defend against claims of infringement or invalidity, and we may not prevail in any future
litigation. Adverse determinations in litigation could result in the loss of our proprietary
rights, subject us to significant liabilities, require us to seek licenses from third parties or
prevent us from licensing our technology or selling our products, any of which could seriously harm
our business. An adverse determination could also result in the issuance of a cease and desist
order, which may force us to discontinue operations through our website or websites. For example,
the injunction issued in the DIALINK matter will force us to at least temporarily change our domain
name in France, currently www.fr.gay.com, during our appeal of that decision and may make it more
difficult for French users to find our French website. Intellectual property litigation, whether or
not determined in our favor or settled, could be costly, could harm our reputation and could divert
the efforts and attention of our management and technical personnel from normal business
operations.
Existing or future government regulation in the United States and other countries could limit our
growth and result in loss of revenue.
We are subject to federal, state, local and international laws affecting companies conducting
business on the Internet, including user privacy laws, regulations prohibiting unfair and deceptive
trade practices and laws addressing issues such as freedom of expression, pricing and access
charges, quality of products and services, taxation, advertising, intellectual property rights and
information security. In particular, we are currently required, or may in the future be required,
to:
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conduct background checks on our members prior to allowing them to interact with other
members on our websites or, alternatively, provide notice on our websites that we have not
conducted background checks on our members, which may result in our members canceling their
membership or failing to subscribe or renew their subscription, resulting in reduced
revenue; |
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provide advance notice of any changes to our privacy policies or to our policies on
sharing non-public information with third parties, and if our members or subscribers
disagree with these policies or changes, they may cancel their membership or subscription,
which will reduce our revenue; |
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with limited exceptions, give consumers the right to prevent sharing of their non-public
personal information with unaffiliated third parties, and if a significant portion of our
members choose to request that we dont share their information, our advertising revenue
that we receive from renting our mailing list to unaffiliated third parties may decline; |
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provide notice to residents in some states if their personal information was, or is
reasonably believed to have been, obtained by an unauthorized person such as a computer
hacker, which may result in our members or subscribers deciding to cancel their membership
or subscription, reducing our membership base and subscription revenue; |
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comply with current or future anti-spam legislation by limiting or modifying some of our
marketing and advertising efforts, such as email campaigns, which may result in a reduction
in our advertising revenue; for instance, two states recently passed legislation creating a
do not contact registry for minors that would make it a criminal violation to send an
e-mail message to an address on that states registry if the e-mail message contained an
advertisement for or even a link to a website that offered products or services that minors
are prohibited from accessing; |
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comply with the European Union privacy directive and other international regulatory
requirements by modifying the ways in which we collect and share our users personal
information; if these modifications render our services less attractive to our members or
subscribers, for example by limiting the amount or type of personal information our members
or subscribers could post to their profiles, they may cancel their memberships or
subscriptions, resulting in reduced revenue; |
Page 24
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qualify to do business in various states and countries, in addition to jurisdictions
where we are currently qualified, because our websites are accessible over the Internet in
multiple states and countries, which if we fail to so qualify, may prevent us from enforcing
our contracts in these states or countries and may limit our ability to grow our business; |
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limit our domestic or international expansion because some jurisdictions may limit or
prevent access to our services as a result of the availability of some content intended for
mature viewing on some of our websites, which may render our services less attractive to our
members or subscribers and result in a decline in our revenue; and |
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limit or prevent access, from some jurisdictions, to some or all of the member-generated
content available through our websites, which may render our services less attractive to our
members or subscribers and result in a decline in our revenue. For example, the United
States Department of Justice (the DOJ) recently adopted regulations purporting to
implement the Child Protection and Obscenity Act of 1988, as amended (the Act), by
requiring primary and secondary producers, as defined in the regulations, of certain adult
materials to obtain, maintain and make available for inspection specified records, such as a
performers name, address and certain specified forms of photo identification as proof of a
performers age. Failure to properly obtain, maintain or make such records available for
inspection upon request of the DOJ could lead to an imposition of penalties, fines or
imprisonment. We could be deemed a secondary producer under the Act because we allow our
members to display photographic images on our websites as part of member profiles.
Enforcement of these regulations has been stayed pending resolution of a legal challenge to
their constitutionality on the grounds that the regulations exceed the DOJs statutory
authority and violate First Amendment and privacy rights, among others. If the legal
challenge is unsuccessful, we will be subject to significant and burdensome recordkeeping
compliance requirements and/or we will have to evaluate and implement additional
registration and recordkeeping processes and procedures, each of which would result in
additional expenses to us. Further, if our members and subscribers feel these additional
registration and recordkeeping processes and procedures are too burdensome, this may result
in an adverse impact on our subscriber growth and churn which, in turn, will have an adverse
effect on our financial condition and results of operations. |
The restrictions imposed by, and costs of complying with, current and possible future laws and
regulations related to our business could limit our growth and reduce our membership base and
revenue.
The risks of transmitting confidential information online, including credit card information,
may discourage customers from subscribing to our services or purchasing goods from us.
In order for the online marketplace to be successful, we and other market participants must be
able to transmit confidential information, including credit card information, securely over public
networks. Third parties may have the technology or know-how to breach the security of our customer
transaction data. Any breach could cause consumers to lose confidence in the security of our
websites and choose not to subscribe to our services or purchase goods from us. We cannot guarantee
that our security measures will effectively prohibit others from obtaining improper access to our
information or that of our users. If a person is able to circumvent our security measures, he or
she could destroy or steal valuable information or disrupt our operations. Any security breach
could expose us to risks of data loss, litigation and liability and may significantly disrupt our
operations and harm our reputation, operating results or financial condition.
If we are unable to provide satisfactory customer service, we could lose subscribers.
Our ability to provide satisfactory customer service depends, to a large degree, on the
efficient and uninterrupted operation of our customer service center. Any significant disruption or
slowdown in our ability to process customer calls resulting from telephone or Internet failures,
power or service outages, natural disasters or other events could make it difficult or impossible
to provide adequate customer service and support. Further, we may be unable to attract and retain
adequate numbers of competent customer service representatives, which is essential in creating a
favorable interactive customer experience. If we are unable to continually provide adequate
staffing for our customer service operations, our reputation could be harmed and we may lose
existing and potential subscribers. In addition, we cannot assure you that email and telephone call
volumes will not exceed our present system capacities. If this occurs, we could experience delays
in responding to customer inquiries and addressing customer concerns.
We may be the target of negative publicity campaigns or other actions by advocacy groups that
could disrupt our operations because we serve the LGBT community.
Advocacy groups may target our business through negative publicity campaigns, lawsuits and
boycotts seeking to limit access to our services or otherwise disrupt our operations because we
serve the LGBT community. These actions could impair our ability to attract and retain customers,
especially in our advertising business, resulting in decreased revenue, and cause additional
financial harm by requiring that we incur significant expenditures to defend our business and by
diverting managements attention. Further, some
Page 25
investors, investment banking entities, market makers, lenders and others in the investment
community may decide not to invest in our securities or provide financing to us because we serve
the LGBT community, which, in turn, may hurt the value of our stock.
If one or more states or countries successfully assert that we should collect sales or other
taxes on the use of the Internet or the online sales of goods and services, our expenses will
increase, resulting in lower margins.
In the United States, federal and state tax authorities are currently exploring the
appropriate tax treatment of companies engaged in online commerce, and new state tax regulations
may subject us to additional state sales and income taxes, which could increase our expenses and
decrease our profit margins.
In 2003, the European Union implemented new rules regarding the collection and payment of
value added tax, or VAT. These rules require VAT to be charged on products and services delivered
over electronic networks, including software and computer services, as well as information and
cultural, artistic, sporting, scientific, educational, entertainment and similar services. These
services are now being taxed in the country where the purchaser resides rather than where the
supplier is located. Historically, suppliers of digital products and services that existed outside
the European Union were not required to collect or remit VAT on digital orders made to purchasers
in the European Union. With the implementation of these rules, we are required to collect and remit
VAT on digital orders received from purchasers in the European Union, effectively reducing our
revenue by the VAT amount because we currently do not pass this cost on to our customers.
We also do not currently collect sales, use or other similar taxes for sales of our
subscription services or for physical shipments of goods into states other than California. In the
future, one or more local, state or foreign jurisdictions may seek to impose sales, use or other
tax collection obligations on us. If these obligations are successfully imposed upon us by a state
or other jurisdiction, we may suffer decreased sales into that state or jurisdiction as the
effective cost of purchasing goods or services from us will increase for those residing in these
states or jurisdictions.
We may need additional capital and may not be able to raise additional funds on favorable terms or
at all, which could increase our costs, limit our ability to grow and dilute the ownership
interests of existing stockholders.
We anticipate that we may need to raise additional capital in the future to facilitate
long-term expansion, to respond to competitive pressures or to respond to unanticipated financial
requirements. We cannot be certain that we will be able to obtain additional financing on
commercially reasonable terms or at all. If we raise additional funds through the issuance of
equity, equity-related or debt securities, these securities may have rights, preferences or
privileges senior to those of the rights of our common stock, and our stockholders will experience
dilution of their ownership interests. A failure to obtain additional financing or an inability to
obtain financing on acceptable terms could require us to incur indebtedness that has high rates of
interest or substantial restrictive covenants, issue equity securities that will dilute the
ownership interests of existing stockholders, or scale back, or fail to address opportunities for
expansion or enhancement of, our operations. We cannot assure you that we will not require
additional capital in the near future.
Our executive offices and our data center are located in the San Francisco Bay area. In the event
of an earthquake, other natural or man-made disaster, or power loss, our operations could be
interrupted, resulting in lower revenue.
Our executive offices and our data center are located in the San Francisco Bay area. Our
business and operations could be disrupted in the event of electrical blackouts, fires, floods,
earthquakes, power losses, telecommunications failures, break-ins or similar events. Because the
San Francisco Bay area is located in an earthquake-sensitive area, we are particularly susceptible
to the risk of damage to, or total destruction of, our systems and infrastructure. We are not
insured against any losses or expenses that arise from a disruption to our business due to
earthquakes. Further, the State of California has experienced deficiencies in its power supply over
the last few years, resulting in occasional rolling blackouts. If rolling blackouts or other
disruptions in power occur, our business and operations could be disrupted, and we will lose
revenue.
Recent and proposed regulations related to equity compensation could adversely affect our ability
to attract and retain key personnel.
We have used stock options and other long-term incentives as a fundamental component of our
employee compensation packages. We believe that stock options and other long-term equity incentives
directly motivate our employees to maximize long-term stockholder value and, through the use of
vesting, encourage employees to remain with our company. Several regulatory agencies and entities
are considering regulatory changes that could make it more difficult or expensive for us to grant
stock options to employees. For example, the Financial Accounting Standards Board has adopted
changes to the U.S. generally accepted accounting principles that will require us to record a
charge to earnings for employee stock option grants. In addition, regulations implemented by the
Nasdaq National Market generally requiring stockholder approval for all stock option plans could
make it more difficult for us to grant options
Page 26
to employees in the future. To the extent that new regulations make it more difficult or
expensive to grant stock options to employees, we may incur increased compensation costs, change
our equity compensation strategy or find it difficult to attract, retain and motivate employees,
each of which could materially and adversely affect our business.
In the event we are unable to satisfy regulatory requirements relating to internal control over
financial reporting, or if these internal controls are not effective, our business and our stock
price could suffer.
Section 404 of the Sarbanes-Oxley Act of 2002 requires companies to do a comprehensive and
costly evaluation of their internal controls. As a result, our management will be required to
perform an evaluation of our internal control over financial reporting and have our independent
registered public accounting firm attest to such evaluations. We have prepared an internal plan of
action for compliance, which includes a timeline and scheduled activities with respect to
preparation of such evaluation. Our efforts to comply with Section 404 and related regulations
regarding our managements required assessment of internal control over financial reporting and our
independent registered public accounting firms attestation of that assessment has required, and
continues to require, the commitment of significant financial and managerial resources. If we fail
to timely complete this evaluation, or if our independent registered public accounting firm cannot
timely attest to our evaluation, we could be subject to regulatory scrutiny and a loss of public
confidence in our internal controls, which could have an adverse effect on our business and our
stock price.
Our stock price may be volatile and you may lose all or a part of your investment.
Since our initial public offering in October 2004, our stock price has been and may continue
to be subject to wide fluctuations. From October 14, 2004 through June 30, 2005, the closing sale
prices of our common stock on the Nasdaq ranged from $6.25 to $13.60 per share. Our stock price may
fluctuate in response to a number of events and factors, such as quarterly variations in our
operating results, changes in financial estimates and recommendations by securities analysts and
the operating and stock price performance of other companies that investors or analysts deem
comparable to us.
In addition, the stock markets have experienced significant price and trading volume
fluctuations, and the market prices of Internet-related and e-commerce companies in particular have
been extremely volatile and have recently experienced sharp share price and trading volume changes.
These broad market fluctuations may impact the trading price of our common stock. In the past,
following periods of volatility in the market price of a public companys securities, securities
class action litigation has often been instituted against that company. This type of litigation
could result in substantial costs to us and a likely diversion of our managements attention.
Provisions in our charter documents and under Delaware law could discourage a takeover that
stockholders may consider favorable.
Our charter documents may discourage, delay or prevent a merger or acquisition that a
stockholder may consider favorable because they will:
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authorize our board of directors, without stockholder approval, to issue up to 5,000,000
shares of undesignated preferred stock; |
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provide for a classified board of directors; |
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prohibit our stockholders from acting by written consent; |
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establish advance notice requirements for proposing matters to be approved by stockholders at stockholder meetings; and |
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prohibit stockholders from calling a special meeting of stockholders. |
As a Delaware corporation, we are also subject to Delaware law anti-takeover provisions. Under
Delaware law, a corporation may not engage in a business combination with any holder of 15% or more
of its capital stock unless the holder has held the stock for three years or, among other things,
the board of directors has approved the transaction. Our board of directors could rely on Delaware
law to prevent or delay an acquisition of us.
Item 3. Qualitative and Quantitative Disclosures About Market Risk
The primary objective of our investment activities is to preserve principal while at the same
time maximizing yields without significantly increasing risk. To achieve this objective, we
maintain our portfolio in primarily money market funds.
Page 27
We do not use derivative financial instruments in our investment portfolio and have no foreign
exchange contracts. Our financial instruments consist of cash and cash equivalents, trade accounts
receivable, accounts payable and long-term obligations. We consider investments in highly-liquid
instruments purchased with a remaining maturity of 90 days or less at the date of purchase to be
cash equivalents. Our exposure to market risk for changes in interest rates relates primarily to
our short-term investments and short-term obligations; thus, fluctuations in interest rates may
have a material impact on the fair value of these securities. A hypothetical 1% increase or
decrease in interest rates would increase (decrease) our earnings or loss by approximately $105,000
per quarter.
Our operations have been conducted primarily in United States currency and as such have not
been subject to material foreign currency exchange rate risk. However, the growth in our
international operations is increasing our exposure to foreign currency fluctuations as well as
other risks typical of international operations, including, but not limited to differing economic
conditions, changes in political climate, differing tax structures and other regulations and
restrictions. Accordingly, our future results could be materially adversely impacted by changes in
these or other factors. We translate income statement amounts that are denominated in foreign
currency into U.S. dollars at the average exchange rates in each applicable period. To the extent
the U.S. dollar weakens against foreign currencies, the translation of these foreign currency
denominated transactions results in increased net revenue operating expenses and net income.
Conversely, our net revenue operating expenses and net income will decrease when the U.S. dollar
strengthens against foreign currencies. The effect of foreign exchange rate fluctuations for 2004
and the first six months of 2005 were not material.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms, and that such information
is accumulated and communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of June 30, 2005, the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation
of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures were effective at the
reasonable-assurance level.
There has been no change in our internal control over financial reporting during our most
recent fiscal quarter that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
In April 2002, we were notified that DIALINK, a French company, had filed a lawsuit in France
against us and our French subsidiary, alleging that we had improperly used the domain names
Gay.net, Gay.com and fr.gay.com in France, as DIALINK alleges that it has exclusive rights to use
the word gay as a domain name and trademark in France. On June 30, 2005, the French court found
that although we had not infringed DIALINKs trademark, we had damaged DIALINK through unfair
competition. The Court ordered us to pay damages of 50,000 (US
$60,000 at June 30, 2005), half
to be paid notwithstanding appeal, the other half to be paid after appeal. The Court also enjoined
us from using gay as a trademark or domain name for our services in France and gave us
approximately two months within which to comply. This injunction will not prohibit us from offering
our services to French users, but will force us to at least temporarily change the domain name of
our French website, currently www.fr.gay.com, and may make it more difficult for French users to
locate our French website. We have accrued the damage award as of June 30, 2005 and plans to
appeal the French courts decision.
We are not currently subject to any additional significant legal proceedings. We may from time
to time, however, become a party to various legal proceedings, arising in the ordinary course of
business. We may also be indirectly affected by administrative or court proceedings or actions in
which we are not involved but which have general applicability to the Internet industry. We do not
believe, based on current knowledge, that current legal proceedings or claims are likely to have a
material adverse effect on our financial position, results of operations or cash flows.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the period January 1 through June 30, 2005, 69,599 shares of capital stock were issued
upon exercise of two outstanding warrants at an exercise price of $4.07 per share. One warrant was
net exercised without the payment of additional consideration, and
Page 28
the second warrant was exercised for cash in the amount of $257,496. There were no
underwriters employed in connection with any of these issuances. These issuances were deemed exempt
from registration under the Securities Act in reliance on Section 4(2) thereof, as transactions by
an issuer not involving any public offering. The recipients in each such issuance represented their
intention to acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions. All recipients either received
adequate information about PlanetOut or had access, through employment or other relationships, to
such information.
On October 13, 2004, a registration statement on Form S-1 (No. 333-114988) was declared
effective by the Securities and Exchange Commission, pursuant to which 5,347,500 shares of common
stock were offered and sold by us at a price of $9.00 per share, generating total proceeds, net of
underwriting discounts and commissions and issuance costs of approximately $42.9 million. In
connection with the offering, we incurred approximately $2.9 million in underwriting discounts and
commissions and approximately $1.9 million in other related expenses. The managing underwriters
were SG Cowen & Co., LLC, RBC Capital Markets Corporation and WR Hambrecht + Co, LLC. We have used
the net proceeds from our initial public offering to invest in short-term, investment grade
interest-bearing securities, to pay off the principal and interest under our senior subordinated
promissory note and for working capital needs. We may use a portion of the net proceeds to acquire
or invest in products and technologies that are complementary to our own, although no portion of
the net proceeds has been allocated for any specific acquisition. None of the net proceeds of the
initial public offering were paid directly or indirectly to any director, officer, general partner
of PlanetOut or their associates, persons owning 10% or more of any class of our or our affiliates
equity securities.
From the time of receipt through December 31, 2004, the proceeds were applied toward repayment
of the principal and interest of the senior subordinated note in the amount of $5,031,000. The
remaining proceeds of $37,869,000 are being used as working capital and are included within cash
and cash equivalents. We expect that the use of the remaining proceeds will conform to the intended
use of proceeds as described in our initial public offering prospectus filed on October 14, 2004.
Page 29
Issuer Purchases of Equity Securities.
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(c) Total Number of |
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(d) Maximum Number |
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(a) Total |
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Shares Purchased as |
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or Approximate Dollar |
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Number of |
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(b) Average |
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Part of Publicly |
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Value) of Shares that May |
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Shares |
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Price Paid per |
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Announced Plans or |
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Yet Be Purchased Under the |
Period |
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Purchased (1) |
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Share |
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Programs |
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Plans or Programs |
April 1,
2005 April 30, 2005 |
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311 |
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$ |
0.43 |
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May 1,
2005 May 31, 2005 |
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$ |
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June 1,
2005 June 30, 2005 |
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$ |
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Total |
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311 |
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$ |
0.43 |
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(1) |
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All of the repurchases were pursuant to contractual rights of PlanetOut to repurchase shares of
its capital stock from employees in connection with the termination of employment. PlanetOut does
not have any publicly announced plans or programs to repurchase shares of its common stock. |
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Our 2005 annual meeting of stockholders was held on June 15, 2005, to elect two Class I directors
to the board of directors and to ratify the appointment of PricewaterhouseCoopers LLP as our
independent public auditors for the fiscal year ended December 31, 2005.
In the election of directors, the two director nominees were elected with the following votes:
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Number of Votes |
Nominee |
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For |
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Withheld |
Robert W. King |
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12,691,018 |
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9,093 |
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Allen Morgan |
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11,598,304 |
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1,101,807 |
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Directors whose terms of office continued after the meeting are H. William Jesse, Jr., Karen
Magee, Lowell R. Selvin and Jerry Colonna.
The stockholders voted in favor of the ratification of the appointment of
PricewaterhouseCoopers LLP as our independent public auditors for the fiscal year ending December
31, 2005, as follows:
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Number of Votes |
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For |
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Against |
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Abstain |
Ratification of appointment of auditors |
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11,546,085 |
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158,481 |
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995,545 |
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Item 5. Other Information.
Not Applicable.
Page 30
Item 6. Exhibits
(a) Exhibits
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Exhibit |
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Number |
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Description of Documents |
3.1
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Amended and Restated Certificate of Incorporation, as currently in effect (filed
as Exhibit 3.3 to our Registration Statement on Form S-1, File No. 333-114988,
initially filed on April 29, 2004, declared effective on October 13, 2004, and
incorporated herein by reference). |
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3.2
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Amended and Restated Bylaws, as currently in effect (filed as Exhibit 3.4 to our
Registration Statement on Form S-1, File No. 333-114988, initially filed on April
29, 2004, declared effective on October 13, 2004, and incorporated herein by
reference). |
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4.1
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Specimen of Common Stock Certificate (filed as Exhibit 4.1 to our Registration
Statement on Form S-1, File No. 333-114988, initially filed on April 29, 2004,
declared effective on October 13, 2004, and incorporated herein by reference). |
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10.25
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Employment Agreement dated as of June 30, 2005 by and between Peter Kretzman and
PlanetOut Inc. (filed as Exhibit 99.1 to our Current Report on Form 8-K, File No.
000-50879, filed on July 7, 2005, and incorporated herein by reference). |
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31.1
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Certificate of Chief Executive Officer pursuant to the Securities Exchange Act
Rules 13a-14(a) and 15d-14(a) as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
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31.2
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Certificate of Chief Financial Officer pursuant to the Securities Exchange Act
Rules 13a-14(a) and 15d-14(a) as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
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32.1
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Certificate of Chief Executive Officer pursuant to Section 18 U.S.C section 1350. |
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32.2
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Certificate of Chief Financial Officer pursuant to Section 18 U.S.C. section 1350. |
Page 31
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.
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PLANETOUT INC. |
Date: August 11, 2005 |
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By:
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/s/ Jeffrey T. Soukup |
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Jeffrey T. Soukup |
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Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
Page 32
EXHIBIT INDEX
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Exhibit |
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Number |
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Description of Documents |
3.1
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Amended and Restated Certificate of Incorporation, as currently in effect (filed
as Exhibit 3.3 to our Registration Statement on Form S-1, File No. 333-114988,
initially filed on April 29, 2004, declared effective on October 13, 2004, and
incorporated herein by reference). |
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3.2
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Amended and Restated Bylaws, as currently in effect (filed as Exhibit 3.4 to our
Registration Statement on Form S-1, File No. 333-114988, initially filed on April
29, 2004, declared effective on October 13, 2004, and incorporated herein by
reference). |
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4.1
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Specimen of Common Stock Certificate (filed as Exhibit 4.1 to our Registration
Statement on Form S-1, File No. 333-114988, initially filed on April 29, 2004,
declared effective on October 13, 2004, and incorporated herein by reference). |
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10.25
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Employment Agreement dated as of June 30, 2005 by and between Peter Kretzman and
PlanetOut Inc. (filed as Exhibit 99.1 to our Current Report on Form 8-K, File No.
000-50879, filed on July 7, 2005, and incorporated herein by reference). |
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31.1
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Certificate of Chief Executive Officer pursuant to the Securities Exchange Act
Rules 13a-14(a) and 15d-14(a) as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
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31.2
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Certificate of Chief Financial Officer pursuant to the Securities Exchange Act
Rules 13a-14(a) and 15d-14(a) as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
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32.1
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Certificate of Chief Executive Officer pursuant to Section 18 U.S.C section 1350. |
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32.2
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Certificate of Chief Financial Officer pursuant to Section 18 U.S.C. section 1350. |
Page 33