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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2006
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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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
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(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 CA
(Address of principal
executive offices)
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94111
(Zip Code)
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(415) 834-6500
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock,
$0.001 Par Value Per Share
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The NASDAQ Stock Market
LLC
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Securities registered pursuant
to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer or a non-accelerated
filer (as defined in
Rule 12b-2
of the Act).
Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Act)
Yes o No þ
The aggregate market value of the voting stock held by
non-affiliates, computed by reference to the closing price for
the common stock as quoted by the Nasdaq Stock Market LLC as of
June 30, 2006 and based upon information provided by
stockholders on Schedules 13D and 13G filed with the Securities
and Exchange Commission, was approximately $83,059,000. Shares
of common stock held by each executive officer and director and
by each person who owns 5% or more of the registrants
outstanding common stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other
purposes.
As of March 1, 2007, there were 17,633,661 shares of
the registrants common stock, $0.001 par value,
outstanding.
DOCUMENTS INCORPORATED BY
REFERENCE
Certain sections of the registrants definitive Proxy
Statement for the 2007 Annual Meeting of Stockholders are
incorporated by reference in Part III of this
Form 10-K
to the extent stated herein.
PlanetOut
Inc.
Form 10-K
For The Fiscal Year Ended December 31, 2006
Table of Contents
Special
Note Regarding Forward-Looking Statements
Certain statements set forth or incorporated by reference in
this
Form 10-K,
as well as in our Annual Report to Stockholders for the year
ended December 31, 2006, constitute forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements involve known
and unknown risks and uncertainties that could cause our results
and our industrys results, level of activity, performance
or achievements to differ materially from those expressed or
implied by the forward-looking statements. In some cases, you
can identify forward-looking statements by terminology such as
anticipates, believes,
continue, estimates,
expects, intends, may,
plans, potential, predicts,
should, will, or similar terminology.
You should consider our forward-looking statements in light of
the risks discussed under the heading Risk Factors
in Item 1A, as well as our Consolidated Financial
Statements, related notes, and the other financial information
appearing elsewhere in this report and our other filings with
the Securities and Exchange Commission. We assume no obligation
to update any forward-looking statements.
1
PART I
Company
Overview
We are a leading global media and entertainment company serving
the worldwide lesbian, gay, bisexual and transgender, or LGBT,
community. This market is estimated to have buying power of
$641 billion in 2006 in the United States alone. We
serve this audience through a wide variety of products and
services including online and print media properties, a travel
marketing business and other goods and services. Our online
media properties include the leading LGBT-focused websites, most
notably Gay.com, PlanetOut.com, Advocate.com and Out.com. Our
print media properties include the magazines The
Advocate, Out, The Out Traveler and
HIVPlus, among others. Our travel marketing business
includes gay and lesbian travel and events marketed through our
RSVP brand, such as cruises, land tours and resort vacations. We
also offer our customers access to specialized products and
services through our transaction-based websites, including
Kleptomaniac.com and BuyGay.com, that generate revenue though
sales of products and services of interest to the LGBT
community, such as fashion, books, video and music products. We
also generate revenue from newsstand sales of our various print
properties.
With the global reach of our brands, multiple media properties
and marketing vehicles, we believe we provide advertisers with
unparalleled access to the LGBT community. We generate revenue
from multiple forms of online advertising including
run-of-site
advertising, advertising within specialized content channels and
online-community areas, and member-targeted
e-mails, as
well as more traditional print and event advertising.
Increasingly, we are offering multi-platform advertising
opportunities through which advertisers can target the gay and
lesbian market using a combination of vehicles such as the
Internet,
e-mail,
print, and live events. We also offer advertisers data on
consumer behavior and the effectiveness of their online
advertising campaigns with us through user feedback and
independent third-party analysis. Although most of our
advertising revenue comes from Fortune 500 and other large
national advertisers, we are also expanding our local directory,
a service that allows smaller, local advertisers to reach the
LGBT audience online.
We believe our user base includes the most extensive network of
self-identified gay and lesbian people in the world. Users can
access content on our flagship websites for free and without
registration, thereby generating page views and potential
advertising and transaction services revenue. Those users who
wish to access our online
member-to-member
connection services must register by providing their name,
e-mail
address and other personal content. Registration on our flagship
websites, Gay.com and PlanetOut.com, allows access to integrated
services, including profile creation and search, basic chat and
instant messaging. Registered users, or members, of our Gay.com
website can connect with other members from around the world in
multiple languages, including English, French, German, Italian,
Portuguese and Spanish.
Members may also subscribe to our paid premium subscription
service which enables them to access a number of special
features that are not generally available under our free basic
membership package, including advanced search, unlimited access
to profiles and photographs, enhanced chat and premium content.
Our paid subscriber base on our Gay.com and PlanetOut.com
websites was approximately 145,000 as of December 31, 2006
and we have reduced the average monthly churn rate among those
subscribers from 7.9% for 2005 to 6.7% for 2006.
With our November 2005 acquisition of substantially all of the
assets of LPI Media Inc. and related entities (LPI),
we expanded the number and scope of our subscription service
offerings. In addition to premium subscriptions to our Gay.com
and PlanetOut.com services, we offer our customers subscriptions
to seven other online and offline products and services, as well
as to various combined, or bundled, packages of these
subscription services, including the leading LGBT-targeted
magazines in the United States, Out and The Advocate.
We believe Out magazine is the leading audited
circulation magazine in the United States focused on the gay and
lesbian community, while The Advocate, a pioneer in LGBT
media since 1967, is the second largest. We believe these, and
other properties acquired from LPI, allow us to better serve our
business and consumer customers by expanding the platforms and
content that we can provide them and to more cost-effectively
promote our own products and services.
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We also offer our users access to specialized products and
services through our transaction-based websites,
Kleptomaniac.com and BuyGay.com, that generate revenue through
sales of products and services of interest to the LGBT
community, such as fashion, books, video and music products. In
addition, we generate transaction revenue from third-party
websites and partners for the sale of products and services to
our users, as well as through newsstand sales of our various
print properties. With our acquisition of substantially all of
the assets of RSVP Productions, Inc. (RSVP) in March
2006, we began to leverage our existing user base and multiple
advertising vehicles into the gay and lesbian travel market by
offering travel and event packages and promotions. The gay and
lesbian travel market is estimated to be $5.5 billion per
year per Community Marketing, Inc. San Francisco, CA.
Industry
Background
We have built the foundation of our business on the Internet, a
global communications medium that enables millions of people to
obtain and share information, interact with one another and
conduct business electronically. Worldwide, the number of
estimated Internet users is approximately 1.1 billion as of
January 2007, according to Internet World Stats at
www.internetworldstats.com. We believe that of all of the major
media formats, the Internet has the greatest potential for
reaching the LGBT community in large, targeted numbers, in part
because of the desire for discretion which many members of the
LGBT community seek and the lack of LGBT-focused media
alternatives in many geographic areas.
To better serve the LGBT community, we are using the leverage
provided by our large online user base to expand into other
areas, such as print publication and travel and event marketing,
through our LPI and RSVP acquisitions, respectively. The
non-Internet based, or offline, LGBT media industry is
fragmented and consists largely of independent print
publications, all of which we believe have smaller audited
circulations than our Out and The Advocate
magazines, and a limited number of radio stations,
television programs and cable outlets. We do not believe that
any of these competing media formats or companies offer the
targeted global reach and network efficiencies provided by our
broad platform of services. While television shows with
self-identified gay characters such as Ugly Betty,
Project Runway and Brothers and Sisters have
attracted large audiences, we believe their focus on general
audiences makes them less attractive to advertisers who want to
reach the LGBT market in the most cost-effective and targeted
way.
LGBT
Demographics and Media Coverage
We believe the global LGBT market remains underserved, despite
recent advances in the corporate, political and social
environments, and despite the attractive demographic
make-up of
the gay and lesbian community. For example, in the United States
alone, the gay and lesbian market had estimated buying power of
over $641 billion in 2006, or approximately
$43,000 per capita, compared to estimated per capita buying
power of $21,000 in the
African-American
and $18,000 in the
Hispanic-American
markets.
Approximately 15 million adults of the general
U.S. population identify themselves as gay, lesbian,
bisexual or transgender, according to The Gay and Lesbian
Market in the U.S. a report published by Packaged Facts in
partnership with Witeck-Combs Communications, Inc. This report
also estimates that the buying power of gay and lesbian
consumers in the United States will grow to approximately
$835 billion by 2011.
LGBT consumers are also loyal and active Internet users.
Approximately 80% percent of gay men and 76% of lesbians
actively use the Internet, and 63% of gay and lesbian consumers
have made purchases online, compared to 53% of heterosexual
consumers, according to Forrester Research. In addition, online
advertising influences gay and lesbian buying decisions:
according to The Gay and Lesbian Market: New Trends, New
Opportunities 4th Edition published by Packaged Facts
in partnership with Witeck-Combs Communications, Inc., while
only 35% of heterosexual consumers say that online
advertisements influence their purchasing decisions, 42% of gay
and lesbian consumers are influenced by online advertisements.
The same report estimates that 78% have reported switching to
brands offered by companies with a commitment to diversity.
According to a leisure travel study conducted by Harris
Interactive, Witeck-Combs Communications, Inc. and the Travel
Industry Association in September 2006, Gay.com is the most
accessed website and The Advocate is the most accessed
publication among the LGBT audience. This study also found that
when seeking a travel destination or provider that is
gay-friendly, LGBT magazines and websites are among the most
trusted endorsement sources.
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As a leading LGBT-focused company with a variety of community
and marketing services and competitive strengths, we believe we
are uniquely positioned to take advantage of the opportunities
presented by this market.
Advertising
Services
Total U.S. advertising spending increased 4% in the first
nine months of 2006 to $108.4 billion as compared to the
first nine months of 2005, according to TNS Media Intelligence.
The growth was driven in part by online display advertising,
which rose 18%
year-over-year
to $7.2 billion for the first nine months of 2006, and
consumer magazine advertising, which rose 6%
year-over-year
to $16.5 billion for the first nine months of 2006.
We believe online advertising will grow and reach a broader
audience as it captures a larger share of total advertising
dollars. The largest online advertising-based business models
now regularly attempt to attract national advertisers with
cross-media campaign opportunities, while smaller, niche
advertising businesses are increasingly offering the option of
advertising online as a means of focusing their marketing
efforts on specific audiences that are often not efficiently
reached through more general advertising campaigns.
Total U.S. advertising spending is expected to increase 3%
year-over-year
in 2007 to $153.7 billion, online display advertising is
expected to increase 13%
year-over-year
in 2007 and U.S. magazine advertising spending is expected
to increase approximately 6% year-over-year in 2007, according
to TNS Media Intelligence. The Annual Ad Spending Study
2007, a comprehensive national study of advertisers
conducted by Outsell Inc., reports that U.S. companies plan
to increase their online advertising spending by 18% in 2007.
According to ZenithOptimedia, global Internet advertising
spending is expected to grow over 28% in 2007 and to represent
almost 9% of total advertising expenditures by 2009.
Subscription
Services
The online paid content and services market has grown alongside
the growth in Internet usage generally, as an increasing number
of consumers have shown willingness to pay for Internet content
and services, such as dating services, business and investment
services, including business news and investment advice, and
entertainment and lifestyle services, including digital music
and film, recipes and other content intended for amusement,
leisure and diversion.
The Online Publishers Association estimates that consumer
spending for online content increased 15%
year-over-year
to $2 billion in 2005, the last period for which data was
published. Sales in the online personals category during 2005
increased approximately 7%
year-over-year
to $503.4 million or 25% of the total.
According to The Magazine Handbook, a comprehensive guide
2006/07
published online by the Magazine Publishers of America, sales of
magazine subscriptions in the U.S. totaled
$7.4 billion in 2005 or 70% of the $10.5 billion in
overall circulation revenue. Copies sold through subscriptions
totaled approximately 314 million or 87% of the
362 million copies sold in the U.S.
Transaction
Services
Leisure travel was projected to total $703 billion in the
U.S. in 2006, according to estimates published by the
Travel Industry Association of America in October 2006. The
Cruise Lines International Association (CLIA)
reported in its The 2006 Overview report that the
number of passengers in the worldwide cruise market grew at an
average annual rate of approximately 8% from 1980 through 2005.
According to the CLIA 2006 Cruise Market Profile,
the average cruiser has taken 3.4 cruises, spends 40% more than
non-cruise vacationers, and pays an average of approximately
$1,700 per person for the cruise experience, including
on-board expenses. Over half of cruisers indicate they expect to
take a future cruise within the next three years. Within the
cruise industry, we believe that the LGBT market is also growing
rapidly. According to market research firm Community Marketing,
Inc., San Francisco, CA, 40% of self-identified LGBT
respondents surveyed indicated they will increase spending on
leisure travel and 51% of the LGBT population has taken a
general-audience or LGBT-targeted cruise as compared to 17%
within the overall U.S. population as reported in the CLIA
2006 Overview.
According to the U.S. Department of Commerce, total
U.S. e-commerce
retail sales increased an estimated 24%
year-over-year
to approximately $108.7 billion in 2006, well ahead of the
6% growth in total retail sales. This
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trend reflects the increasing acceptance of the Internet as a
channel through which consumers purchase a variety of products
and services. With online sales representing less than 3% of
total U.S. retail sales of $3.9 trillion, we believe online
sales will continue to grow and capture a larger percentage of
total retail sales.
Competitive
Strengths
We believe the following competitive strengths have led to our
growth:
Strong Community Affinity. We believe we have
developed a loyal, active community of users, customers, members
and subscribers. The word-of-mouth marketing that occurs through
these individuals is an important source of past and potential
growth, as increasing social interaction among users within our
online community and
word-of-mouth
in the broader LGBT community help us obtain new and retain
previous users and customers across our multiple platforms. We
believe the Gay.com domain name is a brand that helps reinforce
our position as the leading network of LGBT people in the world.
We believe the addition of LPI and RSVP, pioneers in LGBT media
and travel, respectively, reinforces our position as a leader in
serving the LGBT community.
Critical Mass. We believe we have built the
critical mass of users across multiple properties that is
attractive to advertisers, vendors, and consumers alike. Out
and The Advocate magazines have the two largest
audited paid circulations of any LGBT-focused magazines in the
United States, making them attractive vehicles for major
national advertisers wishing to reach this audience through
print. Similarly, we believe our combined worldwide Gay.com and
PlanetOut.com member base constitutes the largest network of gay
and lesbian people in the world. We have expanded our reach and
market position by offering our online services in six languages
to members who identify themselves as residing in more than 100
countries through ten localized versions of our Gay.com website.
We also believe the size and attractive demographic
characteristics of our global user base is appealing to
advertisers who seek multiple, cost-effective ways to target the
LGBT market.
Diversified Revenue Streams. We derive our
revenue from a combination of advertising, subscription and
transaction services offered through multiple online and offline
media properties. Although, in recent years, online premium
subscription services represented a majority of our revenue,
this began to change in the second half of 2005 with our
acquisition of LPI and the transition of our online business to
an advertising-based model. We further accelerated this
diversification with our March 2006 acquisition of RSVP, a
leading marketer of gay and lesbian travel and event
opportunities, and by the end of 2006, our revenue lines became
more balanced. We believe that having multiple revenue streams
allows us to better withstand periodic fluctuations in
individual markets, take advantage of cross-selling
opportunities to our advertising and consumer customers, and
more effectively monetize the audiences and traffic that we have
built through our various properties.
Scalable Business Model. We believe we have an
overall business model in which additional revenue can be
generated with relatively low increases in our expenses. In our
online subscription business, we believe the marginal cost to us
of providing services to each new subscriber is relatively low.
At the same time, much of the content accessible through our
flagship websites is generated by members and made available at
modest incremental cost. By creating additional web pages or
chat screens on which we can place advertisements, each
additional user on these websites also generates additional
advertising capacity at little incremental cost. With the
acquisition of LPI, we believe we will be able to leverage this
low cost model into other media. For example, by bundling our
online and offline subscriptions, we expect to grow our
circulation base for our advertiser customers. Similarly, we
believe we can leverage our numerous marketing and media
platforms to grow RSVPs business with advertising in our
online and print properties at a small incremental cost. The
primary increase in the RSVP expenses is expected to come from
adding incremental travel and event opportunities, which we
expect will provide associated incremental revenue.
Compelling Content. We offer compelling
editorial and programming content to the LGBT community, in
print and online, covering topics such as travel, news,
entertainment, shopping, business, and health. In addition, we
believe our rich and varied LGBT-focused content, the
integration of our chat, profile and instant messaging features
and the ability of our online members to generate and share
their own content and interact with one another keeps users
returning to our websites. Similarly, RSVP offers a unique
market focus and itineraries of interest to the
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LGBT community, resulting in a large number of repeat customers.
In turn, all of these features increase user touchpoints and
provide us with more opportunities to generate advertising
revenue, grow our subscriber base, both online and offline, and
increase product and service sales.
Growth
Strategy
Our goal is to enhance our position as a global LGBT-focused
market leader by maximizing the growth prospects and
profitability of each of our revenue streams. We intend to
achieve this through the following strategies:
Growing Our User Base Across Multiple
Properties. We intend to leverage our critical
mass online to increase our overall revenue.
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Cross-Promote Products and Services. We are
building on our extensive subscriber base that we have developed
online through the Gay.com and PlanetOut.com websites and the
print leadership that we have acquired through The Advocate
and Out magazines by cross-promoting our products and
services to the LGBT community. Just as we have traditionally
promoted our various advertising, subscription and transaction
services through our multiple websites and print properties, we
are expanding this multi-platform, cross-promotion strategy
across our various LPI and RSVP properties.
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Increased Marketing. In addition to
cross-promotions through our own properties, we plan to expand
our multi-channel marketing programs to help drive growth in our
unique visitors, members, subscribers, and customers. We plan to
continue marketing directly to consumers through targeted online
advertising, keyword buys and affiliate programs, as well as
through print advertising and advertising in gay and
lesbian-identified neighborhoods and other high-traffic
neighborhoods that attract a gay audience. We also plan to
increase our visibility through sponsorship of, and
participation at, community events, such as the Dinah Shore
Weekend in Palm Springs and LGBT Pride celebration events.
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New Products and Services. We intend to offer
new products and services through our multi-platform network.
For example, we began to offer new and enhanced social
networking features through our existing services, such as
enhanced photo management tools and blogs. By enhancing the
functionality through the development of our technology to
expand our products and services, we believe we can enhance the
value of our offerings, attract new users and increase our
revenue.
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International Expansion. With advertising
sales from our international subsidiaries and online
subscription sales from users outside of the United States
accounting for approximately 1% and 2% of our total revenue in
2006, respectively, we believe international expansion presents
a growth opportunity. One initiative intended to grow our
long-term international revenue is our international
gratis campaign. As part of this campaign users outside
of the United States and Canada are able to access all of our
online premium subscription services free of charge. While this
campaign has increased our marketing expenses and reduced the
short-term growth in our online premium subscription services
revenue, it is intended to grow critical mass in international
markets and lay the foundation for future international revenue
growth from our family of media and entertainment properties.
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Capitalizing on Advertising Growth and
Relationships. We believe our large user base
across multiple properties provides us with significantly
greater reach than other LGBT-focused media providers and that
we are well positioned to benefit from the growth in advertisers
wishing to target the LGBT community. By promoting packages that
include, among others, Internet, print,
e-mail,
direct mail, and event advertising opportunities, we believe we
can differentiate our products and more effectively serve our
advertising clients. Furthermore, by
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promoting member-generated content and cross-purposing content
across our various properties, we can add new pages to our
websites, grow our advertising inventory and direct our website
traffic to those areas that generate higher advertising revenue.
And finally, we have improved our Local Scene
section of Gay.com, a localized business directory and local
classifieds section designed to attract smaller advertisers. We
believe that our classifieds business is an area for our future
growth.
Leveraging and Growing Our Subscriber
Base. Currently, we offer nine different
subscription services across multiple properties. By bundling
these subscriptions into new and unique packages, we believe we
can expand our subscriber base. In some cases, we can also use
these bundled packages and special promotions to shift
subscribers into longer-term, higher-value plans.
Leveraging Leadership into Other LGBT
Opportunities. We believe the needs of the LGBT
market are underserved compared to those of other niche markets
such as the
African-American
and
Hispanic-American
markets. As with our acquisitions of LPI and RSVP, we continue
to evaluate opportunities to expand further into other
LGBT-focused areas, including other online and offline media,
subscription and transaction service businesses, through
in-house initiatives, strategic partnerships or acquisitions of
other businesses. We believe by marketing new products and
services to our user base, we may be able to grow our revenue
cost-effectively.
Advertising
Services
We derive online advertising revenue from advertising contracts
in which we typically undertake to deliver a minimum number of
impressions, or times that an advertisement appears
in pages viewed by users of our online properties. Our
advertisers can display graphical advertisements on the pages
that are viewed by our users across all our online properties
and on our affiliates websites. We work with our
advertisers to maximize the effectiveness of their campaigns by
optimizing advertisement formats and placement on our websites.
Advertisers are increasingly targeting demographic niche
markets, such as the
African-American
and
Hispanic-American
markets in the United States. A particular targeted audience is
often not efficiently reached through general market advertising
campaigns or broadcast media. As more advertisers target
specific audiences, they are turning to the Internet as a cost
effective way to reach their targets. We believe that
traditional advertisers are also allocating larger portions of
their budgets to the Internet, a trend that we believe will
accelerate as the effectiveness of online advertising becomes
more widely accepted. The Interactive Advertising Bureau, or
IAB, reported that Internet advertising revenues for 2006 were
estimated at $16.8 billion, a 34% increase over the
previous revenue record of $12.5 billion in 2005. We
believe that online advertising will continue to grow and
diversify as it captures a larger share of total advertising
dollars.
By offering cross-media solutions that combine the power of
online media with print, events, direct mail and other
touchpoints, media companies targeting a specific audience
segment are well positioned to help advertisers surround and
capture a niche market. We believe that we provide advertisers
with a number of effective and innovative ways to reach both the
larger LGBT community and those segments within the LGBT
community that may share a particular affinity for their
products or services. Our value proposition to advertisers
includes:
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Focused Advertising. We believe we deliver
access to the largest audience of self-identified gay and
lesbian people in the world. Our advertising programs allow both
large national and international advertisers as well as smaller,
local advertisers to reach the LGBT audience in a cost-effective
manner. Unlike other vehicles that are just
gay-themed, our media properties are specifically
targeted to the unique needs and interests of the gay and
lesbian audience, a group with demographic characteristics that
we believe are highly attractive to advertisers.
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Leading LGBT Media Outlets. In addition to the
critical mass that we have developed online through the Gay.com,
Out.com, Advocate.com, and PlanetOut.com websites, we also
publish leading LGBT print publications, including The
Advocate and Out magazines. This combination of
leading online and offline media properties is unique in the
North America gay and lesbian market.
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Coordinated, Multi-Platform Campaigns. We are
able to leverage our ownership of leading LGBT media properties
to offer advertisers coordinated, multi-platform campaigns.
During 2006, we added to our
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advertising networks new online and offline vehicles, including
365gay.com, NBC Universals Outzonetv.com website from
Bravo, and sponsorship of the Gay Games in Chicago and Dinah
Shore Weekend.
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Targeted Campaigns. In addition to offering
advertisers the opportunity to reach the broader LGBT audience
across multiple platforms, we offer the opportunity to more
closely target specific audiences. For example, advertisers have
the potential to reach our entire online user base with
run-of-site
advertisements or to target only those members who share certain
common attributes such as age, gender or geographic location. In
2005, we added the ability to target users based on their online
behaviors. By dividing our online content offerings into topic
sections within channels, we provide our advertisers with the
ability to target their marketing efforts further, by sponsoring
topic sections or running individual advertisements in channels
specifically relevant to their particular products and services
or brand strategy. Similarly, through the various LPI
properties, we offer advertisers the ability to target members
with particular interests such as politics and current events,
fashion and entertainment, travel, or specific health issues.
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Research and Analysis. We engage third parties
to conduct independent research on member panels assembled from
our online membership base regarding the effectiveness of
specific campaigns as well as other matters of interest to our
advertisers. Campaign studies examine the effect the campaign
had on brand awareness, brand attributes, message association,
brand favorability, purchase intent and advertisement recall and
can include an analysis of the research and recommendations for
future advertising campaigns. In addition to benefiting the
advertiser, this type of research helps educate us on how to
more effectively position and manage campaigns for our
advertisers.
|
During the years ended December 31, 2005 and 2006, no
single advertiser accounted for more than 10% of our domestic
advertising revenue. Our five largest customer industry
categories accounted for approximately 69% and 73%,
respectively, of our domestic advertising revenue for 2005 and
2006.
We market our advertising services through our domestic and
international sales force. Our online national and international
sales representatives are focused on specific advertising
categories or countries, and sell across our networks in the
United States, Europe and Latin America. Our local online sales
team sells directory listings to small local advertisers. Our
national print sales team sells advertising for our print
properties. For large accounts, campaigns are coordinated across
multiple media platforms.
Our national online and print advertising teams generated 94% of
total advertising revenue for 2006. The following is a breakdown
of our domestic online and print advertising revenue for our top
ten categories by industry for the year ended December 31,
2006:
|
|
|
|
|
|
|
Percentage of Domestic
|
|
|
|
Advertising Revenue in
|
|
Category
|
|
2006
|
|
|
Healthcare &
pharmaceutical
|
|
|
21
|
%
|
Travel
|
|
|
19
|
%
|
Retail / fashion
|
|
|
15
|
%
|
Entertainment
|
|
|
10
|
%
|
Telecommunications &
Internet
|
|
|
8
|
%
|
Automotive
|
|
|
7
|
%
|
Finance
|
|
|
7
|
%
|
Consumer packaged goods
|
|
|
4
|
%
|
Food / beverages
|
|
|
4
|
%
|
Electronics
|
|
|
2
|
%
|
8
Subscription
Services
We offer our customers nine separate subscription services
across both our online and offline properties. Of these,
Gay.com, Out and The Advocate have the largest
paid subscriber bases. Increasingly, we have bundled packages of
our various subscription services to increase their value to our
customers and to generate additional subscribers, circulation
and revenue.
Online
Subscription Services
We have offered Gay.com members a free, real-time chat service
since 1996. We launched the PlanetOut.com personals service in
1997, and we believe PlanetOut.com was the first website of
significant size to offer free personals specifically tailored
to the LGBT community. In 2001, we created our paid premium
membership services, Gay.com Premium Services and PlanetOut
PersonalsPlus. As of December 31, 2006, we had
approximately 145,000 subscribers to these online premium
membership services.
We do not charge fees for registering as a member or creating a
profile on either Gay.com or PlanetOut.com, but non-subscribers
have limited access to member profile photographs, may only
perform basic profile searches and have limited access to chat
services. By joining our paid premium membership services, a
Gay.com Premium Services or PlanetOut PersonalsPlus subscriber
may reply to an unlimited number of profiles, bookmark and block
profiles, perform advanced profile searches and view all
full-sized photographs posted by other members. In addition, we
frequently offer other benefits with premium membership,
including free subscriptions to magazines, such as The
Advocate, Cargo, Details, Mens
Fitness and Out and others, for our Gay.com
subscribers. We believe these types of additional premium
offerings serve as an inducement for free members to convert to
paying subscribers and for lower-priced, shorter-term
subscribers to convert to higher-priced, longer-term plans for
which we frequently offer more incentives.
We currently offer both Gay.com Premium Services and PlanetOut
PersonalsPlus under tiered subscription plans. Subscriptions to
Gay.com Premium Services begin at $9.95 for a
seven-day
trial, with $19.95 for a monthly subscription, $42.95 for a
quarterly subscription and $89.95 for an annual subscription.
Subscriptions to PlanetOut PersonalsPlus begin at $4.95 for a
three-day
trial, with $12.95 for a monthly subscription, $29.95 for a
quarterly subscription and $69.95 for an annual subscription.
Periodically, we also offer discounted or free trial
subscriptions to these services. We renew and re-bill all
premium membership subscriptions on Gay.com and PlanetOut.com
automatically, unless the subscription is affirmatively
cancelled. We reduced our average monthly churn rate to 6.7% for
2006, down from 7.9% for 2005.
In addition to the general membership services offered by
Gay.com and PlanetOut.com, the Gay.com Premium Services package
offers members additional enhanced features and is currently
available in six languages, including English, French, German,
Italian, Portuguese and Spanish. These enhanced features include
access live customer and technical support for users in the
United States and Canada and specialized premium content, as
well as the ability to simultaneously enter several of our more
than 1,600 chat rooms, many of which are international. Some of
these special premium features are not currently available on
PlanetOut.com.
While both services are available to anyone, Gay.coms
subscriber base is more heavily male and PlanetOut.coms
includes a higher percentage of females. As of December 31,
2006, approximately 98% of subscribers on Gay.com identified
themselves as male and on PlanetOut.com, 64% of subscribers
identified themselves as female. As of December 31, 2006,
9% of our Gay.com paid subscribers identified themselves as
residing outside the United States. PlanetOut.com is offered in
English only and its members reside primarily in the U.S.
9
In managing our Gay.com and PlanetOut.com premium membership
services, we track a number of operating metrics, including the
following:
Gay.com
and PlanetOut.com Premium Membership Service Operating Metrics
(excluding free trial promotions) as of and for the periods
ended December 31:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Total Subscribers
|
|
|
157,360
|
|
|
|
145,275
|
|
Gross Additions
|
|
|
164,490
|
|
|
|
109,657
|
|
Total Churn
|
|
|
134,657
|
|
|
|
121,742
|
|
Churn Rate
|
|
|
7.9
|
%
|
|
|
6.7
|
%
|
Net Additions (Reductions)
|
|
|
29,833
|
|
|
|
(12,085
|
)
|
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 Subscribers measured at the beginning and end of the
period, divided by the number of months in the period.
|
|
|
|
Net Additions (Reductions): Total Subscribers at the end
of the period minus the total Subscribers at the beginning of
the period.
|
Because their terms are generally shorter than the periods that
we measure, we exclude paid trial subscription (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
subscription prior to the end of their promotional terms. When
these promotional offers are for paid subscription 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 Subscribers, we exclude them from our
definition of Total Churn.
We are paid up-front for premium memberships, and we recognize
subscription revenue ratably over the subscription period. As of
December 31, 2005 and 2006, deferred revenue related to
premium membership subscription totaled approximately
$4.1 million. 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.
Print
Subscription Services
The properties that we acquired from LPI included a number of
print subscription services. In January 2006, we began offering
Out and The Advocate magazines as bundled products
with our Gay.com Premium Services in the United States. During
2006, we grew the
year-over-year
circulation of our print subscriptions to 412,000 as of
December 31, 2006, which represents a 36% increase over
2005.
10
We market our subscription services in the United States and
internationally through a broad spectrum of advertising tools,
including keyword and other online advertising, affiliate
relationships, print and outdoor advertising, events,
word-of-mouth,
direct and
e-mail
marketing, contests and other promotional activities.
Transaction
Services
As a result of our RSVP acquisition, we increased our
transaction service revenue in both absolute dollars and as a
percentage of our overall revenue. Through RSVP, we are able to
offer specialized travel and event packages to the LGBT market.
Typically, RSVP develops travel itineraries on cruises, on land
and at resorts, by contracting with third-parties who provide
the basic travel services. To these basic services, RSVP
frequently adds additional programming elements, such as special
entertainers, parties, and events, and markets these enhanced
vacation packages to the gay and lesbian audience. During 2006,
we announced an expanded schedule of larger-ship itineraries for
2007, including a charter of the Queen Mary 2, and launched
the redesigned RSVPvacations.com website.
We offer products and services of interest to the LGBT community
through multiple
e-commerce
websites, including Kleptomaniac.com and BuyGay.com. To increase
our revenue, we are also capable of taking mail and phone orders
for some products that we offer. The products we sell through
these sites include clothing, such as
t-shirts and
designer jeans, fashion accessories, such as watches and other
jewelry, and DVDs and videotapes, such as the Queer as
Folk and The L Word compilations and the Brokeback
Mountain DVD. We hold inventory for a portion of the
products that we sell, such as CDs, DVDs and videotapes, at our
on-site
fulfillment center in Los Angeles. For other products, such as
fashion products and accessories, we have historically engaged
third-party vendors to hold inventory and fulfill orders. We
believe these arrangements allow us to reduce buying and
fulfillment costs and the risk of holding unwanted inventory. We
advertise these transaction services primarily through our own
properties, including our websites and magazines. We also
recognize transaction services revenue from third-party vendors
and magazine newsstand sales.
Product
Development and Technology
Our product development teams have introduced features that are
intended to enhance and integrate our web-based member services,
while addressing numerous externally driven initiatives
regarding legal and industry standard compliance. In 2006, we
improved our Local Scene product, our local listings
business for the LGBT community. During the fourth quarter of
2006, we delivered numerous technology-based enhancements to our
Gay.com website, including a launch of the first phase of the
look and feel evolution of the site and improved ability for
members to specify and search locations. In addition, Out.com
launched two new blogs, one focused on fashion and one focused
on pop culture. In December 2006, we also launched a new RSVP
web site.
We plan to introduce new features such as expanded and
integrated
e-commerce
services; expanded capabilities related to member-generated
content; and enhancements to our international sites including
improved locations handling and an upgraded and enhanced local
listings product featuring more localized content. We also plan
to move, over time, toward integration of our technology
platforms across all our web properties, beginning with an
extensive effort to re-architect our core platform, leading to
the expansion of core functional capabilities, and including an
initiative to implement a company-wide content management system
to better leverage all of our organic and acquired content of
our print and online properties.
Our capital expenditures are primarily focused on supporting our
member services, including, the introduction of new features and
functions. We strive to centralize our business in many classes
of hardware and software with a single primary vendor when we
believe it is feasible and cost-effective to do so. By reducing
the number of types of systems we use, we believe we are better
able to manage our systems and achieve attractive pricing with
vendors with whom we have established relationships.
Our basic network infrastructure primarily resides in
virtualized machines that are hosted in multi-core servers that
leverage their capabilities in order to maximize efficiency and
scalability. We primarily utilize open source software and
widely scalable, low-cost servers to reduce cost and enable us
easily to expand technological capacity to handle increased
load. We track and monitor the growth of traffic on our websites
and strive to maintain reserve capacity for extraordinary loads.
We attempt to streamline and consolidate our technology as we
upgrade our
11
equipment to increase capacity. We believe our infrastructure
allows us to scale and grow our online business at relatively
low cost and with little disruption to our members.
We employ several methods to protect our computer networks from
damage, power interruption, computer viruses and security
breaches that would result in a disruption of service to our
members. Our hosted computer network, located in San Jose
and operated by a third-party vendor, provides the primary
services that we offer to the public on our flagship websites.
The computer equipment in our hosted network is located in an
industrial-grade server room with
on-site
security systems and redundant uninterruptible power supply
units, as well as smoke detection and fire suppression systems.
The equipment is also deployed in a redundant configuration,
designed to prevent any single computer failure from
interrupting the services available on our websites. This
network is protected from security breaches by a firewall,
including anti-virus protection.
International
Operations
We have offices in London and Buenos Aires that help support our
various services, particularly the localized versions of our
Gay.com site. These localized versions specifically target ten
distinct international markets or segments: UK and Ireland,
Spain, Italy, Germany, France, Mexico, Brazil, Argentina, Latino
(a general Latin American site) and Australia.
The staff in the London office helps market our global services
and provides content and sells advertising for the UK and
Ireland site, our largest international Gay.com site by revenue.
In addition to offering Gay.com premium membership services to
users in the UK and Ireland, that site is a content portal
offering editorial coverage of topics designed to appeal to the
interests of gay and lesbian online users in those regions. Our
London office has an editorial and advertising sales staff that
supports this media business. In addition to editorial and sales
staff, we coordinate a range of traditional direct marketing
activities in our Australian and all of our European markets
other than Spain through London-based staff.
The staff in the Buenos Aires office handles Latin American, as
well as international marketing operations and advertising sales
for all of Gay.coms Spanish and non-European international
sites. We also have a portion of our customer care and Local
Scene services staff located in the Buenos Aires office.
Like the UK and Ireland site, two additional sites, Mexico and
Australia, offer produced content, along with user-generated
content, designed to appeal to the interests of gay and lesbian
online users in those regions, in addition to the premium
membership services. The remaining international sites (Brazil,
Spain, France, Italy, Argentina, Germany, and Latino) currently
offer only premium membership services.
Since October 2005, all of our international sites have offered
the gratis promotion that allows users from qualified
international countries to access all Gay.com premium membership
services free of charge. This effort is designed to further
build critical mass in international markets and pave the way
for future growth.
We believe significant growth opportunities exist for us in
international markets, including in Europe and Latin America. In
certain markets, we believe we are a leader in the LGBT media
market and have sufficient critical mass to take advantage of
growth opportunities there. In other markets, we continue to
look for ways to leverage our knowledge of the LGBT community
and our leading position elsewhere to explore and capture growth
opportunities.
Competition
We operate in a highly competitive environment. Across all three
of our service lines, we compete with traditional media
companies focused on the general population and the LGBT
community, including local newspapers, national and regional
magazines, satellite radio, cable networks, and network, cable
and satellite television shows. In our advertising business, we
compete with a broad variety of online and offline content
providers, including large media companies such as Yahoo!, MSN,
Time Warner, Viacom and News Corporation, as well as a number of
smaller companies focused specifically on the LGBT community. In
our subscription business, our competitors include these
companies as well as other companies that offer more targeted
online service offerings, such as Match.com, Yahoo! Personals
and News Corporation, and a number of other smaller online
12
companies focused specifically on the LGBT community. More
recently, we have faced competition from the growth of social
networking sites, such as MySpace, that provide opportunity for
online community for a wide variety of users, including the LGBT
community. In our transaction business, we compete with
traditional and online retailers. Most of these transaction
service competitors target their products and services to the
general audience while still serving the LGBT market. Other
competitors, however, specialize in the LGBT market,
particularly in the gay and lesbian travel space.
We believe that the primary competitive factors affecting our
business are quality of content and service, price,
functionality, brand recognition, customer affinity and loyalty,
ease of use, reliability and critical mass. Some of our current
and many of our potential competitors have longer operating
histories, larger customer bases and greater brand recognition
in other business and Internet markets and significantly greater
financial, marketing, technical and other resources than we do.
Therefore, these competitors may be able to devote greater
resources to marketing and promotional campaigns, adopt more
aggressive pricing policies or may try to attract readers, users
or traffic by offering services for free and devote
substantially more resources to developing their services and
systems than we can.
Intellectual
Property
We use a combination of trademark, copyright and trade secret
laws and confidentiality agreements to protect our proprietary
intellectual property. We have registered several trademarks in
the United States, including PlanetOut,
PlanetOut and Design, Gay.com and
Design, Out, Out Traveler,
Advocate and RSVP and Design. We have
registered or applied for additional protection for several of
these trademarks in some relevant international jurisdictions.
Even if these applications are allowed, they may not provide us
with a competitive advantage. To date, we have relied primarily
on common law copyright protection to protect the content posted
on our websites. Our printed publications are protected by
copyrights registered with the U.S. Copyright Office.
Competitors may challenge the validity and scope of our
trademarks and copyrights. From time to time, we may encounter
disputes over rights and obligations concerning our use of
intellectual property. We believe that the services we offer do
not infringe the intellectual property rights of any third
party. We cannot, however, make any assurances that we will
prevail in any intellectual property dispute.
Employees
As of December 31, 2006, we had 273 full-time
employees worldwide, including 10 full-time employees in
the United Kingdom and 26 in Argentina. We utilize part-time and
temporary employees to handle overflow work and short-term
projects. As of December 31, 2006, we had 16 part-time
or temporary employees. None of our employees is unionized, and
we believe that we generally have good relations with our
employees.
Executive
Officers
The following table sets forth information regarding our
executive officers as of March 1, 2007:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
|
Position
|
|
|
|
|
|
|
|
|
Executive officers
|
|
|
|
|
|
|
Karen Magee
|
|
|
46
|
|
|
Chief Executive Officer
|
Jeffrey T. Soukup
|
|
|
41
|
|
|
President, Chief Operating Officer
and Secretary
|
Daniel J. Miller
|
|
|
40
|
|
|
Chief Financial Officer, Treasurer
and Senior Vice President
|
William Bain
|
|
|
48
|
|
|
Chief Technology Officer
|
Karen Magee has served as our Chief Executive Officer
since July 2006 and has served on our Board of Directors since
September 2003. Ms. Magee served as Senior Vice President
of Strategic Planning for Time Warner from April 2004 to March
2006. She served as Vice President of Strategic Planning for
Time Inc. from February 2001 until April 2004. From February
1996 until February 2001, she was with TIME magazine where she
served as General Manager for four years and more recently as
Vice President of Consumer Marketing. Ms. Magee sits on the
13
Princeton University Board of Trustees and previously served as
co-chair of The Gay & Lesbian Alliance Against
Defamation (GLAAD) board of directors. Ms. Magee holds a
B.S.E. from Princeton University and a M.B.A. from the Wharton
School of the University of Pennsylvania.
Jeffrey T. Soukup has served as our President since June
2006 and as our Chief Operating Officer and Executive Vice
President since December 2005, after having previously also
served as our Chief Financial Officer until February 2006.
Mr. Soukup originally joined our predecessor company Online
Partners.com Inc. in August 2000 as its Chief Financial Officer
and Senior Vice President, Administration. From August 1999
until August 2000, Mr. Soukup served as Vice President in
the consumer services and business development divisions of
ChannelPoint, Inc., a
business-to-business
Internet-based finance company. From July 1998 until August
1999, Mr. Soukup was a Vice President of GE Equity, the
private equity arm of the General Electric Corporation and,
prior to that, was a co-founder of Stamos Associates, Inc., a
healthcare consulting business which was acquired by Perot
Systems Corporation. Previously, Mr. Soukup was legislative
counsel to Senator Bill Bradley, a Senior Associate at
Booz-Allen & Hamilton Inc., a consulting firm, and an
associate at the law firm of Kirkland & Ellis.
Mr. Soukup sits on the board of directors of the Gay and
Lesbian Alliance Against Defamation (GLAAD) and was a co-chair
of the board of directors of the Gay and Lesbian Victory Fund.
He holds a B.A. in International Relations and a M.A. in
International Policy Studies from Stanford University and a
M.B.A. with a concentration in Finance and a J.D. from the
University of Chicago.
Daniel J. Miller has served as our Chief Financial
Officer, Senior Vice President since February 2006. Prior to
joining us, Mr. Miller served as the Vice President,
Finance and Administration at Predicant Biosciences, Inc., a
life science company based in San Francisco now operating
as Pathwork Diagnostics, a position he held from June 2002 to
December 2005. From October 2000 to May 2002, Mr. Miller
was the Vice President, Finance and Operations for Photuris,
Inc., a telecom equipment company now owned by Meriton Networks.
Prior to that, Mr. Miller served as corporate controller
for Extreme Networks, Inc., held a treasury position at
Genentech, Inc. and was an auditor for Deloitte &
Touche. Mr. Miller is a C.P.A. and holds a bachelors
degree from John Carroll University and a M.B.A. degree in
finance from Carnegie Mellon University.
William Bain has served as our Chief Technology Officer
since February 2007. Prior to joining PlanetOut, Mr. Bain
was the owner and general manager of TechPoint Associates, LLC,
a San Francisco-based technology consulting firm, positions
he had held since April 2006. From October 2004 until March
2006, Mr. Bain was the Chief Technology Officer of
HomeGain, the second-most trafficked web site in the real estate
sector, and from June 2002 to October 2004, Mr. Bain was a
general partner in New Vantage Partners, LLC, a technology
consulting firm serving emerging and Fortune
1000 companies. Additionally, Mr. Bain was the Chief
Technology Officer and co-founder of MedChannel, a highly
integrated healthcare industry solutions network; co-founder and
Chief Technology Officer for Sprockets.com, a data transfer and
project management company for the graphic communications
industry; senior vice president and director of re-engineering
for PaineWebber; and, Chief Technology Officer for the Boston
Company, a subsidiary of American Express. Mr. Bain holds a
Ph.D., a Master of Science degree and a Bachelor of Science
degree in computer science, each from Yale University.
Available
Information
Our corporate website is located at
http://www.planetoutinc.com. We make available
free of charge, on or through the Investor Center on our
corporate website, our annual, quarterly and current reports,
and any amendments to those reports, as soon as reasonably
practicable after electronically filing such reports with the
SEC. Information contained on our corporate website, or on our
flagship or other websites, is not part of this report or any
other report filed with the SEC.
14
We have a
history of significant losses. If we do not regain and 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. As of December 31, 2006, our
accumulated deficit was approximately $38.3 million.
Although we had positive net income in the year ended
December 31, 2005, we have experienced a net loss of
$3.7 million for the year ended December 31, 2006, and
we may not be able to regain, sustain or increase profitability
in the near future, causing our financial condition to suffer
and our stock price to decline.
If we are
unable to generate revenue from advertising or if we were to
lose our existing advertisers, our business will
suffer.
Our advertising revenue is dependent on the budgeting, buying
patterns and expenditures of advertisers which in turn are
affected by a number of factors beyond our control such as
general economic conditions, changes in consumer habits and
changes in the retail sales environment. A decline or delay in
advertising expenditures caused by such factors could reduce or
hurt our ability to increase our revenue. Advertising
expenditures by companies in certain sectors of the economy,
such as the healthcare and pharmaceutical industry, currently
represent a significant portion of our advertising revenue. Any
political, economic, social or technological change resulting in
a significant reduction in the advertising spending of this
sector or other sectors could adversely affect our advertising
revenue or our ability to increase such revenue.
Additionally, advertisers and advertising agencies may not
perceive the LGBT market that we serve to be a broad enough or
profitable enough market for their advertising budgets, or may
prefer to direct their online and print advertising expenditures
to larger higher-traffic websites and higher circulation
publications 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.
In our advertising business, we compete with a broad variety of
online and print content providers, including large media
companies such as Yahoo!, MSN, Time Warner, Viacom and News
Corporation, as well as a number of smaller companies focused on
the LGBT community. If we are unable to successfully compete
with current and new competitors, we may not be able to achieve
or maintain market share, increase our revenue or achieve and
maintain profitability.
If our advertisers perceive the advertising campaigns we run for
them to be unsuccessful or if they do not renew their contracts
with us, our revenue will decrease and operating results will
suffer.
Our
success depends, in part, upon the growth of Internet
advertising and upon our ability to accurately predict the cost
of customized campaigns.
Online advertising represents a significant portion of our
advertising revenue. 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, in our
publications and to our members, including banner
advertisements, rich media advertisements, traditional print
advertising, email campaigns, text links and sponsorships of our
channels, topic sections, directories, sweepstakes, awards and
other online databases and content. Frequently, advertisers
request advertising campaigns
15
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 our
efforts to attract and retain subscribers are not successful,
our revenue will decrease.
Because a significant portion of our revenue is derived from our
subscription 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 or
publications to be of high quality or sufficient breadth, if we
introduce new services or publications that are not favorably
received or if we fail to introduce compelling new content or
features or enhance our existing offerings, we may not be able
to attract new subscribers or retain our current subscribers. In
2006, our Total Churn exceeded the number of Gross Additions,
resulting in a decrease in Total Subscribers, as these terms are
defined on page 10.
Our current online content, shopping and personals platforms may
not allow us to maximize potential cross-platform synergies and
may not provide the most effective platform from which to launch
new or improve current services for our members or market to
them. If there is a further delay in our plan to improve and
consolidate these platforms, and this delay continues to prevent
or delay the development or integration of new features or
enhancements to existing features, our online subscriber growth
could continue to slow and decline. 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. Subscribers cancel
their subscription to our services for many reasons, including a
perception, among some subscribers, that they do not use the
service sufficiently, that the service or publication is a poor
value or that customer service issues are not satisfactorily
resolved. We also believe that online customer satisfaction has
suffered as a result of the presence in the chat rooms of our
websites of adbots, which are software programs that create a
member registration profile, enter a chat room and display
third-party advertisements. Online members may decline to
subscribe or existing online 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
their subscription, we may be required to incur significantly
higher marketing expenditures than we currently anticipate in
order to replace canceled subscribers with new subscribers,
which will harm our financial condition.
If we are
unable to successfully market our 2007 RSVP larger ship
itineraries, our business will suffer.
For a number of the cruises we offer in 2007, we have chartered
larger ships than those chartered by RSVP prior to our March
2006 acquisition of substantially all of RSVPs assets. For
example, for our February 2007 Caribbean cruise aboard the
Caribbean Princess and our May 2007 transatlantic cruise aboard
the Queen Mary 2, we have chartered the two largest
capacity ships ever chartered by RSVP. If we are unable to
successfully market larger ship itineraries and fail to reach a
specified level of cabin occupancy, we may owe a substantial
penalty to the company from whom we chartered the ship, raising
our expenses and causing our operating results to suffer.
Additionally, if in order to meet the specified level of cabin
occupancy we offer discounted prices, our revenue will decrease
and our operating results will suffer.
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
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expectations of public market analysts and investors, which may
result in a decline in our stock price. In particular, with the
acquisition of RSVP in March 2006, our operating results could
be impacted by the long lead times and significant operating
leverage in the cruise industry, and may fluctuate significantly
due to the timing and success of cruises we book.
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 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 us to grow
slower or our net profit to be smaller than expected, which
could cause a decline in our stock price.
If we
fail to manage our growth, our business will suffer.
We have significantly expanded our operations and anticipate
that further expansion may be required to address current and
future growth in our customer base and market opportunities. Our
expansion has placed, and is expected to continue to place, a
significant strain on our technological infrastructure,
management, operational and financial resources. If we continue
to expand our marketing efforts, we may expend cash and create
additional expenses, including additional investment in our
technological infrastructure, which might harm our financial
condition or results of operations. If despite such additional
investments our technological infrastructure is unable to keep
pace with the demands of our online subscribers and members,
members using our online services may experience degraded
performance and our online subscriber growth could slow or
decrease and our revenue may decline.
Restrictions
and covenants in our loan agreement may limit our ability to
operate our business and could prevent us from obtaining needed
funds in the future.
Our September 2006 Loan Agreement with Orix, as amended in
February 2007 contains certain covenants, including certain
specified financial ratios, financial tests and liquidity
covenants, with which we must comply. For example, we must
maintain our Adjusted EBITDA, as defined in the Loan Agreement,
at certain levels, tested quarterly and maintain our liquidity,
as defined in the Loan Agreement, at certain levels, tested
monthly. If we do not maintain our Adjusted EBITDA or liquidity
at these specified levels, we would be in default of the Loan
Agreement. We are also subject to certain covenants that
restrict our ability to transfer cash or other property to
certain of our subsidiaries. The Loan Agreement also contains
additional affirmative and negative covenants, that limit our
ability to, among other things, borrow additional money or issue
guarantees, pay dividends or other distributions to
stockholders, make investments, create liens on or sell assets,
enter into transactions with affiliates, engage in mergers or
consolidations or make acquisitions. For example, the February
2007 amendment to the Loan Agreement caps the amount of our
revolving credit line at $3.0 million, an amount we have
already drawn down. This cap will increase to $5.0 million
at the end of this year if no Event of Default, as defined in
the Loan Agreement, occurs in 2007. All of these restrictions
could affect our ability to operate our business and may limit
our ability to take advantage of potential business
opportunities as they arise.
Our ability to comply with these provisions of the Loan
Agreement may be affected by changes in the economic or business
conditions or other events beyond our control. If we do not
comply with these covenants and restrictions, we would be in
default under the Loan Agreement. If we default under the Loan
Agreement, the Lender could cause all of our outstanding debt
obligations under the Loan Agreement, together with accrued
interest, to become due and payable, and require us to apply all
of our cash to repay the indebtedness under the Loan Agreement.
If we are unable to repay the indebtedness under the Loan
Agreement when due, the Lender could proceed against the
collateral specified in the Loan Agreement, which includes most
of the assets we own, including our intellectual property and
certain portions of the stock and assets of our subsidiaries. As
an additional result of such a default, borrowings under other
debt instruments that contain cross-acceleration or
cross-default provisions may also be accelerated and become due
and payable. If any of these events occur, there can be no
assurance that we would be able to make necessary payments to
the lenders or that we would be able to find alternative
financing.
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If we are
unable to successfully expand our international operations, our
business will suffer.
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 difficult or take longer
than anticipated especially due to international challenges,
such as language barriers, currency exchange issues and the fact
that the Internet infrastructure in foreign countries may be
less advanced than Internet infrastructure in the United States.
In October 2005, we began offering our online premium services
free of charge in some international markets in an effort 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, if our offer of free online premium services to some
international markets fails to develop critical mass in those
markets, or if critical mass is achieved in those markets and
members are then unwilling to pay for our online premium
services once our offer of free premium services ends, our
revenue may decline and our profit margins will be reduced.
Recent
and potential future acquisitions could result in operating
difficulties and unanticipated liabilities.
In November 2005, we significantly expanded our operations by
acquiring substantially all of the assets of LPI. In March 2006,
we acquired substantially all of the assets of RSVP. In June
2006, we largely completed the integration of the assets we
acquired through the LPI and RSVP transactions by executing on a
reorganization plan designed to better align our resources with
our strategic business objectives that cut our global workforce
by approximately 5%. In order to address market opportunities
and potential growth in our customer base, we may consider
additional expansion in the future, including possible
additional acquisitions of third-party assets, technologies or
businesses. Such acquisitions may involve the issuance of shares
of stock that dilute the interests of our other stockholders, or
require us to expend cash, incur debt or assume contingent
liabilities. Our acquisitions of LPI and RSVP and other
potential future acquisitions may be associated with a number of
risks, including:
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the difficulty of integrating the acquired assets and personnel
of the acquired businesses into our operations;
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the potential absorption of significant management attention and
significant financial resources for the ongoing development of
our business;
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the potential impairment of relationships with and difficulty in
attracting and retaining employees of the acquired companies or
our employees as a result of the integration of acquired
businesses;
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the difficulty of integrating the acquired companys
accounting, human resources and other administrative systems;
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the potential impairment of relationships with subscribers,
customers and partners of the acquired companies or our
subscribers, customers and partners as a result of the
integration of acquired businesses;
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the difficulty in attracting and retaining qualified management
to lead the combined businesses;
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the potential difficulties associated with entering new lines of
business with which we have little experience, such as some of
the businesses we have acquired from LPI and RSVP;
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the difficulty of complying with additional regulatory
requirements that may become applicable to us as the result of
an acquisition, such as various regulations that may become
applicable to us as a result of our acquisition of LPI,
including the acquisition of a related entity that produces some
content and other materials intended for mature
audiences; and
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the impact of known or unknown liabilities associated with the
acquired businesses. For example, in our RSVP business, should
some of the third parties with whom we contract in connection
with arranging our travel itineraries fail to perform their
obligations for any reason, as a third-party Austrian riverboat
tour operator with whom we contracted did in August 2006, we may
be forced to cancel or reschedule planned trips, lose deposits
we have made to vendors, refund customer deposits, reimburse
other costs to our customers and lose customers for those and
other travel itineraries as a result.
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If we are unable to successfully address these or other risks
associated with our acquisitions of LPI and RSVP or potential
future acquisitions, we may be unable to realize the anticipated
synergies and benefits of our acquisitions, which could
adversely affect our financial condition and results of
operations. In addition, the businesses we acquired from LPI and
RSVP are in more mature markets than our online businesses. The
value of these new businesses to us depends in part on our
expectation that by cross-marketing their services to our
existing user, member and subscriber bases and advertisers, we
can increase revenues in the acquired businesses. If this
cross-marketing is unsuccessful, or if revenue growth in our
acquired businesses is slower than expected, our financial
condition and results of operations would be harmed.
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 board of directors and on our ability to
recruit, hire, train, retain and manage other highly skilled
employees and directors. In June 2006, we experienced some
disruptions in our senior executive team, including the
resignation, for personal reasons, of our former Chief Executive
Officer, Lowell Selvin, and the subsequent appointment of one of
our directors, Karen Magee, as our Chief Executive Officer.
Additional changes in our senior management took place as part
of our June 2006 reorganization and our February 2007
appointment of a new Chief Technology Officer. Such disruptions
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.
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. Although we have a term loan and revolving line of
credit pursuant to our September 2006 Loan and Security
Agreement (along with related security and pledge agreements,
collectively the Loan Agreement) with ORIX Venture
Finance LLC (Orix), our February 2007 amendment to
the Agreement caps the amount of our revolving credit line at
$3.0 million, an amount we have already drawn down. We also
filed a shelf registration statement in April 2006 with the SEC
for up to $75.0 million of common stock, preferred stock,
debt securities
and/or
warrants to be sold from time to time at prices and on terms to
be determined by market conditions at the time of offering. In
addition, under the shelf registration statement some of our
stockholders may sell up to 1.7 million shares of our
common stock. 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.
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, or by the failure of our third
party vendors to perform their obligations for any reason, any
of 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
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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 member
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. Across all three of our service lines, we compete with
traditional media companies focused on the general population
and the LGBT community, including local newspapers, national and
regional magazines, satellite radio, cable networks and network,
cable and satellite television shows. In our advertising
business, we compete with a broad variety of online and print
content providers, including large media companies such as
Yahoo!, MSN, Time Warner, Viacom and News Corporation, as well
as a number of smaller companies focused specifically on the
LGBT community. In our subscription business, our competitors
include these companies as well as other companies that offer
more targeted online service offerings, such as Match.com,
Yahoo! Personals, News Corporation, and a number of other
smaller online companies focused specifically on the LGBT
community. More recently, we have faced competition from the
growth of social networking sites, such as MySpace, that provide
opportunity for online community for a wide variety of users,
including the LGBT community. In our transaction business, we
compete with traditional and online retailers. Most of these
transaction service competitors target their products and
services to the general audience while still serving the LGBT
market. Other competitors, however, specialize in the LGBT
market, particularly in the gay and lesbian travel space. 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.
We believe that the primary competitive factors affecting our
business are quality of content and service, price,
functionality, brand recognition, customer affinity and loyalty,
ease of use, reliability and critical mass. Some of our current
and many of our potential competitors have longer operating
histories, larger customer bases and greater brand recognition
in other business and Internet markets and significantly greater
financial, marketing, technical and other resources than we do.
Therefore, these competitors may be able to devote greater
resources to marketing and promotional campaigns, adopt more
aggressive pricing policies or may try to attract readers, users
or traffic by offering services for free and devote
substantially more resources to developing their services and
systems than we can. Increased competition may result in reduced
operating margins, loss of market share and reduced revenue. Our
ability to continue to offer increasingly competitive functional
capabilities on our websites will also depend upon our success
in moving onto a more extensible core technology platform.
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 brands,
including Gay.com, PlanetOut.com, Kleptomaniac.com, BuyGay.com,
Out.com, Advocate.com and RSVPVacations.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 forced us to temporarily change our domain name in France
during our appeal of that decision and may have temporarily made
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 or .mobi, 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
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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.
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 brands 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. We may also attract claims that our print and
online media properties have violated the copyrights, rights of
privacy, or other rights of others. 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 forced us
to temporarily change our domain name in France during our
appeal of that decision and may have temporarily made 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,
including 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, display and production of material
intended for mature audiences 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 wish to 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
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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 email
message to an address on that states registry if the email
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;
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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 and through some of the
businesses we acquired from LPI 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,
in June 2005, the United States Department of Justice (the
DOJ) adopted regulations purporting to implement the
Child Protection and Obscenity Act of 1988, as amended (the
CPO 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 forms of photo identification as proof of a
performers age. Failure to properly obtain, maintain or
make these 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
CPO Act because we allow our members to display photographic
images on our websites as part of member profiles. In addition,
we may be deemed a primary producer under the CPO Act because a
portion of one of the businesses we acquired in the LPI
acquisition is involved in production of adult content.
Enforcement of these regulations as to secondary producers has
been stayed pending resolution of a legal challenge on the
grounds that the regulations exceed the DOJs statutory
authority to regulate secondary producers, among other grounds.
In July 2006, the Adam Walsh Child Protection and Safety Act of
2006 (the Walsh Act) became law, amending the CPO
Act by expanding the definition of the adult materials covered
by the CPO Act and by requiring secondary producers to maintain
and make available specified records under the CPO Act.
Additionally, in July 2006, the FBI began conducting CPO Act
record inspections, including inspections of businesses that
were secondary producers under the CPO Act. The Walsh Act may
result in the stay on enforcement of the CPO Act being lifted.
If that occurs or if the FBI continues to inspect businesses
that are secondary producers and there are no legal challenges
to the Walsh Act or these challenges are unsuccessful, we will
be subject to significant and burdensome recordkeeping
compliance requirements and we will have to evaluate and
implement additional registration and recordkeeping processes
and procedures, each of which would result in additional
expenses to us. If our members and subscribers feel these
additional restrictions or registration and recordkeeping
processes and procedures are too burdensome, this may result
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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. Alternatively, if we determine that
the recordkeeping and compliance requirements would be too
burdensome, we may be forced to limit the type of content that
we allow our members to post to their profiles, which will
result in a loss of features that we believe our members and
subscribers find attractive, and in turn could result in a
decline in our subscribers growth.
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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,
revenue and profit margins.
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 centers. 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 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.
Adult
content in our media properties may be the target of negative
publicity campaigns or subject us to restrictive or costly
regulatory compliance.
A portion of the content of our media properties is adult in
nature. Our adult content increased significantly as a result of
our November 2005 acquisition of assets from LPI, which included
several adult-themed media properties. 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 are a provider of
adult content. 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
23
our business and by diverting managements attention.
Further, some 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 of our adult content, which, in turn, may hurt the
value of our stock. Additionally, future laws or regulations, or
new interpretations of existing laws and regulations, may
restrict our ability to provide adult content, or make it more
difficult or costly to do so, such as the Walsh Act, which
became law in July 2006, and the regulations adopted by the DOJ
in June 2005 purporting to implement the Child Protection and
Obscenity Act of 1988.
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, for travel and
event packages or for physical shipments of goods into states
other than California and New York. 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 are
exposed to pricing and production capacity risks associated with
our magazine publishing business, which could result in lower
revenues and profit margins.
We publish and distribute magazines, such as The Advocate,
Out, The Out Traveler and HIVPlus, among others. The
commodity prices for paper products have been increasing over
recent years, and producers of paper products are often faced
with production capacity limitations, which could result in
delays or interruptions in our supply of paper. In addition,
mailing costs have also been increasing, primarily due to higher
postage rates. If pricing of paper products and mailing costs
continue to increase, if we encounter shortages in our paper
supplies, or if our third party vendors fail to meet their
obligations for any reason, our revenues and profit margins
could be adversely affected.
We may
not be able to repay our existing debt; failure to do so or
refinance the debt could prevent us from implementing our
strategy and realizing anticipated profits.
If we were unable to refinance our debt or to raise additional
capital on acceptable terms, our ability to operate our business
would be impaired. As of December 31, 2006, we had an
aggregate of approximately $16.9 million of long-term debt
on a consolidated basis, including current maturities, and
approximately $38.3 million of accumulated deficit. Our
ability to make interest and principal payments on our debt and
borrow additional funds on favorable terms depends on the future
performance of the business. If we do not have enough cash flow
in the future to make interest or principal payments on our
debt, we may be required to refinance all or a part of our debt
or to raise additional capital. We cannot assure that we will be
able to refinance our debt or raise additional capital on
acceptable terms.
24
In the
event of an earthquake, other natural or man-made disaster, or
power loss, our operations could be interrupted or adversely
affected, resulting in lower revenue.
Our executive offices and our data center are located in the
San Francisco Bay area and we have significant operations
in Los Angeles. Our business and operations could be disrupted
in the event of electrical blackouts, fires, floods,
earthquakes, power losses, telecommunications failures, acts of
terrorism, break-ins or similar events. Because our California
operations are located in earthquake-sensitive areas, 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. Revenue from our recently acquired RSVP
travel business depends in significant part on ocean-going
cruises, and could be adversely affected by piracy or
hurricanes, tsunamis and other meteorological events affecting
areas to be visited by future cruises. Our travel business could
also be materially adversely affected by concerns about
communicable infectious diseases, including future varieties of
influenza.
Recent
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 have adopted 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 require us to record a
charge to earnings for employee stock option grants. In
addition, regulations implemented by the Nasdaq Global Market
generally requiring stockholder approval for all stock option
plans could make it more difficult for us to grant options 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 is required on an
ongoing basis to perform an evaluation of our internal control
over financial reporting and have our independent registered
public accounting firm attest to such evaluations. 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 will continue to require, the commitment of
significant financial and managerial resources. If we fail to
timely complete these evaluations, or if our independent
registered public accounting firm cannot timely attest to our
evaluations, 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
December 31, 2006, the closing sale prices of our common
stock on the Nasdaq Stock Market LLC ranged from $3.06 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, the operating and stock
price performance of other companies that investors or analysts
deem comparable to us and sales of stock by our existing
stockholders.
25
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.
Our
Stockholder Rights Plan, along with 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.
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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. Additionally, our Stockholder
Rights Plan adopted in January 2007 will cause substantial
dilution to a person or group that attempts to acquire us on
terms not approved by our board of directors. Our board of
directors could rely on Delaware law or the Stockholder Rights
Plan to prevent or delay an acquisition of us.
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Item 1B.
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Unresolved
Staff Comments
|
None.
We are headquartered in San Francisco, California and
currently lease approximately 56,000 square feet at our
headquarters facility. Our lease runs through 2012 and we have
an option to terminate the lease effective January 2010 with
proper notice for a fee. We also lease additional offices in Los
Angeles, out of which we operate many of the functions
supporting the publications produced by our LPI subsidiary, New
York, out of which we operate our PlanetOut Inc. advertising
sales and support and other LPI support functions and
Minneapolis, out of which we operate our RSVP subsidiary. We
support our international operations out of offices we lease in
London and Buenos Aires. We believe that our existing facilities
are adequate to meet current requirements. We believe that
suitable additional or substitute space will be available as
needed to accommodate any further physical expansion of
corporate operations and for any additional sales offices.
For a discussion of the accounting treatment of our leased
corporate headquarters, see Note 8
Commitments and Contingencies of the notes to our
Consolidated Financial Statements, which we incorporate by
reference herein.
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Item 3.
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Legal
Proceedings
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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 trademark in France. On June 30, 2005,
the French court found that although we had not infringed
DIALINKs trademark, we had damaged
26
DIALINK through unfair competition. The Court ordered us to pay
damages of 50,000 (approximately US $66,000 at
December 31, 2006), half to be paid notwithstanding appeal,
the other half to be paid after appeal. The Court also enjoined
us from using gay as a domain name for our services
in France. In October 2005, we paid half the damage award as
required by the court order and temporarily changed the domain
name of our French website, from www.fr.gay.com to
www.ooups.com, a domain name we have used previously in France.
This temporary change may have made it more difficult for French
users to locate our French website. In January 2006, both sides
appealed the French courts decision. In November 2006, the
Court of Appeals canceled DIALINKs trademarks, found that
we had not engaged in unfair competition, allowed us to resume
use of Gay.net, Gay.com and fr.gay.com in France and ordered
DIALINK to return the 25,000 (approximately
US $33,000 at December 31, 2006) we had paid
previously and pay us 20,511 (approximately
US $27,000 at December 31, 2006) in costs and
interest. DIALINK appealed this matter to the French Supreme
Court in February 2007.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of security holders during
the fourth quarter of 2006.
PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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Market
Information
Our common stock is traded on The Nasdaq Global Market under the
symbol LGBT. Public trading of our common stock
commenced in October 2004 and there was no public market for our
stock prior to that time. The following table sets forth, for
the periods indicated, the high and low bid prices per share of
our common stock as reported on The Nasdaq Global Market:
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High
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Low
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2005
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First Quarter
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$
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13.65
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$
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8.10
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Second Quarter
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9.77
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6.12
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Third Quarter
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10.39
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7.31
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Fourth Quarter
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8.99
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6.83
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2006
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First Quarter
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$
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10.27
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$
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7.37
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Second Quarter
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10.07
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6.47
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Third Quarter
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7.95
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2.66
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Fourth Quarter
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4.86
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3.04
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On March 1, 2007, the closing sales price of our common
stock was $3.90 per share.
As of March 1, 2007, there were approximately 127
holders of record of our common stock. This figure does not
include the number of stockholders whose shares are held of
record by a broker or clearing agency, but does include each
such brokerage house or clearing agency as a single holder of
record.
We have never paid cash dividends on our stock and currently
anticipate that we will continue to retain any future earnings
to finance the growth of our business.
For information on securities authorized for issuance under our
equity compensation plans, refer to Item 12, Part III.
27
Unregistered
Sales of Equity Securities and Use of Proceeds
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, for
acquisitions and for working capital needs. 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, 2006, the
proceeds of our public offering were applied toward repayment of
the principal and interest of the senior subordinated note in
the amount of $5.0 million, $25.5 million for the
acquisition of the assets of LPI and $5.4 million for the
acquisition of the assets of RSVP. The remaining proceeds of
$7.0 million were used for working capital needs of the
business. The use of proceeds of our public offering conformed
to the intended use of proceeds as described in our initial
public offering prospectus filed on October 14, 2004.
Repurchases
of Equity Securities
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(d)
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(c)
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Maximum Number
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(a)
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Total Number
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(or Approximate
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Total Number
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(b)
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of SharesPurchased
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Dollar Value) of
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of Shares
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Average
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as Part of Publicly
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Shares that May
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Purchased
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Price Paid
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Announced
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Yet Be Purchased Under
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Period
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(1)
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per Share
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Plans or Programs
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the Plans or Programs
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October 1, 2006
October 31, 2006
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$
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November 1, 2006
November 30, 2006
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December 1, 2006
December 31, 2006
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Total
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$
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(1) |
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PlanetOut does not have any publicly announced plans or programs
to repurchase shares of its common stock. |
28
Performance
Measurement Comparison(1)
The following graph shows a total stockholder return of an
investment of $100 (and the reinvestment of any dividends
thereafter) made in cash on October 14, 2004 (the date on
which the Companys Common Stock began trading on the
Nasdaq Stock Market) and held until December 31, 2006 for:
(i) the Companys Common Stock; (ii) the Nasdaq
Composite Index; and (iii) the RDG Internet Composite
Index. The RDG Internet Composite Index is composed of
approximately 50 U.S. publicly traded Internet companies.
The Companys stock price performance shown in the graph is
not indicative of future stock performance.
Comparison
of Cumulative Total Return
among PlanetOut Inc., the Nasdaq Composite Index,
and the RDG Internet Composite Index
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(1) |
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This Section is not soliciting material, is not
deemed filed with the SEC and is not to be
incorporated by reference in any of our filings under the
Securities Act of 1933 or the Securities Exchange Act of 1934
whether made before or after the date hereof and irrespective of
any general incorporation language in such filing. |
29
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Item 6.
|
Selected
Financial Data
|
The selected financial data set forth below are derived from our
financial statements. The statement of operations data for the
years ended December 31, 2004, 2005 and 2006, and the
balance sheet data as of December 31, 2005 and 2006 are
derived from our audited financial statements included elsewhere
in this
Form 10-K.
The statement of operations data for the years ended
December 31, 2002 and 2003, and the balance sheet data as
of December 31, 2002 and 2003 and 2004 are derived from our
audited financial statements not included in this
Form 10-K.
The historical results are not necessarily indicative of results
to be expected for any future period. The data presented below
has been derived from financial statements that have been
prepared in accordance with accounting principles generally
accepted in the United States of America and should be read with
our financial statements, including the accompanying notes to
the financial statements, and with Managements
Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this
Form 10-K.
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Year Ended December 31,
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2002
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2003
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2004
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2005
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2006(3)
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(In thousands, except per share amounts)
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Revenue:
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Advertising services
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$
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4,227
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$
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4,626
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$
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6,541
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$
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11,724
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$
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26,479
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Subscription services
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8,030
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12,727
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16,775
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21,135
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|
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24,447
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Transaction services
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1,700
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1,746
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1,646
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2,732
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|
|
|
17,718
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|
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Total revenue
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13,957
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|
|
|
19,099
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|
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24,962
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|
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35,591
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|
|
|
68,644
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|
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Operating costs and expenses:(*)
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Cost of revenue
|
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6,311
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|
|
|
6,696
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|
|
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8,068
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|
|
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11,964
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|
|
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35,205
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Sales and marketing
|
|
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5,739
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|
|
|
6,554
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|
|
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8,806
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|
|
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11,088
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|
|
|
17,344
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General and administrative(1)
|
|
|
7,099
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|
|
|
4,242
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|
|
|
5,182
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|
|
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7,036
|
|
|
|
12,711
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Restructuring
|
|
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|
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|
|
|
|
|
|
|
|
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791
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Depreciation and amortization
|
|
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2,615
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|
|
|
2,030
|
|
|
|
2,457
|
|
|
|
3,460
|
|
|
|
5,606
|
|
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Total operating costs and expenses
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21,764
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|
|
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19,522
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|
|
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24,513
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|
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33,548
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|
|
|
71,657
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Income (loss) from operations
|
|
|
(7,807
|
)
|
|
|
(423
|
)
|
|
|
449
|
|
|
|
2,043
|
|
|
|
(3,013
|
)
|
Equity in net loss of
unconsolidated affiliate(2)
|
|
|
(22
|
)
|
|
|
(59
|
)
|
|
|
(94
|
)
|
|
|
(57
|
)
|
|
|
|
|
Interest expense
|
|
|
(112
|
)
|
|
|
(193
|
)
|
|
|
(1,077
|
)
|
|
|
(238
|
)
|
|
|
(1,189
|
)
|
Other income, net
|
|
|
96
|
|
|
|
72
|
|
|
|
210
|
|
|
|
1,199
|
|
|
|
584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
and minority interest
|
|
|
(7,845
|
)
|
|
|
(603
|
)
|
|
|
(512
|
)
|
|
|
2,947
|
|
|
|
(3,618
|
)
|
Provision for income taxes
|
|
|
(9
|
)
|
|
|
(149
|
)
|
|
|
(25
|
)
|
|
|
(207
|
)
|
|
|
(45
|
)
|
Minority interest in gain of
consolidated affiliate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(7,854
|
)
|
|
|
(752
|
)
|
|
|
(537
|
)
|
|
|
2,740
|
|
|
|
(3,710
|
)
|
Accretion on redeemable
convertible preferred stock
|
|
|
(1,709
|
)
|
|
|
(1,729
|
)
|
|
|
(1,402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable
to common stockholders
|
|
$
|
(9,563
|
)
|
|
$
|
(2,481
|
)
|
|
$
|
(1,939
|
)
|
|
$
|
2,740
|
|
|
$
|
(3,710
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(6.17
|
)
|
|
$
|
(1.53
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
0.16
|
|
|
$
|
(0.21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(6.17
|
)
|
|
$
|
(1.53
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
0.15
|
|
|
$
|
(0.21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006(3)
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Weighted-average shares used to
compute net earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,551
|
|
|
|
1,624
|
|
|
|
4,837
|
|
|
|
17,116
|
|
|
|
17,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
1,551
|
|
|
|
1,624
|
|
|
|
4,837
|
|
|
|
18,192
|
|
|
|
17,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) Stock-based compensation is
allocated as follows (see Note 11):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
255
|
|
|
$
|
502
|
|
|
$
|
565
|
|
|
$
|
177
|
|
|
$
|
70
|
|
Sales and marketing
|
|
|
117
|
|
|
|
419
|
|
|
|
556
|
|
|
|
254
|
|
|
|
41
|
|
General and administrative
|
|
|
369
|
|
|
|
676
|
|
|
|
1,013
|
|
|
|
568
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
741
|
|
|
$
|
1,597
|
|
|
$
|
2,134
|
|
|
$
|
999
|
|
|
$
|
293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006(3)
|
|
|
|
(In thousands)
|
|
|
Consolidated balance sheet
data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,082
|
|
|
$
|
2,282
|
|
|
$
|
43,128
|
|
|
$
|
18,461
|
|
|
$
|
9,674
|
|
Working capital (deficit)
|
|
|
(1,751
|
)
|
|
|
(2,804
|
)
|
|
|
39,209
|
|
|
|
14,761
|
|
|
|
7,144
|
|
Total assets
|
|
|
9,974
|
|
|
|
10,929
|
|
|
|
59,208
|
|
|
|
77,338
|
|
|
|
93,589
|
|
Long-term liabilities
|
|
|
1,856
|
|
|
|
545
|
|
|
|
2,241
|
|
|
|
10,636
|
|
|
|
12,647
|
|
Redeemable convertible preferred
stock
|
|
|
38,034
|
|
|
|
41,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity (deficit)
|
|
$
|
(35,142
|
)
|
|
$
|
(37,717
|
)
|
|
$
|
48,764
|
|
|
$
|
53,052
|
|
|
$
|
51,145
|
|
|
|
|
(1) |
|
Includes a $2,750,000 lease settlement expense in 2002 related
to an office lease terminated in September 2002. |
|
(2) |
|
Represents a minority interest in Gay.it S.p.A., as further
described in Note 3 to the financial statements. |
|
(3) |
|
2006 data reflects the impact of the acquisitions of LPI and
RSVP. |
31
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following Managements Discussion and Analysis of
Financial Condition and Results of Operations summarizes the
significant factors affecting our consolidated operating
results, financial condition and liquidity for the three-year
period ended December 31, 2006, should be read in
conjunction with the Consolidated Financial Statements and Notes
to the Consolidated Financial Statements included elsewhere in
this
Form 10-K,
and contains forward-looking statements regarding future events
and our future results that are subject to the safe harbors
created under the Securities Act of 1933 (the Securities
Act) and the Securities Exchange Act of 1934 (the
Exchange Act). These statements are based on current
expectations, estimates, forecasts, and projections about the
industries in which we operate and the beliefs and assumptions
of our management. Words such as anticipate,
believe, continue, could,
estimate, expect, goal,
intend, may, plan,
potential, predict, project,
seek, should, target,
will, would, variations of such words,
and similar expressions are intended to identify such
forward-looking statements. In addition, any statements that
refer to projections of our future financial performance, our
anticipated growth and trends in our businesses, and other
characterizations of future events or circumstances are
forward-looking statements. Readers are cautioned that these
forward-looking statements are only predictions and are subject
to risks, uncertainties, and assumptions that are difficult to
predict, including those identified below and under Risk
Factors, and elsewhere in this Annual Report on
Form 10-K.
Therefore, actual results may differ materially and adversely
from those expressed in any forward-looking statements. We
undertake no obligation to revise or update any forward-looking
statements for any reason.
Overview
We are a leading global media and entertainment company serving
the worldwide lesbian, gay, bisexual and transgender community.
Our products and services, including travel and events from
RSVP, and our network of media properties, including our
flagship websites Gay.com and PlanetOut.com, and The Advocate
and Out magazines, allow our users to connect with
and learn about other members of the LGBT community around the
world.
With our November 2005 acquisition of substantially all of the
assets of LPI, we expanded the number and scope of our
subscription service offerings. In addition to premium
subscriptions to our Gay.com and PlanetOut.com services, we
offer our customers subscriptions to seven other online and
print products and services, as well as to various combined, or
bundled, packages of these subscription services, including the
leading LGBT-targeted magazines in the United States, Out
and The Advocate. We believe Out
magazine is the leading audited circulation magazine in the
United States focused on the gay and lesbian community, while
The Advocate, a pioneer in LGBT media since 1967, is the
second largest. We believe these, and other properties acquired
from LPI, allow us to better serve our business and consumer
customers by expanding the platforms and content that we can
provide them and to more cost-effectively promote our own
products and services.
In March 2006, we completed the purchase of substantially all of
the assets of RSVP, a leading marketer of gay and lesbian travel
and events, including cruises, land tours and resort vacations.
Through RSVP, we are able to offer specialized travel and event
packages to the LGBT market. Typically, RSVP develops travel
itineraries on cruises, on land and at resorts, by contracting
with third-parties who provide the basic travel services. RSVP
frequently adds additional programming elements to these basic
services, such as special entertainers, parties and events, and
markets these enhanced vacation packages to the gay and lesbian
audience.
These acquisitions support our strategic plan of building a
diversified global media and entertainment company serving the
LGBT community, growing our revenue base and diversifying our
revenue mix among advertising services, subscription services
and transaction services.
32
Results
of Operations
The following table sets forth the percentage of total revenue
represented by items in our consolidated statements of
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(As a percentage of total revenue)
|
|
|
Consolidated statements of
operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising services
|
|
|
26.2
|
%
|
|
|
32.9
|
%
|
|
|
38.6
|
%
|
Subscription services
|
|
|
67.2
|
|
|
|
59.4
|
|
|
|
35.6
|
|
Transaction services
|
|
|
6.6
|
|
|
|
7.7
|
|
|
|
25.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
32.3
|
|
|
|
33.6
|
|
|
|
51.3
|
|
Sales and marketing
|
|
|
35.3
|
|
|
|
31.2
|
|
|
|
25.2
|
|
General and administrative
|
|
|
20.8
|
|
|
|
19.8
|
|
|
|
18.5
|
|
Restructuring
|
|
|
|
|
|
|
|
|
|
|
1.2
|
|
Depreciation and amortization
|
|
|
9.8
|
|
|
|
9.7
|
|
|
|
8.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
98.2
|
|
|
|
94.3
|
|
|
|
104.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
1.8
|
|
|
|
5.7
|
|
|
|
(4.4
|
)
|
Equity in net loss of
unconsolidated affiliate
|
|
|
(0.4
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
Interest expense
|
|
|
(4.3
|
)
|
|
|
(0.7
|
)
|
|
|
(1.7
|
)
|
Other income, net
|
|
|
0.8
|
|
|
|
3.5
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
and minority interest
|
|
|
(2.1
|
)
|
|
|
8.3
|
|
|
|
(5.2
|
)
|
Provision for income taxes
|
|
|
(0.1
|
)
|
|
|
(0.6
|
)
|
|
|
(0.1
|
)
|
Minority interest in gain of
consolidated affiliate
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(2.2
|
)%
|
|
|
7.7
|
%
|
|
|
(5.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of the Years Ended December 31, 2006 and December 31,
2005
Summary
Our total revenue was $68.6 million in fiscal 2006,
increasing 93% above our prior years revenue of
$35.6 million, due to growth of advertising services, and
the incremental effect of the acquisitions of LPI and RSVP.
Total operating costs and expenses were $71.7 million in
fiscal 2006, increasing 114% above the prior year total of
$33.5 million. These increases were primarily due to the
incremental effect of the acquisitions of LPI and RSVP.
Loss from operations was $3.0 million in fiscal 2006,
compared to income from operations of $2.0 million in
fiscal 2005. This decrease was primarily related to the
integration costs and amortization expense related to the
acquisitions of LPI and RSVP, reductions in our total paid
online subscribers, restructuring expenses and increased
expenses related to the operations and support infrastructure of
our online properties.
Included in our 2005 operating expenses are stock-based
compensation expenses of $74,000 for the accelerated vesting of
approximately 720,000 stock options in December 2005, reflecting
the increase in the intrinsic value of these options on the date
of acceleration, and $526,000, reflecting the remaining balance
of unamortized unearned stock-based compensation of these
options on the date of acceleration. As of December 31,
2006, we had
33
$1.2 million of unearned stock-based compensation. We may
recognize additional stock-based compensation expense in the
future if we grant additional stock, stock options or other
forms of equity-based compensation.
Management expects that revenue will increase in fiscal 2007,
primarily as a result of the anticipated increase in transaction
services revenue due to RSVPs expanded schedule of
larger-ship iteneraries for 2007 and, to a lesser extent, an
anticipated increase in advertising services revenue, offset
partially by a reduction in online subscription services
revenue.
We expect our operating loss will increase in fiscal 2007
despite the anticipated increase in revenue as we incur
additional expenses for the development and expansion of site
operations and support infrastructure, increased market research
and marketing campaigns for a number of our brands and the
continuing integration of our acquired businesses. For 2007, we
anticipate that gains in operating efficiencies will be offset
by non-recurring acquisition and business integration costs,
higher expenses to launch new member facing features in our
online products and higher depreciation on capital investments
in our support infrastructure and in our on-going product
development.
Revenue
Advertising Services. We derive online
advertising revenue 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. 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 and from print
advertising. Advertising services revenue was $26.5 million
in fiscal 2006, an increase of 126% from fiscal 2005. This
improvement was due, in part, to growth of the general online
advertising industry and the incremental effect of the
acquisition of LPI. During fiscal 2006, we expanded our
Local Scene listings on our websites, a local
business listing directory intended to drive local business
advertising opportunities. Advertising services revenue
accounted for 39% of revenue for 2006, up from 33% for the prior
year.
For fiscal 2007, we expect a modest increase in advertising
services revenue over 2006 due to continued growth of the
general online advertising industry. We expect the percentage of
our overall revenue attributable to advertising services to
decrease in 2007 as a result of even higher growth in our
transaction services revenue.
Subscription Services. We currently offer our
customers nine separate subscription services across both our
online and print media properties. In addition, we have
developed new bundled packages of our various subscription
services to increase their value to our customers and to
generate subscribers, circulation and revenue. Our subscription
services revenue was $24.4 million in fiscal 2006, 16%
above the prior year. These increases were due to the
incremental effect of the acquisition of LPI, partially offset
by a reduction in online subscribers. Subscription services
revenue accounted for 36% of revenue for 2006, down from 59% for
the prior year. The decrease in subscription services revenue as
a percentage of total revenue occurred as a result of the higher
growth rate of our advertising services, a reduction in our
online subscribers, the international gratis campaign,
and the acquisitions of LPI and RSVP.
For fiscal 2007, we expect total subscription services revenue
to decrease in comparison to fiscal 2006, as a result of a
reduction in online subscribers, and despite an anticipated
increase in print subscribers. We also expect the percentage of
our overall revenue attributable to subscription services to
continue to decrease as a result of higher growth in our
transaction service revenue associated, in part, with the
acquisition of RSVP.
Transaction Services. Transaction services
revenue includes revenue generated from the sale of products
through multiple
e-commerce
websites, sales of magazines through newsstand circulation, book
sales, travel events and event marketing. Travel events services
include cruises, land tours and resort vacations, together with
revenues from onboard and other activities. Our transaction
services revenue totaled $17.7 million in fiscal 2006, a
549% increase from 2005. This increase was primarily due to the
incremental effect of the acquisitions of LPI and RSVP as well
as revenue generated through our joint venture, PNO DSW Events,
LLC. Transaction services revenue accounted for 26% of revenue
for 2006, up from 8% for the prior year.
The travel and event marketing business has long lead times, and
revenue is recorded when cruises or events are delivered. Our
transaction services revenue will fluctuate from quarter to
quarter depending upon the timing of scheduled cruises and
events. For fiscal 2007, we expect transaction services revenue
to increase over fiscal 2006,
34
and the percentage of our revenue attributable to transaction
services revenue to increase as a result RSVPs expanded
schedule of larger-ship itineraries for 2007.
Operating
Costs and Expenses
Cost of Revenue. Cost of revenue primarily
consists of payroll and related benefits associated with
supporting our subscription-based services, leasing costs
related to chartering ships for leased voyages and vacations,
the development and expansion of site operations and support
infrastructure and producing and maintaining content for our
various websites, magazines and newsletters. Other expenses
directly related to generating revenue included in cost of
revenue include commissions and other expenses related to travel
events services, transaction processing fees, computer equipment
maintenance, occupancy costs, co-location and Internet
connectivity fees, purchased content and cost of goods sold.
Cost of revenue was $35.2 million in fiscal 2006, 194%
above the prior year. This increase was due to the incremental
effect of the acquisitions of LPI and RSVP. During the three
months ended September 30, 2006, we wrote-off deposits on
leased voyages of approximately $0.5 million as a result of
a third-party contractors inability to meet its
contractual obligations to us to provide the basic travel
services associated with cruises. Cost of revenue was 51% as a
percentage of total revenue for 2006, up from 34% in the prior
year. This increase was due to the incremental effect of the
acquisitions of LPI and RSVP and an increase in expenses related
to site operations and support infrastructure.
For fiscal 2007, we expect cost of revenue to increase over
fiscal 2006 as we continue our product development efforts, and
due to the acquisitions of LPI and RSVP. We expect the cost of
revenue as percentage of revenue to increase for 2007 over
fiscal 2006 as a result of the shift in our revenue mix
resulting from the acquisitions of LPI and RSVP.
Sales and Marketing. Sales and marketing
expense primarily consists of payroll and related benefits for
employees involved in sales, advertising client service,
customer service, marketing and other support functions;
product, service and general corporate marketing and promotions;
and occupancy costs. Sales and marketing expenses were
$17.3 million in fiscal 2006, up 56% from the prior year.
This increase was due to the incremental effect of the
acquisitions of LPI and RSVP, partially offset by decreased
advertising expenses related to our premium online subscription
services. Sales and marketing expenses as a percentage of
revenue were 25% for 2006, down from 31% in the prior year. This
decrease occurred primarily as a result of the effect of the
acquisitions of LPI and RSVP.
For fiscal 2007, we expect sales and marketing expenses to
increase over fiscal 2006 due to the incremental costs of
selling and marketing the LPI and RSVP products and services. We
expect sales and marketing expense as a percentage of revenue to
continue to decrease as we begin to leverage operating synergies
from our historical business and our acquisitions of LPI and
RSVP.
General and Administrative. General and
administrative expense consists primarily of payroll and related
benefits for executive, finance, administrative and other
corporate personnel, occupancy costs, professional fees,
insurance and other general corporate expenses. Our general and
administrative expenses were $12.7 million for 2006, up 81%
from the prior year. This increase was due to the incremental
effect of the acquisitions of LPI and RSVP; increased
compensation and employee related costs as a result of increases
in headcount; other relocation and retention charges; and
integration and other expenses associated with the acquisitions
of LPI and RSVP such as increased legal and insurance expenses.
General and administrative expenses as a percentage of revenue
were 19% for 2006, down from 20% in the prior year. This
decrease occurred primarily as a result of the effect of the
acquisitions of LPI and RSVP.
For fiscal 2007, we expect general and administrative expenses
to increase over fiscal 2006 related to the acquisition and
integration of LPI and RSVP. We expect general and
administrative expenses as a percentage of revenue to continue
to decrease as we begin to leverage operating synergies from our
acquisitions of LPI and RSVP.
Restructuring. In June 2006, our board of
directors adopted and approved a reorganization plan to align
our resources with our strategic business objectives. As part of
the plan, we consolidated our media and advertising services,
e-commerce
services and back-office operations on a global basis to
streamline our operations as part of
35
continued integration of our recently acquired businesses. The
reorganization, along with other organizational changes, reduced
our total workforce by approximately 5%. Restructuring costs of
approximately $0.8 million, primarily related to employee
severance benefits of approximately $0.6 million and
facilities consolidation expenses of approximately
$0.2 million, were recorded during 2006. During the second
half of 2006, we recorded adjustments to decrease the cost of
closing redundant facilities of approximately $45,000. We
completed this restructuring in the fourth quarter of 2006, with
certain payments continuing beyond 2006 in accordance with the
terms of existing severance and other agreements.
Depreciation and Amortization. Depreciation
and amortization expense was $5.6 million for fiscal 2006,
up 62% from the prior year, due primarily to an increase in the
amortization of intangible assets associated with the
acquisitions of LPI and RSVP and increased capital expenditures
to support our on-going product development and compliance
efforts. Amortization of intangible assets was $1.5 million
due to intangible assets which we capitalized in connection with
the acquisition of LPI. Depreciation and amortization as a
percentage of revenue was 8% for 2006, down from 10% in the
prior year.
For fiscal 2007, we expect depreciation and amortization expense
will increase over fiscal 2006 as a result of capital
investments to support our on-going product development.
Other
Income and Expenses
Equity in Net Loss of Unconsolidated
Affiliate. We recorded a net loss of
unconsolidated affiliate of zero and $57,000 for 2006 and 2005,
respectively, for our interest in Gay.it S.p.A. Our investment
in this unconsolidated affiliate was reduced to zero as of
December 31, 2005.
Interest Expense. Interest expense was
$1.2 million for fiscal 2006, an increase of 400% from the
prior year, due primarily to the issuance of the note payable in
connection with the acquisition of LPI in November 2005 and the
Orix term and revolving loans entered into in September 2006.
Other Income, Net. Other income, net consists
of interest earned on cash, cash equivalents, restricted cash
and short-term investments as well as other miscellaneous
non-operating transactions. Other income, net was
$0.6 million for fiscal 2006, a decrease of 51% from the
prior year, primarily due to decreased interest income during
fiscal 2006 on our lower cash balance as a result of the
acquisitions of LPI in November 2005 and RSVP in March 2006.
Comparison
of the Years Ended December 31, 2005 and December 31,
2004
Revenue
Advertising Services. We had advertising
services revenue of $11.7 million in fiscal 2005, an
increase of 79% from fiscal 2004. This improvement was due, in
part, to growth of the general online advertising industry,
deeper penetration into key advertising categories, growth of
our subscriber base and the incremental effect of the
acquisition of LPI. Our advertising services revenue accounted
for 33% of revenue for 2005, up from 26% for the prior year.
Subscription Services. Our subscription
services revenue was $21.1 million in fiscal 2005, 26%
above the prior year, due to growth in paid subscribers, an
increase in the average subscription length in our online
services, and the incremental effect of the acquisition of LPI.
Deferred revenue for online subscription services increased 26%,
to $4.1 million, as we successfully signed subscribers to
annual plans, which accounted for 60% of all subscriptions in
the fourth quarter of 2005, up from 43% in the same period
during the prior year. For fiscal 2005, subscription services
revenues accounted for 59% of revenue, down from 67% for the
prior year as a result of the higher growth rate of our organic
advertising services, the introduction of the international
gratis campaign in the fourth quarter of 2005, and the
acquisition of LPI.
Transaction Services. Our transaction services
revenue totaled $2.7 million in fiscal 2005, a 66% increase
from 2004, primarily due to the incremental effect of the
acquisition of LPI. Transaction services revenue accounted for
8% of revenue for 2005, up from 7% for the prior year.
36
Operating
Costs and Expenses
Cost of Revenue. Cost of revenue was
$12.0 million in fiscal 2005, 48% above the prior year due
to increases in employee headcount and salaries, higher
occupancy expenses related to the relocation of our corporate
headquarters to larger facilities to accommodate the growth of
our businesses, and the incremental costs of managing the LPI
assets. Cost of revenue was 34% of revenue for 2005, up from 32%
in 2004 due to the incremental effect of the acquisition of LPI.
Sales and Marketing. Sales and marketing
expenses were $11.1 million in fiscal 2005, up 26% from the
prior year, due to increases in marketing promotions for the
subscription services businesses, increases in employee
headcount and salaries, higher occupancy expenses related to the
relocation of our corporate headquarters to larger facilities to
accommodate the growth of our businesses, and the incremental
effect of managing the LPI properties. Sales and marketing
expenses as a percentage of revenue were 31% for 2005, down from
35% in 2004 as a result of improving operating leverage and the
effect of the acquisition of LPI.
General and Administrative. Our general and
administrative expenses were $7.0 million for 2005, up 36%
from the prior year due to higher expenses associated with
increased public company reporting and compliance requirements,
higher insurance and risk management expenses, higher occupancy
expenses related to the relocation of our corporate headquarters
to larger facilities to accommodate the growth of our
businesses, the incremental effect of operating the LPI
properties, and integration and other expenses associated with
the acquisitions of LPI. General and administrative expenses as
a percentage of revenue were 20% for fiscal 2005, down from 21%
in fiscal 2004 as a result of greater operating efficiencies in
our general corporate services and the effect of the acquisition
of LPI.
Depreciation and Amortization. Depreciation
and amortization was $3.5 million for fiscal 2005, up 41%
from the prior year, due primarily to increased capital
expenditures to support our on-going product development and
compliance efforts, and an increase in the amortization of
intangible assets associated with the acquisition of LPI.
Amortization of intangible assets was $0.2 million due to
intangible assets which we capitalized in connection with the
acquisition of LPI.
Other
Income and Expenses
Equity in Net Loss of Unconsolidated
Affiliate. We recorded a net loss of
unconsolidated affiliate of $57,000 and $94,000 for 2005 and
2004, respectively, for our interest in Gay.it S.p.A. Our
investment in this unconsolidated affiliate was reduced to zero
as of December 31, 2005.
Interest Expense. Interest expense was
$0.2 million for fiscal 2005, a decrease from
$1.1 million in the prior year, following the repayment of
our senior subordinated promissory note upon completion of our
initial public offering.
Other Income, Net. Other income, net was
$1.2 million for fiscal 2005, an increase from
$0.2 million in the prior year, primarily due to increased
interest income we received during 2005 on our higher cash
balance as a result of the completion of our initial public
offering in October 2004.
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.
37
We believe the following critical accounting policies require
more significant judgments and estimates in the preparation of
our consolidated financial statements:
Revenue recognition. We derive our revenue
principally from the sale of premium subscription services,
magazine subscriptions, banner and sponsorship advertisements,
magazine advertisements and transactions services. Premium
online subscription services are generally for a period of one
month to twelve months. Premium online subscription services are
generally paid for upfront by credit card, subject to
cancellations by subscribers or charge backs from transaction
processors. Revenue, net of estimated cancellations and charge
backs, is recognized ratably over the service term. To date,
cancellations and charge backs have not been significant and
have been within managements expectations. Deferred
magazine subscription revenue results from advance payments for
magazine subscriptions received from subscribers and is
amortized on a straight-line basis over the life of the
subscription as issues are delivered. We provide an estimated
reserve for magazine subscription cancellations at the time such
subscription revenues are recorded. Newsstand revenues are
recognized based on the on-sale dates of magazines and are
recorded based upon estimates of sales, net of product placement
costs paid to resellers. Estimated returns are recorded based
upon historical experience. In January 2006, we began offering
our customers premium online subscription services bundled with
magazine subscriptions. In accordance with EITF Issue
No. 00-21,
Revenue Arrangements with Multiple
Deliverables (EITF
00-21),
we defer subscription revenue on bundled subscription service
offerings based on the pro-rata fair value of the individual
premium online subscription services and magazine subscriptions.
To date, the duration of our banner advertising commitments has
ranged from one week to one year. Sponsorship advertising
contracts have terms ranging from three months to two years and
also involve more integration with our services, such as the
placement of buttons that provide users with direct links to the
advertisers website. Advertising revenue on both banner
and sponsorship contracts is recognized ratably over the term of
the contract, provided that we have no significant obligations
remaining at the end of a period and collection of the resulting
receivables is reasonably assured, at the lesser of the ratio of
impressions delivered over the total number of undertaken
impressions or the straight line basis. Our obligations
typically include undertakings to deliver a minimum number of
impressions, or times that an advertisement appears
in pages viewed by users of our online properties. To the extent
that these minimums are not met, we defer recognition of the
corresponding revenue until the minimums are achieved. Magazine
advertising revenues are recognized, net of related agency
commissions, on the date the magazines are placed on sale at the
newsstands. Revenues received for advertisements in magazines to
go on sale in future months are classified as deferred
advertising revenue.
Transaction service revenue generated from sale of products held
in inventory is recognized when the product is shipped net of
estimated returns. We also earn commissions for facilitating the
sale of third party products and services which are recognized
when earned based on reports provided by third party vendors or
upon cash receipt if no reports are provided. In accordance with
EITF Issue
No. 99-19,
Reporting Revenue Gross as a Principal Versus Net as an
Agent, the revenue earned for facilitating the sale of
third party merchandise is reported net of cost as agent. This
revenue is reported net due to the fact that although we receive
the order and collect money from buyer, we are under no
obligation to make payment to the third party unless payment has
been received from the buyer and risk of return is also borne by
the third party. We recognize transaction service revenue from
our event marketing and travel events services which include
cruises, land tours and resort vacations, together with revenues
from onboard and other activities and all associated direct
costs of our event marketing and travel events services, upon
the completion of events with durations of ten nights or less
and on a pro rata basis for events in excess of ten nights.
Advertising Costs. Costs related to
advertising and promotion are charged to sales and marketing
expense as incurred except for direct-response advertising costs
which are amortized over the expected life of the subscription,
typically a twelve month period. Direct-response advertising
costs consist primarily of production costs associated with
direct-mail promotion of magazine subscriptions. As of
December 31, 2005 and 2006, the balance of unamortized
direct-response advertising costs was $173,000 and $1,540,000,
respectively, and is included in prepaid expenses and other
current assets. Total advertising costs in 2004, 2005 and 2006
were $2,513,000, $3,260,000 and $4,234,000, respectively.
Valuation Allowances. We maintain allowances
for doubtful accounts for estimated losses resulting from the
inability of our customers to make required payments. If the
financial condition of our customers were to
38
deteriorate, resulting in an impairment of their ability to make
payments, additional allowances might be required. As of
December 31, 2005 and 2006, our allowance for doubtful
accounts was $259,000 and $520,000, respectively.
We accrue an estimated amount for sales returns and allowances
in the same period that the related revenue is recorded based on
historical information, adjusted for current economic trends. To
the extent actual returns and allowances vary from the estimated
experience, revisions to the allowance may be required.
Significant management judgments and estimates are made and used
in connection with establishing the sales and allowances reserve
in any accounting period. As of December 31, 2005 and 2006,
the provision for sales returns and allowances included in
accounts receivable, net was $744,000 and $1,049,000,
respectively.
We have recorded a full valuation allowance of
$15.2 million as of December 31, 2006 against our
deferred tax assets due to uncertainties related to our ability
to realize the benefit of our deferred tax assets primarily from
our net operating losses. In the future, if we generate
sufficient taxable income and we determine that we would be able
to realize our deferred tax assets, an adjustment to the
valuation allowance would impact the results of operations in
that period.
Goodwill and Other Long-lived Assets. Our
long-lived assets include goodwill, intangibles, property and
equipment. We are required to test goodwill for impairment on an
annual basis and between annual tests in certain circumstances.
Application of the goodwill impairment test requires judgment in
determining the fair value of the enterprise. We complete our
annual test as of December 1 and any impairment losses
recorded in the future could have a material adverse impact on
our financial condition and results of operations. Our test for
our 2006 fiscal year showed no impairment.
We are required to record an impairment charge on intangibles or
long-lived assets to be held and used when we determine that the
carrying value of these assets may not be recoverable. Based on
the existence of one or more indicators of impairment, we
measure any impairment based on a projected discounted cash flow
method using a discount rate that we determine to be
commensurate with the risk inherent in our business model. Our
estimates of cash flow require significant judgment based on our
historical results and anticipated results and are subject to
many factors.
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 and amortize these costs on a
straight-line basis over the estimated useful life, generally
three years. For 2004, 2005 and 2006 we capitalized
$1.7 million, $2.0 million and $2.1 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.
Stock-based compensation. We have granted
stock options to employees and non-employee directors. We
recognize compensation expense for all stock-based payments
granted after December 31, 2005 and prior to but not yet
vested as of December 31, 2005, in accordance with
Statement of Financial Accounting Standards (SFAS)
No. 123 (revised 2004), Share-Based Payment
(FAS 123R). Under the fair value
recognition provisions of FAS 123R, we recognize
stock-based compensation net of an estimated forfeiture rate and
only recognize compensation cost for those shares expected to
vest on a straight-line basis over the requisite service period
of the award (normally the vesting period). Prior to
FAS 123R adoption, we accounted for stock-based payments
under Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to
Employees (APB 25). In anticipation
of the impact of adopting FAS 123R, we accelerated the
vesting of approximately 720,000 shares subject to
outstanding stock options in December 2005. The primary purpose
of the acceleration of vesting was to minimize the amount of
compensation expense recognized in relation to the options in
future periods following the adoption by us of FAS 123R.
Since we accelerated these shares and adopted FAS 123R
using the modified prospective method, we did not record any
one-time charges relating to the transition to FAS 123R and
the consolidated financial statements for prior periods have not
been restated to reflect, and do not include any impact of
FAS 123R. As a result of FAS 123R, we expect to award
restricted stock and restricted stock units or other
compensation in lieu of or in addition to stock options.
39
As of December 31, 2006, there was approximately,
$1,194,000 of total unrecognized compensation related to
unvested stock-based compensation arrangements granted under our
equity incentive plans. That cost is expected to be recognized
over a weighted-average period of four years.
Determining the appropriate fair value model and calculating the
fair value of stock-based payment awards require the input of
highly subjective assumptions, including the expected life of
the stock-based payment awards and stock price volatility. We
use the Black-Scholes model to value our stock option awards.
Management uses an estimate of future volatility for our stock
based on our historical volatility and the volatilities of
comparable companies. The assumptions used in calculating the
fair value of stock-based payment awards represent
managements best estimates, but these estimates involve
inherent uncertainties and the application of management
judgment. As a result, if factors change and management uses
different assumptions, stock-based compensation expense could be
materially different in the future. In addition, we are required
to estimate the expected forfeiture rate and only recognize
expense for those shares expected to vest. If the actual
forfeiture rate is materially different from the estimate,
stock-based compensation expense could be significantly
different from what has been recorded in the current period. See
Note 2 of Notes to Consolidated Financial Statements for a
further discussion on stock-based compensation.
Liquidity
and Capital Resources
The following sections discuss the effects of changes in our
balance sheet and cash flows, contractual obligations, certain
commitments and acquisitions on our liquidity and capital
resources.
Cash flow from operating, investing and financing activities, as
reflected in the Consolidated Statements of Cash Flows, and
cash, cash equivalents and short-term investments, as reflected
in the Consolidated Balance Sheets, are summarized in the table
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands, except percentage of total assets)
|
|
|
Net cash provided by (used in)
continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
4,301
|
|
|
$
|
5,488
|
|
|
$
|
(4,618
|
)
|
Investing activities
|
|
|
(4,836
|
)
|
|
|
(29,499
|
)
|
|
|
(14,869
|
)
|
Financing activities
|
|
|
41,388
|
|
|
|
(639
|
)
|
|
|
10,699
|
|
Effect of exchange rate on cash
and cash equivalents
|
|
|
(7
|
)
|
|
|
(17
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
$
|
40,846
|
|
|
$
|
(24,667
|
)
|
|
$
|
(8,787
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and
short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
43,128
|
|
|
$
|
18,461
|
|
|
$
|
9,674
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
2,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and
short-term investments
|
|
$
|
43,128
|
|
|
$
|
18,461
|
|
|
$
|
11,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total assets
|
|
|
72.8
|
%
|
|
|
23.9
|
%
|
|
|
12.5
|
%
|
Cash, cash equivalents and short-term investments as of the end
of 2004, 2005 and 2006 were $43.1 million,
$18.5 million, and $11.7 million, respectively.
The decrease in cash and cash equivalents in 2006 was primarily
the result of cash used for acquisitions of businesses of
$5.4 million, capital expenditures of $4.6 million,
purchases of short-term investments of $2.1 million, an
increase in restricted cash of $2.9 million, cash used in
operating activities of $4.6 million and principal payments
under capital lease obligations and notes payable of
$1.1 million, partially offset by proceeds from issuance of
notes payable of $10.5 million.
Cash used in operating activities for 2006 was
$4.6 million, due primarily to our net loss of
$3.7 million, deposits on leased voyages and vacations of
$7.2 million and increases of $3.3 million in accounts
receivable, partially offset by depreciation and amortization of
$5.6 million. Accounts receivable increased to
$9.3 million and
40
deferred revenue increased to $16.0 million, primarily as a
result of our acquisitions of LPI and RSVP and the overall
growth of our businesses. Cash flow from operating activities
for 2005 was $5.5 million, driven primarily by growth of
our advertising services and subscription services businesses,
and the incremental impact of the acquisition of LPI, offset by
a $4.0 million increase in accounts receivable and a
$0.7 million decrease in accounts payable. During 2004, net
cash provided by operating activities was $4.3 million, and
was primarily attributable to the growth of our subscription
services, offset by $1.6 million in payments for our lease
settlement.
Cash used in investing activities for 2006 was
$14.9 million, of which $5.5 million was used for
acquisitions of businesses, $4.6 million for property and
equipment, purchases of short-term investments of
$2.1 million and an increase in restricted cash of
$2.9 million. Cash used in investing activities for 2005
was $29.5 million, of which $25.5 million was used for
acquisitions of businesses, and $4.0 million for capital
assets. Investments in capital assets were comprised primarily
of computer and office equipment and furniture and fixtures. Net
cash used in investing activities was $4.8 million in 2004,
and was primarily attributable to purchases of hardware,
software, property and equipment, including $1.7 million of
internally developed software, and $1.5 million of
investment in furniture and fixtures associated with the move of
our corporate headquarters.
Net cash provided by financing activities for 2006 was
$10.7 million, due primarily to proceeds from issuance of
notes payable of $10.5 million and proceeds from the
repayment of a stockholder note receivable of $0.8 million,
partially offset by $1.1 million for principal payments
under capital lease obligations and notes payable. Net cash used
by financing activities for 2005 was $0.6 million,
consisting of $1.2 million for principal payments under
capital lease obligations, partially offset by cash provided by
the issuance of common stock related to employee stock option
exercises of $0.6 million. Net cash provided by financing
activities for 2004 was $41.4 million and was primarily
attributable to $44.8 million from the completion of our
initial public offering and $5.0 million from the issuance
of our senior subordinated promissory note in May 2004, net of
$1.9 million of capitalizable offering-related expenses and
$5.0 million for the repayment of our senior subordinated
promissory note in October 2004.
We expect that cash provided by operating activities may
fluctuate in future periods as a result of a number of factors,
including fluctuations in our operating results, subscription
trends, accounts receivable collections, inventory management,
deposit commitments on leased voyages and the timing and amount
of payments and taxes.
In November 2005, we acquired substantially all of the assets of
LPI for a purchase price of approximately $32.6 million
which consisted of $24.9 million paid in cash and
approximately $7.1 million in the form of a note to the
sellers secured by the assets of SpecPub, Inc. and payable in
three equal installments in May, August and November 2007, and
the reimbursement of certain prepaid and other expenses of
approximately $0.6 million.
In March 2006, we acquired substantially all of the assets of
RSVP for a purchase price of approximately $6.7 million.
The purchase agreement entitles RSVP to receive potential
additional earn-out payments of up to $3.0 million payable
upon certain revenue and net income milestones for each of the
years ending December 31, 2007 and December 31, 2008.
These earn-out payments, if any, will be paid no later than
March 15, 2008 and March 15, 2009, respectively, and
may be paid in either cash or shares of our common stock, at our
discretion.
In September 2006, we entered into our Loan Agreement with Orix,
which was amended in February 2007. Pursuant to the Loan
Agreement, we borrowed $7.5 million as a term loan and
$3.0 million as a
24-month
revolving loan in September 2006. The borrowings under the line
of credit are limited to $3.0 million, which we have
already drawn down, and to 85% of qualifying accounts
receivable. The term loan is payable in 48 consecutive monthly
installments of principal beginning on November 1, 2006
bearing interest at a rate of prime plus 3%, decreasing to prime
plus 2% if certain financial benchmarks are met. The revolving
loan bears interest at a rate of prime plus 1%. The loans are
secured by substantially all of our assets and all of the
outstanding capital stock of all of our subsidiaries, except for
the assets and capital stock of SpecPub, Inc., which are pledged
as security for the LPI note. In connection with the term loan
agreement, we also issued to Orix a
7-year
warrant to purchase up to 120,000 shares of our common
stock at an exercise price of $3.74. The warrant vested
immediately, had a fair value of approximately $445,000 as of
the date of issuance and will expire on September 28, 2013.
The value of the warrant was recorded as a discount of the
principal amount of the term loan and will be accreted and
recognized as additional interest expense using the effective
interest method over the life of the term loan.
41
We enter into leasing agreements with cruise lines and other
travel providers which establish varying deposit commitments as
part of the lease agreement prior to the commencement of the
leased voyage or vacation. At December 31, 2006, we had
deposits on leased voyages and vacations of $7.2 million
included in prepaid expenses and other current assets and
commitments for future deposits on leased voyages and vacations
of $8.8 million. Typically, customers who book passage on
these voyages or vacations are required to make scheduled
deposits to us for these leased voyages or vacations. At
December 31, 2006, we had deposits from customers of
$5.6 million included in deferred revenue, current portion.
During 2006, we invested $7.1 million in property and
equipment of which $2.5 million was financed through
capital leases. 80% of this investment related to capitalized
labor, hardware and software related to enhancements to our
website infrastructure and features. For fiscal 2007, we expect
to continue investing in our technology development as we
improve our online technology platform and enhance our features
and functionality across our network of websites.
Our capital requirements depend on many factors, including
growth of our revenues, the resources we devote to developing,
marketing and selling our products and 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 subscription 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.
Based on our current operations and planned growth, we expect
that our available funds and anticipated cash flows from
operations will be sufficient to meet our expected needs for
working capital and capital expenditures for the next twelve
months. 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 or
transactions as of December 31, 2006.
Other
Contractual Commitments
The following table summarizes our contractual obligations as of
December 31, 2006, and the effect that these obligations
are expected to have on our liquidity and cash flows in future
periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
2007
|
|
|
2008-2009
|
|
|
2010-2011
|
|
|
2012 & After
|
|
|
|
(In thousands)
|
|
|
Contractual
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
$
|
2,578
|
|
|
$
|
892
|
|
|
$
|
1,415
|
|
|
$
|
271
|
|
|
$
|
|
|
Operating leases
|
|
|
16,259
|
|
|
|
3,047
|
|
|
|
6,315
|
|
|
|
5,831
|
|
|
|
1,066
|
|
Deposit commitments
|
|
|
8,797
|
|
|
|
8,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
19,803
|
|
|
|
10,403
|
|
|
|
7,758
|
|
|
|
1,642
|
|
|
|
|
|
Other
|
|
|
789
|
|
|
|
628
|
|
|
|
161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
48,226
|
|
|
$
|
23,767
|
|
|
$
|
15,649
|
|
|
$
|
7,744
|
|
|
$
|
1,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 December 31,
2012. Operating lease amounts include minimum rental payments
under our non-cancelable operating leases for office facilities,
as well as limited computer and office equipment that we utilize
under lease arrangements. The amounts presented are consistent
with
42
contractual terms and are not expected to differ significantly,
unless a substantial change in our headcount needs requires us
to exit an office facility early or expand our occupied space.
Deposit Commitments. We enter into leasing
agreements with cruise lines and other travel providers which
establish varying deposit commitments as part of the lease
agreement prior to the commencement of the lease voyage or
vacation.
Notes Payable. In November 2005, we
issued a note payable in connection with our acquisition of the
assets of LPI in the amount of $7,075,000, secured by the assets
of SpecPub, Inc. and payable in three equal installments of
$2,358,000 in May, August and November 2007. The note bears
interest at a rate of 10% per year, payable quarterly and
in arrears.
In June 2006, we entered into a software maintenance agreement
under which $90,000 was financed with a vendor. This amount is
payable in four quarterly installments beginning in July 2006.
In September 2006, we borrowed $7,500,000 under the Orix term
loan and $3,000,000 under the Orix revolving loan. As of
December 31, 2006, $1,695,000 is included in notes payable,
current portion net of discount and $8,100,000 is included in
long-term notes payable, net of discount.
Other. Other contractual obligations consist
of a guaranteed executive incentive bonus and a purchase
obligation for a co-location facility agreement with a
third-party service provider. Under the co-location facility
agreement, we pay a minimum monthly fee of $43,000 to the
third-party service provider for providing space for our network
servers and committed levels of telecommunications bandwidth. 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 $516,000 for 2007.
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 our
e-commerce
websites are affected by the holiday season and by the timing of
the release of compilations of new seasons of popular television
series and feature films.
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-term 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 September 2006, the SEC released Staff Accounting
Bulletin No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements
(SAB 108), which addresses how uncorrected
errors in previous years should be considered when quantifying
errors in current-year financial statements. SAB 108
requires registrants to consider the effect of all carry over
and reversing effects of prior-year misstatements when
quantifying errors in current-year financial statements.
SAB 108 allows registrants to record the effects of
adopting the guidance as a cumulative-effect adjustment to
retained earnings. We adopted SAB 108 during the fourth
quarter of 2006. The adoption of SAB 108 did not have a
material impact on our financial condition or results of
operations.
In September 2006, the FASB issued SFAS No. 157
(FAS 157), Fair Value
Measurements, which defines fair value, establishes
guidelines for measuring fair value and expands disclosures
regarding fair value measurements. FAS 157 does not require
any new fair value measurements but rather eliminates
inconsistencies in guidance found in various prior accounting
pronouncements. FAS 157 is effective for fiscal years
beginning after November 15, 2007. Earlier adoption is
permitted, provided the company has not yet issued financial
statements, including for interim periods, for that fiscal year.
We are currently evaluating the impact of FAS 157, but do
not expect the
43
adoption of FAS 157 to have a material impact on our
consolidated financial position, results of operations or cash
flows.
In July 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an
interpretation of FASB
Statement 109(FIN 48) which
clarifies the accounting for uncertainty in income taxes
recognized in accordance with SFAS No. 109,
Accounting for Income Taxes. FIN 48 is a
comprehensive model for how a company should recognize, measure,
present, and disclose in its financial statements uncertain tax
positions that the company has taken or expects to take on a tax
return. If an income tax position exceeds a more likely than not
(greater than 50%) probability of success upon tax audit, the
company will recognize an income tax benefit in its financial
statements. Additionally, companies are required to accrue
interest and related penalties, if applicable, on all tax
exposures consistent with jurisdictional tax laws. This
interpretation is effective on January 1, 2007 and we do
not expect the adoption of FIN 48 to have a material impact
on our consolidated financial position, results of operations or
cash flows.
|
|
Item 7A.
|
Quantitative
and Qualitative 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 primarily in money market
funds.
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, short-term
investments, 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.
Investment securities with original maturities greater than
three months and remaining maturities of less than one year are
classified as short-term investments. 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 not materially increase
(decrease) our earnings or loss.
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
2006 was not material.
44
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
PlanetOut
Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
|
|
|
|
|
|
|
Page
|
|
Consolidated Financial Statements:
|
|
|
|
|
|
|
|
46
|
|
|
|
|
48
|
|
|
|
|
49
|
|
|
|
|
50
|
|
|
|
|
51
|
|
|
|
|
52
|
|
Supplementary Financial Data
(unaudited):
|
|
|
|
|
|
|
|
80
|
|
Financial Statement Schedule:
|
|
|
|
|
|
|
|
81
|
|
45
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of PlanetOut Inc.:
We have audited the accompanying consolidated balance sheets of
PlanetOut Inc. and subsidiaries as of December 31, 2006 and
2005, and the related consolidated statements of operations,
redeemable convertible preferred stock and stockholders
equity, and cash flows for the years ended December 31,
2006 and 2005. These financial statements are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of PlanetOut Inc. and subsidiaries as of
December 31, 2006 and 2005, and the results of their
operations and their cash flows for the years ended
December 31, 2006 and 2005 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial
statements, effective January 1, 2006, the Company adopted
Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of PlanetOut Inc.s internal control over
financial reporting as of December 31, 2006, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report
dated March 9, 2007 expressed an unqualified opinion thereon.
/s/ Stonefield
Josephson, Inc.
San Francisco, California
March 9, 2007
46
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of PlanetOut Inc.:
In our opinion, the consolidated statements of operations, of
redeemable convertible preferred stock and stockholders
equity and of cash flows for the year ended December 31,
2004 present fairly, in all material respects, the results of
operations and cash flows of PlanetOut Inc. and its subsidiaries
for the year ended December 31, 2004 in conformity with
accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement
schedule for the year ended December 31, 2004 presents
fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial
statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audit. We conducted our audit of these statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers
LLP
San Jose, California
March 25, 2005
47
PlanetOut
Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
18,461
|
|
|
$
|
9,674
|
|
Short-term investments
|
|
|
|
|
|
|
2,050
|
|
Restricted cash
|
|
|
|
|
|
|
2,854
|
|
Accounts receivable, net
|
|
|
6,030
|
|
|
|
9,337
|
|
Inventory
|
|
|
1,349
|
|
|
|
1,690
|
|
Prepaid expenses and other current
assets
|
|
|
2,571
|
|
|
|
11,336
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
28,411
|
|
|
|
36,941
|
|
Property and equipment, net
|
|
|
8,167
|
|
|
|
10,923
|
|
Goodwill
|
|
|
28,699
|
|
|
|
32,572
|
|
Intangible assets, net
|
|
|
10,909
|
|
|
|
12,132
|
|
Other assets
|
|
|
1,152
|
|
|
|
1,021
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
77,338
|
|
|
$
|
93,589
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,334
|
|
|
$
|
1,782
|
|
Accrued expenses and other
liabilities
|
|
|
2,750
|
|
|
|
3,472
|
|
Accrued restructuring
|
|
|
|
|
|
|
235
|
|
Deferred revenue, current portion
|
|
|
8,749
|
|
|
|
14,569
|
|
Capital lease obligations, current
portion
|
|
|
309
|
|
|
|
694
|
|
Notes payable, current portion net
of discount
|
|
|
222
|
|
|
|
8,817
|
|
Deferred rent, current portion
|
|
|
286
|
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
13,650
|
|
|
|
29,797
|
|
Deferred revenue, less current
portion
|
|
|
1,771
|
|
|
|
1,474
|
|
Capital lease obligations, less
current portion
|
|
|
212
|
|
|
|
1,504
|
|
Notes payable, less current portion
and discount
|
|
|
7,075
|
|
|
|
8,100
|
|
Deferred rent, less current portion
|
|
|
1,578
|
|
|
|
1,569
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
24,286
|
|
|
|
42,444
|
|
|
|
|
|
|
|
|
|
|
Minority interest in consolidated
subsidiaries
|
|
|
|
|
|
|
|
|
Commitments and contingencies
(Note 8)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock: $0.001 par
value, 100,000 shares authorized, 17,248 and
17,629 shares issued and outstanding at December 31,
2005 and 2006, respectively
|
|
|
17
|
|
|
|
17
|
|
Additional paid-in capital
|
|
|
88,333
|
|
|
|
89,532
|
|
Note receivable from stockholder
|
|
|
(603
|
)
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
(123
|
)
|
|
|
(122
|
)
|
Accumulated deficit
|
|
|
(34,572
|
)
|
|
|
(38,282
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
53,052
|
|
|
|
51,145
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
77,338
|
|
|
$
|
93,589
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
48
PlanetOut
Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising services
|
|
$
|
6,541
|
|
|
$
|
11,724
|
|
|
$
|
26,479
|
|
Subscription services
|
|
|
16,775
|
|
|
|
21,135
|
|
|
|
24,447
|
|
Transaction services
|
|
|
1,646
|
|
|
|
2,732
|
|
|
|
17,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
24,962
|
|
|
|
35,591
|
|
|
|
68,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:(*)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
8,068
|
|
|
|
11,964
|
|
|
|
35,205
|
|
Sales and marketing
|
|
|
8,806
|
|
|
|
11,088
|
|
|
|
17,344
|
|
General and administrative
|
|
|
5,182
|
|
|
|
7,036
|
|
|
|
12,711
|
|
Restructuring
|
|
|
|
|
|
|
|
|
|
|
791
|
|
Depreciation and amortization
|
|
|
2,457
|
|
|
|
3,460
|
|
|
|
5,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
24,513
|
|
|
|
33,548
|
|
|
|
71,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
449
|
|
|
|
2,043
|
|
|
|
(3,013
|
)
|
Equity in net loss of
unconsolidated affiliate
|
|
|
(94
|
)
|
|
|
(57
|
)
|
|
|
|
|
Interest expense
|
|
|
(1,077
|
)
|
|
|
(238
|
)
|
|
|
(1,189
|
)
|
Other income, net
|
|
|
210
|
|
|
|
1,199
|
|
|
|
584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(512
|
)
|
|
|
2,947
|
|
|
|
(3,618
|
)
|
Provision for income taxes
|
|
|
(25
|
)
|
|
|
(207
|
)
|
|
|
(45
|
)
|
Minority interest in gain of
consolidated affiliate
|
|
|
|
|
|
|
|
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(537
|
)
|
|
|
2,740
|
|
|
|
(3,710
|
)
|
Accretion on redeemable
convertible preferred stock
|
|
|
(1,402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable
to common stockholders
|
|
$
|
(1,939
|
)
|
|
$
|
2,740
|
|
|
$
|
(3,710
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.40
|
)
|
|
$
|
0.16
|
|
|
$
|
(0.21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.40
|
)
|
|
$
|
0.15
|
|
|
$
|
(0.21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used to
compute net earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,837
|
|
|
|
17,116
|
|
|
|
17,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
4,837
|
|
|
|
18,192
|
|
|
|
17,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)Stock-based compensation is
allocated as follows (see Note 2):
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
565
|
|
|
$
|
177
|
|
|
$
|
70
|
|
Sales and marketing
|
|
|
556
|
|
|
|
254
|
|
|
|
41
|
|
General and administrative
|
|
|
1,013
|
|
|
|
568
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
2,134
|
|
|
$
|
999
|
|
|
$
|
293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
49
PlanetOut
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Redeemable convertible preferred
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
41,413
|
|
|
$
|
|
|
|
$
|
|
|
Issuance of Series D for cash
on exercise of options
|
|
|
15
|
|
|
|
|
|
|
|
|
|
Accretion on redeemable convertible
preferred stock
|
|
|
1,402
|
|
|
|
|
|
|
|
|
|
Repurchase of Series B
convertible preferred stock upon termination of employee services
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
Conversion of preferred stock into
common stock upon completion of initial public offering
|
|
|
(42,810
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
2
|
|
|
$
|
17
|
|
|
$
|
17
|
|
Issuance of common stock for cash,
net of offering expenses of $5,226
|
|
|
5
|
|
|
|
|
|
|
|
|
|
Conversion of preferred stock into
common stock upon completion of initial public offering
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
17
|
|
|
|
17
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
paid-in-capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
17
|
|
|
|
88,387
|
|
|
|
88,333
|
|
Issuance of common stock for cash
on exercise of options and warrants
|
|
|
44
|
|
|
|
552
|
|
|
|
461
|
|
Unearned stock-based compensation,
net of cancellations and tax effects of disqualifying
dispositions
|
|
|
3,406
|
|
|
|
(687
|
)
|
|
|
293
|
|
Issuance of stock options to
consultants in exchange for services
|
|
|
88
|
|
|
|
|
|
|
|
|
|
Accretion on redeemable convertible
preferred stock
|
|
|
(1,402
|
)
|
|
|
|
|
|
|
|
|
Issuance of common stock for cash,
net of offering expenses of $5,226
|
|
|
42,896
|
|
|
|
|
|
|
|
|
|
Issuance of common stock warrants
in connection with subordinated promissory note
|
|
|
543
|
|
|
|
|
|
|
|
|
|
Issuance of common stock warrants
in connection with debt issuance
|
|
|
|
|
|
|
|
|
|
|
445
|
|
Conversion of preferred stock into
common stock upon completion of initial public offering
|
|
|
42,800
|
|
|
|
|
|
|
|
|
|
Amount paid to stockholder for
fractional shares due to reverse stock split
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
Stock-based compensation upon
acceleration of unvested options
|
|
|
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
88,387
|
|
|
|
88,333
|
|
|
|
89,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note receivable from stockholder:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
(603
|
)
|
|
|
(603
|
)
|
|
|
(603
|
)
|
Repayment of note receivable from
stockholder
|
|
|
|
|
|
|
|
|
|
|
603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
(603
|
)
|
|
|
(603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned stock-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
(259
|
)
|
|
|
(1,619
|
)
|
|
|
|
|
Unearned stock-based compensation,
net of cancellations
|
|
|
(3,406
|
)
|
|
|
493
|
|
|
|
|
|
Amortization of unearned
stock-based compensation, net of cancellations
|
|
|
2,046
|
|
|
|
600
|
|
|
|
|
|
Stock-based compensation upon
acceleration of unvested options
|
|
|
|
|
|
|
526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
(1,619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
(99
|
)
|
|
|
(106
|
)
|
|
|
(123
|
)
|
Foreign currency translation
adjustment
|
|
|
(7
|
)
|
|
|
(17
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
(106
|
)
|
|
|
(123
|
)
|
|
|
(122
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
(36,775
|
)
|
|
|
(37,312
|
)
|
|
|
(34,572
|
)
|
Net income (loss)
|
|
|
(537
|
)
|
|
|
2,740
|
|
|
|
(3,710
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
(37,312
|
)
|
|
|
(34,572
|
)
|
|
|
(38,282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
$
|
48,764
|
|
|
$
|
53,052
|
|
|
$
|
51,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
9,293
|
|
|
|
|
|
|
|
|
|
Issuance of Series D for cash
on exercise of options
|
|
|
4
|
|
|
|
|
|
|
|
|
|
Repurchase of Series B upon
termination of employee services
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
Conversion of preferred stock into
common stock upon completion of initial public offering
|
|
|
(9,271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
1,728
|
|
|
|
16,943
|
|
|
|
17,248
|
|
Issuance of common stock upon
exercise of options and warrants
|
|
|
223
|
|
|
|
306
|
|
|
|
161
|
|
Issuance of restricted stock
|
|
|
|
|
|
|
|
|
|
|
220
|
|
Issuance of common stock for cash,
net of offering expenses of $5,226
|
|
|
5,348
|
|
|
|
|
|
|
|
|
|
Repurchase of unvested common stock
upon termination of employee services
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
|
|
Conversion of preferred stock into
common stock upon completion of initial public offering
|
|
|
9,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
16,943
|
|
|
|
17,248
|
|
|
|
17,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
50
PlanetOut
Inc.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(537
|
)
|
|
$
|
2,740
|
|
|
$
|
(3,710
|
)
|
Adjustments to reconcile net income
(loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,457
|
|
|
|
3,460
|
|
|
|
5,606
|
|
Provision for doubtful accounts
|
|
|
34
|
|
|
|
112
|
|
|
|
219
|
|
Restructuring
|
|
|
|
|
|
|
|
|
|
|
19
|
|
Amortization of unearned
stock-based compensation, net of cancellation and tax effects
|
|
|
2,046
|
|
|
|
405
|
|
|
|
293
|
|
Stock-based compensation upon
acceleration of vesting of unvested options
|
|
|
|
|
|
|
608
|
|
|
|
|
|
Amortization of warrant and
issuance costs in connection with senior subordinated promissory
note
|
|
|
636
|
|
|
|
|
|
|
|
|
|
Amortization of debt discount
|
|
|
|
|
|
|
|
|
|
|
55
|
|
Amortization of deferrred rent
|
|
|
354
|
|
|
|
256
|
|
|
|
(43
|
)
|
Issuance of stock and stock options
and shares in exchange for services
|
|
|
88
|
|
|
|
|
|
|
|
|
|
Loss on disposal or write-off of
property and equipment
|
|
|
60
|
|
|
|
71
|
|
|
|
46
|
|
Equity in net loss of
unconsolidated affiliate
|
|
|
94
|
|
|
|
57
|
|
|
|
|
|
Changes in operating assets and
liabilities, net of acquisition effects and restructuring:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(826
|
)
|
|
|
(4,067
|
)
|
|
|
(3,265
|
)
|
Inventory
|
|
|
4
|
|
|
|
(668
|
)
|
|
|
(341
|
)
|
Prepaid expenses and other assets
|
|
|
(1,304
|
)
|
|
|
1,221
|
|
|
|
(3,949
|
)
|
Accounts payable
|
|
|
1,557
|
|
|
|
(706
|
)
|
|
|
372
|
|
Accrued expenses and other
liabilities
|
|
|
(1,385
|
)
|
|
|
1,201
|
|
|
|
684
|
|
Accrued restructuring
|
|
|
|
|
|
|
|
|
|
|
235
|
|
Deferred revenue
|
|
|
1,023
|
|
|
|
798
|
|
|
|
(839
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
|
4,301
|
|
|
|
5,488
|
|
|
|
(4,618
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions, net of issuance of
note payable and cash acquired
|
|
|
|
|
|
|
(25,546
|
)
|
|
|
(5,403
|
)
|
Purchases of property and equipment
|
|
|
(4,866
|
)
|
|
|
(3,953
|
)
|
|
|
(4,562
|
)
|
Purchases of short-term investments
|
|
|
|
|
|
|
|
|
|
|
(2,050
|
)
|
Changes in restricted cash
|
|
|
30
|
|
|
|
|
|
|
|
(2,854
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(4,836
|
)
|
|
|
(29,499
|
)
|
|
|
(14,869
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of common
stock and preferred stock options and warrants
|
|
|
59
|
|
|
|
552
|
|
|
|
461
|
|
Proceeds from senior subordinated
promissory note and related warrants, net of issuance costs
|
|
|
4,907
|
|
|
|
|
|
|
|
|
|
Repurchase of redeemable
convertible preferred stock and common stock
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
Repayment of senior subordinated
promissory notes
|
|
|
(5,000
|
)
|
|
|
|
|
|
|
|
|
Purchase of fractional shares due
to reverse stock split
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
Proceeds from repayment of note
receivable from stockholder
|
|
|
|
|
|
|
|
|
|
|
843
|
|
Principal payments under capital
lease obligations and notes payable
|
|
|
(1,454
|
)
|
|
|
(1,191
|
)
|
|
|
(1,105
|
)
|
Proceeds from issuance of notes
payable
|
|
|
|
|
|
|
|
|
|
|
10,500
|
|
Proceeds from issuance of common
stock in initial public stock offering, net of issuance costs
|
|
|
42,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
41,388
|
|
|
|
(639
|
)
|
|
|
10,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate on cash and
cash equivalents
|
|
|
(7
|
)
|
|
|
(17
|
)
|
|
|
1
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
|
40,846
|
|
|
|
(24,667
|
)
|
|
|
(8,787
|
)
|
Cash and cash equivalents,
beginning of period
|
|
|
2,282
|
|
|
|
43,128
|
|
|
|
18,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
period
|
|
$
|
43,128
|
|
|
$
|
18,461
|
|
|
$
|
9,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense paid
|
|
$
|
441
|
|
|
$
|
105
|
|
|
$
|
1,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
86
|
|
|
$
|
172
|
|
|
$
|
177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash
flow investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment and related
maintenance acquired under capital leases
|
|
$
|
1,991
|
|
|
$
|
113
|
|
|
$
|
2,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion on redeemable convertible
preferred stock
|
|
$
|
1,402
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned stock-based compensation
|
|
$
|
3,406
|
|
|
$
|
493
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of preferred stock to
common stock upon completion of initial public offering
|
|
$
|
42,810
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of note payable in
connection with acquisition
|
|
$
|
|
|
|
$
|
7,075
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock warrants
in connection with debt issuance
|
|
$
|
|
|
|
$
|
|
|
|
$
|
445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
51
Note 1
The Company
PlanetOut Inc. (the Company) was incorporated in
Delaware in December 2000. The Company, together with its
subsidiaries, is a leading global media and entertainment
company serving the worldwide lesbian, gay, bisexual and
transgender, or LGBT, community. The Company serves this
audience through a wide variety of products and services,
including online and print media properties, a travel marketing
business and other goods and services. With the acquisitions of
LPI Media, Inc. and related entities (LPI) in
November 2005 and RSVP Productions, Inc. (RSVP) in
March 2006, the Company expanded the number and scope of its
online and print media properties and became a leading marketer
of gay and lesbian travel and events.
The Companys online media properties include the leading
LGBT-focused websites Gay.com, PlanetOut.com, Advocate.com and
Out.com. The Companys print media properties include the
magazines The Advocate, Out, The Out Traveler and
HIVPlus, among others. The Companys travel
marketing business includes gay and lesbian travel and events
marketed through its RSVP brand, such as cruises, land tours and
resort vacations. The Company also offers its customers access
to specialized products and services through its
transaction-based websites, including Kleptomaniac.com and
BuyGay.com, that generate revenue through sales of products and
services of interest to the LGBT community, such as fashion,
books, video and music products. The Company also generates
revenue from newsstand sales of its various print properties.
Note 2
Summary of Significant Accounting Policies
Principles
of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries and
variable interest entities in which the Company has been
determined to be the primary beneficiary. All significant
intercompany transactions and balances have been eliminated in
consolidation. The Company recognizes minority interest for
subsidiaries or variable interest entities where it owns less
than 100 percent of the equity of the subsidiary. The
recording of minority interest eliminates a portion of operating
results equal to the percentage of equity it does not own. The
Company discontinues allocating losses to the minority interest
when the minority interest is reduced to zero.
Investments in entities over which the Company has significant
influence, typically those entities that are 20 to
50 percent owned by the Company, are accounted for using
the equity method of accounting, whereby the investment is
carried at cost of acquisition, plus the Companys equity
in undistributed earnings or losses since acquisition. The
Company monitors such investments for impairment by considering
current factors including economic environment, market
conditions, and operational performance and other specific
factors relating to the business underlying the investment, and
records reductions in carrying values when necessary.
Investments in entities in which the Company holds less than a
20 percent ownership interest and over which the Company
does not have the ability to significantly influence the
operations of the investee are accounted for using the cost
method of accounting.
Reverse
Stock Split
In April 2004, the Companys Board of Directors approved a
reverse stock split of the Companys common stock in a
range of one for ten to one for fifteen shares. The actual split
ratio of one for eleven shares of the Companys common
stock was approved by a committee of the Board of Directors
effective as of July 19, 2004, following stockholder
approval of the range. All share, per share and stock option
data information, including the conversion rates of the
redeemable convertible preferred stock, in the accompanying
consolidated financial statements for all periods have been
retroactively restated to reflect the reverse stock split.
52
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Reclassifications
Certain reclassifications have been made in the prior
consolidated financial statements to conform to the current year
presentation. These reclassifications did not change the
previously reported net income (loss) or net income (loss) per
share of the Company.
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, among others, the
assessment of collectibility of accounts receivable, the
determination of the allowance for doubtful accounts, the
determination of the reserve for inventory obsolescence, the
determination of the fair market value of its common stock, 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.
Cash
Equivalents and Short-term Investments
The Company considers all highly liquid investments purchased
with original or remaining maturities of three months or less to
be cash equivalents. Investment securities with original
maturities greater than three months and remaining maturities of
less than one year are classified as short-term investments. The
Companys investments are primarily comprised of money
market funds and certificates of deposit, the fair market value
of which approximates cost.
Restricted
Cash
Restricted cash consists of $160,000 of cash that is restricted
as to future use by contractual agreements associated with
irrevocable letters of credit relating to a lease agreement for
one of the Companys offices in New York and $2,694,000
relating to a lease agreement with a cruise line securing future
deposit commitments required under that agreement. The
restricted cash related to future deposit commitments will be
applied against the commitments for future deposits in February
2007.
Fair
Value of Financial Instruments
Carrying amounts of certain of the Companys financial
instruments including cash and cash equivalents, short-term
investments, restricted cash, accounts receivable, accounts
payable and borrowings are carried at cost, which approximate
fair value due to their short maturities. The reported amount of
borrowings approximates fair value due to the market value
interest rate.
Concentration
of Credit Risk
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash, cash
equivalents and accounts receivable. Cash and cash equivalents
are maintained by financial institutions in the United States,
Europe and Argentina. Deposits in the United States may exceed
federally insured limits. Management believes that the financial
institutions that hold the Companys investments are
financially credit worthy and, accordingly, minimal credit risk
exists with respect to those investments.
The Companys accounts receivable are derived primarily
from advertising customers. The Company performs ongoing credit
evaluations of its customers, does not require collateral and
maintains allowances for potential credit losses when deemed
necessary. To date, such losses have been within
managements expectations.
53
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In 2004, 2005 and 2006, no single customer accounted for 10% or
more of the Companys revenue or net accounts receivable.
Foreign
Currency Translation
The functional currency for the consolidated foreign
subsidiaries is their applicable local currency. Accordingly,
the translation from their applicable local currency to
U.S. Dollars is performed for balance sheet accounts using
current exchange rates in effect at the balance sheet date and
for revenue and expense accounts using an average exchange rate
during the period. The resulting translation adjustments are
recorded as a component of other comprehensive loss. Foreign
currency translation gains and losses are reflected in the
equity section of the Companys consolidated balance sheets
as accumulated other comprehensive loss. Gains or losses
resulting from foreign currency transactions are included in
other income, net in the consolidated statements of operations
and for 2004, 2005 and 2006 have not been significant.
Inventory
Inventory consists of finished goods held for sale and materials
related to the production of future publications such as
editorial and artwork costs, books, paper, other publishing and
novelty products and shipping materials. Inventory is stated at
the lower of cost or market. Cost is determined using the
weighted-average cost method for finished goods available for
sale and using the
first-in,
first-out method for materials related to future production.
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. At
December 31, 2005 and 2006, the balance of these leasehold
improvement allowances was $1,402,000. During the years ended
December 31, 2004, 2005 and 2006, the Company amortized
$37,000, $186,000 and $193,000, respectively, to the
accompanying consolidated statements of operations as a
reduction of rent expense. At December 31, 2005 and 2006,
the deferred rent balance attributable to these incentives
totaled $1,179,000 and $986,000, respectively. Future
amortization of balance of these tenant incentives is estimated
to be $194,000 each year for 2007 to 2011, and $16,000 in 2012.
At December 31, 2005 and 2006, the Company had receivable
balances for tenant incentives $243,000 and zero, respectively,
recorded under prepaid expenses and other current assets in the
accompanying consolidated balance sheets.
Internal
Use Software and Website Development Costs
The Company capitalizes internally developed software costs in
accordance with the provisions of American Institute of
Certified Public Accountants (AICPA) Statement of
Position (SOP)
98-1,
Accounting for Costs of Computer Software Developed or
Obtained for Internal Use
(SOP 98-1)
and Emerging Issues Task Force (EITF) 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 2004,
2005 and 2006, the Company capitalized costs of $1,650,000,
$2,022,000 and $2,068,000, respectively, and recorded $519,000,
$903,000 and $1,386,000 of related amortization
54
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
expense, respectively. The capitalized costs for 2004, 2005 and
2006 included $904,000, $1,036,000 and $669,000 paid to external
consultants for website development.
Goodwill
The Company accounts for goodwill using the provisions of
Statement of Financial Accounting Standards (SFAS)
No. 142 (FAS 142), Goodwill and
Other Intangible Assets. FAS 142 requires that
goodwill be tested for impairment at the reporting unit level
(operating segment or one level below an operating segment) on
an annual basis and between annual tests in certain
circumstances. The performance of the test involves a two-step
process. The first step of the impairment test involves
comparing the fair value of the Companys reporting unit
with the reporting units carrying amount, including
goodwill. The Company generally determines the fair value of its
reporting unit using the expected present value of future cash
flows, giving consideration to the market comparable approach.
If the carrying amount of the Companys reporting unit
exceeds the reporting units fair value, the Company
performs the second step of the goodwill impairment test. The
second step of the goodwill impairment test involves comparing
the implied fair value of the Companys reporting
units goodwill with the carrying amount of the units
goodwill. If the carrying amount of the reporting units
goodwill is greater than the implied fair value of its goodwill,
an impairment charge is recognized for the excess. The Company
determined that it has one reporting unit. The Company performed
its annual test on December 1, 2004, 2005 and 2006. The
results of Step 1 of the goodwill impairment analysis showed
that goodwill was not impaired as the estimated market value of
its one reporting unit exceeded its carrying value, including
goodwill. Accordingly, Step 2 was not performed. The Company
will continue to test for impairment on an annual basis and on
an interim basis if an event occurs or circumstances change that
would more likely than not reduce the fair value of the
Companys reporting unit below its carrying amounts.
Revenue
Recognition
The Companys revenue is derived principally from the sale
of premium online subscription services, magazine subscriptions,
banner and sponsorship advertisements, magazine advertisements
and transactions services. Premium online subscription services
are generally for a period of one to twelve months. Premium
online subscription services are generally paid for upfront by
credit card, subject to cancellations by subscribers or charge
backs from transaction processors. Revenue, net of estimated
cancellations and charge backs, is recognized ratably over the
service term. To date, cancellations and charge backs have not
been significant and have been within managements
expectations. Deferred magazine subscription revenue results
from advance payments for magazine subscriptions received from
subscribers and is amortized on a straight-line basis over the
life of the subscription as issues are delivered. The Company
provides an estimated reserve for magazine subscription
cancellations at the time such subscription revenues are
recorded. Newsstand revenues are recognized based on the on-sale
dates of magazines and are recorded based upon estimates of
sales, net of product placement costs paid to resellers.
Estimated returns are recorded based upon historical experience.
In January 2006, the Company began offering its customers
premium online subscription services bundled with magazine
subscriptions. In accordance with EITF Issue
No. 00-21,
Revenue Arrangements with Multiple
Deliverables (EITF
00-21),
the Company defers subscription revenue on bundled subscription
service offerings based on the pro-rata fair value of the
individual premium online subscription services and magazine
subscriptions.
To date, the duration of the Companys banner advertising
commitments has ranged from one week to one year. Sponsorship
advertising contracts have terms ranging from three months to
two years and also involve more integration with the
Companys services, such as the placement of buttons that
provide users with direct links to the advertisers
website. Advertising revenue on both banner and sponsorship
contracts is recognized ratably over the term of the contract,
provided that no significant Company obligations remain at the
end of a period and collection of the resulting receivables is
reasonably assured, at the lesser of the ratio of impressions
delivered over the total number of undertaken impressions or the
straight-line basis. The Companys obligations typically
include undertakings to deliver a minimum number of
impressions, or times that an advertisement appears
in pages
55
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
viewed by users of the Companys online properties. To the
extent that these minimums are not met, the Company defers
recognition of the corresponding revenue until the minimums are
achieved. Magazine advertising revenues are recognized, net of
related agency commissions, on the date the magazines are placed
on sale at the newsstands. Revenues received for advertisements
in magazines to go on sale in future months are classified as
deferred advertising revenue.
Transaction service revenue generated from the sale of products
held in inventory is recognized when the product is shipped, net
of estimated returns. The Company also earns commissions for
facilitating the sale of third party products and services which
are recognized when earned based on reports provided by third
party vendors or upon cash receipt if no reports are provided.
In accordance with EITF Issue
No. 99-19,
Reporting Revenue Gross as a Principal Versus Net as an
Agent, the revenue earned for facilitating the sale of
third party merchandise is reported net of cost as agent. This
revenue is reported net due to the fact that although the
Company receives the order and collects money from buyer, the
Company is under no obligation to make payment to the third
party unless payment has been received from the buyer and risk
of return is also borne by the third party. The Company
recognizes transaction service revenue from its event marketing
and travel events services which include cruises, land tours and
resort vacations, together with revenues from onboard and other
activities and all associated direct costs of its event
marketing and travel events services, upon the completion of
events with durations of ten nights or less and on a pro rata
basis for events in excess of ten nights.
Advertising
Costs related to advertising and promotion are charged to sales
and marketing expense as incurred except for direct-response
advertising costs which are amortized over the expected life of
the subscription, typically a twelve month period.
Direct-response advertising costs consist primarily of
production costs associated with direct-mail promotion of
magazine subscriptions. As of December 31, 2005 and 2006,
the balance of unamortized direct-response advertising costs was
$173,000 and $1,540,000, respectively, and is included in
prepaid expenses and other current assets. Total advertising
costs in 2004, 2005 and 2006 were $2,513,000, $3,260,000 and
$4,234,000, respectively.
Event
Marketing
In January 2006, the Companys subsidiary, PNO DSW Events,
LLC, a joint venture, began its event marketing business. The
subsidiary markets events which include a number of
sub-events
that occur over specific periods of four to eight days. EITF
00-21
addresses certain aspects of the accounting by a vendor for
arrangements under which it will perform multiple
revenue-generating activities and how to determine whether an
arrangement involving multiple deliverables contains more than
one unit of accounting. The Companys revenue recognition
policies are in compliance with SEC Staff Accounting
Bulletin No. 104, Revenue Recognition
,
EITF 99-19,
Reporting Revenue Gross as a Principal versus Net as an
Agent, EITF
00-21 and
EITF 01-14,
Income Statement Characterization of Reimbursements
Received for
Out-of-Pocket
Expenses Incurred . For the purposes of EITF
00-21, the
Company considers the
sub-events
as part of a single accounting unit and recognizes the revenue
and related direct costs upon completion of the final
sub-event of
the accounting unit.
Recognition of revenues and expenses are deferred until
completion of the final
sub-event of
the respective defined accounting unit. As of December 31,
2006, the Company has recorded no deferred revenue related to
event marketing and $27,000 of prepaid direct costs of event
marketing included in prepaid expenses and other current assets.
Sales
Returns and Allowances
The Company accrues an estimated amount for sales returns and
allowances in the same period that the related revenue is
recorded based on historical information, adjusted for current
economic trends. To the extent actual returns and allowances
vary from the estimated experience, revisions to the allowance
may be required. Significant
56
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
management judgments and estimates are made and used in
connection with establishing the sales and allowances reserve in
any accounting period. As of December 31, 2005 and 2006,
the provision for sales returns and allowances included in
accounts receivable, net was $744,000 and $1,049,000,
respectively.
Allowance
for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for
estimated losses resulting from the inability of its customers
to make required payments. The Company determines the adequacy
of this allowance by regularly reviewing the composition of its
aged accounts receivable and evaluating individual customer
receivables, considering (i) the customers financial
condition, (ii) the customers credit history,
(iii) current economic conditions and (iv) other known
factors. As of December 31, 2005 and 2006 the allowance for
doubtful accounts included in accounts receivable, net was
$259,000 and $520,000, respectively.
Equity
Incentive Plans
The Company has equity incentive plans for directors, officers,
employees and non-employees. Stock options granted under these
plans generally vest over two to four years, are generally
exercisable at the date of grant with unvested shares subject to
repurchase by the Company and expire within 10 years from
the date of grant. As of December 31, 2006, the Company has
reserved an aggregate of approximately 2,735,000 shares of
common stock for issuance under its equity incentive plans.
Stock-Based
Compensation
On January 1, 2006, the Company adopted
SFAS No. 123 (revised 2004), Share-Based
Payment (FAS 123R), that addresses
the accounting for share-based payment transactions in which an
enterprise receives employee services in exchange for equity
instruments of the enterprise. The statement eliminates the
ability to account for share-based compensation transactions, as
the Company formerly did, using the intrinsic value method as
prescribed by Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to
Employees, and generally requires that such
transactions be accounted for using a fair-value-based method
and recognized as expense in its consolidated statements of
operations.
The Company adopted FAS 123R using the modified prospective
method which requires the application of the accounting standard
as of January 1, 2006. The Companys consolidated
financial statements as of and for the year ended
December 31, 2006 reflect the impact of adopting
FAS 123R. In accordance with the modified prospective
method, the consolidated financial statements for prior periods
have not been restated to reflect, and do not include, the
impact of FAS 123R.
Stock-based compensation expense recognized during the period is
based on the value of the portion of stock-based payment awards
that is ultimately expected to vest. Stock-based compensation
expense recognized in the consolidated statements of operations
during the year ended December 31, 2006 included
compensation expense for stock-based payment awards granted
prior to, but not yet vested, as of December 31, 2005 based
on the grant date fair value estimated in accordance with the
pro forma provisions of SFAS No. 148,
Accounting for Stock-based Compensation
Transition and Disclosure (as amended)
(FAS 148) and compensation expense for the
stock-based payment awards granted subsequent to
December 31, 2005, based on the grant date fair value
estimated in accordance with FAS 123R. As stock-based
compensation expense recognized in the consolidated statements
of operations for the year ended December 31, 2006 is based
on awards ultimately expected to vest, it has been reduced for
estimated forfeitures. FAS 123R requires forfeitures to be
estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates. In the pro forma information required under
FAS 148 for the periods prior to 2006, we accounted for
forfeitures as they occurred. When estimating forfeitures, the
Company considers historic voluntary termination behaviors as
well as trends of actual option forfeitures. In anticipation of
the impact of adopting FAS 123R, the Company accelerated
the vesting of approximately 720,000 shares subject to
outstanding stock options in December 2005. The primary purpose
of the acceleration
57
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of vesting was to minimize the amount of compensation expense
recognized in relation to the options in future periods
following the adoption by the Company of FAS 123R. Since
the Company accelerated these shares, the impact of adopting
FAS 123R was not material, to date, to the Companys
results of operations.
Prior to the adoption of FAS 123R, the Company provided the
disclosures required under FAS 123, as amended by
FAS 148. Employee stock-based compensation expense
recognized under FAS 123R was not reflected in the
Companys results of operations for the years ended
December 31, 2004 and 2005 for employee stock option awards
that were granted with an exercise price equal to the market
value of the underlying common stock on the date of grant.
The pro forma information for the years ended December 31,
2004 and 2005 required under FAS 123 was as follows (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
Net earnings (loss) attributable
to common stockholders, as reported:
|
|
$
|
(1,939
|
)
|
|
$
|
2,740
|
|
Add: Employee stock-based
compensation expense included in reported net income (loss), net
of tax
|
|
|
2,046
|
|
|
|
971
|
|
Less: Total employee stock-based
compensation expense determined under fair value, net of tax
|
|
|
(2,653
|
)
|
|
|
(3,815
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net loss attributable to
common stockholders
|
|
$
|
(2,546
|
)
|
|
$
|
(104
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to
common stockholders:
|
|
|
|
|
|
|
|
|
As reported basic
|
|
$
|
(0.40
|
)
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
As reported diluted
|
|
$
|
(0.40
|
)
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic
|
|
$
|
(0.53
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma diluted
|
|
$
|
(0.53
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
Prior to adopting FAS 123R, the Company presented all tax
benefits resulting from the exercise of stock options as
operating cash flows in its statement of cash flows.
FAS 123R requires cash flows resulting from excess tax
benefits to be classified as a part of cash flows from financing
activities. Excess tax benefits are realized tax benefits from
tax deductions for exercised options in excess of the deferred
tax asset attributable to stock compensation costs for such
options. During the year ended December 31, 2006, the
Company has not recognized a material amount of excess tax
benefits for deductions of disqualifying dispositions of such
options.
Prior to the Companys IPO, the fair value of each option
grant was determined using the minimum value method prescribed
by FAS 123. Subsequent to the offering, the fair value was
determined using the Black-Scholes
58
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
model stipulated by FAS 123. The following weighted average
assumptions were included in the estimated grant date fair value
calculations for the Companys stock option awards:
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2004
|
|
2005
|
|
2006
|
|
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
|
|
7.0
|
Risk free interest rates
|
|
2.77 - 4.05%
|
|
3.59 - 4.55%
|
|
4.32 - 4.57%
|
Dividend yield
|
|
0%
|
|
0%
|
|
0%
|
Volatility
|
|
0 - 94.6%
|
|
85%
|
|
75%
|
The Companys computation of expected volatility for the
year ended December 31, 2006 is based on a combination of
historical and market-based implied volatility from other
equities comparable to the Companys stock at the time of
the grants. The Companys computation of expected life in
2006 was determined based on historical experience of similar
awards, giving consideration to the contractual terms of the
stock-based awards, vesting schedules and expectations of future
employee behavior. The interest rate for periods within the
contractual life of the award is based on the U.S. Treasury
yield curve in effect at the time of grant.
Income
Taxes
The Company accounts for income taxes in accordance with the
liability method. Under this method, deferred tax assets and
liabilities are determined based on the difference between the
financial statement and tax basis of assets and liabilities and
net operating loss and credit carryforwards using enacted tax
rates in effect for the year in which the differences are
expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected
to be realized.
Comprehensive
Loss
Other comprehensive loss includes all changes in equity (net
assets) during a period from non-owner sources and is reported
in the consolidated statement of changes in stockholders
equity (deficit). For 2004, 2005 and 2006, other comprehensive
loss consists of changes in accumulated foreign currency
translation adjustments during the period.
Net
Income (Loss) Per Share
Basic earnings (loss) per share (Basic EPS) is
computed by dividing net earnings (loss) attributable 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
59
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 earnings (loss) per share attributable to common
stockholders (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(537
|
)
|
|
$
|
2,740
|
|
|
$
|
(3,710
|
)
|
Accretion on redeemable
convertible preferred stock
|
|
|
(1,402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable
to common stockholders
|
|
$
|
(1,939
|
)
|
|
$
|
2,740
|
|
|
$
|
(3,710
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used to
compute basic EPS
|
|
|
4,837
|
|
|
|
17,116
|
|
|
|
17,326
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive common stock equivalents
|
|
|
|
|
|
|
1,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares
|
|
|
|
|
|
|
1,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used to
compute diluted EPS
|
|
|
4,837
|
|
|
|
18,192
|
|
|
|
17,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.40
|
)
|
|
$
|
0.16
|
|
|
$
|
(0.21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.40
|
)
|
|
$
|
0.15
|
|
|
$
|
(0.21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The potential shares, which are excluded from the determination
of basic and diluted net earnings (loss) per share as their
effect is anti-dilutive, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Common stock options and warrants
|
|
|
2,424
|
|
|
|
700
|
|
|
|
1,867
|
|
Common stock subject to repurchase
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,426
|
|
|
|
702
|
|
|
|
1,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
Reporting
The Company operates in one segment in accordance with
SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. Although the
chief operating decision maker does review revenue results
across the three revenue streams of advertising, subscription
and transaction services, financial reporting is consistent with
the Companys method of internal reporting where the chief
operating decision maker evaluates, assesses performance and
makes decisions on the allocation of resources at a consolidated
results of operations level. The Company has no operating
managers reporting to the chief operating decision maker over
components of the enterprise for which the separate financial
information of revenue, results of operations, and assets is
available.
60
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Additionally, all business units that meet the quantitative
thresholds of the standard also meet the aggregation criteria of
the standard as well.
Variable
Interest Entity
The Company has determined that its interest in PNO DSW Events,
LLC, a joint venture, qualifies as a variable interest entity as
defined in Financial Accounting Standards Board
(FASB) Interpretation No. 46 (revised December
2003)
(FIN 46-R),
Consolidation of Variable Interest Entities,
and that the Company is the primary beneficiary of the joint
venture. Accordingly, the financial statements of the joint
venture have been consolidated into the Companys
consolidated financial statements. The creditors of the joint
venture have no recourse to the general credit of the Company.
Under the terms of the joint venture agreement, the Company
contributed an initial investment of $250,000 and acquired a 50%
interest in the joint venture. The minority interests
share of income for 2006 totaled $47,000. At December 31,
2006, accumulated losses associated with the minority interest
have reduced the minority interest to zero on the Consolidated
Balance Sheets, with excess losses attributable to the minority
interest amounting to approximately $10,000 included in the
Consolidated Statements of Operations.
Recent
Accounting Pronouncements
In September 2006, the SEC released Staff Accounting
Bulletin No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements
(SAB 108), which addresses how uncorrected
errors in previous years should be considered when quantifying
errors in current-year financial statements. SAB 108
requires registrants to consider the effect of all carry over
and reversing effects of prior-year misstatements when
quantifying errors in current-year financial statements.
SAB 108 allows registrants to record the effects of
adopting the guidance as a cumulative-effect adjustment to
retained earnings. The Company adopted SAB 108 during the
fourth quarter of 2006. The adoption of SAB 108 did not
have a material impact on the Companys financial condition
or results of operations.
In September 2006, the FASB issued SFAS No. 157
(FAS 157), Fair Value
Measurements, which defines fair value, establishes
guidelines for measuring fair value and expands disclosures
regarding fair value measurements. FAS 157 does not require
any new fair value measurements but rather eliminates
inconsistencies in guidance found in various prior accounting
pronouncements. FAS 157 is effective for fiscal years
beginning after November 15, 2007. Earlier adoption is
permitted, provided the company has not yet issued financial
statements, including for interim periods, for that fiscal year.
The Company is currently evaluating the impact of FAS 157,
but does not expect the adoption of FAS 157 to have a
material impact on its consolidated financial position, results
of operations or cash flows.
In July 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement 109
(FIN 48) which clarifies the accounting for
uncertainty in income taxes recognized in accordance with
SFAS No. 109, Accounting for Income
Taxes. FIN 48 is a comprehensive model for how a
company should recognize, measure, present, and disclose in its
financial statements uncertain tax positions that the company
has taken or expects to take on a tax return. If an income tax
position exceeds a more likely than not (greater than 50%)
probability of success upon tax audit, the company will
recognize an income tax benefit in its financial statements.
Additionally, companies are required to accrue interest and
related penalties, if applicable, on all tax exposures
consistent with jurisdictional tax laws. This interpretation is
effective on January 1, 2007 and the Company does not
expect the adoption of FIN 48 to have a material impact on
its consolidated financial position, results of operations or
cash flows.
Note 3
Investment in Gay.it S.p.A.
In January 2006, the Company changed from the equity method to
the cost method of accounting for its investment in Gay.it
S.p.A., an Italian company that operates a website targeting the
Italian gay community, and no longer records its share of Gay.it
S.p.A. losses in its consolidated results of operations. The
change to the cost
61
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
method of accounting for Gay.it S.p.A. was the result of the
Companys ownership percentage declining below
20 percent and qualitative factors which indicated that the
Company does not exercise significant influence over the
operations of Gay.it S.p.A. Prior to 2006, the recognition of
the equity in net loss from this investment and impairment
charges, if any, were included in equity in net loss on
unconsolidated affiliate in the accompanying consolidated
statements of operations. The Company recorded $94,000 and
$57,000 as equity in net loss of unconsolidated affiliate in
2004 and 2005, respectively. As a result of recording the
Companys equity in net loss for its interest in Gay.it
S.p.A., the Companys net investment in this unconsolidated
affiliate was reduced to zero as of December 31, 2005.
In 2004 and 2005, the net loss recorded for the Companys
equity in its investment in Gay.it S.p.A. represented 18% and
2%, respectively, of the Companys consolidated net
earnings (loss) for the year. The following tables summarize the
audited financial statement information of Gay.it S.p.A. as
required by the equity method of accounting as of
December 31, 2005 and for the years ended December 31,
2004 and 2005 (in thousands):
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
Current assets
|
|
$
|
388
|
|
Non-current assets
|
|
$
|
69
|
|
Current liabilities
|
|
$
|
322
|
|
Non-current liabilities
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
Net sales revenue
|
|
$
|
565
|
|
|
$
|
651
|
|
Operating expenses
|
|
$
|
743
|
|
|
$
|
827
|
|
Net loss from operations
|
|
$
|
(178
|
)
|
|
$
|
(176
|
)
|
Net loss
|
|
$
|
(209
|
)
|
|
$
|
(202
|
)
|
Note 4
Business Combinations, Goodwill and Intangible Assets
Business
Combinations
Through domestic acquisitions, the Company has continued to
expand its business. The following table summarizes the
Companys purchase acquisitions in 2005 and 2006 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post
|
|
|
Tangible
|
|
|
Identifiable
|
|
|
|
|
|
Aggregate
|
|
|
|
Year
|
|
|
Acquisition
|
|
|
Assets
|
|
|
Intangible
|
|
|
|
|
|
Purchase
|
|
Company Name
|
|
Acquired
|
|
|
Ownership
|
|
|
(Liabilities)
|
|
|
Assets
|
|
|
Goodwill
|
|
|
Price
|
|
|
LPI Media, Inc. and related
entities
|
|
|
2005
|
|
|
|
100
|
%
|
|
$
|
(3,775
|
)
|
|
$
|
11,100
|
|
|
$
|
25,296
|
|
|
$
|
32,621
|
|
RSVP Productions, Inc.
|
|
|
2006
|
|
|
|
100
|
%
|
|
$
|
(63
|
)
|
|
$
|
2,750
|
|
|
$
|
3,982
|
|
|
$
|
6,669
|
|
62
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Tangible net assets were valued at their respective carrying
amounts as the Company believes that these amounts approximated
their current fair values at the acquisition date. The valuation
of identifiable intangible assets acquired reflects
managements estimates based on, among other factors, use
of established valuation methods. Such assets consist of
customer lists and user bases and trademarks. Identifiable
intangible assets are amortized over the period of estimated
benefit using the straight-line method and the estimated useful
lives of one to six years. The Company believes the
straight-line method of amortization represents the best
estimate of the distribution of the economic value of the
identifiable intangible assets. Goodwill represents the excess
of the purchase price over the fair value of the net tangible
and identifiable intangible assets acquired in each business
combination. Of the $25,296,000 and $3,982,000 of goodwill
recorded for LPI and RSVP, $18,999,000 and $3,982,000 is
expected to be deductible for tax purposes, respectively. The
following table summarizes the Companys acquired
intangible assets by type related to the above purchase
acquisitions (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Customer
|
|
|
|
|
|
Acquired
|
|
|
|
Year
|
|
|
Lists and
|
|
|
|
|
|
Intangible
|
|
Company Name
|
|
Acquired
|
|
|
User Bases
|
|
|
Tradenames
|
|
|
Assets
|
|
|
LPI Media, Inc. and related
entities
|
|
|
2005
|
|
|
$
|
5,400
|
|
|
$
|
5,700
|
|
|
$
|
11,100
|
|
RSVP Productions, Inc.
|
|
|
2006
|
|
|
$
|
1,810
|
|
|
$
|
940
|
|
|
$
|
2,750
|
|
LPI
Media, Inc. Acquisition
On November 8, 2005, the Company acquired substantially all
of the assets of LPI for an aggregate purchase price of
approximately $32,621,000, consisting of $24,865,000 in cash,
$7,075,000 in a note payable, and $681,000 in estimated
transaction costs. Through this purchase, the Company has
expanded the number and scope of subscription and advertising
offers. The Company accounted for the acquisition as a purchase
transaction and, accordingly, the purchase price has been
allocated to the tangible and intangible assets acquired and
liabilities assumed on the basis of their respective estimated
fair values on the acquisition date.
The results of operations for the acquired business have been
included in our consolidated statements of operations for the
period subsequent to the acquisition date of November 8,
2005. Supplemental information on an unaudited pro forma
consolidated basis, as if the LPI acquisition was completed at
the beginning of the years 2004 and 2005, is as follows (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
Revenue
|
|
$
|
54,694
|
|
|
$
|
60,946
|
|
Net income
|
|
$
|
(1,837
|
)
|
|
$
|
2,734
|
|
Basic earnings per share
|
|
$
|
(0.38
|
)
|
|
$
|
0.16
|
|
The unaudited pro forma supplemental information is based on
estimates and assumptions which the Company believes are
reasonable. The unaudited pro forma supplemental information
prepared by management is not necessarily indicative of the
consolidated financial position or results of income in future
periods or the results that actually would have been realized
had the Company and LPI been a combined company during the
specified periods.
RSVP
Productions Inc. Acquisition
On March 8, 2006, the Company acquired substantially all of
the assets of RSVP, a leading marketer of gay and lesbian travel
and events, including cruises, land tours and resort vacations
for an aggregate purchase price of approximately $6,669,000.
Through this purchase, the Company has been able to expand its
product offerings and reach into the LGBT community. The
purchase agreement entitles RSVP to receive potential additional
earn-out payments of up to $3,000,000 based on certain revenue
and net income milestones for each of the years ending
63
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2007 and December 31, 2008. These
earn-out payments, if any, will be paid no later than
March 15, 2008 and March 15, 2009, respectively, and
may be paid in either cash or shares of the common stock of the
Company, at the Companys discretion.
The results of operations for the acquired business have been
included in our consolidated statements of operations for the
period subsequent to the acquisition date of March 8, 2006.
Supplemental consolidated information on an unaudited pro forma
consolidated basis, as if the RSVP acquisition was completed at
the beginning of the years 2005 and 2006, is as follows (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
Revenue
|
|
$
|
44,816
|
|
|
$
|
70,359
|
|
Net income (loss)
|
|
$
|
1,511
|
|
|
$
|
(4,210
|
)
|
Basic earnings per share
|
|
$
|
0.09
|
|
|
$
|
(0.24
|
)
|
The unaudited pro forma supplemental information is based on
estimates and assumptions which the Company believes are
reasonable. The unaudited pro forma supplemental information
prepared by management is not necessarily indicative of the
consolidated financial position or results of income in future
periods or the results that actually would have been realized
had the Company and RSVP been a combined company during the
specified periods.
Goodwill
The following table presents goodwill balances and the
adjustment to the Companys acquisition during the year
ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Goodwill
|
|
|
|
|
|
December 31,
|
|
Acquisition
|
|
2005
|
|
|
Acquired
|
|
|
Adjustments
|
|
|
2006
|
|
|
Acquisitions prior to
December 31, 2004
|
|
$
|
3,403
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,403
|
|
LPI
|
|
|
25,296
|
|
|
|
|
|
|
|
(109
|
)
|
|
|
25,187
|
|
RSVP
|
|
|
|
|
|
|
3,982
|
|
|
|
|
|
|
|
3,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,699
|
|
|
$
|
3,982
|
|
|
$
|
(109
|
)
|
|
$
|
32,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to goodwill during the year ended December 31,
2006 resulted primarily from purchase price adjustments related
to transaction costs and deferred revenue. Goodwill represents
the excess of the purchase price over the fair value of the net
tangible and identifiable intangible assets acquired in each
business combination.
In accordance with FAS 142, goodwill is subject to at least
an annual assessment for impairment, applying a fair-value based
test. The Company conducts its annual impairment test as of
December 1 of each year. Based on the Companys last
impairment test as of December 1, 2006, the Company
determined there was no impairment. There were no events or
circumstances from that date through December 31, 2006
indicating that a further assessment was necessary.
64
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Intangible
Assets
The components of acquired intangible assets are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
December 31, 2006
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Customer lists and user bases
|
|
$
|
8,678
|
|
|
$
|
3,469
|
|
|
$
|
5,209
|
|
|
$
|
10,488
|
|
|
$
|
4,996
|
|
|
$
|
5,492
|
|
Tradenames
|
|
|
8,040
|
|
|
|
2,340
|
|
|
|
5,700
|
|
|
|
8,980
|
|
|
|
2,340
|
|
|
|
6,640
|
|
Other intangible assets
|
|
|
726
|
|
|
|
726
|
|
|
|
|
|
|
|
726
|
|
|
|
726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,444
|
|
|
$
|
6,535
|
|
|
$
|
10,909
|
|
|
$
|
20,194
|
|
|
$
|
8,062
|
|
|
$
|
12,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets subject to amortization consist of customer
lists and user bases with amortization periods of one to six
years. As of December 31, 2005 and 2006, the
weighted-average useful economic life of customer lists and user
bases being amortized was 4.8 and 5.1 years, respectively.
During 2005 and 2006, the Company did not record amortization
expense on its tradenames which it considers to be indefinitely
lived assets. Aggregate amortization expense for intangible
assets totaled $20,000, $191,000 and $1,527,000 for the years
ended December 31, 2004, 2005 and 2006, respectively.
As of December 31, 2006, expected future intangible asset
amortization is as follows (in thousands):
|
|
|
|
|
Fiscal Years:
|
|
|
|
|
2007
|
|
$
|
1,423
|
|
2008
|
|
|
1,396
|
|
2009
|
|
|
1,257
|
|
2010
|
|
|
1,093
|
|
2011
|
|
|
277
|
|
Thereafter
|
|
|
46
|
|
|
|
|
|
|
|
|
$
|
5,492
|
|
|
|
|
|
|
Note 5
Other Balance Sheet Components
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
$
|
2,134
|
|
|
$
|
7,033
|
|
|
$
|
10,906
|
|
Less: Allowance for doubtful
accounts
|
|
|
(59
|
)
|
|
|
(259
|
)
|
|
|
(520
|
)
|
Less: Provision for returns
|
|
|
|
|
|
|
(744
|
)
|
|
|
(1,049
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,075
|
|
|
$
|
6,030
|
|
|
$
|
9,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2004, 2005 and 2006, the Company provided for an increase in
the allowance for doubtful accounts of $34,000, $287,000 and
$1,824,000 respectively, and wrote-off accounts receivable
against the allowance for doubtful accounts totaling $18,000,
$87,000 and $1,563,000, respectively. The increases in
write-offs and provisions for doubtful accounts in 2006 over
2004 and 2005 are due to the businesses acquired in the LPI
acquisition.
Prior to the acquisition of LPI in November 2005, the Company
estimated a provision for returns of zero based on its
historical returns. In 2005 and 2006, the Company provided for
an increase in the provision for returns of
65
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$839,000 and $4,589,000, respectively, and wrote-off accounts
receivable against the provision for returns totaling $95,000
and $4,284,000, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Inventory
|
|
|
|
|
|
|
|
|
|
|
|
|
Materials for future publications
|
|
$
|
|
|
|
$
|
415
|
|
|
$
|
370
|
|
Finished goods available for sale
|
|
|
24
|
|
|
|
1,019
|
|
|
|
1,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
1,434
|
|
|
|
1,756
|
|
Less: reserve for obsolete
inventory
|
|
|
|
|
|
|
(85
|
)
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24
|
|
|
$
|
1,349
|
|
|
$
|
1,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to the acquisition of LPI in November 2005, the Company
estimated a provision for obsolete inventory of zero based on
its historical valuation of inventory. In 2005 and 2006, the
Company provided for an increase in the provision for obsolete
inventory of $87,000 and $34,000, respectively, and wrote-off
inventory against the reserve for obsolete inventory totaling
$2,000 and $53,000, respectively.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Prepaid expenses and other
current assets:
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current
assets
|
|
$
|
2,328
|
|
|
$
|
4,183
|
|
Deposits on leased voyages and
vacations
|
|
|
|
|
|
|
7,153
|
|
Receivable from landlord for
tenant improvement allowance, current portion (Note 2)
|
|
|
243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,571
|
|
|
$
|
11,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Property and
equipment:
|
|
|
|
|
|
|
|
|
Computer equipment and software
|
|
$
|
10,402
|
|
|
$
|
13,569
|
|
Furniture and fixtures
|
|
|
1,396
|
|
|
|
1,613
|
|
Leasehold improvements
|
|
|
1,555
|
|
|
|
2,269
|
|
Website development costs
|
|
|
4,783
|
|
|
|
6,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,136
|
|
|
|
24,220
|
|
Less: Accumulated depreciation and
amortization
|
|
|
(9,969
|
)
|
|
|
(13,297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,167
|
|
|
$
|
10,923
|
|
|
|
|
|
|
|
|
|
|
In 2004, 2005 and 2006, the Company recorded depreciation and
amortization expense of property and equipment of $2,437,000,
$3,269,000 and $4,041,000, respectively.
66
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Other assets
|
|
$
|
921
|
|
|
$
|
1,021
|
|
Interest on note receivable from
stockholder (Note 6)
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,152
|
|
|
$
|
1,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Accrued expenses and other
liabilities:
|
|
|
|
|
|
|
|
|
Accrued payroll and related
liabilities
|
|
$
|
989
|
|
|
$
|
1,499
|
|
Other accrued liabilities
|
|
|
1,761
|
|
|
|
1,973
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,750
|
|
|
$
|
3,472
|
|
|
|
|
|
|
|
|
|
|
Note 6
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 were due and payable in May 2006.
Interest accrued at a rate of 8.5% per annum or the maximum
rate permissible by law, whichever was less and was full
recourse. The note was full recourse with respect to $24,000 in
principal payment and the remainder of the principal was
non-recourse. The note was collateralized by the shares of
common stock and options owned by the executive. Interest income
of $37,000, $51,000 and $9,000 was recognized in 2004, 2005 and
2006, respectively. In March 2006, the executive repaid the
Company approximately $843,000, representing approximately
$603,000 in principal and approximately $240,000 in accrued
interest, fully satisfying the repayment obligations.
Advertising
Agreement
In November 2001, the Company entered into an advertising
agreement with Gay.it S.p.A., an unconsolidated affiliate of the
Company during the years 2004 and 2005 and in which the Company
had an investment in 2006 (see Note 3). Pursuant to this
agreement, the Company paid Gay.it S.p.A. a referral fee of
$63,000, $69,000 and zero in 2004, 2005 and 2006, respectively.
Senior
Subordinated Promissory Note
In May 2004, the Company entered into a $5 million senior
subordinated promissory note with a related party. The note was
due on the earlier to occur of January 18, 2007 or the
30th day after the completion of an initial public offering
with gross proceeds of $30 million or more. The Company was
allowed to prepay the note at any time without penalty. The note
interest rate was 11% per year with interest payable
monthly. In connection with the issuance of the notes, the
Company incurred $93,000 of issuance costs and issued to the
purchaser of the note a warrant to purchase 45,454 shares
of its common stock at an exercise price of $0.011 per
share. The estimated value of this warrant was $610,000 which
was estimated using the Black-Scholes option pricing model with
the following assumptions: a contractual life of 5 years,
weighted average risk-free interest rate of 3.89%, a dividend
yield of 0% and volatility of 75%. The proceeds of the note were
apportioned between the note and the warrant, and the amount
allocated to the warrant of $543,000 was recorded as additional
interest expense over the term of the note. In
67
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
October 2004, the note was paid in full after completion of the
Companys IPO; accordingly, unamortized warrant cost of
$477,000 was recognized as interest expense during 2005. The
warrant was exercised in May 2004.
Note 7
Notes Payable
The Companys notes payable, net of discounts were
comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
December, 31
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Notes payable to vendors
|
|
$
|
222
|
|
|
$
|
47
|
|
LPI note
|
|
|
7,075
|
|
|
|
7,075
|
|
Orix term loan
|
|
|
|
|
|
|
7,187
|
|
Orix revolving loan
|
|
|
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,297
|
|
|
|
17,309
|
|
Less: discount
|
|
|
|
|
|
|
(392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
7,297
|
|
|
|
16,917
|
|
Less: current portion, net of
discount
|
|
|
222
|
|
|
|
8,817
|
|
|
|
|
|
|
|
|
|
|
Notes payable, less current
portion and discount
|
|
$
|
7,075
|
|
|
$
|
8,100
|
|
|
|
|
|
|
|
|
|
|
In November 2004, the Company entered into a software
maintenance agreement under which $332,000 was financed with a
vendor. This amount was payable in seven quarterly installments
beginning in January 2005. The note was paid in full in June
2006. In December 2005, the Company entered into a payment plan
agreement with a vendor to finance a purchase of system software
in the amount of $82,000. This amount was payable in four
quarterly installments beginning in January 2006. The note was
paid in full in September 2006. In June 2006, the Company
entered into a software maintenance agreement under which
$90,000 was financed with a vendor. This amount is payable in
four quarterly installments beginning in July 2006.
In November 2005, the Company issued a note payable (the
LPI note) in connection with its acquisition of the
assets of LPI in the amount of $7,075,000 to the sellers,
secured by the assets of SpecPub, Inc. (a subsidiary of the
Company established to hold certain such assets) and payable in
three equal installments of $2,358,000 in May, August and
November 2007. The note bears interest at a rate of 10% per
year, payable quarterly and in arrears. In 2005 and 2006, the
Company recorded interest expense on the note of $133,000 and
$708,000, respectively, in the consolidated statements of
operations.
In September 2006, the Company entered into a Loan and Security
Agreement with ORIX Venture Finance, LLC (Orix),
which was amended in February 2007 (the Agreement).
Pursuant to the Agreement, the Company borrowed $7,500,000 as a
term loan and $3,000,000 as a
24-month
revolving loan in September 2006. The borrowings under the line
of credit are limited to $3,000,000, which the Company has
already drawn down, and to 85% of qualifying accounts
receivable. The term loan is payable in 48 consecutive monthly
installments of principal beginning on November 1, 2006
bearing interest at a rate of prime plus 3%, decreasing to prime
plus 2% if certain financial benchmarks are met. The revolving
loan bears interest at a rate of prime plus 1%. The Agreement
contains certain financial ratios, financial tests and liquidity
covenants, with which the Company was in compliance at
December 31, 2006. The loans are secured by substantially
all of the assets of the Company and all of the outstanding
capital stock of all subsidiaries of the Company, except for the
assets and capital stock of SpecPub, Inc., which are pledged as
security for the LPI note. In connection with the term loan
agreement, the Company issued Orix a
7-year
warrant to purchase up to 120,000 shares of the common
stock of the Company (see Note 10).
68
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Future minimum payments of notes payable are as follows (in
thousands):
|
|
|
|
|
Year Ending December 31,
|
|
|
|
|
2007
|
|
$
|
8,997
|
|
2008
|
|
|
4,875
|
|
2009
|
|
|
1,875
|
|
2010
|
|
|
1,562
|
|
|
|
|
|
|
|
|
$
|
17,309
|
|
|
|
|
|
|
Note 8
Commitments and Contingencies
Operating
Leases
The Company leases office space and equipment under
noncancelable operating leases with various expiration dates
through December 31, 2012. The Company recognizes rent
expense on a straight-line basis over the lease period. Rent
expense under the Companys operating leases in 2004, 2005
and 2006, was $830,000, $1,523,000 and $2,652,000, respectively.
Future minimum payments under noncancelable operating lease
agreements are as follows (in thousands):
|
|
|
|
|
Year Ending December 31,
|
|
Operating Leases
|
|
|
2007
|
|
$
|
3,047
|
|
2008
|
|
|
3,121
|
|
2009
|
|
|
3,194
|
|
2010
|
|
|
2,944
|
|
2011
|
|
|
2,887
|
|
Thereafter
|
|
|
1,066
|
|
|
|
|
|
|
|
|
$
|
16,259
|
|
|
|
|
|
|
Capital
Leases
As of December 31, 2006, the future minimum lease payments
under noncancelable capital leases are as follows (in thousands):
|
|
|
|
|
Year Ending December 31,
|
|
Capital Leases
|
|
|
2007
|
|
$
|
892
|
|
2008
|
|
|
817
|
|
2009
|
|
|
598
|
|
2010
|
|
|
222
|
|
2011
|
|
|
49
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
2,578
|
|
Less: Amount representing interest
|
|
|
(380
|
)
|
|
|
|
|
|
Present value of capital lease
obligations
|
|
|
2,198
|
|
Less: Current portion
|
|
|
(694
|
)
|
|
|
|
|
|
Long-term portion of capital lease
obligations
|
|
$
|
1,504
|
|
|
|
|
|
|
69
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2005 and 2006, the Company held property
and equipment under capital leases with a cost of $3,917,000 and
$5,851,000, respectively. The accumulated amortization on these
assets was $3,474,000 and $3,719,000 as of December 31,
2005 and 2006, respectively.
Deposit
Commitments
The Company enters into leasing agreements with cruise lines and
other travel providers which establish varying deposit
commitments as part of the lease agreement prior to the
commencement of the leased voyage or vacation. At
December 31, 2006, the Company had deposits on leased
voyages and vacations of $7,153,000 included in prepaid expenses
and other current assets and commitments for future deposits of
$8,797,000, of which $2,738,000 is secured by restricted cash
pursuant to a contractual agreement associated with an
irrevocable letter of credit. Approximately $2,694,000 of the
restricted cash will be applied against the commitments for
future deposits in February 2007.
Co-location
Facility Agreement
In December 2005, the Company entered into a co-location
facility agreement with a third-party service provider which was
renewed in December 2006. In exchange for providing space for
the Companys network servers and committed levels of
telecommunications bandwidth, the Company pays a minimum monthly
fee of $43,000. In the event that bandwidth exceeds an allowed
variance from committed levels, the Company pays for additional
bandwidth at a set monthly rate. Future total minimum payments
under the co-location facility agreement are $516,000 for 2007.
Indemnification
In June 2001, the Company entered into an Indemnity Agreement
with its President pursuant to which the Company agreed to
indemnify him for certain costs of defense and damages that
might be awarded against him in a lawsuit brought against him
and the Company, among others, by a former employee.
Specifically, the Indemnity Agreement provided that the Company
would indemnify its President for his reasonable costs of
defense, generally limited to no more than $3,500 per
month, and for that portion of any damages awarded against him,
if any, in an amount to be determined at arbitration, that the
trier of fact finds resulted from actions he took within the
scope of his employment with OLP, a heritage company. The
Company paid $16,000, $13,000 and zero in 2004, 2005 and 2006
respectively, in connection with this indemnification. The
lawsuit subject to this Indemnity Agreement was settled in
January 2005, and no further material payments are expected
under this agreement.
Contingencies
The Company is not currently subject to any material 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 is currently involved in the
matter described below. However, the Company does not believe,
based on current knowledge, that this matter is likely to have a
material adverse effect on its financial position, results of
operations or cash flows.
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 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 (approximately US$66,000 at
December 31, 2006), 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 domain name for its
services in France. In October 2005, the Company paid half the
damage awarded as required by the court order
70
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and temporarily changed the domain name of its French website,
from www.fr.gay.com to www.ooups.com, a domain
name it has used previously in France. In January 2006, both
sides appealed the French courts decision. In November
2006, the Court of Appeals canceled DIALINKs trademarks,
found that the Company had not engaged in unfair competition,
allowed the Company to resume use of Gay.net, Gay.com and
fr.gay.com in France and ordered DIALINK to return the
25,000 (approximately US$33,000 at December 31,
2006) the Company had paid previously and pay the Company
20,511 (approximately US$27,000 at December 31,
2006) in costs and interest. DIALINK appealed this matter
to the French Supreme Court in February 2007.
Note 9
Redeemable Convertible Preferred Stock
The Companys certificate of incorporation, amended and
restated in October 2004, authorizes the Company to issue up to
5,000,000 shares of preferred stock, with a par value of
$0.001, in one or more series. The Board of Directors may
authorize the issuance of preferred stock with voting or
conversion rights that could adversely affect the voting power
or other rights of the holders of the common stock. The issuance
of preferred stock, while providing flexibility in connection
with possible acquisitions and other corporate purposes, could,
among other things, have the effect of delaying, deferring or
preventing a change in control of the Company and may adversely
affect the market price of the common stock and the voting and
other rights of the holders of common stock. As of
December 31, 2006, no shares of preferred stock were issued
and outstanding.
At December 31, 2003, the Company had the following
redeemable convertible preferred stock outstanding (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
Shares
|
|
|
Issued and
|
|
Series
|
|
Authorized
|
|
|
Outstanding
|
|
|
E
|
|
|
1,273
|
|
|
|
812
|
|
D
|
|
|
3,864
|
|
|
|
3,185
|
|
C-1
|
|
|
1,188
|
|
|
|
729
|
|
C-2
|
|
|
1,667
|
|
|
|
801
|
|
C-3
|
|
|
321
|
|
|
|
221
|
|
C-4
|
|
|
2,129
|
|
|
|
1,305
|
|
C-5
|
|
|
1,967
|
|
|
|
1,737
|
|
B
|
|
|
509
|
|
|
|
503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,918
|
|
|
|
9,293
|
|
|
|
|
|
|
|
|
|
|
During 2004, in accordance with the terms of the Series B
convertible preferred stock purchase agreement, the Company
repurchased 2,000 unvested shares of the Series B preferred
stock for $20,000 upon termination of employee services.
In September 2004, the Company issued 4,000 shares of
Series D redeemable convertible preferred stock for
$4.07 per share resulting in aggregate net cash proceeds of
$15,000.
Upon closing of the Companys initial public offering in
October 2004, all Series E, D, C-1, C-2, C-3, C-4 and C-5
automatically converted into common stock at a
one-to-one
ratio, as adjusted for a reverse stock-split of 11:1.
The Series B convertible preferred stock was automatically
converted upon closing of the IPO into shares of common stock,
as adjusted for a reverse stock split of 11:1, at a conversion
rate of approximately 1:1.8 based on the valuation of the
Company at the time of the IPO, in accordance with the
Companys certificate of incorporation.
71
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Dividends
The holders of Series D and Series E were entitled to
receive cumulative dividends in preference to any dividend on
any other preferred series or common stock, at the amount of
$0.407 per share per annum, compounded quarterly. In
addition, each share of Series D and Series E was
entitled to share on a pro rata basis with any dividends payable
to holders of common stock on an as-converted basis. Prior to
the initial public offering in October 2004, the cumulative
unpaid dividends were $5,376,000. In accordance with the
Companys certificate of incorporation, the undistributed
cumulative dividends terminated upon the IPO.
Redemption
Prior to Companys IPO, at the individual option of each
holder of shares of Series E and D, the Company was
obligated to redeem, at any time on or after May 1, 2006,
the number of shares of Series E or D held by such holder
by paying in cash a sum equal to $4.07 per share plus all
accrued but unpaid dividends on such shares on the date of
redemption (the Redemption Price). The
Redemption Price was payable in two equal installments on
the redemption date and on the first anniversary of the
redemption date. In 2004 the Company recorded $1,304,000 of
accretion for cumulative dividends. The redemption features
terminated upon conversion of the preferred stock into common
stock at the closing of the IPO. In addition to the accretion
for cumulative dividends described above, the Company recorded
accretion of $98,000 in 2004 in connection with issuance costs
capitalized and recorded against the gross proceeds received
from the issuance of Series D and E using the effective
interest method.
Note 10
Warrants
In connection with certain acquisitions, financing arrangements
and in exchange for services rendered, the Company issued
warrants to purchase shares of the Companys redeemable
convertible preferred and common stock. As of December 31,
2006, none of these warrants were outstanding.
In May 2004, the Company issued a warrant to purchase
45,000 shares of common stock in connection with the
issuance of the senior subordinated promissory note. The warrant
was exercised in May 2004 at a price of $0.011 per share
for net proceeds of $500. In October 2004, AOL exercised a
common stock warrant through a cashless exercise transaction
resulting in a net issuance of 100,000 shares of common
stock. In March 2005, Pacific Technology Ventures exercised a
common stock warrant through a cashless exercise transaction
resulting in a net issuance of 4,000 shares of common stock.
In connection with the term loan agreement with Orix (see
Note 7), the Company issued Orix a
7-year
warrant to purchase up to 120,000 shares of the common
stock of the Company at an exercise price of $3.74. The warrant
vested immediately, had a fair value of approximately $445,000
as of the date of issuance and will expire on September 28,
2013. The value of the warrant was recorded as a discount of the
principal amount of the term loan and will be accreted and
recognized as additional interest expense using the effective
interest method over the life of the term loan. The value of the
warrant was estimated by the Company using the Black-Scholes
pricing model with the following assumptions:
|
|
|
|
|
Expected dividend yield
|
|
|
0
|
%
|
Expected stock price volatility
|
|
|
105
|
%
|
Risk-free interest rate
|
|
|
4.56
|
%
|
Expected life of warrants
|
|
|
7 years
|
|
Note 11
Stock Option Plans
In December 1997, the Company adopted the 1997 Stock Plan and in
April 2001, the Company assumed the PlanetOut Corporation 1996
Stock Option Plan and PlanetOut Corporation 1996 Equity
Incentive Plan (as part of the acquisition of POC). In January
2002, the Company adopted the PlanetOut Partners, Inc. 2001
Equity Incentive
72
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Plan. In April 2004, the Company adopted the 2004 Equity
Incentive Plan and the 2004 Executive Officers and Directors
Equity Incentive Plan (hereinafter collectively referred as the
Plans). All of the plans, except for the 2004 Equity
Incentive Plan, terminated upon the closing of the IPO, which
does not affect the awards outstanding under those plans. The
2004 Equity Incentive Plan provides for the granting of stock
options, stock purchase rights, stock bonus awards, restricted
stock awards, restricted stock units, stock appreciation rights,
phantom stock rights, and other similar equity based awards to
employees, outside directors and consultants of the Company.
Options granted under the Plans may be either incentive stock
options or nonqualified stock options. Incentive stock options
(ISO) may be granted only to Company employees and
nonqualified stock options (NSO) may be granted to
Company employees and consultants. As of December 31, 2006,
the Company has reserved an aggregate of 2,735,000 shares
of common stock for issuance under the 2004 Equity Incentive
Plan and other plans.
No further awards may be granted under any of the plans, except
for the 2004 Equity Incentive Plan. Options under the 2004
Equity Incentive Plan may be granted for periods of up to ten
years and as determined by the Board of Directors, provided,
however, that (i) the exercise price of an ISO shall not be
less than 100% of the value of the shares on the date of grant;
and (ii) the exercise price of an ISO and NSO granted to a
10% stockholder shall not be less than 110% of the estimated
fair value of the shares on the date of grant. Options granted
under the Plans are generally exercisable at the date of grant
with unvested shares subject to repurchase by the Company. To
date, options outstanding under the Plans generally vest over
two to four years.
73
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a summary of common stock option activity (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Available
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual Term
|
|
|
Intrinsic
|
|
|
|
for Grant
|
|
|
Shares
|
|
|
Price
|
|
|
(in Years)
|
|
|
Value
|
|
|
Balances at December 31, 2003
|
|
|
721
|
|
|
|
1,572
|
|
|
$
|
1.10
|
|
|
|
|
|
|
|
|
|
Additional shares reserved
|
|
|
904
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(883
|
)
|
|
|
883
|
|
|
$
|
9.25
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(78
|
)
|
|
$
|
0.56
|
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
291
|
|
|
|
(291
|
)
|
|
$
|
3.83
|
|
|
|
|
|
|
|
|
|
Conversion of Series D
redeembable convertible preferred stock options to common
options upon completion of IPO
|
|
|
37
|
|
|
|
112
|
|
|
$
|
4.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2004
|
|
|
1,070
|
|
|
|
2,198
|
|
|
$
|
4.19
|
|
|
|
|
|
|
|
|
|
Additional shares reserved
|
|
|
545
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(461
|
)
|
|
|
461
|
|
|
$
|
8.48
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(240
|
)
|
|
$
|
1.23
|
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
(466
|
)
|
|
|
(307
|
)
|
|
$
|
7.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2005
|
|
|
688
|
|
|
|
2,112
|
|
|
$
|
5.03
|
|
|
|
|
|
|
|
|
|
Additional shares reserved
|
|
|
545
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Restricted stock granted
|
|
|
(220
|
)
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(49
|
)
|
|
|
49
|
|
|
$
|
9.08
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(161
|
)
|
|
$
|
2.89
|
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
24
|
|
|
|
(253
|
)
|
|
$
|
8.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2006
|
|
|
988
|
|
|
|
1,747
|
|
|
$
|
4.77
|
|
|
|
6.4
|
|
|
$
|
3,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at
December 31, 2006
|
|
|
|
|
|
|
1,732
|
|
|
$
|
4.75
|
|
|
|
6.4
|
|
|
$
|
3,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at
December 31, 2006
|
|
|
|
|
|
|
1,694
|
|
|
$
|
4.64
|
|
|
|
6.4
|
|
|
$
|
3,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain common stock option holders have the right to exercise
unvested options subject to a repurchase right held by the
Company, which generally lapses ratably over four years, at the
original exercise price in the event of voluntary or involuntary
termination of employment of the stockholder.
74
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information about common stock
options outstanding and exercisable as of December 31, 2006
(in thousands, except years and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Average
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Range of Exercise Price
|
|
of Shares
|
|
|
Life (Years)
|
|
|
Price
|
|
|
of Shares
|
|
|
Price
|
|
|
$ 0.00 - $ 1.46
|
|
|
806
|
|
|
|
5.6
|
|
|
$
|
0.45
|
|
|
|
806
|
|
|
$
|
0.45
|
|
$ 1.47 - $ 2.93
|
|
|
33
|
|
|
|
3.1
|
|
|
$
|
2.25
|
|
|
|
33
|
|
|
$
|
2.25
|
|
$ 2.94 - $ 4.39
|
|
|
70
|
|
|
|
5.1
|
|
|
$
|
4.07
|
|
|
|
70
|
|
|
$
|
4.07
|
|
$ 4.40 - $ 7.33
|
|
|
23
|
|
|
|
8.4
|
|
|
$
|
7.05
|
|
|
|
23
|
|
|
$
|
7.05
|
|
$ 7.34 - $ 8.79
|
|
|
273
|
|
|
|
8.0
|
|
|
$
|
8.30
|
|
|
|
253
|
|
|
$
|
8.30
|
|
$ 8.80 - $10.26
|
|
|
492
|
|
|
|
7.4
|
|
|
$
|
9.16
|
|
|
|
459
|
|
|
$
|
9.14
|
|
$10.27 - $11.72
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
$11.73 - $13.19
|
|
|
8
|
|
|
|
2.1
|
|
|
$
|
12.23
|
|
|
|
8
|
|
|
$
|
12.23
|
|
$13.20 - $14.66
|
|
|
42
|
|
|
|
5.0
|
|
|
$
|
13.90
|
|
|
|
42
|
|
|
$
|
13.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,747
|
|
|
|
6.4
|
|
|
$
|
4.77
|
|
|
|
1,694
|
|
|
$
|
4.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2004 and 2005, the Company had 2,198,000
and 2,112,000 common stock options exercisable and outstanding
with a weighted average exercise price of $4.19 and
$5.03 per share, respectively.
All options granted were intended to be exercisable at a price
per share not less than the fair market value of the shares of
the Companys stock underlying those options on their
respective dates of grant. The Companys Board of Directors
determined these fair market values in good faith based on the
best information available to the Board and the Companys
management at the time of grant.
The following is a summary of Series D option activity (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Shares
|
|
|
|
|
|
Average
|
|
|
|
Available for
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Grant
|
|
|
Shares
|
|
|
Price
|
|
|
Balances at December 31, 2003
|
|
|
37
|
|
|
|
125
|
|
|
$
|
4.07
|
|
Options granted
|
|
|
|
|
|
|
(4
|
)
|
|
|
4.07
|
|
Options cancelled
|
|
|
|
|
|
|
(9
|
)
|
|
|
4.07
|
|
Conversion of Series D
redeembable convertible preferred stock options to common
options upon completion of IPO
|
|
|
(37
|
)
|
|
|
(112
|
)
|
|