e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
|
|
|
(Mark One)
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the fiscal year ended
December 31, 2007
|
OR
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
|
Commission File Number:
000-50879
PLANETOUT INC.
(Exact name of registrant as
specified in its charter)
|
|
|
DELAWARE
|
|
94-3391368
|
(State or other jurisdiction
of
Incorporation or organization)
|
|
(I.R.S. Employer
Identification No.)
|
|
|
|
1355 Sansome Street,
San Francisco CA
(Address of principal
executive offices)
|
|
94111
(Zip
Code)
|
(415) 834-6500
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
|
|
|
Title of Each Class
|
|
Name of Each Exchange on Which Registered
|
|
Common Stock, $0.001 Par Value Per Share
|
|
The NASDAQ Stock Market LLC
|
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, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
|
|
|
|
|
|
|
Large accelerated
filer o
|
|
Accelerated
filer o
|
|
Non-accelerated
filer o
(Do not check if a smaller reporting company)
|
|
Smaller reporting
company þ
|
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, 2007 and based upon information provided by
stockholders on Schedules 13D and 13G filed with the Securities
and Exchange Commission, was approximately $16,803,000. 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 February 29, 2008, there were 4,096,205 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 2008 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, 2007
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, 2007, 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.
PART I
Company
Overview
PlanetOut Inc. (PlanetOut) was incorporated in
Delaware in 2000. We are a leading global media and
entertainment company serving the worldwide lesbian, gay,
bisexual and transgender, or LGBT, community. We classify our
businesses into two reporting segments: Online and Publishing.
Our Online segment consists of our LGBT-focused websites, most
notably Gay.com, PlanetOut.com, Advocate.com and Out.com which
provide revenues from advertising services and subscription
services. Our Online segment also includes our transaction-based
websites, including BuyGay.com, which generate revenue through
sales of products and services of interest to the LGBT
community. Our Publishing segment includes the operations of our
print media properties including the magazines The
Advocate, Out, The Out Traveler and
HIVPlus. Our Publishing segment also generates revenue
from newsstand sales of our various print properties and our
book publishing businesses, Alyson and Publishers Distributing
Co. (PDC).
With the extensive reach of our brands and multiple media
properties, 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 advertising.
We offer multi-platform advertising opportunities through which
advertisers can target the gay and lesbian market using a
combination of vehicles such as the Internet, print,
e-mail and
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.
We believe our online user base includes one of the most
extensive networks 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 for our general membership services by
providing their name,
e-mail
address and other personal content. Registration for general
membership services on our flagship websites, Gay.com and
PlanetOut.com, allows access to integrated services, including
profile creation and search, basic chat and instant messaging.
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 general
membership packages.
In addition to premium subscriptions to our Gay.com and
PlanetOut.com services, we offer our customers subscriptions to
six 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 consumer
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 also offer our users access to specialized products and
services through our transaction-based websites, including
BuyGay.com, that generate revenue through sales of products and
services of interest to the LGBT community, such as fashion,
books, CDs and DVDs. 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.
Business
Segments
Our two business segments are described below. Additional
financial information relating to these segments may be found in
Note 2 to our Consolidated Financial Statements included in
Part II, Item 8 of this Annual Report on
Form 10-K.
1
Online
Segment
Our Online segment accounted for 87%, 54% and 51% of our total
net revenue in fiscal 2005, 2006 and 2007, respectively. This
segment currently consists of our operations relating to our
LGBT-focused websites, most notably Gay.com, PlanetOut.com,
Advocate.com and Out.com which provide revenues from advertising
services and subscription services. This segment also includes
our transaction-based websites, including BuyGay.com, which
generate revenue through sales of products and services of
interest to the LGBT community, such as fashion, books, CDs and
DVDs. In fiscal 2007, revenues from advertising services,
subscription services and transactions services represented 35%,
61% and 4% of the segments net revenues, respectively.
Online
Advertising Services
We derive advertising services revenue in our Online segment
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. We believe that online advertising
will continue to grow and diversify as it captures a larger
share of total advertising dollars.
During the years ended December 31, 2005, 2006 and 2007, no
single advertiser accounted for more than 10% of our domestic
online advertising revenue. Our five largest customer industry
categories accounted for approximately 69%, 72% and 63%,
respectively, of our domestic online advertising revenue for
fiscal 2005, 2006 and 2007, respectively.
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, 2007, we had
approximately 131,000 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 only limited access to member profile photographs and chat
services, and may only perform basic profile searches. 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 our magazines, The Advocate and
Out. We believe these types of additional premium
offerings serve as an inducement for free members to convert to
paying subscribers and for subscribers to lower-priced,
shorter-term plans to convert to higher-priced, longer-term
plans.
In addition to the general membership services offered by
Gay.com and PlanetOut.com, our Premium Services packages offer
members additional enhanced features which include access to
live customer and technical support and specialized premium
content, as well as the ability to simultaneously enter several
of our more than 1,700 chat rooms. 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,
2007, approximately 91% of subscribers on Gay.com identified
themselves as male and on PlanetOut.com, 40% of subscribers
identified themselves as female. As of December 31, 2007,
11% of our Gay.com paid subscribers identified themselves as
residing outside the United States.
We are paid up-front for premium memberships, and we recognize
subscription revenue ratably over the subscription period. As of
December 31, 2006 and 2007, deferred revenue related to
premium membership subscription totaled approximately
$4.4 million and $3.9 million, respectively.
2
Online
Transaction Services
Our Online segment generates transactions services revenue by
offering products and services of interest to the LGBT community
through multiple
e-commerce
websites, including BuyGay.com. To increase our transactions
services 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, fashion accessories, CDs
and DVDs. We hold inventory for a portion of the products that
we sell, such as CDs and DVDs, 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.
Online
Product Development and Technology
Our product development teams completed extensive consumer
research in 2007 to identify key opportunities for us to
increase the marketability of our online properties. During 2007
we also established a redevelopment roadmap and timeline to
introduce a new user experience for our consumers, completed the
key preliminary planning stages and began the redevelopment
effort.
We plan to introduce improvements to key features such as chat
and profiles, and expanded capabilities related to
member-generated content. We also plan to move, over time,
toward integration of our technology platforms across all our
web properties, beginning with an extensive effort, now
underway, 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 the
integration and re-architecture of the core technology platform
of our websites and supporting our member services, including
the introduction of new features and functions. We strive to
concentrate our acquisitions 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 virtual
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
to easily expand technological capacity to handle increased
loads. 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 equipment to increase capacity.
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.
Publishing
Segment
Our Publishing segment accounted for 13%, 46% and 49% of our
total net revenue in fiscal 2005, 2006 and 2007, respectively.
Our magazine publishing business is conducted by LPI Media Inc.
(LPI) and SpecPub, Inc. (SpecPub), our
wholly-owned subsidiaries. In addition, these subsidiaries
operate certain direct-marketing and direct-selling businesses.
In fiscal 2007, revenues from advertising services, subscription
services and transactions services represented 62%, 21% and 17%
of the segments net revenues, respectively.
3
Magazines
We currently publish seven magazines, five of which are offered
on a subscription basis. These magazines are aimed primarily at
the LGBT market. LPI and SpecPub also distribute digital
editions of some their magazines using Zinio, a leading provider
of digital magazine marketing and distribution.
We enhance the reach of our magazine businesses primarily
through the development of specialized editions aimed at
particular audiences, and the development of new editorial
content for different media, such as the Internet and books.
Many of our magazine brands have developed websites to publish
original content as well as content from the magazines.
Generally, each magazine we publish has an editorial staff under
the supervision of an
Editor-In-Chief.
Advertising sales and marketing, subscription marketing,
production and distribution activities are generally
centralized. Fulfillment activities are provided by a leading
industry vendor.
As the leading magazines targeting the LGBT community in the
U.S., Out and The Advocate include a range of
articles targeted to appeal to this demographic. Since our
purchase of LPI in November 2005, both magazines have undergone
a significant redesign aimed at reaching both older and younger
LGBT readers.
Out is a monthly magazine which targets a younger,
fashion-oriented readership. The Advocate, a bi-weekly,
targets an older demographic among gay opinion leaders. Together
the two titles speak to a broad range of the gay spectrum,
giving them greater reach than smaller and more fragmented
competitors. Outs rate base (the total subscription
and newsstand circulation guaranteed to advertisers) was 175,000
in fiscal 2007, rising 5.7% to 185,000 in fiscal 2008. The
Advocates rate base was 165,000 in fiscal 2007
increasing 6.1% to 175,000 in fiscal 2008.
Books
Our book business consists of our Alyson brand operations and
Publishers Distributing Co. (PDC) distribution
operations. Alyson publishes works targeted to an LGBT audience
or to mainstream audiences where there is an overlap or high
interest in the subject matter. During 2007, Alyson published 50
books in the categories of fiction, non-fiction, pets, pop
culture, erotica, travel, mystery and self-help. PDC markets and
sells LGBT-themed books and materials from third party
publishers to wholesalers and specialty retailers across the
United States primarily for a few foreign owned publishers which
utilize PDC as one of their US distributors.
Advertising
Advertising carried in our print publications comes from many of
the top advertising categories in consumer magazines, including
healthcare, travel, automotive, financial services,
fashion/accessories, grooming products and spirits. During the
years ended December 31, 2005, 2006 and 2007, no single
advertiser accounted for more than 10% of our publishing
advertising revenue. Our five largest customer industry
categories accounted for approximately 76% and 75% of our
publishing advertising revenue for fiscal 2006 and 2007,
respectively.
Circulation
During 2007, we grew the total circulation, which includes
subscription copies and single copy sales, of our print
subscription magazines to 458,000 as of December 31, 2007,
which represents an 11% increase over December 31, 2006. We
market our print subscription services through a broad spectrum
of advertising tools, direct mail,
e-mail,
contests, online advertising and other promotional activities.
In addition to the revenue generated by the sale of our
magazines to consumers, circulation is an important component in
determining our print advertising revenues because advertising
page rates are based on both circulation and readership. Most of
our magazines are sold primarily by subscription and delivered
to subscribers through the mail. Subscriptions are sold
primarily through direct mail and online solicitation,
subscription sales agents, marketing agreements with other
companies, contests and insert cards in our magazines.
4
Paper
and Printing
Paper constitutes a significant component of physical costs in
the production of our magazines. During 2007, we purchased all
of our paper through our two principal printing vendors.
Printing and binding for our magazines are performed primarily
by two North American printers. Magazine printing contracts are
typically fixed-term and fixed priced with, in some cases,
adjustments based on inflation.
Postal
Rates
Postal costs represent a significant operating expense for our
magazine publishing and direct-marketing activities. In 2007, we
spent over $2.5 million for services provided by the
U.S. Postal Service. The U.S. Postal Service
implemented a postal rate increase in May 2007 which resulted in
approximately a 15% increase in our effective postal rates.
These increased costs are not directly passed on to our magazine
subscribers. We strive to minimize postal expense through the
use of certain cost-saving activities with respect to address
quality, mail preparation and delivery of products to postal
facilities.
Competitive
Strengths
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 helps reinforce our position as a leading network of LGBT
people in the world.
Critical Mass. We believe we have built a
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 consumer 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 one of the largest online
networks of gay and lesbian people in the world. We also believe
the size and attractive demographic characteristics of our 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 print
media properties. 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.
Compelling Content. We offer compelling
editorial and programming content to the LGBT community, in
print and online, covering topics such as travel, news,
entertainment, fashion, 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. 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.
5
Niche Market Focus. By offering cross-media
solutions that combine the power of online media with print,
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:
|
|
|
|
|
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.
|
|
|
|
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
reaching the North America LGBT market.
|
|
|
|
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, geographic
location or 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 our print 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.
|
|
|
|
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.
|
Growth
Strategy
Our goal is to enhance our position as an LGBT-focused market
leader by maximizing the growth prospects and profitability of
each of our revenue streams across our two segments. We seek to
achieve this through the following strategies:
Growing Our User Base Across Multiple
Properties. We intend to grow our user base by:
|
|
|
|
|
Cross-Promoting Products and Services. We are
building on our extensive member base that we have developed
online through the Gay.com and PlanetOut.com websites and the
print leadership of The Advocate and Out magazines
by cross-promoting our products and services to the LGBT
community. We plan to continue marketing directly to consumers
through targeted online advertising, keyword buys and affiliate
programs.
|
|
|
|
Creating New Products and Services. We intend
to offer new products and services through our multi-platform
network. For example, we are currently developing improvements
to key features such as chat and profiles, and expanded
capabilities related to member-generated content as part of our
website and technology re-architecture currently underway. By
enhancing website 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.
|
6
Capitalizing on Advertising Growth and
Relationships. We believe our large user base
across multiple properties provides us with 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 events opportunities, we believe we can
differentiate our products and more effectively serve our
advertising clients. Furthermore, by 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.
Leveraging and Growing Our Subscriber
Base. Currently, we offer eight different
subscription services across multiple properties. By bundling
these subscriptions into new and unique packages, we believe we
can attract new subscribers. In some cases, we can also use
these bundled packages and special promotions to shift
subscribers into longer-term, higher-value plans.
Competition
We operate in a highly competitive environment. Across all three
of our revenue streams within our two operating segments, 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!, Google, MSN, Time Warner, Viacom,
Condé Nast and News Corporation, as well as a number of
smaller companies focused specifically on the LGBT community. In
our online subscription business, our competitors include these
companies as well as other companies that offer more targeted
online service offerings, such as Match.com and Yahoo!
Personals, 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 and Facebook, that provide opportunity
for an 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.
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 producing content and 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 and
Advocate. We have registered or applied for
additional protection for several of these trademarks in select
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.
7
Employees
As of December 31, 2007, we had 237 full-time
employees and eight part-time or temporary employees. We utilize
part-time and temporary employees primarily to handle overflow
work and short-term projects. None of our employees are
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, 2008:
|
|
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Executive officers
|
|
|
|
|
|
|
|
|
Karen Magee
|
|
|
47
|
|
|
|
Chief Executive Officer
|
|
Daniel E. Steimle
|
|
|
59
|
|
|
|
Interim Chief Financial Officer
|
|
William Bain
|
|
|
49
|
|
|
|
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
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.
Daniel E. Steimle has served as our Interim Chief
Financial Officer since October 2007. Since June 2007,
Mr. Steimle has been a member of Tatum, LLC, an executive
services firm, prior to which he was with CSL Consulting, a
consulting firm, from November 2006 to May 2007, and again from
October 2002 to June 2004 where he served as acting CFO and in
other advisory capacities for several technology companies. From
July 2004 to November 2006, Mr. Steimle served as Vice
President, Chief Financial Officer at Turin Networks, Inc., a
telecommunications equipment supplier. From August 2000 to
September 2002, Mr. Steimle served as Vice President, Chief
Financial Officer for LGC Wireless, Inc., a wireless
infrastructure equipment supplier. Prior to that,
Mr. Steimle served as Chief Financial Officer and in other
financial management positions for several public and private
technology companies. Mr. Steimle holds a B.S. in
Accounting from Ohio State University and an MBA in
Management/Marketing from the University of Cincinnati.
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
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.
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.
8
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 expect to
continue to incur losses in the future. As of December 31,
2007, our accumulated deficit was approximately
$89.5 million. Although we had positive net income in the
year ended December 31, 2005, we experienced net losses of
$3.7 million and $51.2 million for the years ended
December 31, 2006 and 2007, respectively, and we may not be
able to regain or sustain 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.
Our advertising revenue is also dependent on the collective
experience of our sales force and on our ability to recruit,
hire, train, retain and manage our sales force. If we are unable
to recruit or retain our sales force, we may be unable to meet
the demands of our current advertisers or attract new
advertisers and our advertising revenue could decrease.
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 or if our advertising campaigns are
unsuccessful with the LGBT community, 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!, Google, MSN, Time Warner, Viacom,
Condé Nast 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 profitability.
Our ability to fulfill the demands of our online advertisers is
dependent on the number of page views generated by our visitors,
members and subscribers. If we are not able to attract new
visitors, members or subscribers or to retain our current
visitors, members and subscribers, our page views may decrease.
If our page views decrease, we may be unable to timely meet the
demands of our current online advertisers and our advertising
revenue could decrease.
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
9
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 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 the years ended December 31, 2006 and 2007,
total subscription cancellations exceeded the number of new
subscriptions, resulting in a decrease in total online
subscribers, or members with a paid subscription plan.
Our current online content 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 contraction could
accelerate. 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.
Our
core revenue-generating software applications are written on a
technology platform that has become increasingly difficult to
support. As we convert our applications onto more stable,
supportable platforms a process that requires time
and financial investment we face the risk of not
being able to maintain or enhance the functionality of our
websites. As a result we may lose market share and our revenue
may further decline.
Significant portions of our revenue-generating websites are
written in internally developed code that lacks sufficient
explanatory documentation, and in some instances, is understood
by only a limited number of our
10
technology personnel. Our current core website functionality is
being converted onto a code base and platform that are generally
recognized as industry standard. However, our efforts to execute
this conversion have required and will continue to require
significant expenditures of personnel and financial resources
over an extended period of time. Such an undertaking presents
significant execution risks as we seek to maintain and enhance
existing customer-facing functionality, while simultaneously
building and supporting a new technology infrastructure. If we
are unable to convert to a new technology platform or if we
encounter technical difficulties during the conversion process,
our websites may suffer downtime or may lack the functionality
desired by our visitors, members and subscribers. This in turn
may result in the loss of those visitors, members and
subscribers, and a decline in our revenue.
We
expect our operating results to fluctuate, which may lead to
volatility in our stock price.
Our operating results have fluctuated in the past and may
fluctuate significantly in the future due to a variety of
factors, many of which are outside of our control. As a result,
we believe that period-over-period comparisons of our operating
results are not necessarily meaningful and that you should not
rely on the results of one period as an indication of our future
or long-term performance. Our operating results in future
quarters may be below the expectations of public market analysts
and investors, which may result in a decline in our stock price.
Our
limited operating history makes it difficult to evaluate our
business.
As a result of our 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 or our net loss larger than expected, which
could cause a decline in our stock price.
Recent
and potential future acquisitions and divestitures 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 July 2007, we closed our international
offices in Buenos Aires and London to streamline our business
operations and reduce expenses. In December 2007, we completed
the sale of substantially all of the assets of RSVP. In
addition, as part of our July 2007 financing, we were
contractually obligated to use reasonable efforts to divest
ourselves of our adult businesses by December 31, 2007. Our
efforts to divest ourselves of our adult business have continued
since December 31, 2007 and we intend to continue these
efforts, but to date have not been successful.
We may consider divestitures of businesses that we conclude are
likely to impair our future results, or which we deem no longer
appropriate for our future business plans. For example, in
December 2007, we sold substantially all of the assets of RSVP
to a third party. Our prior acquisitions and divestitures and
other potential future divestitures may be associated with a
number of risks, including:
|
|
|
|
|
potential goodwill write downs associated with acquisitions of
businesses where the previously anticipated synergies of the
combined entities have not been realized. For example, during
fiscal 2007, we recorded an impairment charge of
$21.5 million in continuing operations due to lower
advertising revenue than expected related to our publishing
segment and an impairment charge of $4.0 million in
discontinued operations due to lower revenue than expected
related to our travel business;
|
|
|
|
the difficulty of integrating the acquired assets and personnel
of the acquired businesses into our operations;
|
|
|
|
the potential absorption of significant management attention and
significant financial resources for the ongoing development of
our business;
|
|
|
|
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;
|
11
|
|
|
|
|
the difficulty of integrating the acquired companys
accounting, human resources and other administrative systems;
|
|
|
|
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 or the divestiture of our
prior businesses;
|
|
|
|
the difficulty in attracting and retaining qualified management
to lead the combined or retained businesses;
|
|
|
|
the potential difficulties associated with entering new lines of
business with which we have little experience, such as some of
the businesses we acquired from LPI;
|
|
|
|
the difficulty of complying with additional regulatory
requirements that may become applicable to us as the result of
an acquisition; and
|
|
|
|
the impact of known or unknown liabilities associated with the
acquired businesses.
|
If we are unable to successfully address these or other risks
associated with our acquisition of LPI and divestiture of RSVP
or potential future divestitures, we may be unable to realize
the anticipated synergies and benefits of our acquisitions or
replace the revenue from the divested businesses, which could
adversely affect our financial condition and results of
operations. In addition, the business we acquired from LPI is in
a more mature market than our online businesses. The value of
this business 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 business. If this cross-marketing is unsuccessful,
or if revenue growth in our acquired business 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, our
business may suffer.
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. We have recently experienced departures
of several executives and key employees, and any disruptions
from further departures of our senior executives or key
employees could harm our business and financial results or limit
our ability to grow and expand our business. Our financial
condition may negatively impact our ability to attract and
retain qualified personnel. 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 limit our
ability to continue operations, dilute the ownership interests
of existing stockholders, cause us to seek business dispositions
on unfavorable terms, or cause us to consider curtailing or
ceasing operations.
In July 2007, we completed a private placement financing, which
resulted in significant dilution to our existing stockholders.
As a result of our recent and continuing losses, we may need to
raise additional capital to fund operating activities. In April
2006, we filed a shelf registration statement 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 170,000 shares of our common
stock. However, we are not currently eligible to use the shelf
registration statement for a primary offering of our securities
due to lower than required market capitalization.
We expect that raising additional financing will be very
difficult, if it could be obtained at all. If we were to 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 further
dilution of their ownership interests. If we are unable to raise
additional financing, our business could be harmed, and we could
be forced to engage in dispositions of assets or businesses on
unfavorable terms, or consider curtailing or ceasing operations.
12
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 hardware and telecommunications failures, software
failures, computer viruses, security breaches, catastrophic
events, errors in installation, configuration and usage by our
employees, errors in usage by our customers, risks inherent in
upgrades and transitions to new hardware and software systems
and network devices, or 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 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 both 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!, Google, MSN, Time Warner, Viacom, Condé Nast and
News Corporation, as well as a number of smaller companies
focused specifically on the LGBT community. In our online
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 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 and
Facebook, that provide opportunity for an 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. 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
regain 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 which
will be costly and time-consuming.
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, BuyGay.com, Out.com and
Advocate.com. If we fail to maintain these registrations, a
third party may be able
13
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. 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 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.
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:
|
|
|
|
|
comply with a law passed in New Jersey in January 2008, or other
similar laws which may be passed in the future, requiring us to
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;
|
14
|
|
|
|
|
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;
|
|
|
|
with limited exceptions, give consumers the right to prevent
sharing of their non-public personal information with
unaffiliated third parties, and if a significant portion of our
members choose to request that we dont share their
information, our advertising revenue that we receive from
renting our mailing list to unaffiliated third parties may
decline;
|
|
|
|
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;
|
|
|
|
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;
|
|
|
|
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;
|
|
|
|
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;
|
|
|
|
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
|
|
|
|
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 was
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
allegedly were secondary producers under the CPO Act. In March
2007, the court
|
15
hearing the legal challenge to the CPO Act issued partial
summary judgment in favor of the DOJ and requested further
briefing on how the Walsh Act affected the stay on enforcement
of the CPO Act against secondary producers. In April 2007, the
court lifted the stay on enforcement against secondary
producers. Additionally, in June 2007, the DOJ issued new
proposed regulations to implement the Walsh Act and amended CPO
Act. The public comment period for the proposed regulations
closed in September 2007. It is anticipated that these new
proposed regulations will be challenged in court on various
constitutional grounds and that another stay against enforcement
of these regulations will be sought. In October 2007, the Sixth
Circuit Court of Appeals ruled that the CPO Act was
unconstitutional. The DOJ appealed that decision in January
2008. If the FBI continues to inspect businesses that are
allegedly secondary producers and there are no legal challenges
to the CPO Act, the Walsh Act or the new regulations purporting
to implement these acts, or if these challenges are
unsuccessful, we may 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 is likely to
result in an adverse impact on our subscriber growth 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 subscriber growth.
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 operations. 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. In July 2007, we closed our office in Argentina, as
a result of which the number of customer service representatives
and the hours of customer service representation were reduced.
If due to this reduction or otherwise 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
guarantee that email and telephone call volumes will not exceed
our present system or staffing capacities. If this occurs, we
could experience delays in responding to customer inquiries and
addressing customer concerns.
16
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 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 CPO Act.
If one
or more states or countries successfully assert that we should
collect sales or other taxes on the use of the Internet or the
online sales of goods and services, our expenses will increase,
resulting in lower margins.
In the United States, federal and state tax authorities are
currently exploring the appropriate tax treatment of companies
engaged in online commerce, and new state tax regulations may
subject us to additional state sales and income taxes, which
could increase our expenses and decrease our profit margins.
In 2003, the European Union implemented new rules regarding the
collection and payment of value added tax, or VAT. These rules
require VAT to be charged on products and services delivered
over electronic networks, including software and computer
services, as well as information and cultural, artistic,
sporting, scientific, educational, entertainment and similar
services. These services are now being taxed in the country
where the purchaser resides rather than where the supplier is
located. Historically, suppliers of digital products and
services that existed outside the European Union were not
required to collect or remit VAT on digital orders made to
purchasers in the European Union. With the implementation of
these rules, we are required to collect and remit VAT on digital
orders received from purchasers in the European Union,
effectively reducing our revenue by the VAT amount because we
currently do not pass this cost on to our customers.
We also do not currently collect sales, use or other similar
taxes for sales of our subscription services or for physical
shipments of goods into states other than California 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.
17
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.
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.
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
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 Stock 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, consider changes to 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. Our efforts to comply with
Section 404 and related regulations regarding our
managements required assessment of internal control over
financial reporting has required, and will continue to require,
the commitment of significant financial and managerial
resources. If we fail to timely complete these 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
February 15, 2008, the closing sale prices of our common
stock
18
on the Nasdaq Stock Market ranged from $3.93 to $136.00 per
share, after giving effect to our recently completed one-for-ten
reverse stock split. 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, the limited float due to the
concentration of shares among our recent equity financing
investors and sales of stock by our existing stockholders.
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.
The
sales of common stock by our stockholders could depress the
price of our shares.
If our stockholders sell substantial amounts of our common stock
in the public market, the market price of our shares could fall.
These sales might also make it more difficult for us to sell
equity or equity related securities at a time and price that we
would deem appropriate. For example, pursuant to the terms of
our July 2007 private placement, we filed a registration
statement registering for resale all of the common stock we
issued in the private placement. Sales by these stockholders
could have an adverse impact on the trading price of our common
stock.
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:
|
|
|
|
|
authorize our board of directors, without stockholder approval,
to issue up to 5,000,000 shares of undesignated preferred
stock;
|
|
|
|
provide for a classified board of directors;
|
|
|
|
prohibit our stockholders from acting by written consent;
|
|
|
|
establish advance notice requirements for proposing matters to
be approved by stockholders at stockholder meetings; and
|
|
|
|
prohibit stockholders from calling a special meeting of
stockholders.
|
As a Delaware corporation, we are also subject to Delaware law
anti-takeover provisions. Under Delaware law, a corporation may
not engage in a business combination with any holder of 15% or
more of its capital stock unless the holder has held the stock
for three years or, among other things, the board of directors
has approved the transaction. 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.
|
|
Item 1B.
|
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 our publishing segment, and in New York, out of which
we operate our advertising sales and support for both of our
segments. We believe that our existing facilities are adequate
to meet current
19
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 7
Commitments and Contingencies of the notes to our
Consolidated Financial Statements, which we incorporate by
reference herein.
|
|
Item 3.
|
Legal
Proceedings
|
We are involved from time to time in various legal proceedings,
regulatory investigations and claims incident to the normal
conduct of business, which may include proceedings that are
specific to us and others generally applicable to business
practices within the industries in which we operate. A
substantial legal liability or a significant regulatory action
against us could have an adverse effect on our business,
financial condition and on the results of operations in a
particular quarter or year.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of security holders during
the fourth quarter of 2007.
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
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:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2006
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
102.70
|
|
|
$
|
73.70
|
|
Second Quarter
|
|
|
100.70
|
|
|
|
64.70
|
|
Third Quarter
|
|
|
79.50
|
|
|
|
26.60
|
|
Fourth Quarter
|
|
|
48.60
|
|
|
|
30.40
|
|
2007
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
51.90
|
|
|
$
|
33.00
|
|
Second Quarter
|
|
|
35.20
|
|
|
|
8.60
|
|
Third Quarter
|
|
|
23.30
|
|
|
|
11.80
|
|
Fourth Quarter
|
|
|
13.24
|
|
|
|
5.41
|
|
On February 29, 2008, the closing sales price of our common
stock was $3.88 per share.
As of February 29, 2008, there were approximately 209
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.
20
Repurchases
of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d)
|
|
|
|
|
|
|
|
|
|
(c)
|
|
|
Maximum Number
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(or Approximate
|
|
|
|
(a)
|
|
|
|
|
|
Number of
|
|
|
Dollar Value) of
|
|
|
|
Total
|
|
|
(b)
|
|
|
Shares Purchased
|
|
|
Shares that May
|
|
|
|
Number of
|
|
|
Average
|
|
|
as Part of Publicly
|
|
|
Yet Be Purchased
|
|
|
|
Shares
|
|
|
Price Paid
|
|
|
Announced
|
|
|
Under the Plans
|
|
Period
|
|
Purchased(1)
|
|
|
per Share
|
|
|
Plans or Programs
|
|
|
or Programs
|
|
|
October 1, 2007 October 31, 2007
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
November 1, 2007 November 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 1, 2007 December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
PlanetOut does not have any publicly announced plans or programs
to repurchase shares of its common stock. |
21
|
|
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, 2005, 2006 and 2007, and the
balance sheet data as of December 31, 2006 and 2007 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, 2003 and 2004, and the balance sheet data as
of December 31, 2003, 2004 and 2005 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006(1)
|
|
|
2007(1)
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising services
|
|
$
|
4,626
|
|
|
$
|
6,541
|
|
|
$
|
11,724
|
|
|
$
|
26,479
|
|
|
$
|
25,555
|
|
Subscription services
|
|
|
12,727
|
|
|
|
16,775
|
|
|
|
21,135
|
|
|
|
24,447
|
|
|
|
21,901
|
|
Transaction services
|
|
|
1,746
|
|
|
|
1,646
|
|
|
|
2,732
|
|
|
|
7,830
|
|
|
|
5,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
19,099
|
|
|
|
24,962
|
|
|
|
35,591
|
|
|
|
58,756
|
|
|
|
53,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:(*)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
6,696
|
|
|
|
8,068
|
|
|
|
11,964
|
|
|
|
26,744
|
|
|
|
29,886
|
|
Sales and marketing
|
|
|
6,554
|
|
|
|
8,806
|
|
|
|
11,088
|
|
|
|
15,592
|
|
|
|
16,266
|
|
General and administrative
|
|
|
4,242
|
|
|
|
5,182
|
|
|
|
7,036
|
|
|
|
11,690
|
|
|
|
15,122
|
|
Restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
791
|
|
|
|
630
|
|
Depreciation and amortization
|
|
|
2,030
|
|
|
|
2,457
|
|
|
|
3,460
|
|
|
|
5,187
|
|
|
|
6,723
|
|
Impairment of goodwill and intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
19,522
|
|
|
|
24,513
|
|
|
|
33,548
|
|
|
|
60,004
|
|
|
|
94,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(423
|
)
|
|
|
449
|
|
|
|
2,043
|
|
|
|
(1,248
|
)
|
|
|
(41,528
|
)
|
Interest expense
|
|
|
(193
|
)
|
|
|
(1,077
|
)
|
|
|
(238
|
)
|
|
|
(1,189
|
)
|
|
|
(1,972
|
)
|
Other income, net
|
|
|
13
|
|
|
|
116
|
|
|
|
1,142
|
|
|
|
573
|
|
|
|
531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
(603
|
)
|
|
|
(512
|
)
|
|
|
2,947
|
|
|
|
(1,864
|
)
|
|
|
(42,969
|
)
|
(Benefit) provision for income taxes
|
|
|
149
|
|
|
|
25
|
|
|
|
207
|
|
|
|
45
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(752
|
)
|
|
|
(537
|
)
|
|
|
2,740
|
|
|
|
(1,909
|
)
|
|
|
(42,963
|
)
|
Accretion on redeemable convertible preferred stock
|
|
|
(1,729
|
)
|
|
|
(1,402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,801
|
)
|
|
|
(8,207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to common stockholders
|
|
$
|
(2,481
|
)
|
|
$
|
(1,939
|
)
|
|
$
|
2,740
|
|
|
$
|
(3,710
|
)
|
|
$
|
(51,170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(15.31
|
)
|
|
$
|
(4.01
|
)
|
|
$
|
1.60
|
|
|
$
|
(2.14
|
)
|
|
$
|
(17.79
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(15.31
|
)
|
|
$
|
(4.01
|
)
|
|
$
|
1.51
|
|
|
$
|
(2.14
|
)
|
|
$
|
(17.79
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used to compute net earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
162
|
|
|
|
484
|
|
|
|
1,712
|
|
|
|
1,733
|
|
|
|
2,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
162
|
|
|
|
484
|
|
|
|
1,819
|
|
|
|
1,733
|
|
|
|
2,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) Stock-based compensation is allocated as follows
(see Note 10):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
502
|
|
|
$
|
565
|
|
|
$
|
177
|
|
|
$
|
67
|
|
|
$
|
198
|
|
Sales and marketing
|
|
|
419
|
|
|
|
556
|
|
|
|
254
|
|
|
|
40
|
|
|
|
40
|
|
General and administrative
|
|
|
676
|
|
|
|
1,013
|
|
|
|
568
|
|
|
|
180
|
|
|
|
506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
1,597
|
|
|
$
|
2,134
|
|
|
$
|
999
|
|
|
$
|
287
|
|
|
$
|
744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006(1)
|
|
|
2007(1)
|
|
|
|
(In thousands)
|
|
|
Consolidated balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,282
|
|
|
$
|
43,128
|
|
|
$
|
18,461
|
|
|
$
|
9,674
|
|
|
$
|
8,534
|
|
Working capital (deficit)
|
|
|
(2,804
|
)
|
|
|
39,209
|
|
|
|
14,761
|
|
|
|
7,144
|
|
|
|
8,298
|
|
Total assets
|
|
|
10,929
|
|
|
|
59,208
|
|
|
|
77,338
|
|
|
|
93,589
|
|
|
|
41,352
|
|
Long-term liabilities
|
|
|
545
|
|
|
|
2,241
|
|
|
|
10,636
|
|
|
|
12,647
|
|
|
|
4,076
|
|
Redeemable convertible preferred stock
|
|
|
41,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity (deficit)
|
|
$
|
(37,717
|
)
|
|
$
|
48,764
|
|
|
$
|
53,052
|
|
|
$
|
51,145
|
|
|
$
|
24,909
|
|
|
|
|
(1) |
|
2006 and 2007 data reflects the impact of the acquisition of LPI. |
|
|
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, 2007, 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 media and entertainment company serving the
worldwide lesbian, gay, bisexual and transgender, or LGBT,
community. We serve this audience through a variety of products
and services including online and print media properties, and
other goods and services.
As a result of further integrating our various businesses, our
executive management team, and our financial and management
reporting systems during fiscal 2006, we began to operate as
three segments effective January 1, 2007: Online,
Publishing and Travel and Events. The Travel and Events segment
consisted of travel and events marketed through our RSVP
Productions, Inc. (RSVP) brand and by our
consolidated affiliate, PNO DSW Events, LLC (DSW).
We sold substantially all the assets of RSVP in December 2007
and sold our interest in DSW in March 2007. As a result of these
divestitures and our decision to exit the Travel and Events
business, we have two segments remaining as of December 31,
2007: Online and Publishing. In accordance with Statement of
Financial Accounting Standards No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets,
we have reported the results of operations and financial
position of RSVP and DSW in discontinued operations within the
consolidated financial statements.
Our Online segment consists of our LGBT-focused websites, most
notably Gay.com, PlanetOut.com, Advocate.com and Out.com which
provide revenues from advertising services and subscription
services. Our Online segment also includes our transaction-based
websites, including BuyGay.com, which generate revenue through
sales of products and services of interest to the LGBT
community, such as fashion, books, CDs and DVDs.
23
Our Publishing segment includes the operations of our print
media properties including the magazines The Advocate,
Out, The Out Traveler and HIVPlus, among
others. Our Publishing segment also generates revenue from
newsstand sales of our various print properties and our book
publishing businesses, Alyson and Publishers Distributing Co.
(PDC).
In July 2007, we closed a private placement financing with a
group of accredited and institutional investors and received an
aggregate of approximately $26.2 million in gross proceeds
from the sale of approximately 2.3 million shares of our
common stock at a price of $11.50 per share. We realized net
proceeds of approximately $24.0 million from the private
placement after deducting fees payable to the placement agent
and other transaction costs.
On January 14, 2008, we announced that we have retained the
services of Allen & Company, LLC to assist us in
evaluating strategic alternatives, including a possible sale of
the Company.
Executive
Operating and Financial Summary
Our total revenue was $53.0 million in fiscal 2007,
decreasing 10% from our prior years revenue of
$58.8 million, due primarily to decreases in our
subscription and transaction services revenue.
Total operating costs and expenses were $94.5 million in
fiscal 2007, increasing 58% from the prior year total of
$60.0 million. These increases were primarily due to
impairment charges to goodwill of $21.5 million and
impairment charges to intangible assets of $4.4 million.
Operating costs and expenses also increased due to increased
marketing costs related to direct-mail campaigns for our print
properties, severance charges related to the departure of our
former President and Chief Operating Officer and our former
Chief Technology Officer, increased legal expenses, increased
costs to integrate and re-architect the core technology platform
of our websites and increased depreciation on capital
expenditures as a result our on-going product development and
compliance efforts.
Loss from operations was $41.5 million in fiscal 2007,
compared to a loss from operations of $1.2 million in
fiscal 2006. This increase in loss from operations was primarily
the result of the impairment charges to goodwill and intangible
assets, the other increases in operating costs and expenses
noted above and the decrease in revenue noted above.
We expect that revenue will decrease slightly in fiscal 2008 in
comparison to fiscal 2007, primarily as a result of the planned
divestiture of the SpecPub Inc. asset group and an anticipated
decrease in online subscription services revenue.
We expect our operating loss will decrease in fiscal 2008 in
comparison to fiscal 2007, due to non-recurrence in 2008 of the
impairment charges recognized in fiscal 2007. However, we expect
to incur additional expenses in re-designing our technological
architecture, rewriting our web applications and rebuilding our
technology platform and networks during fiscal 2008.
Results
of Operations
Segment performance is measured based on contribution margin
(loss), which consists of total revenues from external customers
less direct operating expenses. Direct operating expenses
include cost of revenue and sales and marketing expenses.
Segment managers do not have discretionary control over other
operating costs and expenses such as general and administrative
costs (consisting of costs such as corporate management, human
resources, finance and legal), and depreciation and
amortization, as such, other operating costs and expenses are
not evaluated in the measurement of segment performance.
Online
Segment
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. We derive online subscription services revenue from paid
membership subscriptions to our online media properties.
Transaction services revenue includes revenue generated from the
sale of products through multiple transaction-based websites.
24
Comparison of the year ended December 31, 2006 to the year
ended December 31, 2007 (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase (Decrease)
|
|
|
|
2006
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
Online revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising services
|
|
$
|
11,116
|
|
|
$
|
9,365
|
|
|
$
|
(1,751
|
)
|
|
|
(16
|
)%
|
Subscription services
|
|
|
18,378
|
|
|
|
16,476
|
|
|
|
(1,902
|
)
|
|
|
(10
|
)%
|
Transaction services
|
|
|
2,129
|
|
|
|
1,191
|
|
|
|
(938
|
)
|
|
|
(44
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total online revenue
|
|
|
31,623
|
|
|
|
27,032
|
|
|
|
(4,591
|
)
|
|
|
(15
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online direct operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
10,240
|
|
|
|
12,673
|
|
|
|
2,433
|
|
|
|
24
|
%
|
Sales and marketing
|
|
|
10,236
|
|
|
|
9,296
|
|
|
|
(940
|
)
|
|
|
(9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total online direct operating costs and expenses
|
|
|
20,476
|
|
|
|
21,969
|
|
|
|
1,493
|
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online contribution margin
|
|
$
|
11,147
|
|
|
$
|
5,063
|
|
|
$
|
(6,084
|
)
|
|
|
(55
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online revenues decreased as a result of a reduction in the
number of online subscribers to our Gay.com website, a decrease
in sales of products on our transaction-based website properties
and a reduction in our national and local advertising sales due
in part to turnover in our digital sales staff. Online cost of
revenue increased primarily as a result of increased costs to
integrate and re-architect the core technology platform of our
websites, and, to a lesser extent, increased severance and other
costs related to the departure of our former Chief Technology
Officer. Online sales and marketing expenses decreased as a
result of decreased spending on advertising during fiscal 2007.
For fiscal 2008, we expect that online revenue will decrease
from fiscal 2007 as a result of anticipated additional
reductions in the number of online subscribers and reductions in
online revenues contributed by the SpecPub Inc. assets group,
which we plan to divest ourselves of within the next twelve
months. We expect that online cost of revenue will increase as
we continue to re-architect our core technology platform of our
websites, partially offset by reductions in online cost of
revenue contributed by the SpecPub Inc. asset group. For fiscal
2008, we expect that sales and marketing expenses may vary with
the comparable prior year period depending on the timing of
planned advertising to coincide with certain product development
milestones.
Comparison of the year ended December 31, 2005 to the year
ended December 31, 2006 (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase (Decrease)
|
|
|
|
2005
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
Online revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising services
|
|
$
|
9,043
|
|
|
$
|
11,116
|
|
|
$
|
2,073
|
|
|
|
23
|
%
|
Subscription services
|
|
|
20,202
|
|
|
|
18,378
|
|
|
|
(1,824
|
)
|
|
|
(9
|
)%
|
Transaction services
|
|
|
1,611
|
|
|
|
2,129
|
|
|
|
518
|
|
|
|
32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total online revenue
|
|
|
30,856
|
|
|
|
31,623
|
|
|
|
767
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online direct operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
9,248
|
|
|
|
10,240
|
|
|
|
992
|
|
|
|
11
|
%
|
Sales and marketing
|
|
|
10,358
|
|
|
|
10,236
|
|
|
|
(122
|
)
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total online direct operating costs and expenses
|
|
|
19,606
|
|
|
|
20,476
|
|
|
|
870
|
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online contribution margin
|
|
$
|
11,250
|
|
|
$
|
11,147
|
|
|
$
|
(103
|
)
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
The increase in online advertising services revenue was due, in
part, to growth of the general online advertising industry and
the incremental effect of certain online properties gained in
the acquisition of LPI. The decrease in online subscription
services revenue was primarily due to a reduction in online
subscribers. The increase in online transaction services revenue
was due primarily to the incremental effect of certain online
properties gained in the acquisition of LPI.
The increase in online cost of revenue was primarily due to the
incremental effect of certain online properties gained in the
acquisition of LPI and an increase in expenses related to site
operations and support infrastructure, offset partially by a
decrease in stock-based compensation expense. The decrease in
online sales and marketing expense was primarily due to a
decrease in stock-based compensation expense and decreased
advertising expenses related to our premium online subscription
services, offset partially by an increase due to the incremental
effect of certain online properties gained in the acquisition of
LPI.
Publishing
Segment
We derive publishing advertising revenue from advertisements
placed in our print media properties including the magazines
The Advocate, Out, The Out Traveler and
HIVPlus, among others. We offer our customers five
separate subscription services across our print media
properties. Our publishing segment also generates revenue from
newsstand sales of our various print properties and our book
publishing businesses, including Alyson and PDC. We began the
operations of our publishing segment with the magazine, book
publishing and certain other properties gained in our
acquisition of LPI in November 2005.
Comparison of the year ended December 31, 2006 to the year
ended December 31, 2007 (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase (Decrease)
|
|
|
|
2006
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
Publishing revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising services
|
|
$
|
15,363
|
|
|
$
|
16,190
|
|
|
$
|
827
|
|
|
|
5
|
%
|
Subscription services
|
|
|
6,069
|
|
|
|
5,425
|
|
|
|
(644
|
)
|
|
|
(11
|
)%
|
Transaction services
|
|
|
5,701
|
|
|
|
4,366
|
|
|
|
(1,335
|
)
|
|
|
(23
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total publishing revenue
|
|
|
27,133
|
|
|
|
25,981
|
|
|
|
(1,152
|
)
|
|
|
(4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Publishing direct operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
16,504
|
|
|
|
17,213
|
|
|
|
709
|
|
|
|
4
|
%
|
Sales and marketing
|
|
|
5,356
|
|
|
|
6,970
|
|
|
|
1,614
|
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total publishing direct operating costs and expenses
|
|
|
21,860
|
|
|
|
24,183
|
|
|
|
2,323
|
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Publishing contribution margin
|
|
$
|
5,273
|
|
|
$
|
1,798
|
|
|
$
|
(3,475
|
)
|
|
|
(66
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Publishing revenues decreased principally due to decreased
newsstand sales of our magazines and books and decreases in
revenue per subscriber in subscriptions to our magazines,
partially offset by an increase in advertising services revenue
as a result of increased page rates charged to our advertisers
as a result of our circulation base growth. Publishing cost of
revenue increased primarily due to increased prices for paper
used in producing our magazines and due to increased mailing
costs in the delivery of magazines to our subscribers.
Publishing sales and marketing expenses increased primarily due
to the increase in marketing costs related to direct-mail
campaigns on most of our print properties.
For fiscal 2008, we expect that total publishing revenues will
decrease from fiscal 2007 primarily as a result of reductions in
publishing revenues contributed by the SpecPub, Inc. asset group
and the effect of advertising sales migrating from print to
online. We expect that publishing direct operating costs for
fiscal 2008 will increase from fiscal 2007 primarily as a result
of anticipated increases in sales and marketing expenses for
direct mail campaigns, increased prices for paper used in
producing our magazines and increases in mailing costs due to
higher postage rates, partially offset by reductions in
publishing direct operating costs contributed by the SpecPub
Inc. asset group.
26
Comparison of the year ended December 31, 2005 to the year
ended December 31, 2006 (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase (Decrease)
|
|
|
|
2005
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
Publishing revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising services
|
|
$
|
2,681
|
|
|
$
|
15,363
|
|
|
$
|
12,682
|
|
|
|
473
|
%
|
Subscription services
|
|
|
933
|
|
|
|
6,069
|
|
|
|
5,136
|
|
|
|
550
|
%
|
Transaction services
|
|
|
1,121
|
|
|
|
5,701
|
|
|
|
4,580
|
|
|
|
409
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total publishing revenue
|
|
|
4,735
|
|
|
|
27,133
|
|
|
|
22,398
|
|
|
|
473
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Publishing direct operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
2,716
|
|
|
|
16,504
|
|
|
|
13,788
|
|
|
|
508
|
%
|
Sales and marketing
|
|
|
730
|
|
|
|
5,356
|
|
|
|
4,626
|
|
|
|
634
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total publishing direct operating costs and expenses
|
|
|
3,446
|
|
|
|
21,860
|
|
|
|
18,414
|
|
|
|
534
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Publishing contribution margin
|
|
$
|
1,289
|
|
|
$
|
5,273
|
|
|
$
|
3,984
|
|
|
|
309
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in publishing revenue and direct operating costs
and expenses in fiscal 2006 over fiscal 2005 resulted primarily
from the incremental effect of operating of our publishing
segment for a full year in fiscal 2006, compared to two months
of operations in fiscal 2005.
Other
Operating Costs and Expenses
Other operating costs and expenses include general and
administrative costs (such as corporate management, human
resources, finance and legal), restructuring, depreciation and
amortization and impairment of goodwill and intangible assets.
These other operating costs and expenses are not evaluated in
the measurement of segment performance since segment managers do
not have discretionary control over these costs and expenses.
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 $15.1 million for 2007, up 29%
from the prior year. General and administrative expenses as a
percentage of revenue were 29% for 2007, up from 20% in the
prior year. The increase in general and administrative expenses
in both absolute dollars and as a percentage of revenue were due
to increased compensation and employee related costs including
severance and other costs related to the departure of our
President and Chief Operating Officer in March 2007; increased
legal expenses; and increased stock-based compensation expenses.
Our general and administrative expenses were $11.7 million
for 2006, up 66% from the prior year. This increase was due to
the incremental effect of the acquisition of LPI; 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 acquisition
of LPI such as increased legal and insurance expenses. General
and administrative expenses as a percentage of revenue were 20%
for both 2006 and 2005.
For fiscal 2008, we expect general and administrative expenses
to decrease from fiscal 2007 primarily due to decreased
compensation and employee related costs as a result of decreases
in headcount and decreased legal costs.
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 continued integration of
our 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. We completed this restructuring in the
fourth quarter of
27
2006, with certain payments continuing beyond 2006 in accordance
with the terms of existing severance and other agreements.
In July 2007, our board of directors adopted and approved a
reorganization plan to further align our resources with our
strategic business objectives. As part of the plan, we closed
our international offices located in Buenos Aires and London in
order to streamline our business operations and reduce expenses.
The reorganization, along with other organizational changes,
reduced our total workforce by approximately 15%. Restructuring
costs of approximately $630,000, primarily related to employee
severance benefits of approximately $500,000 and facilities
consolidation expenses of approximately $130,000, were recorded
during 2007. We completed this restructuring in the fourth
quarter of 2007.
Depreciation and Amortization. Depreciation
and amortization expense was $6.7 million for fiscal 2007,
up 30% from the prior year, due primarily to an increase in
depreciation expense related to capital expenditures we have
made in order to support our on-going online product development
and compliance efforts. Amortization of intangible assets was
$0.9 million due to intangible assets which we capitalized
in connection with the acquisition of LPI. Depreciation and
amortization as a percentage of revenue was 13% for 2007, up
from 9% in the prior year. Depreciation and amortization expense
was $5.2 million for fiscal 2006, up 50% from the prior
year, due primarily to an increase in the amortization of
intangible assets associated with the acquisition of LPI and
increased capital expenditures to support our on-going online
product development and compliance efforts. Amortization of
intangible assets was $1.1 million due to intangible assets
which we capitalized in connection with the acquisition of LPI.
Depreciation and amortization as a percentage of revenue was 9%
for 2006, down from 10% in the prior year.
For fiscal 2008, we expect depreciation and amortization expense
will increase over fiscal 2007 as a result of capital
investments to support our on-going online product development,
and to integrate and re-architect the core technology platform
of our websites.
Impairment of Goodwill and Intangible
Assets. During 2007, we recorded impairment
charges to goodwill and to intangible assets of
$21.5 million and $4.4 million, respectively. During
the three months ended June 30, 2007, we recorded an
estimated goodwill impairment charge of $21.1 million,
primarily resulting from lower than expected advertising revenue
related to our publishing segment which we believe resulted in a
significant decrease in the trading price of our common stock
and a corresponding reduction in our market capitalization.
During the fourth quarter of 2007, we recorded an additional
impairment charge to goodwill of $0.4 million related to
the winding down of our international marketing efforts and the
closure of our international offices in conjunction with our
July 2007 restructuring plan. Also during the fourth quarter of
2007, we revised our second quarter impairment estimate as a
result of the completion of an independent business valuation of
certain of our intangible assets and recorded an additional
impairment charge of $4.4 million to our intangible assets
for the year ended December 31, 2007.
Other
Income and Expenses
Interest Expense. Interest expense was
$2.0 million for fiscal 2007, an increase of 66% from the
prior year, due primarily to increased interest expense on the
Orix term and revolving loans entered into in September 2006,
offset partially by a decrease in interest expense on the LPI
note entered into in November 2005. 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 as well as the Orix term
and revolving loans. In July 2007, we used a portion of the
proceeds of our equity financing to repay, in full, our
indebtedness obligations under loans from Orix, as well as our
obligations under the LPI note. Interest expense for the year
ended December 31, 2007 includes prepayment fees of
$0.3 million, loan deferral fees of $0.2 million and
$0.2 million for acceleration of the loan discount.
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
$0.5 million for fiscal 2007, a decrease of 7% from the
prior year, primarily due to decreased interest income during
fiscal 2007 on our lower cash balance. Other income, net was
$0.6 million for fiscal 2006, a decrease of 50% 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.
28
Discontinued
Operations
In an effort to simplify our business model, we discontinued our
Travel and Events businesses during 2007. In March 2007, we sold
our membership interest in DSW, a joint venture, to the minority
interest partner. In December 2007, we sold substantially all
the assets of RSVP. As a result of the sale of our interest in
DSW, the sale of substantially all the assets of RSVP and our
decision to exit our Travel and Events businesses, we have
reported the results of operations and financial position of
RSVP and DSW as discontinued operations within the consolidated
financial statements for the years ended December 31, 2006
and 2007 in accordance with FAS 144. We have reported the
financial position of RSVP and DSW as assets and liabilities of
discontinued operations on the consolidated balance sheet as of
December 31, 2006. In addition, we have segregated the cash
flow activity of RSVP and DSW from the consolidated statements
of cash flows for the years ended December 31, 2006 and
2007. The results of operations of RSVP and DSW were previously
reported and included in the results of operations and financial
position of our Travel and Events segment.
The results of discontinued operations for the years ended
December 31, 2006 and 2007 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
Year Ended December 31, 2007
|
|
|
|
RSVP
|
|
|
DSW
|
|
|
Total
|
|
|
RSVP
|
|
|
DSW
|
|
|
Total
|
|
|
Total revenue
|
|
$
|
9,158
|
|
|
$
|
730
|
|
|
$
|
9,888
|
|
|
$
|
17,033
|
|
|
$
|
2
|
|
|
$
|
17,035
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
8,369
|
|
|
|
92
|
|
|
|
8,461
|
|
|
|
18,737
|
|
|
|
|
|
|
|
18,737
|
|
Sales and marketing
|
|
|
1,317
|
|
|
|
435
|
|
|
|
1,752
|
|
|
|
1,525
|
|
|
|
37
|
|
|
|
1,562
|
|
General and administrative
|
|
|
890
|
|
|
|
131
|
|
|
|
1,021
|
|
|
|
262
|
|
|
|
1
|
|
|
|
263
|
|
Restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
19
|
|
Depreciation and amortization
|
|
|
419
|
|
|
|
|
|
|
|
419
|
|
|
|
286
|
|
|
|
|
|
|
|
286
|
|
Impairment of goodwill and intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,400
|
|
|
|
|
|
|
|
4,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
10,995
|
|
|
|
658
|
|
|
|
11,653
|
|
|
|
25,229
|
|
|
|
38
|
|
|
|
25,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(1,837
|
)
|
|
|
72
|
|
|
|
(1,765
|
)
|
|
|
(8,196
|
)
|
|
|
(36
|
)
|
|
|
(8,232
|
)
|
Other income (expense), net
|
|
|
8
|
|
|
|
(44
|
)
|
|
|
(36
|
)
|
|
|
25
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
$
|
(1,829
|
)
|
|
$
|
28
|
|
|
$
|
(1,801
|
)
|
|
$
|
(8,171
|
)
|
|
$
|
(36
|
)
|
|
$
|
(8,207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
The current and non-current assets and liabilities of
discontinued operations of RSVP and DSW were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
RSVP
|
|
|
DSW
|
|
|
Total
|
|
|
Current assets of discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
374
|
|
|
$
|
|
|
|
$
|
374
|
|
Prepaid expenses and other current assets
|
|
|
7,172
|
|
|
|
27
|
|
|
|
7,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,546
|
|
|
$
|
27
|
|
|
$
|
7,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term assets of discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
186
|
|
|
$
|
|
|
|
$
|
186
|
|
Goodwill
|
|
|
3,982
|
|
|
|
|
|
|
|
3,982
|
|
Intangible assets, net
|
|
|
2,369
|
|
|
|
|
|
|
|
2,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,537
|
|
|
$
|
|
|
|
$
|
6,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities of discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
85
|
|
|
$
|
6
|
|
|
$
|
91
|
|
Accrued expenses and other liabilities
|
|
|
397
|
|
|
|
|
|
|
|
397
|
|
Deferred revenue, current portion
|
|
|
5,580
|
|
|
|
|
|
|
|
5,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,062
|
|
|
$
|
6
|
|
|
$
|
6,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Critical
Accounting Policies
Our discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amount of
assets, liabilities, revenue and expenses and related disclosure
of contingent assets and liabilities.
We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis on which we
make judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Because this can vary in each situation, actual results may
differ from the estimates under different assumptions and
conditions.
We believe the following critical accounting policies require
more significant judgments and estimates in the preparation of
our consolidated financial statements:
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 from newsstand
revenues 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,
30
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.
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.
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 deteriorate,
resulting in an impairment of their ability to make payments,
additional allowances might be required.
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.
We record a full valuation allowance 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 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 our reporting units and our enterprise as a
whole. We conduct our annual test as of December 1 each year.
Future impairment losses may have a material adverse impact on
our financial condition and results of operations.
We 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
and/or
exceed their carrying value.
31
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. 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 72,000 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.
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
Notes 1 and 10 of Notes to Consolidated Financial
Statements for a further discussion on stock-based compensation.
Income Taxes We adopted the provisions of Financial
Accounting Standards Board (FASB) Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes an Interpretation of FASB Statement
No. 109 (FIN 48) on
January 1, 2007. We did not have any unrecognized tax
benefits and there was no effect on our financial condition or
results of operations as a result of implementing FIN 48.
We file income tax returns in the U.S. federal jurisdiction
and various state and foreign jurisdictions. We are no longer
subject to U.S. federal tax assessment for years before
2004. State jurisdictions that remain subject to assessment
range from 2003 to 2007. We do not believe there will be any
material changes in our unrecognized tax positions over the next
12 months. We believe that our income tax filing positions
and deductions will be sustained on audit and do not anticipate
any adjustments that will result in a material adverse effect on
our financial condition, results of operations, or cash flow.
Therefore, no reserves for uncertain
32
income tax positions have been recorded pursuant to FIN 48.
In addition, we did not record a cumulative effect adjustment
related to the adoption of FIN 48.
Our policy is that we recognize interest and penalties accrued
on any unrecognized tax benefits as a component of income tax
expense. As of the date of adoption of FIN 48, we did not
have any accrued interest or penalties associated with any
unrecognized tax benefits, nor was any interest expense
recognized during the year. Our effective tax rate differs from
the federal statutory rate primarily due to increases in our
deferred income tax valuation allowance.
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,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands,
|
|
|
|
except percentage of total assets)
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
5,488
|
|
|
$
|
(4,726
|
)
|
|
$
|
(7,916
|
)
|
Investing activities
|
|
|
(29,499
|
)
|
|
|
(14,761
|
)
|
|
|
893
|
|
Financing activities
|
|
|
(639
|
)
|
|
|
10,699
|
|
|
|
5,854
|
|
Effect of exchange rate on cash and cash equivalents
|
|
|
(17
|
)
|
|
|
1
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
$
|
(24,667
|
)
|
|
$
|
(8,787
|
)
|
|
$
|
(1,140
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
18,461
|
|
|
$
|
9,674
|
|
|
$
|
8,534
|
|
Short-term investments
|
|
|
|
|
|
|
2,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and short-term investments
|
|
$
|
18,461
|
|
|
$
|
11,724
|
|
|
$
|
8,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total assets
|
|
|
23.9
|
%
|
|
|
12.5
|
%
|
|
|
20.6
|
%
|
Cash used in operating activities for 2007 was
$7.9 million, due primarily to our loss from continuing
operations of $43.0 million and cash used in operating
activities of discontinued operations of $1.1 million,
partially offset by impairment of goodwill and intangible assets
of $25.9 million, depreciation and amortization expense of
$6.7 million, loss on disposal or write-off of property and
equipment of $0.9 million, stock-based compensation expense
of $0.7 million and a net decrease in operating assets and
liabilities of $1.0 million. Cash used in operating
activities for 2006 was $4.7 million, due primarily to our
loss from continuing operations of $1.9 million, cash used
in operating activities of discontinued operations of
$4.4 million, an increase in accounts receivable of
$3.2 million and an increase in prepaid expenses and other
current assets of $1.6 million, partially offset by
depreciation and amortization of $5.2 million and
stock-based compensation expense of $0.3 million. 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.
Cash provided by investing activities for 2007 was
$0.9 million, due primarily to sales of short-term
investments of $2.1 million and a decrease in restricted
cash of $2.7 million, offset partially by purchases of
property and equipment of $3.8 million. Cash used in
investing activities for 2006 was $14.8 million, due
primarily to acquisitions of discontinued operations of
$5.5 million, purchases of property and equipment of
$4.5 million, 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
33
$4.0 million for capital assets. Investments in capital
assets were comprised primarily of computer and office equipment
and furniture and fixtures.
Net cash provided by financing activities for 2007 was
$5.9 million, due primarily to the net proceeds from our
equity financing of $24.0 million, partially offset by
payment of note obligations of $10.2 million to Orix,
payment of the LPI note of $7.1 million and
$0.8 million for principal payments under capital lease
obligations. 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.
We expect that net cash provided by operating activities will be
negative during 2008 and may fluctuate in future periods as a
result of a number of factors, including fluctuations in our
operating results, advertising sales, subscription trends,
accounts receivable collections and inventory management.
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. The LPI note was repaid in
connection with the private placement financing in July 2007.
In September 2006, we entered into our Loan Agreement with Orix,
which was amended in February 2007, May 2007 and June 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 were limited to lesser of $3.0 million, which we
had already drawn down, or 85% of qualifying accounts
receivable. The term loan was payable in 48 consecutive monthly
installments of principal beginning on November 1, 2006
together with interest at an initial rate of prime plus 3%. The
term loan provided for a prepayment fee equal to 5% of the
amount prepaid in connection with any prepayment made prior to
September 27, 2007. The revolving loan bore interest at a
rate of prime plus 1%. The Loan Agreement contained certain
financial ratios, financial tests and liquidity covenants. The
loans were 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 were
pledged as security for the LPI note.
We entered into a waiver and amendment to the Loan Agreement in
May 2007 (the May Waiver), pursuant to which Orix
waived defaults associated with our failure to meet certain
financial tests and liquidity covenants. In consideration of the
May Waiver, we, in addition to other commitments, agreed to
maintain certain minimum cash balances, increase the interest
rate on the term loan to prime plus 5% and committed to raise at
least $15.0 million in new equity or subordinated debt. At
that time, we also agreed to apply at least $3.0 million of
the proceeds from that transaction to pay down the term loan. As
part of the amendment in June 2007, the parties agreed to modify
the requirement in the May Waiver for the commitment to raise
new equity or subordinated debt to be for gross proceeds of at
least $25.0 million, which could be completed in one or
more closings, with the first closing for not less than
$4.2 million in proceeds, if applicable, occurring no later
than July 10, 2007, and the entire financing being
completed no later than September 30, 2007. In addition,
Orix consented to, among other things, certain limited
prepayments with respect to our other indebtedness in the event
of the first closing and prior to the completion of the entire
financing. Orix also agreed to defer the payment of principal
installments due on July 1, August 1 and September 1 with
respect to its term loan for a deferral fee of $150,000. In July
2007, we completed a private placement financing with a group of
investors for approximately $26.2 million in gross proceeds
from the sale of approximately 2.3 million shares of our
common stock and used a portion of the proceeds to repay, in
full, the LPI note, the Orix term loan, the Orix revolving loan,
the deferral fee and $0.3 million in prepayment fees.
During 2007, we invested $4.3 million in property and
equipment of which $0.5 million was financed through
capital leases. 97% of this investment related to capitalized
labor, hardware and software related to enhancements to our
website infrastructure and features. For fiscal 2008, we expect
to continue investing in our technology
34
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 the
level 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 and for other general corporate activities.
Based on our current operations, 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, although we can
provide no assurances in that regard. 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. On January 14, 2008, we
announced that we have retained the services of
Allen & Company, LLC to assist us in evaluating
strategic alternatives, including a possible sale of the
Company. We are actively considering such strategic
alternatives. We incurred a significant net loss in 2007 and
expect to incur additional losses during 2008. We expect that
raising additional financing will be very difficult, if it could
be obtained at all. Accordingly, if we are unsuccessful in
pursuing our strategic alternatives, we could be forced to
engage in dispositions of assets or businesses on unfavorable
terms, or consider curtailing or ceasing operations. In that
event, we cannot provide any assurance that our assets will be
sufficient to meet our liabilities.
Off-Balance
Sheet Liabilities
We did not have any off-balance sheet liabilities or
transactions as of December 31, 2007.
Other
Contractual Commitments
The following table summarizes our contractual obligations as of
December 31, 2007, and the effect that these obligations
are expected to have on our liquidity and cash flows in future
periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
2008
|
|
|
2009-2010
|
|
|
2011-2012
|
|
|
2013 & After
|
|
|
|
(In thousands)
|
|
|
Contractual obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
$
|
2,206
|
|
|
$
|
1,011
|
|
|
$
|
1,116
|
|
|
$
|
79
|
|
|
$
|
|
|
Operating leases
|
|
|
12,674
|
|
|
|
2,884
|
|
|
|
5,837
|
|
|
|
3,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
14,880
|
|
|
$
|
3,895
|
|
|
$
|
6,953
|
|
|
$
|
4,032
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 operating lease arrangements. The amounts presented are
consistent with the 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.
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.
35
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 December 2007, the FASB issued SFAS No. 141(R),
Business Combinations (FAS 141R).
FAS 141R requires an acquirer to measure the identifiable
assets acquired, the liabilities assumed and any noncontrolling
interest in the acquiree at their fair values on the acquisition
date, with goodwill being the excess value over the net
identifiable assets acquired. FAS 141R is effective for
financial statements issued for fiscal years beginning after
December 15, 2008. Early adoption is prohibited. We have
not yet determined the effect on our consolidated financial
statements, if any, upon adoption of FAS 141R.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51
(FAS 160). FAS 160 clarifies
that a noncontrolling interest in a subsidiary should be
reported as equity in the consolidated financial statements. The
calculation of earnings per share will continue to be based on
income amounts attributable to the parent. FAS 160 is
effective for financial statements issued for fiscal years
beginning after December 15, 2008. Early adoption is
prohibited. We have not yet determined the effect on our
consolidated financial statements, if any, upon adoption of
FAS 160.
In February 2007, the FASB issued SFAS No. 159
(FAS 159), The Fair Value Option for
Financial Assets and Financial Liabilities Including
an Amendment of FASB Statement No. 115 which is
effective for fiscal years beginning after November 15,
2007. This statement permits an entity to choose to measure many
financial instruments and certain other items at fair value at
specified election dates. Subsequent unrealized gains and losses
on items for which the fair value option has been elected will
be reported in earnings. We are currently evaluating the
potential impact of FAS 159, but do not expect the adoption
of FAS 159 to have a material impact on our consolidated
financial position, results of operations or cash flows.
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 adoption of FAS 157 to have a material
impact on our consolidated financial position, results of
operations or cash flows.
36
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
PlanetOut
Inc.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
|
|
|
|
|
|
|
Page
|
|
Consolidated Financial Statements:
|
|
|
|
|
|
|
|
38
|
|
|
|
|
39
|
|
|
|
|
40
|
|
|
|
|
41
|
|
|
|
|
42
|
|
|
|
|
43
|
|
Supplementary Financial Data (unaudited):
|
|
|
|
|
|
|
|
71
|
|
Financial Statement Schedule:
|
|
|
|
|
|
|
|
72
|
|
37
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, 2007
and 2006, and the related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2007. Our audits
also included the financial statement schedule listed in the
Index at Item 15. These financial statements and schedule
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits 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. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also 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, 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, 2007 and 2006, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2007 in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material
respects the information set forth therein.
As discussed in Note 1 to the consolidated financial
statements, in 2006 the Company adopted Statement of Financial
Accounting Standards No. 123 (Revised 2004), Share-Based
Payments.
/s/ Stonefield
Josephson, Inc.
San Francisco, California
March 10, 2008
38
PlanetOut
Inc.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands, except per share amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,674
|
|
|
$
|
8,534
|
|
Short-term investments
|
|
|
2,050
|
|
|
|
|
|
Restricted cash
|
|
|
2,854
|
|
|
|
167
|
|
Accounts receivable, net
|
|
|
8,963
|
|
|
|
6,868
|
|
Inventory
|
|
|
1,690
|
|
|
|
1,113
|
|
Prepaid expenses and other current assets
|
|
|
4,137
|
|
|
|
2,188
|
|
Current assets of discontinued operations
|
|
|
7,573
|
|
|
|
|
|
Current assets held for sale
|
|
|
|
|
|
|
1,795
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
36,941
|
|
|
|
20,665
|
|
Property and equipment, net
|
|
|
10,737
|
|
|
|
8,441
|
|
Goodwill
|
|
|
28,590
|
|
|
|
7,123
|
|
Intangible assets, net
|
|
|
9,763
|
|
|
|
1,870
|
|
Other assets
|
|
|
1,021
|
|
|
|
580
|
|
Long-term assets of discontinued operations
|
|
|
6,537
|
|
|
|
|
|
Long-term assets held for sale
|
|
|
|
|
|
|
2,673
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
93,589
|
|
|
$
|
41,352
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,691
|
|
|
$
|
1,338
|
|
Accrued expenses and other liabilities
|
|
|
3,310
|
|
|
|
2,491
|
|
Deferred revenue, current portion
|
|
|
8,989
|
|
|
|
5,760
|
|
Capital lease obligations, current portion
|
|
|
694
|
|
|
|
838
|
|
Notes payable, current portion net of discount
|
|
|
8,817
|
|
|
|
|
|
Deferred rent, current portion
|
|
|
228
|
|
|
|
264
|
|
Current liabilities of discontinued operations
|
|
|
6,068
|
|
|
|
|
|
Current liabilities related to assets held for sale
|
|
|
|
|
|
|
1,676
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
29,797
|
|
|
|
12,367
|
|
Deferred revenue, less current portion
|
|
|
1,474
|
|
|
|
1,089
|
|
Capital lease obligations, less current portion
|
|
|
1,504
|
|
|
|
984
|
|
Notes payable, less current portion and discount
|
|
|
8,100
|
|
|
|
|
|
Deferred rent, less current portion
|
|
|
1,569
|
|
|
|
1,401
|
|
Long-term liabilities related to assets held for sale
|
|
|
|
|
|
|
602
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
42,444
|
|
|
|
16,443
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 7)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock: $0.001 par value, 100,000 shares
authorized, 1,763 and 4,096 shares issued and outstanding
at December 31, 2006 and 2007, respectively
|
|
|
17
|
|
|
|
40
|
|
Additional paid-in capital
|
|
|
89,532
|
|
|
|
114,406
|
|
Accumulated other comprehensive loss
|
|
|
(122
|
)
|
|
|
(85
|
)
|
Accumulated deficit
|
|
|
(38,282
|
)
|
|
|
(89,452
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
51,145
|
|
|
|
24,909
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
93,589
|
|
|
$
|
41,352
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
39
PlanetOut
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising services
|
|
$
|
11,724
|
|
|
$
|
26,479
|
|
|
$
|
25,555
|
|
Subscription services
|
|
|
21,135
|
|
|
|
24,447
|
|
|
|
21,901
|
|
Transaction services
|
|
|
2,732
|
|
|
|
7,830
|
|
|
|
5,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
35,591
|
|
|
|
58,756
|
|
|
|
53,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:(*)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
11,964
|
|
|
|
26,744
|
|
|
|
29,886
|
|
Sales and marketing
|
|
|
11,088
|
|
|
|
15,592
|
|
|
|
16,266
|
|
General and administrative
|
|
|
7,036
|
|
|
|
11,690
|
|
|
|
15,122
|
|
Restructuring
|
|
|
|
|
|
|
791
|
|
|
|
630
|
|
Depreciation and amortization
|
|
|
3,460
|
|
|
|
5,187
|
|
|
|
6,723
|
|
Impairment of goodwill and intangible assets
|
|
|
|
|
|
|
|
|
|
|
25,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
33,548
|
|
|
|
60,004
|
|
|
|
94,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
2,043
|
|
|
|
(1,248
|
)
|
|
|
(41,528
|
)
|
Interest expense
|
|
|
(238
|
)
|
|
|
(1,189
|
)
|
|
|
(1,972
|
)
|
Other income, net
|
|
|
1,142
|
|
|
|
573
|
|
|
|
531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
2,947
|
|
|
|
(1,864
|
)
|
|
|
(42,969
|
)
|
(Benefit) provision for income taxes
|
|
|
207
|
|
|
|
45
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
2,740
|
|
|
|
(1,909
|
)
|
|
|
(42,963
|
)
|
Loss from discontinued operations, net of taxes
|
|
|
|
|
|
|
(1,801
|
)
|
|
|
(8,207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,740
|
|
|
$
|
(3,710
|
)
|
|
$
|
(51,170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.60
|
|
|
$
|
(1.10
|
)
|
|
$
|
(14.94
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.51
|
|
|
$
|
(1.10
|
)
|
|
$
|
(14.94
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
|
|
|
$
|
(1.04
|
)
|
|
$
|
(2.85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
|
|
|
$
|
(1.04
|
)
|
|
$
|
(2.85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.60
|
|
|
$
|
(2.14
|
)
|
|
$
|
(17.79
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.51
|
|
|
$
|
(2.14
|
)
|
|
$
|
(17.79
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used to compute income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,712
|
|
|
|
1,733
|
|
|
|
2,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
1,819
|
|
|
|
1,733
|
|
|
|
2,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) Stock-based compensation is allocated as follows (see
Note 10):
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
177
|
|
|
$
|
67
|
|
|
$
|
198
|
|
Sales and marketing
|
|
|
254
|
|
|
|
40
|
|
|
|
40
|
|
General and administrative
|
|
|
568
|
|
|
|
180
|
|
|
|
506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
999
|
|
|
$
|
287
|
|
|
$
|
744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
40
PlanetOut
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
17
|
|
|
$
|
17
|
|
|
$
|
17
|
|
Equity financing
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
17
|
|
|
|
17
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
paid-in-capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
88,387
|
|
|
|
88,333
|
|
|
|
89,532
|
|
Issuance of common stock for cash on exercise of options and
warrants
|
|
|
552
|
|
|
|
461
|
|
|
|
71
|
|
Stock-based compensation, net of cancellations and tax effects
of disqualifying dispositions
|
|
|
(687
|
)
|
|
|
293
|
|
|
|
761
|
|
Issuance of common stock warrants in connection with debt
issuance
|
|
|
|
|
|
|
445
|
|
|
|
|
|
Issuance of common stock warrants in connection with financial
advisory services
|
|
|
|
|
|
|
|
|
|
|
185
|
|
Restricted stock withheld for taxes
|
|
|
|
|
|
|
|
|
|
|
(137
|
)
|
Equity financing
|
|
|
|
|
|
|
|
|
|
|
23,994
|
|
Stock-based compensation upon acceleration of unvested options
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
88,333
|
|
|
|
89,532
|
|
|
|
114,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note receivable from stockholder:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
(603
|
)
|
|
|
(603
|
)
|
|
|
|
|
Repayment of note receivable from stockholder
|
|
|
|
|
|
|
603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
(603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned stock-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
(1,619
|
)
|
|
|
|
|
|
|
|
|
Unearned stock-based compensation, net of cancellations
|
|
|
493
|
|
|
|
|
|
|
|
|
|
Amortization of unearned stock-based compensation, net of
cancellations
|
|
|
600
|
|
|
|
|
|
|
|
|
|
Stock-based compensation upon acceleration of unvested options
|
|
|
526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
(106
|
)
|
|
|
(123
|
)
|
|
|
(122
|
)
|
Foreign currency translation adjustment
|
|
|
(17
|
)
|
|
|
1
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
(123
|
)
|
|
|
(122
|
)
|
|
|
(85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
(37,312
|
)
|
|
|
(34,572
|
)
|
|
|
(38,282
|
)
|
Net income (loss)
|
|
|
2,740
|
|
|
|
(3,710
|
)
|
|
|
(51,170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
(34,572
|
)
|
|
|
(38,282
|
)
|
|
|
(89,452
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
$
|
53,052
|
|
|
$
|
51,145
|
|
|
$
|
24,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
1,694
|
|
|
|
1,725
|
|
|
|
1,763
|
|
Issuance of common stock upon exercise of options and warrants
|
|
|
31
|
|
|
|
16
|
|
|
|
14
|
|
Issuance of restricted stock
|
|
|
|
|
|
|
22
|
|
|
|
48
|
|
Forfeitures of restricted stock grants
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
Restricted stock withheld for taxes
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
Equity financing
|
|
|
|
|
|
|
|
|
|
|
2,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
1,725
|
|
|
|
1,763
|
|
|
|
4,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
41
PlanetOut
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,740
|
|
|
$
|
(3,710
|
)
|
|
$
|
(51,170
|
)
|
Net loss from discontinued operations, net of tax
|
|
|
|
|
|
|
1,801
|
|
|
|
8,207
|
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,460
|
|
|
|
5,187
|
|
|
|
6,723
|
|
Impairment of goodwill and intangible assets
|
|
|
|
|
|
|
|
|
|
|
25,914
|
|
Non-cash services expense
|
|
|
|
|
|
|
|
|
|
|
185
|
|
Provision for doubtful accounts
|
|
|
112
|
|
|
|
219
|
|
|
|
211
|
|
Restructuring
|
|
|
|
|
|
|
19
|
|
|
|
203
|
|
Stock-based compensation, net of cancellation and tax effects
|
|
|
405
|
|
|
|
287
|
|
|
|
744
|
|
Stock-based compensation upon acceleration of vesting of
unvested options
|
|
|
608
|
|
|
|
|
|
|
|
|
|
Amortization of debt discount
|
|
|
|
|
|
|
55
|
|
|
|
392
|
|
Amortization of deferred rent
|
|
|
256
|
|
|
|
(43
|
)
|
|
|
(132
|
)
|
Loss on disposal or write-off of property and equipment
|
|
|
71
|
|
|
|
46
|
|
|
|
940
|
|
Equity in net loss of unconsolidated affiliate
|
|
|
57
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities, net of acquisition
effects and restructuring:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(4,067
|
)
|
|
|
(3,152
|
)
|
|
|
1,987
|
|
Inventory
|
|
|
(668
|
)
|
|
|
(341
|
)
|
|
|
263
|
|
Prepaid expenses and other assets
|
|
|
1,221
|
|
|
|
(1,629
|
)
|
|
|
1,489
|
|
Accounts payable
|
|
|
(706
|
)
|
|
|
357
|
|
|
|
(281
|
)
|
Accrued expenses and other liabilities
|
|
|
1,201
|
|
|
|
560
|
|
|
|
(858
|
)
|
Deferred revenue
|
|
|
798
|
|
|
|
(24
|
)
|
|
|
(1,602
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities of
continuing operations
|
|
|
5,488
|
|
|
|
(368
|
)
|
|
|
(6,785
|
)
|
Net cash used in operating activities of discontinued operations
|
|
|
|
|
|
|
(4,358
|
)
|
|
|
(1,131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by(used in)operating activities
|
|
|
5,488
|
|
|
|
(4,726
|
)
|
|
|
(7,916
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions, net of issuance of note payable and cash acquired
|
|
|
(25,546
|
)
|
|
|
76
|
|
|
|
|
|
Acquisitions of discontinued operations, net of cash acquired
|
|
|
|
|
|
|
(5,479
|
)
|
|
|
|
|
Purchases of property and equipment
|
|
|
(3,953
|
)
|
|
|
(4,454
|
)
|
|
|
(3,844
|
)
|
(Purchases) sales of short-term investments
|
|
|
|
|
|
|
(2,050
|
)
|
|
|
2,050
|
|
Changes in restricted cash
|
|
|
|
|
|
|
(2,854
|
)
|
|
|
2,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(29,499
|
)
|
|
|
(14,761
|
)
|
|
|
893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of common stock and preferred stock
options and warrants
|
|
|
552
|
|
|
|
461
|
|
|
|
71
|
|
Proceeds from equity financing, net of transaction costs
|
|
|
|
|
|
|
|
|
|
|
24,017
|
|
Proceeds from repayment of note receivable from stockholder
|
|
|
|
|
|
|
843
|
|
|
|
|
|
Tax withholding payments reimbursed by restricted stock
|
|
|
|
|
|
|
|
|
|
|
(137
|
)
|
Principal payments under capital lease obligations and notes
payable
|
|
|
(1,191
|
)
|
|
|
(1,105
|
)
|
|
|
(18,097
|
)
|
Proceeds from issuance of notes payable
|
|
|
|
|
|
|
10,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by(used in)financing activities
|
|
|
(639
|
)
|
|
|
10,699
|
|
|
|
5,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate on cash and cash equivalents
|
|
|
(17
|
)
|
|
|
1
|
|
|
|
29
|
|
Net decrease in cash and cash equivalents
|
|
|
(24,667
|
)
|
|
|
(8,787
|
)
|
|
|
(1,140
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
43,128
|
|
|
|
18,461
|
|
|
|
9,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
18,461
|
|
|
$
|
9,674
|
|
|
$
|
8,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
105
|
|
|
$
|
1,189
|
|
|
$
|
1,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid (refund received) for taxes
|
|
$
|
172
|
|
|
$
|
177
|
|
|
$
|
(59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash flow investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment and related maintenance acquired under
capital leases
|
|
$
|
113
|
|
|
$
|
2,525
|
|
|
$
|
461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned stock-based compensation
|
|
$
|
493
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
42
PlanetOut
Inc.
|
|
Note 1
|
The
Company and Summary of Significant Accounting Policies
|
The
Company
PlanetOut Inc. (the Company) was incorporated in
Delaware in December 2000. The Company, together with its
subsidiaries, is a leading 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, and other goods and services.
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 Company also offers its
customers access to specialized products and services through
its transaction-based websites, including BuyGay.com, that
generate revenue through sales of products and services of
interest to the LGBT community, such as fashion, books, CDs and
DVDs. The Company also generates revenue from newsstand sales of
its various print properties.
In March 2006, the Company acquired substantially all of the
assets of RSVP Productions, Inc. (RSVP), which the
Company operated as a wholly-owned subsidiary. On
December 14, 2007, the Company completed the sale of
substantially all the assets of RSVP. As a result of this sale
and the Companys decision to exit the Travel and Events
business, the results of operations and financial position of
RSVP are reported in discontinued operations within the
consolidated financial statements. See Note 14,
Discontinued Operations.
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.
As a result of the Company experiencing significant losses and
net cash used in its operating activities in each of the last
two years and its anticipating a significant loss and additional
cash to be used in the next twelve months, the Company has
carefully assessed its anticipated cash needs for the next
twelve months. The Company has adopted an operating plan to
manage the costs of its capital expenditures and operating
activities along with its revenues in order to meet its working
capital needs. Although the Company believes that it has
sufficient working capital to conduct its operations and meet
its current obligations for the next twelve months, it makes no
assurance that it will be able to do so. Accordingly, the
accompanying consolidated financial statements are presented on
the basis that the Company is a going concern.
Reverse
Stock Split
Following the receipt of stockholder approval for a reverse
stock split at the special meeting of stockholders held on
August 29, 2007, the Companys board of directors set
the ratio of the reverse stock split of the Companys
common stock at one-for-ten. The reverse stock split became
effective on October 1, 2007, when the Company filed
43
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
an amendment to its certificate of incorporation. As a result of
the reverse stock split, every ten shares of the Companys
common stock were combined into one share of common stock. No
fractional shares were issued in connection with the reverse
stock split, and stockholders who would have been entitled to
fractional shares received cash in lieu of fractional shares.
The number of shares subject to the Companys outstanding
options and warrants was reduced in the same ratio as the
reduction in the outstanding shares, and the per share exercise
price of those options and warrants will be increased in direct
proportion to the reverse stock split ratio. All references to
share and per-share data for all periods presented have been
adjusted to give effect to the reverse stock split.
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, impairment analysis of goodwill and
intangible 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 as of December 31, 2007 consists of
$167,000 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. Restricted cash as of
December 31, 2006 consisted 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 which was
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
44
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. In 2005, 2006 and 2007, 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 2005, 2006 and 2007 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.
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).
SOP 98-1
requires that costs incurred in the preliminary project and
post-implementation stages of an internal-use software project
be expensed as incurred and that certain costs incurred in the
application development stage of a project be capitalized. The
Company begins to capitalize costs when the preliminary project
stage has been completed and technological and economical
feasibility has been determined. The Company exercises judgment
in determining which stage of development a software project is
in at any point in time. 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. For 2005, 2006 and 2007 the Company capitalized
$2.0 million, $2.1 million and $2.1 million,
respectively.
45
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 Company performs its annual impairment test
as of December 1 of each year. 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 in operating
expenses.
The Company determined that it had one reporting unit through
December 31, 2006. On January 1, 2007, the Company
determined that it had four reporting units and began operating
in three segments. During the fourth quarter of 2007, the
Company divested itself of its Travel and Events business, and
is currently operating in two segments, with three reporting
units.
The Company evaluates goodwill, at a minimum, on an annual basis
and whenever events and changes in circumstances suggest that a
reporting units carrying amount exceeds its fair value.
During the three months ended June 30, 2007, the Company
determined that a triggering event had occurred, primarily due
to lower advertising revenue than expected related to the
Companys publishing segment and lower revenue than
expected related to the Companys Travel and Events
business which the Company believes resulted in a significant
decrease in the trading price of the Companys common stock
and a corresponding reduction in its market capitalization. As a
result of this triggering event, the Company conducted the first
step of its goodwill impairment test and determined that
goodwill had been impaired. Accordingly, the Company conducted
the second step of its impairment test to measure the impairment
and recorded an estimated impairment charge to goodwill in the
amount of $21.1 million in operating expenses of continuing
operations during the three months ended June 30, 2007.
The Company performed its annual test as of December 31,
2007. The results of Step 1 of the annual goodwill impairment
analysis on December 1, 2007 showed that goodwill was not
impaired as the estimated market value of its reporting units
exceeded their 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
additional triggering event occurs or circumstances change that
would more likely than not reduce the fair value of the
Companys reporting units below their carrying amounts. As
a result of the winding down of the Companys international
marketing efforts and the Companys closure of its
international offices in conjunction with the July 2007
restructuring plan, the Company recognized an additional
goodwill impairment charge of $0.4 million in operating
expenses of continuing operations in the fourth quarter of 2007.
An additional impairment charge of $4.0 million related to
the Travel and Events business is reflected under discontinued
operations during 2007. See Note 14, Discontinued
Operations.
Intangible
Assets and Other Long-Lived Assets
The Company accounts for identifiable intangible assets and
other long-lived assets in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment and disposition of
identifiable intangible assets and other long-lived assets. The
Company evaluates long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of a long-lived asset may not be recoverable. The Company
records an impairment
46
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
charge on intangibles or long-lived assets to be held and used
when it determines that the carrying value of these assets may
not be recoverable
and/or
exceed their carrying value. Based on the existence of one or
more indicators of impairment, the Company measures any
impairment based on a projected discounted cash flow method
using a discount rate that it determines to be commensurate with
the risk inherent in its business model. These estimates of cash
flow require significant judgment based on the Companys
historical results and anticipated results and are subject to
many factors.
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 from newsstand revenues 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 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.
47
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2006 and 2007,
the balance of unamortized direct-response advertising costs was
$1,540,000 and $952,000, respectively, and is included in
prepaid expenses and other current assets. Total advertising
costs in 2005, 2006 and 2007 were $3,260,000, $3,086,000 and
$2,363,000, respectively.
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 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, 2006 and 2007, the provision for sales returns
and allowances included in accounts receivable, net was
$1,049,000 and $541,000, 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, 2006 and 2007 the allowance for
doubtful accounts included in accounts receivable, net was
$520,000 and $303,000, respectively.
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 years ended
December 31, 2006 and 2007 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 years ended December 31, 2006 and 2007 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
48
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
statements of operations for the years ended December 31,
2006 and 2007 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, the Company 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 72,000 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 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.
Income
Taxes
The Company adopted the provisions of Financial Accounting
Standards Board (FASB) Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
an Interpretation of FASB Statement No. 109
(FIN 48) on January 1, 2007. The
Company did not have any unrecognized tax benefits and there was
no effect on its financial condition or results of operations as
a result of implementing FIN 48.
The Company files income tax returns in the U.S. federal
jurisdiction and various state and foreign jurisdictions. The
Company is no longer subject to U.S. federal tax assessment
for years before 2004. State jurisdictions that remain subject
to assessment range from 2003 to 2007. The Company does not
believe there will be any material changes in its unrecognized
tax positions over the next 12 months. The Company believes
that its income tax filing positions and deductions will be
sustained on audit and does not anticipate any adjustments that
will result in a material adverse effect on the Companys
financial condition, results of operations, or cash flow.
Therefore, no reserves for uncertain income tax positions have
been recorded pursuant to FIN 48. In addition, the Company
did not record a cumulative effect adjustment related to the
adoption of FIN 48.
The Companys policy is to recognize interest and penalties
accrued on any unrecognized tax benefits as a component of
income tax expense. As of the date of adoption of FIN 48,
the Company did not have any accrued interest or penalties
associated with any unrecognized tax benefits, nor was any
interest expense recognized during 2007. The Companys
effective tax rate differs from the federal statutory rate
primarily due to increases in its deferred income tax valuation
allowance.
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 statements of stockholders equity. For
2005, 2006 and 2007, other comprehensive loss consists of
changes in accumulated foreign currency translation adjustments
during the period.
Net
Income (Loss) Per Share
Basic net income (loss) per share (Basic EPS) is
computed by dividing net income (loss) by the sum of the
weighted-average number of common shares outstanding during the
period. Diluted net income (loss) 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.
49
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the computation of basic and
diluted net income (loss) per share (in thousands, except per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,740
|
|
|
$
|
(3,710
|
)
|
|
$
|
(51,170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used to compute basic EPS
|
|
|
1,712
|
|
|
|
1,733
|
|
|
|
2,876
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive common stock equivalents
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used to compute diluted EPS
|
|
|
1,819
|
|
|
|
1,733
|
|
|
|
2,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.60
|
|
|
$
|
(2.14
|
)
|
|
$
|
(17.79
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.51
|
|
|
$
|
(2.14
|
)
|
|
$
|
(17.79
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The potential shares, which are excluded from the determination
of basic and diluted net income (loss) per share as their effect
is anti-dilutive, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Common stock options and warrants
|
|
|
70
|
|
|
|
187
|
|
|
|
216
|
|
Recent
Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations (FAS 141R).
FAS 141R requires an acquirer to measure the identifiable
assets acquired, the liabilities assumed and any noncontrolling
interest in the acquiree at their fair values on the acquisition
date, with goodwill being the excess value over the net
identifiable assets acquired. FAS 141R is effective for
financial statements issued for fiscal years beginning after
December 15, 2008. Early adoption is prohibited. The
Company has not yet determined the effect on its consolidated
financial statements, if any, upon adoption of FAS 141R.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51
(FAS 160). FAS 160 clarifies
that a noncontrolling interest in a subsidiary should be
reported as equity in the consolidated financial statements. The
calculation of earnings per share will continue to be based on
income amounts attributable to the parent. FAS 160 is
effective for financial statements issued for fiscal years
beginning after December 15, 2008. Early adoption is
prohibited. The Company has not yet determined the effect on its
consolidated financial statements, if any, upon adoption of
FAS 160.
In February 2007, the FASB issued SFAS No. 159
(FAS 159), The Fair Value Option for
Financial Assets and Financial Liabilities Including
an Amendment of FASB Statement No. 115 which is
effective for fiscal years beginning after November 15,
2007. This statement permits an entity to choose to measure many
financial instruments and certain other items at fair value at
specified election dates. Subsequent unrealized gains and losses
on items for which the fair value option has been elected will
be reported in earnings. The Company is currently evaluating the
potential impact of FAS 159, but does not expect the
adoption of FAS 159 to have a material impact on its
consolidated financial position, results of operations or cash
flows.
50
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
|
|
Note 2
|
Segment
Information
|
As a result of further integrating the Companys various
businesses, its executive management team, and its financial and
management reporting systems during fiscal 2006, the Company
began to operate as three segments effective January 1,
2007: Online, Publishing and Travel and Events. The Travel and
Events segment consisted of travel and events marketed through
the Companys RSVP brand and by the Companys
consolidated affiliate, PNO DSW Events, LLC (DSW).
In March 2007, the Company sold its membership interest in DSW,
a joint venture, to the minority interest partner. In December
2007, the Company sold substantially all the assets of RSVP. As
a result of the sale of the Companys interest in DSW, its
sale of substantially all the assets of RSVP and the
Companys decision to exit its Travel and Events business,
the Company has reported the results of operations and financial
position of RSVP and DSW as discontinued operations within the
consolidated financial statements as described more fully in
Note 14, Discontinued Operations. As of
December 31, 2007, the Company has two segments remaining:
Online and Publishing.
Operating segments are based upon the Companys internal
organization structure, the manner in which its operations are
managed, the criteria used by the Companys Chief Operating
Decision Maker to evaluate segment performance and the
availability of separate financial information. The Online
segment includes the Companys global online properties and
websites. The Publishing segment consists of the Companys
print properties, primarily magazines and its book publishing
businesses.
Segment performance is measured based on contribution margin
(loss), which consists of total revenues from external customers
less direct operating expenses. Direct operating expenses
include cost of revenue and sales and marketing expenses.
Segment managers do not have discretionary control over other
operating costs and expenses such as general and administrative
costs (consisting of costs such as corporate management, human
resources, finance and legal), restructuring, depreciation and
amortization expense and impairment of goodwill, as such, other
operating costs and expenses are not evaluated in the
measurement of segment performance.
51
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the financial performance of the
Companys operating segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
Online
|
|
|
Publishing
|
|
|
Total
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising services
|
|
$
|
9,365
|
|
|
$
|
16,190
|
|
|
$
|
25,555
|
|
Subscription services
|
|
|
16,476
|
|
|
|
5,425
|
|
|
|
21,901
|
|
Transaction services
|
|
|
1,191
|
|
|
|
4,366
|
|
|
|
5,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
27,032
|
|
|
|
25,981
|
|
|
|
53,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
12,673
|
|
|
|
17,213
|
|
|
|
29,886
|
|
Sales and marketing
|
|
|
9,296
|
|
|
|
6,970
|
|
|
|
16,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total direct operating costs and expenses
|
|
|
21,969
|
|
|
|
24,183
|
|
|
|
46,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution margin
|
|
$
|
5,063
|
|
|
$
|
1,798
|
|
|
|
6,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
15,122
|
|
Restructuring
|
|
|
|
|
|
|
|
|
|
|
630
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
6,723
|
|
Impairment of goodwill
|
|
|
|
|
|
|
|
|
|
|
25,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating costs and expenses
|
|
|
|
|
|
|
|
|
|
|
48,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
|
|
|
|
|
|
|
|
(41,528
|
)
|
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
(1,441
|
)
|
Benefit for income taxes
|
|
|
|
|
|
|
|
|
|
|
6
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(8,207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
$
|
(51,170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
Online
|
|
|
Publishing
|
|
|
Total
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising services
|
|
$
|
11,116
|
|
|
$
|
15,363
|
|
|
$
|
26,479
|
|
Subscription services
|
|
|
18,378
|
|
|
|
6,069
|
|
|
|
24,447
|
|
Transaction services
|
|
|
2,129
|
|
|
|
5,701
|
|
|
|
7,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
31,623
|
|
|
|
27,133
|
|
|
|
58,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
10,240
|
|
|
|
16,504
|
|
|
|
26,744
|
|
Sales and marketing
|
|
|
10,236
|
|
|
|
5,356
|
|
|
|
15,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total direct operating costs and expenses
|
|
|
20,476
|
|
|
|
21,860
|
|
|
|
42,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution margin
|
|
$
|
11,147
|
|
|
$
|
5,273
|
|
|
|
16,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
11,690
|
|
Restructuring
|
|
|
|
|
|
|
|
|
|
|
791
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
5,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating costs and expenses
|
|
|
|
|
|
|
|
|
|
|
17,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
|
|
|
|
|
|
|
|
(1,248
|
)
|
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
(616
|
)
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
(45
|
)
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(1,801
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
$
|
(3,710
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
Online
|
|
|
Publishing
|
|
|
Total
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising services
|
|
$
|
9,043
|
|
|
$
|
2,681
|
|
|
$
|
11,724
|
|
Subscription services
|
|
|
20,202
|
|
|
|
933
|
|
|
|
21,135
|
|
Transaction services
|
|
|
1,611
|
|
|
|
1,121
|
|
|
|
2,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
30,856
|
|
|
|
4,735
|
|
|
|
35,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
9,248
|
|
|
|
2,716
|
|
|
|
11,964
|
|
Sales and marketing
|
|
|
10,358
|
|
|
|
730
|
|
|
|
11,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total direct operating costs and expenses
|
|
|
19,606
|
|
|
|
3,446
|
|
|
|
23,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution margin
|
|
$
|
11,250
|
|
|
$
|
1,289
|
|
|
|
12,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
7,036
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
3,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating costs and expenses
|
|
|
|
|
|
|
|
|
|
|
10,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
|
2,043
|
|
Other income, net
|
|
|
|
|
|
|
|
|
|
|
904
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
(207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
$
|
2,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Total assets by reportable segments were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Total assets by reportable segment:
|
|
|
|
|
|
|
|
|
Online
|
|
$
|
33,149
|
|
|
$
|
24,105
|
|
Publishing
|
|
|
45,409
|
|
|
|
17,247
|
|
Travel and Events
|
|
|
15,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
93,589
|
|
|
$
|
41,352
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 3
|
Goodwill
and Intangible Assets
|
Goodwill
The Company records as goodwill the excess of the purchase price
of net tangible and intangible assets acquired over their
estimated fair value. Goodwill is not amortized. In accordance
with FAS 142, goodwill is subject to at least an annual
assessment for impairment, and between annual tests in certain
circumstances, applying a fair-value based test. The Company
conducts its annual impairment test as of December 1 of each
year, and between annual tests if a triggering event occurs.
During the three months ended June 30, 2007, the Company
determined that a triggering event had occurred in May 2007,
primarily due to lower advertising revenue than expected related
to the Companys publishing segment and lower than expected
revenue related to the Companys Travel and Events business
which the Company believes resulted in a significant decrease in
the trading price of the Companys common stock and a
corresponding reduction in its market capitalization. As a
result of this triggering event, the Company conducted the first
of its goodwill impairment test and determined that goodwill had
been impaired. Accordingly, the Company conducted the second
step of its impairment test to measure the impairment and
recorded an estimated impairment charge to goodwill in the
amount of $21.1 million in operating expenses of continuing
operations during the three months ended June 30, 2007.
The Company performed its annual test as of December 31,
2007. The results of Step 1 of the annual goodwill impairment
analysis on December 1, 2007 showed that goodwill was not
impaired as the estimated market value of its reporting units
exceeded their 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
additional triggering event occurs or circumstances change that
would more likely than not reduce the fair value of the
Companys reporting units below their carrying amounts. As
a result of the winding down of the Companys international
marketing efforts and the Companys closure of its
international offices in conjunction with the July 2007
restructuring plan, the Company recognized an additional
goodwill impairment charge of $0.4 million in operating
expenses of continuing operations the fourth quarter of 2007.
During the fourth quarter of 2007, the Company divested itself
of its Travel and Events business, and is currently operating in
two segments, with three reporting units. An additional
impairment charge of $4.0 million related to the Travel and
Events business is included in the Companys loss from
discontinued operations. See Note 14, Discontinued
Operations.
54
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of changes in the Companys goodwill during the
year ended December 31, 2007 by reportable segment is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
December 31,
|
|
Acquisition
|
|
2006
|
|
|
Adjustments
|
|
|
Impairment
|
|
|
2007
|
|
|
Online
|
|
$
|
3,403
|
|
|
$
|
|
|
|
$
|
(415
|
)
|
|
$
|
2,988
|
|
Publishing
|
|
|
25,187
|
|
|
|
48
|
|
|
|
(21,100
|
)
|
|
|
4,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,590
|
|
|
$
|
48
|
|
|
$
|
(21,515
|
)
|
|
$
|
7,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to goodwill during the year ended December 31,
2007 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.
Intangible
Assets
The components of acquired intangible assets are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
December 31, 2007
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Customer lists and user bases
|
|
$
|
8,678
|
|
|
$
|
4,615
|
|
|
$
|
4,063
|
|
|
$
|
4,809
|
|
|
$
|
4,809
|
|
|
$
|
|
|
Tradenames
|
|
|
8,040
|
|
|
|
2,340
|
|
|
|
5,700
|
|
|
|
4,210
|
|
|
|
2,340
|
|
|
|
1,870
|
|
Other intangible assets
|
|
|
726
|
|
|
|
726
|
|
|
|
|
|
|
|
726
|
|
|
|
726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,444
|
|
|
$
|
7,681
|
|
|
$
|
9,763
|
|
|
$
|
9,745
|
|
|
$
|
7,875
|
|
|
$
|
1,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets subject to amortization consist of customer
lists and user bases with amortization periods of one to six
years. As of December 31, 2006, the weighted-average useful
economic life of customer lists and user bases being amortized
was 4.8 years. During 2006 and 2007, 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 $191,000, $1,146,000 and $927,000
for the years ended December 31, 2005, 2006 and 2007,
respectively. The net carrying amount of customer lists and user
bases and tradenames related to the SpecPub asset group that
have been classified as assets held for sale as of
December 31, 2007 totaled $1,187,000 and $1,380,000,
respectively, as described more fully in Note 4,
Assets and Liabilities Related to Assets Held for
Sale. The net carrying amount of customer lists and user
bases and tradenames related to RSVP that have been classified
as discontinued operations totaled $1,429,000 and $940,000 as of
December 31, 2006, respectively, as described more fully in
Note 14, Discontinued Operations.
Also during the fourth quarter of 2007, in conjunction with its
estimate to measure goodwill impairment in the second quarter of
2007, the Company recorded an impairment charge in operating
expenses of continuing operations to its customer lists and user
bases and tradenames of $1.9 million and $2.5 million,
respectively, as a result of the completion of an independent
business valuation of the intangible assets of its LPI reporting
unit.
An additional impairment charge of $0.4 million related to
the Travel and Events business is included in the Companys
loss from discontinued operations. See Note 14,
Discontinued Operations.
|
|
Note 4
|
Assets
and Liabilities Related to Assets Held for Sale
|
At such time as management determines that a material long-lived
asset or a long-lived asset that is part of a group that
includes other assets and liabilities (asset group)
is to be disposed of within a twelve-month period and all other
criteria required under SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets,
55
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(FAS 144) have been met, that material asset or
asset group is reclassified on the condensed consolidated
balance sheet as held for sale and recorded at the lower of its
carrying amount or fair value less cost to sell.
In June 2007, management, with the authority to approve the
action, committed to a plan to sell the assets and liabilities
related to its SpecPub, Inc. asset group. The Company is
actively marketing the asset group and expects to complete the
sale within the next twelve months.
In accordance with FAS 144, the assets and liabilities
related to the SpecPub, Inc. asset group have been classified as
assets held for sale and liabilities related to assets held for
sale. The results of the SpecPub, Inc. asset group are not
recorded as discontinued operations because the primary
operations of the SpecPub, Inc. asset group are part of a larger
cash-flow-generating product group in the Companys
publishing segment and do not represent a separate reporting
unit or component as defined by FAS 144. The carrying
amounts of the major classes of assets and liabilities related
to assets held for sale as of December 31, 2007 are as
follows (in thousands):
|
|
|
|
|
Current assets held for sale:
|
|
|
|
|
Accounts receivable, net
|
|
$
|
977
|
|
Inventory
|
|
|
314
|
|
Prepaid expenses and other current assets
|
|
|
504
|
|
|
|
|
|
|
|
|
$
|
1,795
|
|
|
|
|
|
|
Long-term assets held for sale:
|
|
|
|
|
Property and equipment, net
|
|
$
|
54
|
|
Intangible assets, net
|
|
|
2,567
|
|
Other assets
|
|
|
52
|
|
|
|
|
|
|
|
|
$
|
2,673
|
|
|
|
|
|
|
Current liabilities related to assets held for sale:
|
|
|
|
|
Accounts payable
|
|
$
|
74
|
|
Accrued expenses and other liabilities
|
|
|
161
|
|
Deferred revenue, current portion
|
|
|
1,434
|
|
Capital lease obligations, current portion
|
|
|
7
|
|
|
|
|
|
|
|
|
$
|
1,676
|
|
|
|
|
|
|
Long-term liabilities related to assets held for sale:
|
|
|
|
|
Deferred revenue, less current portion
|
|
$
|
578
|
|
Capital lease obligations, less current portion
|
|
|
24
|
|
|
|
|
|
|
|
|
$
|
602
|
|
|
|
|
|
|
|
|
Note 5
|
Other
Balance Sheet Components
|
The Companys other balance sheet components noted in this
footnote exclude the assets and liabilities of the SpecPub group
that have been classified as assets and liabilities related to
assets held for sale on the consolidated balance sheet as of
December 31, 2007 as described more fully in Note 4,
Assets and Liabilities Related to Assets Held for
Sale. The Companys other balance sheet components
noted in this footnote also exclude the assets and liabilities
of RSVP and DSW which have been reported as discontinued
operations on the consolidated balance sheet as of
December 31, 2006 as described more fully in Note 14,
Discontinued Operations.
56
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
$
|
7,033
|
|
|
$
|
10,532
|
|
|
$
|
7,712
|
|
Less: Allowance for doubtful accounts
|
|
|
(259
|
)
|
|
|
(520
|
)
|
|
|
(303
|
)
|
Less: Provision for returns
|
|
|
(744
|
)
|
|
|
(1,049
|
)
|
|
|
(541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,774
|
|
|
$
|
8,963
|
|
|
$
|
6,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2005, 2006 and 2007, the Company provided for an increase in
the allowance for doubtful accounts of $287,000, $1,824,000 and
$1,439,000 respectively, and wrote-off accounts receivable
against the allowance for doubtful accounts totaling $87,000,
$1,563,000 and $1,458,000, respectively. The allowance for
doubtful accounts related to the SpecPub asset group that has
been classified as assets held for sale as of December 31,
2007 totaled $198,000, as described more fully in Note 4,
Assets and Liabilities Related to Assets Held for
Sale.
In 2005, 2006 and 2007, the Company provided for an increase in
the provision for returns of $839,000, $4,589,000 and
$4,309,000, respectively, and wrote-off accounts receivable
against the provision for returns totaling $95,000, $4,284,000
and $4,545,000, respectively. The provision for returns related
to the SpecPub asset group that has been classified as assets
held for sale as of December 31, 2007 totaled $272,000, as
described more fully in Note 4, Assets and
Liabilities Related to Assets Held for Sale.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Inventory
|
|
|
|
|
|
|
|
|
|
|
|
|
Materials for future publications
|
|
$
|
415
|
|
|
$
|
370
|
|
|
$
|
375
|
|
Finished goods available for sale
|
|
|
1,019
|
|
|
|
1,386
|
|
|
|
788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,434
|
|
|
|
1,756
|
|
|
|
1,163
|
|
Less: reserve for obsolete inventory
|
|
|
(85
|
)
|
|
|
(66
|
)
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,349
|
|
|
$
|
1,690
|
|
|
$
|
1,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2005, 2006 and 2007, the Company provided for an increase in
the provision for obsolete inventory of $87,000, $34,000 and
$74,000, respectively, and wrote-off inventory against the
reserve for obsolete inventory totaling $2,000, $53,000 and
$50,000, respectively. The provision for obsolete inventory
related to the SpecPub asset group that has been classified as
assets held for sale as of December 31, 2007 totaled
$40,000, as described more fully in Note 4, Assets
and Liabilities Related to Assets Held for Sale.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Computer equipment and software
|
|
$
|
13,694
|
|
|
$
|
10,364
|
|
Furniture and fixtures
|
|
|
1,202
|
|
|
|
1,082
|
|
Leasehold improvements
|
|
|
2,245
|
|
|
|
2,299
|
|
Website development costs
|
|
|
6,855
|
|
|
|
6,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,996
|
|
|
|
20,198
|
|
Less: Accumulated depreciation and amortization
|
|
|
(13,259
|
)
|
|
|
(11,757
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,737
|
|
|
$
|
8,441
|
|
|
|
|
|
|
|
|
|
|
57
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In 2005, 2006 and 2007, the Company recorded depreciation and
amortization expense of property and equipment of $3,269,000,
$4,005,000 and $5,499,000, respectively. In 2005, 2006 and 2007,
the Company recorded non-cash impairment charges of zero, zero
and $665,000, respectively.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Accrued expenses and other liabilities:
|
|
|
|
|
|
|
|
|
Accrued payroll and related liabilities
|
|
$
|
1,163
|
|
|
$
|
1,422
|
|
Other accrued liabilities
|
|
|
2,147
|
|
|
|
1,069
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,310
|
|
|
$
|
2,491
|
|
|
|
|
|
|
|
|
|
|
The Companys notes payable, net of discounts were
comprised of the following:
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Notes payable to vendors
|
|
$
|
47
|
|
LPI note
|
|
|
7,075
|
|
Orix term loan
|
|
|
7,187
|
|
Orix revolving loan
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
17,309
|
|
Less: discount
|
|
|
(392
|
)
|
|
|
|
|
|
|
|
|
16,917
|
|
Less: current portion, net of discount
|
|
|
8,817
|
|
|
|
|
|
|
Notes payable, less current portion and discount
|
|
$
|
8,100
|
|
|
|
|
|
|
In November 2005, the Company issued a note payable (the
LPI note) in connection with its acquisition of the
assets of LPI Media, Inc. and related entities (LPI)
in the amount of $7,075,000 to the sellers, secured by the
assets of SpecPub, Inc. and payable in three equal installments
of $2,358,000 in May, August and November 2007. In July 2007,
the Company paid the LPI note in full. The note bore interest at
a rate of 10% per year, payable quarterly and in arrears. In
2005, 2006 and 2007 the Company recorded interest expense on the
LPI note of $133,000, $708,000 and $331,000, respectively, in
the consolidated statements of operations.
In June 2006, the Company entered into a software maintenance
agreement under which $90,000 was financed with a vendor. This
amount was payable in four quarterly installments beginning in
July 2006. The note was paid in full in June 2007.
In September 2006, the Company entered into a Loan and Security
Agreement with ORIX Venture Finance, LLC (Orix),
which was amended in February 2007, May 2007 and June 2007 (the
Loan Agreement). Pursuant to the Loan 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 were limited to the lesser of $3,000,000, which the
Company had already drawn down, or 85% of qualifying accounts
receivable. The term loan was payable in 48 consecutive monthly
installments of principal beginning on November 1, 2006,
together with interest at an initial rate of prime plus 3%. The
term loan provided for a prepayment fee equal to 5% of the
amount prepaid in connection with any prepayment made prior to
September 27, 2007. The revolving loan bore interest at a
rate of prime plus 1%. The loans were 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 were pledged as
58
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
security for the LPI note. In connection with the term loan
agreement, the Company issued Orix a
7-year
warrant to purchase up to 12,000 shares of the common stock
of the Company at an exercise price of $37.40. 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 Company and Orix entered into a waiver and amendment to the
Loan Agreement in May 2007 (the May Waiver),
pursuant to which Orix waived defaults associated with the
Companys failure to meet certain financial tests and
liquidity covenants. In consideration of the May Waiver, the
Company, in addition to other commitments, agreed to maintain
certain minimum cash balances, increase the interest rate on the
term loan to prime plus 5% and committed to raise at least
$15.0 million in new equity or subordinated debt. At that
time, the Company also agreed to apply at least
$3.0 million of the proceeds from that transaction to pay
down the term loan. As part of the amendment in June 2007, the
Company and Orix agreed to modify the requirement in the May
Waiver for the commitment to raise new equity or subordinated
debt to be for gross proceeds of at least $25.0 million,
which could be completed in one or more closings, with the first
closing for not less than $4.2 million in proceeds, if
applicable, occurring no later than July 10, 2007, and the
entire financing being completed no later than
September 30, 2007. In addition, Orix consented to, among
other things, certain limited prepayments with respect to the
Companys other indebtedness in the event of the first
closing and prior to the completion of the entire financing.
Orix also agreed to defer the payment of principal installments
due on July 1, August 1 and September 1 with respect to its
term loan for a deferral fee of $150,000. In July 2007, the
Company completed a private placement financing with a group of
investors for approximately $26.2 million in gross proceeds
from the sale of approximately 2.3 million shares of the
Companys common stock and used a portion of the proceeds
to repay, in full, the LPI note, the Orix term loan, the Orix
revolving loan, the deferral fee and $0.3 million in
prepayment fees. As a result of the payment of the loans, the
Company accelerated the accretion of the loan discount.
|
|
Note 7
|
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 2005, 2006
and 2007, was $1,523,000, $2,634,000 and $2,570,000,
respectively.
Future minimum payments under noncancelable operating lease
agreements are as follows (in thousands):
|
|
|
|
|
|
|
Operating
|
|
Year Ending December 31,
|
|
Leases
|
|
|
2008
|
|
$
|
2,884
|
|
2009
|
|
|
2,957
|
|
2010
|
|
|
2,880
|
|
2011
|
|
|
2,887
|
|
2012
|
|
|
1,066
|
|
|
|
|
|
|
|
|
$
|
12,674
|
|
|
|
|
|
|
59
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Capital
Leases
As of December 31, 2007, the future minimum lease payments
under noncancelable capital leases are as follows (in thousands):
|
|
|
|
|
|
|
Capital
|
|
Year Ending December 31,
|
|
Leases
|
|
|
2008
|
|
$
|
1,003
|
|
2009
|
|
|
770
|
|
2010
|
|
|
329
|
|
2011
|
|
|
69
|
|
2012
|
|
|
2
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
2,173
|
|
Less: Amount representing interest
|
|
|
(351
|
)
|
|
|
|
|
|
Present value of capital lease obligations
|
|
|
1,822
|
|
Less: Current portion
|
|
|
(838
|
)
|
|
|
|
|
|
Long-term portion of capital lease obligations
|
|
$
|
984
|
|
|
|
|
|
|
As of December 31, 2006 and 2007, the Company held property
and equipment under capital leases with a cost of $5,851,000 and
$3,740,000, respectively. The accumulated amortization on these
assets was $3,719,000 and $2,166,000 as of December 31,
2006 and 2007, respectively. The capital leases related to the
SpecPub asset group that have been classified as current
liabilities related to assets held for sale and long-term
liabilities related to assets held for sale as of
December 31, 2007 totaled $7,000 and $24,000, respectively,
as described more fully in Note 4, Assets and
Liabilities Related to Assets Held for Sale. The property
and equipment under capital leases related to the SpecPub asset
group and the accumulated amortization on these assets that have
been classified as long-term assets held for sale as of
December 31, 2007 totaled $38,000 and $7,000, respectively.
Co-location
Facility Agreement
The Company has co-location facility agreements with two
third-party service providers which provide space for the
Companys network servers and committed levels of
telecommunications bandwidth. The Company pays a minimum monthly
fee of $35,000 for these services. 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 these agreements are $236,000 for
2008.
Indemnification
In June 2001, the Company entered into an Indemnity Agreement
with its President at that time 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
$13,000, zero and zero in 2005, 2006 and 2007 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.
60
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
|
|
Note 8
|
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 $51,000 and
$9,000 was recognized in 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.
|
|
Note 9
|
Stockholders Equity
|
Stockholder
Rights Plan
On January 4, 2007, the board of directors approved the
adoption of a Stockholder Rights Plan (the Rights
Plan). Terms of the Rights Plan provide for a dividend
distribution of one preferred share purchase right (a
Right) for each outstanding share of common stock,
par value $.001 per share (the Common Shares), of
the Company. The dividend was paid on January 31, 2007 to
the stockholders of record at the close of business on that
date. Each Right entitles the registered holder to purchase from
the Company one one-thousandth of a share of Series A
Junior Participating Preferred Stock, par value $.001 per share
(the Preferred Shares), at a price of $30 per one
one-thousandth of a Preferred Share, subject to adjustment. Each
one one-thousandth of a share of Preferred Shares has
designations and powers, preferences and rights, and the
qualifications, limitations and restrictions which make its
value approximately equal to the value of a Common Share. The
rights expire on January 4, 2017.
Preferred
Stock
The Company has 5.0 million shares of preferred stock
authorized with a par value of $0.001 per share, of which
100,000 shares are designated as Series A Junior
Participating Preferred Stock. The Company had no preferred
shares issued and outstanding at December 31, 2006 and 2007.
Equity
Financing
In July 2007, the Company closed its private placement financing
with a group of accredited and institutional investors. The
Company received an aggregate of approximately
$26.2 million in gross proceeds from the sale of
approximately 2.3 million shares of its common stock at a
price of $11.50 per share (the Private Placement).
The Company realized net proceeds of approximately
$24.0 million from the Private Placement after deducting
fees payable to the placement agent and other transaction costs.
The Company used a portion of the proceeds to repay, in full,
its indebtedness obligations under the LPI note, as well as its
obligations under loans from Orix. In August 2007, the Company
filed a registration statement on
Form S-3
with the SEC pursuant to which it registered for re-sale the
shares sold in the Private Placement.
61
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Warrants
In connection with the term loan agreement with Orix (see
Note 6), the Company issued Orix a
7-year
warrant to purchase up to 12,000 shares of the common stock
of the Company at an exercise price of $37.40. 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. This discount was recognized
as additional interest expense using the effective interest
method over the life of the term loan, which was paid in full in
July 2007. As a result of the payment of the term loan, the
Company accelerated the accretion of the loan discount.
In May 2007, the Company retained Allen & Company LLC
(Allen) as a financial advisor for a period of three
years with respect to various matters. In consideration for
Allens services, the Company issued a warrant to Allen to
purchase 75,000 shares of the Companys common stock
at $16.90 per share, subject to certain anti-dilution
provisions. The warrant vested immediately with respect to
37,500 shares and will vest with respect to 25,000
additional shares on the first anniversary of the date of
issuance, with the remaining 12,500 shares vesting on the
second anniversary of the date of issuance. The Company valued
the warrant which vested on issuance at $485,000. The value of
the remaining warrant is reassessed quarterly until vested in
May 2008 and May 2009. The warrant expires in October 2017. In
the year ended December 31, 2007, the Company recorded
$185,000 of non-cash services expense associated with this
warrant.
The value of the warrants was estimated by the Company using the
Black-Scholes pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Orix Warrant
|
|
|
Allen Warrant
|
|
|
Expected lives (in years)
|
|
|
7.0
|
|
|
|
10.0
|
|
Risk free interest rates
|
|
|
4.56
|
%
|
|
|
4.65
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Volatility
|
|
|
105
|
%
|
|
|
61
|
%
|
|
|
Note 10
|
Stock-Based Plans
|
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 (POC)
1996 Equity Incentive Plan (as part of the acquisition of POC).
In January 2002, the Company adopted the PlanetOut Partners,
Inc. 2001 Equity Incentive 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 initial public offering
(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, 2007, the Company has
reserved an aggregate of 250,000 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
62
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
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, 2004
|
|
|
107
|
|
|
|
220
|
|
|
$
|
41.90
|
|
|
|
|
|
|
|
|
|
Additional shares reserved
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(46
|
)
|
|
|
46
|
|
|
|
84.80
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(24
|
)
|
|
|
12.30
|
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
(47
|
)
|
|
|
(31
|
)
|
|
|
71.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2005
|
|
|
69
|
|
|
|
211
|
|
|
|
50.30
|
|
|
|
|
|
|
|
|
|
Additional shares reserved
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock granted
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(5
|
)
|
|
|
5
|
|
|
|
90.80
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(16
|
)
|
|
|
28.90
|
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
2
|
|
|
|
(25
|
)
|
|
|
89.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2006
|
|
|
99
|
|
|
|
175
|
|
|
|
47.72
|
|
|
|
|
|
|
|
|
|
Additional shares reserved
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock granted
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(14
|
)
|
|
|
4.60
|
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
15
|
|
|
|
(32
|
)
|
|
|
81.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007
|
|
|
121
|
|
|
|
129
|
|
|
$
|
45.00
|
|
|
|
5.3
|
|
|
$
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2007
|
|
|
|
|
|
|
129
|
|
|
$
|
44.89
|
|
|
|
5.2
|
|
|
$
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2007
|
|
|
|
|
|
|
129
|
|
|
$
|
44.89
|
|
|
|
5.2
|
|
|
$
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
63
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information about common stock
options outstanding and exercisable as of December 31, 2007
(in thousands, except years and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Average
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
Range of Exercise Price
|
|
Shares
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
$ 0.00 - $ 14.66
|
|
|
64
|
|
|
|
4.5
|
|
|
$
|
4.43
|
|
|
|
64
|
|
|
$
|
4.43
|
|
$ 14.67 - $ 29.32
|
|
|
3
|
|
|
|
2.1
|
|
|
|
22.51
|
|
|
|
3
|
|
|
|
22.51
|
|
$ 29.32 - $ 58.64
|
|
|
3
|
|
|
|
3.5
|
|
|
|
40.70
|
|
|
|
3
|
|
|
|
40.70
|
|
$ 58.65 - $ 73.30
|
|
|
2
|
|
|
|
7.4
|
|
|
|
70.70
|
|
|
|
2
|
|
|
|
70.70
|
|
$ 73.31 - $ 87.96
|
|
|
18
|
|
|
|
7.7
|
|
|
|
82.88
|
|
|
|
18
|
|
|
|
82.88
|
|
$ 87.97 - $117.28
|
|
|
36
|
|
|
|
5.7
|
|
|
|
90.94
|
|
|
|
36
|
|
|
|
90.94
|
|
$117.29 - $146.30
|
|
|
3
|
|
|
|
3.1
|
|
|
|
135.51
|
|
|
|
3
|
|
|
|
135.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129
|
|
|
|
6.4
|
|
|
$
|
45.00
|
|
|
|
129
|
|
|
$
|
44.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005 and 2006, the Company had 211,200
and 174,700 common stock options exercisable and outstanding
with a weighted average exercise price of $50.30 and $47.72 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.
Restricted
Stock Grants
In August 2003, the Company issued 50,300 restricted shares of
Series B at a purchase price of $7.70 per share to all
employees as of July 31, 2003, with the exception of one
executive officer, which vested over a term of two years
beginning on the later of February 1, 2003 or the date of
hire. As a result, the Company recorded unearned stock-based
compensation for the estimated fair value of Series B at
date of grant of $1,267,000, which was being amortized over the
vesting period. The Company recorded stock-based compensation
expense, net of cancellation of $2,000 associated with the
issuance of these awards in 2005. As of December 31, 2006
and 2007, there were no common shares subject to repurchase by
the Company at the original issuance price.
The Company grants restricted stock to employees and
non-employee directors under the 2004 Equity Incentive Plan (the
Plan). Restricted stock grants issued under the Plan
generally vest in one to four years but are considered
outstanding at the time of grant, as the stockholders are
entitled to dividends and voting rights. The Company records
compensation expense for restricted stock grants based on the
quoted market price of the Companys stock at the grant
date and amortizes the expense over the vesting period. During
2006 and 2007, the Company recorded approximately $367,000 and
$713,000 of compensation expense related to restricted stock
grants, respectively.
64
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the status of and changes in the Companys
unvested shares of restricted stock related to its equity
incentive plans is presented below (in thousands, except per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Unvested at January 1, 2006
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
22
|
|
|
|
63.70
|
|
Vested
|
|
|
(1
|
)
|
|
|
66.70
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2006
|
|
|
21
|
|
|
|
63.70
|
|
Granted
|
|
|
48
|
|
|
|
17.13
|
|
Vested
|
|
|
(16
|
)
|
|
|
46.89
|
|
Forfeited
|
|
|
(4
|
)
|
|
|
52.44
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2007
|
|
|
49
|
|
|
$
|
24.17
|
|
|
|
|
|
|
|
|
|
|
Stock-Based
Compensation
Prior to January 1, 2006, the Company accounted for
employee stock-based compensation using the intrinsic value
method supplemented by pro forma disclosures in accordance with
APB 25 and FAS 123, as amended by FAS 148. Effective
January 1, 2006, the Company adopted FAS 123R using
the modified prospective approach and accordingly prior periods
have not been restated to reflect the impact of FAS 123R.
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 years ended December 31, 2006 and 2007,
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 model stipulated by
FAS 123. The Company did not grant any stock options during
the year ended December 31, 2007. The following weighted
average assumptions were included in the estimated grant date
fair value calculations for the Companys stock option
awards for the years ended December 31, 2005 and 2006:
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2005
|
|
2006
|
|
Common stock options:
|
|
|
|
|
Expected lives (in years)
|
|
5.0
|
|
7.0
|
Risk free interest rates
|
|
3.59 - 4.55%
|
|
4.32 - 4.57%
|
Dividend yield
|
|
0%
|
|
0%
|
Volatility
|
|
85%
|
|
75%
|
The Companys computation of expected volatility 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 is 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.
65
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 year ended
December 31, 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 year ended December 31,
2005 required under FAS 123 was as follows (in thousands,
except per share amounts):
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
Net income, as reported
|
|
$
|
2,740
|
|
Add: Employee stock-based compensation expense included in
reported net income, net of tax
|
|
|
971
|
|
Less: Total employee stock-based compensation expense determined
under fair value, net of tax
|
|
|
(3,815
|
)
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(104
|
)
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
As reported basic
|
|
$
|
1.60
|
|
|
|
|
|
|
As reported diluted
|
|
$
|
1.51
|
|
|
|
|
|
|
Pro forma basic
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
Pro forma diluted
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
During the year ended December 31, 2004, the Company issued
common stock options under the Plans at exercise prices below
the fair value of the Companys common stock at the date of
grant. Accordingly, for such stock options issued to employees,
the Company recorded deferred stock-based compensation of
$3,406,000 of which the Company amortized $611,000 of
stock-based compensation in 2005.
As described in Note 1, the Company accelerated the vesting
of approximately 72,000 shares subject to outstanding stock
options in December 2005. The Company recorded additional
stock-based compensation expense upon the acceleration of
$74,000 based on the additional intrinsic value of these options
on the date of acceleration. Additionally, on the date of
acceleration, the remaining balance of unamortized unearned
stock-based compensation of these stock option grants of
$526,000 was recorded as stock-based compensation expense in
accordance with FASB Interpretation No. 44,
Accounting for Certain Transactions Involving Stock
Compensation an Interpretation of APB No. 25
(FIN 44). As of December 31, 2005, the
balance of unearned stock-based compensation was zero. The
Company may recognize additional unearned stock-based
compensation and stock-based compensation expense in the future
if it grants additional stock or stock options. As a result of
the acceleration of the stock options noted above, the impact of
adopting FAS 123R was not material, to date, to the
Companys results of operations.
Stock-based
Compensation Associated with Awards Granted to
Nonemployees
During 2004, the Company granted 320 common stock options at an
exercise price of $90.20 per share to consultants in
consideration for their services rendered to the Company. In
each reporting period, the Company recognizes stock-based
compensation expense associated with options awarded to
nonemployees as they vest and estimates their fair value based
on the Black- Scholes option pricing model and its applicable
assumptions at each reporting period. Accordingly, in 2005, 2006
and 2007, the Company recorded stock-based compensation expense
totaling $27,000, zero and zero, respectively. The following
assumptions were utilized: expected dividend yield of 0% for
common stock; risk-free interest rate ranging from 4.06% to
4.60%; expected volatility ranging from 75% to 76%; and a
remaining contractual life ranging from 7 to 10 years.
66
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Option
Cancellation and Regrant Program
In January 2002, the Company implemented an Option Cancellation
and Regrant Program (the Program). The Program
offered then current Company employees the opportunity to cancel
certain common stock options with an exercise price in excess of
$11.00 per share, in exchange for the Companys promise to
grant replacement common stock options in August 2002 at an
exercise price equal to the fair value of the common stock on
the grant date. The number of new common stock options would be
at least equal to the common stock options cancelled. The
Program resulted in the cancellation of 41,800 common stock
options at a weighted-average exercise price of $106.70 per
share and the grant, and on August 23, 2002, the grant of
152,400 common stock options at an exercise price of $4.40 per
share.
Additionally, in January 2002, the Company issued to the
participants of the Program, an aggregate of 23,900
Series D options at an exercise price of $40.70 per share.
Of the total Series D options, a total of 15,500
Series D options (the Replacement Awards) are
subject to variable plan accounting, as they were granted within
6 months and one day from the cancellation date of the
original awards, as defined by FIN 44. Under FIN 44,
the Company will remeasure the intrinsic value of the
Replacement Awards until such options are exercised, forfeited
or expire. Subsequently, in August 2003, a total of 9,300
Series D options were exercised. The Company recorded
stock-based compensation benefits related to the Replacement
Awards of $228,000, $146,000 and $20,000 in 2005, 2006 and 2007,
respectively.
|
|
Note 11
|
Defined
Contribution Plan
|
The Company maintains a defined contribution plan in the United
States, which qualifies as a tax deferred savings plan under
Section 401(k) of the Internal Revenue Code
(IRC). Eligible U.S. employees may contribute a
percentage of their pre-tax compensation, subject to certain IRC
limitations. The Plan provides for employer matching
contributions to be made at the discretion of the Board of
Directors. Employer matching contributions were $94,000,
$278,000 and $306,000 for 2005, 2006 and 2007, respectively.
In June 2006, the board of directors of the Company adopted and
approved a reorganization plan to align the Companys
resources with its strategic business objectives. As part of the
plan, the Company consolidated its media and advertising
services,
e-commerce
services and back-office operations on a global basis to
streamline its operations as part of continued integration of
its acquired businesses. The reorganization, along with other
organizational changes, reduced the Companys total
workforce by approximately 5%. Restructuring costs of
approximately $834,000, primarily related to termination
benefits of approximately $631,000 and the cost of closing
redundant facilities of approximately $203,000, were recorded
during the three months ended June 30, 2006. During the
third and fourth quarters of 2006, the Company recorded
adjustments to decrease the cost of closing redundant facilities
of approximately $45,000 and to increase the cost of termination
benefits by approximately $1,000. The Company 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.
In July 2007, the board of directors of the Company adopted and
approved a reorganization plan to further align the
Companys resources with its strategic business objectives.
As part of the plan, the Company closed its international
offices located in Buenos Aires and London in order to
streamline the Companys business operations and reduce
expenses. The reorganization, along with other organizational
changes, reduced the Companys total workforce by
approximately 15%. Restructuring costs of approximately
$581,000, primarily related to employee severance benefits of
approximately $451,000 and facilities consolidation expenses of
approximately $130,000, were recorded during the three months
ended September 30, 2007. During the fourth quarter of
2007, the Company recorded an adjustment to increase the cost of
severance benefits by approximately $49,000. The Company
completed this restructuring in the fourth quarter of 2007.
67
PlanetOut
Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The provision for income taxes is $207,000, $45,000 and ($5,700)
in 2005, 2006 and 2007, respectively. The Companys
effective tax rate differs from the statutory rates, primarily
due to no tax benefit for operating losses.
The following is a reconciliation of the difference between the
applicable federal statutory rate and the actual provision for
income taxes as a percentage of income (loss) before income
taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Provision at statutory rate
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
State taxes, net of federal benefit
|
|
|
1.82
|
|
|
|
(0.52
|
)
|
|
|
|
|
Permanent differences
|
|
|
13.10
|
|
|
|
(1.26
|
)
|
|
|
(0.09
|
)
|
Change in valuation allowance
|
|
|
(44.24
|
)
|
|
|
(33.48
|
)
|
|
|
(34.03
|
)
|
Other
|
|
|
2.34
|
|
|
|
0.03
|
|
|
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net tax provision
|
|
|
7.02
|
%
|
|
|
(1.23
|
)%
|
|
|
0.01
|
%
|
|
|
|
|
|
|