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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
  FORM 10-Q  x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended: September 30, 2004 or o TRANSITION REPORT PURSUANT TO SECTION OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ________ to_________ Commission File Number: 000-50879 PLANETOUT INC.  DELAWARE
(State or Other Jurisdiction of Incorporation or Organization)
    
    94-3391368
(I.R.S. Employer Identification No.)1355 SANSOME STREET, SAN FRANCISCO, CALIFORNIA
(Address of Principal Executive Offices)
    
    94111
(Zip Code)
 (415) 834-6500
(Registrants Telephone Number, Including Area Code)    Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past
90 days.       o Yes x No Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange
Act).      
o Yes x No The number of shares outstanding of the registrants Common Stock, $0.001
par value, as of November 15, 2004 was 16,944,388.




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PlanetOut Inc.

INDEX
Form 10-Q
For the Quarter ended September 30, 2004






PAGEPART
I  FINANCIAL INFORMATIONItem 1
    
    Condensed Consolidated Financial Statements
    
    3Condensed Consolidated Balance Sheets as of December 31, 2003 and September 30, 2004 (unaudited)
    
    3Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2003 and 2004 (unaudited) and the Nine Months ended September 30, 2003 and 2004 (unaudited)
    
    4Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2004(unaudited)
    
    5Notes to Condensed
Consolidated Financial Statements (unaudited)
    
    6Item 2
    
    Managements Discussion and Analysis on Financial Condition and Results of Operations
    
    13Item 3
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    30Item 4
    
    Controls and Procedures
    
    30PART II  OTHER INFORMATION
    
    31Item 1
    
    Legal Proceedings
    
    31Item 2
    
    Unregistered Sales of Equity Securities And Use of Proceeds
    
    31Item 3
    
    Defaults Upon Senior Securities
    
    32Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    32Item 5
    
    Other Information
    
    32Item 6
    
    Exhibits
    
    32SIGNATURESEXHIBIT
INDEXEXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2






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PART I
FINANCIAL INFORMATION PlanetOut Inc. 
 Item 1. Condensed Consolidated Financial Statements 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amount) December 31,
    
    September 30,2003
    
    2004(unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    2,282
    
    
    $
    5,592Accounts receivable, net of allowance for
doubtful accounts of $43 and $48
(unaudited) at December 31, 2003 and September 30, 2004, respectively
    
    
    1,283
    
    
    
    1,383Prepaid expenses and other current assets
    
    
    319
    
    
    
    661Total current assets
    
    
    3,884
    
    
    
    7,636Property and equipment, net
    
    
    3,029
    
    
    
    4,519Goodwill
    
    
    3,403
    
    
    
    3,403Intangible assets, net
    
    
    20
    
    
    
    Investment in unconsolidated affiliate
    
    
    151
    
    
    
    107Other assets
    
    
    442
    
    
    
    2,668Total assets
    
    $
    10,929
    
    
    $
    18,333Liabilities, redeemable convertible preferred stock and stockholders equity (deficit)Current liabilities:Accounts payable
    
    $
    423
    
    
    $
    1,984Accrued liabilities
    
    
    2,914
    
    
    
    1,397Deferred revenue
    
    
    2,483
    
    
    
    3,130Capital lease obligations, current portion
    
    
    868
    
    
    
    1,143Total current liabilities
    
    
    6,688
    
    
    
    7,654Capital lease obligations, less current portion
    
    
    545
    
    
    
    520Senior subordinated promissory note
    
    
    
    
    
    
    4,513Other liabilities
    
    
    
    
    
    
    115Total liabilities
    
    
    7,233
    
    
    
    12,802Contingencies (Note 3)Redeemable convertible preferred stock, $0.001
par value; 142,100 shares authorized; 102,227
and 101,993 (unaudited) shares issued and
outstanding at December 31, 2003 and
September 30, 2004, respectively
(Liquidation value at December 31, 2003 and
September 30, 2004 of $81,789 and $83,024
(unaudited), respectively)
    
    
    41,413
    
    
    
    42,721Stockholders equity (deficit):Common stock: $0.001 par value; 17,136 shares
authorized; 1,728 and 1,849 (unaudited)
shares issued and outstanding at December 31,
2003 and September 30, 2004, respectively
    
    
    2
    
    
    
    2Additional paid-in capital
    
    
    17
    
    
    
    2,813Note receivable from stockholder
    
    
    (603
    )
    
    
    (603
    )Unearned stock-based compensation
    
    
    (259
    )
    
    
    (2,067
    )Accumulated other comprehensive loss
    
    
    (99
    )
    
    
    (115
    )Accumulated deficit
    
    
    (36,775
    )
    
    
    (37,220
    )Total stockholders equity (deficit)
    
    
    (37,717
    )
    
    
    (37,190
    )Total liabilities, redeemable
convertible preferred stock and
stockholders equity (deficit)
    
    $
    10,929
    
    
    $
    18,333
 See accompanying notes to condensed consolidated financial statements. 3




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PlanetOut, Inc. 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amount) Three Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2003
    
    2004
    
    2003
    
    2004(unaudited)Revenue:Subscription services
    
    $
    3,337
    
    
    $
    4,328
    
    
    $
    9,164
    
    
    $
    12,167Advertising services
    
    
    1,180
    
    
    
    1,604
    
    
    
    3,190
    
    
    
    4,414Transaction services
    
    
    384
    
    
    
    378
    
    
    
    1,442
    
    
    
    1,278Total revenue
    
    
    4,901
    
    
    
    6,310
    
    
    
    13,796
    
    
    
    17,859Operating costs and expenses:Cost of
revenue (inclusive of stock-based compensation expense of $464 (unaudited) and
$115 (unaudited) for the three months ended September 30, 2003 and 2004,
respectively, and $440 (unaudited) and $466 (unaudited) for the nine months ended September 30, 2003 and 2004,
respectively)
    
    
    2,084
    
    
    
    1,941
    
    
    
    5,088
    
    
    
    6,098Sales and
marketing (inclusive of stock-based compensation expense of $398 (unaudited) and
$149 (unaudited) for the three months ended September 30, 2003 and 2004,
respectively, and $372 (unaudited) and $436 (unaudited) for the nine months ended September 30, 2003 and 2004,
respectively)
    
    
    2,055
    
    
    
    2,248
    
    
    
    5,049
    
    
    
    6,234General and administrative (inclusive of stock-based compensation expense of
$755 (unaudited) and $273 (unaudited) for the three months ended September 30, 2003 and
2004, respectively, and $618 (unaudited) and $822 (unaudited) for the nine months ended September 30, 2003
and 2004, respectively)
    
    
    1,592
    
    
    
    1,263
    
    
    
    3,360
    
    
    
    3,862Depreciation and amortization
    
    
    488
    
    
    
    645
    
    
    
    1,426
    
    
    
    1,673Total costs and expenses
    
    
    6,219
    
    
    
    6,097
    
    
    
    14,923
    
    
    
    17,867Income (loss) from operations
    
    
    (1,318
    )
    
    
    213
    
    
    
    (1,127
    )
    
    
    (8
    )Equity in net income (loss) of unconsolidated affiliate
    
    
    (15
    )
    
    
    (12
    )
    
    
    (45
    )
    
    
    (44
    )Interest expense
    
    
    (56
    )
    
    
    (240
    )
    
    
    (118
    )
    
    
    (430
    )Other income (expense), net
    
    
    17
    
    
    
    29
    
    
    
    53
    
    
    
    61Income (loss) before income taxes
    
    
    (1,372
    )
    
    
    (10
    )
    
    
    (1,237
    )
    
    
    (421
    )Provision for income taxes
    
    
    
    
    
    
    (19
    )
    
    
    (32
    )
    
    
    (24
    )Net income (loss)
    
    
    (1,372
    )
    
    
    (29
    )
    
    
    (1,269
    )
    
    
    (445
    )Accretion on redeemable convertible preferred stock
    
    
    (437
    )
    
    
    (438
    )
    
    
    (1,293
    )
    
    
    (1,313
    )Net income (loss) attributable to common stockholders
    
    $
    (1,809
    )
    
    $
    (467
    )
    
    $
    (2,562
    )
    
    $
    (1,758
    )Net income (loss) per share attributable to common stockholders  basic and diluted
    
    $
    (1.10
    )
    
    $
    (0.25
    )
    
    $
    (1.61
    )
    
    $
    (0.99
    )Weighted average number of shares used in computing per share calculations  basic
and diluted
    
    
    1,641
    
    
    
    1,841
    
    
    
    1,591
    
    
    
    1,780
 See accompanying notes to condensed consolidated financial statements. 4




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PlanetOut Inc. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Nine MonthsEnded September 30,2003
    
    2004(unaudited)Cash flows from operating activities:Net income (loss)
    
    $
    (1,269
    )
    
    $
    (445
    )Adjustments to reconcile net income (loss) to net cash (used in) provided by operating
activities:
Depreciation and amortization
    
    
    1,426
    
    
    
    1,673Amortization of unearned stock-based compensation, net of cancellation
    
    
    1,407
    
    
    
    1,655Issuance of stock options in exchange for services
    
    
    23
    
    
    
    63Issuance of common stock in consideration of services provided by consultant
    
    
    
    
    
    
    6Amortization of debt issuance costs
    
    
    
    
    
    
    65Loss on disposal of assets
    
    
    34
    
    
    
    40Deferred rent
    
    
    
    
    
    
    115Equity in net loss of unconsolidated affiliate
    
    
    45
    
    
    
    44Changes in operating assets and liabilities:Accounts receivable
    
    
    57
    
    
    
    (100
    )Prepaid expenses and other assets
    
    
    102
    
    
    
    (773
    )Accounts payable
    
    
    21
    
    
    
    843Accruals and other liabilities
    
    
    (952
    )
    
    
    (1,517
    )Deferred revenue
    
    
    320
    
    
    
    647Net cash provided by operating activities
    
    
    1,214
    
    
    
    2,316Cash flows from investing activities:Purchases of property and equipment
    
    
    (1,000
    )
    
    
    (2,102
    )Net cash used in investing activities
    
    
    (1,000
    )
    
    
    (2,102
    )Cash flows from financing activities:Proceeds
from exercise of common stock options, preferred stock options and warrants
    
    
    10
    
    
    
    49Repurchase of redeemable convertible preferred stock
    
    
    
    
    
    
    (20
    )Principal payments under capital lease obligations
    
    
    (605
    )
    
    
    (968
    )Deferred costs associated with initial public offering
    
    
    
    
    
    
    (858
    )Proceeds from senior subordinated promissory note, net of issuance costs
    
    
    
    
    
    
    4,909Net cash provided by (used in) financing activities
    
    
    (595
    )
    
    
    3,112Effect of exchange rate on cash and cash equivalents
    
    
    (47
    )
    
    
    (16
    )Net increase (decrease) in cash and cash equivalents
    
    
    (428
    )
    
    
    3,310Cash and cash equivalents, beginning of period
    
    
    2,082
    
    
    
    2,282Cash and cash equivalents, end of period
    
    $
    1,654
    
    
    $
    5,592Supplemental disclosure of noncash flow investing and financing activities:Property and equipment acquired under capital leases
    
    $
    1,444
    
    
    $
    1,348Accretion on redeemable convertible preferred stock
    
    $
    1,293
    
    
    $
    1,313Unearned stock-based compensation
    
    $
    1,718
    
    
    $
    3,463Issuance of
common stock warrant in connection with subordinated promissory note
    
    $
    
    
    
    $
    543
 See accompanying notes to condensed consolidated financial statements. 5




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PlanetOut Inc. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 1  The Company PlanetOut Inc. (the Company) is an online media company serving the
lesbian, gay, bisexual and transgendered, or LGBT, community. Through its Gay.com and
PlanetOut.com websites, the Company offers membership based services and
features. The Company generates revenue through subscription fees for premium
membership services on Gay.com and PlanetOut.com, as well as advertising sales
and sales of products and services through its e-commerce site,
Kleptomaniac.com, and travel website, OutandAbout.com. Note 2  Summary of Significant Accounting Policies Unaudited Interim Financial Information The accompanying unaudited condensed consolidated financial statements
have been prepared and reflect all adjustments, consisting only of normal
recurring adjustments, which in the opinion of management are necessary to
present fairly the financial position and the results of operations for the
interim periods. The unaudited condensed consolidated financial statements have
been prepared in accordance with the regulations of the Securities and Exchange
Commission, but omit certain information and footnote disclosure necessary to
present the statements in accordance with generally accepted accounting
principles. Results of interim periods are not necessarily indicative of
results for the entire year. These condensed consolidated financial statements
should be read in conjunction with the Companys prospectus
filed on October 14, 2004. Principles of Consolidation The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenue and
expenses during the reporting periods. Significant estimates and assumptions
made by management include the assessment of collectibility of accounts
receivable, the determination of the allowance of doubtful accounts, the
determination of the fair market value of its preferred and common stock, the
valuation and useful life of its capitalized software and long-lived assets and
the valuation of deferred tax asset balances. Actual results could differ from
those estimates. Cash Equivalents The Company considers all highly liquid investments purchased with
original or remaining maturities of three months or less to be cash
equivalents. Interest is accrued as earned. As of December 31, 2003 and
September 30, 2004, cash and cash equivalents included $1,573,000 and
$5,089,000 (unaudited), respectively, of money market funds and commercial
paper, the fair market value of which approximates costs. 6




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The Companys 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
managements expectations. For the three and nine months ended September 30,
2003 and 2004, no single customer accounted for more than 10% of the Companys
revenue. 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 income. Foreign currency translation gain and losses are
reflected in the equity section of the Companys consolidated balance sheets as
accumulated other comprehensive income (loss). Gains or losses resulting from
foreign currency transactions are included in other income (expenses) in the
consolidated statement of operations and for the nine months ended September
30, 2003 and 2004, have not been significant. Inventory Inventory, which consists of finished goods held for sale, is recorded at
the lower of cost (determined on a weighted average cost method) or market and
the balance as of December 31, 2003 and September 30, 2004 of $28,000 and
$25,000, respectively, is included in other current assets. Internal Use Software and Website Development Costs The Company capitalizes internally developed software costs in accordance
with the Statement of Position 98-1, Accounting for Costs of Computer Software
Developed or Obtained for Internal Use (SOP 98-1) and Emerging Issues Task
Force Abstract No. 00-02, Accounting for Web Site Development Costs (EITF
00-02). Capitalized costs are amortized on a straight-line basis over the
estimated useful life of the software, generally three years, once it is
available for its intended use. During 2003 and the three and nine months ended
September 30, 2004, the Company capitalized costs of $855,000,
$153,000 and $634,000,
respectively. The Company recorded related amortization expense of $60,000
and $149,000 for the three months ended September 30, 2003
and 2004, respectively, and
$165,000 and $359,000 for the nine months ended September 30,
2003 and 2004, respectively. Goodwill and Other Intangible Assets Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible
Assets. In accordance with SFAS 142, the Company ceased amortizing goodwill,
reclassified balance for assembled workforce to goodwill and performed a
transitional test of its goodwill as of January 1, 2002. SFAS 142 requires that
goodwill be tested for impairment at the reporting unit level (operating
segment or one level below an operating segment) on an annual basis and between
annual tests in certain circumstances. The performance of the test involves a
two-step process. The first step of the impairment test involves comparing the
fair value of the Companys reporting units with the reporting units carrying
amount, including goodwill. The Company generally determines the fair value of
its reporting units using the expected present value of future cash flows,
giving consideration to the market comparable approach. If the carrying amount
of the Companys reporting units exceeds the reporting units fair value, the
Company performs the second step of the goodwill impairment test to determine
the amount of impairment loss. The second step of the goodwill impairment test
involves comparing the implied fair value of the Companys reporting units
goodwill with the carrying amount of that goodwill. Other intangible assets are carried at cost less accumulated amortization.
The Company amortizes other intangible assets on a straight line basis over
their estimated useful lives, generally one to three years. Long-lived assets
to be held and used and other intangible assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of such assets may not be recoverable. Factors which are considered important
that could trigger an impairment include, but are not limited to, the
following:  
    
    Significant underperformance relative to expected historical or
projected future operating results;  
    
    Significant changes in the manner of the Companys use of the
acquired assets or the strategy for the overall Companys business; 7




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
    
    Significant negative industry or economic trends; and  
    
    A current expectation that, more likely than not, a long-lived asset
will be sold, modified or otherwise disposed of significantly before the
end of its previously estimated useful life. Determination of recoverability is based on an estimate of undiscounted
future cash flows resulting from the use of the asset and its eventual
disposition. Measurement of any impairment loss for long-lived assets and
certain identifiable intangible assets that management expects to hold and use
is based on the amount the carrying value exceeds the fair value of the asset. In
connection with the restructuring of its French operation in the
third and fourth quarters of 2003, the Company made judgments about
the timing of charges associated with the impairment of certain
assets. In its most recent earnings release, the Company applied an
impairment charge to the third quarter of 2003. Upon review, the
Company believes that this charge would be more appropriate in the
fourth quarter of 2003. The Company does not believe that this
timing change is material nor does it impact any other periods or
the Company's full year 2003 financial statements. Intangible
asset amortization expense was $63,000 and $0 for the three months ended
September 30, 2003 and 2004, respectively, and
$199,000 and $20,000 for the nine months ended
September 30, 2003 and 2004, respectively. Advertising Costs related to advertising and promotion are charged to sales and
marketing expense as incurred. Advertising costs were $356,000 and
$623,000 for the three months
ended September 30, 2003 and 2004,
respectively, and $848,000, and
$1,654,000 for the nine months ended September 30,
2003 and 2004, respectively. Stock-based Compensation The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, (APB No. 25), and related
interpretations. The Company follows the disclosure provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123), and related interpretations. Under APB No. 25,
compensation expense is based on the difference, if any, on the date of the
grant, between the fair value of the Companys stock and the exercise price.
Stock-based compensation determined under either APB No. 25 or SFAS No. 123 is
recognized using the multiple option method prescribed by the Financial
Accounting Standards Board Interpretation No. 28, Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Awards Plans (FIN No.
28), over the options vesting period, which generally is two to four years. The Company accounts for equity instruments issued to nonemployees in
accordance with SFAS No. 123, Emerging Task Force Issue No. 96-18, Accounting
for Equity Instruments that are Issued to Other than Employees for Acquiring,
or in Conjunction with Selling, Goods or Services (EITF 96-18) and FIN No.
28. Accordingly, as these equity instruments vest, the Company will be required
to remeasure the fair value of the equity instruments at each reporting period
prior to vesting and then finally at the vesting date of the equity
instruments. For the purposes of pro forma disclosures, the estimated fair value of the
options granted under the Companys stock option plans is amortized to expense
over the vesting period of the respective options, generally two to four years. The pro forma disclosures of the difference between compensation cost
included in the net loss and the related cost measured by the fair value method
as required by SFAS 123, as amended, are presented as follows (in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2004
    
    2003
    
    2004(unaudited)Net income (loss) attributable to common stockholders, as reported:
    
    
    ($1,809
    )
    
    
    ($467
    )
    
    
    ($2,562
    )
    
    
    ($1,758
    )Add: Employee stock-based compensation expense included in
reported net loss, net of tax
    
    
    1,609
    
    
    
    518
    
    
    
    1,407
    
    
    
    1,655Less: Total employee stock-based compensation expense determined
under fair value, net of tax
    
    
    (1,885
    )
    
    
    (696
    )
    
    
    (1,770
    )
    
    
    (2,054
    )Pro forma net income (loss) attributable to common stockholders
    
    
    (2,085
    )
    
    
    (645
    )
    
    
    (2,925
    )
    
    
    (2,157
    )Net income (loss) per share attributable to common stockholders:As reported  basic and diluted
    
    
    (1.10
    )
    
    
    (0.25
    )
    
    
    (1.61
    )
    
    
    (0.99
    )Pro forma  basic and diluted
    
    
    (1.27
    )
    
    
    (0.35
    )
    
    
    (1.84
    )
    
    
    (1.21
    )
 The Company calculated the fair value of each common stock option grant on
the date of grant using the minimum value method with the following
assumptions: dividend yield of 0% and 10% for common stock and preferred stock,
respectively; weighted average option term of five years and thirty months for
common stock and 8




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preferred stock,
respectively; risk free interest rate of 3.07% to 3.28% and
3.43% to 3.80% for the three months ended September 30, 2003 and
2004, respectively, and 2.15% to 3.28% and 2.77% to 4.05% for the nine
months ended September 30, 2003 and 2004, respectively. The weighted fair value
of common stock options granted was $0.77 and $13.42 for the three months
ended September 30, 2003 and 2004, respectively, and $0.77 and $13.36 for the
nine months ended September 30, 2003 and 2004, respectively. Segment Reporting The Company has one reporting segment. During the three
months ended September 30, 2003 and 2004, the Companys revenue derived from
its operations based in Europe and Argentina was $250,000 and
$245,000, respectively, and $756,000
and $721,000 during the nine months ended September 30, 2003 and
2004, respectively. As
of December 31, 2003 and September 30, 2004, $15,000 and $17,000,
respectively, of the Companys long-lived assets were held in Europe and
Argentina. Net Income (Loss) Per Share Basic net income (loss) per share is computed using the weighted average
number of shares outstanding. Diluted net income (loss) per share is computed
using the weighted average number of common and potential common shares
outstanding. Potential common shares consist of the incremental number of
common shares issuable upon conversion of convertible preferred stock (using
the if-converted method) and common shares issuable upon the exercise of stock
options and warrants (using the treasury stock method). Potential common shares
are excluded from the computation if their effect is anti-dilutive. The following table sets forth the computation of basic and diluted net
loss attributable to common stockholders (in thousands, except per share
amounts): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2004
    
    2003
    
    2004(unaudited)Numerator:Net income (loss) attributable to common stockholders
    
    
    (1,809
    )
    
    
    (467
    )
    
    
    (2,562
    )
    
    
    (1,758
    )Denominator for basic and diluted net income (loss) per common share:Weighted-average common shares outstanding
    
    
    1,641
    
    
    
    1,841
    
    
    
    1,591
    
    
    
    1,780Net income (loss) per share attributable to common stockholders
basic and diluted
    
    
    (1.10
    )
    
    
    (0.25
    )
    
    
    (1.61
    )
    
    
    (0.99
    )
 The potential shares, which are excluded from the determination of basic
and diluted net loss per share as their effect is anti-dilutive, are as follows
(in thousands): Nine Months EndedSeptember 30,2003
    
    2004(unaudited)Redeemable convertible preferred stock
    
    
    102,228
    
    
    
    101,993Redeemable convertible preferred stock options and warrants
    
    
    3,613
    
    
    
    3,493Common stock options and warrants
    
    
    2,004
    
    
    
    2,273Common stock subject to repurchase
    
    
    2
    
    
    
    2107,847
    
    
    
    107,761
 Stock Split The
Company effected a one for eleven reverse stock split of the
Companys Common Stock on July 19, 2004. All
share, per share and stock option data information, including the conversion
rates of the redeemable convertible preferred stock, in the financial
statements for all periods have been retroactively restated to reflect the
reverse stock split. Reclassifications Certain reclassifications have been made in the prior consolidated
financial statements to conform to the current year presentation. The
reclassifications did not change the previously reported net loss of the
Company. 9




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##### Table of Contents



Recent Accounting Pronouncements On March 31, 2004, the FASB issued a proposed Statement, Share-Based
Payment,that addresses the accounting for share-based payment transactions in
which an enterprise receives employee services in exchange for (a) equity
instruments of the enterprise or (b) liabilities that are based on the fair
value of the enterprises equity instruments or that may be settled by the
issuance of such equity instruments. The proposed Statement would eliminate the
ability to account for share-based compensation transactions using APB Opinion
No. 25 and generally would require instead that such transactions be accounted
for using a fair-value-based method. If adopted in its current form, the
proposed Statement would be effective for fiscal years beginning after June 15,
2005. In April 2004, the EITF issued Statement No. 03-06 Participating
Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per
Share (EIFT 03-06). EITF 03-06 addresses a number of questions regarding the
computation of earnings per share by companies that have issued securities
other than common stock that contractually entitle the holder to participate in
dividends and earnings of the company when, and if, it declares dividends on
its common stock. The issue also provides further guidance in applying the
two-class method of calculating earnings per share, clarifying what constitutes
a participating security and how to apply the two-class method of computing
earnings per share once it is determined that a security is participating,
including how to allocate undistributed earnings to such a security. EITF 03-06
is effective for fiscal periods beginning after March 31, 2004. The adoption of
this standard did not have any impact on the resulting earnings per share of
the periods presented. Note 3  Contingencies Contingencies The Company is not currently subject to any material legal proceedings.
However, the Company may from time to time become a party to various legal
proceedings, arising in the ordinary course of business. The Company may also
be indirectly affected by administrative or court proceedings or actions in
which the Company is not involved but which have general applicability to the
Internet industry. The Company is currently involved in the following matters.
The Company does not believe, based on current knowledge, that any of the
following legal proceedings or claims are likely to have a material adverse
effect on its financial position, results of operations or cash flows. In November 2000, a former employee of the Company filed a lawsuit against
Online Partners.com, Inc., or OLP, and a number of the Companys former employees,
including its current President, Mark Elderkin, and his partner, Jeff Bennett.
The complaint alleges breach of contract, fraud and numerous other business
torts. The plaintiff, Mr. Elderkin and Mr. Bennett were the sole holders of
membership interests in Pridecom LLC, whose assets were assumed by Pridecom
Inc. prior to its acquisition by Online Partners.com, Inc. in 1999. The
plaintiff claims that the membership interest he negotiated in Pridecom LLC
does not accurately represent the value of his contribution to Pridecom LLC or
its successor entities. The plaintiff seeks an unspecified amount of fully
vested stock, along with unspecified compensatory and exemplary damages. In
July 2001, the San Francisco Superior Court ordered the parties to mediate the
case and, if the mediation proved unsuccessful, to arbitrate the case. The
matter was mediated in March 2004, but the Company was unable to reach
agreement with the plaintiff. The Company intends to defend itself vigorously
in this matter and has filed a demand for arbitration. No amount has been recorded for this contingency because the
Company believes that the likelihood of loss is remote. In April 2002, the Company was notified that DIALINK, a French company,
had filed a lawsuit in France against PlanetOut and the Companys French
subsidiary, alleging that the Company had improperly used the domain names
Gay.net, Gay.com and fr.gay.com in France, as DIALINK alleges that it has
exclusive rights to use the word gay as a domain name and trademark in
France. DIALINK seeks an injunction against the use of the word gay as a domain name and monetary damages of 300,000 (approximately US $370,000 at September 30, 2004). The Company estimates
that its range of possible loss is from no loss and no injunction to the full
amount of the plaintiffs prayer for relief. No amount has been recorded for
this contingency because of uncertainty as to the amount that would be required
to be paid, if any. The Company intends to defend itself vigorously in this
matter. 10




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##### Table of Contents



Indemnification In June 2001, the Company entered into an Indemnity Agreement with its
President pursuant to which the Company agreed to indemnify him for certain
costs of defense and damages that might be awarded against him in a lawsuit
brought against him and the Company, among others, by a former employee.
Specifically, the Indemnity Agreement provides that the Company will 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. In
addition, the Company has entered into indemnification agreements
with each of its executive officers and directors. Note 4  Senior Subordinated Promissory Note In May 2004, the Company entered into a $5 million senior subordinated
promissory note with a related party. The note is due on the earlier to occur
of January 18, 2007 or the 30th day after the completion of an initial public
offering with gross proceeds of $30 million or more. The Company may prepay the
note at any time without penalty. The note bears interest at a rate of 11% per
year with interest payable monthly. If the note remains outstanding on January
1, 2007, the interest rate on the note will automatically increase to 22% per
year. The note is currently unsecured, but if in the future the Company fails
to meet certain financial covenants regarding its tangible net worth and the
ratio of its current assets to current liabilities, the note holder will have
the option to take a security interest in all of its assets. In the event that
the note holder takes a security interest in its assets, the interest rate on
the note will be reduced to 8% per annum. In connection with the issuance of
the notes, the Company issued to the purchaser of the note a warrant to
purchase 45,454 shares of its common stock at an exercise price of $0.011 per
share. The terms of the warrant provide that if the entire amount of the senior
subordinated promissory note has not been repaid prior to May 15, 2005, the
number of shares for which the warrant may be exercised shall automatically
increase to 90,908. The Company valued the warrant using the Black-Scholes
option pricing model applying a contractual life of 5 years, weighted average
risk-free interest rate of 3.89%, a dividend yield of 0% and volatility of 75%.
The proceeds of the note is apportioned between the note and the warrant, and
the amount allocated to the warrant of $543,000 is recorded as additional
interest expense over the term of the note. Note 5  Balance Sheet Components December 31,
    
    September 30,2003
    
    2004(unaudited)Property and equipment (in thousands):Computer and network equipment
    
    $
    4,805
    
    
    $
    6,146Furniture and fixtures
    
    
    278
    
    
    
    307Computer software
    
    
    1,090
    
    
    
    1,268Leasehold improvements
    
    
    355
    
    
    
    905Capitalized software and website development costs
    
    
    1,419
    
    
    
    2,3297,947
    
    
    
    10,955Less: Accumulated depreciation and amortization
    
    
    (4,918
    )
    
    
    (6,436
    )$
    3,029
    
    
    $
    4,519 December 31,
    
    September 30,2003
    
    2004(unaudited)Other Assets (in thousands):Restricted cash
    
    $
    30
    
    
    $
    30Non-current assets
    
    
    268
    
    
    
    881Direct expenses associated with the Companys initial public offering
    
    
    
    
    
    
    1,577Interest on note receivable from stockholder
    
    
    144
    
    
    
    180$
    442
    
    
    $
    2,668
 11




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##### Table of Contents



Note 6 Subsequent Events

Initial Public Offering

In
October 2004, the Company completed a public offering
of 5,347,500 shares of common stock, including the exercise of the
underwriters over-allotment option, generating total proceeds of
approximately $44.8 million to
the Company, net of underwriting discounts and commissions. In connection with
the initial public offering, all shares of redeemable convertible preferred
stock converted into 9,646,576 shares of common stock in accordance with the
Companys Certificate of Incorporation.

Senior Subordinated Promissory
Note

On
October 20, 2004,
the Company repaid the senior subordinated promissory
note of $5 million along with accrued interest of $31,000. Debt issuance
cost
of $83,000 and debt discount of $487,000 related to the warrant issued in
connection with the note was recognized as interest expense upon repayment of
the note.

New York Office In November 2004, the Company entered into a five year agreement to
sub-lease approximately 4,800 square feet of office space in New York through
February 2009. The Company plans to move its New York offices during the 4th
quarter of 2004. The future minimum lease payments are $127,000 in 2005;
$131,000 in 2006; $135,000 in 2007; $139,000 in 2008 and $24,000 in 2009. 12




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##### Table of Contents



Item 2. Managements Discussion and Analysis on Financial Condition and
Results of Operations The following discussion should be read in conjunction with the financial
statements and related notes which appear elsewhere in this document. This
discussion contains forward-looking statements that involve risks and
uncertainties. In some cases, you can identify forward-looking
statements by terminology including would,
could, may, will,
should, expect, intend,
plan, anticipate, believe,
estimate, predict, potential or
continue, the negative of these terms or other comparable
terminology. These statements are only predictions. Forward-looking
statements include statements about our business strategy, future
operating performance and prospects. You should not place undue
reliance on these forward-looking statements. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including those discussed below and elsewhere in this document and in
our prospectus filed on October 14, 2004 with the SEC. Overview We are a leading global online media company serving the LGBT community. Our network of
websites, including our flagship websites Gay.com and PlanetOut.com, allows our members to connect
with other members of the LGBT community around the world. We
have incurred significant losses since our inception. As of September 30, 2004, we had an accumulated
deficit of $37.2 million. We expect to incur significant marketing, engineering and technology, general
and administrative and stock-based compensation expenses for the foreseeable future. As a result, we will
need to continue to grow revenue and increase our operating margins to achieve profitability. Results of Operations The following table sets forth the percentage of total revenue represented
by items in our consolidated statements of operations for the periods
presented: Three Months
    
    Nine MonthsEnded
    
    EndedSeptember 30,
    
    September 30,2003
    
    2004
    
    2003
    
    2004(As a percentage of total revenue)Consolidated statement of operations data:Revenue:Subscription services
    
    
    68.1
    %
    
    
    68.6
    %
    
    
    66.4
    %
    
    
    68.1
    %Advertising services
    
    
    24.1
    
    
    
    25.4
    
    
    
    23.1
    
    
    
    24.7Transaction services
    
    
    7.8
    
    
    
    6.0
    
    
    
    10.5
    
    
    
    7.2Total revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Operating costs and expenses:Cost of revenue
    
    
    42.5
    
    
    
    30.8
    
    
    
    36.9
    
    
    
    34.1Sales and marketing
    
    
    41.9
    
    
    
    35.6
    
    
    
    36.6
    
    
    
    34.9General and administrative
    
    
    32.5
    
    
    
    20.0
    
    
    
    24.4
    
    
    
    21.6Depreciation and amortization
    
    
    10.0
    
    
    
    10.2
    
    
    
    10.3
    
    
    
    9.4Total costs and expenses
    
    
    126.9
    
    
    
    96.6
    
    
    
    108.2
    
    
    
    100.0Income (loss) from operations
    
    
    (26.9
    )
    
    
    3.4
    
    
    
    (8.2
    )
    
    
    (0.0
    )Other income (expense), net
    
    
    (1.1
    )
    
    
    (3.6
    )
    
    
    (0.8
    )
    
    
    (2.4
    )Income (loss) before income taxes
    
    
    (28.0
    )
    
    
    (0.2
    )
    
    
    (9.0
    )
    
    
    (2.4
    )Provision for income taxes
    
    
    (0.0
    )
    
    
    (0.3
    )
    
    
    (0.2
    )
    
    
    (0.1
    )Net income (loss)
    
    
    (28.0
    )%
    
    
    (0.5
    )%
    
    
    (9.2
    )%
    
    
    (2.5
    )%
 13




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##### Table of Contents



The
following provides some explanatory information
with respect to our
consolidated statements of operations data:

We derive
our revenue from three main sources: subscription, advertising and transaction
services. For the forseeable future, we expect subscription and advertising
services to remain our largest sources of revenue and to be more of a focus for
our internal operations than transaction services.

Subscription Services.We
charge for subscriptions to our premium
membership services on PlanetOut.com and Gay.com. On both of these websites,
the set of services for which we offer paid premium memberships includes
viewing, searching and replying to profiles, chat, instant messaging and email.
The Gay.com paid premium memberships also include premium chat features, video
chat and premium content. We currently offer Gay.com membership services in six
languages to members who identify themselves as residing in more than 100
countries through Gay.com and localized versions of Gay.com.

During
2003 and 2004, we have priced our premium
membership services as
follows, excluding promotional discounts:

Yearly
    
    Quarterly
    
    Monthly
    
    TrialsPlanetOut
Premium Membership Services
    
    $
    69.95
    
    
    $
    29.95
    
    
    $
    12.95
    
    
    $4.95 3-day trial December
2002 to presentGay.com Premium
Membership Services


Yearly
    
    Quarterly
    
    Monthly
    
    TrialsJanuary 2003 to March 2003
    
    $
    89.95
    
    
    $
    39.95
    
    
    $
    16.95
    
    
    $7.95 7-day trialMarch 2003 to May 2004
    
    $
    79.95
    
    
    $
    39.95
    
    
    $
    16.95
    
    
    $6.95 7-day trial
March 2003 to April 2004$9.95 7-day trial
April 2004 to May 2004May 2004 to October 2004
    
    $
    79.95
    
    
    $
    39.95
    
    
    $
    17.95
    
    
    $9.95 7-day trialOctober 2004 to present
    
    $
    89.95
    
    
    $
    42.95
    
    
    $
    19.95
    
    
    $9.95 7-day trial


In managing our premium membership services, we track a number of operating
metrics, including the following: Premium Membership Service
Operating Metrics
(including free trial promotions) 2002
    
    2003
    
    2004YearEnded
    
    Quarters Ended
    
    YearEnded
    
    Quarters EndedDecember
    
    March
    
    
    
    
    
    September
    
    December
    
    December
    
    March
    
    
    
    
    
    September31
    
    31
    
    June 30
    
    30
    
    31
    
    31
    
    31
    
    June 30
    
    30Total Paid Subscribers
    
    
    80,364
    
    
    
    88,776
    
    
    
    88,103
    
    
    
    91,886
    
    
    
    98,445
    
    
    
    98,445
    
    
    
    105,179
    
    
    
    110,598
    
    
    
    118,392Gross Additions
    
    
    137,098
    
    
    
    39,053
    
    
    
    34,305
    
    
    
    37,167
    
    
    
    40,721
    
    
    
    151,246
    
    
    
    43,064
    
    
    
    38,272
    
    
    
    43,239Total Churn (with
free promotions)
    
    
    112,526
    
    
    
    30,641
    
    
    
    34,978
    
    
    
    33,384
    
    
    
    34,162
    
    
    
    133,165
    
    
    
    36,330
    
    
    
    32,853
    
    
    
    35,445Churn
Rate
(with free
promotions)
    
    
    13.8
    %
    
    
    12.1
    %
    
    
    13.2
    %
    
    
    12.4
    %
    
    
    12.0
    %
    
    
    12.4
    %
    
    
    11.9
    %
    
    
    10.2
    %
    
    
    10.3
    %Net Additions
    
    
    24,572
    
    
    
    8,412
    
    
    
    (673
    )
    
    
    3,783
    
    
    
    6,559
    
    
    
    18,081
    
    
    
    6,734
    
    
    
    5,419
    
    
    
    7,794
 14




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##### Table of Contents



Historically, we have calculated these metrics using the following definitions:  
    
    Total Paid Subscribers: members with an active, paid subscription
plan, excluding paid trial subscribers, at the end of the period.  
    
    Gross Additions: members who initiate a subscription during the
period, excluding paid trial subscriptions. Gross Additions during a
period equals Net Additions plus Total Churn during that period.  
    
    Total Churn: total subscription cancellations during the period,
including cancellations of promotional subscriptions, but excluding
cancellations of paid 3- and 7-day trial subscriptions. Subscription cancellations
include subscriptions cancelled due to failed credit cards.  
    
    Churn Rate: Total Churn divided by the average of the Total
Paid Subscribers measured at the beginning and end of the period, divided by the
number of months in the period.  
    
    Net Additions: Total Paid Subscribers at the end of the period
minus the Total Paid Subscribers at the beginning of the period. Because their terms are generally shorter than the periods that we measure, we
exclude paid trial subscriptions (currently, 3- and 7-day paid trials) from
these operating metrics. Recently, we began testing new promotional offers, including some free trial
promotions. Members who sign up for any of these promotional offers, discounted
or free, provide us with payment information and authorize us to bill them at
our regular premium membership service rates, unless they cancel their
subscriptions prior to the end of their promotional terms. Because these
promotional offers were generally for our annual, monthly, or quarterly
plans and were based on discounted offers, rather than free trials, we have
historically included all cancellations of promotional subscriptions in our
churn calculations. However, as we have expanded our testing of free trial promotions, we have also
examined excluding these promotions from our operating metric definitions.
Because free trial subscribers do not count toward our definition of Total Paid
Subscribers, we believe that excluding them from our definition of
Total Churn provides a more accurate measure of subscriber turnover. As seen in the table below,
excluding these free trial subscribers from these operating metrics reduces our
Gross Additions, Total Churn and Churn Rate, and does not impact our Total
Paid Subscribers or Net Additions. Premium Membership Service
Operating Metrics
(excluding free trial promotions) 2002
    
    2003
    
    2004Year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    YearEnded
    
    Quarters Ended
    
    Ended
    
    Quarters EndedSeptember
    
    December
    
    December
    
    
    
    
    
    
    
    
    
    SeptemberDecember 31
    
    March 31
    
    June 30
    
    30
    
    31
    
    31
    
    March 31
    
    June 30
    
    30Total Paid Subscribers
    
    
    80,364
    
    
    
    88,776
    
    
    
    88,103
    
    
    
    91,886
    
    
    
    98,445
    
    
    
    98,445
    
    
    
    105,179
    
    
    
    110,598
    
    
    
    118,392Gross Additions
    
    
    137,098
    
    
    
    39,053
    
    
    
    34,305
    
    
    
    37,167
    
    
    
    40,721
    
    
    
    151,246
    
    
    
    42,635
    
    
    
    37,582
    
    
    
    41,082Total Churn (excluding
free promotions)
    
    
    112,526
    
    
    
    30,641
    
    
    
    34,978
    
    
    
    33,384
    
    
    
    34,162
    
    
    
    133,165
    
    
    
    35,901
    
    
    
    32,163
    
    
    
    33,288Churn Rate (excluding free promotions)
    
    
    13.8
    %
    
    
    12.1
    %
    
    
    13.2
    %
    
    
    12.4
    %
    
    
    12.0
    %
    
    
    12.4
    %
    
    
    11.8
    %
    
    
    9.9
    %
    
    
    9.7
    %Net Additions
    
    
    24,572
    
    
    
    8,412
    
    
    
    (673
    )
    
    
    3,783
    
    
    
    6,559
    
    
    
    18,081
    
    
    
    6,734
    
    
    
    5,419
    
    
    
    7,794
 Currently, we expect to
provide quarter-to-quarter information about these operating metrics
through the end of 2005. 15




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##### Table of Contents



In addition to revenue from premium membership services, we derive revenue
from subscriptions for print and online versions of our Out&About newsletter.
We publish the newsletter ten times a year and currently anticipate that
December 2004 will be the date of the final printed issue. Revenue from our Out&About
newsletter subscriptions was less than 2% of our total revenue in 2003 and the
first nine months of 2004. For both premium membership and Out&About subscriptions, we are paid
up-front. We recognize subscription revenue ratably over the subscription
period. As of September 30, 2004, deferred revenue related to premium
membership and Out&About subscriptions totaled approximately $2.9 million and
$60,000, respectively. Our subscription revenue is not subject to sales or use
tax in the United States, but is subject to Value Added Tax, or VAT, in the
European Union. Currently, we do not require our subscribers to reimburse us
for VAT and we offset this liability against revenue. Advertising Services.We derive advertising revenue principally from
advertising contracts in which we typically undertake to deliver a minimum
number of impressions to users over a specified time period for a fixed fee.
Advertising rates, measured on a number of bases, including on a cost per
thousand impressions, or CPM, basis, depend on whether the impressions are for
general rotation throughout our network or for targeted audiences through our
newsletter or on our websites. We recognize advertising revenue ratably in the period in which the
advertisement is displayed, provided that we have no significant obligation
remaining and the collection of the resulting receivable is reasonably assured,
at the lesser of the ratio of impressions delivered over the total number of
contracted impressions or the straight-line basis over the term of the
contract. To the extent that we do not provide the contracted number of
impressions during a specific time period, we defer recognition of the
corresponding revenue until the thresholds are achieved. Throughout 2003 and 2004, our primary goals for advertising services
included attracting additional advertisers, diversifying our client base and
increasing average account size. We expect to continue to pursue Fortune 500
companies and other clients and to provide increasingly customized and targeted
advertising campaigns. In addition to revenue from advertisers who place general online
advertisements on our websites, we derive advertising revenue from the sale of
online classified listings, primarily for travel-related businesses, as well as
print advertising, as part of or accompanying our Out&About newsletter. We
expect to expand the scope of our online classifieds listings to include more
non-travel-related businesses. Transaction Services.Our principal source of transaction services
revenue is from sales through Kleptomaniac.com, our e-commerce website and, to
a lesser extent, through our travel website, OutandAbout.com. Through
Kleptomaniac.com, we offer hundreds of products, including DVDs, music CDs and
fashion items, some of which we own and some of which are owned by
third-parties. Revenue from Kleptomaniac.com accounted for approximately 70% of
our transaction services revenue and approximately 6% of our overall revenue in
2003 and approximately 58% of our transaction services revenue and
approximately 4% of our overall revenue
for the first nine months of 2004. For those items that we own, we recognize
revenue when the product is shipped, net of estimated returns. We recognize
commissions for facilitating the sale of third-party products and services when
earned, based on reports provided by the vendors or upon cash receipt if no
reports are provided. Cost of Revenue.Cost of revenue primarily consists of payroll and
related benefits associated with supporting our subscription-based services and
producing and maintaining content for our various websites and newsletters.
Other expenses directly related to generating revenue included in cost of
revenue include transaction processing fees, computer maintenance, allocated
occupancy costs, co-location and Internet connectivity fees, purchased content
and cost of goods sold. We research and test potential improvements to our hardware and software
systems in an effort to improve our productivity and enhance our members
experience. We expect to continue to invest in technology and improvements in
our websites. We believe costs associated with certain projects have ongoing
benefit. If we believe that capitalization criteria have been met, we
capitalize the development costs related to these projects which are amortized
on a straight-line basis over the estimated three year useful life of the
software. The amortization of 16




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capitalized software is included in depreciation and amortization. We
expense the costs associated with these projects only when we believe
capitalization criteria have not been met. Sales and Marketing.Sales and marketing expense consists of expenses
related to selling, marketing and promoting our products and services. Major
expense items include:  
    
    payroll and related benefits for employees involved in sales, client
service, customer service, corporate marketing and other support
functions;  
    
    product and service marketing and promotions;  
    
    general corporate marketing and promotions; and  
    
    allocated occupancy costs. General and Administrative.General and administrative expense consists
primarily of payroll and related benefits for executive, finance and
administrative personnel, allocated occupancy costs, professional fees,
insurance and other general corporate expenses. Occupancy Costs.Each of our cost of revenue, sales and marketing and
general and administrative expense categories include occupancy costs. The
amount of charges from occupancy costs allocated to each of these categories is
based on the headcount associated with each of these categories. In addition,
we allocate to the general and administrative expense category the costs of any
one-time charges associated with lease terminations. Stock-based Compensation and Related Charges.Each of our cost of
revenue, sales and marketing and general and administrative expense categories
include stock-based compensation charges for equity instruments issued to
employees. These charges represent the intrinsic value, if any, between the
respective exercise price of stock options or stock grants and the fair market
value of the underlying stock on the date of grant or reporting date if the
option is subject to variable plan accounting. 17




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At September 30, 2004, we had options to acquire 56,086 shares of our
capital stock subject to variable plan accounting which requires us to measure
the intrinsic value at each reporting date until these options expire, or are
exercised or forfeited. In any period, variable plan accounting may result in
increases or decreases in stock-based compensation, depending on the estimated
fair market value of our capital stock. We amortize deferred stock-based
compensation over the vesting periods of the individual options, using the
multiple option method. Changes in fair market value will result in stock-based
compensation expense or credit in each period. We recognized employee
stock-based compensation expense of $1.6 million in 2003, and $1.7 million in
the first nine months of 2004. At September 30, 2004, we had unearned stock-based compensation of $2.0
million, of which $410,000 will be amortized in 2004, $986,000 will be
amortized in 2005, $480,000 will be amortized in 2006 and $184,000 will be
amortized in 2007. We may recognize additional stock-based compensation expense
in the future if we grant additional options with an exercise price below the
fair market value of our stock. Comparison of the Three Month and Nine Month Periods Ended September 30, 2004
and September 30, 2003 Revenue Total revenue increased approximately 29%, from $13.8 million in the nine
months ended September 30, 2003 to $17.9 million in the nine months ended
September 30, 2004. Total revenue increased approximately 29%, from $4.9
million in the three months ended September 30, 2003 to $6.3 million for the
three months ended September 30, 2004. Subscription Services.From September 30, 2003 to September 30, 2004, the
number of our subscribers grew from approximately 91,900 to approximately
118,400. As a result of this increase, our subscription revenue for the nine
months ended September 30, 2003 and 2004 increased approximately
33%, from $9.2 million to $12.2 million, respectively. Subscription revenue
for the three months ended September 30, 2003, 2004 increased
approximately 30%, from $3.3 million to $4.3 million, respectively. Other
factors that contributed to this change in revenue included:  
    
    an expansion in the number of customer support representatives and their hours of coverage;  
    
    the effect of the increase in marketing and promotional activities that began in the second quarter of 2003; and 18




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
    
    a reduction in revenue from our PlanetOut.com premium
membership service, as we have concentrated more of our marketing
activities on our Gay.com premium membership service. Revenue from our premium membership services made up more than 98% of
subscription revenue in the three and nine months ended September 30, 2003 and 2004. For the foreseeable future, we expect
subscription services to grow and to continue to remain our largest revenue
area. Advertising Services.Our advertising services revenue increased
approximately 38%, from $3.2 million in the nine months ended September 30,
2003 to $4.4 million in the nine months ended September 30, 2004. Advertising
services revenue increased approximately 33%, from $1.2 million in the three
months ended September 30, 2003 to $1.6 million in the three months ended
September 30, 2004. The majority of this increase came from increases in online
advertising revenue on our flagship websites, Gay.com and PlanetOut.com. While
the number of accounts decreased for the nine months ended September 30, 2004
compared to the nine months ended September 30, 2003, the average account size
increased, reflecting efforts to concentrate on large
corporate accounts. Other factors that affected our advertising revenue for the nine
months ended September 30, 2004 as compared to the nine months ended September
30, 2003 included:  
    
    the improvement in the advertising market generally and in the online advertising market specifically;
    
    the increasing interest of advertisers in targeting the LGBT community;
    
    our decision to suspend advertising on our French language website, fr.gay.com, in mid-2003; and
    
    periodic advertising capacity constraints during the nine months
ended September 30, 2004 on the most popular areas of our website
serving the United Kingdom, uk.gay.com. For the foreseeable future, we expect online advertising to grow and to
continue to remain the largest portion of our overall advertising services
revenue. Transaction Services.Our transaction services revenue declined from $1.4
million in the nine months ended September 30, 2003 to $1.3 million in the nine
months ended September 30, 2004. Transaction services revenue remained $0.4
million in the three months ended September 30, 2003 and 2004.
The decline over the nine month period was largely due to
the ongoing shift of internal promotional space on our websites away from
Kleptomaniac.com toward our premium membership services and advertising
services. This decline also reflects the fact that sales on Kleptomaniac.com
were unusually high in the first quarter of 2003 due to the popularity of DVD
compilations that were released in that quarter. Revenue from Kleptomaniac.com
accounted for approximately 58% of transaction services revenue in the first
nine months of 2004 and approximately 70% in the first nine months of 2003.
Transaction revenue from sources other than Kleptomaniac.com, while relatively
small in total dollar amounts, increased for the first nine months of 2004 as
compared to the first nine months of 2003. Operating Costs and Expenses Total operating expenses grew approximately 20%, from $14.9 million in the
nine months ended September 30, 2003 to $17.9 million in the nine months ended
September 30, 2004. These numbers include stock-based compensation expenses of
$1.4 million and $1.7 million in the nine months ended
September 30, 2003 and 2004, respectively. Total operating
expenses decreased approximately 2%, from $6.2 million in the three months
ended September 30, 2003 to $6.1 million in the three months ended September
30, 2004. These numbers include stock-based compensation expenses of $1.6
million and $0.5 million in the three months ended
September 30, 2003 and 2004, respectively. Cost of Revenue.Our cost of revenue increased approximately 20%, from
$5.1 million in the nine months ended September 30, 2003 to $6.1 million in the
nine months ended September 30, 2004. This change was primarily the result of
increases in labor-related expenses associated with increases in headcount and
compensation. In
addition, credit card processing fees increased by $115,000 due 19




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to growth in revenue from subscription services and hardware and software
maintenance expenses increased by $59,000. These increases included
capitalized development expenses of $647,000 in the
first nine months of 2003 and $634,000 in the first nine months of 2004. Cost of
revenue decreased approximately 7%, from $2.1 million in the three months ended
September 30, 2003 to $1.9 million in the three months ended September 30,
2004. This change was primarily the result of decreases in stock-based
compensation of $349,000, offset by increases in labor-related expenses
associated with increases in headcount and compensation. For the foreseeable
future, we expect cost of revenue, exclusive of stock-based compensation
expenses, to increase in absolute dollars as our investment in headcount and
other expenses grow along with our revenue. Sales and Marketing.Our sales and marketing expenses increased
approximately 24%, from $5.0 million in the nine months ended September 30,
2003 to $6.2 million in the nine months ended September 30, 2004. This change
was attributable primarily to expanded investment in promotional activities in
the amount of $862,000 and an increase in labor-related expenses associated
with increases in headcount and compensation of $465,000, including changes in
stock-based compensation expenses of $64,000. Sales and marketing expenses
increased approximately 9%, from $2.1 million in the three months ended
September 30, 2003 to $2.2 million in the three months ended September 30,
2004. This change was attributable primarily to expanded investment in
promotional activities in the amount of $268,000. For the foreseeable future,
we expect sales and marketing expenses, exclusive of stock-based compensation
expenses, to increase in absolute dollars as we expand our investment in
marketing activities. General and Administrative.Our general and administrative expenses
increased approximately 16% from $3.4 million in the nine months ended
September 30, 2003 to $3.9 million in the nine months ended September 30, 2004.
This change was primarily the result of increases in labor-related expenses
associated with increases in headcount and compensation of $687,000, including
changes in stock-based compensation expenses of $204,000. The increase also
includes changes in professional fees of $115,000, reflecting an
increase in
accounting and legal expenses as a result of our decision to become a public company.
General and administrative expenses decreased approximately 19% from $1.6
million in the three months ended September 30, 2003 to $1.3 million in the
three months ended September 30, 2004. This change was primarily the result of
decreases in stock-based compensation of $482,000. For the foreseeable future,
we expect general and administrative expenses, exclusive of stock-based
compensation expenses, to grow due to the expenses associated with being a public
company. Depreciation and Amortization.Our depreciation and amortization expenses
grew by approximately 17%, from $1.4 million in the nine months ended September
30, 2003 to $1.7 million in the nine months ended September 30, 2004.
Depreciation and amortization expenses grew by approximately 32%,
from $488,000 in the three months ended September 30, 2003 to
$645,000 in the three months ended September 30, 2004. For the foreseeable future, we expect
depreciation and amortization costs to increase with the growth of our
investment in hardware, software and capitalized development expenses. Interest expense.Our interest expense grew by approximately 264%, from
$118,000 in the nine months ended September 30, 2003 to $430,000 in the nine
months ended September 30, 2004. Interest expense grew by
approximately 329%, from $56,000 in the three months ended September 30, 2003
to $240,000 in the three months ended September 30, 2004. The change for both
the three month and nine month periods reflects the effect of interest payments
in connection with our senior subordinated promissory note. Liquidity and Capital Resources We have historically financed our operations primarily through private
sales of equity and capitalized leases. During the nine months ended September
30, 2003, net cash provided by operating activities was $1.2 million, and was
primarily attributable to the growth of our premium subscription services,
offset by $1.2 million in payments to settle a lease dispute
related to our former San Francisco headquarters facility. During the nine
months ended September 30, 2004, net cash provided by operating activities was
$2.3 million, and was primarily attributable to the growth of our premium
subscription services, offset by $1.6 million in payments for our lease
settlement. Net cash used in investing activities was $1.0 million for the nine
months ended September 30, 2003, and was primarily attributable to purchases of
property and equipment. Net cash used in investing activities was $2.1 million
for the nine months ended September 30, 2004, and was primarily attributable to
purchases of property and equipment. Net cash used by financing activities in
the nine months ended September 30, 2003 was $595,000 and was primarily
attributable to payments of capitalized lease obligations. Net cash provided by
financing activities in the nine months ended September 30, 2004 was $3.1
million and was primarily attributable to the issuance of our $5.0 million
senior subordinated promissory note in May 2004, net of 20




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expenses related to our offering and payments of capitalized lease
obligations. As of September 30, 2003 and September 30, 2004, we had cash and
cash equivalents of approximately $1.7 million and $5.6 million, respectively. Subsequent to September 30, 2004, we completed our initial public offering in
October 2004. We raised $38.9 million, net of underwriters fees, in the
offering, and an additional $5.8 million in the exercise of the
underwriters
over-allotment option. We also paid off our senior subordinated promissory note in
full, including principle and interest, on October 20, 2004. We intend to use
a portion of the net proceeds from our initial public offering to repay all
outstanding indebtedness under our senior subordinated promissory note and the
balance for working capital and general corporate purposes. We have not
allocated a specific portion of our net proceeds from our initial public
offering to any particular purpose, other than repayment of indebtedness under
our senior subordinated promissory note. The amount and timing of our actual
expenditures will depend on numerous factors, such as the progress of our
development and marketing efforts and the amount of cash used by our other
operations. Thus, we will retain broad discretion over the use of the net
proceeds from our initial public offering. Our capital requirements depend on many factors, including growth of our
revenue, the resources we devote to developing, marketing and selling our
services, the timing and extent of our introduction of new features and
services, the extent and timing of potential investments or acquisitions and
other factors. In particular, our premium membership services consist of
prepaid subscriptions that provide cash flows in advance of the actual
provision of services. We expect to devote substantial capital resources to
expand our product development and marketing efforts, to expand internationally
and for other general corporate activities. In the nine months ended September
30, 2004, we devoted $634,000 to investment in product development and $1.8
million to external marketing of our products and services both domestically
and internationally. Based on our current operations and planned growth, we expect that our
available funds and anticipated cash flows from operations, together with the
proceeds from our initial public offering, will be sufficient to meet our
expected needs for working capital and capital expenditures for the next twelve
months. Thereafter, if we do not have sufficient cash available to finance our
operations, we may be required to obtain additional public or private debt or
equity financing. We cannot be certain that additional financing will be
available to us on favorable terms when required or at all. If we are unable to
raise sufficient funds, or if this offering is not consummated, we may need to
reduce our planned operations and expansion activities. Off-balance Sheet Liabilities We did not have any off-balance sheet liabilities as of September 30,
2004. Other Contractual Commitments The following table summarizes our contractual obligations as of September
30, 2004, excluding the redemption value attributable to our series D and E
preferred stock which converted into common stock at the time of the
closing of our initial
public offering in October 2004, and the effect that these obligations are expected to have on
our liquidity and cash flows in future periods: Payments Due by PeriodRemainder of
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    2004
    
    2005-2007
    
    2008-2009
    
    2010(In thousands)Contractual obligations:Capital lease obligations
    
    $
    1,866
    
    
    $
    454
    
    
    $
    1,314
    
    
    $
    98
    
    
    $
    Operating leases
    
    
    9,696
    
    
    
    136
    
    
    
    3,720
    
    
    
    2,773
    
    
    
    3,067Purchase obligations
    
    
    465
    
    
    
    93
    
    
    
    372
    
    
    
    
    
    
    
    Senior subordinated promissory note(1)
    
    
    5,000
    
    
    
    5,000
    
    
    
    
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    17,027
    
    
    $
    5,683
    
    
    $
    5,406
    
    
    $
    2,871
    
    
    $
    3,067
   (1)
    
    Our senior subordinated promissory note was due on the earlier of January
2007 or thirty days after the completion of our initial public offering
and the note was paid in full on October 20, 2004. 21




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Capital Lease Obligations.We hold property and equipment under
noncancelable capital leases with varying maturities. Operating Leases.We lease or sublease office space and equipment under
noncancelable operating leases with various expiration dates through
January 20, 2012. In 2002, we terminated our headquarters lease which resulted in a
decrease in our rent expense in 2003 and the first quarter of 2004. In July
2004, we entered into a new lease for our executive headquarters. The new lease
is for a larger facility at a higher average cost per square foot and will
result in an increase in our current occupancy cost. In addition, in
November 2004, we entered into a five year agreement to
sub-lease approximately 4,800 square feet of office space in New York through
February 2009. We plan to move our New York offices during the 4th
quarter of 2004. The future minimum lease payments are $127,000 in 2005;
$131,000 in 2006; $135,000 in 2007; $139,000 in 2008 and $24,000 in 2009. Purchase Obligations.In January 2002, we entered into a co-location
facility agreement with a third party service provider. In exchange for
providing space for our network servers and committed levels of
telecommunications bandwidth, we pay a minimum monthly fee of $31,000. In the
event that bandwidth exceeds an allowed variance from committed levels, we pay
for additional bandwidth at a set monthly rate. Future total minimum payments under
the co-location facility agreement are $372,000 for 2005. 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.Subscription and transaction services are generally
paid for upfront by credit card, subject, in some cases, to cancellations by
subscribers or charge backs from transaction processors. We also provide
limited return rights in connection with our transaction services. We base the
recognition of premium subscription and transaction services revenue on our
assessment of the estimated rates of cancellations, charge backs and returns
which historically have been insignificant. We base the recognition of
advertising services revenue partly on our assessment of the probability of
collection of the resulting accounts receivable balance. As a result, the
timing and amount of revenue recognition may vary if we use different
assessments of the probability of collection of accounts receivable and the
rates of cancellations, charge backs and returns. 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. Our allowance for doubtful accounts as of
September 30, 2004 was $48,000. We
have recorded a full valuation allowance of $15.2 million as of
September 30, 2004 against our deferred tax assets due to uncertainties related
to our ability to realize the benefit of our deferred tax assets primarily from
our net operating losses. In the future, if we generate sufficient taxable
income and we determine that we would be able to realize our deferred tax
assets, an adjustment to the valuation allowance would impact the results of
operations in that period. Goodwill and Other Long-lived Assets.Our long-lived assets include
goodwill, intangibles, property and equipment. We are required to test goodwill
for impairment on an annual basis and between annual tests in certain
circumstances. Application of the goodwill impairment test requires judgment in
determining the fair value of the enterprise. We complete our annual test as of
December 1 and any impairment losses recorded in the future could have a
material adverse impact on our financial condition and results of operations. 22




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We are required to record an impairment charge on intangibles or
long-lived assets to be held and used when we determine that the carrying value
of these assets may not be recoverable. Based on the existence of one or more
indicators of impairment, we measure any impairment based on a projected
discounted cash flow method using a discount rate that we determine to be
commensurate with the risk inherent in our business model. Our estimates of
cash flow require significant judgment based on our historical results and
anticipated results and are subject to many factors. Capitalized Website Development Costs.We capitalize the costs of
enhancing and developing features for our websites when we believe that the
capitalization criteria for these activities have been met and amortize these
costs on a straight-line basis over the estimated useful life, generally three
years. For 2003 and the three and nine months ended
September 30, 2004, we capitalized
$855,000, $153,000 and $634,000, respectively. We expense the cost of enhancing and
developing features for our websites in cost of revenue only when we believe
that capitalization criteria have not been met. We exercise judgment in
determining when to begin capitalizing costs and the period over which we
amortize the capitalized costs. If different judgments were made, it would have
an impact on our results of operations. Seasonality and Inflation We anticipate that our business may be affected by the seasonality of
certain revenue lines. For example, print and online advertising buys are
usually higher approaching year-end and lower at the beginning of a new year
than at other points during the year, and sales on Kleptomaniac.com are
affected by the holiday season and by the timing of the release of compilations
of new seasons of popular television series. Inflation has not had a significant effect on our revenue or expenses
historically and we do not expect it to be a significant factor in the
short-term. However, inflation may affect our business in the medium- to
long-term. In particular, our operating expenses may be affected by a
tightening of the job market, resulting in increased pressure for salary
adjustments for existing employees and higher cost of replacement for employees
that are terminated or resign. Recent Accounting Pronouncements In March 2004, the FASB issued a proposed Statement, Share-Based Payment,
that addresses the accounting for share-based payment transactions in which an
enterprise receives employee services in exchange for (a) equity instruments of
the enterprise or (b) liabilities that are based on the fair value of the
enterprises equity instruments or that may be settled by the issuance of such
equity instruments. The proposed Statement would eliminate the ability to
account for share-based compensation transactions using APB Opinion No. 25 and
generally would require instead that such transactions be accounted for using a
fair-value-based method. If adopted in its current form, the proposed Statement
would be effective for fiscal years beginning after June 15, 2005. In April 2004, the EITF issued Statement No. 03-06 Participating
Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per
Share (EITF 03-06). EITF 03-06 addresses a number of questions regarding the
computation of earnings per share by companies that have issued securities
other than common stock that contractually entitle the holder to participate in
dividends and our earnings when, and if, it declares dividends on its common
stock. The issue also provides further guidance in applying the two-class
method of calculating earnings per share, clarifying what constitutes a
participating security and how to apply the two-class method of computing
earnings per share once it is determined that a security is participating,
including how to allocate undistributed earnings to such a security. EITF 03-06
is effective for fiscal periods beginning after March 31, 2004. The adoption of
this standard did not have any impact on the resulting earnings per share of
the periods presented. Risk Factors The
risks and uncertainties described below are not the only ones we
face. Additional risks and uncertainties not presently known to us or
that are currently deemed immaterial may also affect our business, financial conditions and results of operations. These risks should
be read in conjunction with the other information set forth in this
Form 10-Q and our prospectus filed on October 14,
2004. 23




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We have a history of significant
losses. If we do not achieve or sustain
profitability, our financial condition and stock price could suffer. We have experienced significant net losses and we may continue to incur
losses for the foreseeable future given our anticipated increase in sales and
marketing expenditures. We incurred net losses of approximately $16.5 million,
$7.9 million and $0.8 million for the years ended December 31, 2001, 2002 and
2003, respectively. As of September 30, 2004, our accumulated deficit was
approximately $37.2 million. We have not yet achieved profitability. If our
revenue grows more slowly than we anticipate, or if our operating expenses are
higher than we expect, we may not be able to achieve, sustain or increase
profitability in the near future or at all, our financial condition will suffer
and our stock price could decline. If our efforts to attract and retain subscribers are not successful, our
revenue will decrease. Because most of our revenue is derived from our premium membership
services, we must continue to attract and retain subscribers. Many of our new
subscribers originate from word-of-mouth referrals from existing subscribers
within the LGBT community. If our subscribers do not perceive our service
offerings to be of high quality or sufficient breadth, if we introduce new
services that are not favorably received or if we fail to introduce compelling
new features or enhance our existing offerings, we may not be able to attract
new subscribers or retain our current subscribers. 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 service for
many reasons, including a perception, among some subscribers, that they do not
use the service sufficiently, that the service is a poor value and that
customer service issues are not satisfactorily resolved. We must continually
add new subscribers both to replace subscribers who cancel or whose
subscriptions are not renewed due to credit card failures and to continue to
grow our business beyond our current subscriber base. If excessive numbers of
subscribers cancel our service, we may be required to incur significantly
higher marketing expenditures than we currently anticipate to replace these
subscribers with new subscribers, which will harm our financial condition. Our success depends, in part, upon the growth of Internet advertising and upon
our ability to accurately predict the cost of customized campaigns. We compete with traditional media including television, radio and print,
in addition to high-traffic websites, such as those operated by Yahoo!, Google,
AOL and MSN, for a share of advertisers total online advertising expenditures.
We face the risk that advertisers might find the Internet to be less effective
than traditional media in promoting their products or services, and as a result
they may reduce or eliminate their expenditures on Internet advertising. Many
potential advertisers and advertising agencies have only limited experience
advertising on the Internet and historically have not devoted a significant
portion of their advertising expenditures to Internet advertising.
Additionally, filter software programs that limit or prevent advertisements
from being displayed on or delivered to a users computer are becoming
increasingly available. If this type of software becomes widely accepted, it
would negatively affect Internet advertising. Our business could be harmed if
the market for Internet advertising does not grow. Currently, we offer advertisers a number of alternatives to advertise
their products or services on our websites and to our members, including banner
advertisements, rich media advertisements, email campaigns, text links and
sponsorships of our channels, topic sections, directories and other online
databases and content. Frequently, advertisers request advertising campaigns
consisting of a combination of these offerings, including some that may require
custom development. If we are unable to accurately predict the cost of
developing these custom campaigns for our advertisers, our expenses will
increase and our margins will be reduced. If advertisers do not find the LGBT market to be economically profitable,
our business will be harmed. We focus our services exclusively on the LGBT community. Advertisers and
advertising agencies may not consider the LGBT community to be a broad enough
or profitable enough market for their advertising budgets, and they may prefer
to direct their online advertising expenditures to larger high-traffic websites
that focus on broader 24




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markets. If we are unable to attract new advertisers, if our advertising
campaigns are unsuccessful with the LGBT community or if our existing
advertisers do not renew their contracts with us, our revenue will decrease and
operating results will suffer. Our limited operating history makes it difficult to evaluate our business. As a result of our recent growth and limited operating history, it is
difficult to forecast our revenue, gross profit, operating expenses, number of
subscribers and other financial and operating data. Our inability, or the
inability of the financial community at large, to accurately forecast our
operating results could cause our net losses to be greater than expected, which
could cause a decline in the trading price of our common stock. 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. Any significant disruption in service on our websites or in our computer
and communications hardware and software systems could harm our business. Our ability to attract new visitors, members, subscribers, advertisers and
other customers to our websites is critical to our success and largely depends
upon the efficient and uninterrupted operation of our computer and
communications hardware and software systems. Our systems and operations are
vulnerable to damage or interruption from power outages, computer and
telecommunications failures, computer viruses, security breaches, catastrophic
events and errors in usage by our employees and customers, which could lead to
interruption in our service and operations, and loss, misuse or theft of data.
Our websites could be also targeted by direct attacks intended to cause a
disruption in service or to siphon off customers to other Internet services.
Among other risks, our chat rooms may be vulnerable to infestation by software
programs or scripts that we refer to as adbots. An adbot is a software program
that creates a registration profile, enters a chat room and displays
third-party advertisements. 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. 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 currently do not offer alternative payment options and cannot guarantee
that our security measures will effectively prohibit others from obtaining
improper access to our information or that of our users. If a person is able to
circumvent our security measures, he or she could destroy or steal valuable
information or disrupt our operations. Any security breach could expose us to
risks of data loss, litigation and liability and may significantly disrupt our
operations and harm our reputation, operating results or financial condition. If we are unable to provide satisfactory customer service, we could lose
subscribers. Our ability to provide satisfactory customer service depends, to a large
degree, on the efficient and uninterrupted operation of our customer service
center. Any significant disruption or slowdown in our ability to process
customer calls resulting from telephone or Internet failures, power or service
outages, natural disasters or other events could make it difficult or
impossible to provide adequate customer service and support. Further, we may be
unable to attract and retain adequate numbers of competent customer service
representatives, which is essential in creating a favorable interactive
customer experience. If we are unable to continually provide adequate staffing
for our customer service operations, our reputation could be harmed and we may
lose existing and potential subscribers. In addition, we cannot assure you that
email and telephone call volumes will not exceed our present system capacities.
If this occurs, we could experience delays in responding to customer inquiries
and addressing customer concerns. 25




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If we are unable to compete effectively, we may lose market share and our
revenue may decline. Our markets are intensely competitive and subject to rapid change. We
compete with a number of large and small companies, such as vertically
integrated Internet portals and specialty focused media that provide online and
offline products and services to the LGBT community. In our subscription
business, we compete with other online services, such as those offered by
Match.com and Yahoo! Personals, as well as a number of other smaller online
companies focused specifically on the LGBT community. In our online advertising
business, we compete with a broad variety of content providers. We also compete
with offline LGBT media companies, including local newspapers, national and
regional magazines, satellite radio and television shows. If we are unable to
successfully compete with current and new competitors, we may not be able to
achieve or maintain adequate market share, increase our revenue or achieve and
maintain profitability. Some of these competitors have longer operating histories, larger customer
bases, greater brand recognition and significantly greater financial, marketing
and other resources than we do. Some of our competitors have adopted, and may
continue to adopt, aggressive pricing policies and devote substantially more
resources to marketing and technology development than we do. The rapid growth
of our online subscription business since our inception may attract direct
competition from larger companies with significantly greater financial
resources and national brand recognition, such as InterActiveCorp, Microsoft,
Time Warner, Viacom or Yahoo! which may choose to increase their focus on the
LGBT market. Increased competition may result in reduced operating margins,
loss of market share and reduced revenue. 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 managements 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. If we are unable to protect our domain names, our reputation and brand
could be harmed if third parties gain rights to, or use, these domain names in
a manner that would confuse or impair our ability to attract and retain
customers. We have registered various domain names relating to our brand, including
Gay.com, PlanetOut.com, Kleptomaniac.com and OutandAbout.com. If we fail to
maintain these registrations, a third party may be able to gain rights to 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, 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
brand and other intangible assets may be diminished, competitors may be able to
more effectively mimic our service and methods of operations, the perception of
our business and service to subscribers 26




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and potential subscribers may become confused in the marketplace and our
ability to attract subscribers and other customers may suffer, resulting in
loss of revenue. The Internet content delivery market is characterized by frequent
litigation regarding patent and other intellectual property rights. As a
publisher of online content, we face potential liability for negligence,
copyright, patent or trademark infringement or other claims based on the nature
and content of materials that we publish or distribute. For example, we have
received, and may receive in the future, notices or offers from third parties
claiming to have intellectual property rights in technologies that we use in
our businesses and inviting us to license those rights. Litigation may be
necessary in the future to enforce our intellectual property rights, to protect
our trade secrets, to determine the validity and scope of the proprietary
rights of others or to defend against claims of infringement or invalidity, and
we may not prevail in any future litigation. Adverse determinations in
litigation could result in the loss of our proprietary rights, subject us to
significant liabilities, require us to seek licenses from third parties or
prevent us from licensing our technology or selling our products, any of which
could seriously harm our business. An adverse determination could also result
in the issuance of a cease and desist order, which may force us to discontinue
operations through our website or websites. 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. If we fail to manage our growth, including through acquisitions and our
planned international expansion, our business will suffer. We have significantly expanded our operations, and anticipate that further
expansion, including the possible acquisition of third-party assets,
technologies or businesses, will be required to address potential growth in our
customer base and market opportunities. This expansion has placed, and is
expected to continue to place, a significant strain on our management,
operational and financial resources. If we make future acquisitions or continue
to expand our marketing efforts, we may issue shares of stock that dilute the
interests of our other stockholders, expend cash, incur debt, assume contingent
liabilities, create additional expenses or face difficulties in integrating
acquired assets or businesses into our operations, any of which might harm our
financial condition or results of operations. In addition, we offer services and products to the LGBT community outside
the United States, and we intend to continue to expand our international
presence, which may be more difficult or take longer than anticipated
especially due to international challenges, such as language barriers, currency
exchange issues and the fact that Internet infrastructure in foreign countries
may be less advanced than Internet infrastructure in the United States.
Expansion into international markets requires significant resources that we may
fail to recover by generating additional revenue. If we are unable to successfully expand our international operations,
manage growth effectively or successfully integrate any assets, technologies or
businesses that we may acquire, our revenue may decline and our profit margins
will be reduced. Existing or future government regulation in the United States and other
countries could limit our growth and result in loss of revenue. We are subject to federal, state, local and international laws affecting
companies conducting business on the Internet, including user privacy laws,
regulations prohibiting unfair and deceptive trade practices and laws
addressing issues such as freedom of expression, pricing and access charges,
quality of products and services, taxation, advertising, intellectual property
rights and information security. In particular, we are currently required, or
may in the future be required, to:  
    
    provide advance notice of any changes to our privacy policies or to
our policies on sharing non-public information with third parties, and
if our members or subscribers disagree with these policies or changes,
they may cancel their membership or subscription, which will reduce our
revenue;
    
    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 dont share their information, our advertising revenue that we
receive from renting our mailing list to unaffiliated third parties may
decline; 27




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
    
    provide notice to residents in some states if their personal
information was, or is reasonably believed to have been, obtained by an
unauthorized person such as a computer hacker, which may result in our
members or subscribers deciding to cancel their membership or
subscription, reducing our membership base and subscription revenue;
    
    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;
    
    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, 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. The restrictions imposed by, and costs of complying with, current and
possible future laws and regulations related to our business could limit our
growth and reduce our membership base and revenue. 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 VAT. These rules require VAT to be charged on products and
services delivered over electronic networks, including software and computer
services, as well as information and cultural, artistic, sporting, scientific,
educational, entertainment and similar services. These services are now being
taxed in the country where the purchaser resides rather than where the supplier
is located. Historically, suppliers of digital products and services that
existed outside the European Union were not required to collect or remit VAT on
digital orders made to purchasers in the European Union. With the
implementation of these rules, we are required to collect and remit VAT on
digital orders received from purchasers in the European Union, effectively
reducing our revenue by the VAT amount because we currently do not pass this
cost on to our customers. We also do not currently collect sales, use or other similar taxes for
sales of our subscription services or for physical shipments of goods into
states other than California. In the future, one or more local, state or
foreign jurisdictions may seek to impose sales, use or other tax collection
obligations on us. If these obligations are successfully imposed upon us by a
state or other jurisdiction, we may suffer decreased sales into that state or
jurisdiction as the effective cost of purchasing goods or services from us will
increase for those residing in these states or jurisdictions. If we do not continue to attract and retain qualified personnel, we may
not be able to expand our business. Our success depends on the collective experience of our senior executive
team and on our ability to hire, train, retain and manage other highly skilled
employees. Disruptions in our senior executive team could harm our business and
financial results or limit our ability to grow and expand our business. We
cannot assure you 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. 28




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We may need additional capital and may not be able to raise additional funds on
favorable terms or at all, which could increase our costs, limit our ability to
grow and dilute the ownership interests of existing stockholders. We anticipate that we may need to raise additional capital in the future
to facilitate long-term expansion, to respond to competitive pressures or to
respond to unanticipated financial requirements. We cannot be certain that we
will be able to obtain additional financing on commercially reasonable terms or
at all. If we raise additional funds through the issuance of equity,
equity-related or debt securities, these securities may have rights,
preferences or privileges senior to those of the rights of our common stock,
and our stockholders will experience dilution of their ownership interests. A
failure to obtain additional financing or an inability to obtain financing on
acceptable terms could require us to incur indebtedness that has high rates of
interest or substantial restrictive covenants, issue equity securities that
will dilute the ownership interests of existing stockholders, or scale back, or
fail to address opportunities for expansion or enhancement of, our operations.
We cannot assure you that we will not require additional capital in the near
future. Our executive offices and our data center are located in the San Francisco
Bay area. In the event of an earthquake, other natural or man-made disaster or
power loss, our operations could be interrupted, resulting in lower revenue. Our executive offices and our data center are located in the San Francisco
Bay area. Our business and operations could be disrupted in the event of
electrical blackouts, fires, floods, earthquakes, power losses,
telecommunications failures, break-ins or similar events. Because the San
Francisco Bay area is located in an earthquake-sensitive area, we are
particularly susceptible to the risk of damage to, or total destruction of, our
systems and infrastructure. We are not insured against any losses or expenses
that arise from a disruption to our business due to earthquakes. Further, the
State of California has experienced deficiencies in its power supply over the
last few years, resulting in occasional rolling blackouts. If rolling blackouts
or other disruptions in power occur, our business and operations could be
disrupted, and we will lose revenue. Provisions in our charter documents and under Delaware law could
discourage a takeover that stockholders may consider favorable. Our charter documents may discourage, delay or prevent a merger or
acquisition that a stockholder may consider favorable because they will:  
    
    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
business combination with any holder of 15% or more of its capital stock unless
the holder has held the stock for three years or, among other things, the board
of directors has approved the transaction. Our board of directors could rely
on Delaware law to prevent or delay an acquisition of us. Our stock price may be volatile and you may lose all or part of your
investment. The market price of our common stock may be subject to significant
fluctuations. It is possible that in some future periods our results of
operations may be below the expectations of securities analysts and investors.
If this occurs, our stock price will decline. 29




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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 companys
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 managements attention. We cannot
assure that you will receive a positive return on your investment when you sell
your shares or that you will not lose the entire amount of your investment. 
 Item 3. Qualitative and Quantitative Disclosures About Market Risk We do not use derivative financial instruments in our investment portfolio
and have no foreign exchange contracts. Our financial instruments consist of
cash and cash equivalents, trade accounts receivable, accounts payable and
long-term obligations. We consider investments in highly-liquid instruments
purchased with a remaining maturity of 90 days or less at the date of purchase
to be cash equivalents. Our exposure to market risk for changes in interest
rates relates primarily to our short-term investments and short-term
obligations; thus, fluctuations in interest rates would not have a material
impact on the fair value of these securities. A hypothetical 1% increase or
decrease in interest rates would not have a material impact on our earnings or
loss, or the fair market value or cash flows of these instruments. Our
operations have been conducted primarily in the United States
currency and as such have not been subject to material foreign
currency exchange rate risk. However, the growth in our international
operations is increasing our exposure to foreign currency
fluctuations as well as other risks typical of international
operations, including, but not limited to differing economic
conditions, changes in political climate, differing tax structures
and other regulations and restrictions. Accordingly, our future
results could be materially adversely impacted by changes in these or
other factors. We translate income statement amounts that are
denominated in foreign currency into U.S. dollars at the average
exchange rates in each applicable period. To the extent the
U.S. dollar weakens against foreign currencies, the translation
of these foreign currency denominated transactions results in
increased net revenues, operating expenses and net income. Conversely,
our net revenues, operating expenses and net income will decrease
when the U.S. dollar strengthens against foreign currencies. We
do not currently have a currency hedging program to mitigate the
effect of fluctuations of currency prices on our financial results. 
 Item 4. Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. As of September 30, 2004, the end of the period covered by this report, we
carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer and our Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on the foregoing, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and
procedures were effective at the reasonable-assurance level. There has been no change in our internal controls over financial reporting
during our most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting. 30




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PART II  OTHER INFORMATION 
 Item 1. Legal Proceedings We
are not currently subject to any material legal proceedings.
We may from time to time, however, become a party to various legal
proceedings, arising in the ordinary course of business. We may also
be indirectly affected by administrative or court proceedings or actions in
which we are not involved but which have general applicability to the
Internet industry. We are currently involved in the following matters.
We do not believe, based on current knowledge, that any of the
following legal proceedings or claims are likely to have a material adverse
effect on our financial position, results of operations or cash flows. In November 2000, a former employee of the Company filed a lawsuit against
OLP and a number of the Companys former employees,
including its current President, Mark Elderkin, and his partner, Jeff Bennett.
The complaint alleges breach of contract, fraud and numerous other business
torts. The plaintiff, Mr. Elderkin and Mr. Bennett were the sole holders of
membership interests in Pridecom LLC, whose assets were assumed by Pridecom
Inc. prior to its acquisition by OLP in 1999. The
plaintiff claims that the membership interest he negotiated in Pridecom LLC
does not accurately represent the value of his contribution to Pridecom LLC or
its successor entities. The plaintiff seeks an unspecified amount of fully
vested stock, along with unspecified compensatory and exemplary damages. In
July 2001, the San Francisco Superior Court ordered the parties to mediate the
case and, if the mediation proved unsuccessful, to arbitrate the case. The
matter was mediated in March 2004, but we were unable to reach
agreement with the plaintiff. We intend to defend ourselves vigorously in this matter and filed a demand for arbitration.
No amount has been recorded for this contingency because we believe
that the likelihood of loss is remote. In
April 2002, we were notified that DIALINK, a French company,
had filed a lawsuit in France against PlanetOut and our French
subsidiary, alleging that we had improperly used the domain names
Gay.net, Gay.com and fr.gay.com in France, as DIALINK alleges that it has
exclusive rights to use the word gay as a domain name and trademark in
France. DIALINK seeks an injunction against the use of the word gay as a
domain name and monetary damages of 300,000. We estimate that
our
range of possible loss is from no loss and no injunction to the full amount of
the plaintiffs prayer for relief. No amount has been recorded for this
contingency because of uncertainty as to the amount that would be required to
be paid, if any. We intend to defend ourselves vigorously in this
matter. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. During the period July 1 through September 30, 2004, we issued options to
purchase an aggregate of 31,816 shares of capital stock, all of which at an
exercise price of $13.42, under the our equity incentive plans. During the same
period, a total of 17,550 shares of capital stock were issued upon exercise of
outstanding options, at exercise prices ranging from $0.44 to
$4.07 per
share, under our equity incentive plans. There were no underwriters employed in
connection with any of these issuances. These issuances were deemed exempt from
registration under the Securities Act in reliance on Section 4(2) or Rule 701
promulgated thereunder as transactions pursuant to compensatory benefit plans
and contracts relating to compensation. The recipients in each such issuance
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and other
instruments issued in such transactions. All recipients either received
adequate information about PlanetOut or had access, through employment or other
relationships, to such information. On October 13, 2004, a registration statement on Form S-1 (No. 333-114988) was
declared effective by the Securities and Exchange Commission, pursuant to which
5,347,500 shares of common stock were offered and sold by us at a price of
$9.00 per share, generating total proceeds, net of underwriting discounts and
commissions, of approximately $44.8 million.
In connection with the offering, we incurred approximately $2.9 million in
underwriting discounts and commissions and approximately $1.8 million in other
related expenses. The managing underwriters were SG Cowen & Co., LLC, RBC
Capital Markets Corporation and WR Hambrecht + Co, LLC. From the time of
receipt, we have used the net proceeds from our initial public offering to
invest in short-term, investment grade interest-bearing securities, to pay off
the principal and interest under our senior subordinated promissory note and
for working capital needs. The net proceeds of the initial public offering will
be used for general corporate purposes, including working capital. We may use a
portion of the net proceeds to acquire or invest in products and technologies
that are complementary to our own, although no portion of the net
proceeds has been allocated for any specific acquisition. None of the net
proceeds of the initial public offering were paid directly or indirectly to any
director, officer, general partner of PlanetOut or their associates, persons
owning 10% or more of any class of equity securities of the Company, or an
affiliate of the Company. We expect that our use of proceeds from the offering
will conform to the intended use of proceeds as described in our initial public
offering prospectus filed on October 14, 2004. Issuer Purchases of Equity Securities. (c) Total Number of
    
    (d) Maximum Number (or(a) Total
    
    
    
    
    
    Shares Purchased as
    
    Approximate Dollar Value)Number of
    
    (b) Average
    
    Part of Publicly
    
    of Shares that May Yet BeShares
    
    Price Paid per
    
    Announced Plans or
    
    Purchased Under the PlansPeriod
    
    Purchased (1)
    
    Share
    
    Programs
    
    or ProgramsJuly 1, 2004  July
31, 2004
    
    
    1,449
    
    
    $
    0.43
    
    
    
    
    August 1, 2004 
August 31, 2004
    
    
    258
    
    
    $
    0.43
    
    
    
    
    September 1, 2004 
September 30, 2004
    
    
    6,382
    
    
    $
    0.43
    
    
    
    
    Total
    
    
    8,089
    
    
    $
    0.43
    
    
    
    
    
 31




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(1) All of the repurchases were pursuant to contractual rights of PlanetOut to
repurchase shares of its capital stock from employees in connection with the
termination of employment. PlanetOut does not have any publicly announced plans
or programs to repurchase shares of its common stock. All share and
per share amounts have been adjusted to reflect the reverse stock
split in July 2004 and the conversion of all preferred stock at the
time of our initial public offering in October 2004. 
 Item 3. Defaults Upon Senior Securities. Not Applicable. 
 Item 4. Submission of Matters to a Vote of Security Holders. Not Applicable. 
 Item 5. Other Information. Not Applicable. 
 Item 6. Exhibits (a) Exhibits EXHIBITNUMBER
    
    DESCRIPTION OF DOCUMENTS3.1
    
    
    (1
    )
    
    Amended and Restated Certificate of Incorporation, as currently in effect.3.2
    
    
    (2
    )
    
    Amended and Restated Bylaws, as currently in effect.4.1
    
    
    (3
    )
    
    Specimen of Common Stock Certificate.31.1
    
    
    
    
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    
    
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    
    
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    
    
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   (1)
    
    Filed as Exhibit 3.3 to our Registration Statement on Form S-1, File No. 333-114988,
initially filed on April 29, 2004, declared effective on October 13, 2004, and
incorporated herein by reference.(2)
    
    Filed as Exhibit 3.4 to our Registration Statement on Form S-1, File No. 333-114988,
initially filed on April 29, 2004, declared effective on October 13, 2004, and
incorporated herein by reference.(3)
    
    Filed as Exhibit 4.1 to our Registration Statement on Form S-1, File No. 333-114988,
initially filed on April 29, 2004, declared effective on October 13, 2004, and
incorporated herein by reference. 32




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. Date:
November 22, 2004
    
    
    
    
    
    PLANETOUT INC.By:
    
    /s/ Jeffrey T. SoukupJeffrey T. SoukupChief Financial Officer(Principal Financial and Accounting Officer)




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EXHIBIT INDEX EXHIBITNUMBER
    
    DESCRIPTION OF DOCUMENTS3.1
    
    
    (1
    )
    
    Amended and Restated Certificate of Incorporation, as currently in effect.3.2
    
    
    (2
    )
    
    Amended and Restated Bylaws, as currently in effect.4.1
    
    
    (3
    )
    
    Specimen of Common Stock Certificate.31.1
    
    
    
    
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    
    
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    
    
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    
    
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    (1)
    
    Filed as Exhibit 3.3 to our Registration Statement on Form S-1, File No. 333-114988,
initially filed on April 29, 2004, declared effective on October 13, 2004, and
incorporated herein by reference.(2)
    
    Filed as Exhibit 3.4 to our Registration Statement on Form S-1, File No. 333-114988,
initially filed on April 29, 2004, declared effective on October 13, 2004, and
incorporated herein by reference.(3)
    
    Filed as Exhibit 4.1 to our Registration Statement on Form S-1, File No. 333-114988,
initially filed on April 29, 2004, declared effective on October 13, 2004, and
incorporated herein by reference.