##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended: September 30, 2005
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ___to___
 Commission File Number: 000-50879
 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
  þ o
 o þ
 o þ
    Page 1




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##### Table of Contents



PlanetOut Inc.
INDEX
Form 10-Q
For the Quarter ended September 30, 2005
 PAGEPART I  FINANCIAL INFORMATION
    
    
    3Item 1 Unaudited Condensed Consolidated Financial Statements
    
    
    3Unaudited Condensed Consolidated Balance Sheets as of December 31, 2004 and September 30, 2005
    
    
    3Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2004 and 2005 and the Nine Months Ended September 30, 2004 and 2005
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2005
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2 Managements Discussion and Analysis on Financial Condition and Results of Operations
    
    
    11Item 3 Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 4 Controls and Procedures
    
    
    28PART II  OTHER INFORMATION
    
    
    29Item 1 Legal Proceedings
    
    
    29Item 2 Unregistered Sales of Equity Securities And Use of Proceeds
    
    
    29Item 3 Defaults Upon Senior Securities
    
    
    30Item 4 Submission of Matters to a Vote of Security Holders
    
    
    30Item 5 Other Information
    
    
    30Item 6 Exhibits
    
    
    31SIGNATURES
    
    
    32EXHIBIT INDEX
    
    
    33EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
 Page 2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 PlanetOut Inc.
 
 Item 1. Unaudited Condensed Consolidated Financial Statements
 
 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands, except per share amount)
 December 31,
    
    
    September 30,2004
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    43,128
    
    
    $
    44,149Accounts receivable, net
    
    
    2,075
    
    
    
    2,188Prepaid expenses and other current assets
    
    
    2,209
    
    
    
    1,916Total current assets
    
    
    47,412
    
    
    
    48,253Property and equipment, net
    
    
    7,011
    
    
    
    7,839Goodwill
    
    
    3,403
    
    
    
    3,403Investment in unconsolidated affiliate
    
    
    57
    
    
    
    Other assets
    
    
    1,325
    
    
    
    1,049Total assets
    
    $
    59,208
    
    
    $
    60,544LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,040
    
    
    $
    632Accrued liabilities
    
    
    1,469
    
    
    
    1,393Deferred revenue
    
    
    3,506
    
    
    
    4,352Capital lease obligations, current portion
    
    
    998
    
    
    
    381Notes payable, current portion
    
    
    190
    
    
    
    189Total current liabilities
    
    
    8,203
    
    
    
    6,947Capital lease obligations, less current portion
    
    
    491
    
    
    
    261Notes payable, less current portion
    
    
    142
    
    
    
    Deferred rent
    
    
    1,608
    
    
    
    1,781Total liabilities
    
    
    10,444
    
    
    
    8,989Stockholders equity:Common stock: $0.001 par value, 100,000 shares authorized, 16,943 and
17,219 shares issued and outstanding at December 31, 2004
and September 30, 2005, respectively
    
    
    17
    
    
    
    17Additional paid-in capital
    
    
    88,387
    
    
    
    88,224Note receivable from stockholder
    
    
    (603
    )
    
    
    (603
    )Unearned stock-based compensation
    
    
    (1,619
    )
    
    
    (680
    )Accumulated other comprehensive loss
    
    
    (106
    )
    
    
    (121
    )Accumulated deficit
    
    
    (37,312
    )
    
    
    (35,282
    )Total stockholders equity
    
    
    48,764
    
    
    
    51,555Total liabilities and stockholders equity
    
    $
    59,208
    
    
    $
    60,544
  Page 3




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##### Table of Contents



PlanetOut Inc.
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share amounts)
 Three months ended September 30,
    
    
    Nine months ended September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005Revenue:Subscription services
    
    $
    4,328
    
    
    $
    5,077
    
    
    $
    12,167
    
    
    $
    15,102Advertising services
    
    
    1,604
    
    
    
    2,106
    
    
    
    4,414
    
    
    
    6,064Transaction services
    
    
    378
    
    
    
    368
    
    
    
    1,278
    
    
    
    1,120Total revenue
    
    
    6,310
    
    
    
    7,551
    
    
    
    17,859
    
    
    
    22,286Operating costs and expenses:Cost of revenue (inclusive of stock-based compensation expense of
$115 and $10 for the three months ended September 30, 2004 and 2005, respectively,
and $466 and $37 for the nine months ended September 30, 2004 and
2005, respectively)
    
    
    1,941
    
    
    
    2,177
    
    
    
    6,098
    
    
    
    6,622Sales and marketing (inclusive of stock-based compensation expense of
$149 and $33 for the three months ended September 30, 2004 and 2005, respectively,
and $436 and $58 for the nine months ended September 30, 2004 and
2005, respectively)
    
    
    2,248
    
    
    
    2,551
    
    
    
    6,234
    
    
    
    7,539General and administrative (inclusive of stock-based compensation expense of
$273 and $90 for the three months ended September 30, 2004 and 2005, respectively,
and $822 and $156 for the nine months ended September 30, 2004 and
2005, respectively)
    
    
    1,263
    
    
    
    1,430
    
    
    
    3,862
    
    
    
    4,293Depreciation and amortization
    
    
    645
    
    
    
    787
    
    
    
    1,673
    
    
    
    2,455Total costs and expenses
    
    
    6,097
    
    
    
    6,945
    
    
    
    17,867
    
    
    
    20,909Income (loss) from operations
    
    
    213
    
    
    
    606
    
    
    
    (8
    )
    
    
    1,377Equity in net loss of unconsolidated affiliate
    
    
    (12
    )
    
    
    (32
    )
    
    
    (44
    )
    
    
    (57
    )Interest expense
    
    
    (240
    )
    
    
    (20
    )
    
    
    (430
    )
    
    
    (88
    )Other income (expense), net
    
    
    29
    
    
    
    362
    
    
    
    61
    
    
    
    914Income (loss) before income taxes
    
    
    (10
    )
    
    
    916
    
    
    
    (421
    )
    
    
    2,146Provision for income taxes
    
    
    (19
    )
    
    
    (75
    )
    
    
    (24
    )
    
    
    (116
    )Net income (loss)
    
    
    (29
    )
    
    
    841
    
    
    
    (445
    )
    
    
    2,030Accretion on redeemable convertible preferred stock
    
    
    (438
    )
    
    
    
    
    
    
    (1,313
    )
    
    
    Net earnings (loss) attributable to common stockholders
    
    $
    (467
    )
    
    $
    841
    
    
    $
    (1,758
    )
    
    $
    2,030Net earnings (loss) per share:Basic
    
    $
    (0.25
    )
    
    $
    0.05
    
    
    $
    (0.99
    )
    
    $
    0.12Diluted
    
    $
    (0.25
    )
    
    $
    0.05
    
    
    $
    (0.99
    )
    
    $
    0.11Weighted-average shares used to compute net earnings per share:Basic
    
    
    1,841
    
    
    
    17,202
    
    
    
    1,780
    
    
    
    17,078Diluted
    
    
    1,841
    
    
    
    18,200
    
    
    
    1,780
    
    
    
    18,148
  Page 4




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##### Table of Contents



PlanetOut Inc.
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 Nine months ended September 30,2004
    
    
    2005Cash flows from operating activities:Net income (loss)
    
    $
    (445
    )
    
    $
    2,030Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Depreciation and amortization
    
    
    1,673
    
    
    
    2,455Amortization of unearned stock-based compensation, net of cancellation
    
    
    1,655
    
    
    
    251Amortization of deferred rent
    
    
    115
    
    
    
    173Issuance of stock options and shares in exchange for services
    
    
    69
    
    
    
    Amortization of debt issuance costs
    
    
    65
    
    
    
    Loss (gain) on disposal of assets
    
    
    40
    
    
    
    (3
    )Equity in net loss of unconsolidated affiliate
    
    
    44
    
    
    
    57Changes in operating assets and liabilities:Accounts receivable
    
    
    (100
    )
    
    
    (113
    )Prepaid expenses and other assets
    
    
    (773
    )
    
    
    569Accounts payable
    
    
    843
    
    
    
    (1,408
    )Accrued and other liabilities
    
    
    (1,517
    )
    
    
    (76
    )Deferred revenue
    
    
    647
    
    
    
    846Net cash provided by operating activities
    
    
    2,316
    
    
    
    4,781Cash flows from investing activities:Purchases of property and equipment
    
    
    (2,102
    )
    
    
    (3,246
    )Net cash used in investing activities
    
    
    (2,102
    )
    
    
    (3,246
    )Cash flows from financing activities:Proceeds from exercise of common stock and preferred stock options and warrants
    
    
    49
    
    
    
    525Repurchase of redeemable convertible preferred stock
    
    
    (20
    )
    
    
    Principal payments under capital lease obligations and notes payable
    
    
    (968
    )
    
    
    (1,024
    )Deferred costs associated with initial public offering
    
    
    (858
    )
    
    
    Proceeds from senor subordinated promissory note, net of issuance costs
    
    
    4,909
    
    
    
    Net cash provided by (used in) financing activities
    
    
    3,112
    
    
    
    (499
    )Effect of exchange rate on cash and cash equivalents
    
    
    (16
    )
    
    
    (15
    )Net increase in cash and cash equivalents
    
    
    3,310
    
    
    
    1,021Cash and cash equivalents, beginning of period
    
    
    2,282
    
    
    
    43,128Cash and cash equivalents, end of period
    
    $
    5,592
    
    
    $
    44,149Supplemental disclosure of noncash flow investing and financing activities:Property and equipment and related maintenance acquired under capital leases
    
    $
    1,348
    
    
    $
    34Accretion on redeemable convertible preferred stock
    
    $
    1,313
    
    
    $
    Unearned stock-based compensation
    
    $
    3,463
    
    
    $
    468Issuance of common stock warrant in connection with subordinated promissory note
    
    $
    543
    
    
    $
    
  Page 5




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##### Table of Contents



PlanetOut Inc.
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Note 1  The Company
   Note 2  Basis of Presentation and Summary of Significant Accounting Policies
 Unaudited Interim Financial Information
   Use of Estimates
  Property and Equipment
   Page 6




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##### Table of Contents



Internal Use Software and Website Development Costs
  Stock-based Compensation
     Three months ended September 30,
    
    
    Nine months ended September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005(unaudited)
    
    
    (unaudited)Net earnings (loss) attributable to common
stockholders, as reported:
    
    $
    (467
    )
    
    $
    841
    
    
    $
    (1,758
    )
    
    $
    2,030Add: Employee stock-based compensation expense
included in
reported net income (loss), net of tax
    
    
    518
    
    
    
    133
    
    
    
    1,655
    
    
    
    251Less: Total employee stock-based compensation expense
determined under fair value, net of tax
    
    
    (696
    )
    
    
    (245
    )
    
    
    (2,054
    )
    
    
    (646
    )Pro forma net earnings (loss) attributable to common
stockholders
    
    $
    (645
    )
    
    $
    729
    
    
    $
    (2,157
    )
    
    $
    1,635Net earnings (loss) per share attributable to common
stockholders:As reported  basic
    
    $
    (0.25
    )
    
    $
    0.05
    
    
    $
    (0.99
    )
    
    $
    0.12As reported  diluted
    
    $
    (0.25
    )
    
    $
    0.05
    
    
    $
    (0.99
    )
    
    $
    0.11Pro forma  basic
    
    $
    (0.35
    )
    
    $
    0.04
    
    
    $
    (1.21
    )
    
    $
    0.10Pro forma  diluted
    
    $
    (0.35
    )
    
    $
    0.04
    
    
    $
    (1.21
    )
    
    $
    0.09
 Page 7




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##### Table of Contents



Nine months endedSeptember 30,2004
    
    2005(unaudited)Preferred stock options:Expected lives (in years)
    
    
    2.5
    
    
    
    Risk free interest rates
    
    
    2.77 - 4.05
    %
    
    
    Dividend yield
    
    
    10
    %
    
    
    Volatility
    
    
    0
    %
    
    
    Common stock options:Expected lives (in years)
    
    
    5.0
    
    
    
    5.0Risk free interest rates
    
    
    2.77 - 4.05
    %
    
    
    3.59 - 4.16
    %Dividend yield
    
    
    0
    %
    
    
    0
    %Volatility
    
    
    0
    %
    
    
    85
    %
 Net Income (Loss) Per Share
    Three months ended September 30,
    
    
    Nine months ended September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005(unaudited)
    
    
    (unaudited)Numerator:Net income (loss)
    
    $
    (29
    )
    
    $
    841
    
    
    $
    (445
    )
    
    $
    2,030Accretion on redeemable
convertible preferred stock
    
    
    (438
    )
    
    
    
    
    
    
    (1,313
    )
    
    
    Net earnings (loss) attributable to common stockholders
    
    $
    (467
    )
    
    $
    841
    
    
    $
    (1,758
    )
    
    $
    2,030Denominator:Weighted-average shares used to compute basic EPS
    
    
    1,841
    
    
    
    17,202
    
    
    
    1,780
    
    
    
    17,078Effect of dilutive securities:Dilutive common stock equivalents
    
    
    
    
    
    
    998
    
    
    
    
    
    
    
    1,070Dilutive potential common shares
    
    
    
    
    
    
    998
    
    
    
    
    
    
    
    1,070Weighted-average shares used to compute diluted EPS
    
    
    1,841
    
    
    
    18,200
    
    
    
    1,780
    
    
    
    18,148Net earnings per share:Basic
    
    $
    (0.25
    )
    
    $
    0.05
    
    
    $
    (0.99
    )
    
    $
    0.12Diluted
    
    $
    (0.25
    )
    
    $
    0.05
    
    
    $
    (0.99
    )
    
    $
    0.11
 Page 8




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##### Table of Contents



Nine months ended September 30,2004
    
    2005(unaudited)Redeemable convertible preferred stock
    
    
    9,272
    
    
    
    Redeemable convertible preferred stock options and warrants
    
    
    3,493
    
    
    
    Common stock options and warrants
    
    
    2,273
    
    
    
    723Common stock subject to repurchase
    
    
    2
    
    
    
    215,040
    
    
    
    725
 Recent Accounting Pronouncements
    Page 9




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##### Table of Contents



Note 3  Other Balance Sheet Components
 December 31,
    
    
    September 30,2004
    
    
    2005(unaudited)Property and equipment (in thousands):Computer and network equipment
    
    $
    7,130
    
    
    $
    7,729Furniture and fixtures
    
    
    918
    
    
    
    1,121Computer software
    
    
    1,683
    
    
    
    2,381Leasehold improvements
    
    
    1,191
    
    
    
    1,388Capitalized software and website development costs
    
    
    2,919
    
    
    
    4,46413,841
    
    
    
    17,083Less: Accumulated depreciation and amortization
    
    
    (6,830
    )
    
    
    (9,244
    )$
    7,011
    
    
    $
    7,839
  December 31,
    
    
    September 30,2004
    
    
    2005(unaudited)Prepaid expenses and other current assets (in thousands):Prepaid expenses and other current assets
    
    $
    1,262
    
    
    $
    1,502Receivable from landlord for tenant improvement
allowance, current portion
(Note 2)
    
    
    947
    
    
    
    414$
    2,209
    
    
    $
    1,916
 December 31,
    
    
    September 30,2004
    
    
    2005(unaudited)Other assets (in thousands):Other assets
    
    $
    838
    
    
    $
    831Receivable from landlord for tenant
improvement allowance, less current portion
(Note 2)
    
    
    308
    
    
    
    Interest on note receivable from stockholder
    
    
    179
    
    
    
    218$
    1,325
    
    
    $
    1,049
 December 31,
    
    
    September 30,2004
    
    
    2005(unaudited)Accrued liabilities (in thousands):Accrued payroll and related liabilities
    
    $
    493
    
    
    $
    489Other accrued liabilites
    
    
    976
    
    
    
    904$
    1,469
    
    
    $
    1,393
 Note 4  Related Party Transactions
 Note Receivable
 
 Advertising Agreement
  Note 5 Contingencies
 Contingencies
 
  Note 6  Subsequent Event
  Page 10




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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 Form 10-K filed March 31, 2005.


Overview






Results of Operations




Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005(As a percentage of total revenue; unaudited)Consolidated statement of operations data:Revenue:Subscription services
    
    
    68.6
    %
    
    
    67.2
    %
    
    
    68.1
    %
    
    
    67.8
    %Advertising services
    
    
    25.4
    
    
    
    27.9
    
    
    
    24.7
    
    
    
    27.2Transaction services
    
    
    6.0
    
    
    
    4.9
    
    
    
    7.2
    
    
    
    5.0Total revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Operating costs and expenses:Cost of revenue
    
    
    30.8
    
    
    
    28.8
    
    
    
    34.1
    
    
    
    29.7Sales and marketing
    
    
    35.6
    
    
    
    33.8
    
    
    
    34.9
    
    
    
    33.8General and administrative
    
    
    20.0
    
    
    
    18.9
    
    
    
    21.6
    
    
    
    19.3Depreciation and amortization
    
    
    10.2
    
    
    
    10.5
    
    
    
    9.4
    
    
    
    11.0Total costs and expenses
    
    
    96.6
    
    
    
    92.0
    
    
    
    100.0
    
    
    
    93.8Income (loss) from operations
    
    
    3.4
    
    
    
    8.0
    
    
    
    
    
    
    
    6.2Other income (expense), net
    
    
    (3.6
    )
    
    
    4.1
    
    
    
    (2.4
    )
    
    
    3.4Income (loss) before income taxes
    
    
    (0.2
    )
    
    
    12.1
    
    
    
    (2.4
    )
    
    
    9.6Provision for income taxes
    
    
    (0.3
    )
    
    
    (1.0
    )
    
    
    (0.1
    )
    
    
    (0.5
    )Net income (loss)
    
    
    (0.5
    )%
    
    
    11.1
    %
    
    
    (2.5
    )%
    
    
    9.1
    %






Subscription Services.


Page 11



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##### Table of Contents



Gay.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
 Yearly
    
    Quarterly
    
    Monthly
    
    TrialsPlanetOut Premium Membership
    
    $
    69.95
    
    
    $
    29.95
    
    
    $
    12.95
    
    
    $4.95 3-day trial December 2002 to presentServices
 Page 12
    Table of Contents  Premium Membership Service Operating Metrics
 2003
    
    
    2004
    
    
    20051Q
    
    
    2Q
    
    
    3Q
    
    
    4Q
    
    
    FY
    
    
    1Q
    
    
    2Q
    
    
    3Q
    
    
    4Q
    
    
    FY
    
    
    1Q
    
    
    2Q
    
    
    3QTotal Subscribers
    
    
    88,776
    
    
    
    88,103
    
    
    
    91,886
    
    
    
    98,445
    
    
    
    98,445
    
    
    
    105,179
    
    
    
    110,598
    
    
    
    118,392
    
    
    
    127,527
    
    
    
    127,527
    
    
    
    137,500
    
    
    
    145,114
    
    
    
    153,793Gross Additions
    
    
    39,053
    
    
    
    34,305
    
    
    
    37,167
    
    
    
    40,721
    
    
    
    151,246
    
    
    
    42,635
    
    
    
    37,582
    
    
    
    41,082
    
    
    
    44,219
    
    
    
    165,518
    
    
    
    44,245
    
    
    
    41,370
    
    
    
    43,967Total Churn
    
    
    30,641
    
    
    
    34,978
    
    
    
    33,384
    
    
    
    34,162
    
    
    
    133,165
    
    
    
    35,901
    
    
    
    32,163
    
    
    
    33,288
    
    
    
    35,084
    
    
    
    136,436
    
    
    
    34,272
    
    
    
    33,756
    
    
    
    35,288Churn Rate
    
    
    12.1
    %
    
    
    13.2
    %
    
    
    12.4
    %
    
    
    12.0
    %
    
    
    12.4
    %
    
    
    11.8
    %
    
    
    9.9
    %
    
    
    9.7
    %
    
    
    9.5
    %
    
    
    10.1
    %
    
    
    8.6
    %
    
    
    8.0
    %
    
    
    7.9
    %Net Additions
    
    
    8,412
    
    
    
    (673
    )
    
    
    3,783
    
    
    
    6,559
    
    
    
    18,081
    
    
    
    6,734
    
    
    
    5,419
    
    
    
    7,794
    
    
    
    9,135
    
    
    
    29,082
    
    
    
    9,973
    
    
    
    7,614
    
    
    
    8,679Average Lifetime (months)
    
    
    8.3
    
    
    
    7.6
    
    
    
    8.1
    
    
    
    8.4
    
    
    
    8.1
    
    
    
    8.5
    
    
    
    10.1
    
    
    
    10.3
    
    
    
    10.5
    
    
    
    9.9
    
    
    
    11.6
    
    
    
    12.6
    
    
    
    12.7
  
    
    Total Subscribers: members with an active, paid
subscription plan, excluding paid trial subscribers, at the
end of the period.
    
    Gross Additions: members who initiate a subscription during
the period, excluding paid trial subscriptions. Gross
Additions during a period equals Net Additions plus Total
Churn during that period.
    
    Total Churn: total subscription cancellations during the
period, including cancellations of paid promotional
subscriptions, but excluding cancellations of paid 3- and
7-day trial subscriptions and free promotional
subscriptions. Subscription cancellations include
subscriptions cancelled due to failed credit cards.
    
    Churn Rate: Total Churn divided by the average of the Total
Paid Subscribers measured at the beginning and end of the
period, divided by the number of months in the period.
    
    Net Additions: Total Paid Subscribers at the end of the
period minus the Total Paid Subscribers at the beginning of
the period.
    
    Average Lifetime: Average length of a subscription. Average
lifetime equals one hundred percent divided by churn rate
for the period.
      Advertising Services.
 Page 13
    Table of Contents  Transaction Services.
 Cost of Revenue.
  Sales and Marketing.
 
    
    payroll and 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.
 Occupancy Costs.
 Stock-based Compensation and Related Charges.
 Page 14
    Table of Contents  Comparison of the Three and Nine Months Ended September 30, 2005 and September 30, 2004
 Revenue
  Subscription Services.
  
    
    new features including the offer of subscriptions to popular magazines with premium memberships beginning in
May 2004, and the expansion and launch of online features such
as expanded messenger services, expanded and
searchable whos online features, and the addition of Hot and Buddy lists, among others;
    
    the launch of automated credit card updating;
    
    a price increase for our Gay.com membership services in October 2004;
    
    the migration of approximately 1,400 of our Out&About newsletter subscribers to our premium membership
services in December 2004;
    
    an increase in marketing and promotional activities including targeted price discounts on select
subscription plan offerings;
    
    the effect of periods during the fourth quarter of 2004 and the first quarter of 2005, during which our
transaction processing system was not available or did not perform as expected, in part as a result of
adding new transaction processing capabilities, subsequent to which we have implemented technology upgrades
to help address these issues;
    
    delays in new feature rollout for our subscription services, which limited subscriber and revenue growth; and
    
    a reduction in subscribers and revenue from our PlanetOut.com premium membership service, as we have
concentrated more of our marketing and development activities on our Gay.com premium membership service.
  Page 15
    Table of Contents  Advertising Services.
 
    
    the growth in the advertising market generally and in the online advertising market specifically;
    
    the development of new customized sponsorship programs and integrated editorial programming
which increased our CPM rate;
    
    the launch of improved website tracking capability in the third quarter of 2005, increasing our
ability to monetize our UK site traffic;
    
    the increasing interest of advertisers in targeting the LGBT community; and
    
    the expansion of our Gay.com local service listings during the first nine months of 2005.
  Transaction Services.
 Operating Costs and Expenses
  Cost of Revenue.
  Page 16
    Table of Contents  Sales and Marketing.
  General and Administrative.
  Depreciation and Amortization.
 Other Income and Expenses.
 Liquidity and Capital Resources
   Page 17
    Table of Contents  Off-balance Sheet Liabilities
  Other Contractual Commitments
  Payments Due by PeriodTotal
    
    
    Remainder of 2005
    
    
    2006-2007
    
    
    2008-2009
    
    
    2010 & After(In thousands)Contractual obligations:Capital lease obligations
    
    $
    734
    
    
    $
    138
    
    
    $
    479
    
    
    $
    116
    
    
    $
    1Operating leases
    
    
    11,266
    
    
    
    384
    
    
    
    3,735
    
    
    
    3,724
    
    
    
    3,423Purchase obligations
    
    
    315
    
    
    
    173
    
    
    
    142Total contractual obligations:
    
    $
    12,315
    
    
    $
    695
    
    
    $
    4,356
    
    
    $
    3,840
    
    
    $
    3,424
 Capital Lease Obligations.
 Operating Leases.
 Page 18
    Table of Contents  Purchase Obligations.
  Critical Accounting Policies
    Capitalized Website Development Costs.
  Seasonality and Inflation
   Recent Accounting Pronouncements
  Page 19
    Table of Contents  Risk Factors
 We have a history of significant losses. If we do not sustain profitability, our financial
condition and stock price could suffer.
  If our efforts to attract and retain subscribers are not successful, our revenue will decrease.
   Page 20
    Table of Contents  Our limited operating history makes it difficult to evaluate our business.
  We expect our operating results to fluctuate, which may lead to volatility in our stock price.
  If we fail to manage our growth, our business will suffer.
  If we are unable to successfully expand our international operations, our business will suffer.
   Recent and potential future acquisitions could result in operating difficulties and unanticipated
liabilities.
  
    
    the difficulty of integrating the acquired assets and personnel of the acquired businesses into our operations;
    
    the distraction of management during the negotiations and potential disruption of our current operations;
    
    the potential impairment of relationships with and difficulty in attracting and retaining employees of the
acquired companies or our employees as a result of the integration of acquired businesses;
 Page 21
    Table of Contents  
    
    the difficulty of integrating the acquired companys accounting, human resources and other administrative systems;
    
    the potential impairment of relationships with subscribers, customers and partners of the acquired companies or
our subscribers, customers and partners as a result of the integration of acquired businesses;
    
    the difficulty in attracting and retaining qualified management to lead the combined businesses;
    
    the potential difficulties associated with entering new lines of business with which we have little experience,
such as some of the businesses we acquired from LPI;
    
    the difficulty of complying with additional regulatory requirements that may become applicable to us as the
result of an acquisition, such as various regulations that may become applicable to us
as a result of our acquisition of LPI, including the acquisition of a related entity that produces
some content and other materials intended for mature audiences;
    
    the impact of known or unknown liabilities associated with the acquired businesses.
  If we do not continue to attract and retain qualified personnel, we may not be able to expand our
business.
  Our success depends, in part, upon the growth of Internet advertising and upon our ability to
accurately predict the cost of customized campaigns.
   If advertisers do not find the LGBT market to be economically profitable, our business will be
harmed.
  Page 22
    Table of Contents  Any significant disruption in service on our websites or in our computer and communications
hardware and software systems could harm our business.
  If we are unable to compete effectively, we may lose market share and our revenue may decline.
   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.
  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.
  Page 23
    Table of Contents  Existing or future government regulation in the United States and other countries could limit our
growth and result in loss of revenue.
  
    
    conduct background checks on our members prior to allowing
them to interact with other members on our websites or,
alternatively, provide notice on our websites that we have
not conducted background checks on our members, which may
result in our members canceling their membership or failing
to subscribe or renew their subscription, resulting in
reduced revenue;
    
    provide advance notice of any changes to our privacy
policies or to our policies on sharing non-public
information with third parties, and if our members or
subscribers disagree with these policies or changes, they
may wish to cancel their membership or subscription, which
will reduce our revenue;
    
    with limited exceptions, give consumers the right to
prevent sharing of their non-public personal information
with unaffiliated third parties, and if a significant
portion of our members choose to request that we dont
share their information, our advertising revenue that we
receive from renting our mailing list to unaffiliated third
parties may decline;
    
    provide notice to residents in some states if their
personal information was, or is reasonably believed to have
been, obtained by an unauthorized person such as a computer
hacker, which may result in our members or subscribers
deciding to cancel their membership or subscription,
reducing our membership base and subscription revenue;
    
    comply with current or future anti-spam legislation by
limiting or modifying some of our marketing and advertising
efforts, such as email campaigns, which may result in a
reduction in our advertising revenue; for instance, two
states recently passed legislation creating a do not
contact registry for minors that would make it a criminal
violation to send an e-mail message to an address on that
states registry if the e-mail message contained an
advertisement for or even a link to a website that offered
products or services that minors are prohibited from
accessing;
    
    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
 Page 24
    Table of Contents  from enforcing our contracts in
these states or countries and may limit our ability to grow
our business;
    
    limit our domestic or international expansion because some
jurisdictions may limit or prevent access to our services
as a result of the availability of some content intended
for mature viewing on some of our websites and through some
of the businesses we acquired from LPI Media Inc., which
may render our services less attractive to our members or
subscribers and result in a decline in our revenue; and
    
    limit or prevent access, from some jurisdictions, to some
or all of the member-generated content available through
our websites, which may render our services less attractive
to our members or subscribers and result in a decline in
our revenue. For example, in June 2005, the United States
Department of Justice (the DOJ) adopted regulations
purporting to implement the Child Protection and Obscenity
Act of 1988, as amended (the Act), by requiring primary
and secondary producers, as defined in the regulations, of
certain adult materials to obtain, maintain and make
available for inspection specified records, such as a
performers name, address and certain specified forms of
photo identification as proof of a performers age. Failure
to properly obtain, maintain or make such records available
for inspection upon request of the DOJ could lead to an
imposition of penalties, fines or imprisonment. We could be
deemed a secondary producer under the Act because we allow
our members to display photographic images on our websites
as part of member profiles. In addition, we may be deemed a primary producer
under the Act because a portion of one of the businesses we acquired
in the LPI acquisition are involved in production of content intended for mature
audiences. Eenforcement of these regulations has been
stayed pending resolution of a legal challenge to their
constitutionality on the grounds that the regulations
exceed the DOJs statutory authority and violate First
Amendment and privacy rights, among others. If the legal
challenge is unsuccessful, we will be subject to
significant and burdensome recordkeeping compliance
requirements and/or we will have to evaluate and implement
additional registration and recordkeeping processes and
procedures, each of which would result in additional
expenses to us. Further, if our members and subscribers
feel these additional registration and recordkeeping
processes and procedures are too burdensome, this may
result in an adverse impact on our subscriber growth and
churn which, in turn, will have an adverse effect on our
financial condition and results of operations.
  The risks of transmitting confidential information online, including credit card information,
may discourage customers from subscribing to our services or purchasing goods from us.
  If we are unable to provide satisfactory customer service, we could lose subscribers.
  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.
  Page 25
    Table of Contents  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.
    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.
  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.
  Recent and proposed regulations related to equity compensation could adversely affect our ability
to attract and retain key personnel.
  Page 26
    Table of Contents  In the event we are unable to satisfy regulatory requirements relating to internal control over
financial reporting, or if these internal controls are not effective, our business and our stock
price could suffer.
  Our stock price may be volatile and you may lose all or a part of your investment.
   Provisions in our charter documents and under Delaware law could discourage a takeover that
stockholders may consider favorable.
  
    
    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.
  Page 27
    Table of Contents  Item 3. Qualitative and Quantitative Disclosures About Market Risk
    
 Item 4. Controls and Procedures
    Page 28
    Table of Contents  PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
 
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
   Issuer Purchases of Equity Securities.
 (c) Total Numberof
    
    (d) Maximum NumberShares Purchased
    
    or Approximate Dollaras
    
    Value) of Shares that(a) Total
    
    (b) Average
    
    Part of Publicly
    
    MayNumber of
    
    Price Paid
    
    Announced Plans
    
    Yet Be PurchasedShares
    
    per
    
    or
    
    Under thePeriod
    
    Purchased (1)
    
    Share
    
    Programs
    
    Plans or ProgramsJuly 1, 2005  July 31, 2005
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    August 1, 2005  August 31, 2005
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    September 1, 2005  September 30, 2005
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    
 
 (1)
    
    PlanetOut does not have any publicly announced plans or programs to repurchase shares of its common stock. 
 Page 29
    Table of Contents  Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5. Other Information.
  Page 30
    Table of Contents  Item 6. Exhibits
 (a) Exhibits
 ExhibitNumber
    
    Description of Documents3.1
    
    Amended and Restated Certificate of Incorporation, as currently in effect (filed
as Exhibit 3.3 to our Registration Statement on Form S-1, File No. 333-114988,
initially filed on April 29, 2004, declared effective on October 13, 2004, and
incorporated herein by reference).3.2
    
    Amended and Restated Bylaws, as currently in effect (filed as Exhibit 3.4 to our
Registration Statement on Form S-1, File No. 333-114988, initially filed on April
29, 2004, declared effective on October 13, 2004, and incorporated herein by
reference).4.1
    
    Specimen of Common Stock Certificate (filed as Exhibit 4.1 to our Registration
Statement on Form S-1, File No. 333-114988, initially filed on April 29, 2004,
declared effective on October 13, 2004, and incorporated herein by reference).31.1
    
    Certificate of Chief Executive Officer pursuant to the Securities Exchange Act
Rules 13a-14(a) and 15d-14(a) as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certificate of Chief Financial Officer pursuant to the Securities Exchange Act
Rules 13a-14(a) and 15d-14(a) as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certificate of Chief Executive Officer pursuant to Section 18 U.S.C section 1350.32.2
    
    Certificate of Chief Financial Officer pursuant to Section 18 U.S.C. section 1350.
 Page 31
    Table of Contents  SIGNATURES
  Date: November 11, 2005
    PLANETOUT INC.By:
    /s/ Jeffrey T. SoukupJeffrey T. SoukupChief Financial Officer
(Principal Financial and Accounting Officer) Page 32
    Table of Contents  EXHIBIT INDEX
 ExhibitNumber
    
    Description of Documents3.1
    
    Amended and Restated Certificate of Incorporation, as currently in effect (filed
as Exhibit 3.3 to our Registration Statement on Form S-1, File No. 333-114988,
initially filed on April 29, 2004, declared effective on October 13, 2004, and
incorporated herein by reference).3.2
    
    Amended and Restated Bylaws, as currently in effect (filed as Exhibit 3.4 to our
Registration Statement on Form S-1, File No. 333-114988, initially filed on April
29, 2004, declared effective on October 13, 2004, and incorporated herein by
reference).4.1
    
    Specimen of Common Stock Certificate (filed as Exhibit 4.1 to our Registration
Statement on Form S-1, File No. 333-114988, initially filed on April 29, 2004,
declared effective on October 13, 2004, and incorporated herein by reference).31.1
    
    Certificate of Chief Executive Officer pursuant to the Securities Exchange Act
Rules 13a-14(a) and 15d-14(a) as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certificate of Chief Financial Officer pursuant to the Securities Exchange Act
Rules 13a-14(a) and 15d-14(a) as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certificate of Chief Executive Officer pursuant to Section 18 U.S.C section 1350.32.2
    
    Certificate of Chief Financial Officer pursuant to Section 18 U.S.C. section 1350.
 Page 33