##### 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, 2006
 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
  o þ




---



##### 



PlanetOut Inc.
INDEX
Form 10-Q
For the Quarter ended September 30, 2006
 PAGEPART I  FINANCIAL INFORMATION
    
    
    1Item 1 Unaudited Condensed Consolidated Financial Statements
    
    
    1Unaudited Condensed Consolidated Balance Sheets as of December 31, 2005 and September 30, 2006
    
    
    1Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended
September 30, 2005 and 2006 and the Nine Months Ended September 30, 2005 and 2006
    
    
    2Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30,
2005 and 2006
    
    
    3Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    4Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3 Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4 Controls and Procedures
    
    
    25PART II  OTHER INFORMATION
    
    
    25Item 1 Legal Proceedings
    
    
    25Item 1A Risk Factors
    
    
    25Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    35Item 3 Defaults Upon Senior Securities
    
    
    35Item 4 Submission of Matters to a Vote of Security Holders
    
    
    35Item 5 Other Information
    
    
    35Item 6 Exhibits
    
    
    36SIGNATURES
    
    
    37EXHIBIT INDEX
    
    
    38EXHIBIT 12.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  i




---



##### 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 amounts)
 December 31,
    
    
    September 30,2005
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    18,461
    
    
    $
    14,781Short-term investments
    
    
    
    
    
    
    769Restricted cash
    
    
    
    
    
    
    4,080Accounts receivable, net
    
    
    6,030
    
    
    
    7,434Inventory
    
    
    1,349
    
    
    
    1,432Prepaid expenses and other current assets
    
    
    2,571
    
    
    
    12,077Total current assets
    
    
    28,411
    
    
    
    40,573Property and equipment, net
    
    
    8,167
    
    
    
    10,011Goodwill
    
    
    28,699
    
    
    
    32,572Intangible assets, net
    
    
    10,909
    
    
    
    12,533Other assets
    
    
    1,152
    
    
    
    1,014Total assets
    
    $
    77,338
    
    
    $
    96,703LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,334
    
    
    $
    2,437Accrued expenses and other liabilities
    
    
    2,750
    
    
    
    3,661Accrued restructuring
    
    
    
    
    
    
    533Deferred revenue, current portion
    
    
    8,749
    
    
    
    15,081Capital lease obligations, current portion
    
    
    309
    
    
    
    598Notes payable, current portion net of discount
    
    
    222
    
    
    
    6,444Deferred rent, current portion
    
    
    286
    
    
    
    386Total current liabilities
    
    
    13,650
    
    
    
    29,140Deferred revenue, less current portion
    
    
    1,771
    
    
    
    1,525Capital lease obligations, less current portion
    
    
    212
    
    
    
    1,395Notes payable, less current portion and discount
    
    
    7,075
    
    
    
    10,731Deferred rent, less current portion
    
    
    1,578
    
    
    
    1,395Total liabilities
    
    
    24,286
    
    
    
    44,186Minority interest in consolidated subsidiaries
    
    
    
    
    
    
    47Stockholders equity:Common stock: $0.001 par value, 100,000 shares authorized, 17,248 and 17,503 shares
issued and outstanding at December 31, 2005 and September 30, 2006, respectively
    
    
    17
    
    
    
    17Additional paid-in capital
    
    
    88,333
    
    
    
    89,137Note receivable from stockholder
    
    
    (603
    )
    
    
    Accumulated other comprehensive loss
    
    
    (123
    )
    
    
    (132
    )Accumulated deficit
    
    
    (34,572
    )
    
    
    (36,552
    )Total stockholders equity
    
    
    53,052
    
    
    
    52,470Total liabilities and stockholders equity
    
    $
    77,338
    
    
    $
    96,703
  1




---



##### 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 30,2005
    
    
    2006
    
    
    2005
    
    
    2006Revenue:Advertising services
    
    $
    2,106
    
    
    $
    6,386
    
    
    $
    6,064
    
    
    $
    19,051Subscription services
    
    
    5,077
    
    
    
    5,831
    
    
    
    15,102
    
    
    
    18,422Transaction services
    
    
    368
    
    
    
    3,191
    
    
    
    1,120
    
    
    
    11,803Total revenue
    
    
    7,551
    
    
    
    15,408
    
    
    
    22,286
    
    
    
    49,276Operating costs and expenses: (*)Cost of revenue
    
    
    2,177
    
    
    
    8,225
    
    
    
    6,622
    
    
    
    24,527Sales and marketing
    
    
    2,551
    
    
    
    4,144
    
    
    
    7,539
    
    
    
    12,515General and administrative
    
    
    1,430
    
    
    
    2,996
    
    
    
    4,293
    
    
    
    9,154Restructuring
    
    
    
    
    
    
    58
    
    
    
    
    
    
    
    892Depreciation and amortization
    
    
    787
    
    
    
    1,319
    
    
    
    2,455
    
    
    
    3,843Total operating costs and expenses
    
    
    6,945
    
    
    
    16,742
    
    
    
    20,909
    
    
    
    50,931Income (loss) from operations
    
    
    606
    
    
    
    (1,334
    )
    
    
    1,377
    
    
    
    (1,655
    )Equity in net loss of unconsolidated affiliate
    
    
    (32
    )
    
    
    
    
    
    
    (57
    )
    
    
    Interest expense
    
    
    (20
    )
    
    
    (218
    )
    
    
    (88
    )
    
    
    (616
    )Other income, net
    
    
    362
    
    
    
    96
    
    
    
    914
    
    
    
    376Income (loss) before income taxes and minority interest
    
    
    916
    
    
    
    (1,456
    )
    
    
    2,146
    
    
    
    (1,895
    )Provision for income taxes
    
    
    (75
    )
    
    
    (38
    )
    
    
    (116
    )
    
    
    (38
    )Minority interest in gain of consolidated affiliate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (47
    )Net income (loss)
    
    $
    841
    
    
    $
    (1,494
    )
    
    $
    2,030
    
    
    $
    (1,980
    )Net income (loss) per share:Basic
    
    $
    0.05
    
    
    $
    (0.09
    )
    
    $
    0.12
    
    
    $
    (0.11
    )Diluted
    
    $
    0.05
    
    
    $
    (0.09
    )
    
    $
    0.11
    
    
    $
    (0.11
    )Weighted-average shares used to compute net income (loss) per share:Basic
    
    
    17,202
    
    
    
    17,333
    
    
    
    17,078
    
    
    
    17,303Diluted
    
    
    18,200
    
    
    
    17,333
    
    
    
    18,148
    
    
    
    17,303
 
 (*) Includes stock-based compensation as follows (see Note 2):Cost of revenue
    
    $
    10
    
    
    $
    11
    
    
    $
    37
    
    
    $
    17Sales and marketing
    
    
    33
    
    
    
    16
    
    
    
    58
    
    
    
    18General and administrative
    
    
    90
    
    
    
    34
    
    
    
    156
    
    
    
    12Total stock-based compensation
    
    $
    133
    
    
    $
    61
    
    
    $
    251
    
    
    $
    47
  2




---



##### Table of Contents



PlanetOut Inc.
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 Nine months ended September 30,2005
    
    
    2006Cash flows from operating activities:Net income (loss)
    
    $
    2,030
    
    
    $
    (1,980
    )Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:Depreciation and amortization
    
    
    2,455
    
    
    
    3,843Provision for doubtful accounts
    
    
    28
    
    
    
    293Restructuring
    
    
    
    
    
    
    19Stock-based compensation
    
    
    251
    
    
    
    47Amortization of deferred rent
    
    
    173
    
    
    
    (59
    )(Gain) loss on disposal or write-off of property and equipment
    
    
    (3
    )
    
    
    15Equity in net loss of unconsolidated affiliate
    
    
    57
    
    
    
    Minority interest
    
    
    
    
    
    
    47Changes in operating assets and liabilities, net of acquisition effects and restructuring:Accounts receivable
    
    
    (141
    )
    
    
    (1,436
    )Inventory
    
    
    
    
    
    
    (83
    )Prepaid expenses and other assets
    
    
    569
    
    
    
    (4,653
    )Accounts payable
    
    
    (1,408
    )
    
    
    1,027Accrued expenses and other liabilities
    
    
    (76
    )
    
    
    873Accrued restructuring
    
    
    
    
    
    
    533Deferred revenue
    
    
    846
    
    
    
    (276
    )Net cash provided by (used in) operating activities
    
    
    4,781
    
    
    
    (1,790
    )Cash flows from investing activities:Acquisitions, net of cash acquired
    
    
    
    
    
    
    (5,403
    )Purchases of property and equipment
    
    
    (3,246
    )
    
    
    (2,670
    )Purchases of short-term investments
    
    
    
    
    
    
    (769
    )Changes in restricted cash
    
    
    
    
    
    
    (4,080
    )Net cash used in investing activities
    
    
    (3,246
    )
    
    
    (12,922
    )Cash flows from financing activities:Proceeds from exercise of common stock options and warrants
    
    
    525
    
    
    
    312Proceeds from issuance of notes payable
    
    
    
    
    
    
    10,500Proceeds from repayment of note receivable from stockholder
    
    
    
    
    
    
    843Principal payments under capital lease obligations and notes payable
    
    
    (1,024
    )
    
    
    (614
    )Net cash provided by (used in) financing activities
    
    
    (499
    )
    
    
    11,041Effect of exchange rate on cash and cash equivalents
    
    
    (15
    )
    
    
    (9
    )Net increase (decrease) in cash and cash equivalents
    
    
    1,021
    
    
    
    (3,680
    )Cash and cash equivalents, beginning of period
    
    
    43,128
    
    
    
    18,461Cash and cash equivalents, end of period
    
    $
    44,149
    
    
    $
    14,781Supplemental disclosure of noncash flow investing and financing activities:Property and equipment and related maintenance acquired under capital leases
    
    $
    34
    
    
    $
    2,135Unearned stock-based compensation
    
    $
    468
    
    
    $
    Issuance of common stock warrants in connection with debt issuance
    
    $
    
    
    
    $
    445
  3




---



##### Table of Contents



PlanetOut Inc.
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Note 1  The Company
  The Advocate, Out, The Out Traveler HIVPlus
 Note 2  Basis of Presentation and Summary of Significant Accounting Policies
 Unaudited Interim Financial Information
  Principles of Consolidation
  Reclassifications
  Use of Estimates
  4




---



##### Table of Contents



Cash Equivalents and Short-term Investments
  Restricted Cash
  Inventory
  Property and Equipment
   Internal Use Software and Website Development Costs
 Accounting for Costs of Computer Software Developed or Obtained for Internal Use Accounting for Web Site Development Costs
 5




---



##### Table of Contents



Goodwill
 Goodwill and Other Intangible Assets.
 Revenue Recognition
 Revenue Arrangements with Multiple Deliverables
  Reporting Revenue Gross as a Principal Versus
Net as an Agent,
 6




---



##### Table of Contents



Advertising
  Event Marketing
 Revenue Recognition Reporting Revenue Gross
as a Principal versus Net as an Agent, Income Statement
Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred
  Equity Incentive Plans
  Stock-Based Compensation
 Share-Based Payment Accounting for Stock Issued to Employees
  Accounting for Stock-based
Compensation  Transition and Disclosure (as amended)
   7




---



##### Table of Contents



Three months ended
    
    
    Nine months endedSeptember 30, 2005
    
    
    September 30, 2005Net income, as reported:
    
    $
    841
    
    
    $
    2,030Add: Employee stock-based compensation expense included in
reported net income, net of tax
    
    
    133
    
    
    
    251Less: Total employee stock-based compensation expense
determined under fair value, net of tax
    
    
    (245
    )
    
    
    (646
    )Pro forma net income
    
    $
    729
    
    
    $
    1,635Net income per shareAs reported  basic
    
    $
    0.05
    
    
    $
    0.12As reported  diluted
    
    $
    0.05
    
    
    $
    0.11Pro forma  basic
    
    $
    0.04
    
    
    $
    0.10Pro forma  diluted
    
    $
    0.04
    
    
    $
    0.09
   Nine months ended September 30,2005
    
    2006Expected lives (in years)
    
    5
    
    7Risk free interest rates
    
    3.59 - 4.16%
    
    4.32 - 4.57%Dividend yield
    
    0%
    
    0%Volatility
    
    85%
    
    75%
   8




---



##### Table of Contents



WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual Term
    
    
    IntrinsicShares
    
    
    Price
    
    
    (in years)
    
    
    ValueOutstanding at January 1, 2006
    
    
    2,112
    
    
    $
    5.03Granted
    
    
    49
    
    
    $
    9.08Exercised
    
    
    (93
    )
    
    $
    3.36Cancelled
    
    
    (107
    )
    
    $
    8.01Outstanding at September 30, 2006
    
    
    1,961
    
    
    $
    5.04
    
    
    
    6.20
    
    
    $
    3,622Vested and expected to vest at September 30, 2006
    
    
    1,939
    
    
    $
    5.02
    
    
    
    6.17
    
    
    $
    3,613Options exercisable at September 30, 2006
    
    
    1,902
    
    
    $
    4.93
    
    
    
    6.11
    
    
    $
    3,613
  Restricted Stock Grants
   Weighted AverageGrant-DateShares
    
    
    Fair ValueUnvested at January 1, 2006
    
    
    
    
    
    $
    Granted
    
    
    162
    
    
    $
    7.04Unvested at September 30, 2006
    
    
    162
    
    
    $
    7.04
 Net Income (Loss) Per Share
   9




---



##### Table of Contents



Three months ended September 30,
    
    
    Nine months ended September 30,2005
    
    
    2006
    
    
    2005
    
    
    2006Numerator:Net income (loss)
    
    $
    841
    
    
    $
    (1,494
    )
    
    $
    2,030
    
    
    $
    (1,980
    )Denominator:Weighted-average shares
    
    
    17,202
    
    
    
    17,333
    
    
    
    17,078
    
    
    
    17,303Effect of dilutive securities:Dilutive common stock equivalents
    
    
    998
    
    
    
    
    
    
    
    1,070
    
    
    
    Dilutive potential common shares
    
    
    998
    
    
    
    
    
    
    
    1,070
    
    
    
    18,200
    
    
    
    17,333
    
    
    
    18,148
    
    
    
    17,303Net income (loss) per share:Basic
    
    $
    0.05
    
    
    $
    (0.09
    )
    
    $
    0.12
    
    
    $
    (0.11
    )Diluted
    
    $
    0.05
    
    
    $
    (0.09
    )
    
    $
    0.11
    
    
    $
    (0.11
    )
  Nine months ended September 30,2005
    
    2006Common stock options and warrants
    
    
    723
    
    
    
    2,081Common stock subject to repurchase
    
    
    2
    
    
    
    725
    
    
    
    2,081
 Segment Reporting
 Disclosures About
Segments of an Enterprise and Related Information,
 10




---



##### Table of Contents



Variable Interest Entity
 Consolidation of Variable Interest
Entities,
 Recent Accounting Pronouncements
 Fair Value Measurements
 Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement 109 Accounting for Income
Taxes.
 Note 3  Business Combinations, Goodwill and Intangible Assets
 RSVP Productions Inc. Acquisition
   Cash
    
    $
    1,289Other current assets
    
    
    4,987Property and
equipment, net
    
    
    116Definite lived intangible assets:Customer relationships
    
    
    1,810Indefinite lived intangible assets:Tradenames
    
    
    940Goodwill
    
    
    3,982Accounts payable and other current liabilities
    
    
    (60
    )Deferred revenue
    
    
    (6,395
    )Total preliminary purchase price
    
    $
    6,669
 11




---



##### Table of Contents



Three months ended September 30,
    
    
    Nine months ended September 30,2005
    
    
    2006
    
    
    2005
    
    
    2006(Unaudited)
    
    
    (Unaudited)Revenue
    
    $
    12,425
    
    
    $
    15,408
    
    
    $
    31,342
    
    
    $
    50,991Net income (loss)
    
    $
    1,008
    
    
    $
    (1,494
    )
    
    $
    1,698
    
    
    $
    (2,480
    )Basic income (loss) per share
    
    $
    0.06
    
    
    $
    (0.09
    )
    
    $
    0.10
    
    
    $
    (0.14
    )
 Goodwill
  December 31,
    
    
    Goodwill
    
    
    
    
    
    
    September 30,Acquisition
    
    2005
    
    
    Acquired
    
    
    Adjustments
    
    
    2006Acquisitions prior to December 31, 2004
    
    $
    3,403
    
    
    $
    
    
    
    $
    
    
    
    $
    3,403LPI
    
    
    25,296
    
    
    
    
    
    
    
    (109
    )
    
    
    25,187RSVP
    
    
    
    
    
    
    3,982
    
    
    
    
    
    
    
    3,982$
    28,699
    
    
    $
    3,982
    
    
    $
    (109
    )
    
    $
    32,572
   Intangible Assets
  December 31, 2005
    
    
    September 30, 2006Gross
    
    
    
    
    
    
    
    
    
    
    GrossCarrrying
    
    
    Accumulated
    
    
    Net Carrying
    
    
    Carrrying
    
    
    Accumulated
    
    
    Net CarryingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    Amount(In thousands)
    
    
    (In thousands)Intangible assets:Customer lists and user bases
    
    $
    8,678
    
    
    $
    3,469
    
    
    $
    5,209
    
    
    $
    10,488
    
    
    $
    4,595
    
    
    $
    5,893Tradenames
    
    
    8,040
    
    
    
    2,340
    
    
    
    5,700
    
    
    
    8,980
    
    
    
    2,340
    
    
    
    6,640Other intangible assets
    
    
    726
    
    
    
    726
    
    
    
    
    
    
    
    726
    
    
    
    726
    
    
    
    $
    17,444
    
    
    $
    6,535
    
    
    $
    10,909
    
    
    $
    20,194
    
    
    $
    7,661
    
    
    $
    12,533
   12




---



##### Table of Contents



Fiscal Years:2006 (remaining three months)
    
    $
    4012007
    
    
    1,4232008
    
    
    1,3962009
    
    
    1,2572010
    
    
    1,0932011
    
    
    277Thereafter
    
    
    46$
    5,893
 Note 4  Other Balance Sheet Components
 December 31,
    
    
    September 30,2005
    
    
    2006(In thousands)Accounts receivable:Trade accounts receivable
    
    $
    7,033
    
    
    $
    8,903Less: Allowance for doubtful accounts
    
    
    (259
    )
    
    
    (412
    )Less: Provision for returns
    
    
    (744
    )
    
    
    (1,057
    )$
    6,030
    
    
    $
    7,434
   December 31,
    
    
    September 30,2005
    
    
    2006(In thousands)Inventory:Materials for future publications
    
    $
    415
    
    
    $
    400Finished goods available for sale
    
    
    1,019
    
    
    
    1,1321,434
    
    
    
    1,532Less: reserve for obsolete inventory
    
    
    (85
    )
    
    
    (100
    )$
    1,349
    
    
    $
    1,432
  13




---



##### Table of Contents



December 31,
    
    
    September 30,2005
    
    
    2006(In thousands)Prepaid expenses and other current assets:Prepaid expenses and other current assets
    
    $
    2,328
    
    
    $
    4,024Deposits on
leased voyages and vacations
    
    
    
    
    
    
    8,053Receivable from landlord for tenant improvement allowance, current portion (Note 2)
    
    
    243
    
    
    
    $
    2,571
    
    
    $
    12,077
 December 31,
    
    
    September 30,2005
    
    
    2006(In thousands)Property and equipment:Computer equipment and software
    
    $
    10,402
    
    
    $
    12,501Furniture and fixtures
    
    
    1,396
    
    
    
    1,653Leasehold improvements
    
    
    1,555
    
    
    
    1,970Website development costs
    
    
    4,783
    
    
    
    6,21818,136
    
    
    
    22,342Less: Accumulated depreciation and amortization
    
    
    (9,969
    )
    
    
    (12,331
    )$
    8,167
    
    
    $
    10,011
  December 31,
    
    
    September 30,2005
    
    
    2006(In thousands)Other assets:Other assets
    
    $
    921
    
    
    $
    1,014Interest on note receivable from stockholder (Note 5)
    
    
    231
    
    
    
    $
    1,152
    
    
    $
    1,014
 December 31,
    
    
    September 30,2005
    
    
    2006(In thousands)Accrued liabilities:Accrued payroll and related liabilities
    
    $
    989
    
    
    $
    1,270Other accrued liabilities
    
    
    1,761
    
    
    
    2,391$
    2,750
    
    
    $
    3,661
 Note 5  Related Party Transaction
  14




---



##### Table of Contents



Note 6  Notes Payable
  December 31,
    
    
    September 30,2005
    
    
    2006(In thousands)Notes payable to vendors
    
    $
    222
    
    
    $
    45LPI note
    
    
    7,075
    
    
    
    7,075Orix term loan
    
    
    
    
    
    
    7,500Orix revolving loan
    
    
    
    
    
    
    3,0007,297
    
    
    
    17,620Less: discount
    
    
    
    
    
    
    (445
    )7,297
    
    
    
    17,175Less: current portion, net of discount
    
    
    222
    
    
    
    6,444Notes payable, less current portion and discount
    
    $
    7,075
    
    
    $
    10,731
     Expected dividend yield
    
    
    0
    %Expected stock price volatility
    
    
    105
    %Risk-free interest rate
    
    
    4.56
    %Expected life of warrants
    
    7 years
 15




---



##### Table of Contents



Note 7 Commitments and Contingencies
 Deposit Commitments
  Contingencies
   de novo
 Note 8  Restructuring
   AccruedInitial
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    RestructuringRestructuring
    
    
    Cash
    
    
    
    
    
    
    
    
    
    
    As ofCharges
    
    
    Payments
    
    
    Write-offs
    
    
    Adjustments
    
    
    September 30, 2006(In thousands)Termination benefits
    
    $
    631
    
    
    $
    (279
    )
    
    $
    
    
    
    $
    
    
    
    $
    352Cost of closing redundant facilities
    
    
    203
    
    
    
    (61
    )
    
    
    (19
    )
    
    
    58
    
    
    
    181Total
    
    $
    834
    
    
    $
    (340
    )
    
    $
    (19
    )
    
    $
    58
    
    
    $
    533
 16




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of 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 for the year ended December 31, 2005.
 Overview
 The Advocate Out
 Out The Advocate Out The Advocate,
     Results of Operations
  17




---



##### Table of Contents



Three months ended September 30,
    
    Nine months ended September 30,2005
    
    2006
    
    2005
    
    2006(As a percentage of total revenue; unaudited)Consolidated statements of operations data:Revenue:Advertising services
    
    
    27.9
    %
    
    
    41.4
    %
    
    
    27.2
    %
    
    
    38.6
    %Subscription services
    
    
    67.2
    
    
    
    37.9
    
    
    
    67.8
    
    
    
    37.4Transaction services
    
    
    4.9
    
    
    
    20.7
    
    
    
    5.0
    
    
    
    24.0Total revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Operating costs and expenses:Cost of revenue
    
    
    28.8
    
    
    
    53.4
    
    
    
    29.7
    
    
    
    49.8Sales and marketing
    
    
    33.8
    
    
    
    26.9
    
    
    
    33.8
    
    
    
    25.4General and administrative
    
    
    18.9
    
    
    
    19.4
    
    
    
    19.3
    
    
    
    18.6Restructuring
    
    
    
    
    
    
    0.4
    
    
    
    
    
    
    
    1.8Depreciation and amortization
    
    
    10.5
    
    
    
    8.6
    
    
    
    11.0
    
    
    
    7.8Total operating costs and expenses
    
    
    92.0
    
    
    
    108.7
    
    
    
    93.8
    
    
    
    103.4Income (loss) from operations
    
    
    8.0
    
    
    
    (8.7
    )
    
    
    6.2
    
    
    
    (3.4
    )Equity in net loss of unconsolidated affiliate
    
    
    (0.4
    )
    
    
    
    
    
    
    (0.3
    )
    
    
    Interest expense
    
    
    (0.3
    )
    
    
    (1.4
    )
    
    
    (0.4
    )
    
    
    (1.3
    )Other income, net
    
    
    4.8
    
    
    
    0.6
    
    
    
    4.1
    
    
    
    0.9Income (loss) before income taxes and minority interest
    
    
    12.1
    
    
    
    (9.5
    )
    
    
    9.6
    
    
    
    (3.8
    )Provision for income taxes
    
    
    (1.0
    )
    
    
    (0.2
    )
    
    
    (0.5
    )
    
    
    (0.1
    )Minority interest in gain of consolidated affiliate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Net income (loss)
    
    
    11.1
    %
    
    
    (9.7
    )%
    
    
    9.1
    %
    
    
    (4.0
    )%
 Summary
   gratis gratis
  18




---



##### Table of Contents



Revenue
 Advertising Services.
  Subscription Services. gratis
 gratis
 Transaction Services.
  19




---



##### Table of Contents



Operating Costs and Expenses
 Cost of Revenue.
  Sales and Marketing.
  General and Administrative.
  Restructuring.
 20




---



##### Table of Contents



Depreciation and Amortization.
  Other Income and Expenses
 Equity in Net Loss of Unconsolidated Affiliate.
 Interest Expense.
 Other Income, Net.
 Liquidity and Capital Resources
    21




---



##### Table of Contents



Off-balance Sheet Liabilities
  Other Contractual Commitments
  Payments Due by PeriodRemainder ofTotal
    
    
    2006
    
    
    2007-2008
    
    
    2009-2010
    
    
    2011 & After(In thousands)Contractual obligations:Capital lease obligations
    
    $
    2,375
    
    
    $
    212
    
    
    $
    1,429
    
    
    $
    695
    
    
    $
    39Operating leases
    
    
    16,729
    
    
    
    683
    
    
    
    5,993
    
    
    
    6,100
    
    
    
    3,953Deposit commitments
    
    
    10,032
    
    
    
    1,624
    
    
    
    8,408
    
    
    
    
    
    
    
    Notes payable
    
    
    20,465
    
    
    
    682
    
    
    
    15,980
    
    
    
    3,803
    
    
    
    Other
    
    
    438
    
    
    
    165
    
    
    
    112
    
    
    
    92
    
    
    
    69Total contractual obligations
    
    $
    50,039
    
    
    $
    3,366
    
    
    $
    31,922
    
    
    $
    10,690
    
    
    $
    4,061
 22




---



##### Table of Contents



Capital Lease Obligations.
 Operating Leases.
 Deposit
Commitments.
 Notes payable.
   Other.
 Critical Accounting Policies
    Stock-based compensation. Share-
Based Payment Accounting for
Stock Issued to Employees
  23




---



##### Table of Contents



Seasonality and Inflation
   Recent Accounting Pronouncements
 Fair Value Measurements
 Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement 109 Accounting for Income
Taxes.
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
   24




---



##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control over Financial Reporting
  
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
 de novo
 
 Item 1A. 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.
  25




---



##### 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.
  26




---



##### Table of Contents



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 potential absorption of significant management attention and significant financial resources for the ongoing
development of our business;
    
    the potential impairment of relationships with and difficulty in attracting and retaining employees of the
acquired companies or our employees as a result of the integration of acquired businesses;
    
    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 have acquired from LPI and RSVP;
    
    the difficulty of complying with additional regulatory requirements that may become applicable to us as the
result of an acquisition, such as various regulations that may become applicable to us as a result of our
acquisition of LPI, including the acquisition of a related entity that produces some content and other materials
intended for mature audiences; and
    
    the impact of known or unknown liabilities associated with the acquired businesses. For example, in our RSVP
business, should some of the third parties with whom we contract in connection with arranging our travel
itineraries fail to perform their obligations for any reason, as a third-party Austrian riverboat tour operator
with whom we contracted did in August 2006, we may be forced to cancel or reschedule planned trips, lose deposits
we have made to vendors, refund customer deposits, reimburse other costs to our customers and lose customers for
those and other travel itineraries as a result.
  If we do not continue to attract and retain qualified personnel, we may not be able to expand our
business.
  27




---



##### Table of Contents



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.
  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.
  28




---



##### Table of Contents



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.
   29




---



##### 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 email message to an address on that
states registry if the email message contained an
advertisement for or even a link to a website that offered
products or services that minors are prohibited from
accessing;
    
    comply with the European Union privacy directive and other
international regulatory requirements by modifying the ways
in which we collect and share our users personal
information; if these modifications render our services
less attractive to our members or subscribers, for example
by limiting the amount or type of personal information our
members or subscribers could post to their profiles, they
may cancel their memberships or subscriptions, resulting in
reduced revenue;
    
    qualify to do business in various states and countries, in
addition to jurisdictions where we are currently qualified,
because our websites are accessible over the Internet in
multiple states and countries, which if we fail to so
qualify, may prevent us from enforcing our contracts in
these states or countries and may limit our ability to grow
our business;
    
    limit our domestic or international expansion because some
jurisdictions may limit or prevent access to our services
as a result of the availability of some content intended
for mature viewing on some of our websites and through some
of the businesses we acquired from LPI which may render our
services less attractive to our members or subscribers and
result in a decline in our revenue; and
 30




---



##### Table of Contents




    
    limit or prevent access, from some jurisdictions, to some
or all of the member-generated content available through
our websites, which may render our services less attractive
to our members or subscribers and result in a decline in
our revenue. For example, in June 2005, the United States
Department of Justice (the DOJ) adopted regulations
purporting to implement the Child Protection and Obscenity
Act of 1988, as amended (the CPO Act), by requiring
primary and secondary producers, as defined in the
regulations, of certain adult materials to obtain, maintain
and make available for inspection specified records, such
as a performers name, address and certain forms of photo
identification as proof of a performers age. Failure to
properly obtain, maintain or make these records available
for inspection upon request of the DOJ could lead to an
imposition of penalties, fines or imprisonment. We could be
deemed a secondary producer under the CPO Act because we
allow our members to display photographic images on our
websites as part of member profiles. In addition, we may be
deemed a primary producer under the CPO Act because a
portion of one of the businesses we acquired in the LPI
acquisition is involved in production of adult content.
Enforcement of these regulations as to secondary producers
has been stayed pending resolution of a legal challenge on
the grounds that the regulations exceed the DOJs statutory
authority to regulate secondary producers, among other
grounds. In July 2006, the Adam Walsh Child Protection and
Safety Act of 2006 (the Walsh Act) became law, amending
the CPO Act by expanding the definition of the adult
materials covered by the CPO Act and by requiring secondary
producers to maintain and make available specified records
under the CPO Act. Additionally, in July 2006, the FBI
began conducting CPO Act record inspections, including an
inspection of a business that was a secondary producer
under the CPO Act. The Walsh Act may result in the stay on
enforcement of the CPO Act being lifted. If that occurs or
if the FBI continues to inspect businesses that are
secondary producers and there are no legal challenges to
the Walsh Act or these challenges are unsuccessful, we will
be subject to significant and burdensome recordkeeping
compliance requirements and we will have to evaluate and
implement additional registration and recordkeeping
processes and procedures, each of which would result in
additional expenses to us. If our members and subscribers
feel these additional restrictions or registration and
recordkeeping processes and procedures are too burdensome,
this may result in an adverse impact on our subscriber
growth and churn which, in turn, will have an adverse
effect on our financial condition and results of
operations. Alternatively, if we determine that the
recordkeeping and compliance requirements would be too
burdensome, we may be forced to limit the type of content
that we allow our members to post to their profiles, which
will result in a loss of features that we believe our
members and subscribers find attractive, and in turn could
result in a decline in our subscribers growth.
  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.
  31




---



##### Table of Contents



Adult content in our media properties may be the target of negative publicity campaigns or subject
us to restrictive or costly regulatory compliance.
  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 are exposed to pricing and production capacity risks associated with our magazine publishing
business, which could result in lower revenues and profit margins.
 The Advocate, Out, The Out Traveler HIVPlus,
 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.
  32




---



##### Table of Contents



Restrictions and covenants in our loan agreement may limit our ability to operate our business and
could prevent us from obtaining needed funds in the future.
   We may not be able to repay our existing debt; failure to do so or refinance the debt could prevent
us from implementing our strategy and realizing anticipated profits.
  In the event of an earthquake, other natural or man-made disaster, or power loss, our operations
could be interrupted or adversely affected, resulting in lower revenue.
  33




---



##### Table of Contents



Recent regulations related to equity compensation could adversely affect our ability to attract and
retain key personnel.
  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
 34




---



##### Table of Contents




    
    prohibit stockholders from calling a special meeting of stockholders.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
    Repurchases of Equity Securities.
 (c) Total Number
    
    
    (d) Maximum Number(a) Total
    
    
    
    
    
    
    of
    
    
    or ApproximateNumber of
    
    
    (b) Average
    
    
    Shares Purchased
    
    
    Dollar Value) ofShares
    
    
    Price Paid
    
    
    as Part of Publicly
    
    
    Shares that MayPurchased
    
    
    per
    
    
    Announced
    
    
    Yet Be Purchased UnderPeriod
    
    (1)
    
    
    Share
    
    
    Plans or Programs
    
    
    the Plans or ProgramsJuly 1, 2006  July 31, 2006
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    August 1, 2006  August 31, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    September 1, 2006  September
30, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    
 
 (1)
    
    PlanetOut does not have any publicly announced plans or programs to repurchase shares of its common stock. 
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5. Other Information.
  35




---



##### 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).4.2
    
    Form of Senior Debt Indenture (filed as Exhibit 4.5 to our Registration Statement
on Form S-3, File No. 333-133536, filed on April 25, 2006 and incorporated
herein by reference).4.3
    
    Form of Subordinated Debt Indenture (filed as Exhibit 4.6 to our Registration
Statement on Form S-3, File No. 333-133536, filed on April 25, 2006 and
incorporated herein by reference).10.27
    
    Amended and Restated Employment Agreement dated as of August 2, 2006 by and
between Jeffrey T. Soukup and PlanetOut Inc. (filed as Exhibit 99.1 to our
Current Report on Form 8-K, File No. 000-50879, filed on August 2, 2006 and
incorporated herein by reference).10.28
    
    Loan and Security Agreement dated September 28, 2006, by and among: PlanetOut
Inc. and its direct subsidiaries PlanetOut USA Inc., LPI Media Inc., SpecPub,
Inc. and RSVP Productions, Inc. as Borrowers; and ORIX Venture Finance LLC as
Lender (filed as Exhibit 99.1 to our Current Report on Form 8-K, File No.
000-50879, filed on October 3, 2006 and incorporated herein by reference).10.29
    
    Common Stock Warrant dated September 28, 2006 issued to ORIX Venture Finance LLC
(filed as Exhibit 99.2 to our Current Report on Form 8-K, File No. 000-50879,
filed on October 3, 2006 and incorporated herein by reference).12.1
    
    Computation of Ratio of Earnings to Fixed Charges.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.
 36




---



##### Table of Contents



SIGNATURES
  PLANETOUT INC.Date: November 8, 2006By:
    
    /s/ DANIEL J. MILLER

Daniel J. MillerSenior Vice President, Chief FinancialOfficer and Treasurer(Principal Financial and Accounting Officer)
 37




---



##### 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).4.2
    
    Form of Senior Debt Indenture (filed as Exhibit 4.5 to our Registration Statement
on Form S-3, File No. 333-133536, filed on April 25, 2006 and incorporated
herein by reference).4.3
    
    Form of Subordinated Debt Indenture (filed as Exhibit 4.6 to our Registration
Statement on Form S-3, File No. 333-133536, filed on April 25, 2006 and
incorporated herein by reference).10.27
    
    Amended and Restated Employment Agreement dated as of August 2, 2006 by and
between Jeffrey T. Soukup and PlanetOut Inc. (filed as Exhibit 99.1 to our
Current Report on Form 8-K, File No. 000-50879, filed on August 2, 2006 and
incorporated herein by reference).10.28
    
    Loan and Security Agreement dated September 28, 2006, by and among: PlanetOut
Inc. and its direct subsidiaries PlanetOut USA Inc., LPI Media Inc., SpecPub,
Inc. and RSVP Productions, Inc. as Borrowers; and ORIX Venture Finance LLC as
Lender (filed as Exhibit 99.1 to our Current Report on Form 8-K, File No.
000-50879, filed on October 3, 2006 and incorporated herein by reference).10.29
    
    Common Stock Warrant dated September 28, 2006 issued to ORIX Venture Finance LLC
(filed as Exhibit 99.2 to our Current Report on Form 8-K, File No. 000-50879,
filed on October 3, 2006 and incorporated herein by reference).12.1
    
    Computation of Ratio of Earnings to Fixed Charges.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.
 38