S-1/A 1 i10505.htm FORM S-3 AMENDMENT 3

As filed with the Securities and Exchange Commission on May 18, 2009

Registration No. 333-156414

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


AMENDMENT NO. 3 TO

FORM S-1

REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933


FRIENDFINDER NETWORKS INC.

(Exact name of registrant as specified in its charter)

Nevada
           
7370
   
13-3750988
(State or other jurisdiction of
           
(Primary standard industrial
   
(I.R.S. Employer
incorporation or organization)
           
classification code number)
   
Identification No.)
 


6800 Broken Sound Parkway
Boca Raton, Florida 33487
(561) 912-7000
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)


Marc H. Bell
Chief Executive Officer
6800 Broken Sound Parkway
Boca Raton, Florida 33487
(561) 912-7000
(Name, address, including zip code, and telephone number, including area code of agent for service)


Copies to:

Bruce S. Mendelsohn, Esq.
Akin Gump Strauss Hauer & Feld LLP
One Bryant Park
New York, New York 10036
Telephone (212) 872-1000
Facsimile: (212) 872-1002
           
Richard B. Aftanas, Esq.
Richard A. Ely, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036
Telephone (212) 735-3000
Facsimile: (212) 735-2000
 


Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ]

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]

Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated filer
           
[  ]
   
Accelerated filer
   
[  ]
Non accelerated filer
           
[X]
   
Smaller Reporting Company
   
[  ]
(Do not check if smaller reporting company)
 


The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to Section 8(a), may determine.





SUBJECT TO COMPLETION, DATED MAY 18, 2009

PRELIMINARY PROSPECTUS

Shares

 

Common Stock

This is an initial public offering of          shares of our common stock. All of the shares to be sold in the offering are being sold by us.

Prior to this offering, there has been no public market for our common stock. It is currently estimated that the initial public offering price per share will be between $       and $      . We intend to apply to have our common stock listed on the New York Stock Exchange under the symbol “FFN.”

Investing in our common stock involves risks. See “Risk Factors” beginning on page 11 to read about factors you should consider before buying shares of our common stock.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

        Per Share
    Total
Initial public offering price
              $                  $           
Underwriting discounts and commissions
              $           $    
Proceeds to us
              $           $    
 

We have granted the underwriters a 30-day option to purchase up to an additional        shares of common stock from us at the initial public offering price less the underwriting discount, solely to cover over-allotments.

The underwriters expect to deliver the shares to investors in this offering in New York, New York on or about                         , 2009.


Renaissance Securities (Cyprus) Limited

                        , 2009

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to
buy these securities in any state where the offer or sale is not permitted.



TABLE OF CONTENTS

        Page
Prospectus Summary
                 1    
Risk Factors
                 11   
Forward-Looking Statements
                 35   
Market and Industry Data
                 37   
Use of Proceeds
                 38   
Dividend Policy
                 41   
Capitalization
                 42   
Dilution
                 44   
Unaudited Pro Forma Financial Data
                 46   
Selected Consolidated Financial Data
                 50   
Management’s Discussion and Analysis of Financial Condition and Results of Operations
                 53   
Our Industry
                 93   
Business
                 97   
Management
                 113   
Principal Stockholders
                 131   
Certain Relationships and Related Party Transactions
                 134   
Description of Capital Stock
                 140   
Description of Indebtedness
                 146   
Shares Eligible for Future Sale
                 152   
Certain Material U.S. Tax Considerations
                 154   
Underwriting
                 156   
Legal Matters
                 161   
Independent Registered Public Accounting Firm
                 161   
Where You Can Find More Information
                 161   
Index to Consolidated Financial Statements
                 F-1    
 


You may rely only on the information contained in this prospectus. Neither we nor the underwriters have authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. Under no circumstances should the delivery to you of this prospectus or any sale made pursuant to this prospectus create any implication that the information contained in this prospectus is correct as of any time after the date of this prospectus. Neither we nor the underwriters are making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted.

For convenience in this prospectus, all references to “we,” “us,” “our,” or “our company” refer to FriendFinder Networks Inc. and, where appropriate, our consolidated direct and indirect subsidiaries. References to our “common stock” refer only to our $0.01 par value per share common stock, except as otherwise noted, and does not include our Series B common stock or our preferred stock. References to our “articles of incorporation,” “articles” or “charter” refer to our amended and restated articles of incorporation to be effective upon the consummation of this offering, which will, among other things, (i) increase the authorized number of shares of preferred stock issuable by us by 200,000,000 shares, and (ii) change the par value of our authorized capital stock, including all classes and series of common and preferred stock, from $0.01 par value per share to $0.001 par value per share. References to our “bylaws” refer to the amended and restated bylaws to be effective upon the consummation of this offering. Registered trademarks referred to in this prospectus are the property of their respective owners.

i




PROSPECTUS SUMMARY

The following summary highlights information contained elsewhere in this prospectus and is qualified in its entirety by the more detailed information and consolidated financial statements included elsewhere in this prospectus. The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern. This summary may not contain all of the information that may be important to you. You should carefully read the entire prospectus, including the “Risk Factors” and our consolidated financial statements and the notes to those statements, before making an investment decision.

About Our Company

We are a leading internet-based social networking and multimedia entertainment company operating several of the most heavily visited social networking websites in the world. Through our extensive network of websites, since our inception, we have built a base of over 300 million registrants and over 200 million members in approximately 170 countries offering a wide variety of online services so that our members can interact with each other and access the content available on our websites. Our websites are intended to appeal to users of diverse cultures and interest groups and include social networking, live interactive video and premium content websites. Our most heavily visited social networking and entertainment websites include AdultFriendFinder.com, Amigos.com, AsiaFriendFinder.com, Cams.com, FriendFinder.com, BigChurch.com and SeniorFriendFinder.com. Our revenue to date has been primarily derived from subscription and paid-usage adult-oriented products and services. We believe that our broad and diverse user base also represents a valuable asset that will provide opportunities for us to offer targeted online advertising to specific demographic groups. In addition to our online products and services, we also produce and distribute original pictorial and video content, license the globally-recognized Penthouse brand to a variety of consumer product companies and entertainment venues and publish branded men’s lifestyle magazines.

We categorize our users into five categories: visitors, registrants, members, subscribers and paid users and focus on the following key business metrics to evaluate the effectiveness of our operating strategies.

•  
  Visitors. Visitors are users who visit our websites but do not necessarily register. Visitors come to our websites through a number of channels, including by being directed from affiliate websites, keyword searches through standard search engines and by word of mouth. We believe we achieve large numbers of unique visitors because of our focus on continuously enhancing the user experience and expanding the breadth of our services. For the three months ended March 31, 2009, we averaged 55 million unique worldwide visitors per month according to comScore.

•  
  Registrants. Registrants are users who complete a free registration form on one of our websites by giving basic identification information and submitting their e-mail address. For the three months ended March 31, 2009, we averaged more than 3.8 million new registrations on our websites each month.

•  
  Members. Members are registrants who log into one of our websites and make use of our free products and services. Members are able to complete their personal profile and access our searchable database of members but do not have the same full access rights as subscribers. For the three months ended March 31, 2009, we averaged approximately three million new members on our websites each month.

•  
  Subscribers. Subscribers are members who purchase daily, three-day, weekly, monthly, quarterly, annual or lifetime subscriptions for one or more of our websites. Subscribers have full access to our websites and may access special features including premium content. For the three months ended March 31, 2009, we had a monthly average of approximately one million paying subscribers from whom we derived approximately 79.6% of our internet revenue.

•  
  Paid Users. Paid users are members who purchase products or services on a paid-by-usage basis. For the three months ended March 31, 2009, we averaged approximately 1.3 million purchased minutes by paid users each month from whom we derived approximately 17.9% of our internet revenue.

•  
  Average Monthly Net Revenue per Subscriber. Average revenue per subscriber, or ARPU, is calculated by dividing adjusted non-GAAP net revenue for the period by the average number of subscribers in the period.

1




For the three months ended March 31, 2009, our average monthly adjusted net revenue not measured in accordance with generally accepted accounting principles, or GAAP, which adjusted revenue we refer to as adjusted non-GAAP net revenue, per subscriber on our adult social networking websites and general audience social networking websites was approximately $21.60 and $18.74, respectively. For more information regarding our adjusted non-GAAP net revenue, see “Prospectus Summary — Non-GAAP Financial Results” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — FriendFinder Networks Inc. and Subsidiaries — Year Ended December 31, 2008 as Compared to Pro Forma Year Ended December 31, 2007.”

•  
  Churn. Churn is calculated by dividing terminations of subscriptions during the period by the total number of subscribers at the beginning of that period. Our average monthly churn rate, which measures the rate of loss of subscribers, for our adult social networking websites has decreased from approximately 17.5% per month for the three months ended March 31, 2008, to approximately 17.1% per month for the three months ended March 31, 2009. Our average monthly churn rate for our general audience social networking websites has decreased from approximately 21.3% for the three months ended March 31, 2008 to approximately 17.8% for the three months ended March 31, 2009.

•  
  Marketing Affiliates. Our marketing affiliates are companies that operate websites that market our services on their websites. These affiliates direct visitor traffic to our websites by using our technology to place banners or links on their websites to one or more of our websites. As of March 31, 2009, we had over 150,000 participants in our marketing affiliate program from which we derive a substantial portion of our new members and approximately 43% of our revenue. For the year ended December 31, 2008 and the three months ended March 31, 2009, we made payments to marketing affiliates of approximately $62.3 million and $16.3 million, respectively.

As of March 31, 2009, we had approximately $81.0 million in principal amount of debt outstanding at the parent level and Interactive Network, Inc., or INI, our wholly-owned subsidiary organized in connection with our December 2007 acquisition of Various, Inc., or Various, had approximately $415.0 million in principal amount of debt outstanding. We incurred debt at the parent level through the October 2004 offering of 13% term loan notes, or the Term Loan Notes, which were issued in connection with our predecessor being purchased out of bankruptcy and were later exchanged for 13% subordinated term loan notes, or the Subordinated Term Loan Notes and through the August 2005 offering of 15% senior secured notes due in 2010, or the 2005 Notes, which proceeds were used to fund the retirement of a $20 million credit facility, to fund the repayment of $11.8 million of our Subordinated Term Loan Notes, to fund the purchase of certain trademark assets and for general corporate purposes. We also incurred debt at the parent level through the August 2006 offering of 15% senior secured notes due in 2010, or the 2006 Notes, which proceeds were used to fund the acquisition of substantially all of the assets of the debtor estate of Jill Kelly Productions, Inc., a production company, and for general corporate purposes. In connection with the Various acquisition, INI issued senior secured notes due 2011, or the First Lien Senior Secured Notes, subordinated secured notes due 2011, or the Second Lien Subordinated Secured Notes, as well as 6% subordinated convertible notes, or the Subordinated Convertible Notes.

Events of default have occurred under certain of our debt agreements, which would permit noteholders to demand payment of our 2006 Notes, 2005 Notes, First Lien Senior Secured Notes, Second Lien Subordinated Secured Notes and Subordinated Convertible Notes. Our independent registered public accounting firm’s report dated March 20, 2009 stated that these conditions raise substantial doubt about our ability to continue as a going concern. We have obtained waivers from the requisite noteholder for certain events of default with respect to our Subordinated Term Loan Notes. For more information regarding the nature of these events of default, see “Description of Indebtedness.”

The primary purpose of this offering is to repay all of our outstanding debt, including certain debt held by our affiliates, which we expect will decrease our interest expense and increase our flexibility with respect to our operations and growth strategy.

2




Our Competitive Strengths

We believe that we have the following competitive strengths that we can leverage to implement our strategy:

•  
  Paid Subscriber-Based Social Networking Model. Our paid subscriber-based model of social networking websites is distinctly different from other free social networking websites whose users access the websites to remain connected to their pre-existing friends and interest groups. Our subscription based model allows our users to make new connections with other members with whom they share common interests, for which we receive a subscription fee.

•  
  Large and Diverse User Base Attractive to New and Existing Users. We operate some of the most heavily visited social networking websites in the world, currently adding on average more than 3.8 million new registrants and approximately three million new members each month. We believe our large user base represents a substantial barrier to entry for potential competitors.

•  
  Large and Difficult to Replicate Affiliate Network. Our marketing affiliate program with over 150,000 participants allows us to market our brand beyond our established users by collaborating with other companies who market our services on their websites. We believe that the difficulty in building an affiliate network of this large size presents a significant barrier to entry for potential competitors.

•  
  Proprietary and Scalable Technology Platform and Business Model. We have developed a robust, highly scalable technology platform over the last ten years that allows us to add new features and launch additional websites at a relatively low incremental cost.

•  
  Brand Recognition and Compelling Adult Content. The strength and wide recognition of our AdultFriendFinder, FriendFinder and Penthouse brands provides us with a competitive advantage. Due to our ability to offer a wide variety of both member-generated and professionally-produced content, we believe our websites appeal to adult internet users worldwide.

Our Strategy

As one of the world’s leading internet-based social networking and multimedia entertainment companies, our goal is to enhance revenue opportunities while improving our profitability. We plan to achieve these goals using the following strategies:

•  
  Encourage Visitors, Registrants and Members to Become Subscribers or Paid Users. We continually seek to improve the websites we operate with the goal of encouraging visitors, registrants and members to become subscribers or paid users by constantly evaluating, adding and enhancing features on our websites to improve our users’ experience.

•  
  Generate Advertising Revenue. To date, advertising revenue has represented less than 1.0% of our revenue, averaging approximately $0.1 million per month in the three months ended March 31, 2009. We believe that our large social networking user base represents a significant advertising opportunity. We believe we will be able to offer advertisers an opportunity to achieve superior results with advertisements that are well-targeted to their preferred demographic and interest groups.

•  
  Penetrate New Communities of Interest and Monetize Current Foreign Markets. We are constantly seeking to identify groups of sufficient size who share a common interest in order to create an online website intended to appeal to their interests. Our technology provides us with a scalable, low-cost capacity to quickly create and launch additional websites without substantial additional capital investment. Our extensive user database serves as an existing source of potential members and subscribers for new websites we create. Additionally, we seek to expand in selected geographic markets, including southeast Europe, South America and Asia, particularly as credit cards and other payment mechanisms become more accessible in selected geographic markets, we expect our revenue to grow.

•  
  Pursue Targeted Acquisitions. We believe there is a significant opportunity to expand our business by acquiring and integrating additional social networking websites, owners, creators and distributors of content and payment processing and advertising businesses.

Our Corporate Information

Our executive offices are located at 6800 Broken Sound Parkway, Boca Raton, Florida 33487 and our telephone number is (561) 912-7000. Our website address is www.ffn.com. The information contained in, or accessible through, our website is not part of this prospectus.

3




THE OFFERING

Common stock offered by us
           
            shares
Common stock outstanding before this offering (as of March 31, 2009)
           
104,956,481 shares
Common stock to be outstanding after this offering
           
            shares
Dividend policy
           
We do not anticipate paying cash dividends for the foreseeable future.
Over-allotment option
           
We have granted the underwriters an option to purchase up to        additional shares of our common stock at the public offering price to cover any over-allotment.
Use of proceeds
           
We estimate that our net proceeds from this offering will be approximately $       , assuming an initial offering price of $       per share of common stock, the midpoint of the range set forth on the cover page of this prospectus, after deducting underwriting discounts and estimated offering expenses payable by us. We intend to use the net proceeds to redeem our outstanding debt as further described under “Use of Proceeds.” The balance of the net proceeds will be used for working capital and general corporate purposes.
Risk factors
           
You should read the section captioned “Risk Factors” beginning on page 11 for a discussion of factors you should consider carefully before deciding whether to purchase shares of our common stock. Our independent registered public accounting firm has issued an opinion expressing substantial doubt about our ability to continue as a going concern. If we are unable to continue as a going concern, you may lose your entire investment.
Proposed New York Stock Exchange symbol
           
“FFN”
 

Unless the context requires otherwise, the number of shares of our common stock outstanding after this offering is based on the number of shares outstanding as of March 31, 2009 and includes:

•  
                   shares of common stock issuable upon our anticipated election to convert the Subordinated Convertible Notes;

•  
  35,334,011 shares of common stock issuable upon the conversion of Series A Convertible Preferred Stock outstanding as of March 31, 2009 (assuming all holders notify us in writing that they intend to exercise their option to convert);

•  
  168,897,005 shares of common stock issuable upon the conversion of Series B Convertible Preferred Stock outstanding as of March 31, 2009 (assuming all holders notify us in writing that they intend to exercise their option to convert);

•  
  36,796,500 shares of common stock issuable upon the exchange of Series B common stock outstanding as of March 31, 2009 (assuming all holders notify us in writing that they intend to exercise their option to convert); and

•  
                               shares of common stock underlying

•  
  9,531,276 outstanding warrants with an exercise price of $0.31 per share (assuming all holders notify us in writing that they intend to exercise their option to exercise such warrants for cash) that were originally issued in connection with certain of our debt offerings, which if not exercised, will expire upon the closing of this offering;

•  
  501,800 outstanding warrants with an exercise price of $0.51 per share (assuming all holders notify us in writing that they intend to exercise their option to exercise such warrants for cash) that were originally issued in connection with certain of our debt offerings, which if not exercised, will expire upon the closing of this offering; and

4




•  
  132,952,781 outstanding warrants with an exercise price of $0.00001 per share (assuming such warrants are exercised for cash) that were originally issued in connection with certain of our debt offerings, which if not exercised, will expire upon the closing of this offering;

but excludes:

•  
  26,879,946 shares of common stock issuable upon the exercise of options available for future issuance under The Penthouse Media Group Inc. 2008 Stock Option Plan, or our 2008 Stock Option Plan;

•  
                               shares equal to up to one percent of our fully diluted equity following this offering of common stock reserved for future issuance under our FriendFinder Networks Inc. 2009 Restricted Stock Plan, or our 2009 Restricted Stock Plan; and

•  
                                   shares of common stock the underwriters may purchase upon the exercise of the underwriters’ over-allotment option.

5




Summary Consolidated Financial Information and Other Financial Data

The following summary historical financial data should be read in conjunction with, and are qualified by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the audited consolidated financial statements and unaudited condensed consolidated financial statements and notes thereto included elsewhere in this prospectus. The following summary unaudited pro forma financial data should be read in conjunction with, and are qualified by reference to, “Unaudited Pro Forma Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — FriendFinder Networks Inc. and Subsidiaries — Year Ended December 31, 2008 as Compared to Pro Forma Year Ended December 31, 2007” included elsewhere in this prospectus. We derived the statement of operations data for the years ended December 31, 2008, 2007 and 2006 and the consolidated balance sheet data as of December 31, 2008 and 2007 from the audited consolidated financial statements included elsewhere in this prospectus. In their report dated March 20, 2009, which is also included in this prospectus, our independent registered public accounting firm stated that events of default have occurred under certain of our debt agreements allowing noteholders to demand payment of our 2006 Notes and 2005 Notes and our subsidiary’s First Lien Senior Secured Notes, Second Lien Subordinated Secured Notes and Subordinated Convertible Notes and that these conditions raise substantial doubt about our ability to continue as a going concern. We derived the summary financial data as of March 31, 2009 and for each of the three month periods ended March 31, 2009 and 2008 from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. We prepared the unaudited financial statements on a basis consistent with that used in preparing our audited consolidated financial statements, and they include all adjustments consisting of normal and recurring items, that in the opinion of management are necessary for a fair presentation of the financial position and results of operations for the unaudited periods. Results for the three month period ended March 31, 2009 are not necessarily indicative of the results of operations that may be expected for our full year performance or any future period.

In December 2007, we acquired Various for approximately $401.0 million which was paid in cash and notes together with related warrants. Our statement of operations for the year ended December 31, 2008 includes the results of operations of Various and our statement of operations for the year ended December 31, 2007 includes 25 days of results of operations from Various after giving effect to certain purchase accounting adjustments. The summary unaudited pro forma financial data has been presented to give effect to the acquisition of Various as if it had been completed on January 1, 2007. The pro forma year ended December 31, 2007 is not necessarily indicative of operating results which would have been achieved had the acquisition of Various been completed as of January 1, 2007 and should not be construed as representative of future operating results. Our statement of operations for the year ended December 31, 2006 does not include the results of operations of Various.

6




        FriendFinder Networks Inc. Consolidated Data
   
        Three Months Ended
March 31,
  Year Ended December 31,
   
      2009
  2008
    2008(1)
    2007(1)
    Pro Forma
Year Ended
December 31,
2007(2)
    Year
Ended
December 31,
2006
      (unaudited)             (unaudited)    
        (in thousands, except share and per share data)    
Statements of Operations and
Per Share Data:
                                                                                                       
Net revenue
              $ 84,125         $ 76,136         $ 331,017          $ 48,073          $ 332,907          $ 29,965   
Cost of revenue
              24,979         26,009             96,514             23,330             98,407             15,927   
Gross profit
              59,146         50,127             234,503             24,743             234,500             14,038   
Operating expenses
                                                                                                       
Product development
              3,474         3,154             14,553             1,002             11,329                
Selling and marketing
              12,388         14,408             59,281             7,595             71,483             1,430   
General and administrative
              17,955         21,011             88,280             24,466             75,836             24,354   
Depreciation & amortization
              10,312         10,145             40,849             5,091             42,810             3,322   
Impairment of goodwill
                                   9,571             925              925              22,824   
Impairment of other intangible assets
                                   14,860             5,131             5,131                
Total operating expenses:
              44,129         48,718             227,394             44,210             207,514             51,930   
Income (loss) from operations
              15,017         1,409             7,109             (19,467 )            26,986             (37,892 )  
Interest and other expense, net(3)
              19,527         24,794             71,251             16,880             95,537             12,049   
Loss before income tax benefit
              (4,510 )         (23,385 )             (64,142 )            (36,347 )            (68,551 )            (49,941 )  
Income tax benefit
              (1,370 )         (6,344 )             (18,176 )            (6,430 )            (14,945 )               
Net loss
              $ (3,140 )         $ (17,041 )          $ (45,966 )         $ (29,917 )         $ (53,606 )         $ (49,941 )  
Net loss per common share — basic
and diluted(3)
              $ (0.01 )         $ (0.14 )          $ (0.17 )         $ (0.23 )         $ (0.20 )         $ (0.45 )  
Weighted average common shares
outstanding — basic and diluted(4)
              274,706         121,714             274,706             132,193             274,706             111,088   
 

        FriendFinder Networks Inc. Consolidated Data
   
      As of
March 31,
 
 
    As of December 31,
   
      2009
 
 
    2008(1)
    2007(1)
      (unaudited)    
        (in thousands)    
Consolidated Balance Sheet Data (at period end):
                                                                       
Cash, restricted cash and cash equivalents
                 $    28,544                   $ 31,565          $ 23,722   
Total assets
              585,776                      599,913             649,868   
Long-term debt classified as current due to events of default, net of unamortized discount(5)
              374,160                      415,606             417,310   
Long-term debt
              38,856                      38,768             35,379   
Deferred revenue
              42,095                      42,814             27,214   
Total liabilities
              653,342                      657,998             661,987   
Convertible preferred stock
              2,042                      2,042             2,042   
Accumulated deficit
              (149,392 )                      (144,667       (98,701 )   
Total stockholders’ (deficiency)
              (67,566 )                      (58,085 )            (12,119 )  
 

      Three Months
Ended March 31,
  Year Ended
December 31,
 
      2009
  2008
  2008
  2007
      (unaudited)  
      (in thousands)    
Other Data:
                                                                       
Net cash provided by (used in) operating activities
                 $ 11,293         $ 10,485         $ 50,948          $ 4,744   
Net cash (used in) investing activities
                 (233 )         (1,280 )         (9,289 )         (149,322 )   
Net cash (used in) provided by financing activities
                 (13,125 )                 (25,336 )             148,961   
EBITDA(6)
              $ 26,865         $ 6,663          $ 57,217          $ (15,303 )  
Adjusted EBITDA(6)
              $ 26,865         $ 16,213          $ 100,848          $ (787 )  
 

7





(1)  
  Net revenue for the years ended December 31, 2008 and 2007 does not reflect $19.2 million and $8.5 million, respectively, due to a non-recurring purchase accounting adjustment that required the deferred revenue at the date of the acquisition of Various to be recorded at fair value. Management believes that it is appropriate to add back the deferred revenue adjustment because the average renewal rate of the subscriptions that were the basis for the deferred revenue was approximately 63%. The renewal rate on subscriptions that had already been renewed at least one time since the acquisition was 78%. Therefore, management believes that historical results of Various are reflective, including those revenues that were added back to the pro forma net revenue, of our future results.

(2)  
  On a pro forma basis to give effect to the acquisition of Various as if it had been completed on January 1, 2007, as more fully described in “Unaudited Pro Forma Financial Data.”

(3)  
  Includes interest expense, net of interest income, interest and penalties related to VAT, loss on modification of debt, foreign exchange gain, gain on settlement of VAT liability, gain on liability related to warrants and other (expense) income, net.

(4)  
  Basic and diluted loss per share is based on the weighted average number of shares of common stock outstanding and Series B common stock and including shares underlying common stock purchase warrants which are exercisable at the nominal price of $0.00001 per share. For information regarding the computation of per share amounts, refer to Note B(23) of our December 31, 2008 consolidated financial statements included elsewhere in this prospectus.

(5)  
  Excludes $1.4 million at December 31, 2008 of required principal amortization of First Lien Senior Secured Notes due by February 15, 2009, which is classified as a current portion of long-term debt.

(6)  
  The financial and operating data below set out supplementary information that we believe is useful for investors in evaluating our underlying operations. The following table reconciles our net income (loss) to EBITDA and adjusted EBITDA. EBITDA is defined as earnings (loss) before deducting net interest expense, income taxes, depreciation and amortization. Adjusted EBITDA is equal to EBITDA plus one time adjustments relating to deferred revenue, impairment of goodwill and impairment of other intangible assets. EBITDA is a key measurement metric used to measure the operating performance of our internet and entertainment segments. EBITDA is also a metric used for determining performance-based compensation of our executive officers. We present our EBITDA and adjusted EBITDA as a measure of operating performance because we believe analysts, investors and others frequently use it in the evaluation of companies in our industry. Other companies in our industry may calculate EBITDA differently, particularly as it relates to non-recurring, unusual items. EBITDA and adjusted EBITDA are not measurements of financial performance under GAAP and should not be considered as alternatives to cash flow from operating activities or as measures of liquidity, or as alternatives to net income or as indications of operating performance or any other measure of performance derived in accordance with GAAP.

        FriendFinder Networks Inc. Consolidated Data(a)
   
      Three Months
Ended March 31,
    Year Ended December 31,
   
      2009
  2008
    2008
    2007
    2006
      (unaudited)     (in thousands)    
 
Net loss
              $ (3,140 )         $ (17,041 )          $ (45,966 )         $ (29,917 )         $ (49,941 )  
Add: Interest expense, net
              21,063         19,903             80,510             15,953             7,918   
Less: Income tax benefit
              (1,370 )         (6,344 )             (18,176 )            (6,430 )               
Add: Depreciation and amortization
              10,312         10,145             40,849             5,091             3,322   
EBITDA(b)
              $ 26,865         $ 6,663          $ 57,217          $ (15,303 )         $ (38,701 )  
Add: Deferred revenue purchase accounting adjustment
                      9.550             19,200             8,460                
Add: Impairment of goodwill
                                   9,571             925              22,824   
Add: Impairment of other intangible assets
                                   14,860             5,131                
Adjusted EBITDA
              $ 26,865         $ 16,213          $ 100,848          $ (787 )         $ (15,877 )  
 


(a)  
  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of certain business acquisitions.

(b)  
  For the year ended December 31, 2008 and for the three months and twelve months ended March 31, 2009, we failed to satisfy our EBITDA covenants with respect to our 2006 Notes and 2005 Notes because of operating performance. For the year ended December 31, 2008 we failed to satisfy our EBITDA covenants with respect to the First Lien Senior Secured Notes and the Second Lien Subordinated Secured Notes due to the value added tax, or VAT, liability. For the three months ended March 31, 2009, we met our EBITDA covenants with respect to the First Lien Senior Secured Notes and the Second Lien Subordinated Secured Notes. For more information regarding this and other events of default under our debt agreements, see “Description of Indebtedness.” Our debt arrangements contain material debt covenants based on our maintaining specified levels of EBITDA (as it is specifically defined in the particular agreement as noted below). Specifically, we are required to maintain the following EBITDA levels for our outstanding debt:

  •  2006 Notes and 2005 Notes — $15,000,000 for the twelve month period ending March 31, 2009, $17,500,000 for the twelve month period ending June 30, 2009, $17,500,000 for the twelve month period ending September 30, 2009, $20,000,000 for the twelve month period ending December 31, 2009, $20,000,000 for the twelve month period ending March 31, 2010, $25,000,000 for the twelve month period ending June 30, 2010 and $25,000,000 for the twelve month period ending September 30, 2010. The EBITDA calculation under the covenant in each of the 2006 Notes and 2005 Notes only allows us to include the EBITDA of FriendFinder Networks Inc. on a standalone non-consolidated basis and, therefore, does not allow us to include the EBITDA of INI or its subsidiaries

8




   
  in this calculation. However, we may include dividends actually received from INI in this calculation. The EBITDA of FriendFinder Networks Inc., excluding EBITDA of INI, for the twelve month period ended March 31, 2009 based on this calculation was $5.5 million.

•  
  First Lien Senior Secured Notes and Second Lien Subordinated Secured Notes — $85,000,000 annualized consolidated EBITDA for INI and its subsidiaries. The annualized EBITDA based on the first quarter of 2009, as defined in the relevant documents, for INI and its subsidiaries was $100.9 million.

Non-GAAP Financial Results

We believe that the use of non-GAAP financial measures including, EBITDA and adjusted EBITDA, as some of many financial measures to be utilized by an investor determining whether to invest in us, are helpful since they allow the investor to measure our operating performance year over year without taking into account the wide disparity in the amounts of the interest, depreciation and amortization and tax expense items set forth in the financial statements. As discussed below, we also believe that the use of non-GAAP financial measures including adjusted net revenue, adjusted income from operations and adjusted net loss are useful to an investor as they eliminate one-time adjustments made for accounting purposes in connection with our Various acquisition in order to provide information that is directly comparable to our historical and current financial statements. However, these non-GAAP financial measures may not provide information that is directly comparable to that provided by other companies in our industry, as other companies in our industry may calculate items such as EBITDA and adjusted EBITDA differently, particularly as it relates to non-recurring, unusual items. Our non-GAAP financial measures, including adjusted net revenue, adjusted income from operations, adjusted net loss, EBITDA and adjusted EBITDA, are not measurements of financial performance under GAAP and should not be considered as alternatives to cash flow from operating activities or as measures of liquidity or as alternatives to net income or as indications of operating performance or any other measure of performance derived in accordance with GAAP.

For the quarter ended March 31, 2009, our net revenue, income from operations, net loss and EBITDA were $84.1 million, $15.0 million, $(3.1) million and $26.9 million, respectively. There were no purchase accounting adjustments after December 31, 2008.

For the year ended December 31, 2008, our net revenue, income from operations, net loss and earnings before deducting net interest expense, income taxes, depreciation and amortization, or EBITDA, were $331.0 million, $7.1 million, $(46.0) million and $57.2 million, respectively. However, in 2008, there was a one time $19.2 million reduction to net revenue due to purchase accounting that required the deferred revenue to be recorded at fair value on the date of acquisition of Various. The purchase accounting adjustment takes into account the assumption that a portion of our deferred revenue is related to the sales effort performed by Various prior to the acquisition and, therefore, we are only entitled to the fulfillment effort for the deferred subscription revenue acquired. For new subscriptions we are entitled to all of the deferred revenue from a subscription because we also performed the sales effort. In 2008, there were also non-cash impairment charges to goodwill and intangible assets of $17.6 million related to our entertainment segment and $6.8 million related to our internet segment. For more information regarding the purchase accounting adjustments and these other adjustments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Key Factors Affecting Our Results of Operations — Internet Revenue.” Management believes that the purchase accounting adjustment is one time in nature as it relates to an acquisition that has been completed. Further, management believes that due to the one time nature of the adjustment, it is appropriate to add back the amount of the adjustment as well as the non-cash impairment charges in 2008 to obtain a more meaningful comparison of the revenues, income from operations, net loss and EBITDA between 2008 and prior years.

As adjusted, and not measured in accordance with GAAP, each of net revenue, income from operations, net loss and EBITDA for the year ended December 31, 2008 were $350.2 million, $50.7 million, $(12.0) million and $100.8 million, respectively. For a reconciliation of these non-GAAP numbers to GAAP numbers see the table below.

We present our EBITDA and adjusted EBITDA as a measure of operating performance because we believe analysts, investors and others frequently use it in the evaluation of companies in our industry. We are highly leveraged and we have had a large varying amount of interest expense for the historical years presented. We plan to use the proceeds of this offering to reduce our leverage, thereby reducing our interest expense. In addition, we have the benefit of interest deductions and tax loss carryforwards which distorts comparisons of income tax expense

9





from year to year as interest expense is reduced and tax carryforwards are depleted and we book an income tax expense as opposed to a benefit. Finally, our depreciation and amortization expense has changed significantly due to the Various acquisition and purchase accounting impact on depreciation and amortization expense.

Reconciliation of GAAP Financial Measures to Non-GAAP Financial Measures

      GAAP
  Year Ended
December 31, 2008
Non-GAAP
Adjustments
  Non-GAAP
        (in thousands)  
Net revenue
              $ 331,017       $  19,200  (1 )         $ 350,217  
 
Income from operations
              7,109         19,200  (1 )         50,740  
 
                        24,431  (2 )                  
 
EBITDA
              57,217         19,200  (1 )         100,848  
 
                        24,431  (2 )                  
 
Net loss
              (45,966 )         19,200  (1 )         (12,008 )  
 
                        24,431  (2 )            
 
                     
   (9,673) (3)
         
 


(1)  
  To add back the one time deferred revenue adjustment resulting from purchase accounting.

(2)  
  To add back non-cash impairment charges to goodwill and intangible assets.

(3)  
  To reflect the tax effect of the non-GAAP adjustments.

Certain Non-Financial Operating Data

The non-financial operating data below includes the results of Various and our company for all periods presented.

        Non-Financial Operating Data
   
      Three Months Ended
March 31,

    Year Ended December 31,
   
      2009
  2008
    2008
    2007(4)
    2006(4)
Historical Operating Data:
                                                                                    
Adult Social Networking Websites
                                                                                       
Subscribers (as of the end of the period)
              914,765         963,420             896,211             919,146             906,641   
Churn(1)
              17.1 %       17.5 %             17.8 %            19.3 %            21.7 %  
ARPU(2)
              $ 21.60         $ 20.21          $ 21.98          $ 19.95          $ 20.39   
General Audience Social Networking Websites
                                                                                       
Subscribers (as of the end of the period)
              62,241         91,044             68,647             85,893             96,221   
Churn(1)
              17.8 %       21.3 %             18.6 %            22.2 %            27.0 %  
ARPU(2)
              $ 18.74         $ 18.34          $ 19.48          $ 16.38          $ 18.02   
Live Interactive Video Websites
                                                                                       
Average Revenue Per Minute
              $ 3.48         $ 2.58          $ 3.03          $ 2.93             n/a    
Cams — Minutes(3)
           
4,039,882   
   
5,800,559   
   
19,101,173   
   
20,613,825   
         n/a    
 


(1)  
  Churn is calculated by dividing terminations of subscriptions during the period by the total number of subscribers at the beginning of that period.

(2)  
  ARPU is calculated by dividing adjusted non-GAAP net revenue for the period by the average number of subscribers in the period. For more information regarding our adjusted non-GAAP net revenue, see “Prospectus Summary — Non-GAAP Financial Results” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — FriendFinder Networks Inc. and Subsidiaries — Year Ended December 31, 2008 as Compared to Pro Forma Year Ended December 31, 2007.”

(3)  
  Users purchase minutes in advance of their use and draw down on the available funds as the minutes are used.

(4)  
  Derived from historical information of Various.

10



RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider the following information about these risks, together with the other information contained in this prospectus. If any of the events anticipated by the risks described below occur, our results of operations and financial condition could be adversely affected, which could result in a decline in the value of our common stock, causing you to lose all or part of your investment.

Risks Related to our Business

We face significant competition from other social networking, internet personals and adult-oriented websites.

Our general audience social networking and personals websites face significant competition from other social networking websites such as MySpace.com, Facebook.com and Friendster.com, as well as companies providing online personals services such as Match.com, L.L.C., Yahoo!Personals, a website owned and operated by Yahoo! Inc., eHarmony, Inc., Lavalife Corp., Plentyoffish Media Inc. and Spark Networks Limited websites, including jdate.com, americansingles.com and relationships.com. Other social networking websites have significantly higher numbers of worldwide unique users than our general audience websites do. According to comScore, in March 2009, Facebook.com and MySpace.com had approximately 295 million and 128 million worldwide unique users, respectively, compared to FriendFinder.com’s 62 million worldwide unique users. In addition, the number of unique users on our general audience social networking and personals websites has decreased and may continue to decrease. Our adult-oriented websites face competition for visitors from other websites offering free adult-oriented content. We face competition from companies offering adult-oriented internet personals websites such as Cytek Ltd., the operator of SexSearch.com and Fling Incorporated and we compete with many adult-oriented and live interactive video websites, such as Playboy.com and LiveJasmin.com.

Some of our competitors may have significantly greater financial, marketing and other resources than we do. Our competitors may undertake more far-reaching marketing campaigns, including print and television advertisements, and adopt more aggressive pricing policies that may allow them to build larger member and subscriber bases than ours. Our competitors may also develop products or services that are equal or superior to our products and services or that achieve greater market acceptance than our products and services. Our attempts to increase traffic to and revenue from our general audience websites may be unsuccessful. Additionally, some of our competitors are not subject to the same regulatory restrictions that we are, including those imposed by our settlement with the Federal Trade Commission over the use of sexually explicit advertising. For more information regarding our potential liability for third party activities see “—We may be held secondarily liable for the actions of our affiliates, which could result in fines or other penalties that could harm our reputation, financial condition and business.” These activities could attract members and paying subscribers away from our websites, reduce our market share and adversely affect our results of operations.

We heavily rely on our affiliate network to generate traffic to our websites. If we lose affiliates, our business could experience a substantial loss of traffic, which could harm our ability to generate revenue.

Our affiliate network generated approximately 43.0% of our revenue for the three months ended March 31, 2009 from visitor traffic to our websites. We generally pay referring affiliates commissions based on the amount of revenue generated by the traffic they deliver to our websites. We intend to expand our current affiliate program to include general audience affiliates. However, our efforts to implement such a program may not proceed as anticipated. If other websites, including our competitors, were to offer higher paying affiliate programs, we could lose some of our affiliates unless we increased the commission rates we paid under our marketing affiliate program. In addition, our affiliates must comply with the terms of our December 2007 settlement with the Federal Trade Commission, which could deter affiliates from participating in our affiliate network or force us to terminate such affiliates if they violate such settlement. For more information regarding our potential liability for third party activities see “—We may be held secondarily liable for the actions of our affiliates, which could result in fines or other penalties that could adversely affect our reputation, financial condition and business.” Our affiliates arrangements can be terminated immediately by us or our affiliates for any reason. Typically, we do not have exclusivity arrangements with our affiliates, and some of our affiliates may also be affiliates for our competitors. Any increase in the commission rates we pay our affiliates would result in higher cost of revenue and could

11




negatively impact our results of operations. Finally, we could lose affiliates if their internal policies are revised to prohibit entering into business contracts with companies like ours that provide adult material. The loss of affiliates providing significant traffic and visitors to our websites could harm our ability to generate revenue.

We have never generated significant revenue from internet advertising and may not be able to in the future.

We believe that we may have an opportunity to shift some of our websites with lower subscription penetration to an advertising-based revenue model, as well as to provide selected targeted advertising on our subscriber focused websites. Our ability to generate significant advertising revenue will depend upon several factors, including, among others, the following:

•  
  our ability to maintain a large, demographically attractive registrant, member and subscriber base for our websites;

•  
  our ability to offer attractive advertising rates;

•  
  our ability to attract advertisers; and

•  
  our ability to provide effective advertising delivery and measurement systems.

If companies perceive our websites to be a limited or ineffective advertising medium, they will be less likely to advertise with us. In addition, if the users of social networking websites are found to be unresponsive to advertisements placed on such websites, companies may be deterred from advertising with us.

Our advertising revenue will also be dependent on the level of spending by advertisers, which is impacted by a number of factors beyond our control, including general economic conditions, changes in consumer purchasing and viewing habits and changes in the retail sales environment.

Our strategy to grow our advertising revenue is also dependent on the continued development of the internet as an advertising medium. If the market for internet-based advertising does not continue to develop or develops more slowly than expected, or if social networking websites are deemed to be a poor medium on which to advertise, our plan to use internet advertising revenue as a means of revenue growth may not succeed.

Additionally, filter software programs that limit or prevent advertising from being delivered to an internet user’s computer are becoming increasingly effective and easy to use, making the success of implementing an advertising medium increasingly difficult. Widespread adoption of this type of software could harm the commercial viability of internet-based advertising and, as a result, hinder our ability to grow our advertising-based revenue.

If we engaged in the internet advertising business and we failed to compete effectively against other internet advertising companies, we could lose customers or advertising inventory and our business and results of operations could be adversely affected.

The market for internet advertising and related services is intensely competitive and is characterized by rapidly changing technologies, evolving industry standards, frequent new product and service introductions, and changing client demands. Our existing competitors, as well as potential new competitors, may have significantly greater financial, technical and marketing resources than we do. Our competitors may be able to undertake more extensive marketing campaigns, adopt aggressive advertising pricing policies and devote substantially more resources to attracting advertising customers. In addition, the introduction by others of new advertising services embodying new technologies and the emergence of new industry standards and practices could render our services obsolete and unmarketable or require unanticipated technology investments. Our failure to adapt successfully to these changes could result in price reductions for advertising space, reduced margins and loss of our market share, which could adversely affect our business and results of operations.

Competition for advertising placements among current and future suppliers of internet navigational and informational services, high-traffic websites and internet service providers, or ISPs, as well as competition with non-internet media for advertising placements, could result in significant price competition, declining margins and/or reductions in advertising revenue. In addition, as we continue to expand the scope of our internet services, we may compete with a greater number of internet publishers and other media companies across an increasing range

12




of different internet services, including in focused markets where competitors may have advantages in expertise, brand recognition and other areas. If existing or future competitors develop or offer services that provide significant performance, price, creative or other advantages over those offered by us, our business, results of operations and financial condition would be negatively affected. We would also compete with traditional advertising media, such as direct mail, television, radio, cable, and print, for a share of advertisers’ total advertising budgets. Many potential competitors would enjoy competitive advantages over us, such as longer operating histories, greater name recognition, larger customer bases, greater access to advertising space on high-traffic websites, and significantly greater financial, technical and marketing resources. As a result, we may not be able to compete successfully.

Our business depends on strong brands, and if we are not able to maintain and enhance our brands, our ability to expand our base of users, advertisers and affiliates will be impaired and our business and operating results could be harmed.

We believe that the brand recognition that we have developed has significantly contributed to the success of our business. We also believe that maintaining and enhancing the “FriendFinder,” “AdultFriendFinder” and “Penthouse” brands is critical to expanding our base of users, advertisers and affiliates. Maintaining and enhancing our brands’ profiles may require us to make substantial investments and these investments may not be successful. If we fail to promote and maintain the “FriendFinder,” “AdultFriendFinder” and “Penthouse” brands’ profiles, or if we incur excessive expenses in this effort, our business and operating results could be harmed. We anticipate that, as our market becomes increasingly competitive, maintaining and enhancing our brands’ profiles may become increasingly difficult and expensive. Maintaining and enhancing our brands will depend largely on our ability to be a technology leader and to continue to provide attractive products and services, which we may not do successfully.

People have in the past expressed, and may in the future express, concerns over certain aspects of our products. For example, people have raised privacy concerns relating to the ability of our members to post pictures, videos and other information on our websites. Aspects of our future products may raise similar public concerns. Publicity regarding such concerns could harm our brands. Further, if we fail to maintain high standards for product quality, or if we fail to maintain high ethical, social and legal standards for all of our operations and activities, our reputation could be jeopardized.

In addition, affiliates and other third parties may take actions that could impair the value of our brands. We are aware that third parties, from time to time, use “FriendFinder,” “AdultFriendFinder” and “Penthouse” and similar variations in their domain names without our approval, and our brands may be harmed if users and advertisers associate these domains with us.

Our business, financial condition and results of operations may be adversely affected by unfavorable economic and market conditions.

Changes in global economic conditions could adversely affect the profitability of our business. Economic conditions worldwide have from time to time contributed to slowdowns in the technology industry, as well as in the specific segments and markets in which we operate, resulting in reduced demand and increased price competition for our products and services. Our operating results in one or more geographic regions may also be affected by uncertain or changing economic conditions within that region, such as the challenges that are currently affecting economic conditions in the United States and abroad. If economic and market conditions in the United States or other key markets, remain unfavorable or persist, spread or deteriorate further, we may experience an adverse impact on our business, financial condition and results of operation. If our entertainment segment continues to be adversely affected by these economic conditions, we may be required to take an impairment charge with respect to these assets. In addition, the current or future tightening of credit in financial markets could result in a decrease in demand for our products and services. The demand for entertainment and leisure activities tends to be highly sensitive to consumers’ disposable incomes, and thus a decline in general economic conditions may lead to our current and potential registrants, members , subscribers and paid users having less discretionary income to spend. This could lead to a reduction in our revenue and have a material adverse effect on our operating results. For the year ended December 31, 2008 and the three months ended March 31, 2009, our internet and entertainment revenue was adversely impacted by negative global economic conditions. For more information regarding the effect of economic conditions on our operating results see “Management’s Discussion and Analysis of Financial Condition and Results

13




of Operations — Year Ended December 31, 2008 as Compared to Pro Forma Year Ended December 31, 2007 — Net Revenue,” “Management, Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — FriendFinder Networks Inc. and Subsidiaries — Three Months Ended March 31, 2009 as Compared to the Three Months Ended March 31, 2008 — Net Revenue,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Various Inc. and Subsidiaries — Internet Segment Historical Operating Data for the Three Months Ended March 31, 2009 as Compared to the Three Months Ended March 31, 2008” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Various Inc. and Subsidiaries — Internet Segment Historical Operating Data for the Year Ended December 31, 2008 as Compared to the Pro Forma Year Ended December 31, 2007.”Accordingly, this economic downturn in the U.S. and other countries may hurt our financial performance. We are unable to predict the likely duration and severity of the current disruption in financial markets and adverse economic conditions and the effects they may have on our business and financial condition and results of operations.

Registrants are able to opt-out of receiving certain communications from us thereby limiting the potential value of these registrants to us as a source of revenue.

Our user database serves as an existing source of potential members or subscribers for new websites we create and additionally presents opportunities for us to offer targeted online advertising to specific demographic groups. However, we allow our registrants to opt out of receiving certain communications from us and third parties, including advertisements. The number of registrants who have opted out of receiving such communications are not identified in our gross number of registrants. Registrants who have opted out of receiving advertisements are potentially less valuable to us as a source of revenue than registrants who have not done so.

Continued imposition of tighter processing restrictions by credit card processing companies and acquiring banks would make it more difficult to generate revenue from our websites.

We rely on third parties to provide credit card processing services allowing us to accept credit card payments from our subscribers and paid users. As of March 31, 2009, three credit card processing companies accounted for approximately 47.1% of our accounts receivable. Our business could be disrupted if these or other companies become unwilling or unable to provide these services to us. We are also subject to the operating rules, certification requirements and rules governing electronic funds transfers imposed by the payment card industry seeking to protect credit cards issuers, which could change or be reinterpreted to make it difficult or impossible for us to comply with such rules or requirements. If we fail to comply, we may be subject to fines and higher transaction fees and lose our ability to accept credit card payments from our customers, and our business and operating results would be adversely affected. Our ability to accept credit cards as a form of payment for our online products and services could also be restricted or denied for a number of other reasons, including but not limited to:

•  
  if we experience excessive chargebacks and/or credits;

•  
  if we experience excessive fraud ratios;

•  
  if there is an adverse change in policy of the acquiring banks and/or card associations with respect to the processing of credit card charges for adult-related content;

•  
  an increase in the number of European and U.S. banks that will not accept accounts selling adult-related content;

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  if there is a breach of our security resulting in the theft of credit card data;

•  
  continued tightening of credit card association chargeback regulations in international commerce; and

•  
  association requirements for new technologies that consumers are less likely to use.

In May 2000, American Express instituted a policy of not processing credit card transactions for online, adult-oriented content and terminated all of its adult website merchant accounts. If other credit card processing companies were to implement a similar policy, it would have a material adverse effect on our business operations and financial condition.

Our credit card charge back rate is currently approximately 0.8% of the transactions processed and the reserves the banks require us to maintain are less than 2.0% of our total revenue. In addition, our required reserve balances

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have decreased from $7.9 million at December 31, 2008 to $6.9 million at March 31, 2009. If our charge back rate increases or we are required to maintain increased reserves, this could increase our operating expenses and may have a material adverse effect on our business operations and financial condition.

Our ability to keep pace with technological developments is uncertain.

Our failure to respond in a timely and effective manner to new and evolving technologies could harm our business, financial condition and operating results. The internet industry is characterized by rapidly changing technology, evolving industry standards, changes in consumer needs and frequent new service and product introductions. Our business, financial condition and operating results will depend, in part, on our ability to develop the technical expertise to address these rapid changes and to use leading technologies effectively. We may experience difficulties that could delay or prevent the successful development, introduction or implementation of new features or services.

Further, if the new technologies on which we intend to focus our investments fail to achieve acceptance in the marketplace or our technology does not work and requires significant cost to replace or fix, our competitive position could be adversely affected, which could cause a reduction in our revenue and earnings. For example, our competitors could be the first to obtain proprietary technologies that are perceived by the market as being superior. Further, after incurring substantial costs, one or more of the technologies under development could become obsolete prior to its introduction.

To access technologies and provide products that are necessary for us to remain competitive, we may make future acquisitions and investments and may enter into strategic partnerships with other companies. Such investments may require a commitment of significant capital and human and other resources. The value of such acquisitions, investments and partnerships and the technology accessed may be highly speculative. Arrangements with third parties can lead to contractual and other disputes and dependence on the development and delivery of necessary technology on third parties that we may not be able to control or influence. These relationships may commit us to technologies that are rendered obsolete by other developments or preclude the pursuit of other technologies which may prove to be superior.

We may be held secondarily liable for the actions of our affiliates, which could result in fines or other penalties that could adversely affect our reputation, financial condition and business.

Under the terms of our December 2007 settlement with the Federal Trade Commission, we have agreed not to display sexually explicit online advertisements to consumers who are not seeking out sexually explicit content, and we require that members of our marketing affiliate network affirmatively agree to abide by this restriction as part of our affiliate registration process. We have also agreed to end our relationship with any affiliate that fails to comply with this restriction. Notwithstanding these measures, should any affiliate fail to comply with the restriction and display sexually explicit advertisements relating to our adult-oriented websites to any consumer not seeking adult content, we may be held liable for the actions of such affiliate and subjected to fines and other penalties that could adversely affect our reputation, financial condition and business.

The report of our independent registered public accounting firm includes an explanatory paragraph concerning conditions that raise substantial doubt about our ability to continue as a going concern, and there is no guarantee that we will be able to continue to operate our business or generate revenue.

Our ability to continue as a going concern is dependent on our ability to raise additional capital, including from this offering. As of March 31, 2009, we had approximately $28.5 million in cash and restricted cash and $410.6 million in short-term debt, net of unamortized discount, $374.1 million of which had been reclassified from long-term debt, due to our failure to comply with certain covenants and restrictions in the agreements governing our 2006 Notes and 2005 Notes and our subsidiary’s First Lien Senior Secured Notes, Second Lien Subordinated Secured Notes and Subordinated Convertible Notes and for which waivers had not been obtained. We have unsuccessfully sought to obtain waivers from all of our noteholders, except such waivers that have been obtained from an affiliate of Messrs. Bell and Staton relating to our Subordinated Term Loan Notes, for our failure to comply with certain covenants and restrictions contained in these agreements. If we are unable to cure such defaults and/or obtain waivers, we could trigger the acceleration of payment provisions in such agreements which would require

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us to immediately repay up to approximately $455.6 million to our noteholders. We do not currently have sufficient cash to repay this indebtedness if our debt is accelerated and if the noteholders instituted foreclosure proceedings against our assets, the proceeds of the assets could be insufficient to repay such indebtedness in full. Under these circumstances, we may be unable to continue operating as a going concern.

In their report dated March 20, 2009, which is also included in this prospectus, our independent registered public accounting firm stated that events of default have occurred under certain of our debt agreements allowing noteholders to demand payment of our 2006 Notes and 2005 Notes, and our subsidiary’s First Lien Senior Secured Notes, Second Lien Subordinated Secured Notes and Subordinated Convertible Notes and that these conditions raise substantial doubt about our ability to continue as a going concern. If doubts are raised about our ability to continue as a going concern following this offering, our stock price could drop and our ability to raise additional funds may be adversely affected. Any of these outcomes would be detrimental to our operations.

We have breached certain non-monetary covenants contained in agreements governing our 2006 Notes and 2005 Notes and our subsidiary, INI, has breached certain non-monetary covenants contained in its agreements governing the First Lien Senior Secured Notes, Second Lien Subordinated Secured Notes and Subordinated Convertible Notes. We cannot assure you that we will be able to cure such defaults or events of default, obtain waivers and consents, amend the covenants, and/or remain in compliance with these covenants in the future.

Our debt agreements require us to maintain certain financial ratios as well as comply with other financial covenants relating to minimum consolidated EBITDA and minimum consolidated coverage ratio and negative covenants relating to restricted payments from INI to us and permitted investments. Certain of these ratios and covenants have not been maintained or satisfied primarily due to the unexpected VAT liability that was discovered after we acquired Various.

Furthermore, we and INI have failed to comply with certain non-monetary covenants contained within some of our debt agreements including the timely delivery of quarterly financial statements and officer’s certificates and the holding of quarterly meetings of our board of directors. We also failed to obtain the consent of the noteholders prior to taking certain corporate actions such as seeking their consent prior to changing our name from Penthouse Media Group Inc. to FriendFinder Networks Inc. and our subsidiary’s name from FriendFinder Network, Inc. to FriendFinder California Inc. In addition, in connection with the Various acquisition, we failed to meet certain operating targets and timely deliver certain agreed-upon documents and take certain actions with respect to the granting and perfection of security interests after the acquisition of Various was completed, although such documents and actions were subsequently completed.

If our efforts to cure and/or obtain waivers for such events of default from our noteholders are unsuccessful in the future it could result in the acceleration of $455.6 million in debt. If all of our indebtedness was accelerated, we would not have sufficient funds at the time of acceleration to repay most of our indebtedness, which could have a material adverse effect on our ability to continue as a going concern.

We have a history of significant operating losses and we may incur additional net losses in the future, which have had and may continue to have material consequences to our business.

We have historically generated significant net losses. As of March 31, 2009, we had an accumulated deficit of approximately $149.4 million. For the three months ended March 31, 2009, we had a net loss of $3.1 million. For the years ended December 31, 2008, 2007 and 2006, we had net losses of approximately $46.0 million, $29.9 million and $49.9 million, respectively. We also had negative operating cash flows in 2006. We expect our operating expenses will continue to increase during the next several years as a result of the promotion of our services and the expansion of our operations, including the launch of new websites and entering into acquisitions, strategic alliances and joint ventures. If our revenue does not grow at a substantially faster rate than these expected increases in our expenses or if our operating expenses are higher than we anticipate, we may not be profitable and we may incur additional losses, which could be significant. Our net losses cause us to be more highly leveraged, increase our cost of debt and make us subject to certain covenants which limit our ability to grow our business organically or through acquisitions. For more information with respect to the covenants to which we are currently subject, see “—Any remaining indebtedness after this offering could make obtaining additional capital reserves difficult and could materially adversely affect our business, financial condition, results of operations and our growth strategy.”

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If any of our relationships with internet search websites terminate, if such websites’ methodologies are modified or if we are outbid by competitors, traffic to our websites could decline.

We depend in part on various internet search websites, such as Google.com, MSN.com, Yahoo.com and other websites to direct a significant amount of traffic to our websites. Search websites typically provide two types of search results, algorithmic and purchased listings. Algorithmic listings generally are determined and displayed as a result of a set of formulas designed by search engine companies in their discretion. Purchased listings generally are displayed if particular word searches are performed on a search engine. We rely on both algorithmic and purchased search results, as well as advertising on other internet websites, to direct a substantial share of visitors to our websites and to direct traffic to the advertiser customers we serve. If these internet search websites modify or terminate their relationship with us or we are outbid by our competitors for purchased listings, meaning that our competitors pay a higher price to be listed above us in a list of search results, traffic to our websites could decline. Such a decline in traffic could affect our ability to generate subscription revenue and could reduce the desirability of advertising on our websites.

If members decrease their contributions of content to our websites that depend on such content, the viability of those websites would be impaired.

Many of our websites rely on members’ continued contribution of content without compensation. We cannot guarantee that members will continue to contribute such content to our websites. In addition, we may offer discounts to members who provide content for our websites as an incentive for their contributions. In the event that contributing members decrease their contributions to our websites, or if the quality of such contributions is not sufficiently attractive to our audiences, or if we are required to offer additional discounts in order to encourage members to contribute content to our websites, this could have a negative impact on our business, revenue and financial condition.

Most of our revenue is currently derived from subscribers to our online offerings and a reduction in the number of our subscribers or a reduction in the amount of spending by our subscribers could harm our financial condition.

Our internet business generated approximately 93.1% of our revenue for the three months ended March 31, 2009 from subscribers and other paying customers to our websites. For more information regarding our adjusted non-GAAP net revenue, see “Prospectus Summary — Non-GAAP Financial Results” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — FriendFinder Networks Inc. and Subsidiaries  —  Year Ended December 31, 2008 as Compared to Pro Forma Year Ended December 31, 2007.” We must continually add new subscribers to replace subscribers that we lose in the ordinary course of business due to factors such as competitive price pressures, credit card expirations, subscribers’ perceptions that they do not use our services sufficiently and general economic conditions. Our subscribers maintain their subscriptions on average for approximately five months. Our business depends on our ability to attract a large number of visitors, to convert visitors into registrants, to convert registrants into members, to convert members into subscribers and to retain our subscribers. As of March 31, 2009, we had approximately one million subscribers. If we are unable to remain competitive and provide the pricing and content, features, functions or services necessary to attract new subscribers or retain existing subscribers, our operating results could suffer. To the extent free social networking and personals websites, or free adult content on the internet, continue to be available or increase in availability, our ability to attract and retain subscribers may be adversely affected. In addition, any decrease in our subscribers’ spending due to general economic conditions could also reduce our revenue or negatively impact our ability to grow our revenue.

Increased subscriber churn or subscriber upgrade and retention costs could adversely affect our financial performance.

Turnover of subscribers in the form of subscriber service cancellations or failures to renew, or churn, has a significant financial impact on the results of operations of any subscription internet provider, including us, as does the cost of upgrading and retaining subscribers. For the three months ended March 31, 2009, our average monthly churn rate for our adult social networking websites was 17.1% and our average monthly churn rate for our general audience social networking websites was 17.8%. Any increase in the costs necessary to upgrade and retain existing subscribers could adversely affect our financial performance. In addition, such increased costs could cause us to

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increase our subscription rates, which could increase churn. Churn may also increase due to factors beyond our control, including churn by subscribers who are unable or unwilling to pay their monthly subscription fees because of personal financial restrictions, the impact of a slowing economy or the attractiveness of competing services or websites. If excessive numbers of subscribers cancel or fail to renew their subscriptions, we may be required to incur significantly higher marketing expenditures than we currently anticipate in order to replace canceled or unrenewed subscribers with new subscribers, which could harm our financial condition.

Our business, financial condition and results of operations could be adversely affected if we fail to provide adequate security to protect our users and our systems.

Online security breaches could adversely affect our business, financial condition and results of operations. Any well-publicized compromise of security could deter use of the internet in general or use of the internet to conduct transactions that involve transmitting confidential information or downloading sensitive materials. In offering online payment services, we may increasingly rely on technology licensed from third parties to provide the security and authentication necessary to effect secure transmission of confidential information, such as customer credit card numbers. Advances in computer capabilities, new discoveries in the field of cryptography or other developments could compromise or breach the algorithms that we use to protect our customers’ transaction data. If third parties are able to penetrate our network security or otherwise misappropriate confidential information, we could be subject to liability, which could result in litigation. In addition, experienced programmers or “hackers” may attempt to misappropriate proprietary information or cause interruptions in our services that could require us to expend significant capital and resources to protect against or remediate these problems.

Our business involves risks of liability claims arising from our media content, which could adversely affect our ability to generate revenue and could increase our operating expenses.

As a distributor of media content, we face potential liability for defamation, invasion of privacy, negligence, copyright or trademark infringement, obscenity, violation of rights of publicity and/or obscenity laws and other claims based on the nature and content of the materials distributed. These types of claims have been brought, sometimes successfully, against broadcasters, publishers, online services and other disseminators of media content. We could also be exposed to liability in connection with content made available through our online social networking and personals websites by users of those websites. Any imposition of liability that is not covered by insurance or is in excess of our insurance coverage could have a material adverse effect on us. In addition, measures to reduce our exposure to liability in connection with content available through our internet websites could require us to take steps that would substantially limit the attractiveness of our internet websites and/or their availability in certain geographic areas, which could adversely affect our ability to generate revenue and could increase our operating expenses.

Privacy concerns could increase our costs, damage our reputation, deter current and potential users from using our products and services and negatively affect our operating results.

From time to time, concerns may arise about whether our products and services compromise the privacy of users and others. Concerns about our practices with regard to the collection, use, disclosure or security of personal information or other privacy-related matters, even if unfounded, could damage our reputation and deter current and potential users from using our products and services, which could negatively affect our operating results. While we strive to comply with all applicable data protection laws and regulations, as well as our own posted privacy policies, any failure or perceived failure to comply may result in proceedings or actions against us by governmental entities or others, which could potentially have an adverse effect on our business. Increased scrutiny by regulatory agencies, such as the Federal Trade Commission and state agencies, of the use of customer information, could also result in additional expenses if we are obligated to reengineer systems to comply with new regulations or to defend investigations of our privacy practices.

In addition, as most of our products and services are web based, the amount of data we store for our users on our servers (including personal information) has been increasing. Any systems failure or compromise of our security that results in the release of our users’ data could seriously harm our reputation and brand and, therefore, our business. A security or privacy breach may:

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•  
  cause our customers to lose confidence in our services;

•  
  deter consumers from using our services;

•  
  harm our reputation;

•  
  require that we expend significant additional resources related to our information security systems and result in a disruption of our operations;

•  
  expose us to liability;

•  
  cause us to incur expenses related to remediation costs; and

•  
  decrease market acceptance of the use of e-commerce transactions.

The risk that these types of events could adversely affect our business is likely to increase as we expand the number of products and services we offer as well as increase the number of countries where we operate, as more opportunities for such breaches of privacy will exist.

Proposed legislation concerning data protection is currently pending at the U.S. federal and state level as well as in certain foreign jurisdictions. In addition, the interpretation and application of data protection laws in Europe, the U.S. and elsewhere are still uncertain and in flux. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our data practices. If so, in addition to the possibility of fines, this could result in an order requiring that we change our data practices, which could have an adverse effect on our business. Complying with these laws could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business.

We may not be able to protect and enforce our intellectual property rights.

We currently own and maintain approximately 100 U.S. trademark registrations and applications and over 900 foreign trademark registrations and applications. We believe that our trademarks, particularly the “AdultFriendFinder,” “FriendFinder,” “FastCupid,” “Penthouse,” “Penthouse Letters,” “Forum,” and “Variations” names and marks, the One Key Logo, and other proprietary rights are critical to our success, potential growth and competitive position. Our inability or failure to protect or enforce these trademarks and other proprietary rights could materially adversely affect our business. Accordingly, we devote substantial resources to the establishment, protection and enforcement of our trademarks and other proprietary rights. Our actions to establish, protect and enforce our trademarks and other proprietary rights may not prevent imitation of our products, services or brands or control piracy by others or prevent others from claiming violations of their trademarks and other proprietary rights by us. There are factors outside of our control that pose a threat to our intellectual property rights. For example, effective intellectual property protection may not be available in every country in which our products and services are distributed or made available through the internet.

Intellectual property litigation could expose us to significant costs and liabilities and thus negatively affect our business, financial condition and results of operations.

We are, from time to time, subject to claims of infringement or other violations of intellectual property rights. Intellectual property claims are generally time-consuming and expensive to litigate or settle. To the extent that claims against us are successful, we may have to pay substantial monetary damages or discontinue any of our services or practices that are found to be in violation of another party’s rights. Successful claims against us could also result in us having to seek a license to continue our practices, which may significantly increase our operating burden and expenses, potentially resulting in a negative effect on our business, financial condition and results of operations.

If we are unable to obtain or maintain key website addresses, our ability to operate and grow our business may be impaired.

Our website addresses, or domain names, are critical to our business. We currently own over 2,000 domain names. However, the regulation of domain names is subject to change, and it may be difficult for us to prevent third parties from acquiring domain names that are similar to ours, that infringe our trademarks or that otherwise

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decrease the value of our brands. If we are unable to obtain or maintain key domain names for the various areas of our business, our ability to operate and grow our business may be impaired.

We may have difficulty scaling and adapting our existing network infrastructure to accommodate increased traffic and technology advances or changing business requirements, which could cause us to incur significant expenses, lead to the loss of users and advertisers and affect our ability to hire or retain employees.

To be successful, our network infrastructure has to perform well and be reliable. The greater the user traffic and the greater the complexity of our products and services, the more computer power we will need. We could incur substantial costs if we need to modify our websites or our infrastructure to adapt to technological changes. If we do not maintain our network infrastructure successfully, or if we experience inefficiencies and operational failures, the quality of our products and services and our users’ experience could decline. Maintaining an efficient and technologically advanced network infrastructure is particularly critical to our business because of the pictorial nature of the products and services provided on our websites. A decline in quality could damage our reputation and lead us to lose current and potential users and advertisers. Cost increases, loss of traffic or failure to accommodate new technologies or changing business requirements could harm our operating results and financial condition.

In addition, technological innovation depends, to a significant extent, on the work of technically skilled employees. Competition for the services of these employees is vigorous. We cannot assure you that we will be able to continue to attract and retain these employees.

If we do not diversify, continue to innovate and provide services that are useful to users and which generate significant traffic to our websites, we may not remain competitive or generate revenue.

Internet-based social networking is characterized by significant competition, evolving industry standards and frequent product and service enhancements. Our competitors are constantly developing innovations in internet social networking. We must continually invest in improving our users’ experiences and in providing services that people expect in a high quality internet experience, including services responsive to their needs and preferences and services that continue to attract, retain and expand our user base.

If we are unable to predict user preferences or industry changes, or if we are unable to modify our services on a timely basis, we may lose users, licensees, affiliates and/or advertisers. Our operating results would also suffer if our innovations are not responsive to the needs of our users, advertisers, affiliates or licensees, are not appropriately timed with market opportunity or are not effectively brought to market. As internet-based social networking technology continues to develop, our competitors may be able to offer social networking products or services that are, or that are be perceived to be, substantially similar or better than those generated by us. As a result, we must continue to invest resources in order to diversify our service offerings and enhance our technology. If we are unable to provide social networking technologies and other services which generate significant traffic to our websites, our business could be harmed, causing revenue to decline.

The loss of our main data center or other parts of our systems and network infrastructure would adversely affect our business.

Our main data center and most of our servers are located at external third-party facilities in Northern California, an area with a high risk of major earthquakes. If our main data center or other parts of our systems and network infrastructure was destroyed by, or suffered significant damage from, an earthquake, fire, flood, or other similar catastrophes, or if our main data center was closed because of the operator having financial difficulties, our business would be adversely affected. Our casualty insurance policies may not adequately compensate us for any losses that may occur due to the occurrence of a natural disaster.

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Our internet operations are subject to system failures and interruptions that could hurt our ability to provide users with access to our websites, which could adversely affect our business and results of operations.

The uninterrupted performance of our computer systems is critical to the operation of our websites. Our ability to provide access to our websites and content may be disrupted by power losses, telecommunications failures or break-ins to the facilities housing our servers. Our users may become dissatisfied by any disruption or failure of our computer systems that interrupts our ability to provide our content. Repeated or prolonged system failures could substantially reduce the attractiveness of our websites and/or interfere with commercial transactions, negatively affecting our ability to generate revenue. Our websites must accommodate a high volume of traffic and deliver regularly-updated content. Some of our network infrastructure is not fully redundant, meaning that we do not have back-up infrastructure on site for our entire network, and our disaster recovery planning cannot account for all eventualities. Our websites have, on occasion, experienced slow response times and network failures. These types of occurrences in the future could cause users to perceive our websites as not functioning properly and therefore induce them to frequent other websites. We are also subject to risks from failures in computer systems other than our own because our users depend on their own internet service providers in order to access our websites and view our content. Our revenue could be negatively affected by outages or other difficulties users experience in accessing our websites due to internet service providers’ system disruptions or similar failures unrelated to our systems. Any disruption in the ability of users to access our websites, could result in fewer visitors to our websites and subscriber cancellations or failures to renew, which could adversely affect our business and results of operations. We may not carry sufficient levels of business interruption insurance to compensate us for losses that may occur as a result of any events that cause interruptions in our service.

Because of our adult content, companies providing products and services on which we rely may refuse to do business with us.

Many companies that provide products and services we need are concerned that associating with us could lead to their becoming the target of negative publicity campaigns by public interest groups and boycotts of their products and services. As a result of these concerns, these companies may be reluctant to enter into or continue business relationships with us. For example, some domestic banks have declined providing merchant bank processing services to us and some credit card companies have ceased or declined to be affiliated with us. This has caused us, in some cases, to seek out and establish business relationships with international providers of the services we need to operate our business. There can be no assurance however, that we will be able to maintain our existing business relationships with the companies, domestic or international, that currently provide us with services and products. Our inability to maintain such business relationships, or to find replacement service providers, would materially adversely affect our business, financial condition and results of operations. We could be forced to enter into business arrangements on terms less favorable to us than we might otherwise obtain, which could lead to our doing business with less competitive terms, higher transaction costs and more inefficient operations than if we were able to maintain such business relationships or find replacement service providers.

Changes in government laws could materially adversely affect our business, financial condition and results of operations.

Our businesses are regulated by diverse and evolving laws and governmental authorities in the United States and other countries in which we operate. Such laws relate to, among other things, internet, licensing, copyrights, commercial advertising, subscription rates, foreign investment, use of confidential customer information and content, including standards of decency/obscenity and record-keeping for adult content production. Promulgation of new laws, changes in current laws, changes in interpretations by courts and other government officials of existing laws, our inability or failure to comply with current or future laws or strict enforcement by current or future government officers of current or future laws could adversely affect us by reducing our revenue, increasing our operating expenses and/or exposing us to significant liabilities. The following laws relating to the internet, commercial advertising and adult content highlight some of the potential difficulties we face:

•  
  Internet. Several U.S. governmental agencies are considering a number of legislative and regulatory proposals that may lead to laws or regulations concerning different aspects of the internet, including social networking, online content, intellectual property rights, user privacy, taxation, access charges, liability for

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third-party activities and personal jurisdiction. New Jersey recently enacted the Internet Dating Safety Act, which requires online dating services to disclose whether they perform criminal background screening practices and to offer safer dating tips on their websites. Other states have enacted or considered enacting similar legislation. While online dating and social networking websites are not currently required to verify the age or identity of their members or to run criminal background checks on them, any such requirements could increase our cost of operations. The Children’s Online Privacy Protection Act restricts the ability of online services to collect information from minors. The Protection of Children from Sexual Predators Act of 1998 requires online service providers to report evidence of violations of federal child pornography laws under certain circumstances. In the area of data protection, many states have passed laws requiring notification to users when there is a security breach for personal data, such as California’s Information Practices Act. In addition, the Digital Millennium Copyright Act has provisions that are available to limit, but not eliminate, our liability for listing or linking to third-party websites that include materials that infringe copyrights or other rights, so long as we comply with the statutory requirements of this act. We face similar risks in international markets where our products and services are offered and may be subject to additional regulations. The interpretation and application of data protection laws in the United States, Europe and elsewhere are still uncertain and in flux. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our data practices. If so, in addition to the possibility of fines, this could result in an order requiring that we change our data practices. Nevada recently passed Senate Bill 347, a bill prohibiting businesses from transferring a customer’s personal information through an electronic transmission, unless that information is encrypted. The law went into effect on October 1, 2008. Practically speaking, the new law requires businesses operating in Nevada to purchase and implement data encryption software in order to send any electronic transmission (including e-mail) that contains a customer’s personal information. Any failure on our part to comply with these regulations may subject us to additional liabilities. Regulation of the internet could materially adversely affect our business, financial condition and results of operations by reducing the overall use of the internet, reducing the demand for our services or increasing our cost of doing business.

•  
  Commercial advertising. We receive a significant portion of our print publications advertising revenue from companies selling alcohol and tobacco products. Significant limitations on the ability of those companies to advertise in our publications or on our websites because of legislative, regulatory or court action could materially adversely affect our business, financial condition and results of operations.

•  
  Adult content. Regulation, investigations and prosecutions of adult content could prevent us from making such content available in certain jurisdictions or otherwise have a material adverse effect on our business, financial condition and results of operations. Government officials may also place additional restrictions on adult content affecting the way people interact on the internet. The governments of some countries, such as China and India, have sought to limit the influence of other cultures by restricting the distribution of products deemed to represent foreign or “immoral” influences. Regulation aimed at limiting minors’ access to adult content both in the United States and abroad could also increase our cost of operations and introduce technological challenges by requiring development and implementation of age verification systems. U.S. government officials could amend or construe and seek to enforce more broadly or aggressively the adult content recordkeeping and labeling requirements set forth in 18 U.S.C. Section 2257 and its implementing regulations in a manner that is unfavorable to our business. Court rulings may place additional restrictions on adult content affecting how people interact on the internet, such as mandatory web labeling.

We could be held liable for any physical and emotional harm caused by our members and subscribers to other members or subscribers.

We cannot control the actions of our members and subscribers in their online behavior or their communication or physical actions with other members or subscribers. There is a possibility that one or more of our members or subscribers could be physically or emotionally harmed by the behavior of or following interaction with another of our members or subscribers. We warn our members and subscribers that member profiles are provided solely by third parties, and we are not responsible for the accuracy of information they contain or the intentions of individuals that use our sites. We are also unable to and do not take any action to ensure personal safety on a meeting between members or subscribers arranged following contact initiated via our websites. If an unfortunate incident

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of this nature occurred in a meeting between users of our websites following contact initiated on one of our websites or a website of one of our competitors, any resulting negative publicity could materially and adversely affect us or the social networking and online personals industry in general. Any such incident involving one of our websites could damage our reputation and our brands. This, in turn, could adversely affect our revenue and could cause the value of our common stock to decline. In addition, the affected members or subscribers could initiate legal action against us, which could cause us to incur significant expense, whether we were ultimately successful or not, and damage our reputation.

Our websites may be misused by users, despite the safeguards we have in place to protect against such behavior.

Users may be able to circumvent the controls we have in place to prevent illegal or dishonest activities and behavior on our websites, and may engage in such activities and behavior despite these controls. For example, our websites could be used to exploit children and to facilitate individuals seeking payment for sexual activity and related activities in jurisdictions in which such behavior is illegal. The behavior of such users could injure our other members and may jeopardize the reputation of our websites and the integrity of our brands. Users could also post fraudulent profiles or create false profiles on behalf of other, non-consenting parties. This behavior could expose us to liability or lead to negative publicity that could injure the reputation of our websites and of social networking and online personals websites in general.

Our business is exposed to risks associated with online commerce security and credit card fraud.

Consumer concerns over the security of transactions conducted on the internet or the privacy of users may inhibit the growth of the internet and online commerce. To transmit confidential information such as customer credit card numbers securely, we rely on encryption and authentication technology. Unanticipated events or developments could result in a compromise or breach of the systems we use to protect customer transaction data. Furthermore, our servers may also be vulnerable to viruses and other attacks transmitted via the internet. While we proactively check for intrusions into our infrastructure, a new and undetected virus could cause a service disruption. Under current credit card practices, we may be held liable for fraudulent credit card transactions and other payment disputes with customers. A failure to control fraudulent credit card transactions adequately would adversely affect our business.

If one or more states or countries successfully assert that we should collect sales or other taxes on the use of the internet or the online sales of goods and services, our expenses will increase, resulting in lower margins.

In the United States, federal and state tax authorities are currently exploring the appropriate tax treatment of companies engaged in e-commerce and new state tax regulations may subject us to additional state sales and income taxes, which could increase our expenses and decrease our profit margins. The application of indirect taxes (such as sales and use tax, value added tax, goods and services tax, business tax and gross receipt tax) to e-commerce businesses such as ours and to our users is a complex and evolving issue. Many of the statutes and regulations that impose these taxes were established before the growth in internet technology and e-commerce. In many cases, it is not clear how existing statutes apply to the internet or e-commerce or communications conducted over the internet. In addition, some jurisdictions have implemented or may implement laws specifically addressing the internet or some aspect of e-commerce or communications on the internet. The application of existing or future laws could have adverse effects on our business.

Under current law, as outlined in the U.S. Supreme Court’s decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), a seller with substantial nexus (usually defined as physical presence) in its customer’s state is required to collect state (and local) sales tax on sales arranged over the internet (or by telephone, mail order, or other means). In contrast, an out-of-state seller without substantial nexus in the customer’s state is not required to collect the sales tax. The U.S. federal government’s moratorium on states and other local authorities imposing new taxes on internet access or multiple or discriminatory taxes on internet commerce is scheduled to expire in October 31, 2014. This moratorium, however, does not prohibit the possibility that U.S. Congress will be willing to grant state or local authorities the authority to require remote (out-of-state) sellers to collect sales and use taxes on interstate sales of goods (including intellectual property) and services over the internet. Several proposals to that extent have been made at the U.S. federal, state and local levels (for example, the Streamlined Sales and the Use Tax initiative). These

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proposals, if adopted, would likely result in our having to charge state sales tax to some or all of our users in connection with the sale of our products and services, which would harm our business if the added cost deterred users from visiting our websites and could substantially impair the growth of our e-commerce opportunities and diminish our ability to derive financial benefit from our activities.

Commencing in 2003, the member states of the European Union implemented rules requiring the collection and payment of VAT on revenues generated by non-European Union businesses for providing electronic services that end-users consumed within the European Union. These rules require VAT to be charged on products and services delivered over electronic networks, including software and computer services, as well as information and cultural, artistic, sporting, scientific, educational, entertainment and similar services. Historically, suppliers of digital products and services located outside of the European Union were not required to collect or remit VAT on digital orders made by purchasers within the European Union. With the implementation of these rules, we are required to collect and remit VAT on digital orders received from purchasers in the European Union. We recently began collecting VAT from our subscribers in the European Union, which will result in an increase in the effective cost of our subscriptions to such subscribers or a reduction in our per subscription revenues. There can be no assurance that this increased cost will not adversely affect our ability to attract new subscribers within the European Union or to retain existing subscribers within the European Union, and consequently adversely affect our results of operations.

Our liability to tax authorities in the European Union for the failure of Various and its subsidiaries to pay VAT on purchases made by subscribers in the European Union could adversely affect our financial condition and results of operations.

After our acquisition of Various, we became aware that Various and its subsidiaries had not collected VAT from subscribers in the European Union nor had Various remitted VAT to the tax jurisdictions requiring it. We have since registered with the tax authorities of the applicable jurisdictions and have begun collecting VAT from our subscribers in the European Union and remitting it as required. We have initiated discussions with most tax authorities in the European Union jurisdictions to attempt to resolve liabilities related to Various’ past failure to collect and remit VAT, and have now resolved such prior liabilities in several jurisdictions on favorable terms, but there can be no assurance that we will resolve or reach a favorable resolution in every jurisdiction. If we are unable to reach a favorable resolution with a jurisdiction, the terms of such resolution could adversely affect our financial condition or results of operations. For example, we might be required to pay substantial sums of money without the benefit of a payment deferral plan, which could adversely affect our cash position and impair operations. As of March 31, 2009, the total amount of historical uncollected VAT payments was approximately $74.1 million, including approximately $35.5 million in potential penalties and interest. For more information regarding the potential effect that our VAT liability could have on our operations see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.” Until we have reached a favorable resolution with a jurisdiction, the jurisdictions might take action against us and against our managers. For example, in an effort to recover VAT payments it claims it is owed, the German tax authority has attempted unsuccessfully to freeze assets in bank accounts maintained by subsidiaries of Various in Germany, and did freeze assets in a bank account in The Netherlands with the cooperation of the Dutch authorities in the amount of e610,343. Were Germany or another jurisdiction to freeze or seize our cash or other assets, our operations and financial condition could be impaired. In addition, in many jurisdictions the potential exists for criminal investigations or proceedings to be instituted against us and against individual members of prior or current management. For example, the German authorities had initiated an investigation of an individual who was an officer of Various until its acquisition by us. The German authorities also have introduced a criminal investigation of Various’s president, the current President of our internet group. This criminal investigation has been settled for approximately $2.3 million, which represents a portion of the total amount owed of the historical uncollected German VAT liability. In connection with the settlement, we also paid a fine of e25,000, or approximately $32,500, to a charitable organization in April 2009. The $2.3 million is payable in six equal monthly installments of approximately $380,000, commencing April 1, 2009, the first two of which have been paid. Were members of our management to face criminal processes individually, their attention to operational matters could be diverted and their ability to continue to serve in their capacities could be impaired. Were Various or its subsidiaries to face criminal processes, it could result in additional fines and penalties, or substantially interfere with continued operations in such jurisdictions. We are actively

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engaged in discussions with the German authorities in an effort to resolve all issues, but there can be no assurance that we will be able to do so. Though we recently have resolved our Austrian VAT liabilities by agreeing to a payment deferral plan, we face criminal processes there if a deferral payment is not timely made. Other favorable resolutions depend on the continued adherence of Various or its subsidiaries to payment plans and other actions, the failure of which could result in additional penalties and fines that could adversely affect our cash position and impair operations. Though we have received no notice of any such intent, there can be no assurance that other European Union jurisdictions will not pursue criminal or civil investigations and processes, seizure of funds or other courses of action that could adversely impact our operations.

Unforeseen liabilities arising from our acquisition of Various could materially adversely affect our financial condition and results of operations.

Our acquisition of Various and its subsidiaries in December 2007 may expose us to undisclosed and unforeseen operating risks and liabilities arising from Various’s operating history. For example, after our acquisition of Various we became aware that VAT had not been collected from subscribers in the European Union and that VAT had not been paid to tax authorities in the European Union. There can be no assurance that other unforeseen liabilities related to the acquisition of Various and its subsidiaries (including, without limitation, VAT issues in other non-European Union jurisdictions) could materialize.

Our recourse for liabilities arising from our acquisition of Various may be limited.

Under the Stock Purchase Agreement pursuant to which we purchased Various and its subsidiaries, our sole recourse against the sellers for most losses suffered by us as a result of liabilities is to offset the principal amount of our Subordinated Convertible Notes by the amount of any such losses. The maximum amount of such offset available to us is $175 million, although this amount can be reduced under certain circumstances, depending on such factors as the type of claim, when the claim is made and conversion of the Subordinated Convertible Notes. This recourse is available only if we can enforce applicable indemnification and other rights arising under the governing Stock Purchase Agreement. There can be no assurance that we will be able to successfully enforce such indemnification or other rights, or that such liability would not exceed the $175 million principal amount of the promissory notes or such lesser amount available to us. Accordingly, any such liabilities may result in losses or require us to reserve against possible losses, and adversely affect our financial condition and results of operations. For example, with respect to European VAT, we are seeking reimbursement for all VAT payments made (including interest, late fees and penalties) and related expenses incurred by us to resolve the liability arising due to the sellers’ failure to have collected and remitted VAT. The sellers have denied responsibility for the VAT liability. While we believe that we will prevail on the matter, there can be no assurance that we will be permitted to offset any or all such amounts against our Subordinated Convertible Notes.

In pursuing future acquisitions we may not be successful in identifying appropriate acquisition candidates or consummating acquisitions on favorable or acceptable terms. Furthermore, we may face significant integration issues and may not realize the anticipated benefits of the acquisitions due to integration difficulties or other operating issues.

If appropriate opportunities become available, we may acquire businesses, products or technologies that we believe are strategically advantageous to our business. Transactions of this sort could involve numerous risks, including:

•  
  unforeseen operating difficulties and expenditures arising from the process of integrating any acquired business, product or technology, including related personnel, and maintaining uniform standards, controls, procedures and policies;

•  
  diversion of a significant amount of management’s attention from the ongoing development of our business;

•  
  dilution of existing stockholders’ ownership interests;

•  
  incurrence of additional debt;

•  
  exposure to additional operational risks and liabilities, including risks and liabilities arising from the operating history of any acquired businesses;

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•  
  negative effects on reported results of operations from acquisition-related charges and amortization of acquired intangibles;

•  
  entry into markets and geographic areas where we have limited or no experience;

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  the potential inability to retain and motivate key employees of acquired businesses;

•  
  adverse effects on our relationships with suppliers and customers; and

•  
  adverse effects on the existing relationships of any acquired companies, including suppliers and customers.

In addition, we may not be successful in identifying appropriate acquisition candidates or consummating acquisitions on favorable or acceptable terms, or at all. Failure to effectively manage our growth through acquisitions could adversely affect our growth prospects, business, results of operations and financial condition.

Our efforts to capitalize upon opportunities to expand into new markets may fail and could result in a loss of capital and other valuable resources.

One of our strategies is to expand into new markets to increase our revenue base. We intend to identify new markets by targeting identifiable groups of people who share common interests and the desire to meet other individuals with similar interests, backgrounds or traits. Our planned expansion into new markets will occupy our management’s time and attention and will require us to invest significant capital resources. The results of our expansion efforts into new markets are unpredictable and there is no guarantee that our efforts will have a positive effect on our revenue base. We face many risks associated with our planned expansion into new markets, including but not limited to the following:

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  competition from pre-existing competitors with significantly stronger brand recognition in the markets we enter;

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  our erroneous evaluations of the potential of such markets;

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  diversion of capital and other valuable resources away from our core business;

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  foregoing opportunities that are potentially more profitable; and

•  
  weakening our current brands by over expansion into too many new markets.

We face the risk that additional international expansion efforts and operations will not be effective.

One of our strategies is to increase our revenue base by expanding into new international markets and expanding our presence in existing international markets. Although we currently have offices in foreign markets, further expansion into international markets requires management time and capital resources. We face the following risks associated with our expansion outside the United States:

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  challenges caused by distance, language and cultural differences;

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  local competitors with substantially greater brand recognition, more users and more traffic than we have;

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  challenges associated with creating and increasing our brand recognition, improving our marketing efforts internationally and building strong relationships with local affiliates;

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  longer payment cycles in some countries;

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  credit risk and higher levels of payment fraud in some countries;

•  
  different legal and regulatory restrictions among jurisdictions;

•  
  political, social and economic instability;

•  
  potentially adverse tax consequences; and

•  
  higher costs associated with doing business internationally.

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Any remaining indebtedness after this offering could make obtaining additional capital resources difficult and could materially adversely affect our business, financial condition, results of operations and our growth strategy.

We intend to use $       million of the net proceeds from this offering to repay our existing indebtedness. To the extent we will require additional capital resources after this offering, there can be no assurance that such funds will be available to us on favorable terms, or at all. The unavailability of funds could have a material adverse effect on our financial condition, results of operations and ability to expand our operations. Any remaining indebtedness after this offering could materially adversely affect us in a number of ways, including the following:

•  
  we may be unable to obtain additional financing for working capital, capital expenditures, acquisitions and other general corporate purposes;

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  a significant portion of our cash flow from operations must be dedicated to debt service, which reduces the amount of cash we have available for other purposes;

•  
  we may be disadvantaged as compared to our competitors, such as in our ability to adjust to changing market conditions, as a result of the amount of debt we owe;

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  we may be restricted in our ability to make strategic acquisitions and to exploit business opportunities; and

•  
  additional dilution of stockholders may be required to service our debt.

In addition, our existing debt contains covenants that limit our actions. These covenants could materially and adversely affect our ability to finance our future operations or capital needs or to engage in other business activities that may be in our best interest. The covenants limit our ability to, among other things:

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  incur or guarantee additional indebtedness;

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  repurchase capital stock;

•  
  make loans and investments;

•  
  enter into agreements restricting our subsidiaries’ abilities to pay dividends;

•  
  grant liens on assets;

•  
  sell or otherwise dispose of assets;

•  
  enter new lines of business;

•  
  merge or consolidate with other entities; and

•  
  engage in transactions with affiliates.

If we do not maintain certain financial ratios, satisfy certain financial tests and remain in compliance with our debt instruments, we may be restricted in the way we run our business.

Our debt instruments contain certain financial covenants and restrictions requiring us to maintain specified financial ratios and satisfy certain financial tests. As a result of these covenants and restrictions, we are limited in how we conduct our business and we may be unable to raise additional debt or equity financing, compete effectively or take advantage of new business opportunities.

Our failure to comply with the covenants and restrictions contained in our debt instruments could lead to a default under these instruments. If such a default occurs and we are unable to cure such default or obtain a waiver, the holders of the debt in default could accelerate the maturity of the related debt, which in turn could trigger the cross-acceleration provisions of our other financing agreements. Even if we are able to cure it or obtain a waiver, such a default could trigger the cross-default provisions of our financing agreements. If any of these events occur, we cannot assure you that we will have sufficient funds available to pay in full the total amount of obligations that become due as a result of any such acceleration, or that we will be able to find additional or alternative financing to refinance any such accelerated obligations on terms acceptable to us or on any terms.

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We have defaulted on certain terms of our indebtedness in the past and are currently in default on certain of our indebtedness and we cannot assure you that we will be able to remain in compliance with these covenants in the future and, if we fail to do so, that we will be able to cure such default, obtain waivers from the holders of the debt and/or amend the covenants as we have in the past. For more information regarding the potential risks associated with our having defaulted on certain of our indebtedness see “ — Our financial statements include an explanatory paragraph concerning conditions that raise substantial doubt about our ability to continue as a going concern, and there is no guarantee that we will be able to continue to operate our business or generate revenue,” and “ — We have breached certain non-monetary covenants contained in agreements governing our 2006 Notes and 2005 Notes and our subsidiary, INI, has breached certain non-monetary covenants contained in its agreements governing the First Lien Senior Secured Notes, Second Lien Subordinated Secured Notes and Subordinated Convertible Notes. We cannot assure you that we will be able to cure such defaults or events of default, obtain waivers and consents, amend the covenants, and/or remain in compliance with these covenants in the future.”

The net proceeds of this offering are expected to be used to repay our noteholders, including certain of our officers and directors, who may have a conflict of interest in determining the use of proceeds.

We intend to raise sufficient funds in order to use the proceeds from this offering to repay all of our existing debt, some of which is held by certain of our officers and directors. If we do not raise enough funds in this offering to repay all of our existing debt, our debt will be repaid in accordance with the provisions of our debt documents, which set forth the priority of payment. However, to the extent that there is discretion to be exercised with respect to the application of any of the proceeds of this offering, either as a result of negotiations, an increase in offering proceeds over the estimated amount or otherwise, our management, including officers who are noteholders, will advise our board of directors which of our existing debt it should repay with the proceeds of this offering, which could result in a conflict of interest. Based upon the covenants in our First Lien Senior Secured Notes and Second Lien Subordinated Secured Notes, our management will have discretion over approximately $        of the proceeds from this offering and affiliates of management may receive a portion of the proceeds from this offering as further described under “Use of Proceeds.” The financial interest of these certain officers and directors could influence our management’s motivation in selecting which debt to repay with the proceeds of the offering and therefore there may be a conflict of interest when determining whether repaying a particular piece of debt over another is in the stockholders’ best interest. From time to time, one or more of our officers will present the proposed use of proceeds to our board of directors, and our board of directors will consider and evaluate the proposed application of these proceeds. Our board of directors will approve any such application of these proceeds in accordance with its fiduciary duties under Nevada law. If any proposed application of these proceeds poses a conflict of interest involving any of our directors or officers, our board of directors will comply with Nevada Revised Statutes 78.140, which provides certain procedural safe harbors for board action under such circumstances.

Our business will suffer if we lose and are unable to replace key personnel or if the other obligations of our key personnel create conflicts of interest or otherwise distract these individuals.

We believe that our ability to successfully implement our business strategy and to operate profitably depends on the continued employment of our executive officers and other key employees, including employees familiar with the operations acquired from Various. In particular, Marc Bell and Daniel Staton are critical to our overall management and our strategic direction. Upon the closing of this offering, we intend to enter into an employment agreement with each of Messrs. Bell and Staton which sets a term of employment and provides for certain bonuses and grants of our stock in order to incentivize performance. However, the executives are free to voluntarily terminate their employment upon 180 days prior written notice. Therefore, the agreements do not ensure continued service with us. We have not obtained key-man life insurance and there is no guarantee that we will be able to obtain such insurance in the future. While we have entered into a management agreement with our Chief Executive Officer and our Chairman of the Board, the primary purpose of this agreement is to provide compensation for services; it does not ensure continued service with us. Furthermore, most of our key employees are at-will employees. If we lose members of our senior management without retaining replacements, our business, financial condition and results of operations could be materially adversely affected.

Additionally, Messrs. Bell and Staton each serve as an officer and director of Enterprise Acquisition Corp., a special purpose acquisition company, or EAC, and Ezra Shashoua, our chief financial officer, also serves EAC

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in that capacity. EAC is a newly organized blank check company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition or other similar business combination with one or more operating businesses, not limited to any particular industry. If EAC is unable to consummate a business combination by November 7, 2009, its corporate existence will cease by operation of Delaware corporate law pursuant to its amended and restated certificate of incorporation. We expect that each of Messrs. Bell, Staton and Shashoua will devote a minimum of five percent of their time to EAC until November 7, 2009, at which point EAC will have either completed a business combination or will be required to liquidate. If, during this time, EAC is negotiating with potential target businesses or has entered into a definitive agreement for a business combination, we expect that Messrs. Bell, Staton, and Shashoua will devote approximately twenty five percent of their combined time to EAC. In the event that a business combination is consummated, the future role of each of Messrs. Bell, Staton and Shashoua, if any, in the business following a business combination cannot presently be stated with any certainty. Messrs. Bell, Staton and Shashoua’s service as a director or officer of EAC could cause them to be distracted from the management of our business and could also create conflicts of interest if they are faced with decisions that could have materially different implications for us and for EAC, such as in the area of potential acquisitions. If such a conflict arises, we believe our directors and officers intend to take all actions necessary to comply with their fiduciary duties to our stockholders, including, where appropriate, abstaining from voting on matters that present a conflict of interest. However, these conflicts of interest, or the perception among investors that conflicts of interest could arise, could harm our business and cause our stock price to fall.

We rely on highly skilled personnel and, if we are unable to attract, retain or motivate key personnel or hire qualified personnel, we may not be able to grow effectively.

Our growth strategy and performance is largely dependent on the talents and efforts of highly skilled individuals. Our success greatly depends on our ability to attract, hire, train, retain and motivate qualified personnel, particularly in sales, marketing, service and support. There can be no assurance that we will be able to successfully recruit and integrate new employees. We face significant competition for individuals with the skills required to perform the services we offer and currently we do not have non-compete agreements with any of our executive officers or key personnel other than Robert Brackett, President of our internet group. The loss of the services of our executive officers or other key personnel, particularly if lost to competitors, could materially and adversely affect our business. If we are unable to attract, integrate and retain qualified personnel or if we experience high personnel turnover, we could be prevented from effectively managing and expanding our business.

Moreover, companies in technology industries whose employees accept positions with competitors have in the past claimed that their competitors have engaged in unfair competition or hiring practices. If we received such claims in the future as we seek to hire qualified personnel, it could lead to material litigation. We could incur substantial costs in defending against such claims, regardless of their merit. Competition in our industry for qualified employees is intense, and certain of our competitors may directly target our employees. Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate our existing employees.

Workplace and other restrictions on access to the internet may limit user traffic on our websites.

Many offices, businesses, libraries and educational institutions restrict employee and student access to the internet or to certain types of websites, including social networking and personals websites. Since our revenue is dependent on user traffic to our websites, an increase in these types of restrictions, or other similar policies, could harm our business, financial condition and operating results. In addition, access to our websites outside the U.S. may be restricted by governmental authorities or internet service providers. If these restrictions become more prevalent, our growth could be hindered.

Adverse currency fluctuations could decrease revenue and increase expenses.

We conduct business globally in many foreign currencies, but report our financial results in U.S. dollars. We are therefore exposed to adverse movements in foreign currency exchange rates because depreciation of non-U.S. currencies against the U.S. dollar reduces the U.S. dollar value of the non-U.S. dollar denominated revenue that we recognize and appreciation of non-U.S. currencies against the U.S. dollar increases the U.S. dollar value of

29




expenses that we incur that are denominated in those foreign currencies. Such fluctuations could decrease revenue and increase our expenses. We have not entered into foreign currency hedging contracts to reduce the effect of adverse changes in the value of foreign currencies but may do so in the future.

Our limited operating history and relatively new business model in an emerging and rapidly evolving market make it difficult to evaluate our future prospects.

We derive nearly all of our net revenue from online subscription fees for our services, which is an early stage business model for us that has undergone, and continues to experience, rapid and dramatic changes. As a result, we have very little operating history for you to evaluate in assessing our future prospects. You must consider our business and prospects in light of the risks and difficulties we will encounter as an early-stage company in a new and rapidly evolving market. Our performance will depend on the continued acceptance and evolution of online personal services and other factors addressed herein. We may not be able to effectively assess or address the evolving risks and difficulties present in the market, which could threaten our capacity to continue operations successfully in the future. Our efforts to capitalize upon opportunities to expand into new markets may fail and could result in a loss of capital and other valuable resources.

We are subject to litigation and adverse outcomes in such litigation could have a material adverse effect on our financial condition.

We are party to various litigation claims and legal proceedings including, but not limited to, actions relating to intellectual property, in particular patent claims against us, breach of contract and fraud claims, some of which are described in this prospectus in the section entitled “Business — Legal Proceedings” and the notes to our audited consolidated financial statements, that involve claims for substantial amounts of money or for other relief or that might necessitate changes to our business or operations. The defense of these actions may be both time consuming and expensive.

We evaluate these litigation claims and legal proceedings to assess the likelihood of unfavorable outcomes and to estimate, if possible, the amount of potential losses. Based on these assessments and estimates, we establish reserves and/or disclose the relevant litigation claims or legal proceedings, as appropriate. These assessments and estimates are based on the information available to management at the time and involve a significant amount of management judgment. As a result, actual outcomes or losses may differ materially from those envisioned by our current assessments and estimates. Our failure to successfully defend or settle any of these litigations or legal proceedings could result in liability that, to the extent not covered by our insurance, could have a material adverse effect on our financial condition, revenue and profitability and could cause the market value of our common stock to decline.

Industry reports may not accurately reflect the current economic climate.

Because industry reports and publications contain data that has been compiled for prior measurement periods, such reports and publications may not accurately reflect the current economic climate affecting the industry. The necessary lag time between the end of a measured period and the release of an industry report or publication may result in reporting results that, while not inaccurate with respect to the period reported, are out of date with the current state of the industry.

Risks Related to this Offering

You may find it difficult to sell our common stock.

There has been no public market for any of our securities, including the common stock being sold in this offering, prior to this offering. We cannot assure you that an active trading market will develop or be sustained following this offering. The initial public offering price will be determined by negotiation between the representative of the underwriters and us and may not be indicative of prices that will prevail in the trading market. Regardless of whether an active and liquid public market exists, fluctuations in our actual or anticipated operating results may cause the market price of our common stock to fall, making it more difficult for you to sell our stock at a favorable price or at all.

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If you purchase shares of our common stock in this offering, you will suffer immediate and substantial dilution in the net tangible book value of your shares and may be subject to additional future dilution.

Prior investors have paid less per share for our common stock than the price in this offering. The initial public offering price is substantially higher than the per share net tangible book value of our common stock immediately after this offering. Therefore, based on an assumed offering price of $      per share, the midpoint of the price range set forth on the cover page of this prospectus, if you purchase our common stock in this offering, you will suffer immediate and substantial dilution of approximately $       per share. If the underwriters exercise their over-allotment option, or if outstanding options and warrants to purchase our common stock are exercised, or if our Series A Convertible Preferred Stock and Series B Convertible Preferred Stock or our convertible notes are converted into shares of common stock, you will experience additional dilution. Any future equity issuances and the future exercise of employee stock options granted pursuant to our 2008 Stock Option Plan and 2009 Restricted Stock Plan will also result in further dilution to holders of our common stock.

Our executive officers, directors and principal stockholders will continue to own a substantial percentage of our common stock after this offering, which will likely allow them to control matters requiring stockholder approval. They could make business decisions for us with which you disagree and that cause our stock price to decline.

Upon the closing of this offering, our executive officers, directors and principal stockholders will beneficially own approximately       % of our common stock, including options, Convertible Preferred Stock and convertible notes that are exercisable for, or convertible into, shares of our common stock within 60 days of the date of this prospectus. As a result, if they act in concert, they could control matters requiring approval by our stockholders, including the election of directors, and could have the ability to prevent or approve a corporate transaction, even if other stockholders, including those who purchase shares in this offering, oppose such action. This concentration of voting power could also have the effect of delaying, deterring, or preventing a change of control or other business combination, which could cause our stock price to decline.

There are a large number of shares of common stock underlying our warrants, Convertible Preferred Stock, Series B common stock and the Subordinated Convertible Notes, which may be available for future sale and may cause the prevailing market price of our common stock to decrease and impair our capital raising abilities.

Immediately following this offering, we will have     shares of common stock outstanding (assuming that (i) the holders of warrants to purchase 9,531,276 shares of our common stock exercise such warrants at an exercise price of $0.31 per share prior to their expiration upon the closing of this offering (assuming all holders notify us in writing that they intend to exercise their option to exercise such warrants for cash); (ii) the holders of warrants to purchase 501,800 shares of our common stock exercise such warrants at an exercise price of $0.51 per share prior to their expiration upon the closing of this offering (assuming all holders notify us in writing that they intend to exercise their option to exercise such warrants for cash); (iii) the holders of warrants to purchase 132,952,781 shares of our common stock exercise such warrants at an exercise price of $0.00001 per share prior to their expiration upon the closing of this offering (assuming such warrants are exercised for cash); (iv) the underwriters do not exercise their over-allotment option, (v) the issuance of 204,231,016 shares of common stock upon the conversion of all of the shares of our outstanding Series A Convertible Preferred Stock and Series B Convertible Preferred Stock (assuming all holders of these securities notify us in writing that they intend to exercise their option to convert such securities), (vi) the issuance of 36,796,500 shares of common stock upon the conversion of all of the outstanding shares of our Series B common stock (assuming all holders of these securities notify us in writing that they intend to exercise their option to convert such securities) and (v ii) the issuance of             shares upon our anticipated election to convert the Subordinated Convertible Notes); and an additional 26,879,946 shares of common stock reserved for issuance upon the exercise of options that have been or may be granted under our 2008 Stock Option Plan. We will also have an additional      shares of our common stock, and shares of preferred stock, authorized and available for issuance, which we may, in general, issue without any action or approval by our stockholders, including in connection with acquisitions or otherwise except as required by relevant stock exchange requirements.

The        shares sold in this offering will be freely tradable, except for any shares purchased by our “affiliates” as defined in Rule 144 under the Securities Act of 1933, as amended. Holders of the other        shares that will be outstanding and holders of our derivative securities have agreed with the underwriters, subject to certain

31




exceptions and extensions, not to dispose of any of their securities for a period of 180 days following the date of this prospectus, except with the prior written consent of the underwriters. For more information regarding this lock-up, see “Underwriting — No Sales of Similar Securities”. After the expiration of this 180-day lock-up period, these shares may be sold in the public market, subject to prior registration or qualification for an exemption from registration, including, in the case of shares held by our affiliates, compliance with the volume restrictions of Rule 144. The holders of   shares, as well as the holders of our Convertible Preferred Stock convertible into   shares and holders of the Subordinated Convertible Notes convertible into   shares (based on the midpoint of the range on the front cover of this prospectus), are also entitled to certain piggy back registration rights with respect to the public resale of their shares. In addition, following this offering, we intend to file a registration statement covering the shares issuable under our 2008 Stock Option Plan.

The market price for our common stock could decline as a result of sales of a large number of shares of our common stock in the market after this offering, and even the perception that these sales could occur may depress the market price. The sale of shares issued upon the exercise or conversion of our derivative securities could also further dilute your investment in our common stock. Further, the sale of any of the foregoing shares could impair our ability to raise capital through the sale of additional equity securities.

Public interest group actions targeted at our stockholders may cause the prevailing market price of our common stock to decrease and impair our capital raising abilities.

Public interest groups may target our stockholders, particularly institutional stockholders, seeking to cause those stockholders to divest their holdings of our securities because of the adult-oriented nature of parts of our business. The sale by any institutional investor of its holdings of our common stock, and the reluctance of other institutional investors to invest in our securities, because of such public interest group actions, or the threat of such actions, could cause the market price of our common stock to decline and could impair our ability to raise capital through the sale of additional equity securities.

We will incur increased costs as a result of being a public company.

As a public company, we will incur increased legal, accounting and other costs not incurred as a private company. The Sarbanes-Oxley Act of 2002 and related rules and regulations of the Securities and Exchange Commission, or SEC, and the New York Stock Exchange regulate the corporate governance practices of public companies. We expect that compliance with these requirements will increase our expenses and make some activities more time consuming than they have been in the past when we were a private company. Such additional costs going forward could negatively impact our financial results.

Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our ability to produce accurate financial statements and on our stock price.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we will be required to furnish a report by our management on our internal control over financial reporting. We have not been subject to these requirements in the past. The internal control report must contain (a) a statement of management’s responsibility for establishing and maintaining adequate internal control over financial reporting, (b) a statement identifying the framework used by management to conduct the required evaluation of the effectiveness of our internal control over financial reporting, (c) management’s assessment of the effectiveness of our internal control over financial reporting as of the end of our most recent fiscal year, including a statement as to whether or not internal control over financial reporting is effective, and (d) a statement that our independent registered public accounting firm has issued an attestation report on internal control over financial reporting.

To achieve compliance with Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to dedicate internal resources, engage outside consultants and adopt a detailed work plan to (a) assess and document the adequacy of internal control over financial reporting, (b) take steps to improve control processes where appropriate, (c) validate through testing that controls are functioning as documented, and (d) implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, we can provide no assurance as to our, or our independent registered public accounting firm’s,

32




conclusions with respect to the effectiveness of our internal control over financial reporting under Section 404. There is a risk that neither we nor our independent registered public accounting firm will be able to conclude within the prescribed timeframe that our internal controls over financial reporting are effective as required by Section 404. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.

We do not expect to pay any dividends for the foreseeable future. Investors in this offering may never obtain a return on their investment.

You should not rely on an investment in our common stock to provide dividend income. We do not anticipate that we will pay any dividends to holders of our common stock in the foreseeable future. Instead, we plan to retain any earnings to maintain and expand our existing operations, further develop our brands and finance the acquisition of additional brands. In addition, our ability to pay dividends is prohibited by the terms of our currently outstanding notes and we expect that any future credit facility will contain terms prohibiting or limiting the amount of dividends that may be declared or paid on our common stock. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any return on their investment. As a result, investors seeking cash dividends should not purchase our common stock.

We will have broad discretion over the use of the proceeds to us from this offering.

We intend to use the net proceeds from this offering to repay all of our existing indebtedness and for general corporate purposes. We have allocated $       million for the repayment of our existing indebtedness, leaving approximately $       million in net proceeds for general corporate purposes and working capital. Other than the repayment of debt, our board of directors and management will have broad discretion over the allocation of the net proceeds from this offering as well as over the timing of our expenditures. You may not agree with the way our management decides to spend these proceeds. It is also possible that our management may allocate these proceeds in ways that do not improve our operating results.

Fluctuations in our quarterly operating results may cause the market price of our common stock to fluctuate.

Our operating results have in the past fluctuated from quarter to quarter and we expect this trend to continue in the future. As a result, the market price of our common stock could be volatile. In the past, following periods of volatility in the market price of stock, many companies have been the object of securities class action litigation. If we were to be sued in a securities class action, it could result in substantial costs and a diversion of management’s attention and resources which could adversely affect our results of operations.

Anti-takeover provisions in our articles of incorporation and bylaws or provisions of Nevada law could prevent or delay a change in control, even if a change of control would benefit our stockholders.

Provisions of our articles of incorporation and bylaws, as well as provisions of Nevada law, could discourage, delay or prevent a merger, acquisition or other change in control, even if a change in control would benefit our stockholders. These provisions:

•  
  establish advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings;

•  
  under certain circumstances may require the written consent of certain holders of our preferred stock before action could be taken to effect a change of control;

•  
  authorize our board of directors to issue “blank check” preferred stock to increase the number of outstanding shares and thwart a takeover attempt;

•  
  require the written request of at least 75% of the voting power of our capital stock in order to compel management to call a special meeting of the stockholders; and

•  
  prohibit stockholder action by written consent and require that all stockholder actions be taken at a meeting of our stockholders, unless otherwise specifically required by our articles of incorporation or the Nevada Revised Statutes.

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In addition, the Nevada Revised Statutes contain provisions governing the acquisition of a controlling interest in certain Nevada corporations. These laws provide generally that any person that acquires 20% or more of the outstanding voting shares of certain Nevada corporations in the secondary public or private market must follow certain formalities before such acquisition or they may be denied voting rights, unless a majority of the disinterested stockholders of the corporation elects to restore such voting rights in whole or in part. These laws will apply to us if we have 200 or more stockholders of record, at least 100 of whom have addresses in Nevada, unless our articles of incorporation or bylaws in effect on the tenth day after the acquisition of a controlling interest provide otherwise. These laws provide that a person acquires a “controlling interest” whenever a person acquires shares of a subject corporation that, but for the application of these provisions of the Nevada Revised Statutes, would enable that person to exercise (1) one-fifth or more, but less than one-third, (2) one-third or more, but less than a majority or (3) a majority or more, of all of the voting power of the corporation in the election of directors. Once an acquirer crosses one of these thresholds, shares which it acquired in the transaction taking it over the threshold and within the 90 days immediately preceding the date when the acquiring person acquired or offered to acquire a controlling interest become “control shares.” These laws may have a chilling effect on certain transactions if our articles of incorporation or bylaws are not amended to provide that these provisions do not apply to us or to an acquisition of a controlling interest, or if our disinterested stockholders do not confer voting rights in the control shares. For more information regarding the specific provisions of Nevada corporate law to which we are subject see “Description of Capital Stock — Nevada Anti-Takeover Laws and Certain Articles and Bylaws Provisions.”

Nevada law also provides that if a person is the “beneficial owner” of 10% or more of the voting power of certain Nevada corporations, such person is an “interested stockholder” and may not engage in any “combination” with the corporation for a period of three years from the date such person first became an interested stockholder, unless the combination or the transaction by which the person first became an interested stockholder is approved by the board of directors of the corporation before the person first became an interested stockholder. Another exception to this prohibition is if the combination is approved by the affirmative vote of the holders of stock representing a majority of the outstanding voting power not beneficially owned by the interested stockholder at a meeting, no earlier than three years after the date that the person first became an interested stockholder. These laws generally apply to Nevada corporations with 200 or more stockholders of record, but a Nevada corporation may elect in its articles of incorporation not to be governed by these particular laws. We have made such an election in our articles of incorporation, which will be effective upon consummation of this offering.

Nevada law also provides that directors may resist a change or potential change in control if the directors determine that the change is opposed to, or not in the best interest of, the corporation.

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FORWARD-LOOKING STATEMENTS

This prospectus contains certain forward-looking statements. These forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Generally, the inclusion of the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “will,” and similar expressions also identify statements that constitute forward-looking statements. These forward-looking statements appear in a number of places throughout this prospectus and include statements regarding our intentions, beliefs, projections, outlook, analyses or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies, the industry in which we operate and the trends that may affect our industry. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short term and long term business operations and objectives and financial needs.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events, competitive dynamics, customer and industry change and depend on the economic or technological circumstances that may or may not occur in the future or may occur on longer or shorter timelines than anticipated. We caution the investors that the forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity and the development of the industry or results in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this prospectus. In addition, even if our results of operations, financial condition and liquidity and the development of the industry in which we operate are consistent with the forward-looking statements contained in this prospectus, they may not be predictive of results or developments in future periods.

Any or all of our forward-looking statements in this prospectus may turn out to be incorrect. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many of these factors will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially.

Except as may be required under the federal securities laws, we undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. Under the caption “Risk Factors,” we provide a cautionary discussion of risks, uncertainties and possibly inaccurate assumptions relevant to our business. These are factors that we think could cause our actual results to differ materially from expected and historical results. Other factors besides those listed in “Risk Factors” could also adversely affect us.

The following list represents some, but not necessarily all, of the factors that may cause our actual results to differ from those anticipated or predicted:

•  
  competition from other social networking, internet personals and adult-oriented websites;

•  
  our reliance on our affiliates to drive traffic to our websites;

•  
  our ability to generate significant revenue from internet advertising;

•  
  our ability to maintain our well-recognized brands;

•  
  unfavorable economic and market conditions;

•  
  our registrants opting out of receiving communications from us;

•  
  our reliance on credit cards as a form of payment;

•  
  our ability to keep up with new technologies and remain competitive;

•  
  we may be held secondarily liable for the actions of our affiliates;

•  
  our ability to continue as a going concern;

•  
  our history of breaching certain covenants in our debt documents and the risk of future breaches;

•  
  our history of operating losses and the risk of incurring additional losses in the future;

•  
  our reliance on subscribers to our websites for most of our revenue and member-generated content;

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•  
  security breaches may cause harm to our subscribers or our systems;

•  
  we may be subject to liability arising from our media content;

•  
  our ability to safeguard the privacy of the users of our websites;

•  
  our ability to enforce and protect our intellectual property rights;

•  
  we may be subject to claims that we have violated the intellectual property rights of others;

•  
  the loss of our main data center or other parts of our infrastructure;

•  
  systems failures and interruptions in our ability to provide access to our websites and content;

•  
  companies providing products and services on which we rely may refuse to do business with us;

•  
  changes in government laws affecting our business;

•  
  we may be liable if one of our members or subscribers harms another;

•  
  risks associated with additional taxes being imposed by any states or countries;

•  
  we may have unforeseen liabilities from our acquisition of Various;

•  
  we may not be successful in integrating any future acquisitions we make;

•  
  any debt outstanding after the consummation of this offering could restrict the way we do business;

•  
  our reliance on key personnel;

•  
  restrictions to access on the internet affecting traffic to our websites;

•  
  risks associated with currency fluctuations;

•  
  risks associated with our litigation and legal proceedings; and

•  
  our ability to obtain appropriate financing.

36



MARKET AND INDUSTRY DATA

This prospectus includes estimates of market share and industry data that we obtained from industry publications and surveys and internal company sources.

The market data and other statistical information used throughout this prospectus are based on third parties’ reports and independent industry publications. The reports and industry publications used by us to determine market share and industry data contained in this prospectus have been obtained from sources believed to be reliable. We have compiled and extracted the market share data and industry data, but have not independently verified the data provided by third parties or industry or general publications. Statements as to our market position are based on market data currently available to us. While we are not aware of any misstatements regarding our industry data presented in this prospectus, our estimates involve risks and uncertainties and are subject to change based on a variety of factors, including those discussed under the heading “Risk Factors” in this prospectus. Statements referencing “unique visitors” or “unique worldwide visitors” refer to the estimated number of individuals that visited any content of a website during the reporting period.

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USE OF PROCEEDS

We estimate that our net proceeds from the sale of the          shares of our common stock in this offering will be $             million or $             million if the underwriters exercise their option to purchase additional shares in full. “Net proceeds” is what we expect to receive after paying the underwriters’ discounts and commissions and other expenses of the offering. For purposes of estimating net proceeds, we are assuming that the public offering price will be the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, which is $             per share. Each $1.00 increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) the net proceeds to us from this offering by approximately $            , assuming the number of shares that we offer, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and other estimated expenses.

We intend to use the net proceeds from this offering to redeem the following debt in the following priority:

Description of Debt
        Aggregate
Principal Amount
Outstanding as of
March 31, 2009
    Redemption
Price (%)(1)
    Aggregate
Redemption
Price

    Intended
Use of Proceeds
from T his
Offering
        (in millions, except redemption price)
   
First Lien Senior Secured Notes
           
$219.8
   
115.0% for the
notes redeemed
using the first
50% of net IPO
proceeds,
105.0% for the
remaining notes
through
December 2009
and 102.0%
thereafter
      $      (2)         $      (3)  
Second Lien Subordinated Secured Notes
           
 80.0
   
100.0%
         80.0             80.0 (4)  
2006 Notes
           
  6.1
   
101.5%
         6.2             6.2   
2005 Notes
           
 38.4
   
101.5%
         39.0             39.0   
Subordinated Term Loan Notes
           
 36.4
   
100.0%
         36.4             36.4 (5)  
 
           
 
   
 
                     $         
 


(1)
  The redemption price assumes this offering is completed prior to December 31, 2009. Based on the agreements governing our First Lien Senior Secured Notes and our Second Lien Subordinated Secured Notes, we must use the first 95% of net proceeds from this offering, or an amount of up to approximately $178 million (after paying the underwriters’ discounts and commission and other expenses of this offering) to repay the First Lien Senior Secured Notes and the Second Lien Subordinated Secured Notes.

(2)
  Assuming the public offering price will be the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, which is $      per share, and assuming the underwriters do not exercise their over-allotment option, we have assumed gross offering proceeds of $      million, less underwriting fees and commissions of approximately 7% of the gross proceeds, or $      million, resulting in $      million of net offering proceeds. Accordingly, we assume that 50% of our net offering proceeds will be used at a 115.0% redemption price to repay $      million in principal of the First Lien Senior Secured Notes and that the remaining $      million in principal will be redeemed at 105.0%, for $      million.

(3)
  Pursuant to the purchase agreement with the holders of the First Lien Senior Secured Notes, $        million will be payable to our affiliates, including $      million to affiliates of Mr. Bell, our Chief Executive Officer, President and a director, and Mr. Staton, our Chairman of the Board and Treasurer.

(4)
  Pursuant to the purchase agreement with the holders of the Second Lien Subordinated Secured Notes, $80.0 million will be payable to our affiliates, including Andrew Conru and Lars Mapstead.

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(5)
  $      of the $36.4 million will be payable to affiliates, including $      million to affiliates of Mr. Bell, our Chief Executive Officer, President and a director, and Mr. Staton, our Chairman of the Board and Treasurer and $      million to an affiliate of Mr. Florescue, one of our directors.

Any remaining net proceeds will be used for working capital and general corporate purposes.

The terms of the First Lien Senior Secured Notes require us to use at least 50% of the net proceeds from this offering to redeem the First Lien Senior Secured Notes at a redemption price equal to 115.0% of the principal amount redeemed plus accrued and unpaid interest on the redeemed First Lien Senior Secured Notes. The First Lien Senior Secured Notes have a stated maturity date of June 30, 2011. Interest on the First Lien Senior Secured Notes accrues at a rate per annum equal to 8% plus the greater of (a) 4.5% or (b) the London Inter-Bank Offered Rate, or LIBOR, for the applicable interest period. In December 2007, our subsidiary INI issued $257.3 million in principal amount of the First Lien Senior Secured Notes, the proceeds of which were used to pay part of the purchase price in our acquisition of Various. We intend to use 50% of the net proceeds from this offering to redeem the relevant portion of outstanding principal amount of First Lien Senior Secured Notes at a redemption price equal to 115.0% of the outstanding principal amount plus accrued and unpaid interest through the redemption date. The balance of the notes will be redeemed at a redemption price of 105.0% of the principal amount redeemed plus accrued and unpaid interest. As of March 31, 2009, there was no accrued and unpaid interest on the First Lien Senior Secured Notes.

In December 2007, INI also issued $80.0 million in principal amount of Second Lien Subordinated Secured Notes as partial payment of the purchase price of Various. The Second Lien Subordinated Secured Notes have a stated maturity date of December 6, 2011. Interest accrues on the Second Lien Subordinated Secured Notes at a rate of 15% per annum. We intend to use $80.0 million of the net proceeds from this offering to redeem all the outstanding principal amount of Second Lien Subordinated Secured Notes at a redemption price equal to 100.0% of the outstanding principal amount plus accrued and unpaid interest through the redemption date. As of March 31, 2009, there was no accrued and unpaid interest on the Second Lien Subordinated Secured Notes.

Our 2006 Notes were issued in August 2006 as our 15% Senior Secured Notes due 2010. The 2006 Notes have a stated maturity date of July 31, 2010 and accrue interest at a rate of 15% per annum. We intend to use $6.3 million of the net proceeds from this offering to redeem all the outstanding principal amount of 2006 Notes at a redemption price equal to 101.5% of the outstanding principal amount plus accrued and unpaid interest through the redemption date. As of March 31, 2009, there was $115,000 of accrued and unpaid interest on the 2006 Notes.

Our 2005 Notes were issued in August 2005 as our 11% Senior Secured Notes due 2010. The 2005 Notes have a stated maturity date of July 31, 2010 and have been amended to accrue interest at a rate of 15% per annum. We intend to use $39.0 million of the net proceeds from this offering to redeem all the outstanding principal amount of 2005 Notes at a redemption price equal to 101.5% of the outstanding principal amount plus accrued and unpaid interest through the redemption date. As of March 31, 2009, there was $720,000 of accrued and unpaid interest on the 2005 Notes.

Our Subordinated Term Loan Notes have a stated maturity date of October 1, 2011 and accrue interest at a rate of 13% per annum. We intend to use $36.4 million of the net proceeds from this offering to redeem all the outstanding principal amount of Subordinated Term Loan Notes at a redemption price equal to 100.0% of the outstanding principal amount plus accrued and unpaid interest through the redemption date. Under the terms of the intercreditor agreement, dated as of December 6, 2007, among us and our subsidiaries, the holders of the Subordinated Term Loan Notes and the holders of the Subordinated Convertible Notes, the Subordinated Term Loan Notes may not be redeemed prior to the redemption or conversion of the Subordinated Convertible Notes. The Subordinated Convertible Notes, by their terms, may not be converted prior to December 7, 2008. As of March 31, 2009, there was $2.3 million of accrued and unpaid interest on the Subordinated Term Loan Notes.

The underwriters’ over-allotment option, if exercised in full, provides for the issuance of up to additional shares of our common stock, for additional net proceeds of $            . Any proceeds obtained upon exercise of the over-allotment option will be used for general working capital purposes.

We will have broad discretion over the manner in which the remaining additional net proceeds of the offering, if any, will be applied, and we may not use these proceeds in a manner desired by our stockholders. Although we

39




have no present intention of doing so, future events may require us to reallocate the offering proceeds. Pending the uses described above, we intend to invest the net proceeds in short-term, interest-bearing, investment-grade securities.

The initial public offering price will be determined by negotiation between the representative of the underwriters and us and may not be indicative of prices that will prevail in the trading market.

40



DIVIDEND POLICY

We have never paid or declared dividends on our common stock. We do not anticipate that we will pay any dividends to holders of our common stock in the foreseeable future, as we currently plan to retain any earnings to maintain and expand our existing operations. Payments of any cash dividends in the future, however, is within the discretion of our board of directors and will depend on our financial condition, results of operations and capital and legal requirements as well as other factors deemed relevant by our board of directors. In addition, our ability to pay dividends is prohibited by the terms of our outstanding debt and we expect that any future credit facility will contain terms prohibiting or limiting the amount of dividends that may be declared or paid on our common stock. If the proceeds of this offering are not sufficient to repay all of our outstanding debt, we will be limited by such restrictions on declaring dividends and INI will be restricted in its ability to distribute income up to us.

41



CAPITALIZATION

Please read the following capitalization table together with the sections of this prospectus entitled “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes included elsewhere in this prospectus.

The following table sets forth our cash, excluding restricted cash, and our consolidated capitalization as of March 31, 2009:

•  
  on an actual, historical basis;

•  
  on a pro forma basis reflecting (i) our issuance of           shares of common stock upon our anticipated election to conver t the Subordinated Convertible Notes, (ii) the issuance of 204,231,016 shares of common stock upon the conversion of all of the shares of our outstanding Series A Convertible Preferred Stock and Series B Convertible Preferred Stock (assuming all holders notify us in writing that they intend to exercise their option to convert), (iii) the issuance of 36,796,500 shares of common stock upon the conversion of all of the outstanding shares of our Series B common stock (assuming all holders notify us in writing that they intend to exercise their option to convert), and (iv) the issuance of   shares of common stock underlying (a) 9,531,276 outstanding warrants with an exercise price of $0.31 per share (assuming all holders notify us in writing that they intend to exercise their option to exercise such warrants for cash), (b) 501,800 outstanding warrants with an exercise price of $0.51 per share (assuming all holders notify us in writing that they intend to exercise their option to exercise such warrants for cash), and (c) 132,952,781 outstanding warrants with an exercise price of $0.00001 per share (assuming such warrants are exercised for cash), each of which warrants were originally issued in connection with certain of our debt offerings, which if not exercised, will expire upon the closing of this offering; and

•  
  on a pro forma as adjusted basis reflecting (i) all of the foregoing pro forma adjustments, (ii) the sale of              shares of our common stock in this offering at the assumed initial offering price of $             per share, the midpoint of the range set forth on the front cover of this prospectus, after deducting underwriting discounts and commissions and giving effect to the receipt of the estimated proceeds; and (iii) the prepayment of certain indebtedness under our existing notes as further described in “Use of Proceeds.”

        As of March 31, 2009
   
        Actual
    Pro Forma (1)
    Pro Forma as
Adjusted
        (unaudited)  
      (dollars in thousands except share data)    
Cash
                 $  21,639             $  24,849          $                
Indebtedness:
                                                       
Debt issued by INI in connection with the acquisition of Various
                                                       
First Lien Senior Secured Notes, net of unamortized discount of $20,442
                 $199,436             $199,436          $    
Second Lien Subordinated Secured Notes, net of unamortized discount of $4,648
                 75,352             75,352                   
Subordinated Convertible Notes, net of unamortized discount of $19,111
                 92,095                                  
Other, net of unamortized discount of $660
                 3,340             3,340                   
2006 Notes and 2005 Notes, net of unamortized discount of $1,718
                 42,812             42,812                   
Subordinated Term Loan Notes
                 36,432             36,432                  
Total Indebtedness
                 449,467             357,372                  
 


(1)  
  We have assumed that we will elect to convert all of the outstanding Subordinated Convertible Notes prior to or upon the closing of this offering. We have assumed that holders of all of our outstanding Series A Convertible Preferred Stock, Series B Convertible Preferred Stock and Series B common stock have notified us in writing that they intend to convert all of their securities prior to or upon the closing of this offering. We have also assumed that holders of all of our outstanding warrants will exercise their warrants, which warrants if not exercised, will expire upon the closing of this offering.

42



        As of March 31, 2009
   
        Actual
    Pro Forma
    Pro Forma as
Adjusted
        (unaudited)
(dollars in thousands except share data)
   
Stockholders’ deficiency:
                                                       
Preferred stock, $0.01 par value, 250,000,000 shares authorized and 450,000,000 authorized pro forma and pro forma as adjusted
                                                       
Series A Convertible Preferred Stock, 50,000,000 shares authorized, 35,334,011 shares issued and outstanding, actual, no shares issued and outstanding pro forma and pro forma as adjusted
                 353                                   
Series B Convertible Preferred Stock, 200,000,000 shares authorized; and 168,897,005 shares issued and outstanding, actual, no shares outstanding pro forma and pro forma as adjusted
                 1,689                                  
Common stock, $0.01 par value, 1,250,000,000 shares authorized
                                                       
Common stock, 1,000,000,000 shares authorized; 104,956,481 shares issued and outstanding, actual,          , pro forma, and           pro forma as adjusted
                 1,050                                  
Series B non-voting common stock, 250,000,000 shares authorized; and 36,796,500 shares issued and outstanding, actual, no shares issued and outstanding pro forma and pro forma as adjusted
                 368                                   
Capital in excess of par
                 78,366                                  
Accumulated deficit
                 (149,392 )             (149,392 )                  
Total stockholders’ (deficiency) equity
                 (67,566 )             (149,392 )                  
Total capitalization
                 $381,901          $                          $                
 

43



DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share and the net tangible book value per share of the common stock after this offering. Our net tangible book value as of March 31, 2009 after giving effect to: (i) our issuance of           shares of common stock upon our anticipated election to convert the Subordinated Convertible Notes, (ii) the issuance of 204,231,016 shares of common stock upon the conversion of all of the shares of our outstanding Series A Convertible Preferred Stock and Series B Convertible Preferred Stock (assuming all holders notify us in writing that they intend to exercise their option to convert), (iii) the issuance of 36,796,500 shares of common stock upon the conversion of all of the outstanding shares of our Series B common stock (assuming all holders notify us in writing that they intend to exercise their option to convert), and (iv) the issuance of   shares of common stock underlying (a) 9,531,276 outstanding warrants with an exercise price of $0.31 per share (assuming all holders notify us in writing that they intend to exercise their option to exercise such warrants for cash), (b) 501,800 outstanding warrants with an exercise price of $0.51 per share (assuming all holders notify us in writing that they intend to exercise their option to exercise such warrants for cash), and (c) 132,952,781 outstanding warrants with an exercise price of $0.00001 per share (assuming such warrants are exercised for cash), each of which warrants were originally issued in connection with certain of our debt offerings, which if not exercised will expire upon the closing of this offering, would have been $            , or $            per share of common stock based on              shares outstanding before this offering. Net tangible book value per share represents the amount of the total tangible assets less total liabilities, divided by the number of shares of common stock that are outstanding.

After giving effect to the sale by us of              shares of common stock at an assumed initial public offering price of $            per share, the midpoint of the range on the front cover of this prospectus and after deducting the estimated underwriting discounts and commissions and offering expenses, the adjusted net tangible book value as of March 31, 2009 would have been $            million, or $            per share. This represents an immediate increase in net tangible book value of $            per share to existing stockholders and an immediate and substantial dilution in net tangible book value of $            per share to investors purchasing common stock in this offering. The following table illustrates this per share dilution:

Assumed initial offering price per share to the public
                             $                    
Net historical tangible book value as of March 31, 2009 after conversions
                                      
Increase attributable to new public investors
                                       
As adjusted net tangible book value per share after this offering
                                     
Dilution in adjusted net tangible book value per share to
new investors
                             $            
 

A $1.00 increase (decrease) in the initial public offering price from the assumed initial public offering price of $            per share would increase (decrease) our adjusted net tangible book value after giving effect to this offering by approximately $            million, increase (decrease) our adjusted net tangible book value per share after giving effect to the offering by $            per share and increase (decrease) the dilution in net tangible book value per share to new investors in this offering by $            per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses and assuming no other change to the number of shares offered by us as set forth on the cover page of this prospectus. An increase (decrease) of 1,000,000 shares from the expected number of shares to be sold by us in the offering, assuming no change in the initial public offering price from the price assumed above, would increase (decrease) our adjusted net tangible book value after giving effect to this offering by approximately $             million, increase (decrease) our adjusted net tangible book value per share after giving effect to this offering by $            per share, and increase (decrease) the dilution in net tangible book value per share to new investors in this offering by $            per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses.

44



The following table summarizes on an as adjusted basis as of March 31, 2009 the difference between the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by existing stockholders and to be paid by new investors in this offering at an assumed initial public offering price of $            per share, calculated before deduction of estimated underwriting discounts and commissions.

        Shares Purchased
    Total Consideration
   
        Amount
    Percent
    Amount
    Percent
    Average
price per
share
        (in thousands, except per share data)    
Existing stockholders
                                         %           $                         %           $          
Investors in this offering
                                     %                                  %           $    
Total
                                100.0 %         $                    100.0 %                  
 

45



UNAUDITED PRO FORMA FINANCIAL DATA

The following unaudited pro forma consolidated statement of operations gives effect to the acquisition of Various as if it had been completed on January 1, 2007. Our consolidated financial statements for the year ended December 31, 2007 include the results of operations of Various from its acquisition date on December 7, 2007 to December 31, 2007. The 2007 financial statements of Various include its results of operations for the period from January 1, 2007 to December 6, 2007.

The pro forma consolidated financial data has been prepared by our management based upon the financial statements of Various included elsewhere within this prospectus and reflects certain estimates and assumptions described in the accompanying notes to the pro forma statement. This unaudited pro forma consolidated statement of operations should be read in conjunction with our audited financial statements and the audited financial statements of Various which are included elsewhere in this prospectus.

The pro forma statement of operations is not necessarily indicative of operating results which would have been achieved had the foregoing transaction actually been completed at the beginning of 2007 and should not be construed as representative of future operating results.

Unaudited Pro Forma Consolidated Statement of Operations for the Year Ended December 31, 2007

        FriendFinder
Networks Inc.
    Various,
Inc.
    Pro Forma
Adjustments
    Pro Forma
Consolidated
        (in thousands, except for per share data)    
Net revenue
              $ 48,073          $ 289,480          $ (13,106 )(1)         $ 332,907   
 
                                               8,460  (2)                  
Cost of revenue
                 23,330             75,603             (526 )(3)            98,407   
Gross profit
                 24,743             213,877             (4,120 )            234,500   
Operating expenses
                                                                       
Product development
                 1,002             10,327                            11,329   
Sales and marketing
                 7,595             63,888                            71,483   
General and administrative
                 24,466             57,787             683  (4)            75,836   
 
                                               (7,100 )(5)                  
Depreciation & amortization
                 5,091             3,634             33,559  (6)            42,810   
 
                                               526  (3)                  
VAT expense
                              13,106             (13,106 )(1)               
Impairment of other intangible assets and goodwill
                 6,056                                           6,056   
Total operating expenses
                 44,210             148,742             14,562             207,514   
Operating (loss) income
                 (19,467 )            65,135             (18,682 )            26,986   
Interest expense, net of interest income
                 (15,953 )            860              (62,663 )(7)            (77,756 )  
Other (expense) income, net
                 (927 )            (16,854 )                           (17,781 )  
(Loss) income before income taxes
                 (36,347 )            49,141             (81,345 )            (68,551 )  
(Benefit) provision for income taxes
                 (6,430 )            577              (9,092 )(8)            (14,945 )  
Net (loss) income
              $ (29,917 )         $ 48,564          $ (72,253 )         $ (53,606 )(9)(10)  
Net (loss) income per common share — basic and diluted
              $ (0.23 )                                       $ (0.20 )  
Weighted average common shares outstanding — basic and diluted(11)
                 132,193                                           274,706   
 

46



Notes to the Unaudited Pro Forma Consolidated Statement of Operations

(1)
  Reclassification of VAT expense recorded by Various as operating expenses in its 2007 financial statements to revenue to conform with our classification.

(2)
  Includes net revenue that Various would have recognized for the period from December 7, 2007 through December 31, 2007 absent the acquisition by eliminating the non-recurring adjustment to reduce deferred revenue of Various to fair value at the date of the acquisition. Management believes that it is appropriate to add back the deferred revenue adjustment because the average renewal rate of the subscriptions that were the basis for the deferred revenue was approximately 63%. The renewal rate on subscriptions that had already been renewed at least one time since the acquisition was 78%. Therefore, management believes that historical results of Various are reflective, including those revenues that were added back to the pro forma net revenue, of our future results.

(3)
  Reclassification of amortization of capitalized software recorded by Various as cost of revenue in its 2007 financial statements to depreciation and amortization to conform with our classification.

(4)
  To adjust expense due to new employment agreements for: increase in Chief Operating Officer salary, $200,000; new Chief Financial Officer, $333,000; and on-going board of directors’ fees of $150,000.

(5)
  To eliminate non-recurring bonuses paid to employees of Various in connection with the acquisition of Various by us.

(6)
  To reflect amortization expense due to the purchase accounting adjustments to fair value Various’ intangible assets and capitalized software. The fair value assigned to Various’ intangible assets and capitalized software was $182.5 million. The calculation of increased amortization resulting from adjusting identifiable assets to fair value is as follows:

Asset
        Life
    Value
    Annual
Amortization
            (in thousands)    
Contracts
                 3-5           $ 76,100          $ 15,615   
Customers
                 2-4              23,500             11,424   
Domain names
           
Indefinite
         55,000                
Non-compete agreements
                 3              10,600             3,541   
Software
                 3              17,300             5,767   
Total
                             $ 182,500          $ 36,347   
Amortization of capitalized software by Various
for the period January 1, 2007 through December 6, 2007
                                               (526 )  
Amortization recorded in the period from December 7, 2007
through December 31, 2007
                                               (2,262 )  
Pro forma adjustment
                                            $ 33,559   
 

47



(7)
  To record interest expense and discount amortization in connection with the debt issued to finance the Various acquisition, as follows:

        First
Lien
Senior
Secured
Notes
    Second
Lien
Subordinated
Secured
Notes
    Subordinated
Convertible
Notes
    Other
Note
    Total
        (in thousands, except for percentage data)    
Principal
              $ 257,338          $ 80,000          $ 105,720          $ 5,000          $ 448,058   
Stated interest rate
                 13 %(a)            15 %            6 %            %                  
Annual interest, exclusive of discount amortization
                 33,763             12,000             6,343                          52,106   
Amortization of discount
                 8,141             1,472             4,644             540              14,797   
Amortization of deferred financing fees
                                                                             561    
Total annual interest including amortization of deferred financing fees
                                                                             67,464   
Less amounts recorded from the period
December 7, 2007 to December 31, 2007:
                                                                                       
Interest expense
                 2,438             867              440                           3,745   
Amortization of discount
                 541              136              304              37              1,018   
Amortization of deferred financing fees
                                                                             38    
Total
                                                                             4,801   
Additional amount to be recognized
                                                                          $ 62,663   
 


(a)
  Based on the LIBOR in effect at December 6, 2007.

(8)
  To adjust the benefit for income taxes based on pro forma income before income taxes for the year ended December 31, 2007. Prior to its acquisition by us, Various and certain of its subsidiaries and affiliates operated as S corporations for federal and state income tax purposes and were thus subject only to California state income tax at a 1.54% rate.

(9)
  Differs from the $79,559 net loss reflected in “Note C(1) — Acquisition of Various” in our consolidated financial statements and related notes as such statement includes $7.1 million of bonuses paid to Various employees relating to the Various acquisition, excludes $0.6 million of additional compensation related to new employment agreements, and includes a $25.8 million reduction in net revenue to reflect the reduction in deferred revenue due to purchase accounting, based on the deferred revenue balance at January 1, 2007, net of the tax effects on the aforementioned items.

(10)
  The financial and operating data below set out supplementary information that we believe is useful for investors in evaluating our underlying operations. The following table reconciles our pro forma net income (loss) to EBITDA and adjusted EBITDA. Adjusted EBITDA is equal to EBITDA plus adjustments relating to deferred revenue, impairment of goodwill and impairment of other intangible assets. EBITDA is a key measurement metric used to measure the operating performance of our internet and entertainment segments. EBITDA is also a metric used for determining performance-based compensation of our executive officers. We believe that the use of non-GAAP financial measures including, EBITDA and adjusted EBITDA, as some of many financial measures to be utilized by an investor determining whether to invest in us, are helpful since they allow the investor to measure our operating performance year over year without taking into account the wide disparity in the amounts of the interest, depreciation and amortization and tax expense items set forth in the financial statements. However, these non-GAAP financial measures may not provide information that is directly comparable to that provided by other companies in our industry, as other companies in our industry may calculate EBITDA differently, particularly as it relates to non-recurring, unusual items. EBITDA and adjusted EBITDA are not measurements of financial performance under GAAP and should not be considered as alternatives to cash flow from operating activities or as measures of liquidity, or as alternatives to net income or as indications of operating performance or any other measure of performance derived in accordance with GAAP.

48



        Year Ended
December 31,
2007
(in thousands)
Pro forma consolidated net loss
              $ (53,606 )  
Add: Interest expense, net
                 77,756   
Less: Income tax benefit
                 (14,945 )  
Add: Depreciation and amortization
                 42,810   
Pro forma EBITDA
                 52,015   
Add: Impairment of goodwill
                 925    
Add: Impairment of other intangible assets
                 5,131   
Pro forma Adjusted EBITDA
              $ 58,071   
 
(11)
     The pro forma basic and diluted net loss per share is based on the weighted average number of shares of our common stock outstanding including shares underlying common stock purchase warrants (including warrants issued in connection with the financing of the Various acquisition), which are exercisable at the nominal price of $0.00001 per share, as follows:

        As reported
    Pro forma
        (in thousands)    
Common stock
                 71,222             71,222   
Series B common stock
                 36,797             36,797   
Warrants exercisable at $0.00001 per share
                 24,174             166,687   
 
                 132,193             274,706   
 

49



SELECTED CONSOLIDATED FINANCIAL DATA

The following tables set forth selected historical consolidated financial data of us and our predecessor as of the dates and for the periods indicated. The statement of operations data for the years ended December 31, 2008, 2007 and 2006 as well as the balance sheet data as of December 31, 2008, 2007 and 2006 are derived from our audited consolidated financial statements also included as part of this prospectus. In their report dated March 20, 2009, which is also included in this prospectus, our independent registered public accounting firm stated that events of default have occurred under certain of our debt agreements allowing noteholders to demand payment of our 2006 Notes and 2005 Notes, and our subsidiary’s First Lien Senior Secured Notes, Second Lien Subordinated Secured Notes and Subordinated Convertible Notes and that these conditions raise substantial doubt about our ability to continue as a going concern. The statement of operations data for the year ended December 31, 2005 and the balance sheet data as of December 31, 2005 is derived from our audited consolidated financial statements which are not contained in this prospectus. The audited consolidated financial statements are prepared in accordance with U.S. GAAP and have been audited by Eisner LLP, an independent registered public accounting firm.

The selected consolidated statements of operations data for the year ended December 31, 2004 reflects our audited results from inception on October 5, 2004 (from Chapter 11 reorganization) to December 31, 2004 and were derived from audited financial statements not included in this prospectus. The consolidated statements of operations data for the nine month period from January 1, 2004 to September 30, 2004 is prior to our inception and represents the unaudited results of our predecessor company (General Media, Inc. and Subsidiaries), which are derived from consolidated financial statements not included in this prospectus. The selected consolidated balance sheet data as of December 31, 2004 is derived from our audited consolidated financial statements not included in this prospectus.

The selected consolidated statements of operations data for the three months ended March 31, 2009 and 2008 and the balance sheet data as of March 31, 2009 are derived from our unaudited condensed consolidated financial statements also included as part of this prospectus. We prepared the unaudited financial statements on the same basis as the audited financial statements, and they include all adjustments, consisting of normal and recurring items, that in the opinion of management are necessary for a fair presentation of the financial position and results of operations for the unaudited periods.

These historic results are not necessarily indicative of results for any future period and the year to date results are not necessarily indicative of our full year performance. You should read the following selected financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included elsewhere in this prospectus.

50



        FriendFinder Networks Inc. (formerly known as Penthouse Media Group Inc.)
Consolidated Data(1)
        General Media, Inc.
(Predecessor Company)
   
        Three Months Ended
March 31,
  Year Ended December 31,
   
 
       
        2009
  2008
  2008 (2)
    2007(2)
    2006
    2005
    From
Inception
(October 5,
2004)
to
December 31,
2004
        January 1,
2004
to
September 30,
2004
      (unaudited)     (in thousands, except per share data)         (unaudited)    
Statements of Operations and Per Share Data:
                                                                                                                     
Net revenue
              $ 84,125         $ 76,136          $ 331,017          $ 48,073          $ 29,965          $ 31,040          $ 8,992              $ 27,278   
Cost of revenue
                 24,979         26,009         96,514             23,330             15,927             14,336             3,904                 11,662   
Gross profit
              59,146         50,127             234,503             24,743             14,038             16,704             5,088                 15,616   
Operating expenses
                                                                                                                         
Product development
              3,474         3,154             14,553             1,002                                                           
Selling and marketing
              12,388         14,408             59,281             7,595             1,430             1,552             117                  383    
General and administrative
              17,955         21,011             88,280             24,466             24,354             24,108             4,179                 12,840   
Depreciation and amortization
              10,312         10,145             40,849             5,091             3,322             3,062             684                  142    
Impairment of goodwill
                                   9,571             925              22,824                                              
Impairment of other intangible assets
                                 14,860             5,131                                                           
Total operating expenses
                 44,129         48,718         227,394             44,210             51,930             28,722             4,980                 13,365   
Income (loss) from operations
                 15,017         1,409         7,109             (19,467 )            (37,892 )            (12,018 )            108                  2,251   
Interest and other expense, net
                 19,527         24,794         71,251             16,880             12,049             4,854             2,079                 10,384   
Loss before income tax benefit
                 (4,510 )         (23,385 )         (64,142 )             (36,347 )            (49,941 )            (16,872 )            (1,971 )                (8,133 )  
Income tax benefit
(expense)
                 1,370          6,344          18,176             6,430                                                        (18 )  
Net loss
                $ (3,140 )         $ (17,041 )         $ (45,966 )          $ (29,917 )         $ (49,941 )         $ (16,872 )         $ (1,971 )             $ (8,151 )  
Net loss per common share — basic and diluted(3)
                 $   (0.01       $ (0.14 )         $ (0.17 )          $ (0.23 )         $ (0.45 )         $ (0.16 )         $ (0.02 )             $ (17.09 )  
Weighted average common shares outstanding
— basic and diluted(3)
                 274,706         121,714         274,706             132,193             111,088             105,013             100,000                 477    
 

51



        FriendFinder Networks Inc. (formerly known as Penthouse Media Group Inc.)
Consolidated Data(1)
   
          As of December 31,
   
        As of
March 31,
2009
  2008 (2)
    2007(2)
    2006
    2005
    2004
      (unaudited)  
        (in thousands)    
Consolidated Balance Sheet Data (at period end):
                                                                                                  
Cash, restricted cash and cash equivalents
              $ 28,544          $ 31,565          $ 23,722          $ 2,998          $ 12,443          $ 1,073   
Total Assets
              585,776             599,913             649,868             70,770             99,685             88,741   
Long-term debt classified as current due to events of default, net of unamortized discount(4)
                 374,160             415,606             417,310                                          
Long-term debt
                 38,856             38,768             35,379             63,166             54,126             44,874   
Deferred revenue
                 42,095             42,814             27,214             6,974             5,535             5,923   
Total Liabilities
                 653,342             657,998             661,987             91,516             80,523             72,872   
Convertible preferred stock
                 2,042             2,042             2,042             353              252                 
Accumulated deficit
                 (149,392 )             (144,667 )            (98,701 )            (68,784 )            (18,843 )            (1,971 )  
Total stockholders’ (deficiency) equity
                 (67,566 )             (58,085 )            (12,119 )            (20,746 )            19,162             15,869   
 
        FriendFinder Networks Inc. (formerly known as Penthouse Media Group Inc.)
Consolidated Data(1)
        General Media, Inc.
(Predecessor Company)
   
      Three Months Ended
March 31,
  Year Ended December 31,
   
 
       
      2009
  2008
  2008 (2)
    2007(2)
    2006
    2005
    From
Inception
(October 5,
2004)
to
December 31,
2004
        January 1,
2004
to
September 30,
2004
        (unaudited)           (unaudited)  
            (in thousands)          
Other Data
                                                                                                                               
Net cash provided by (used in) operating activities
                 $11,293         $ 10,485          $ 50,948          $ 4,744          $ (16,600 )         $ (9,866 )         $ (3,096 )             $ 1,233   
Net cash (used in) provided by investing activities
                 (233 )         (1,280 )             (9,289 )            (149,322 )            (3,414 )            (4,393 )            (753 )                312    
Net cash (used in) provided by provided by financing activities
                 (13,125 )                      (25,336 )            148,961             10,569             25,629             2,986                 (750 )  
 


(1)
  Prior period amounts were reclassified to conform to the current period classification. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of certain business acquisitions.

(2)
  Net revenue for the years ended December 31, 2008 and 2007 does not reflect $19.2 million and $8.5 million, respectively, due to a non-recurring purchase accounting adjustment that required the deferred revenue at the date of the acquisition of Various to be recorded at fair value. Management believes that it is appropriate to add back the deferred revenue adjustment because the average renewal rate of the subscriptions that were the basis for the deferred revenue was approximately 63%. The renewal rate on subscriptions that had already been renewed at least one time since the acquisition was 78%. Therefore, management believes that historical results of Various are reflective, including those revenues that were added back to the pro forma net revenue, of our future results.

(3)
  Basic and diluted loss per share is based on the weighted average number of shares of common stock outstanding and Series B common stock including shares underlying common stock purchase warrants which are exercisable at the nominal price of $0.00001 per share. For information regarding the computation of per share amounts, refer to Note B(23) of our December 31, 2008 consolidated financial statements included elsewhere in this prospectus.

(4)
  Excludes $1.4 million at December 31, 2008 of principal amortization of First Lien Senior Secured Notes required to be paid on February 15, 2009, which is classified as a current portion of long-term debt.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited and audited consolidated financial statements and the related notes thereto included elsewhere in this prospectus. This discussion contains forward-looking statements, based on current expectations and related to future events and our future financial performance, that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

Overview

We are a leading internet-based social networking and multimedia entertainment company operating several of the most heavily visited social networking websites in the world. Through our extensive network of websites, since our inception, we have built a base of over 300 million registrants and over 200 million members in approximately 170 countries offering a wide variety of online services so that our members can interact with each other and access the content available on our websites. Our websites are intended to appeal to users of diverse cultures and interest groups and include social networking, live interactive video and premium content websites. Our most heavily visited social networking and entertainment websites include AdultFriendFinder.com, Amigos.com, AsiaFriendFinder.com, Cams.com, FriendFinder.com, BigChurch.com and SeniorFriendFinder.com. Our revenue to date has been primarily derived from subscription and paid-usage adult-oriented products and services. In addition to our online products and services, we also produce and distribute original pictorial and video content, license the globally-recognized Penthouse brand to a variety of consumer product companies and entertainment venues and publish branded men’s lifestyle magazines.

Historically, we operated our business in and generated our revenue from four segments: internet, publishing, studio and licensing. The internet segment consisted of our social networking, live interactive video and premium content websites. The publishing segment was comprised of publishing Penthouse magazine as well as other magazines and digests. The studio segment was comprised of our production of original adult video and pictorial content, and our library of over 650 films, over 10,000 hours of video content and over one million images. The licensing segment included the licensing of the Penthouse name, logos, trademarks and artwork for the manufacture, sale and distribution of consumer products.

On December 6, 2007, we acquired Various for approximately $401.0 million and became one of the world’s leading social networking and multimedia entertainment companies. The total consideration included approximately $137.0 million of cash and notes valued at approximately $248.0 million together with related warrants to acquire approximately 57.5 million shares of common stock, valued at approximately $16.0 million. Our results of operations for 2007 include 25 days of revenue and expenses from Various after giving effect to certain purchase accounting adjustments discussed below.

Due to the significance of the acquisition of Various and based on a review of Statement of Financial Accounting Standards or, SFAS, No. 131, Disclosures about Segments of an Enterprise and Related Information, we have determined that we now operate in two segments, internet and entertainment and we have revised prior financial results to reflect the two segments. The internet segment now includes Various and our social networking, live interactive video and premium content websites and the entertainment segment includes the former publishing, studio and licensing segments.

Our internet segment offers services and features that include social networking, online personals, premium content, live interactive video, recorded video, online chatrooms, instant messaging, photo, video and voice sharing, blogs, message boards and free e-mail. Our market strategy is to grow this segment and expand our service offerings with complimentary services and features.

Our entertainment segment produces and distributes original pictorial and video content, licenses the globally-recognized Penthouse brand to a variety of consumer product companies and entertainment venues and publishes branded men’s lifestyle magazines. We continually seek to expand our licenses and products in new markets and retail categories both domestically and internationally.

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Our History

Our predecessor company was incorporated in Delaware in 1993 under the name General Media, Inc., or GMI. GMI filed for bankruptcy on August 12, 2003 under Chapter 11 of the United States Bankruptcy Code and in November 2003, Marc H. Bell and Daniel C. Staton formed PET Capital Partners LLC, or PET, to acquire GMI’s secured notes and preferred stock.

On October 5, 2004, GMI emerged from Chapter 11 protection with all new equity distributed solely to the holders of the GMI secured notes. The reorganized capital structure also included approximately $35.8 million of Term Loan Notes distributed to former secured and unsecured creditors. Concurrently with the emergence from Chapter 11, we changed the name of the company to Penthouse Media Group Inc. and PET sold a minority position of non-voting Series B common stock to Interactive Brand Development Inc., or IBD.

During 2005, we consummated the sale of $33 million of 2005 Notes and $15 million of Series A Convertible Preferred Stock to fund the retirement of a $20 million credit facility, to fund the repayment of $11.8 million of our Term Loan Notes, to fund the purchase of certain trademark assets and for general corporate purposes. The remaining outstanding Term Loan Notes were reissued as Subordinated Term Loan Notes.

On March 31, 2006, we changed our state of incorporation from Delaware to Nevada.

On August 28, 2006, we consummated an offering of $5.0 million of 2006 Notes and $6.0 million of additional Series A Convertible Preferred Stock to fund the acquisition of substantially all of the assets of the debtor estate of Jill Kelly Productions, Inc., a production company, and for general corporate purposes.

On October 25, 2006, we acquired the outstanding shares of the Danni.com business, an adult internet content provider, for $1.4 million in cash and approximately 2.5 million shares of common stock valued at $1.5 million, for which we issued an additional $0.9 million of Subordinated Term Loan Notes to fund part of the purchase price consideration.

In December 2007, we consummated an offering of $5.0 million of Series B Convertible Preferred Stock at a price of $0.029604 per share. The purchasers in the offering included certain current stockholders, including Messrs. Staton and Bell and the Florescue Family Corporation, an entity affiliated with one of our directors, Barry Florescue. We used the proceeds from the Series B Convertible Preferred Stock offering to pay expenses relating to our acquisition of Various in December 2007 and for working capital.

On July 1, 2008, we changed our name from Penthouse Media Group Inc. to FriendFinder Networks Inc.

Key Factors Affecting Our Results of Operations

Net Revenue

Our net revenue is affected primarily by the overall demand for online social networking and personals services. Our net revenue is also affected by our ability to deliver user content together with the services and features required by our users’ diverse cultures, ethnicities and interest groups.

The level of our net revenue depends to a large degree on the growth of internet users, increased internet usage per user and demand for adult content. Our net revenue also depends on demand for online advertising, credit card availability and other payment methods in countries in which we have registrants, members, subscribers and paid users, general economic conditions, and government regulation. Online advertising may be affected by corporate spending due to the conditions of the overall economy. The demand for entertainment and leisure activities tends to be highly sensitive to consumers’ disposable incomes, and thus a decline in general economic conditions may lead to our current and potential registrants, members, subscribers and paid users having less discretionary income to spend. This could lead to a reduction in our revenue and have a material adverse effect on our operating results. In addition, our net revenue could be impacted by foreign and domestic government laws that affect companies conducting business on the internet. Laws which may affect our operations relating to payment methods, including the use of credit cards, user privacy, freedom of expression, content, advertising, information security, internet obscenity and intellectual property rights are currently being considered for adoption by many countries throughout the world.

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Internet Revenue

As a result of the acquisition of Various, approximately 92.9% of our adjusted non-GAAP net revenue for the year ended December 31, 2008 was generated from our internet segment comprised of social networking, live interactive video and premium content websites. For more information regarding our adjusted non-GAAP net revenue, see “Prospectus Summary — Non-GAAP Financial Results” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — FriendFinder Networks Inc. and Subsidiaries — Year Ended December 31, 2008 as Compared to Pro Forma Year Ended December 31, 2007.” We derive our revenue primarily from subscription fees and pay-by-usage fees. These fees are charged in advance and recognized as revenue over the term of the subscription or as the advance payment is consumed on the pay-by-usage basis, which is usually immediately. VAT is presented on a net basis and is excluded from revenue.

Net revenue consists of all revenue net of credits back to customers for disputed charges and any chargeback expenses from credit card processing banks for such items as cancelled subscriptions, stolen cards and non-payment of cards. We estimate the amount of chargebacks that will occur in future periods to offset current revenue. For the three months ended March 31, 2009, these credits and chargebacks were approximately 4.7% of gross revenue while chargebacks alone were approximately 1.4% of gross revenue. For the years ended December 31, 2008, 2007 and 2006, these credits and chargebacks have held steady at slightly under 4.0% of gross revenue, while chargebacks alone have been less than 1.0% of gross revenue.

In addition, our net revenue was reduced for the year ended December 31, 2008 in the amount of $19.2 million due to a purchase accounting adjustment that required deferred revenue at the date of acquisition to be recorded at fair value to reflect a normal profit margin for the sales effort after the acquisition (in effect a reduction to deferred revenue reflected in the historical financial statements of Various to eliminate any profit related to selling or other efforts prior to the acquisition date). This reduction did not impact the service to be provided to our online subscribers or the cash collected by us associated with these subscriptions. There were no further purchase accounting adjustments after December 31, 2008. Future revenue will not be impacted by this non-recurring adjustment.

Various’ adjusted non-GAAP net revenue grew from $127.5 million in 2004 to $317.8 million in 2008, which approximates an annual compounded growth rate of 25.6% (excluding the impact of certain purchase accounting adjustments). This rapid growth was primarily the result of the acquisition in March 2005 of Streamray, Inc., which provides live interactive video services. The live interactive video portion of the business grew at a faster rate than the social networking business through the end of 2007, however for the year ended December 31, 2008 our social networking business grew while our live interactive video portion declined.

Various’ business has grown rapidly since inception and we expect that Various’ business will continue to grow. We believe that we have new opportunities to substantially increase revenue by adding new features to our websites, expanding in foreign markets and generating third party advertising revenue from our internet websites, which allow us to target specific demographics and interest groups within our user base. However, our revenue growth rate has declined over the past year and may continue to do so as a result of increased penetration of our services over time and as a result of increased competition.

Entertainment Revenue

Entertainment revenue consists of studio production and distribution, licensing of the Penthouse name, logos, trademarks and artwork for the manufacture, sale and distribution of consumer products and publishing revenue. We derive revenue through third party license agreements for the distribution of our programming where we either receive a percentage of revenue or a fixed fee. The revenue sharing arrangements are usually either a percentage of the subscription fee paid by the customer or a percentage of single program or title fee purchased by the customer. Our fixed fee contracts may receive a fixed amount of revenue per title, group of titles or for a certain amount of programming during a period of time. Revenue from the sale of magazines at newsstands is recognized on the on-sale date of each issue based on an estimate of the total sell through, net of estimated returns. The amount of estimated revenue is adjusted in subsequent periods as sales and returns information becomes available. Revenue from the sale of magazine subscriptions is recognized ratably over their respective terms.

55



Cost of Revenue

Cost of revenue for the internet segment is primarily comprised of commissions, which are expensed as incurred, paid to our affiliate websites and revenue shares for online models and studios in connection with our live interactive video websites. We estimate that cost of revenue will decrease as a percentage of net revenue primarily due to improvement in our affiliate commission structure and revenue sharing arrangements with our models and studios as net revenue increases. Cost of revenue for the entertainment segment consists primarily of publishing costs including costs of printing and distributing magazines and studio costs which principally consist of the cost of the production of videos. These costs are capitalized and amortized over three years which represents the estimated period during which substantially all the revenue from the content will be realized.

Marketing Affiliates

Our marketing affiliates are companies that operate websites that market our services on their websites and direct visitor traffic to our websites by placing banners or links on their websites to one or more of our websites. The total revenue derived from these marketing affiliates has declined less than 2.0% from year to year during the three years shown, while the percentage of revenue contribution has declined more with the increase in total revenue which is primarily a result of increased revenue from our internal advertising efforts and selective ad buys. Our compensation to our marketing affiliates have increased modestly while revenues have decreased modestly, reflecting small increases in the rate at which we compensate our marketing affiliates. The percentage of revenues derived from these affiliates and the compensation to our affiliates for the three months ended March 31, 2009 and the previous three fiscal years are set forth below:

        Year Ended December 31,
   
        Three Months
Ended
March 31,
2009
  2008
    2007
    2006
Percentage of Revenue Contributed
              43 %             43 %            46 %            49 %  
Compensation to Affiliates (in millions)
              $ 16.3          $ 62.3          $ 61.3          $ 58.2   
 

Product Development

Product development expense consists of the costs incurred for maintaining the technical staff which are primarily engineering salaries related to the planning and post-implementation stages of our website development efforts. These costs also include amortization of the capitalized website costs attributable to the application development stage. We expect our product development expenses to remain stable as a percentage of revenue as we continue to develop new websites, services, content and features which will generate revenue in the future.

Selling and Marketing

Selling and marketing expenses consist principally of advertising costs, which we pay internet search engines for key word searches to generate traffic to our websites. Selling and marketing expenses also include salaries and incentive compensation for selling and marketing personnel and related costs such as public relations. Additionally, the entertainment segment includes certain nominal promotional publishing expenses. We believe that our selling and marketing expenses will remain relatively constant as a percentage of revenue as these expenses are relatively variable and within the discretion of management, therefore increases or decreases in the dollar amount of selling and marketing expenses should be approximately proportional to the increase or decrease in net revenue.

General and Administrative

General and administrative expenses relate primarily to our corporate personnel related costs, professional fees, occupancy, credit card processing fees and other overhead costs. We expect that the total amount of our general and administrative expenses will increase significantly due to the regulatory and compliance obligations associated with being a public company, however, we anticipate that these expenses will decrease as a percentage of net revenue as a large portion of these expenses are relatively fixed in nature and do not increase with a corresponding increase in net revenue.

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Depreciation and Amortization

Depreciation and amortization is primarily depreciation expense on our computer equipment and amortization is primarily attributable to intangible assets and internal-use software acquired in acquisitions. We expect our depreciation and amortization expenses to decrease due to purchases of new hardware and software associated with our growth plans increasing at a slower rate than our anticipated growth in net revenue. If we acquire other businesses which results in additional intangible assets, the amortization of any acquired intangible assets could cause our depreciation and amortization expense to increase as a percentage of net revenue.

In addition, as a result of purchase accounting rules, fair values were established for intangibles and internal-use software. The new total value of these intangibles and internal-use software was $182.5 million. We must reflect the depreciation and amortization of the value of these intangibles and internal-use software in the statement of operations for periods beginning on December 7, 2007. The amortization periods vary from two to five years with the weighted average amortization period equaling approximately three years. Approximately $36.1 million of the depreciation and amortization for the year ended December 31, 2008 was as a result of the amortization of these intangibles. Amortization for the three months ended March 31, 2009 was $7.6 million.

Impairment of Goodwill and Intangible Assets

Impairment of goodwill and intangible assets is recognized when we determine that the carrying value of goodwill and indefinite-lived intangible assets is greater than the fair value. We assess goodwill and other indefinite-lived intangibles at least annually, or more frequently when circumstances indicate that the carrying value may be impaired. We recorded goodwill impairment charges of $2.8 and $0.9 million in 2008 and 2007, respectively, related to our entertainment segment and $6.8 million in 2008 related to our internet segment. In addition, we also recorded an impairment charge related to our trademarks of $14.9 million and $5.1 million in 2008 and 2007, respectively, related to our entertainment segment. There were no further impairment charges recorded in the three months ended March 31, 2009. We do not expect that there will be future impairment recorded to goodwill and intangible assets based on current information available. However, if future circumstances change and the fair values of goodwill or intangible assets is less than the current carrying value, additional impairment losses will be recognized.

Interest Expense, Net of Interest Income

Interest expense, net of interest income mainly represents interest expense recognized from the debt incurred in connection with the acquisition of Various and an increase in interest expense related to our debt incurred prior to the acquisition. Included in interest expense is amortization of note discounts due to certain warrants issued in connection with our 2005 Notes, 2006 Notes, First Lien Senior Secured Notes and Second Lien Subordinated Secured Notes and amortization of a discount to record the fair value of the Subordinated Convertible Notes at the date of issuance. We expect interest expense to decline after we become a public company because the proceeds from this offering are expected to be used to repay certain long-term notes as required by the terms of such notes.

Interest and Penalties Related to VAT

Interest and penalties related to the VAT liability are due to our failure to file VAT tax returns and pay VAT based on the applicable law of each country in the European Union. Commencing in 2003, the member states of the European Union implemented rules requiring the collection and payment of VAT on revenues generated by non-European Union businesses that provide electronic services that are purchased by end users within the European Union. We did not begin collecting VAT from our subscribers until July 2008. At March 31, 2009, the total amount of uncollected VAT payments was approximately $74.1 million. The majority of the penalties assessed by the various tax jurisdictions related to the VAT liability were incurred prior to our purchase of Various and thus charged back to the sellers of Various by an offset in the principal amount of the Subordinated Convertible Notes held by the sellers. The portion of interest incurred prior to the purchase of Various was also charged back to the sellers of Various by an offset in the principal amount of the Subordinated Convertible Notes held by the sellers, and subsequently continues to be recorded on the unpaid amounts. For more information regarding the reductions of the principal amount of Subordinated Convertible Notes as a result of our VAT liability see “Business — Legal Proceedings.”

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Foreign Exchange Gain/Loss

Foreign exchange gain or loss is the result of the fluctuation in the U.S. dollar against foreign currencies. We record a gain when the dollar strengthens against foreign currencies and a loss when the dollar weakens against those currencies. Our primary exposure to foreign exchange fluctuations is related to the VAT liability, the majority of which is denominated in Euros and British pounds. We also record a foreign exchange gain or loss on daily transactions in foreign countries.

Gain on Settlement of VAT Liability

Gain on settlement of VAT liability reflects our settlement of historical VAT liabilities owed at amounts less than what we had recorded. We have been able to settle with or pay in full certain tax jurisdictions on favorable terms, which resulted in the gain. However, we still have numerous tax jurisdictions remaining to be resolved that may result in our recording a gain or loss.

Income Taxes

At December 31, 2008, we had net operating loss carryforwards for federal income tax purposes of approximately $77.2 million available to offset future taxable income, which expire at various dates from 2024 through 2027. Our ability to utilize approximately $9.1 million of these carryforwards related to the periods prior to our exit from Chapter 11 reorganization proceedings is limited due to changes in our ownership, as defined by federal tax regulations. Realization of the deferred tax assets is dependent on the existence of sufficient taxable income within the carryforward period, including future reversals of taxable temporary differences.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect both the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and judgments are subject to an inherent degree of uncertainty. Our significant accounting policies are more fully described in Note B to our 2008 consolidated financial statements and in Note B to our unaudited condensed consolidated financial statements for the three months ended March 31, 2009, included elsewhere in this prospectus. However, certain of our accounting policies are particularly important to the portrayal of our financial position and results of operations. In applying these critical accounting policies, our management uses its judgment in making certain assumptions to be used in making such estimates. Those estimates are based on our historical experience, the terms of existing contracts, our observation of trends in our industry and information available from other outside sources as appropriate. Accounting policies that, in their application to our business, involve the greatest amount of subjectivity by way of management judgments and estimates are those relating to:

•  
  valuation of goodwill, identified intangibles and other long-lived assets including business combinations; and

•  
  legal contingencies.

Valuation of Goodwill, Identified Intangibles and Other Long-lived Assets, including Business Combinations

We test goodwill and intangible assets for impairment in accordance with SFAS No. 142, Goodwill and Other Intangible Assets and test property, plant and equipment for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. We assess goodwill, and other indefinite-lived intangible assets at least annually, or more frequently when circumstances indicate that the carrying value may not be recoverable. Factors we consider important and which could trigger an impairment review include the following:

•  
  a significant decline in actual projected revenue;

•  
  a significant decline in performance of certain acquired companies relative to our original projections;

•  
  an excess of our net book value over our market value;

58



•  
  a significant decline in our operating results relative to our operating forecasts;

•  
  a significant change in the manner of our use of acquired assets or the strategy for our overall business;

•  
  a significant decrease in the market value of an asset;

•  
  a shift in technology demands and development; and

•  
  a significant turnover in key management or other personnel.

When we determine that the carrying value of goodwill and indefinite-lived intangible assets and other long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. In the case of intangible assets and other long-lived assets, this measurement is only performed if the projected undiscounted cash flows for the asset are less than its carrying value.

In 2008 and 2007, a trademark impairment loss of approximately $14.9 million and $5.1 million, respectively, was recognized related to our entertainment segment. Such loss, which is included in impairment of other intangible assets in the 2008 and 2007 consolidated statement of operations, resulted due to the estimated fair value of certain trademarks being less than their carrying value. We had impairment charges related to goodwill of approximately $2.8 million and $0.9 million in 2008 and 2007, respectively, and $6.8 million in 2008 related to our internet segment. These losses were attributable to downward revisions of earnings forecasted for future years and an increase in the discount rate due to an increase in the perceived risk of our business prospects related to negative global economic conditions and increased competition. There were no further impairment charges in the three months ended March 31, 2009.

We have acquired the stock or specific assets of certain companies from 2006 through 2007 some of which were considered to be business acquisitions. Under the purchase method of accounting, the cost, including transaction costs, are allocated to the underlying net assets, based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.

The judgments made in determining the estimated fair value and expected useful life assigned to each class of assets and liabilities acquired can significantly impact net income.

As with the annual testing described above, determining the fair value of certain assets and liabilities acquired is subjective in nature and often involves the use of significant estimates and assumptions.

The excess of the purchase price over the estimated fair values of the net assets acquired in Various was recorded as goodwill. Intangible assets which resulted from the acquisition were recorded at estimated fair value at the date of acquisition. Identifiable intangible assets are comprised mainly of studio and service contracts, domain names, customer lists and a non-compete agreement. In addition, purchase accounting requires deferred revenue be restated to estimated cost incurred to service the liability in the future, plus a reasonable margin.

In our impairment testing, our forecasts of future performance, the discount rates used in discounted cash flow analysis and comparable company comparisons are all subjective in nature and a change in one or more of the factors could have a material change in the results of such testing and our financial results.

Legal Contingencies

We are currently involved in certain legal proceedings, as discussed in the notes to our audited consolidated financial statements and under “Business — Legal Proceedings.” To the extent that a loss related to a contingency is reasonably estimable and probable, we accrue an estimate of that loss. Because of the uncertainties related to both the amount and range of loss on certain pending litigation, we may be unable to make a reasonable estimate of the liability that could result from an unfavorable outcome of such litigation. As additional information becomes available, we will assess the potential liability related to our pending litigation and make or, if necessary, revise our estimates. Such revisions in our estimates of the potential liability could materially impact our results of operations and financial position.

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Segment Information

We divide our business into two reportable segments: internet, which consists of social networking, live interactive video and premium content websites; and entertainment, which consists of studio production and distribution, licensing and publishing. Certain corporate expenses are not allocated to segments. The following table presents our results of operations for the periods indicated for our reportable segments:

      Three Months Ended
March 31,
    Year Ended December 31,
   
        2009
  2008
  2008
    2007
    2006
      (unaudited)  
        (in thousands)    
Net revenue
                                                                                       
Internet
              $ 78,335         $ 69,643          $ 306,129          $ 20,961          $ 6,623   
Entertainment
                 5,790         6,493         24,888             27,112             23,342   
Total
                 84,125         76,136         331,017             48,073             29,965   
Cost of revenue
                                                                                       
Internet
                 21,506         22,244         81,815             8,479             1,398   
Entertainment
                 3,473         3,765         14,699             14,851             14,529   
Total
                 24,979         26,009         96,514             23,330             15,927   
 
Gross profit
                                                                                       
Internet
                 56,829         47,399         224,314         12,482             5,225   
Entertainment
                 2,317         2,728         10,189             12,261             8,813   
Total
                 59,146         50,127         234,503             24,743             14,038   
 
Income (Loss) from operations
                                                                                       
Internet
                 15,915         4,306         34,345             (964 )            4,088   
Entertainment
                 894         (87 )         (17,748 )             (7,811 )            (28,043 )  
Unallocated corporate
                 (1,792 )         (2,810 )         (9,488 )             (10,692 )            (13,937 )  
Total
                 $ 15,017         $ 1,409         $ 7,109          $ (19,467 )         $ (37,892 )  
 

Internet Segment Historical Operating Data

The following table presents certain key business metrics for our adult social networking websites, general audience social networking websites and live interactive video websites for the three months ended March 31, 2009 and 2008, the year ended December 31, 2008, the pro forma year ended December 31, 2007 and the year ended December 31, 2006. For more information regarding our adjusted non-GAAP revenue, see “Prospectus Summary — Non-GAAP Financial Results” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — FriendFinder Networks Inc. and Subsidiaries — Year Ended December 31, 2008 as Compared to Pro Forma Year Ended December 31, 2007.”

      Three Months Ended
March 31,
    Year Ended December 31,
   
        2009
  2008
  2008
    2007(1)
    2006
Adult Social Networking Websites
                                                                                    
Beginning Subscribers
              896,211         919,146             919,146             906,641             864,358   
New Subscribers
                 479,091         526,188         1,935,533             2,109,845             2,297,354   
Terminations
                 460,537         481,914         1,958,468             2,097,340             2,255,071   
Ending Subscribers
                 914,765         963,420         896,211             919,146             906,641   
Churn
              17.1 %         17.5 %             17.8 %            19.3 %            21.7 %  
ARPU
              $ 21.60         $ 20.21          $ 21.98          $ 19.95          $ 20.39   
Adjusted non-GAAP Revenue (2)
(in millions)
                 $ 58.7         $ 57.1         $ 239.4          $ 218.6          $ 216.7   

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        Three Months Ended
March 31,
    Year Ended December 31,
   
        2009
    2008
    2008
    2007(1)
    2006
General Audience Social Networking Websites
                                                                                    
Beginning Subscribers
                 68,647         85,893         85,893             96,221             95,571   
New Subscribers
                 30,227         60,003         174,290             245,764             310,575   
Terminations
                 36,633         54,852         191,536             256,092             309,925   
Ending Subscribers
                 62,241         91,044         68,647             85,893             96,221   
Churn
                 17.8 %         21.3 %         18.6 %             22.2 %            27.0 %  
ARPU
                 $18.74         $ 18.34         $ 19.48          $ 16.38          $ 18.02   
Adjusted non-GAAP Revenue (2)
(in millions)
                 $3.7         $ 4.9         $ 18.1          $ 17.9          $ 20.7   
Live Interactive Video Websites
                                                                                    
Total Minutes
                 4,039,882         5,800,559         19,101,173             20,613,825             N/A    
Average Revenue Per Minute
                 $3.48         $ 2.58         $ 3.03          $ 2.93             N/A    
Total Adjusted non-GAAP
Revenue (2) (in millions)
                 $14.1         $ 14.9         $ 57.9          $ 60.3          $ 52.3   
 


(1)
  Pro forma results give effect to the acquisition of Various as if it had been completed on January 1, 2007.

(2)
  Revenue for the three months ended March 31, 2009 is GAAP revenue with no adjustments.

Results of Operations

Segments and Periods Presented

Prior to December 2007, we operated in four segments. As a result of our acquisition of Various and based on a review of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, we have determined that we now operate in two segments, internet and entertainment and we have revised prior financial results to reflect these two segments. Our strategy is largely focused on the expansion of our internet segment. As a result, we expect our entertainment segment to become a decreasing percentage of our total net revenue. We expect our entertainment segment to continue to account for less than 10.0% and 5.0% of our revenues and gross profit, respectively, for the next five years.

Our entertainment segment has higher fixed and variable costs associated with the business resulting in historically lower gross profit margins than our internet segment. We expect gross profit margins in our entertainment segment to continue to vary but remain within its historical range. Prior to December 2007, our internet segment as reported was an ancillary business to the activities within our entertainment segment. As a result, gross profit margins prior to December 2007 are not indicative of the current substantially larger internet business. In addition, the gross profit margin for the internet segment for the period ended December 31, 2008 is not comparable to the other periods presented which had substantially smaller net revenues. We expect the internet gross profit percentage in future years to be consistent with the gross profit percentage in 2008.

We have provided a discussion of our results of operations on a consolidated basis and have also provided certain detailed discussions for each of our segments including the former pre-acquisition results of Various. The results of Various are not included in our results of operations until December 6, 2007, but constitute a substantial portion of our business after that date. As a result, in order to provide a meaningful discussion of our ongoing business, we have provided a discussion of the following:

•  
  our consolidated results of operations for the three months ended March 31, 2009 compared to the three months ended March 31, 2008;

•  
  our consolidated results of operations for the year ended December 31, 2008 (which include the results of operations of Various) compared to the year ended December 31, 2007 (which include 25 days of the results of operations of Various);

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•  
  our consolidated results of operations for the year ended December 31, 2008 compared to the results of operations for the pro forma year ended December 31, 2007 as if the Various acquisition had been completed on January 1, 2007, which we refer to as the pro forma year ended December 31, 2007;

•  
  our consolidated results of operations for the year ended December 31, 2007 (which include 25 days of the results of operations of Various) compared to the year ended December 31, 2006 (which do not include the results of operations of Various);

•  
  Various results of operations for the fiscal period January 1, 2007 through December 6, 2007 compared to the year ended December 31, 2006; and

•  
  an analysis of internet segment operating data which are key to an understanding of our operating results and strategies for the three months ended March 31, 2009 as compared to the three months ended March 31, 2008, for the year ended December 31, 2008 as compared to pro forma year ended December 31, 2007 and for the pro forma year ended December 31, 2007 versus the Various year ended December 31, 2006.

The following table presents our historical operating results as a percentage of our net revenue for the periods indicated:

      Three Months Ended
March 31,
    Year Ended December 31,
   
        2009
  2008
  2008
    2007
    2006
Net revenue
              100 %         100 %             100 %            100 %            100 %  
Cost of revenue
                 30         34         29             48              53    
Gross profit
                 70         66         71             52              47    
 
Operating expenses:
                                                                                       
Product development
              4         4             4              2                 
Selling and marketing
              15         19             18              16              5    
General and administrative
              21         28             27              51              81    
Depreciation and amortization
              12         13             12              10              11    
Impairment of goodwill
                                   3              2              76    
Impairment of intangible assets
                                 5             11                 
Total operating expenses
                 52         64         69             92              173    
Income (loss) from operations
                 18         2         2             (40 )            (126 )  
 
Interest expense, net of interest income
              (25 )         (26 )             (24 )            (33 )            (27 )  
Interest and penalty related to VAT
              (2 )         (2 )             (3 )            (3 )               
Loss on modification of debt
                                                             (13 )  
Foreign exchange gain/(loss)
              3         (4 )             5              1                 
Gain on settlement of VAT liability
                                   1                            
Gain on liability related to warrants
                                                 
Other (expense) income, net
                                                             (1 )  
Loss before income taxes
                 (6 )         (30 )         (19 )             (75 )            (167 )  
 
Income tax benefit
                 2         8         5             13                 
 
Net loss
                 (4 )%         (22 )%         (14 )%             (62 )%            (167 )%  
 

FriendFinder Networks Inc. and Subsidiaries

Three Months Ended March 31, 2009 as Compared to the Three Months Ended March 31, 2008

Net Revenue.  Net revenue for the three months ended March 31, 2009 and 2008 was $84.1 million and $76.1 million, respectively, representing an increase of $8.0 million or 10.5%. Internet revenue for the three months ended March 31, 2009 and 2008 was $78.3 million and $69.6 million, respectively, representing an increase of $8.7 million or 12.5%. Entertainment revenue for the three months ended March 31, 2009 and 2008 was $5.8 million and $6.5

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million, respectively, representing a decrease of $0.7 million or 10.8%. Included above for the three months ended March 31, 2008 was a reduction to net revenue of $9.6 million due to a purchase accounting adjustment that required the deferred revenue to be recorded at fair value as of the day of acquisition of Various in 2007.

Without the impact of the purchase accounting adjustment, adjusted non-GAAP net revenue for the three months ended March 31, 2008 would have been $85.7 million, as compared to $84.1 million for the three months ended March 31, 2009, a decrease of $1.6 million or 1.9%. Internet revenue without the effect of the purchase accounting adjustment would have been $79.2 million for the three months ended March 31, 2008 as compared to $78.3 million for the three months ended March 31, 2009, representing a decrease of $0.9 million or 1.1%. The decrease in adjusted non-GAAP revenue was primarily attributable to a decrease in our live interactive video websites of $0.9 million, or 5.9%, due to a loss of referral business from affiliate web sites, resulting in lower web traffic and sign-ups. In addition, negative global economic conditions contributed to the decline. Furthermore, we had a decrease in adjusted non-GAAP revenue for our premium content websites of $0.6 million, or 26.6%, due mainly to a decrease in traffic and negative global economic conditions. Those decreases were offset by an increase of $0.4 million, or 0.7%, in adjusted non-GAAP revenue for our social networking websites mainly attributable to benefits realized from the continued investment in technology enhancements, marketing campaigns and our affiliate commission programs, which was partially offset by negative global economic conditions.

Adjusted non-GAAP internet revenue for the three months ended March 31, 2009 was comprised of 79.6% relating to our social networking websites, 17.9% relating to our live interactive video websites and 2.0% relating to our premium content websites, as compared to 78.2% for our social networking websites, 18.9% for our live interactive video websites and 2.7% for our premium content websites for the same period in 2008.

Entertainment revenue for the three months ended March 31, 2009 was $5.8 million as compared to $6.5 million for the three months ended March 31, 2008, representing a decrease of $0.7 million or 10.8%. This decrease can be primarily attributed to a decline in publication revenue of $1.3 million as a result of a decline in the number of magazines sold from 1.7 million to 1.4 million issues, offset by a $0.4 million increase resulting from entering into new video contracts. There was no impact of purchase accounting adjustments on entertainment revenue.

The following table presents the purchase accounting related adjustments to revenue (in millions):

      Three Months
Ended
March 31, 2009
  Adjusted
Three Months
Ended
March 31, 2008
      (unaudited)  
Net revenue
              $ 84.1         $ 76.1  
Purchase accounting adjustment
                      9.6  
Adjusted non-GAAP net revenue
              84.1         85.7  
Internet revenue
              $ 78.3         $ 69.6  
Purchase accounting adjustment
                      9.6  
Adjusted non-GAAP net internet revenue
              78.3         79.2  
Entertainment revenue
              $ 5.8         $ 6.5  
 

For more information regarding our adjusted non-GAAP net revenue, see “Prospectus Summary — Non-GAAP Financial Results.”

Cost of Revenue.  Cost of revenue for the three months ended March 31, 2009 and 2008 was $25.0 million and $26.0 million, respectively, representing a decrease of $1.0 million or 3.8%. The decrease in cost of revenue was primarily attributable to a reduction in affiliate commission expense of $0.6 million which was mainly due to a change in payment plan structure to affiliates as well as the decrease in revenue. There was also a reduction in studio and model costs of $0.3 million that was due mainly to the decrease in live interactive web sites revenue of 5.9% as described above.

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The following table presents our operating results, adjusted for purchase accounting in 2008, as a percentage of our net revenue for the periods indicated:

      Three Months
Ended
March 31, 2009
  Adjusted
Three Months
Ended
March 31, 2008
Net revenue
              100.0 %         100.0 %  
Cost of revenue
              29.7         30.4  
Gross profit
              70.3         69.6  
Operating expenses:
                                       
Product development
              4.1         3.7  
Selling and marketing
              14.7         16.8  
General and administrative
              21.3         24.5  
Depreciation and amortization
              12.3         11.8  
Total operating expenses
              52.4         56.8  
Income from operations
              17.9         12.8  
Interest expense, net of interest income
              (25.0 )         (23.2 )  
Interest and penalty related to VAT
              (1.9 )         (1.9 )  
Foreign exchange gain (loss)
              3.4         (3.8 )  
Gain on settlement of VAT liability
              0.1          
Gain on liability related to warrants
              0.3          
Other (expense), net
              (0.1 )         0.0  
Loss before income taxes
              (5.3 )         (16.1 )  
Income tax benefit
              1.6         7.4  
Net loss
              (3.7 )         (8.7 )  
 

Product Development.  Product development expense for the three months ended March 31, 2009 and March 31, 2008 was $3.5 million and $3.2 million, respectively, representing an increase of $0.3 million or 9.4%. The primary reason for the increase in product development expense was due to a rise in engineering costs to support revenue growth and to enhance existing technology.

Selling and Marketing.   Selling and marketing expense for the three months ended March 31, 2009 and 2008 was $12.4 million and $14.4 million, respectively, representing a decrease of $2.0 million or 13.9%. The decrease in selling and marketing expense is primarily attributable to a $1.8 million decrease in our ad buy expenses for our internet segment over the period. The largest single sales and marketing expense item is our ad buy expense, the cost of purchasing key word searches from major search engines, coupled with expenses related to marketing personnel.

General and Administrative.  General and administrative expense for the three months ended March 31, 2009 and 2008 was $18.0 million and $21.0 million, respectively, representing a decrease of $3.0 million or 14.3%. The decrease in general and administrative expense is primarily due to a $2.5 million decrease in legal fees. The decrease in legal expense was primarily attributable to a $2.7 million reimbursement related to a prior lawsuit in which the sellers of Various repaid a portion of the settlement payment and litigation expenses to us pursuant to the acquisition agreement for Various. The decrease in general and administrative expense was also due a decline in merchant fees of $0.9 million due to a change to a new credit card processor at our internet segment; a decrease in temporary help expenses of $0.4 million due to the majority of integration work being completed by March 31, 2008; and a $0.5 million decrease in other corporate expenses. The decreases were offset by a $0.8 million increase in our salaries, wages and benefits to help build our corporate infrastructure and a $0.6 million increase for costs due to bandwidth for a new disaster recovery location and overall increased capacity and speed.

Depreciation and Amortization.  Depreciation and amortization expense for the three months ended March 31, 2009 and 2008 was $10.3 million and $10.1 million, respectively, representing an increase of $0.2 million or 2.0%. The increase in depreciation and amortization is primarily related to additional assets purchased.

Interest Expense, Net of Interest Income.  Interest expense for the three months ended March 31, 2009 and 2008 was $21.1 million and $19.9 million, respectively, representing an increase of $1.2 million or 6.0%. The

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increase was due mainly to additional original issue discount, or OID, amortization on our first lien debt from excess cash flow payments, offset by an overall reduction in our total debt during the three months ended March 31, 2009.

Interest and Penalties Related to VAT.  Effective July 1, 2003, as a result of a change in the law in the European Union, VAT was required to be collected from customers in connection with their use of internet services in the European Union countries. A provision and related liability have been recorded for interest and penalties related to the unremitted VAT and failure to file tax returns based on the applicable law of each relevant country in the European Union.

Intere