S-1/A 1 i10763.htm AMENDMENT NO. 11 TO FORM S-1

As filed with the Securities and Exchange Commission on February 4, 2010

Registration No. 333-156414

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


AMENDMENT NO. 11 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.






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.

SUBJECT TO COMPLETION, DATED FEBRUARY 4, 2010

PRELIMINARY PROSPECTUS

20,000,000 Shares

 

Common Stock

This is an initial public offering of 20,000,000 shares of common stock of FriendFinder Networks Inc. 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 $10.00 and $12.00. Our common stock has been approved for listing on NYSE Amex under the symbol “FFN,” subject to official notice of issuance.

All of the net proceeds from the offering will be used to pay waiver fees and repay a portion of our outstanding debt as further described in the section entitled “Use of Proceeds” beginning on page 41.

Investing in our common stock involves risks. See the section entitled “Risk Factors” beginning on page 15 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(1)
              $           $    
Proceeds to us
              $           $    
 


(1)  
  In addition, we have agreed to reimburse the underwriters for certain expenses in connection with this offering. See the section entitled “Underwriting.”

The underwriters and FriendFinder Networks Inc. have entered into a firm commitment underwriting agreement as further described in the section entitled “Underwriting.” We have granted the underwriters a 30-day option to purchase up to an additional 3,000,000 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                         , 2010.

    

RenCap

 

Ledgemont Capital Markets LLC

Merriman Curhan Ford & Co.

 

Lighthouse Financial


                        , 2010







TABLE OF CONTENTS

        Page
Prospectus Summary
                 1    
Risk Factors
                 15    
Forward-Looking Statements
                 38    
Market and Industry Data
                 40    
Use of Proceeds
                 41    
Dividend Policy
                 42    
Capitalization
                 43    
Dilution
                 45    
Unaudited Pro Forma Financial Data
                 46    
Selected Consolidated Financial Data
                 49    
Management’s Discussion and Analysis of Financial Condition and Results of Operations
                 53    
Our Industry
                 103   
Business
                 107   
Management
                 125   
Principal Stockholders
                 147   
Certain Relationships and Related Party Transactions
                 151   
Description of Capital Stock
                 160   
Description of Indebtedness
                 166   
Shares Eligible for Future Sale
                 175   
Certain Material U.S. Tax Considerations
                 177   
Underwriting
                 179   
Legal Matters
                 184   
Independent Registered Public Accounting Firm
                 184   
Where You Can Find More Information
                 184   
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.

Renaissance Securities (Cyprus) Limited is not a Securities and Exchange Commission, or SEC, registered broker-dealer. Any offers and sales of shares of our common stock by Renaissance Securities (Cyprus) Limited to U.S. persons will be effected by its SEC-registered broker-dealer affiliate, RenCap Securities, Inc., and any offers and sales of shares of our common stock to any retail investors will be effected through an SEC-registered broker-dealer, acting as a selling agent, all in accordance with applicable U.S. securities laws.

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 voting common stock and except as otherwise noted, such references do not include our Series B common stock or our preferred stock. 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. References to our “articles of incorporation,” “articles” or “charter” refer to our amended and restated articles of incorporation. Our amended and restated articles of incorporation, among other things, changed 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. Our amended and restated articles of incorporation became effective on January 25, 2010 following the effectiveness on the same date of (i) the amendment and restatement of the certificate of designation of the Series A Convertible Preferred Stock, (ii) the 1-for-20 reverse split of our Series A Convertible Preferred Stock, including a corresponding and proportionate decrease in the number of outstanding shares of Series A Convertible Preferred Stock, (iii) the amendment and restatement of the certificate of designation of the Series B Convertible Preferred

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Stock, (iv) the 1-for-20 reverse split of our Series B Convertible Preferred Stock, including a corresponding and proportionate decrease in the number of outstanding shares of Series B Convertible Preferred Stock and (v) the 1-for-20 reverse split of each series of our authorized common stock, including a corresponding and proportionate decrease in the number of outstanding shares of such series, each of which were effected on January 25, 2010. 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.

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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. This summary may not contain all of the information that may be important to you. You should carefully read the entire prospectus, including the section entitled “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 365 million registrants and over 245 million members in over 170 countries, with a majority of our members outside of the United States, 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 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.

As described below, 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 nine months ended September 30, 2009, we averaged 68 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 nine months ended September 30, 2009, we averaged more than 4.4 million new registrations on our websites each month. Some of our registrants are also members, as described below.

•  
  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 nine months ended September 30, 2009, we averaged more than 2.8 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. Our subscribers maintain their subscriptions on average for approximately six months. For the nine months ended September 30, 2009, we had a monthly average of approximately one million paying subscribers from whom we derived approximately 78.6% of our internet revenue.

•  
  Paid Users. Paid users are members who purchase products or services on a pay-by-usage basis. For the nine months ended September 30, 2009, we averaged approximately 1.4 million purchased minutes by paid users each month from whom we derived approximately 19.1% of our internet revenue.

•  
  Average Revenue per Subscriber. We calculate average revenue per subscriber, or ARPU, by dividing adjusted non-GAAP revenue for the period by the average number of subscribers in the period and by the number of months in the period. As such, our ARPU is a monthly calculation. For the nine months ended September 30,

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2009, our average monthly adjusted non-GAAP revenue per subscriber on our adult social networking websites and general audience social networking websites was approximately $21.44 and $17.24, respectively. For more information regarding our adjusted non-GAAP revenue, see the sections entitled “— 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 — Nine Months Ended September 30, 2009 as Compared to Nine Months Ended September 30, 2008.”

•  
  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 17.8% per month for the nine months ended September 30, 2008 to approximately 16.5% per month for the nine months ended September 30, 2009. Our average monthly churn rate for our general audience social networking websites has decreased from approximately 19.6% for the nine months ended September 30, 2008 to approximately 16.2% for the nine months ended September 30, 2009.

•  
  Cost Per Gross Addition. Cost per gross addition, or CPGA, is calculated by adding affiliate commission expense plus ad buy expenses and dividing by new subscribers during the measurement period. Our CPGA for our adult social networking websites decreased from $50.52 for the nine months ended September 30, 2008 to $47.07 for the nine months ended September 30, 2009. Our CPGA for our general audience social networking websites increased from $34.02 for the nine months ended September 30, 2008 to $45.05 for the nine months ended September 30, 2009.

•  
  Average Lifetime Net Revenue Per Subscriber. Average Lifetime Net Revenue Per Subscriber is calculated by multiplying the average lifetime (in months) of a subscriber by ARPU for the measurement period and then subtracting the CPGA for the measurement period. Our Average Lifetime Net Revenue Per Subscriber for our adult social networking websites increased from $69.79 for the nine months ended September 30, 2008 to $82.64 for the nine months ended September 30, 2009. Our Average Lifetime Net Revenue Per Subscriber for our general audience social networking websites increased from $59.67 for the nine months ended September 30, 2008 to $61.55 for the nine months ended September 30, 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 September 30, 2009, we had over 200,000 participants in our marketing affiliate program from which we derive a substantial portion of our new members and approximately 44% of our revenue. For the nine months ended September 30, 2009, we made payments to marketing affiliates of approximately $42.9 million.

As of September 30, 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 $432.8 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 which 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 2010, or the 2005 Notes, the proceeds of which 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, the proceeds of which 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, and 6% subordinated convertible notes due 2011, or the Subordinated Convertible Notes.

On October 8, 2009, subsequent to the issuance of the 2008 financial statements, we obtained waivers or amendments to our note agreements which cured events of default that would have permitted noteholders to demand payment of our 2006 Notes, 2005 Notes, Subordinated Term Loan Notes, First Lien Senior Secured Notes, Second Lien Subordinated Secured Notes and Subordinated Convertible Notes. These events of default had raised

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substantial doubt about our ability to continue as a going concern for the year ended December 31, 2008. Now, however, the conditions that raised substantial doubt about whether we will continue as a going concern no longer exist. See Note S(5), “Subsequent Events” of our December 31, 2008 consolidated financial statements included elsewhere in this prospectus. For more information regarding the curing of these events of default, see the section entitled “Description of Indebtedness.”

The primary purpose of this offering is to repay some 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.

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 4.4 million new registrants and more than 2.8 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 200,000 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. At the same time, we work to improve our ability to dynamically adjust offers and pricing to users based on a variety of factors such as geography, currency, payment system, country of origin, or time.

•  
  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 nine months ended September 30, 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, such as new social networking websites, content-driven websites that serve

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  as portals for user-generated and professional content and complimentary FriendFinder branded 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, as we seek to expand in selected geographic markets, including southeast Europe, South America and Asia, and, 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.

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THE OFFERING

Common stock offered by us
           
20,000,000 shares
Common stock outstanding before this offering (as of September 30, 2009)
           
5,329,639 shares
Common stock to be outstanding after this offering
           
41,636,144 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 3,000,000 additional shares of our common stock at the public offering price less the underwriting discount to cover any over-allotment.
Use of proceeds
           
We estimate that our net proceeds from this offering will be approximately $200.1 million, assuming an initial offering price of $11.00 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 all of the net proceeds to pay waiver fees equal to (i) 1% of the outstanding principal amount of the First Lien Senior Secured Notes on the date we consummate this offering which we expect to be approximately $1.9 million, and (ii) 1% of the outstanding principal amount of the Second Lien Subordinated Secured Notes on the date we consummate this offering which we expect to be approximately $0.8 million, each in connection with the waiver or amendment of our note agreements, as well as to repay our First Lien Senior Secured Notes on the terms as further described under the section entitled “Use of Proceeds.” In addition, cash on hand will be used to repay the remaining portion of First Lien Senior Secured Notes. After this offering, we will still have outstanding debt.
Risk factors
           
You should read the section entitled “Risk Factors” beginning on page 15 for a discussion of factors you should consider carefully before deciding whether to purchase shares of our common stock.
NYSE Amex 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 September 30, 2009 and includes:

•  
  8,444,853 shares of common stock issuable upon the conversion of all of the 8,444,853 outstanding shares of the Series B Convertible Preferred Stock (the holders of which have notified us in writing that they intend to exercise their option to convert effective upon the consummation of this offering);

•  
  1,839,825 shares of common stock issuable upon the exchange of all of the 1,839,825 outstanding shares of the Series B common stock (the holders of which have notified us in writing that they intend to exercise their option to exchange); and

•  
  6,021,827 shares of common stock underlying 5,192,005 outstanding warrants with an exercise price of $0.0002 per share, which if not exercised will expire upon the closing of this offering;

but excludes:

•  
  2,000,447 shares of common stock issuable upon conversion of all of the 1,766,703 outstanding shares of the Series A Convertible Preferred Stock;

•  
  1,343,648 shares of common stock underlying 1,373,859 outstanding warrants with an exercise price of $0.0002 per share (assuming such warrants are exercised for cash) which were amended on October 8, 2009 such that they will not expire upon the closing of this offering;

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•  
  466,086 shares of common stock underlying all of the 476,572 outstanding warrants with an exercise price of $6.20 per share (assuming such warrants are exercised for cash);

•  
  25,090 shares of common stock underlying all of the 25,090 outstanding warrants with an exercise price of $10.25 per share (upon the warrants exercise for cash);

•  
  9,588,138 shares of common stock issuable upon the holders’ election to convert their Subordinated Convertible Notes (assuming an initial offering price of $11.00 per share of common stock, the midpoint of the range set forth on the cover of this prospectus) and subject to further restriction on conversion as set forth in the Subordinated Convertible Notes;

•  
  1,343,997 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;

•  
  a number of shares equal to up to one percent of our fully diluted equity following this offering of common stock (estimated to be 564,009 shares based on the assumptions set forth herein) reserved for future issuance under our FriendFinder Networks Inc. 2009 Restricted Stock Plan, or our 2009 Restricted Stock Plan; and

•  
  3,000,000 shares of common stock the underwriters may purchase upon the exercise of the underwriters’ over-allotment option.

Except where we state otherwise, the information presented in this prospectus reflects (i) the amendment and restatement of our bylaws to be effective upon the consummation of this offering, and (ii) the amendment and restatement of our articles of incorporation, which became effective on January 25, 2010, following the effectiveness on the same date of:

•  
  the amendment and restatement of the certificate of designation of our Series A Convertible Preferred Stock;

•  
  the 1-for-20 reverse split of our authorized Series A Convertible Preferred Stock, including a corresponding and proportionate decrease in the number of outstanding shares of Series A Convertible Preferred Stock;

•  
  the amendment and restatement of the certificate of designation of the Series B Convertible Preferred Stock;

•  
  the 1-for-20 reverse split of our authorized Series B Convertible Preferred Stock, including a corresponding and proportionate decrease in the number of outstanding shares of Series B Convertible Preferred Stock; and

•  
  the 1-for-20 reverse split of each series of our authorized common stock, including a corresponding and proportionate decrease in the number of outstanding shares of such series.

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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, the section entitled “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, the sections entitled “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 the 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. We derived the summary financial data as of September 30, 2009 and for each of the nine month periods ended September 30, 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 nine month period ended September 30, 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.

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        FriendFinder Networks Inc. Consolidated Data
   
        Nine Months Ended
September 30,
    Year Ended December 31,
   
        2009
    2008
    2008(1)
    2007(1)
    2007(1)(2)
    2006
        (unaudited)         (Restated)(3)     Pro Forma
(unaudited)
   
        (in thousands, except share and per share data)    
Statements of Operations and
Per Share Data:
                                                                                                       
Net revenue
              $ 244,440          $ 243,887          $ 331,017          $ 48,073          $ 332,907          $ 29,965   
Cost of revenue
                 68,733             73,285             96,514             23,330             98,407             15,927   
Gross profit
                 175,707             170,602             234,503             24,743             234,500             14,038   
Operating expenses
                                                                                                       
Product development
                 10,301             10,120             14,553             1,002             11,329                
Selling and marketing
                 30,830             46,045             59,281             7,595             71,483             1,430   
General and administrative
                 58,311             66,344             88,280             24,466             75,836             24,354   
Amortization of acquired intangibles and software
                 27,154             27,132             36,347             2,262             35,821                
Depreciation and other amortization
                 3,673             3,360             4,502             2,829             6,989             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
                 130,269             153,001             227,394             44,210             207,514             51,930   
Income (loss) from operations
                 45,438             17,601             7,109             (19,467 )            26,986             (37,892 )  
Interest and other expense, net(4)
                 75,361             59,920             71,251             16,880             95,537             12,049   
Loss before income tax benefit
                 (29,923 )            (42,319 )            (64,142 )            (36,347 )            (68,551 )            (49,941 )  
Income tax benefit
                 (2,544 )            (9,977 )            (18,176 )            (6,430 )            (14,945 )               
Net loss
                 (27,379 )            (32,342 )            (45,966 )            (29,917 )            (53,606 )            (49,941 )  
Non-cash dividends on convertible preferred stock
                                                        (4,396 )            (4,396 )               
Net loss attributable to common stock
              $ (27,379 )         $ (32,342 )         $ (45,966 )         $ (34,313 )         $ (58,002 )         $ (49,941 )  
Net loss per common share — basic
and diluted(4)
              $ (1.99 )         $ (2.35 )         $ (3.35 )         $ (5.19 )         $ (4.98 )         $ (8.99 )  
Weighted average common shares
outstanding — basic and diluted(5)
                 13,735             13,735             13,735             6,610             11,639             5,554   
 

        FriendFinder Networks Inc. Consolidated Data
   
        As of
September 30,
    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
              $ 31,673          $ 31,565          $ 23,722   
Total assets
                 562,065             599,913             649,868   
Long-term debt classified as current due to events of default, net of unamortized discount(6)
                              415,606             417,310   
Long-term debt
                 409,526             38,768             35,379   
Deferred revenue
                 41,126             42,814             27,214   
Total liabilities
                 653,870             657,998             661,987   
Redeemable preferred stock
                 26,000             26,000             26,000   
Accumulated deficit
                 (173,631 )            (144,667 )            (98,701 )  
Total stockholders’ (deficiency)
                 (117,805 )            (84,085 )            (38,119 )  
 

8





        Nine Months
Ended September 30,
    Year Ended
December 31,
   
        2009
    2008
    2008
    2007
        (unaudited)
 
           
        (in thousands)    
Consolidated Statement of Cash Flows Data:
                                                                       
Net cash provided by operating activities
              $ 36,628          $ 51,297          $ 50,948          $ 4,744   
Net cash (used in) investing activities
                 (1,742 )            (8,113 )            (9,289 )            (149,322 )  
Net cash provided by (used in) financing activities
                 (33,284 )            (15,210 )            (25,336 )            148,961   
 


(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 of our future results, including those revenues that were added back to the pro forma net revenue.

(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)  
  Please refer to Note B(28), “Summary of Significant Accounting Policies — Restatement” of our December 31, 2008 consolidated financial statements included elsewhere in this prospectus.

(4)  
  Includes interest expense, net of interest income, interest and penalties related to value added tax, or VAT, loss on modification of debt, foreign exchange gain, gain on settlement of liability related to VAT not charged to customers, gain on liability related to warrants and other (expense) income, net.

(5)  
  Basic and diluted loss per share is based on the weighted average number of shares of common stock and Series B common stock outstanding and includes shares underlying common stock purchase warrants which are exercisable at the nominal price of $0.0002 per share. For information regarding the computation of per share amounts, refer to Note B(24), “Summary of Significant Accounting Policies — Per share data” of our December 31, 2008 consolidated financial statements included elsewhere in this prospectus.

(6)  
  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.

Non-GAAP Financial Results

We believe that the use of non-GAAP financial measures are helpful financial measures to be utilized by an investor determining whether to invest in us. Specifically, we believe that the use of non-GAAP financial measures of adjusted non-GAAP revenue, adjusted non-GAAP income (loss) from operations and adjusted non-GAAP net income (loss) are useful to an investor for two reasons. First, 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. Second, they eliminate adjustments for non-cash impairment charges for goodwill and intangible assets, which we believe will help an investor evaluate our future prospects, without taking into account historical non-cash charges that we believe are not recurring.

We also believe that the non-GAAP financial measures of earnings before deducting net interest expense, income taxes, depreciation and amortization, or EBITDA, and adjusted EBITDA 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. For instance, 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 repay our First Lien Senior Secured Notes, thereby reducing our interest expense. In addition, we have the benefit of interest deductions and tax loss carryforwards which distorts comparisons of income tax benefit from year to year as interest expense is reduced and tax carryforwards are depleted and we book an income tax benefit as opposed to an expense. Finally, our depreciation and amortization expense has changed significantly due to the Various acquisition and purchase accounting impact on depreciation and amortization expense, as discussed below. We believe analysts, investors and others frequently use EBITDA and adjusted EBITDA in the evaluation of companies in our industry.

9





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 such financial measures differently, particularly as it relates to nonrecurring, unusual items. Our non-GAAP financial measures of EBITDA adjusted EBITDA, adjusted non-GAAP revenue, adjusted non-GAAP income (loss) from operations and adjusted non-GAAP net income (loss) 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.

The following table reflects the reconciliation of GAAP net revenue, GAAP income (loss) from operations and GAAP net income (loss) to the non-GAAP financial measures of adjusted non-GAAP revenue, adjusted non-GAAP income (loss) from operations and adjusted non-GAAP net income (loss), respectively.

Reconciliation of GAAP Financial Measures to Non-GAAP Financial Measures

        FriendFinder Networks Inc. Consolidated Data(a)
   
        Nine Months
Ended September 30,
    Year Ended December 31,
   
        2009
    2008
    2008
    2007
    2007
    2006
                        Pro Forma
   
        (in thousands)    
GAAP net revenue
              $ 244,440          $ 243,887          $ 331,017          $ 48,073          $ 332,907          $ 29,965   
Non-GAAP adjustments:
                                                                                                       
Add: Deferred revenue purchase accounting adjustment
                              18,512             19,200             8,460                             
Adjusted non-GAAP revenue
              $ 244,440          $ 262,399          $ 350,217          $ 56,533          $ 332,907          $ 29,965   
 
GAAP income (loss) from operations
              $ 45,438          $ 17,601          $ 7,109          $ (19,467 )         $ 26,986          $ (37,892 )  
Non-GAAP adjustments:
                                                                                                       
Add: Deferred revenue purchase accounting adjustment
                              18,512             19,200             8,460                             
Add: Impairment of goodwill
                                           9,571             925              925              22,824   
Add: Impairment of other intangible assets
                                           14,860             5,131             5,131                
Add: Amortization of acquired intangibles and software
                 27,154             27,132             36,347             2,262             35,821                
Adjusted non-GAAP income (loss) from operations
              $ 72,592          $ 63,245          $ 87,087          $ (2,689 )         $ 68,863          $ (15,068 )  
 
GAAP net loss
              $ (27,379 )         $ (32,342 )         $ (45,966 )         $ (29,917 )         $ (53,606 )         $ (49,941 )  
Non-GAAP adjustments:
                                                                                                       
Add: Deferred revenue purchase accounting adjustment
                              18,512             19,200             8,460                             
Add: Impairment of goodwill
                                           9,571             925              925              22,824   
Add: Impairment of other intangible assets
                                           14,860             5,131             5,131                
Add: Amortization of acquired intangibles and software
                 27,154             27,132             36,347             2,262             35,821                
Add (subtract): Charges (income) related to VAT not charged to customers
                 7,638             (294 )            (9,480 )            1,046             17,900                
Less: Tax effect of non-GAAP adjustments(b)
                 (2,958 )            (10,692 )            (16,359 )            (2,931 )            (9,990 )               
Adjusted non-GAAP net income (loss)
              $ 4,455          $ 2,316          $ 8,173          $ (15,024 )         $ (3,819 )         $ (27,117 )  
 


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

(b)  
  The tax effect is calculated using the effective tax rate for the period, adjusted for non-tax deductible expenses including impairment of goodwill, penalties related to VAT not charged to customers and other discrete items.

10





The following table reflects the reconciliation of GAAP net loss to the non-GAAP financial measures of EBITDA and adjusted EBITDA.

Reconciliation of GAAP Net Loss to EBITDA and Adjusted EBITDA

        FriendFinder Networks Inc. Consolidated Data(a)
   
        Nine Months
Ended September 30,
    Year Ended December 31,
   
        2009
    2008
    2008
    2007
    2007
    2006
                        Pro Forma    
        (in thousands)    
GAAP net loss
              $ (27,379 )         $ (32,342 )         $ (45,966 )         $ (29,917 )         $ (53,606 )         $ (49,941 )  
Add: Interest expense, net
                 67,386 (b)            59,954             80,510             15,953             77,756             7,918   
Less: Income tax benefit
                 (2,544 )            (9,977 )            (18,176 )            (6,430 )            (14,945 )               
Add: Amortization of acquired intangible assets and software
                 27,154             27,132             36,347             2,262             35,821                
Add: Depreciation and other amortization
                 3,673             3,360             4,502             2,829             6,989             3,322   
EBITDA(c)
              $ 68,290          $ 48,127          $ 57,217          $ (15,303 )         $ 52,015          $ (38,701 )  
Add: Deferred revenue purchase accounting adjustment
                              18,512             19,200             8,460             (d)               
Add: Impairment of goodwill
                                           9,571             925              925              22,824   
Add: Impairment of other intangible assets
                                           14,860             5,131             5,131                
Add (subtract): Charges (income) related to VAT not charged to customers
                 7,638             (294 )            (9,480 )            1,046             17,900                
Adjusted EBITDA
              $ 75,928          $ 66,345          $ 91,368          $ 259           $ 75,971          $ (15,877 )  
 


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

(b)  
  Interest expense for the nine months ended September 30, 2009 includes an aggregate of approximately $30.0 million in cash and non-cash interest paid on the First Lien Senior Secured Notes.

(c)  
  For the year ended December 31, 2008 and for the quarters ended March 31, 2008, June 30, 2008, September 30, 2008, March 31, 2009 and June 30, 2009, we failed to satisfy our EBITDA covenants with respect to our 2006 Notes and 2005 Notes because of operating performance. For the quarters ended March 31, 2008, June 30, 2008 and September 30, 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 liability related to VAT not charged to customers and the purchase accounting adjustment due to the required reduction of the deferred revenue liability to fair value. On October 8, 2009, these events of default were cured. For the quarter ended September 30, 2009, we met our EBITDA covenants with respect to our 2006 Notes and 2005 Notes, each as amended. For the year ended December 31, 2008 and the three and nine months ended September 30, 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 note agreements, see the section entitled “Description of Indebtedness.” Our note agreements, as amended, contain material debt covenants based on our maintaining specified levels of EBITDA (as it is 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 — at least $1.0 million for the four-quarter period ending on December 31, 2009 and $3.5 million for each four-quarter period ending on or after March 31, 2010. The EBITDA calculation under the covenant in each of the agreements governing 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 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 September 30, 2009 based on this calculation was $6.8 million.

•  
  First Lien Senior Secured Notes and Second Lien Subordinated Secured Notes — at least $85.0 million annualized consolidated EBITDA for INI and its subsidiaries. The annualized EBITDA based on the third quarter of 2009, as defined in the relevant documents, for INI and its subsidiaries was $105.6 million.

(d)  
  Pro forma unaudited net loss for 2007 already reflects the purchase accounting adjustment related to deferred revenue.

11





For the nine months ended September 30, 2009, our net revenue, income from operations and net loss were $244.4 million, $45.4 million and $(27.4) million, respectively. For the nine months ended September 30, 2009, our adjusted non-GAAP revenue, adjusted non-GAAP income from operations and adjusted non-GAAP net income were $244.4 million, $72.6 million and $4.5 million, respectively. For the nine months ended September 30, 2009, our EBITDA and adjusted EBITDA were $68.3 million and $75.9 million, respectively.

Management derived adjusted non-GAAP revenue, adjusted non-GAAP income (loss) from operations, adjusted non-GAAP net income (loss) and adjusted EBITDA for the nine months ended September 30, 2009 using the following adjustments.

There were no purchase accounting adjustments after December 31, 2008, and accordingly there were no such adjustments to net revenue, income (loss) from operations, net loss or EBITDA for the nine months ended September 30, 2009.

With respect to arriving at adjusted non-GAAP income (loss) from operations and adjusted non-GAAP net income (loss) for the nine months ended September 30, 2009, there was a non-recurring adjustment to fair value of the acquired intangible assets and software of Various due to purchase accounting in relation to the Various acquisition in 2007, which increased the depreciation and amortization expense on such items for subsequent quarters. This expense is reflected in the line entitled “Amortization of acquired intangibles and software” in the statement of operations. Management adds back this line item to arrive at adjusted non-GAAP income (loss) from operations and adjusted non-GAAP net income (loss). Management believes it is informative to investors to add back the amortization related to the acquired intangible assets and software of Various in order to negate the effects of this unusual adjustment due to purchase accounting.

With respect to arriving at adjusted non-GAAP net income (loss) and adjusted EBITDA, management believes that the VAT activity that relates to periods prior to notification from the European Union tax authorities, which we refer to as VAT not charged to customers, should be excluded from adjusted non-GAAP net income (loss) and adjusted EBITDA. 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 European Union jurisdictions. We began collecting VAT from subscribers in July 2008, and all amounts from July 2008 and beyond are considered current VAT and such costs are properly reflected in the statement of operations. Since the VAT not charged to customers, including penalties, interest expense, gains and losses on settlements and foreign exchange gains and losses, is unusual and not representative of our current operations, we have excluded it from adjusted non-GAAP net income (loss) and adjusted EBITDA.

Finally, management believes it is informative to investors to subtract the tax effect of the non-GAAP adjustments in order to arrive at adjusted non-GAAP net income (loss). Management uses the measurement of adjusted non-GAAP net income (loss) in making resource deployment and capital spending decisions.

For the year ended December 31, 2008, our net revenue, income from operations and net loss were $331.0 million, $7.1 million and $(46.0) million, respectively. For the year ended December 31, 2008, our adjusted non-GAAP revenue, adjusted non-GAAP income from operations and adjusted non-GAAP net income were $350.2 million, $87.1 million and $8.2 million, respectively. For the year ended December 31, 2008, our EBITDA and adjusted EBITDA were $57.2 million and $91.4 million, respectively.

Management derived adjusted non-GAAP revenue, adjusted non-GAAP income (loss) from operations, adjusted non-GAAP net income (loss) and adjusted EBITDA for the year ended December 31, 2008 using the following adjustments.

With respect to arriving at each of the above-listed non-GAAP financial measures, there was a one time $19.2 million reduction to net revenue due to purchase accounting in 2008 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. Management believes that the purchase accounting adjustment is one time in nature as

12






it relates to an acquisition that has been completed and therefore, it is appropriate to add back the amount of the adjustment in 2008 to obtain a more meaningful comparison of the revenues, income from operations, net loss and EBITDA between 2008 and prior years. For more information regarding these purchase accounting adjustments, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Key Factors Affecting Our Results of Operations — Internet Revenue.”

In addition, with respect to arriving at adjusted non-GAAP income (loss) from operations, adjusted non-GAAP net income (loss) and adjusted EBITDA, there were 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 in 2008. For the following reasons, management believes it is appropriate to add back a $9.6 million impairment charge to goodwill and a $14.9 million impairment charge to other intangible assets to derive a more meaningful measure of income from operations, net loss and EBITDA for 2008. While we have had impairment charges for previous years relating to the businesses in operation prior to the Various acquisition, with the impairment charges taken in 2008, the goodwill relating to our non-internet business units of the company has been reduced to zero. Further, management believes that with the acquisition and integration of the Various business, the online business unit that is now operated in conjunction with the internet businesses of Various should not be expected to have further impairment going forward. Management gauges its operating performance without giving effect to the impairment charges taken historically due to its belief that it is unlikely that further impairment charges will be incurred. However, there can be no assurance that there will be no further impairment to the online business unit.

With respect to arriving at adjusted non-GAAP income (loss) from operations and adjusted non-GAAP net income (loss) for the year ended December 31, 2008, there was a non-recurring adjustment to fair value of the acquired intangible assets and software of Various due to purchase accounting in relation to the Various acquisition in 2007, which increased the depreciation and amortization expense on such items for subsequent years. This expense is reflected in the line entitled “Amortization of acquired intangibles and software” in the statement of operations in 2008. For the reasons set forth above in the discussion relating to such amortization expense addback for the period ended September 30, 2009, management adds back this line item to calculate adjusted non-GAAP income (loss) from operations and adjusted non-GAAP net income (loss).

With respect to arriving at adjusted non-GAAP net income (loss) and adjusted EBITDA, for the reasons set forth above, management believes that the VAT not charged to customers should be excluded and that the tax effect of the non-GAAP adjustments should be subtracted in calculating adjusted non-GAAP net income (loss) and adjusted EBITDA.

13





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
   
        Nine Months Ended
September 30,

    Year Ended December 31,
   
        2009
    2008
    2008
    2007(1)
    2006(1)
Historical Operating Data:
                                                                                    
Adult Social Networking Websites
                                                                                       
Subscribers (as of the end of the period)
                 868,571             946,598             896,211             919,146             906,641   
Churn(2)
                 16.5 %            17.8 %            17.8 %            19.3 %            21.7 %  
ARPU(3)
              $ 21.44          $ 21.45          $ 22.28          $ 19.95          $ 20.39   
CPGA(4)
              $ 47.07          $ 50.52          $ 51.26          $ 44.57          $ 38.54   
Average Lifetime Net Revenue Per Subscriber(5)
              $ 82.64          $ 69.79          $ 74.22          $ 58.92          $ 55.24   
General Audience Social Networking Websites
                                                                                       
Subscribers (as of the end of the period)
                 54,287             78,732             68,647             85,893             96,221   
Churn(2)
                 16.2 %            19.6 %            18.6 %            22.2 %            27.0 %  
ARPU(3)
              $ 17.24          $ 18.36          $ 19.21          $ 16.38          $ 18.02   
CPGA(4)
              $ 45.05          $ 34.02          $ 36.68          $ 36.62          $ 34.05   
Average Lifetime Net Revenue Per Subscriber(5)
              $ 61.55          $ 59.67          $ 66.70          $ 37.23          $ 32.63   
Live Interactive Video Websites
                                                                                       
Average Revenue Per Minute
              $ 3.44          $ 2.77          $ 2.87          $ 2.93             n/a    
Cams — Minutes(6)
           
12,662,795 
   
15,442,605  
   
19,101,173  
   
20,613,825  
         n/a    
 


(1)  
  Derived from historical information of Various.

(2)  
  Churn is calculated by dividing terminations of subscriptions during the period by the total number of subscribers at the beginning of that period and by the number of months in the period.

(3)  
  ARPU is calculated by dividing adjusted non-GAAP revenue for the period by the average number of subscribers in the period. For more information regarding our adjusted non-GAAP revenue, see the sections entitled “ — 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 the Pro Forma Year Ended December 31, 2007.”

(4)  
  CPGA is calculated by adding affiliate commission expense plus ad buy expenses and dividing by new subscribers during the measurement period.

(5)  
  Average Lifetime Net Revenue Per Subscriber is calculated by multiplying the average lifetime (in months) of a subscriber by ARPU for the measurement period and then subtracting the CPGA for the measurement period.

(6)  
  Users purchase minutes in advance of their use and draw down on the available funds as the minutes are used.

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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., Windows Live Profile, run by Microsoft Corporation, 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 higher numbers of worldwide unique users than our general audience websites do. According to comScore, in September 2009, Facebook.com and MySpace.com had approximately 411 million and 111 million worldwide unique users, respectively, compared to FriendFinder.com’s 109 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 December 2007 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 the risk factor entitled “—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 44% of our revenue for the nine months ended September 30, 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 additional general audience affiliates. However, our efforts to implement such an expansion 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 the risk factor entitled “—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

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affiliates for our competitors. Any increase in the commission rates we pay our affiliates would result in higher cost of revenue and could 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 and a failure to compete effectively against other internet advertising companies could result in lost customers or could adversely affect our business and results of operations.

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 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, because we allow our registrants to opt out of receiving certain communications from us and third parties, including advertisements, 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. The number of registrants who have opted out of receiving such communications are not identified in our gross number of registrants.

Our ability to generate significant advertising revenue will also depend upon several factors beyond our control, including general economic conditions, changes in consumer purchasing and viewing habits and changes in the retail sales environment and 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.

In addition, 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.

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 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

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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 nine months ended September 30, 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 the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Year Ended December 31, 2008 as Compared to the 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 — Nine Months Ended September 30, 2009 as Compared to the Nine Months Ended September 30, 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 Nine Months Ended September 30, 2009 as Compared to the Nine Months Ended September 30, 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, the 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.

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 September 30, 2009, three credit card processing companies accounted for approximately 68.6% 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

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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;

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

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

•  
  if there is continued tightening of credit card association chargeback regulations in international commerce;

•  
  if there are association requirements for new technologies that consumers are less likely to use; and

•  
  if negative global economic conditions result in credit card companies denying more transactions.

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 chargeback rate is currently approximately 0.9% 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 have decreased from $7.9 million at December 31, 2008 to $6.4 million at September 30, 2009. If our chargeback 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

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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.

In addition, we run the risk of being held responsible for the conduct or legal violations of our affiliates or those who have a marketing relationship with us, including, for example, with respect to their use of adware programs or other technology that causes internet advertisements to manifest in pop ups or similar mechanisms that can be argued to block or otherwise interfere with another website’s content or otherwise be argued to violate the Lanham Act or be considered an unlawful, unfair, or deceptive business practice.

We have breached certain non-monetary covenants contained in agreements governing our 2006 Notes, 2005 Notes and Subordinated Term Loan Notes, and our subsidiary, INI, has breached certain non-monetary covenants contained in its agreements governing the First Lien Senior Secured Notes and Second Lien Subordinated Secured Notes, which events of default have been cured by obtaining waivers or amendments to our note agreements. We cannot assure you that if additional defaults occur in the future 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.

Our note 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 were not maintained or satisfied primarily due to the unexpected VAT liability that was discovered after we acquired Various.

Furthermore, we and INI failed to comply with certain non-monetary covenants contained within some of our note 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 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., making certain restricted payments and incurring additional liens. 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.

On October 8, 2009 we cured these events of default by obtaining waivers or amendments to our note agreements. However, if additional defaults occur in the future and our efforts to cure such events of default are unsuccessful it could result in the acceleration of our then outstanding debt. If all of our indebtedness was accelerated, we may 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 September 30, 2009, we had an accumulated deficit of approximately $173.6 million. For the nine months ended September 30, 2009, we had a net loss of $27.4 million. For the years ended December 31, 2008, 2007 and 2006, we had net losses of approximately $46.0 million, $29.9

19





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 the risk factor entitled “—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.”

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 93.6% of our revenue for the nine months ended September 30, 2009 from subscribers and other paying customers to our websites. For more information regarding our adjusted non-GAAP revenue, see the sections entitled “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 the 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 six 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 September 30, 2009, we had approximately one million subscribers. For more information about our key business metrics including, but not limited to, the number of subscribers and the conversion of members to subscribers, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Internet Segment Historical Operating Data.” If we are unable to remain competitive and provide the pricing and content, features, functions or services

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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 nine months ended September 30, 2009, our average monthly churn rate for our adult social networking websites was 16.5% and our average monthly churn rate for our general audience social networking websites was 16.2%. 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 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.

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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:

•  
  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;

•  
  subject us to unfavorable regulatory restrictions and requirements imposed by the Federal Trade Commission or similar authority;

•  
  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 United States 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

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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 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

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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.

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.

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Changes in 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 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. In 2008, Nevada enacted a law prohibiting businesses from transferring a customer’s personal information through an electronic transmission, unless that information is encrypted. In practice, the 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 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

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  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 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.

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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 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.

In addition, in 2007 we received a claim from the State of Texas for an immaterial amount relating to our failure to file franchise tax returns for the years 2000 through 2006. We believe that we are not obligated to file franchise tax returns because of the nature of our services provided and the lack of sufficient nexus to the State of Texas. If we are wrong in our assessment or if there is a clarification of the law against us it is possible that such taxes will need to be paid along with other remedies and penalties. We have received and could continue to receive similar inquiries from other states attempting to impose franchise, income or similar taxes on us.

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 collect and remit 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 September 30, 2009, the total amount of historical uncollected VAT payments was approximately $43.8 million,

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including approximately $18.1 million in potential penalties and interest. For more information regarding the potential effect that our VAT liability could have on our operations see the section entitled “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 €610,343 of assets in a bank account in The Netherlands with the cooperation of the Dutch authorities and continues to enlist the Dutch tax authorities to assist in its collection efforts. If another jurisdiction were 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 initiated an investigation of an individual who served prior to our acquisition of Various as an officer of Various. The German authorities also initiated 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, all of which has now been paid. In connection with the settlement, we also paid a fine of €25,000, or approximately $32,500, to a charitable organization in April 2009. 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 engaged in efforts to resolve all issues, but there can be no assurance that we will be able to do so.

On June 10, 2009, the United Kingdom taxing authority notified us that it had reversed its previous position and that we were not subject to VAT in the United Kingdom in connection with providing internet services. As a result of this decision, we adjusted our indemnity claim against the sellers of Various, or the sellers, and increased the recorded principal balance of the Subordinated Convertible Notes issued to the sellers by approximately $38 million, representing the principal reduction previously recorded as of the date of the acquisition for a post-closing working capital adjustment related to the United Kingdom VAT. 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 is 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 was 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 was $175 million. On October 14, 2008, we made an indemnity claim against these notes under the acquisition agreement for Various in the amount of $64.3 million due to working capital adjustments resulting from the VAT liability which was not disclosed at the closing of the acquisition. On October 8, 2009, we settled and released all indemnity claims against the sellers (whether the claims were VAT related or not) by reducing the original principal amount of the Subordinated Convertible Notes by the full value of the then-outstanding VAT

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liability. In addition, the sellers agreed to make available to us, to pay VAT and certain VAT-related expenses, $10.0 million cash held in a working capital escrow established at the closing of the Various transaction. If the actual costs to us of eliminating the VAT liability are less than $29.0 million, after applying amounts from the working capital escrow, then the principal amount of the Subordinated Convertible Notes will be increased by the issuance of new Subordinated Convertible Notes to reflect the difference between $29.0 million and the actual VAT liability, plus interest on such difference. Accordingly, any additional undisclosed liabilities arising from our acquisition of Various may result in losses that we can no longer attempt to recover from the sellers. Any such liabilities for which we have no recourse could adversely affect our financial condition and results of operations.

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:

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  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;

•  
  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;

•  
  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:

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

•  
  our erroneous evaluations of the potential of such markets;

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

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•  
  foregoing opportunities that are potentially more profitable; and

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  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. 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;

•  
  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;

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

•  
  different legal and regulatory restrictions among jurisdictions;

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  political, social and economic instability;

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  potentially adverse tax consequences; and

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  higher costs associated with doing business internationally.

We may not have the funds, or the ability to raise the funds, necessary to repay the 2006 Notes and 2005 Notes when they become due.

The 2006 Notes and 2005 Notes mature on July 31, 2010. In connection with the waivers and amendments obtained on October 8, 2009, our note agreements were amended to require the use of initial public offering, or IPO, proceeds to fully repay the First Lien Senior Secured Notes and Second Lien Subordinated Secured Notes prior to repayment of our 2006 Notes and 2005 Notes. The remaining proceeds from this offering, if any, may not be sufficient to repay the aggregate amount of $44.5 million of 2006 Notes and 2005 Notes outstanding as of September 30, 2009 at maturity on July 31, 2010. Consequently, it will be necessary for us to restructure the 2006 Notes and 2005 Notes, to extend the term of the 2006 Notes and 2005 Notes or to find alternative sources of financing to repay such notes at maturity; however, there is no assurance that we will be able to restructure or extend such notes or find alternative sources of funding. For a discussion of the potential effects of the upcoming maturity of the 2006 Notes and 2005 Notes on our liquidity, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.” If the 2006 Notes and 2005 Notes are not restructured, extended or paid by maturity, this would constitute an event of default, which would lead to the principal and accrued but unpaid interest on the outstanding notes becoming immediately due and payable and would trigger cross-default provisions in our note agreements pertaining to our First Lien Senior Secured Notes, Second Lien Subordinated Secured Notes, Subordinated Term Loan Notes and Subordinated Convertible Notes, which cross-default provisions as of September 30, 2009 would render an additional aggregate principal amount of $465.3 million of indebtedness becoming due and payable. Such an event of default could also negatively affect the trading price of our common stock and would impact on our ability to continue as a going concern.

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 $200.1 million of the net proceeds from the sale of the 20,000,000 shares of our common stock in this offering to repay some of our existing indebtedness. To the extent we will require additional capital resources after this offering, including to repay existing debt at maturity, 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:

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•  
  we may be unable to obtain additional financing for repayment of debt at maturity, 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;

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  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

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

Moreover, our note agreements, as amended contain 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;

•  
  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 note agreements, we may be restricted in the way we run our business.

Our note agreements contain certain financial covenants and restrictions requiring us to maintain specified financial ratios and satisfy certain financial tests. In connection with the waivers and amendments obtained on October 8, 2009, certain financial covenants and ratios in our note agreements were amended and supplemented. As a result of these new and existing 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 note agreements 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-default and cross-acceleration provisions of our other 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.

We have defaulted on certain terms of our indebtedness in the past 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, we cannot assure you 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 breach of covenants on certain of our indebtedness see the risk factor entitled “ — We have breached certain non-monetary covenants contained in agreements governing our 2006 Notes, 2005 Notes and Subordinated Term Loan Notes, and our subsidiary, INI, has breached certain non-monetary covenants contained in its agreements governing the First Lien Senior Secured Notes and Second Lien Subordinated Secured Notes, which events of default have been cured by

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obtaining waivers or amendments to note agreements. We cannot assure you that if additional defaults occur in the future 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.”

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, Mr. Staton serves as Chairman and Mr. Bell serves as a director of ARMOUR Residential REIT, Inc., or ARMOUR, which consummated a merger with Enterprise Acquisition Corp., a special purpose acquisition company, or EAC, on November 6, 2009. EAC was a 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. Staton Bell Blank Check LLC, an entity affiliated with Messrs. Bell and Staton, is contractually obligated to provide services to ARMOUR Residential Management LLC, or ARRM, which entity will manage and advise ARMOUR, pursuant to a sub-management agreement. Staton Bell Blank Check LLC will be receiving a percentage of the net management fees earned by ARRM. We expect that Messrs. Bell and Staton, will devote approximately ten percent of their combined time to ARMOUR. Messrs. Bell, and Staton’s service as a director or an affiliate of the sub-manager of ARMOUR 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 ARMOUR, 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

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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 United States 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 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.

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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.

We may be subject to certain anti-dilution claims from existing holders of Series A Convertible Preferred Stock.

In December 2007, we issued additional warrants to 15 holders of Series A Convertible Preferred Stock, warrants, 2006 Notes and 2005 Notes in lieu of the application of the conversion price adjustment provided for in the certificate of designation of the Series A Convertible Preferred Stock and the anti-dilution provisions in the warrants triggered by the issuance of the Series B Convertible Preferred Stock, as well as in consideration for their waivers of certain events of default under such notes. We refer to this issuance of additional warrants as the equity true-up. Parties who held Series A Convertible Preferred Stock and then purchased Series B Convertible Preferred Stock did not receive the equity true-up and the securities purchase agreement pursuant to which we issued the Series B Convertible Preferred Stock, or the Series B Preferred Purchase Agreement, contained a waiver of any rights that an investor may have that conflict with or provide a challenge for the equity true-up or provide for an anti-dilution adjustment. In August 2009, we received an informal demand from Absolute Income Fund Limited, or AIF, the successor to Absolute Return Europe Fund, or ARE, and a holder of Series A Convertible Preferred Stock and Series B Convertible Preferred Stock, claiming a right to an equity true-up exercisable at a price of $0.0002 per share for approximately 800,000 shares of common stock in satisfaction of the conversion price adjustment with respect to its Series A Convertible Preferred Stock. AIF claims that the waiver contained in its Series B Preferred Purchase Agreement is not valid because the signatory to the Series B Preferred Purchase Agreement was no longer employed by AIF at the time the signature pages were delivered to us for the closing of the transaction. If a claim by AIF is made and it is successful, we may be obligated to issue a warrant for approximately 800,000 shares of our common stock exercisable at a price of $0.0002 per share. Although we believe the claim is without merit, we cannot guarantee the outcome of such claim if it were to be brought against us.

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 representatives 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.

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. Immediately after this offering there will be a per share net tangible book value deficiency of our common stock. Therefore, based on an assumed offering price of $11.00 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 $(21.27) 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, or our Subordinated Convertible Notes are converted into shares of common stock, the amount of your dilution may be affected. 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 affect the amount of dilution to holders of our common stock.

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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 58.40% of our common stock, including shares of common stock issuable upon the exercise, exchange, or conversion, as applicable, of our warrants, Series B common stock, Series A Convertible Preferred Stock, Series B Convertible Preferred Stock and Subordinated Convertible Notes that are exercisable or exchangeable 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 41,636,144 shares of common stock outstanding, based on the assumptions we have made with respect to our outstanding securities. For more information see the section entitled “Prospectus Summary — The Offering.” We will also have an additional 70,863,856 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 20,000,000 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 at least 32,243,946 of the other shares outstanding or convertible into our common stock have agreed with the underwriters, subject to certain 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 the section entitled “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 7,890,901 shares issued or issuable upon exercise of our warrants, as well as the holders of our Series A Convertible Preferred Stock convertible into 2,000,447 shares and holders of the Subordinated Convertible Notes convertible into 9,588,138 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.

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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 SEC and NYSE Amex 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, 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.

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.

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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:

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  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;

•  
  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.

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 the section entitled “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 amended and restated articles of incorporation.

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 the section entitled “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:

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

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

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  our ability to generate significant revenue from internet advertising;

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  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 history of breaching certain covenants in our note agreements 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;

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  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;

•  
  our ability to repay, restructure or extend our 2006 Notes and 2005 Notes;

•  
  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.

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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 section entitled “Risk Factors” in this prospectus.

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USE OF PROCEEDS

We estimate that our net proceeds from the sale of the 20,000,000 shares of our common stock in this offering will be $200.1 million, or $230.8 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 $11.00 per share. Each $1.00 increase (decrease) in the assumed initial public offering price of $11.00 per share would increase (decrease) the net proceeds to us from this offering by approximately $18.6 million, 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.

Assuming the underwriters do not exercise their over-allotment option, we have assumed gross offering proceeds of $220 million, less underwriting fees and commissions of approximately 7% of the gross proceeds, or $15.4 million, and other offering expenses of $4.5 million, resulting in $200.1 million of net proceeds. We intend to use such net proceeds in accordance with our amended note agreements to pay approximately $1.9 million in waiver fees to holders of our First Lien Senior Secured Notes, approximately $0.8 million in waiver fees to holders of our Second Lien Subordinated Secured Notes and to repay $85.8 million in principal amount of our First Lien Senior Secured Notes at a redemption price of 115% and $94.0 million in principal amount at a redemption price of 105%. In addition, cash on hand will be used to repay the remaining $9.2 million of First Lien Senior Secured Notes at a redemption price of 102%, resulting in an approximate aggregate redemption price of $206.8 million. This assumes that holders of the First Lien Senior Secured Notes do not opt to forego the repayment of the First Lien Senior Secured Notes held by them or their affiliates from such offering proceeds. If any such holders forego repayment of their First Lien Senior Secured Notes, then such funds shall be used to further prepay the other First Lien Senior Secured Notes on a pro rata basis with 50% of such proceeds prepaid at a redemption price of 115% and the remaining 50% at a redemption price of 105%. Pursuant to the purchase agreement with the holders of the First Lien Senior Secured Notes, $91.1 million will be payable to our affiliates, including $8.3 million to affiliates of Mr. Bell, our Chief Executive Officer, President and a director, and Mr. Staton, our Chairman of the Board and Treasurer.

As of September 30, 2009, we had $199.7 million of First Lien Senior Secured Notes outstanding, of which $10.7 million was repaid in November 2009 pursuant to a required quarterly amortization payment. 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. As of September 30, 2009, there was no accrued and unpaid interest on the First Lien Senior Secured Notes.

In the event that there are any remaining net proceeds from this offering after payment of the waiver fees and the First Lien Senior Secured Notes, as described above, the remaining net proceeds will be used, in accordance with our amended note agreements, to first prepay the Second Lien Subordinated Secured Notes at a redemption price of 100% and second prepay the 2006 Notes and the 2005 Notes at a redemption price of 100%. As of September 30, 2009, we had $80.0 million of Second Lien Subordinated Secured Notes outstanding. The Second Lien Subordinated Secured Notes have a stated maturity date of December 6, 2011 and accrue interest at a rate of 15% per annum. As of September 30, 2009, we had approximately $6.1 million of our 2006 Notes outstanding and approximately $38.4 million of our 2005 Notes outstanding. The 2006 Notes and 2005 Notes have a stated maturity date of July 31, 2010 and accrue interest at a rate of 15% per annum. For more information regarding the use of proceeds required by our note agreements, see the section entitled “Description of Indebtedness.”

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 $30.7 million. Any proceeds obtained upon exercise of the over-allotment option will be used to repay debt, as described above.

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

41




DIVIDEND POLICY

We have never paid or declared dividends on our common stock. Furthermore, we are limited by the restrictions in our note agreements, as amended, on declaring dividends, and INI and Various are restricted in their ability to distribute income up to us. In addition 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. 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.

42




CAPITALIZATION

Please read the following capitalization table together with the sections entitled “Selected Consolidated Financial Data” and “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 September 30, 2009:

•  
  on an actual, historical basis;

•  
  on a pro forma basis reflecting (i) the issuance of 8,444,853 shares of common stock upon the conversion of all of the outstanding shares of our Series B Convertible Preferred Stock (the holders of which have notified us in writing that they intend to exercise their option to convert effective upon the consummation of this offering), (ii) the issuance of 1,839,825 shares of common stock upon the exchange of all of the outstanding shares of our Series B common stock (the holders of which have notified us in writing that they intend to exercise their option to exchange), and (iii) the issuance of 6,021,827 shares of common stock underlying 5,192,005 outstanding warrants with an exercise price of $0.0002 per share, 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 20,000,000 shares of our common stock in this offering at the assumed initial offering price of $11.00 per share, the midpoint of the range set forth on the front cover of this prospectus, after deducting underwriting discounts and commissions of $15.4 million and related estimated offering expenses of $9.5 million (including $5.0 million incurred and paid at September 30, 2009) and giving effect to the receipt of the estimated proceeds of $220.0 million, (iii) the $10.7 million quarterly amortization payment on the First Lien Senior Secured Notes made in November 2009, (iv) the repayment of certain indebtedness under our existing notes as further described in the section entitled “Use of Proceeds” and the resultant $38,044 loss on extinguishment of debt, net of related deferred tax effect, and (v) the reclassification of Series A Convertible Preferred Stock as described in note (2) below.

        As of September 30, 2009
   
        Actual
    Pro Forma
    Pro Forma as
Adjusted(1)
        (unaudited)    
        (dollars in thousands except share data)    
Cash
              $ 25,306          $ 25,307          $ 5,241   
Indebtedness:
                                                       
Debt issued by INI in connection with the acquisition of Various
                                                       
First Lien Senior Secured Notes, net of unamortized discount of $14,916 actual, $14,916 pro forma, and none pro forma as adjusted
              $ 184,801          $ 184,801          $    
Second Lien Subordinated Secured Notes, net of unamortized discount of $3,770
                 76,230             76,230             76,230   
Subordinated Convertible Notes, net of unamortized discount of $22,328
                 126,837             126,837             126,837   
Other, net of unamortized discount of $426
                 3,574             3,574             3,574   
2006 Notes and 2005 Notes, net of unamortized discount of $1,157
                 43,373             43,373             43,373   
Subordinated Term Loan Notes
                 36,432             36,432             36,432   
Total Indebtedness
                 471,247             471,247             286,446   
 

43




        As of September 30, 2009
   
        Actual
    Pro Forma
    Pro Forma as
Adjusted(1)
        (unaudited)
(dollars in thousands except share data)
   
Redeemable preferred stock:
                                                       
Series A Convertible Preferred Stock, $0.001 par value; 2,500,000 shares authorized; shares issued and outstanding (at liquidation preference): 1,766,703 actual and pro forma and none pro forma as adjusted
                 21,000             21,000                
Series B Convertible Preferred Stock, $0.001 par value; 10,000,000 shares authorized; shares issued and outstanding (at liquidation preference): 8,444,853 actual, none pro forma and none pro forma as adjusted
                 5,000                             
Stockholders’ (deficiency) equity:
                                                       
Preferred stock, $0.001 par value; 22,500,000 shares authorized; shares issued and outstanding: 10,211,556 actual (shown above), 1,766,703 pro forma (shown above) and 1,766,703 pro forma as adjusted (liquidation preference $21 million)
                                           2    
Common stock, $0.001 par value; 125,000,000 shares authorized
                                                       
Common stock; 112,500,000 shares authorized; shares issued and outstanding: 5,329,639 actual, 21,636,144 pro forma and 41,636,144 pro forma as adjusted
                 5              22              42    
Series B non-voting common stock; 12,500,000 shares authorized; shares issued and outstanding: 1,839,825 actual, none pro forma and none pro forma as adjusted
                 2                              
Capital in excess of par
                 55,819             60,805             276,883   
Accumulated deficit
                 (173,631 )            (173,631 )            (211,675 )  
Total stockholders’ (deficiency) equity
                 (117,805 )            (112,804 )            65,252   
Total capitalization
              $ 379,442          $ 379,443          $ 351,698   
 


(1)  
  Pro forma as adjusted reflects the amendment and restatement of the certificate of designation of the Series A Convertible Preferred Stock on January 25, 2010 to eliminate the liquidation preference in the event of a change in control or qualified IPO and thereby the resultant reclassification of such preferred stock to stockholders’ equity.

44




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 deficiency as of September 30, 2009 after giving effect to: (i) the issuance of 8,444,853 shares of common stock upon the conversion of all of the outstanding shares of the Series B Convertible Preferred Stock (the holders of which have notified us in writing that they intend to exercise their option to convert effective upon the consummation of this offering), (ii) the issuance of 1,839,825 shares of common stock upon the exchange of all of the outstanding shares of our Series B common stock (the holders of which have notified us in writing that they intend to exercise their option to exchange), and (iii) the issuance of 6,021,827 shares of common stock underlying 5,192,005 outstanding warrants with an exercise price of $0.0002 per share, which if not exercised will expire upon the closing of this offering, would have been $(586.4) million, or $(27.10) per share of common stock based on 21,636,144 shares outstanding before this offering. Net tangible book value deficiency per share represents the amount that the total liabilities and the liquidation preference ($21.0 million) of the Series A Convertible Preferred Stock exceeds total tangible assets, divided by the number of shares of common stock that are outstanding.

After giving effect to the sale by us of 20,000,000 shares of common stock at an assumed initial public offering price of $11.00 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 and prepaying our First Lien Senior Secured Notes, as further described in the section entitled “Use of Proceeds”, the adjusted net tangible book value deficiency as of September 30, 2009 would have been $(427.5) million, or $(10.27) per share. This represents an immediate decrease in net tangible book value deficiency of $16.83 per share to existing stockholders and an immediate and substantial dilution in net tangible book value deficiency of $(21.27) per share to investors purchasing common stock in this offering. The following table illustrates this per share dilution:

Assumed initial public offering price per share
                             $ 11.00   
Net tangible book value deficiency per share as of September 30, 2009
              $ (27.10 )                 
Decrease in net tangible book value deficiency attributable to new investors
              $ 16.83                  
Adjusted net tangible book value deficiency per share after this offering
                             $ (10.27 )  
Dilution per share to new investors
                             $ (21.27 )  
 

A $1.00 increase in the assumed initial public offering price of $11.00 would decrease our net tangible book value deficiency by $18.6 million, decrease the net tangible book value deficiency per share after this offering by approximately $0.45, and increase the dilution per share to new investors by approximately $0.55. A $1.00 decrease in the assumed initial public offering price of $11.00 would increase our net tangible book value deficiency by $18.6 million, increase the net tangible book value deficiency per share after this offering by approximately $0.45 and decrease the dilution per share to new investors by approximately $0.55. These calculations assume the number of shares offered by us, as set forth on the cover page of the prospectus, remains the same and after deducting estimated underwriter discounts. The decrease/increase excludes the effect of any change in the amount of loss on extinguishment of debt.

The following table summarizes on an as adjusted basis as of September 30, 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 $11.00 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
                 21,636             52.0 %         $ 22,842             9.0 %         $ 1.06   
Investors in this offering
                 20,000             48.0 %            220,000             91.0 %         $ 11.00   
Total
                 41,636             100.0 %         $ 242,842             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
        (Restated)(1)    
        (in thousands, except for per share data)    
Net revenue
              $ 48,073          $ 289,480          $ (13,106 )(2)         $ 332,907   
 
                                               8,460  (3)                  
Cost of revenue
                 23,330             75,603             (526 )(4)            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  (5)            75,836   
 
                                               (7,100 )(6)                  
Amortization of acquired intangibles and software
                 2,262                          33,559  (7)            35,821   
Depreciation and other amortization
                 2,829             3,634             526  (4)            6,989   
VAT expense
                              13,106             (13,106 )(2)               
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 )(8)            (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 )(9)            (14,945 )  
Net (loss) income
                 (29,917 )            48,564             (72,253 )            (53,606 )(10)(11)  
Non-cash dividends on convertible preferred stock
                 (4,396 )                                      (4,396 )  
Net loss attributable to common stock
              $ (34,313 )         $ 48,564          $ 72,233          $ 58,002   
Net (loss) income per common share — basic and diluted
              $ (5.19 )                                       $ (4.98 )  
Weighted average common shares outstanding — basic and diluted(12)
                 6,610                                           11,639   
 

46




Notes to the Unaudited Pro Forma Consolidated Statement of Operations

(1)
  Please refer to Note B(28), “Summary of Significant Accounting Policies — Restatement” of our December 31, 2008 consolidated financial statements included elsewhere in this prospectus.

(2)
  Reclassification of VAT expense recorded by Various as operating expenses in its 2007 financial statements to revenue to conform with our classification.

(3)
  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.

(4)
  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.

(5)
  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.

(6)
  To eliminate non-recurring bonuses paid to employees of Various in connection with the acquisition of Various by us.

(7)
  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   
 
(8)
  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.

47




(9)
  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.

(10)
  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.

(11)
  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 purchase accounting adjustment, impairment of goodwill, impairment of other intangible assets and charges related to VAT not charged to customers. 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.

        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: Amortization of acquired intangibles and software
                 35,821   
Add: Depreciation and other amortization
                 6,989   
Pro forma EBITDA
                 52,015   
Add: Deferred revenue purchase accounting adjustment
                    
Add: Impairment of goodwill
                 925    
Add: Impairment of other intangible assets
                 5,131   
Add: Charges related to VAT not charged to customers
                 17,900   
Pro forma adjusted EBITDA
              $ 75,971   
 
(12)
  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 $0.0002 per share, as follows:

        As reported
    Pro forma
        (in thousands)    
Common stock
                 3,561             3,561   
Series B common stock
                 1,840             1,840   
Warrants exercisable at $0.0002 per share
                 1,209             6,238   
 
                 6,610             11,639   
 

48




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. 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 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 nine months ended September 30, 2009 and 2008 and the balance sheet data as of September 30, 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 the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included elsewhere in this prospectus.

49



        FriendFinder Networks Inc. (formerly known as Penthouse Media Group Inc.)
Consolidated Data(1)
        General Media, Inc.
(Predecessor Company)
   
        Nine Months Ended
September 30,
    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)         (Restated)(3)               (unaudited)    
            (in thousands, except per share data)            
Statements of Operations and Per Share Data:
                                                                                                                                   
Net revenue
              $ 244,440          $ 243,887          $ 331,017          $ 48,073          $ 29,965          $ 31,040          $ 8,992              $ 27,278   
Cost of revenue
                 68,733             73,285             96,514             23,330             15,927             14,336             3,904                 11,662   
Gross profit
                 175,707             170,602             234,503             24,743             14,038             16,704             5,088                 15,616   
Operating expenses
                                                                                                                                   
Product development
                 10,301             10,120             14,553             1,002                                                           
Selling and marketing
                 30,830             46,045             59,281             7,595             1,430             1,552             117                  383    
General and administrative
                 58,311             66,344             88,280             24,466             24,354             24,108             4,179                 12,840   
Amortization of acquired intangibles and software
                 27,154             27,132             36,347             2,262                                                           
Depreciation and other amortization
                 3,673             3,360             4,502             2,829             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
                 130,269             153,001             227,394             44,210             51,930             28,722             4,980                 13,365   
Income (loss) from operations
                 45,438             17,601             7,109             (19,467 )            (37,892 )            (12,018 )            108                  2,251   
Interest and other expense, net
                 (75,361 )            (59,920 )            71,251             16,880             12,049             4,854             2,079                 10,384   
Loss before income tax benefit
                 (29,923 )            (42,319 )            (64,142 )            (36,347 )            (49,941 )            (16,872 )            (1,971 )                (8,133 )  
Income tax benefit
(expense)
                 2,544             9,977             18,176             6,430                                                        (18 )  
Net loss
                 (27,379 )            (32,342 )            (45,966 )            (29,917 )            (49,941 )            (16,872 )            (1,971 )                (8,151 )  
Non-cash dividends on convertible preferred stock
                                                        (4,396 )                                                          
Net loss attributable to common stock
              $ (27,379 )         $ (32,342 )         $ (45,966 )         $ (34,313 )         $ (49,941 )         $ (16,872 )         $ (1,971 )             $ (8,151 )  
Net loss per common share — basic and diluted(4)
              $ (1.99 )         $ (2.35 )         $ (3.35 )         $ (5.19 )         $ (8.99 )         $ (3.21 )         $ (0.39 )             $ (17.09 )  
Weighted average common shares outstanding
— basic and diluted(4)
                 13,735             13,735             13,735             6,610             5,554             5,251             5,000                 477    
Pro forma net loss per common share — basic and diluted(5)(6)
                 $(0.16 )                           $(0.54 )                                                                                 
Pro forma weighted average common shares outstanding — basic and diluted(5)
                 42,980                            42,980                                                                                  
 

50




        FriendFinder Networks Inc. (formerly known as Penthouse Media Group Inc.)
Consolidated Data(1)
   
            As of December 31,
   
        As of
September 30,
2009
    2008(2)
    2007(2)
    2006
    2005
    2004
        (unaudited)        
        (in thousands)    
Consolidated Balance Sheet Data (at period end):
                                                                                                 
Cash, restricted cash and cash equivalents
              $ 31,673          $ 31,565          $ 23,722          $ 2,998          $ 12,443          $ 1,073   
Total assets
                 562,065             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(6)
                              415,606             417,310                                          
Long-term debt
                 409,526             38,768             35,379             63,166             54,126             44,874   
Deferred revenue
                 41,126             42,814             27,214             6,974             5,535             5,923   
Total liabilities
                 653,870             657,998             661,987             91,516             80,523             72,872   
Redeemable preferred stock
                 26,000             26,000             26,000             21,000             15,000                
Accumulated deficit
                 (173,631 )            (144,667 )            (98,701 )            (68,784 )            (18,843 )            (1,971 )  
Total stockholders’ (deficiency) equity
                 (117,805 )            (84,085 )            (38,119 )            (41,746 )            4,162             15,869   
 
        FriendFinder Networks Inc. (formerly known as Penthouse Media Group Inc.)
Consolidated Data(1)
        General Media, Inc.
(Predecessor Company)
   
        Nine Months Ended
September 30,
    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
              $ 36,628          $ 51,297          $ 50,948          $ 4,744          $ (16,600 )         $ (9,866 )         $ (3,096 )             $ 1,233   
Net cash provided by (used in) investing activities
                 (1,742 )            (8,113 )            (9,289 )            (149,322 )            (3,414 )            (4,393 )            (753 )                312    
Net cash provided by (used in) financing activities
                 (33,284 )            (15,210 )            (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 section entitled “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)
  Please refer to Note B(28), “Summary of Significant Accounting Policies — Restatement” of our December 31, 2008 consolidated financial statements included elsewhere in this prospectus.

(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 including shares underlying common stock purchase warrants which are exercisable at the nominal price of $0.0002 per share. For information regarding the computation of per share amounts, refer to Note B(24), “Summary of Significant Accounting Policies — Per share data” of our December 31, 2008 consolidated financial statements included elsewhere in this prospectus.

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(5)
  Following is a calculation of pro forma results assuming that, as of the beginning of the respective periods, (a) 20,000,000 shares of our common stock were sold in this offering and a portion of the outstanding First Lien Senior Secured Notes were extinguished with the proceeds of the offering and (b) all of the outstanding shares of our Series B Convertible Preferred Stock were converted into common stock:

            Nine Months Ended
September 30, 2009
    Year Ended
December 31, 2008
 
           
Net loss, as reported (in thousands):
      $ (27,379 )         $ (45,966 )  
 
           
Pro forma adjustments:
                               
 
           
1)  A reduction in interest expense resulting from the repayment of a portion of the First Lien Senior
    Secured Notes from the proceeds of this offering.
         25,098             31,721   
           
2)  Reduction in tax benefit related to reduction in interest expense
      (4,474 )         (8,855 )  
 
           
Pro forma net loss
         $(6,755 )(a)            $(23,100 )(a)  
 
 
           
Weighted average common shares outstanding — basic and diluted (in thousands)
         13,735             13,735   
 
           
Pro forma adjustments:
                               
 
           
1)  Issuance of common stock upon the conversion of all of the outstanding shares of our
    Series B Convertible Preferred stock (the holders of which have notified us in writing that they intend to exercise their option to convert effective upon the consummation of this offering)
         8,445             8,445   
 
           
2)  An increase in the shares of common stock underlying certain of our warrants
    resulting from the anti-dilution provisions of such warrants
         800              800    
 
           
3)  The sale of common stock in this offering
         20,000             20,000   
 
           
Pro forma weighted average common shares outstanding
         42,980             42,980   
 
                                                       
 
           
Net loss per common share — basic and diluted
         $(0.16 )            $(0.54 )  
 
(a)
  The pro forma net loss per common share excludes any loss on extinguishment of a portion of our First Lien Senior Secured Notes ($38,890,000 and $44,671,000 for nine months ended September 30, 2009 and year ended December 31, 2008, respectively) representing a non-recurring charge directly attributable to the use of proceeds from this offering.

(6)
  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 the section entitled “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 365 million registrants and over 245 million members in over 170 countries, with a majority of our members outside of the U.S., 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 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 2.9 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 authoritative literature 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 September 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 125,000 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 $0.59208 per share. The purchasers in the offering included certain current stockholders, including Messrs. Staton and Bell, Florescue Family Corporation, an entity affiliated with one of our directors, Barry Florescue, and ARE. 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 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. This revenue is treated as service revenue in our financial statements. For more information regarding our net revenue by service and product, see Note N, “Segment Information” of our December 31, 2008 consolidated financial statements included elsewhere in this prospectus. For more information regarding our adjusted non-GAAP revenue, see the sections entitled “Prospectus Summary — Non-GAAP Financial Results” and “— Results of Operations — FriendFinder Networks Inc. and Subsidiaries — Year Ended December 31, 2008 as Compared to the 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 nine months ended September 30, 2009, these credits and chargebacks were approximately 4.7% of gross revenue while chargebacks alone were approximately 1.2% 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 cost required to fulfill the customer’s order 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 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. This revenue is treated as product revenue in our financial statements, with the exception of revenue derived from licensing, which is treated as service revenue. For more information regarding our net revenue by service and product, see Note N, “Segment Information” of our December 31, 2008 consolidated financial statements included elsewhere in this prospectus. 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

55





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.

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 nine months ended September 30, 2009 and the previous three fiscal years are set forth below:

            Year Ended December 31,
   
        Nine Months
Ended
September 30,
2009
    2008
    2007
    2006
Percentage of revenue contributed by affiliates
                 44 %            43 %            46 %            49 %  
Compensation to affiliates (in millions)
              $ 42.9          $ 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.

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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.

Amortization of Acquired Intangibles and Software

Amortization of acquired intangibles and software is primarily attributable to intangible assets and internal-use software from acquisitions. As a result of purchase accounting rules, fair values were established for intangibles and internal-use software. As of September 30, 2009, the total fair value of these intangibles and internal-use software was $182.5 million. Amortization of these intangibles and software are reflected 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. We recognized amortization expense associated with these assets of $36.3 million and $27.2 million for the year ended December 31, 2008 and the nine months ended September 30, 2009, respectively. If we acquire other businesses which results in us owning 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.

Depreciation and Other Amortization

Depreciation and other amortization is primarily depreciation expense on our computer equipment. We expect our depreciation and other 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.

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 nine months ended September 30, 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 not Charged to Customers

Interest and penalties related to VAT not charged to customers 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

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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 September 30, 2009, the total amount of uncollected VAT payments was approximately $43.8 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 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 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. On October 14, 2008, we made an indemnity claim against these notes under the acquisition agreement for Various in the amount of $64.3 million. On June 10, 2009, the United Kingdom taxing authority notified us that it had reversed its previous position and that we were not subject to VAT, which resulted in an approximately $39.5 million reduction in the VAT liability. On October 8, 2009, we settled and released all indemnity claims against the sellers (whether claims are VAT related or not) by reducing the original principal amount of the Subordinated Convertible Notes by the full value of the then-outstanding VAT liability. In addition, the sellers agreed to make available to us, to pay VAT and certain VAT-related expenses, $10.0 million held in a working capital escrow established at the closing of the Various transaction. As of December 31, 2009, a total of $7.3 million has been released from the escrow to reimburse us for VAT-related expenses already incurred. If the actual costs to us of eliminating the VAT liability are less than $29.0 million, after applying amounts from the working capital escrow, then the principal amount of the Subordinated Convertible Notes will be increased by the issuance of new Subordinated Convertible Notes to reflect the difference between $29.0 million and the actual VAT liability, plus interest on such difference. For more information regarding the reductions of the principal amount of Subordinated Convertible Notes as a result of our VAT liability see the section entitled “Business — Legal Proceedings.”

Foreign Exchange Gain/(Loss) on VAT not Charged to Customers

Foreign exchange gain or loss on VAT not charged to customers 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 fluctuations is related to the liability related to VAT not charged to customers, the majority of which is denominated in Euros and, until June 2009 when the United Kingdom VAT liability was eliminated, British pounds.

Gain on Elimination of Liability for United Kingdom VAT not Charged to Customers

Gain on elimination of liability for United Kingdom VAT not charged to customers reflects the elimination of liabilities related to VAT not charged to customers in the United Kingdom. This gain was due to the United Kingdom taxing authority notifying us that it had reversed its previous position and that we were not subject to VAT in the United Kingdom in connection with providing internet services.

Gain on Settlement of Liability Related to VAT not Charged to Customers

Gain on settlement of liability related to VAT not charged to customers reflects our settlement of liabilities related to VAT not charged to customers 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. In addition, utilization of the remainder of such carryforwards may be limited by the occurrence of certain further ownership changes, including changes as a result of this offering. 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.

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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 D to our unaudited condensed consolidated financial statements for the nine months ended September 30, 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 authoritative guidance. We also test property, plant and equipment for impairment in accordance with authoritative guidance. 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;

•  
  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

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global economic conditions and increased competition. There were no further impairment charges in the nine months ended September 30, 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 the section entitled “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.

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:

        Nine Months Ended
September 30,
    Year Ended December 31,
   
        2009
    2008
    2008
    2007
    2006
        (unaudited)    
        (in thousands)    
Net revenue
                                                                                       
Internet
              $ 228,743          $ 225,218          $ 306,129          $ 20,961          $ 6,623   
Entertainment
                 15,697             18,669             24,888             27,112             23,342   
Total
                 244,440             243,887             331,017             48,073             29,965   
Cost of revenue
                                                                                       
Internet
                 58,901             62,103             81,815             8,479             1,398   
Entertainment
                 9,832             11,182             14,699             14,851             14,529   
Total
                 68,733             73,285             96,514             23,330             15,927   

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        Nine Months Ended
September 30,
    Year Ended December 31,
   
        2009
    2008
    2008
    2007
    2006
        (unaudited)    
        (in thousands)    
 
Gross profit
                                                                                       
Internet
              $ 169,842          $ 163,115          $ 224,314          $ 12,482          $ 5,225   
Entertainment
                 5,865             7,487             10,189             12,261             8,813   
Total
                 175,707             170,602             234,503             24,743             14,038   
 
Income (loss) from operations
                                                                                       
Internet
                 48,259             26,819             34,345             (964 )            4,088   
Entertainment
                 2,062             (313 )            (17,748 )            (7,811 )            (28,043 )  
Unallocated corporate
                 (4,883 )            (8,905 )            (9,488 )            (10,692 )            (13,937 )  
Total
              $ 45,438          $ 17,601          $ 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 nine months ended September 30, 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 the sections entitled “Prospectus Summary — Non-GAAP Financial Results” and “— Results of Operations — FriendFinder Networks Inc. and Subsidiaries — Year Ended December 31, 2008 as Compared to the Pro Forma Year Ended December 31, 2007.”

        Nine Months Ended
September 30,
    Year Ended December 31,
   
        2009
    2008
    2008
    2007(1)
    2006
Adult Social Networking Websites
                                                                                    
New members
                 16,031,921             15,455,822             20,738,807             21,344,560             23,135,741   
Beginning subscribers
                 896,211             919,146             919,146             906,641             864,358   
New subscribers(2)
                 1,305,624             1,502,369             1,935,533             2,109,845             2,297,354   
Terminations
                 1,333,264             1,474,917             1,958,468             2,097,340             2,255,071   
Ending subscribers
                 868,571             946,598             896,211             919,146             906,641   
Conversion of members to subscribers
                 8.1 %            9.7 %            9.3 %            9.9 %            9.9 %  
Churn
                 16.5 %            17.8 %            17.8 %            19.3 %            21.7 %  
ARPU
              $ 21.44          $ 21.45          $ 22.28          $ 19.95          $ 20.39   
CPGA
              $ 47.07          $ 50.52          $ 51.26          $ 44.57          $ 38.54   
Average lifetime net revenue per subscriber
              $ 82.64          $