S-1 1 i10357.htm FORM S-1

As filed with the Securities and Exchange Commission on December 23, 2008

Registration No. 333-

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


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)
 



CALCULATION OF REGISTRATION FEE

Title of Each Class of Securities to be Registered


  
Proposed Maximum Aggregate
Offering Price (1)(2)
  
Amount of Registration Fee
Common Stock, $0.001 par value per share
              $ 460,000,000          $ 18,078   
 

(1)  
  Includes shares of common stock issuable upon exercise of underwriters’ over-allotment option.

(2)  
  In accordance with Rule 457(o) under the Securities Act, the number of shares being registered and the proposed maximum offering price per share are not included in this table.


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






SUBJECT TO COMPLETION, DATED DECEMBER 23, 2008

PRELIMINARY PROSPECTUS

Shares



 

Common Stock

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

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

Investing in our common stock involves risks. See “Risk Factors” beginning on page 8 to read about factors you should consider before buying shares of our common stock.

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

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

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

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


Renaissance Capital

                        , 2009

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




TABLE OF CONTENTS

        Page
Prospectus Summary
                 1    
Risk Factors
                 8    
Forward-Looking Statements
                 30    
Market and Industry Data
                 31    
Use of Proceeds
                 32    
Dividend Policy
                 34    
Capitalization
                 35    
Dilution
                 37    
Unaudited Pro Forma Financial Data
                 39    
Selected Consolidated Financial Data
                 42    
Management’s Discussion and Analysis of Financial Condition and Results of Operations
                 45    
Our Industry
                 70    
Business
                 74    
Management
                 90    
Principal Stockholders
                 103    
Certain Relationships and Related Party Transactions
                 106    
Description of Capital Stock
                 109    
Description of Indebtedness
                 115    
Shares Eligible for Future Sale
                 120    
Certain Material U.S. Tax Considerations
                 122    
Underwriting
                 125    
Legal Matters
                 128    
Independent Registered Public Accounting Firm
                 128    
Where You Can Find More Information
                 128    
Index to Consolidated Financial Statements
                 F-1    
Glossary of Commonly Used Terms
                 G-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.

i





PROSPECTUS SUMMARY

The following summary highlights information contained elsewhere in this prospectus and is qualified in its entirety by the more detailed information and consolidated financial statements included elsewhere in this prospectus. This summary may not contain all of the information that may be important to you. You should carefully read the entire prospectus, including the “Risk Factors” and our consolidated financial statements and the notes to those statements, before making an investment decision. All references to “we,” “us,” “our,” or “our company” refer to FriendFinder Networks Inc. and, where appropriate, our consolidated direct and indirect subsidiaries. References to our “common stock” refer only to our $0.01 par value per share common stock and does not include our Series B common stock or our preferred stock. References to our “articles of incorporation,” “articles” or “charter” refer to our articles of incorporation as modified by the amendments we intend to effectuate prior to the consummation of this offering, which amendments include, among other things, (i) an increase in the authorized number of shares of preferred stock issuable by us by 200,000,000 shares, and (ii) a change in the par value of our authorized capital stock, including all classes and series of common and preferred stock, from $0.01 par value per share to $0.001 par value per share. References to our “bylaws” refer to the amended and restated bylaws we intend to effectuate prior to the consummation of this offering. For your convenience, we have included a glossary beginning on page G-1 of selected commonly referred to terms. Registered trademarks referred to in this prospectus are the property of their respective owners.

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 270 million members in approximately 170 countries offering a wide variety of online services so that our members can interact with each other and access the content available on our websites. Our websites are intended to appeal to members of diverse cultures and interest groups and include social networking, live interactive video and premium content websites. Our most heavily visited social networking and entertainment websites include AdultFriendFinder.com, Amigos.com, AsiaFriendFinder.com, Cams.com, FriendFinder.com, BigChurch.com and SeniorFriendFinder.com. Our revenue to date has been primarily derived from subscription and paid-usage adult-oriented products and services. We believe that our broad and diverse membership 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. For the nine months ended September 30, 2008, our net revenue, operating income and earnings before deducting net interest expense, income taxes, depreciation and amortization, or EBITDA, were $262.4 million, $36.1 million and $66.6 million, respectively, as pro forma adjusted for an $18.5 million non-recurring reduction in net revenue due to purchase accounting that required the deferred revenue to be recorded at fair value on the date of acquisition, to a deferred revenue liability at the date of acquisition of Various, Inc., or Various, and our net loss was $32.3 million unadjusted for this purchase accounting. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

We categorize our users into four categories: visitors, 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, 2008, we averaged over 59 million unique worldwide visitors per month according to comScore.

•  
  Members. Members are users who complete a free registration form on one of our websites by giving basic identification information and submitting their e-mail address. 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, 2008, we averaged more than four million new member registrations on our websites each month.

1






•  
  Subscribers. Subscribers are members who purchase daily, three-day, weekly, monthly, quarterly, annual or lifetime subscriptions for one or more of our websites. Subscribers have full access to our websites and may access special features including premium content. For the nine months ended September 30, 2008, we averaged over one million paying subscribers each month from whom we derived 77.2% of our internet revenue.

•  
  Paid Users. Paid users are members who purchase products or services on a paid-by-usage basis. For the nine months ended September 30, 2008, we averaged approximately 1,715,845 paid minutes each month and derived 19.6% of our internet revenue from paid users.

•  
  Average Monthly Net Revenue per Subscriber. Average revenue per subscriber, or ARPU, is calculated by dividing net revenue for the period by the average number of subscribers in the period. For the nine months ended September 30, 2008, our average monthly net revenue per subscriber was approximately $19.06.

•  
  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, has decreased from approximately 19.6% per month for the year ended December 31, 2007 to approximately 18.0% for the nine months ended September 30, 2008.

•  
  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, 2008, we had over 110,000 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, 2008, we made payments to marketing affiliates of over $46.4 million.

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 that allow our users to make connections with other members with whom they share common interests, for which we receive a subscription fee, is distinctly different from other social networking websites whose users can access the websites for free to remain connected to their pre-existing friends and interest groups.

•  
  Large and Diverse Membership Base Attractive to Members. We operate some of the most heavily visited social networking websites in the world, currently adding on average more than four million new members each month, which represents a substantial barrier to entry for potential competitors.

•  
  Large and Difficult to Replicate Affiliate Network. Our marketing affiliate program with over 110,000 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.

•  
  Proven Management Team with Experience in Integrating Companies. Our management team has a broad range of experience in the internet and entertainment industries and a proven track record of identifying potential target companies, executing transactions and integrating the acquired companies.

2





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:

•  
  Increase Conversion of Members to Subscribers. We continually seek to improve the websites we operate with the goal of encouraging visitors to become members and members to become subscribers by constantly evaluating, adding and enhancing features on our websites to improve our members’ experience.

•  
  Generate Advertising Revenue. To date, advertising revenue has represented less than 1% of our revenue, averaging approximately $152,356 per month in the nine months ended September 30, 2008. We believe that our large social networking membership base represents a significant advertising opportunity. We believe we will be able to offer advertisers an opportunity to achieve superior results with advertisements that are well-targeted to their preferred demographic and interest groups.

•  
  Penetrate New Communities of Interest and Monetize Current Foreign Markets. We are constantly seeking to identify groups of sufficient size who share a common interest in order to create an online website intended to appeal to their interests. Our technology provides us with a scalable, low-cost capacity to quickly create and launch additional websites without substantial additional capital investment and our extensive membership database serves as an existing list of users who could potentially be members of new websites we create. Additionally, we seek to expand in selected geographic markets, including southeast Europe, South America and Asia, and 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 executive offices are located at 6800 Broken Sound Parkway, Boca Raton, Florida 33487 and our telephone number is (561) 912-7000. Our website address is www.ffn.com. The information contained in, or accessible through, our website is not part of this prospectus.

3





THE OFFERING

Common stock offered by us
           
shares
Common stock outstanding before this offering (as of September 30, 2008)
           
104,956,481 shares
Common stock to be outstanding after this offering
           
shares
Dividend policy
           
We do not anticipate paying cash dividends for the foreseeable future.
Over-allotment option
           
We have granted the underwriters an option to purchase up to        additional shares of our common stock at the public offering price to cover any over-allotment.
Use of proceeds
           
We estimate that our net proceeds from this offering will be approximately $       , assuming an initial offering price of $       per share of common stock, the midpoint of the range set forth on the cover page of this prospectus, after deducting underwriting discounts and estimated offering expenses payable by us. We intend to use the net proceeds to redeem our outstanding debt as further described under “Use of Proceeds.” The balance of the net proceeds will be used for working capital and general corporate purposes.
Risk factors
           
You should read the section captioned “Risk Factors” beginning on page 8 for a discussion of factors you should consider carefully before deciding whether to purchase shares of our common stock. Our independent registered public accounting firm has issued an opinion expressing substantial doubt about our ability to continue as a going concern. If we are unable to continue as a going concern, you may lose your entire investment.
Proposed New York Stock Exchange symbol
           
“FFN”
 

Unless the context requires otherwise, the number of shares of our common stock outstanding after this offering is based on the number of shares outstanding as of September 30, 2008 and includes:

•  
                   shares of common stock issuable upon the conversion of the 6% subordinated convertible notes, or the Subordinated Convertible Notes, issued by Interactive Network, Inc., or INI, a wholly-owned subsidiary which we organized in connection with our December 2007 acquisition of Various (assuming the maximum conversion of 17% of the fully diluted equity of FriendFinder Networks Inc. based upon the midpoint of the range set forth on the cover of this prospectus);

•  
  35,334,011 shares of common stock issuable upon the conversion of Series A convertible preferred stock outstanding as of September 30, 2008;

•  
  168,897,005 shares of common stock issuable upon the conversion of Series B convertible preferred stock outstanding as of September 30, 2008;

•  
  36,796,500 shares of common stock issuable upon the exchange of Series B common stock outstanding as of September 30, 2008; and

•  
  142,733,364 shares of common stock underlying outstanding warrants to purchase our common stock at $0.00001 per share, which if not exercised, will expire upon the closing of this offering;

but excludes:

•  
  26,879,946 shares of common stock issuable upon the exercise of options available for future issuance under our stock option plan, or our 2008 Stock Option Plan; and

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

4





Summary Consolidated Financial Information

The following summary historical financial data should be read in conjunction with, and are qualified by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the audited consolidated financial statements and unaudited condensed consolidated financial statements and notes thereto included elsewhere in this prospectus. We derived the statement of operations data for the years ended December 31, 2007, 2006 and 2005 and the consolidated balance sheet data as of December 31, 2007 and 2006 from the audited consolidated financial statements included elsewhere in this prospectus. In their report dated December 22, 2008, which is also included in this prospectus, our independent registered public accounting firm stated that events of default have occurred under certain of our debt agreements allowing noteholders to demand payment of our 2005 Notes and 2006 Notes and our subsidiary’s First Lien Senior Secured Notes, Second Lien Subordinated Secured Notes and Subordinated Convertible Notes (each as defined herein) and that these conditions raise substantial doubt about our ability to continue as a going concern. We derived the consolidated balance sheet data as of December 31, 2005 from our audited consolidated financial statements that are not included in this prospectus. We derived the summary financial data as of September 30, 2008 and for each of the nine-month periods ended September 30, 2008 and 2007 from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. We prepared the unaudited information on a basis consistent with that used in preparing our audited consolidated financial statements, and it includes all adjustments, consisting of normal and recurring items, that we consider 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, 2008 are not necessarily indicative of results 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 nine months ended September 30, 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. Our statement of operations for the nine months ended September 30, 2007 and for the years ended December 31, 2006 and 2005 does not include the results of operations of Various.

        FriendFinder Networks Inc. Consolidated Data
   
        Nine Months Ended
September 30,

    Year Ended December 31,
   
        2008(1)
    2007
    2007(1)
    2006
    2005
        (unaudited)    
        (in thousands, except share and per share data)    
Statements of Operations and Per Share Data:
                                                                                       
Net revenue
              $ 243,887          $ 26,669          $ 48,073          $ 29,965          $ 31,040   
Cost of net revenue
                 73,285             12,799             23,330             15,927             14,336   
Gross profit
                 170,602             13,870             24,743             14,038             16,704   
Operating expenses
                                                                                      
Product development
                 10,120                          1,002                             
Selling and marketing
                 46,045             3,335             7,595             1,430             1,552   
General and administrative
                 66,344             14,495             24,466             24,354             24,108   
Depreciation & amortization
                 30,492             2,508             5,091             3,322             3,062   
Impairment of goodwill
                                           925              22,824                
Impairment of other intangible assets
                                           5,131                             
Total operating expenses:
                 153,001             20,338             44,210             51,930             28,722   
Operating income (loss)
                 17,601             (6,468 )            (19,467 )            (37,892 )            (12,018 )  
Interest and other expense, net
                 59,920             8,356             16,880             12,049             4,854   
Loss before income tax benefit
                 (42,319 )            (14,824 )            (36,347 )            (49,941 )            (16,872 )  
Income tax benefit
                 9,977                          6,430                             
Net loss
              $ (32,342 )         $ (14,824 )         $ (29,917 )         $ (49,941 )         $ (16,872 )  
Net loss per common share — basic
and diluted(2)
              $ (0.12 )         $ (0.12 )         $ (0.23 )         $ (0.45 )         $ (0.16 )  
Weighted average common shares
outstanding — basic and diluted(2)
                 274,706             121,714             132,193             111,088             105,013   
 

5





        FriendFinder Networks Inc. Consolidated Data
   
        As of September 30,
    As of December 31,
   
        2008(1)
    2007
    2007(1)
    2006
    2005
        (unaudited)    
        (in thousands)    
Consolidated Balance Sheet Data (at period end):
                                                                                       
Cash, restricted cash and equivalents
              $ 35,355          $ 249           $ 23,722          $ 2,998          $ 12,443   
Total assets
                 646,598             66,485             649,868             70,770             99,685   
Long-term debt classified as current due to events of default, net of unamortized discount(3)
                 411,019                          417,310                             
Long-term debt
                 35,379             67,252             35,379             63,166             54,126   
Deferred revenue
                 48,393             5,255             27,214             6,974             5,535   
Total liabilities
                 691,059             98,601             661,987             91,516             80,523   
Convertible preferred stock
                 2,042             353              2,042             353              252    
Accumulated deficit
                 (131,043 )            (83,608 )            (98,701 )            (68,784 )            (18,843 )  
Total stockholders’ (deficiency) equity
                 (44,461 )            (32,116 )            (12,119 )            (20,746 )            19,162   
Other Data:
                                                                                       
Net cash provided by (used in) operating activities
              $ 51,297          $ (5,826 )         $ 4,744          $ (16,600 )         $ (9,866 )  
Net cash (used in) provided by investing activities
                 (8,113 )            (377 )            (149,322 )            (3,414 )            (4,393 )  
Net cash provided by (used in) financing activities
                 (15,210 )            3,454             148,961             10,569             25,629   
EBITDA(4)
              $ 48,127          $ (4,741 )         $ (15,303 )         $ (38,701 )         $ (7,997 )  
 


(1)  
  Net revenue for the nine months ended September 30, 2008 and the year ended December 31, 2007 does not reflect $18.5 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.

(2)  
  Basic and diluted loss per share is based on the weighted average number of shares of common stock outstanding and Series B common stock and including shares underlying common stock purchase warrants which are exerciseable at the nominal price of $0.00001 per share. For information regarding the computation of per share amounts, refer to Note B.24 of our December 31, 2007 consolidated financial statements included elsewhere in this prospectus.

(3)  
  Excludes $10,324 at September 30, 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.

(4)  
  The financial and operating data below set out supplementary information that we believe is useful for investors in evaluating our underlying operations. The following table reconciles our net income (loss) to EBITDA. EBITDA is defined as earnings (loss) before deducting net interest expense, income taxes, depreciation and amortization. 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. Although EBITDA is not a measure of performance calculated in accordance with generally accepted accounting principles, or GAAP, management believes that it is useful to an investor in evaluating our underlying operations because it is a widely used measure to evaluate a company’s operating performance.

        FriendFinder Networks Inc. Consolidated Data(a)
   
        Nine Months Ended
September 30,
    Year Ended December 31,
   
        2008
    2007
    2007
    2006
    2005
        (unaudited)    
        (in thousands)    
Net loss
              $ (32,342 )         $ (14,824 )         $ (29,917 )         $ (49,941 )         $ (16,872 )  
Add: Interest expense, net
                 59,954             7,575             15,953             7,918             5,813   
Less: Income tax benefit
                 (9,977 )                         (6,430 )                            
Add: Depreciation and amortization
                 30,492             2,508             5,091             3,322             3,062   
EBITDA
              $ 48,127          $ (4,741 )         $ (15,303 )         $ (38,701 )         $ (7,997 )  
 


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

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

        Non-Financial Operating Data
   
            Year Ended December 31,(4)
   
        Nine Months
Ended
September 30,
2008
    2007
    2006
    2005
FriendFinder Historical Operating Data:
                                                                   
Adult Social Networking Websites
                                                                       
Subscribers (as of the end of the period)
                 946,598             919,146             906,641             864,358   
Churn(1)
                 17.8 %            19.3 %            21.7 %            24.3 %  
ARPU(2)
              $ 19.31          $ 20.13          $ 20.39          $ 18.94   
General Audience Social Networking Websites
                                                                       
Subscribers (as of the end of the period)
                 78,501             85,662             96,037             95,387   
Churn(1)
                 19.7 %            22.2 %            27.1 %            24.7 %  
ARPU(2)
              $ 16.28          $ 17.20          $ 18.06          $ 14.94   
Live Interactive Video Websites
                                                                       
Average Revenue Per Minute
              $ 2.86          $ 3.07             n/a              n/a    
Cams — Minutes(3)
           
15,422,605  
   
20,613,825  
         n/a              n/a    
 


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

(2)  
  ARPU is calculated by dividing net revenue for the period by the average number of subscribers in the period.

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

(4)  
  Derived from historical information of Various.

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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., eHarmony, Inc., Lavalife Corp., Plentyoffish Media Inc. and Spark Networks Limited websites, including jdate.com, americansingles.com and relationships.com. Other social networking websites have significantly higher numbers of worldwide unique users than our general audience websites do. According to comScore, in October 2008, Facebook.com and MySpace.com had approximately 182 million and 127 million worldwide unique users compared to FriendFinder.com’s 60 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. Additionally, some of our competitors are not subject to the same regulatory restrictions that we are, including those imposed by our settlement with the Federal Trade Commission over the use of sexually explicit advertising. See “—We may be held secondarily liable for the actions of our affiliates, which could result in fines or other penalties that could harm our reputation, financial condition and business.” These activities could attract members and paying subscribers away from our websites, reduce our market share and adversely affect our results of operations.

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

Our affiliate network generated approximately 44% of our revenue as of September 30, 2008 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.

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. See “—We may be held secondarily liable for the actions of our affiliates, which could result in fines or other penalties that could adversely affect our reputation, financial condition and business.” Our affiliates arrangements can be terminated immediately by us or our affiliates for any reason. Typically, we do not have exclusivity arrangements with our affiliates, and some of our affiliates may also be affiliates for our competitors. Any increase in the commission rates we pay our affiliates would result in higher cost of revenue and could 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.

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

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

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

•  
  our ability to offer attractive advertising rates;

•  
  our ability to attract advertisers; and

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

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

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

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

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

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

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

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

9





competitors would enjoy competitive advantages over us, such as longer operating histories, greater name recognition, larger customer bases, greater access to advertising space on high-traffic websites, and significantly greater financial, technical and marketing resources. As a result, we may not be able to compete successfully.

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

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

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

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

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

Changes in global economic conditions could adversely affect the profitability of our business. Economic conditions worldwide have from time to time contributed to slowdowns in the technology industry, as well as in the specific segments and markets in which we operate, resulting in reduced demand and increased price competition for our products and services. Our operating results in one or more geographic regions may also be affected by uncertain or changing economic conditions within that region, such as the challenges that are currently affecting economic conditions in the United States and abroad. If economic and market conditions in the United States or other key markets, remain unfavorable or persist, spread or deteriorate further, we may experience an adverse impact on our business, financial condition and results of operation. If our entertainment segment continues to be adversely affected by these economic conditions, we may be required to take an impairment charge with respect to these assets. In addition, the current or future tightening of credit in financial markets could result in a decrease in demand for our products and services. The demand for entertainment and leisure activities tends to be highly sensitive to consumers’ disposable incomes, and thus a decline in general economic conditions may lead to our members and potential new subscribers 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. Accordingly, this economic downturn in the U.S. and other countries may hurt our financial performance. We are unable to predict the likely duration and severity of the current disruption in financial markets and adverse economic conditions and the effects they may have on our business and financial condition and results of operations.

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 users. Our business could be disrupted if these companies become unwilling or unable to provide these

10






services to us. We are also subject to the operating rules, certification requirements and rules governing electronic funds transfers imposed by the payment card industry seeking to protect credit cards issuers, which could change or be reinterpreted to make it difficult or impossible for us to comply with such rules or requirements. If we fail to comply, we may be subject to fines and higher transaction fees and lose our ability to accept credit card payments from our customers, and our business and operating results would be adversely affected. Our ability to accept credit cards as a form of payment for our online products and services could also be restricted or denied for a number of other reasons, including but not limited to:

•  
  if we experience excessive chargebacks and/or credits;

•  
  if we experience excessive fraud ratios;

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

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

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

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

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

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

Our ability to keep pace with technological developments is uncertain.

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

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

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

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

Under the terms of our December 2007 settlement with the Federal Trade Commission, we have agreed not to display sexually explicit online advertisements to consumers who are not seeking out sexually explicit content, and we require that members of our marketing affiliate network affirmatively agree to abide by this restriction as

11





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.

Our financial statements include an explanatory paragraph concerning conditions that raise substantial doubt about our ability to continue as a going concern, and there is no guarantee that we will be able to continue to operate our business or generate revenue.

Our ability to continue as a going concern is dependent on our ability to raise additional capital, including from this offering. As of September 30, 2008, our balance sheet had approximately $43.3 million in cash and restricted cash and $420.1 million in short-term debt, net of unamortized discount, $411.0 million of which had been reclassified from long-term debt, due to our failure to comply with certain covenants and restrictions in the agreements governing our 2005 Notes and 2006 Notes and our subsidiary’s First Lien Senior Secured Notes, Second Lien Subordinated Secured Notes and Subordinated Convertible Notes and for which waivers had not been obtained. We have unsuccessfully sought to obtain waivers from all of our noteholders, except such waivers that have been obtained from Messrs. Bell and Staton in connection with the Subordinated Term Loan Notes, for our failure to comply with certain covenants and restrictions contained in these agreements. If we are unable to cure such defaults and/or obtain waivers, we could trigger the acceleration of payment provisions in such agreements which would require us to immediately repay up to approximately $466.0 million to our noteholders. We do not currently have sufficient cash to repay this indebtedness if our debt is accelerated and if the noteholders instituted foreclosure proceedings against our assets, the proceeds of the assets could be insufficient to repay such indebtedness in full. Under these circumstances, we may be unable to continue operating as a going concern.

In their report dated December 22, 2008, which is also included in this prospectus, our independent registered public accounting firm stated that events of default have occurred under certain of our debt agreements allowing noteholders to demand payment of our 2005 Notes and 2006 Notes, and our subsidiary’s First Lien Senior Secured Notes, Second Lien Subordinated Secured Notes and Subordinated Convertible Notes and that these conditions raise substantial doubt about our ability to continue as a going concern. If the proceeds from the initial public offering are inadequate to repay our existing debt and/or we have not been successful in obtaining waivers from our noteholders, we may also receive a going concern modification on our 2008 financial statements. If doubts are raised about our ability to continue as a going concern following this offering, our stock price could drop and our ability to raise additional funds may be adversely affected. Any of these outcomes would be detrimental to our operations.

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

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

Furthermore, we and INI have failed to comply with certain non-monetary covenants contained within some of our debt agreements including the timely delivery of quarterly financial statements and officer’s certificates and the holding of quarterly meetings of our board of directors. We also failed to obtain the consent of the noteholders prior to taking certain corporate actions such as seeking their consent prior to changing our name from Penthouse Media Group Inc. to FriendFinder Networks Inc. and our subsidiary’s name from FriendFinder Network, Inc. to FriendFinder California Inc. In addition, in connection with the Various acquisition, we failed to meet certain

12





operating targets and timely deliver certain agreed-upon documents and take certain actions with respect to the granting and perfection of security interests after the acquisition of Various was completed, although such documents and actions were subsequently completed.

If our efforts to cure and/or obtain waivers for such events of default from our noteholders are unsuccessful in the future it could result in the acceleration of $466.0 million in debt. If all of our indebtedness was accelerated, we would not have sufficient funds at the time of acceleration to repay 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 losses in the future.

We have historically generated significant operating losses. As of December 31, 2007, we had an accumulated deficit of approximately $98.7 million. We had net losses of approximately $32.3 million for the nine months ended September 30, 2008 and $29.9 million for the year ended December 31, 2007 and a loss of $49.9 million for the fiscal year ended December 31, 2006. We also had negative operating cash flows in 2006 and 2005. 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.

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 92% of our revenue for the year ended December 31, 2007, on a pro forma basis assuming the acquisition of Various on January 1, 2007, and approximately 92% of our revenue for the nine months ended September 30, 2008 from subscribers and other paying customers to our websites. 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

13





for approximately five months. Our business depends on our ability to attract a large number of members, to convert members into subscribers and to retain our subscribers. If we are unable to remain competitive and provide the pricing and content, features, functions or services necessary to attract new subscribers or retain existing subscribers, our operating results could suffer. To the extent free social networking and personals websites, or free adult content on the internet, continue to be available or increase in availability, our ability to attract and retain subscribers may be adversely affected. In addition, any decrease in our subscribers’ spending due to general economic conditions could also reduce our revenue or negatively impact our ability to grow our revenue.

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

Turnover of subscribers in the form of subscriber service cancellations or failures to renew, or churn, has a significant financial impact on the results of operations of any subscription internet provider, including us, as does the cost of upgrading and retaining subscribers. 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.

14




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;

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

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

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

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

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

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

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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. 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 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.

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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.

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

Our businesses are regulated by diverse and evolving laws and governmental authorities in the United States and other countries in which we operate. Such laws relate to, among other things, internet, licensing, copyrights, commercial advertising, subscription rates, foreign investment, use of confidential customer information and

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

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

•  
  Adult content. Regulation, investigations and prosecutions of adult content could prevent us from making such content available in certain jurisdictions or otherwise have a material adverse effect on our business, financial condition and results of operations. Government officials may also place additional restrictions on adult content affecting the way people interact on the internet. The governments of some countries, such as China and India, have sought to limit the influence of other cultures by restricting the distribution of products deemed to represent foreign or “immoral” influences. Regulation aimed at limiting minors’ access to adult content both in the United States and abroad could also increase our cost of operations and introduce technological challenges by requiring development and implementation of age verification systems. Court rulings may place additional restrictions on adult content affecting how people interact on the internet, such as mandatory web labeling.

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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 we do not and cannot screen other members and subscribers. 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. 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

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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.

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

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

After our acquisition of Various, we became aware that Various and its subsidiaries had not collected VAT from subscribers in the European Union nor had Various remitted VAT to the tax jurisdictions requiring it. We have since registered with the tax authorities of the applicable jurisdictions and have begun collecting VAT from our subscribers in the European Union and remitting it as required. We have initiated discussions with most tax authorities in the European Union jurisdictions to attempt to resolve liabilities related to Various’ past failure to collect and remit VAT, and have now resolved such prior liabilities in several jurisdictions on favorable terms, but there can be no assurance that we will resolve or reach a favorable resolution in every jurisdiction. If we are unable to reach a favorable resolution with a jurisdiction, the terms of such resolution could adversely affect our financial condition or results of operations. For example, we might be required to pay substantial sums of money without the benefit of a payment deferral plan, which could adversely affect our cash position and impair operations. 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, as well as in The Netherlands with the cooperation of the Dutch authorities. Were Germany or another jurisdiction to freeze or seize our cash or other assets, our operations and financial condition could be impaired. In addition, in many jurisdictions the potential exists for criminal investigations or proceedings to be instituted against us and against individual members of prior or current management. For example, the German authorities had initiated an investigation of an individual who was an officer of Various until its acquisition by us. The German authorities also have introduced a criminal investigation of Various’s current president. 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 discussions with the German authorities in an effort to resolve all issues,

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

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

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

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

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

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

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

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

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

•  
  dilution of existing stockholders’ ownership interests;

•  
  incurrence of additional debt;

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

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

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

•  
  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;

•  
  foregoing opportunities that are potentially more profitable; and

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

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

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

•  
  challenges caused by distance, language and cultural differences;

•  
  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;

•  
  longer payment cycles in some countries;

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

•  
  different legal and regulatory restrictions among jurisdictions;

•  
  political, social and economic instability;

•  
  potentially adverse tax consequences; and

•  
  higher costs associated with doing business internationally.

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

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

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

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

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

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

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

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

•  
  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 debt instruments, we may be restricted in the way we run our business.

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

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

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

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

We intend to raise sufficient funds in order to use the proceeds from this offering to repay all of our existing debt, some of which is held by certain of our officers and directors. If we do not raise enough funds in this offering to repay all of our existing debt, our management, including officers who are noteholders, will advise the board which of our existing debt it should repay with the proceeds of this offering, thereby resulting in a conflict of interest. The financial interest of these certain officers and directors could influence our management’s motivation in selecting which debt to repay with the proceeds of the offering and therefore there may be a conflict of interest when determining whether repaying a particular piece of debt over another is in the stockholders’ best interest.

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 the overall management of the company 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 and to act as a non-compete in the event that one of these individuals ceases to work for us; it does not ensure continued service with us. Furthermore, most of our key employees are at-will employees. If we lose members of our senior management without retaining replacements, our business, financial condition and results of operations could be materially adversely affected.

Additionally, Messrs. Bell and Staton each serve as an officer and director of Enterprise Acquisition Corp., a special purpose acquisition company, or EAC, and Ezra Shashoua, our chief financial officer, also serves EAC in that capacity. Their service as a director or officer of EAC could cause them to be distracted from the management of our business and could also create conflicts of interest if they are faced with decisions that could have materially different implications for us and for EAC, such as in the area of potential acquisitions. If such a conflict arises, we believe our directors and officers intend to take all actions necessary to comply with their fiduciary duties to our stockholders, including, where appropriate, abstaining from voting on matters that present a conflict of interest. However, these conflicts of interest, or the perception among investors that conflicts of interest could arise, could harm our business and cause our stock price to fall.

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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. The loss of the services of our executive officers or other key personnel, particularly if lost to competitors, could materially and adversely affect our business. If we are unable to attract, integrate and retain qualified personnel or if we experience high personnel turnover, we could be prevented from effectively managing and expanding our business.

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

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

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

Adverse currency fluctuations could decrease revenue and increase expenses.

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

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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.

Risks Related to this Offering

You may find it difficult to sell our common stock.

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

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

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

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

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

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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 Convertible Preferred Stock and the Subordinated Convertible Notes which may be available for future sale and may cause the prevailing market price of our common stock to decrease and impair our capital raising abilities.

Immediately following this offering, we will have     shares of common stock outstanding (assuming (i) that the holders of warrants to purchase 142,733,362 shares of our common stock at $0.00001 per share exercise such warrants prior to their expiration upon the closing of this offering, (ii) the underwriters do not exercise their over-allotment option, (iii) issuance of 204,231,016 shares of common stock upon the conversion of all of the shares of our outstanding Convertible Preferred Stock, (iv) the issuance of 36,796,500 shares of common stock upon the conversion of all of the outstanding shares of our Series B common stock and (v) the issuance of                      shares upon the conversion of the Subordinated Convertible Notes (assuming maximum conversion of 17% of our fully diluted equity and based on the midpoint of the range on the front cover of this prospectus)); and an additional shares of common stock reserved for issuance upon the exercise of options that have been or may be granted under our 2008 Stock Option Plan. We will also have an additional      shares of our common stock, and shares of preferred stock, authorized and available for issuance, which we may, in general, issue without any action or approval by our stockholders, including in connection with acquisitions or otherwise except as required by relevant stock exchange requirements.

The        shares sold in this offering will be freely tradable, except for any shares purchased by our “affiliates” as defined in Rule 144 under the Securities Act of 1933, as amended. Holders of the other        shares that will be outstanding and holders of our derivative securities have agreed with the underwriters, subject to certain 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. After the expiration of this 180-day lock-up period, these shares may be sold in the public market, subject to prior registration or qualification for an exemption from registration, including, in the case of shares held by our affiliates, compliance with the volume restrictions of Rule 144. The holders of     shares, as well as the holders of our Convertible Preferred Stock convertible into        shares and holders of the Subordinated Convertible Notes convertible into       shares (based on the midpoint of the range on the front cover of this prospectus), are also entitled to certain piggy back registration rights with respect to the public resale of their shares. In addition, following this offering, we intend to file a registration statement covering the shares issuable under our 2008 Stock Option Plan.

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

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

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

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

As a public company, we will incur increased legal, accounting and other costs not incurred as a private company. The Sarbanes-Oxley Act of 2002 and related rules and regulations of the Securities and Exchange Commission, or SEC, and the New York Stock Exchange regulate the corporate governance practices of public companies. We expect that compliance with these requirements will increase our expenses and make some activities

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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.

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

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

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

Our operating results have in the past fluctuated from quarter to quarter and we expect this trend to continue in the future. As a result, the market price of our common stock could be volatile. In the past, following periods

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of volatility in the market price of stock, many companies have been the object of securities class action litigation. If we were to be sued in a securities class action, it could result in substantial costs and a diversion of management’s attention and resources which could adversely affect our results of operations.

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

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

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

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

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

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

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

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. See “Description of Capital Stock—Nevada Anti-Takeover Laws and Certain Articles and Bylaws Provisions.”

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

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 “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, or the Reform Act. 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 within the meaning of the Reform Act and that are intended to come within the safe-harbor protection provided by the Reform Act. 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 technology circumstances that may or may not occur in the future or may occur on longer or shorter timelines than anticipated. We caution the investors that the forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity and the development of the industry or results in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this prospectus. In addition, even if our results of operations, financial condition and liquidity and the development of the industry in which we operate are consistent with the forward-looking statements contained in this prospectus, they may not be predictive of results or developments in future periods.

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

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

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

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

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

•  
  our ability to generate significant revenue from internet advertising;

•  
  our ability to maintain our well-recognized brands;

•  
  unfavorable economic and market conditions;

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

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

•  
  our ability to continue as a going concern;

•  
  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;

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

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

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

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

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

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

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

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

•  
  changes in government laws affecting our business;

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

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

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

•  
  our reliance on key personnel;

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

•  
  risks associated with currency fluctuations; and

•  
  risks associated without litigation and legal proceedings.

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 industry publications and surveys used by us to determine market share and industry data contained in this prospectus generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to their accuracy and completeness. Statements referencing “unique visitors” or “unique worldwide visitors” refers to the estimated number of unique IP addresses that visited a particular website during the period described. We have not independently verified any of the data from third-party sources, nor have we ascertained the underlying economic assumptions relied upon therein. 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 herein, our estimates involve risks and uncertainties and are subject to change based on a variety of factors, including those discussed under the heading “Risk Factors” in this prospectus.

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USE OF PROCEEDS

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

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

•  
  $242.1 million aggregate principal amount of INI Senior Secured Notes due 2011, or the First Lien Senior Secured Notes;

•  
  $80.0 million aggregate principal amount of INI Subordinated Secured Notes due 2011, or the Second Lien Subordinated Secured Notes;

•  
  $6.2 million aggregate principal amount of our 15% Senior Secured Notes due 2010, or the 2006 Notes;

•  
  $38.4 million aggregate principal amount of our 15% Senior Secured Notes due 2010, or the 2005 Notes; and

•  
  $32.2 million aggregate principal amount of our 13% Subordinated Term Loan Notes due 2011, or the Subordinated Term Loan Notes.

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

The terms of the First Lien Senior Secured Notes require us to use at least 50% of the net proceeds from this offering to redeem the First Lien Senior Secured Notes at a redemption price equal to 115% of the principal amount redeemed plus accrued and unpaid interest on the redeemed First Lien Senior Secured Notes. The First Lien Senior Secured Notes have a stated maturity date of June 30, 2011. Interest on the First Lien Senior Secured Notes accrues at a rate per annum equal to 8% plus the greater of (a) 4.5% or (b) the London Inter-Bank Offered Rate, or LIBOR, for the applicable interest period. In December 2007, our subsidiary INI issued $257.3 million in principal amount of the First Lien Senior Secured Notes, the proceeds of which were used to pay part of the purchase price in our acquisition of Various. We intend to use 50% of the net proceeds from this offering to redeem the relevant portion of outstanding principal amount of First Lien Senior Secured Notes at a redemption price equal to 115% of the outstanding principal amount plus accrued and unpaid interest through the redemption date. The balance of the notes will be redeemed at a redemption price of 105% of the principal amount redeemed plus accrued and unpaid interest.

In December 2007, INI also issued $80.0 million in principal amount of Second Lien Subordinated Secured Notes as partial payment of the purchase price of Various. The Second Lien Subordinated Secured Notes have a stated maturity date of December 6, 2011. Interest accrues on the Second Lien Subordinated Secured Notes at a rate of 15% per annum. We intend to use the net proceeds from this offering to redeem all the outstanding principal amount of Second Lien Subordinated Secured Notes at a redemption price equal to 100% of the outstanding principal amount plus accrued and unpaid interest through the redemption date.

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

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

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Our Subordinated Term Loan Notes have a stated maturity date of October 1, 2011 and accrue interest at a rate of 13% per annum. We intend to use the net proceeds from this offering to redeem all the outstanding principal amount of Subordinated Term Loan Notes at a redemption price equal to 100% of the outstanding principal amount plus accrued and unpaid interest through the redemption date. Under the terms of the intercreditor agreement, dated as of December 6, 2007, among us and our subsidiaries, the holders of the Subordinated Term Loan Notes and the holders of the Subordinated Convertible Notes, the Subordinated Term Loan Notes may not be redeemed prior to the redemption or conversion of the Subordinated Convertible Notes. The Subordinated Convertible Notes, by their terms, may not be converted prior to December 7, 2008.

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

We will have broad discretion over the manner in which the remaining additional net proceeds of the offering, if any, will be applied, and we may not use these proceeds in a manner desired by our stockholders. Although we have no present intention of doing so, future events may require us to reallocate the offering proceeds. Pending the uses described above, we intend to invest the net proceeds in short-term, interest-bearing, investment-grade securities.

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

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DIVIDEND POLICY

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

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CAPITALIZATION

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

The following table sets forth our cash, excluding restricted cash, and our consolidated capitalization as of September 30, 2008:

•  
  on an actual, historical basis;

•  
  on a pro forma basis reflecting (i) our issuance of           shares of common stock upon the conversion of the Subordinated Convertible Notes of INI (assuming maximum conversion of 17% of our fully diluted equity and based upon the midpoint of the range set forth on the front cover of this prospectus), (ii) the issuance of 204,231,016 shares of common stock upon the conversion of all of the shares of our outstanding preferred stock, (iii) the issuance of 36,796,500 shares of common stock upon the conversion of all of the outstanding shares of our Series B common stock, and (iv) the issuance of 142,733,364 shares of common stock upon the exercise of common stock warrants that will terminate if not exercised concurrently with the consummation of this initial public offering; and

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

        As of September 30, 2008
   
        Actual
    Pro Forma
    Pro Forma as
Adjusted
        (unaudited)
(dollars in thousands except share data)
   
Cash
              $ 35,355          $ 38,622          $                
Indebtedness:
                                                       
Debt issued by INI in connection with the acquisition of Various
                                                       
First Lien Senior Secured Notes, net of unamortized discount of $27,199
              $ 214,930          $ 214,930          $    
Second Lien Subordinated Secured Notes, net of unamortized discount of $5,451
                 74,549             74,549                   
Subordinated Convertible Notes, net of unamortized discount of $22,006
                 89,526                                
Other, net of unamortized discount of $953
                 4,047             4,047                   
2005 Notes and 2006 Notes, net of unamortized discount of $2,192
                 42,338             42,338                   
Subordinated Term Loan Notes
                 32,242             32,242                  
Total Indebtedness
                 457,632             368,106                  
 

35




        As of September 30, 2008
   
        Actual
    Pro Forma
    Pro Forma as
Adjusted
        (unaudited)
(dollars in thousands except share data)
   
Stockholders’ deficiency:
                                                       
Preferred stock, $0.01 par value, 250,000,000 shares authorized and 450,000,000 authorized pro forma and pro forma as adjusted
                                                       
Series A Convertible Preferred Stock, 50,000,000 shares authorized, 35,334,011 shares issued and outstanding, actual, no shares issued and outstanding pro forma and pro forma as adjusted
                 353                                 
Series B Convertible Preferred Stock, 200,000,000 shares authorized; and 168,897,005 shares issued and outstanding, actual, no shares outstanding pro forma and pro forma as adjusted
                 1,689                                
Common stock, $0.01 par value, 1,250,000,000 shares authorized
                                                       
Common stock voting, 1,000,000,000 shares authorized; 104,956,481 shares issued and outstanding, actual,          , pro forma, and           pro forma as adjusted
                 1,050                                
Series B non-voting common stock, 250,000,000 shares authorized; and 36,796,500 shares issued and outstanding, actual, no shares issued and outstanding pro forma and pro forma as adjusted
                 368                                 
Capital in excess of par
                 83,122             172,927                   
Accumulated deficit
                 (131,043 )            (131,043 )                 
Total stockholders’ (deficiency) equity
                 (44,461 )                              
Total capitalization
              $ 413,171          $           $                
 

36




DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share and the net tangible book value per share of the common stock after this offering. Our net tangible book value as of September 30, 2008 after giving effect to: (i) our issuance of           shares of common stock upon the conversion of the Subordinated Convertible Notes of INI (assuming maximum conversion of 17% of our fully diluted equity and based upon the midpoint of the range set forth on the cover of this prospectus), (ii) the issuance of 204,231,016 shares of common stock upon the conversion of all of the shares of our outstanding preferred stock, (iii) the issuance of 36,796,500 shares of common stock upon the conversion of all of the outstanding shares of our Series B common stock, and (iv) the issuance of 142,733,364 shares of common stock upon the exercise of common stock warrants that will terminate if not exercised concurrently with the consummation of the initial public offering, would have been $            , or $            per share of common stock based on              shares outstanding before this offering. Net tangible book value per share represents the amount of the total tangible assets less total liabilities, divided by the number of shares of common stock that are outstanding.

After giving effect to the sale by us of              shares of common stock at an assumed initial public offering price of $            per share, the midpoint of the range on the front cover of this prospectus and after deducting the estimated underwriting discounts and commissions and offering expenses, the adjusted net tangible book value as of September 30, 2008 would have been $            million, or $            per share. This represents an immediate increase in net tangible book value of $            per share to existing stockholders and an immediate and substantial dilution in net tangible book value of $            per share to investors purchasing common stock in this offering. The following table illustrates this per share dilution:

Assumed initial offering price per share to the public
                             $                    
Net historical tangible book value as of September 30, 2008 after conversions
                                      
Increase attributable to new public investors
                                       
As adjusted net tangible book value per share after this offering
                                     
Dilution in adjusted net tangible book value per share to
new investors
                             $            
 

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

37




The following table summarizes on an as adjusted basis as of September 30, 2008 the difference between the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by existing stockholders and to be paid by new investors in this offering at an assumed initial public offering price of $            per share, calculated before deduction of estimated underwriting discounts and commissions.

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

38




UNAUDITED PRO FORMA FINANCIAL DATA

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

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

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

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

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

39




Notes to the Unaudited Pro Forma Consolidated Statement of Operations

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

(2)
  Includes net revenue that Various would have recognized for the period from December 7, 2007 through December 31, 2007 absent the acquisition by eliminating the non-recurring adjustment to reduce deferred revenue of Various to fair value at the date of acquisition.

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

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

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

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

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

40




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

        First
Lien
Senior
Secured
Notes
    Second
Lien
Subordinated
Secured
Notes
    Subordinated
Convertible
Notes
    Other
Note
    Total
        (in thousands, except for percentage data)    
Principal
              $ 257,338          $ 80,000          $ 105,720             5,000          $ 48,058   
Stated interest rate
                 13 %(a)            15 %            6 %            %                  
Annual interest, exclusive of discount amortization
                 33,763             12,000             6,343                          52,106   
Amortization of discount
                 8,141             1,472             4,644             540              14,797   
Amortization of deferred financing fees
                                                                             561    
Total annual interest including amortization of deferred financing fees
                                                                             67,464   
Less amounts recorded from the period
December 7, 2007 to December 31, 2007:
                                                                                       
Interest expense
                 2,438             867              440                           3,745   
Amortization of discount
                 541              136              304              37              1,018   
Amortization of deferred financing fees
                                                                             38    
Total
                                                                             4,801   
Additional amount to be recognized
                                                                          $ 62,663   
 


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

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

(9)
  The pro forma basic and diluted net loss per share is based on the weighted average number of shares of our common stock outstanding including shares underlying common stock purchase warrants (including warrants issued in connection with the financing of the Various acquisition), which are exercisable at the nominal price of $0.00001 per share, as follows:

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

41




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 income data for the years ended December 31, 2007, 2006 and 2005 as well as the balance sheet data as of December 31, 2007 and 2006 are derived from our audited consolidated financial statements also included as part of this prospectus. In their report dated December 22, 2008, which is also included in this prospectus, our independent registered public accounting firm stated that events of default have occurred under certain of our debt agreements allowing noteholders to demand payment of our 2005 Notes and 2006 Notes, and our subsidiary’s First Lien Senior Secured Notes, Second Lien Subordinated Secured Notes and Subordinated Convertible Notes and that these conditions raise substantial doubt about our ability to continue as a going concern. The balance sheet data for the year ended December 31, 2005 is derived from our audited consolidated financial statements which are not contained in this prospectus. The audited consolidated financial statements are prepared in accordance with U.S. GAAP and have been audited by Eisner LLP, an independent registered public accounting firm.

The selected consolidated statements of operations data for the year ended December 31, 2004 reflects our audited results from inception on October 5, 2004 (from Chapter 11 reorganization) to December 31, 2004 and were derived from audited financial statements not included in this prospectus. The consolidated statements of operations data for the nine month period from January 1, 2004 to September 30, 2004 is prior to our inception and represents the unaudited results of our predecessor company (General Media, Inc. and Subsidiaries), which are derived from consolidated financial statements not included in this prospectus. The selected consolidated balance sheet data as of December 31, 2004 is derived from our audited consolidated financial statements not included in this prospectus. The consolidated statements of operations data for the year ended December 31, 2003 and the selected consolidated balance sheet data as of December 31, 2003 are derived from unaudited consolidated financial statements of our predecessor company (General Media, Inc. and its subsidiaries) and are not included in this prospectus.

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

42




        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,
   
 
     
        2008(2)
    2007
    2007(2)
    2006
    2005
    From
Inception
(October 5,
2004)
to
December 31,
2004
      January 1,
2004
to
September 30,
2004
    Year Ended
December 31,

2003
        (unaudited)                       (unaudited)     (unaudited)    
                (in thousands, except per share data)          
Statements of Operations and Per Share Data:
                                                                                                        
Net revenue
              $ 243,887          $ 26,669          $ 48,073          $ 29,965          $ 31,040          $ 8,992            $ 27,278          $ 38,867   
Cost of net revenue
                 73,285             12,799             23,330             15,927             14,336             3,904               11,662             14,727   
Gross profit
                 170,602             13,870             24,743             14,038             16,704             5,088               15,616             24,140   
Operating expenses
                                                                                                                                  
Product development
                 10,120                          1,002                                                                      
Selling and marketing
                 46,045             3,335             7,595             1,430             1,552             117                383              347    
General and administrative.
                 66,344             14,495             24,466             24,354             24,108             4,179               12,840             17,728   
Depreciation & amortization
                 30,492             2,508             5,091             3,322             3,062             684                142              1,379   
Impairment of goodwill
                                           925              22,824                                                         
Impairment of other intangible assets
                                           5,131                                                      —-              1,092   
Total operating expenses
                 153,001             20,338             44,210             51,930             28,722             4,980               13,365             20,546   
Operating income (loss)
                 17,601             (6,468 )            (19,467 )            (37,892 )            (12,018 )            108                2,251             3,594   
Interest and other expense, net
                 59,920             8,356             16,880             12,049             4,854             2,079               10,384             9,989   
Loss before income tax benefit
                 (42,319 )            (14,824 )            (36,347 )            (49,941 )            (16,872 )            (1,971 )              (8,133 )            (6,395 )  
Income tax benefit (expense)
                 9,977             —-              6,430                                                      (18 )            808    
Loss before cumulative effect of change in accounting principle
                 (32,342 )            (14,824 )            (29,917 )            (49,941 )            (16,872 )            (1,971 )              (8,151 )            (5,587 )  
Cumulative effect of change in accounting principle
                                                                                                              379    
Net loss
              $ (32,342 )         $ (14,824 )         $ (29,917 )         $ (49,941 )         $ (16,872 )         $ (1,971 )           $ (8,151 )         $ (5,208 )  
Net loss per common share — basic and diluted(3)
              $ (0.12 )         $ (0.12 )         $ (0.23 )         $ (0.45 )         $ (0.16 )         $ (0.02 )           $ (17.09 )         $ (10.96 )  
Weighted average common shares outstanding
— basic and diluted(3)
                 274,706             121,714             132,193             111,088             105,013             100,000               477              475    
 

43




        FriendFinder Networks Inc. (formerly known as Penthouse Media Group Inc.)
Consolidated Data(1)
    General
Media Inc.
(Predecessor
Company)

   
        As of September 30,
    As of December 31,
      As of
December 31,
 
   
        2008(2)
    2007
    2007(2)
    2006
    2005
    2004
      2003
        (unaudited)                       (unaudited)    
        (in thousands)      
Consolidated Balance Sheet Data (at period end):
                                                                                                                   
Cash, restricted cash and equivalents
              $ 43,259          $ 249           $ 23,722          $ 2,998          $ 12,443          $ 1,073            $ 1,154   
Total Assets
                 646,598             66,485             649,868             70,770             99,685             88,741               13,690   
Long-term debt classified as current due to events of default, net of unamortized discount(4)
                 411,019                          417,310                                                         
Long-term debt
                 35,379             67,252             35,379             63,166             54,126             44,874               39,897   
Deferred revenue
                 48,393             5,255             27,214             6,974             5,535             5,923               6,385   
Total Liabilities
                 691,059             98,601             661,987             91,516             80,523             72,872               84,013   
Convertible preferred stock
                 2,042             353              2,042             353              252                             12,869   
Accumulated deficit
                 (131,043 )            (83,608 )            (98,701 )            (68,784 )            (18,843 )            (1,971 )              (70,328 )  
Total stockholders’ equity (deficiency)
                 (44,461 )            (32,116 )            (12,119 )            (20,746 )            19,162             15,869               (70,323 )  
 
        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,
   
 
     
        2008(2)
    2007
    2007(2)
    2006
    2005
    From
Inception
(October 5,
2004)
to
December 31,
2004
      January 1,
2004
to
September 30,

2004
    Year Ended
December 31,
2003

        (unaudited)                       (unaudited)     (unaudited)    
        (in thousands)          
Other Data
                                                                                                                                  
Net cash provided by (used in) operating activities
              $ 51,297          $ (3,626 )         $ 4,744          $ (16,600 )         $ (9,866 )         $ (3,096 )           $ 1,233          $ (2,042 )  
Net cash (used in) provided by investing activities
                 (8,113 )            (2,577 )            (149,322 )            (3,414 )            (4,393 )            (753 )              312                 
Net cash provided by (used in) financing activities
                 (15,210 )            3,454             148,961             10,569             25,629             2,986               (750 )            2,990   
 


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

(2)
  Net revenue for the nine months ended September 30, 2008 and the year ended December 31, 2007 does not reflect $18.5 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.

(3)
  Basic and diluted loss per share is based on the weighted average number of shares of common stock outstanding and Series B common stock including shares underlying common stock purchase warrants which are exerciseable at the nominal price of $0.00001 per share. For information regarding the computation of per share amounts, refer to Note B.24 of our December 31, 2007 consolidated financial statements included elsewhere in this prospectus.

(4)
  Excludes $10,324 at September 30, 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.

44




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

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

Overview

We are a leading internet-based social networking and multimedia entertainment company operating several of the most heavily visited social networking websites in the world. Through our extensive network of websites, since our inception, we have built a base of over 270 million members in approximately 170 countries offering a wide variety of online services so that our members can interact with each other and access the content available on our websites. Our websites are intended to appeal to members of diverse cultures and interest groups and include social networking, live interactive video and premium content websites. Our most heavily visited social networking and entertainment websites include AdultFriendFinder.com, Amigos.com, AsiaFriendFinder.com, Cams.com, FriendFinder.com, BigChurch.com and SeniorFriendFinder.com. Our revenue to date has been primarily derived from subscription and paid-usage adult-oriented products and services. In addition to our online products and services, we also produce and distribute original pictorial and video content, license the globally-recognized Penthouse brand to a variety of consumer product companies and entertainment venues and publish branded men’s lifestyle magazines.

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

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

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

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

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

45




Our History

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

On October 5, 2004, GMI emerged from Chapter 11 protection with all new equity distributed solely to the holders of the GMI secured notes. The reorganized capital structure also included approximately $32.5 million of Subordinated 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 one of our stockholders.

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 $7.5 million of our Subordinated Term Loan Notes, to fund the purchase of certain trademark assets and for general corporate purposes.

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

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

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

Key Factors Affecting Our Results of Operations

Net Revenue

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

The level of our net revenue depends to a large degree on the growth of internet users, increased internet usage per user and demand for adult content. Our net revenue also depends on demand for online advertising, credit card availability and other payment methods in countries in which we have members, general economic conditions, and government regulation. Online advertising may be affected by corporate spending due to the conditions of the overall economy. 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.

Internet Revenue

As a result of the acquisition of Various, approximately 92% of our net revenue for the nine months ended September 30, 2008 was generated from our internet segment comprised of social networking, live interactive video and premium content websites. We derive our revenue primarily from subscription fees and pay-by-usage fees.

46





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 are 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, 2008, and the years ended December 31, 2007 and 2006, these credits and chargebacks have held steady at slightly under 4% of gross revenue, while chargebacks alone have been less than 1% of gross revenue.

In addition, our net revenue was reduced for the nine months ended September 30, 2008 in the amount of $18.5 million due to a purchase accounting adjustment that required deferred revenue at the date of acquisition to be recorded at fair value to reflect a normal profit margin for the sales effort after the acquisition (in effect a reduction to deferred revenue reflected in the historical financial statements of Various to eliminate any profit related to selling or other efforts prior to the acquisition date). This reduction did not impact the service to be provided to our online subscribers or the cash collected by us associated with these subscriptions. Future revenue will not be impacted by this non-recurring adjustment.

Various’ net revenue grew from $130.1 million in 2004 to $310.0 million in 2007, which approximates an annual compounded growth rate of 33.6% (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 nine months ended September 30, 2008 our social networking business has been growing at a faster rate.

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 member base. However, our revenue growth rate has declined over the past year and may continue to do so as a result of increased penetration of our services over time and as a result of increased competition.

Entertainment Revenue

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

Cost of Net Revenue

Cost of net 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 net 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 net 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.

47




Product Development

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

Selling and Marketing

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

General and Administrative

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

Depreciation and Amortization

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

In addition, as a result of purchase accounting rules, fair values were established for intangibles and internal-use software. The new total value of these intangibles and internal-use software was $182.5 million. We must reflect the depreciation and amortization of the value of these intangibles and internal-use software in the statement of operations for periods beginning on December 7, 2007. The amortization periods vary from two to seven years with the weighted average amortization period equaling approximately five years. Approximately $27.3 million of the depreciation and amortization for the nine months ended September 30, 2008 was as a result of the amortization of these intangibles.

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 the 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.

48




Income Taxes

At December 31, 2007, we had net operating loss carryforwards for federal income tax purposes of approximately $95.9 million available to offset future taxable income, which expire at various dates from 2024 through 2027. Our ability to utilize approximately $15.9 million of these carryforwards related to the periods prior to our exit from Chapter 11 reorganization proceedings is limited due to changes in our ownership, as defined by federal tax regulations. Realization of the deferred tax assets is dependent on the existence of sufficient taxable income within the carryforward period, including future reversals of taxable temporary differences.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect both the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and judgments are subject to an inherent degree of uncertainty. Our significant accounting policies are more fully described in Note B to our 2007 consolidated financial statements, included elsewhere in this prospectus. However, certain of our accounting policies are particularly important to the portrayal of our financial position and results of operations. In applying these critical accounting policies, our management uses its judgment in making certain assumptions to be used in making such estimates. Those estimates are based on our historical experience, the terms of existing contracts, our observation of trends in our industry and information available from other outside sources as appropriate. Accounting policies that, in their application to our business, involve the greatest amount of subjectivity by way of management judgments and estimates are those relating to:

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

•  
  legal contingencies.

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

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

•  
  a significant decline in actual projected revenue;

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

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

•  
  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.

49




In 2007, a trademark impairment loss of approximately $5.2 million was recognized, of which approximately $3.7 million was related to licensing intangibles and $1.5 million was related to publishing intangibles. Such loss, which is included in impairment of intangible assets in the 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 $0.9 million and $22.8 million in 2007 and 2006, respectively. 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 the entertainment segment.

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 actual cost incurred to service the liability in the future, plus a reasonable margin.

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

Legal Contingencies

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

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,
   
        2008
    2007
    2007
    2006
    2005
        (unaudited)        
        (in thousands)    
Net revenue
                                                                                       
Internet
              $ 225,218          $ 6,918          $ 20,961          $ 6,623          $ 5,046   
Entertainment
                 18,669             19,751             27,112             23,342             25,994   
Total
                 243,887             26,669             48,073             29,965             31,040   

50




        Nine Months Ended
September 30,
    Year Ended December 31,
   
        2008
    2007
    2007
    2006
    2005
        (unaudited)        
        (in thousands)    
Cost of net revenue
                                                                                       
Internet
                 62,103             2,300             8,479             1,398             140    
Entertainment
                 11,182             10,499             14,851             14,529             14,196   
Total
                 73,285             12,799             23,330             15,927             14,336   
 
Gross profit
                                                                                       
Internet
                 163,115             4,618             12,482             5,225             4,906   
Entertainment
                 7,487             9,252             12,261             8,813             11,798   
Total
                 170,602             13,870             24,743             14,038             16,704   
 
Income (Loss) from operations
                                                                                       
Internet
                 26,819             3,148             (964 )            4,088             3,156   
Entertainment
                 (313 )            (1,244 )            (7,811 )            (28,043 )            884    
Unallocated corporate
                 (8,905 )            (8,372 )            (10,692 )            (13,937 )            (16,058 )  
Total
              $ 17,601          $ (6,468 )         $ (19,467 )         $ (37,892 )         $ (12,018 )  
 

Results of Operations

Segments and Periods Presented

Prior to December 2007, we operated in four segments. As a result of our acquisition of Various and based on a review of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, we have determined that we now operate in two segments, internet and entertainment and we have revised prior financial results to reflect these two segments.

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

•  
  our consolidated results of operations for the nine months ended September 30, 2008 (which include the results of operations of Various) compared to the nine months ended September 30, 2007 (which exclude the results of operations of Various);

•  
  our consolidated results of operations for the year ended December 31, 2007 (which include 25 days of the results of operations of Various) compared to the year ended December 31, 2006 and the year ended December 31, 2006 compared to the year ended December 31, 2005 (which for the years 2006 and 2005 do not include the results of operations of Various); and

•  
  Various results of operations for the fiscal period January 1, 2007 through December 6, 2007 compared to the year ended December 31, 2006 and the year ended December 31, 2006 compared to the year ended December 31, 2005.

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

        Nine Months Ended
September 30,
    Year Ended December 31,
   
        2008
    2007
    2007
    2006
    2005
Net revenue
                 100 %            100 %            100 %            100 %            100 %  
Cost of net revenue
                 30              48              48              53              46    
Gross profit
                 70              52              52              47              54    
 
Operating expenses:
                                                                                       
Product development
                 4                           2                              
Selling and marketing
                 19              13              16              5              5    
General and administrative
                 27              54              51              81              78    
Depreciation and amortization
                 13              9              11              11              10    
Impairment of intangible assets
                                           11                              
Impairment of goodwill
                                               2              76                 
Total operating expenses
                 63              76              93              173              93    
Income (loss) from operations
                 7              (24 )            (41 )            (126 )            (39 )  
 
Interest expense, net of interest income
                 (24 )            (28 )            (33 )            (27 )            (19 )  
Loss on modification of debt
                                                        (13 )               
Other (expense) income, net
                              (3 )            (2 )            (1 )            3    
Loss before income taxes
                 (17 )            (55 )            (76 )            (167 )            (55 )  
 
Income tax benefit
                 4                           14                              
 
Net loss
                 (13 )%            (55 )%            (62 )%            (167 )%            (55 )%  
 

FriendFinder Networks Inc. and Subsidiaries

Nine Months Ended September 30, 2008 as Compared to the Nine Months Ended September 30, 2007

Net Revenue.   Net revenue for the nine months ended September 30, 2008 and 2007 was $243.9 million and $26.7 million, respectively, representing an increase of $217.2 million or 813.5%. Internet revenue increased $218.3 million or 3,156.1% over the same period. The primary increase in internet revenue resulted from the recognition of net internet revenue in the amount of $219.3 million relating to the acquisition of Various in December 2007. Entertainment revenue decreased $1.1 million or 3.5% over the same period. This decrease can be primarily attributed to a decline in publication revenue of $1.6 million as a result of a decline in the number of magazines sold from 2.5 million to 2.2 million, offset by a $1.0 million increase resulting from entering into new video contracts.

Cost of Net Revenue.   Cost of net revenue for the nine months ended September 30, 2008 and 2007 was $73.3 million and $12.8 million, respectively, representing an increase of $60.5 million or 472.7%. The primary reason for the increase in cost of net revenue was the recognition of net revenue costs in the amount of $60.6 million relating to the acquisition of Various.

Product Development.   Product development expense for the nine months ended September 30, 2008 was $10.1 million. There was no product development expense for the nine months ended September 30, 2007. The increase in product development expense was primarily due to the recognition of product development costs in the amount of $10.1 million relating to the acquisition of Various.

Selling and Marketing.   Selling and marketing expense for the nine months ended September 30, 2008 and 2007 was $46.0 million and $3.3 million, respectively, representing an increase of $42.7 million or 1,294.0%. The increase in selling and marketing expense resulted primarily from the recognition of $44.9 million of selling and marketing expense relating to the acquisition of Various, offset by a Super Bowl party held for promotional purposes in 2007, which cost $1.7 million, that did not recur in 2008.

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General and Administrative.   General and administrative expense for the nine months ended September 30, 2008 and 2007 was $66.3 million and $14.5 million, respectively, representing an increase of $51.8 million or 357.2%. The increase in general and administrative expense was primarily due to the recognition of general and administrative expense in the amount of $50.6 million relating to the acquisition of Various. In addition, legal and professional fees related to the Various acquisition increased $1.2 million, offset by a decrease of $0.9 million in salaries and wages because of decreased headcount.

Depreciation and Amortization.   Depreciation and amortization for the nine months ended September 30, 2008 and 2007 was $30.5 million and $2.5 million, respectively, representing an increase of $28.0 million or 1,120.0%. The increase in depreciation and amortization costs primarily resulted from the recognition of depreciation and amortization costs in the amount of $30.1 million related to the acquisition of Various.

Interest Expense.   Interest expense, net of interest income for the nine months ended September 30, 2008 and 2007 was $60.0 million and $7.6 million, respectively, representing an increase of $52.4 million or 689.5%. The increase in interest expense was primarily due to additional interest expense recognized in the amount of $51.2 million relating to the debt incurred in connection with the acquisition of Various and an increase in interest expense of $0.8 million and $0.4 million related to our debt incurred prior to the acquisition, respectively.

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

Interest and penalties related to VAT for the nine months ended September 30, 2008 and 2007 were $4.9 million and $0.5 million, respectively, representing an increase of $4.4 million or 880.0%. We started collecting and remitting VAT effective July 1, 2008.

Foreign Exchange Gain/(Loss).   Foreign exchange gain/(loss) for the nine months ended September 30, 2008 and 2007 was $5.2 million and $(0.2) million, respectively, representing a change of $5.4 million. The gain for the nine months ended September 30, 2008 primarily represented the decrease in the U.S. dollar amount of the VAT liability assumed from Various which was denominated in Euros and British pounds due to the strengthening of the U.S. dollar against these currencies.

Income Tax Benefit.   Income tax benefit for the nine months ended September 30, 2008 was $10.0 million. There was no income tax benefit for the nine months ended September 30, 2007. The tax benefit for 2008 is based on the estimated annual effective tax rate for the year ended December 31, 2008 applied to the pretax loss for the nine months ended September 30, 2008. No tax benefits related to losses incurred by us during 2007 prior to the acquisition of Various were recognized in operations due to the recording of a valuation allowance recorded against deferred tax assets resulting from pretax losses.

Net Loss.   Net loss for the nine months ended September 30, 2008 and 2007 was $32.3 million and $14.8 million, respectively, representing an increase of $17.5 million or 118.2%. The larger net loss in 2008 is primarily attributable to the increase in the interest expense resulting from the debt incurred in connection with the acquisition of Various and the increase in depreciation and amortization expense from purchase accounting related to the acquisition.

Year Ended December 31, 2007 as Compared to the Year Ended December 31, 2006

Net Revenue.   Net revenue for the year ended December 31, 2007 and 2006 was $48.1 million and $30.0 million, respectively, representing an increase of $18.1 million or 60.3%. Internet revenue increased $14.3 million or 216.5% over the prior year. The primary increase in internet revenue resulted from the recognition in 2007 of net internet revenue in the amount of $12.0 million relating to the acquisition of Various in December 2007 and $3.0 million attributable to the acquisition of Danni.com in October 2006. Entertainment revenue increased $3.8 million or 16.2% over the prior year. This increase was primarily due to new video and mobile content distribution contracts and magazine licensing, mainly as the result of adding new international magazine licensees. The increase in entertainment revenue was partially offset by a decrease in subscription revenue of $0.4 million as a result of a decrease in the number of subscribers.

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The purchase accounting valuation in connection with the acquisition of Various resulted in a $27.6 million reduction in our deferred revenue liability assumed from Various on our December 7, 2007 balance sheet. Approximately $8.5 million, or 30.8%, of this reduction was recognized for the period December 7, 2007 through December 31, 2007.

Cost of Net Revenue.   Cost of net revenue for the year ended December 31, 2007 and 2006 was $23.3 million and $15.9 million, respectively, representing an increase of $7.4 million or 46.5%. The primary reason for the increase in cost of net revenue was the recognition of net revenue costs in the amount of $5.5 million relating to the acquisition of Various in December 2007 and $1.3 million relating to the Danni.com acquisition in October 2006.

Product Development.   Product development expense for the year ended December 31, 2007 was $1.0 million. There was no product development expense for the year ended December 31, 2006. The product development expense in 2007 resulted primarily from the recognition of product development costs in the amount of $1.0 million relating to the acquisition of Various.

Selling and Marketing.   Selling and marketing expense for the year ended December 31, 2007 and 2006 was $7.6 million and $1.4 million, respectively, representing an increase of $6.2 million or 442.9%. The increase in selling and marketing expense resulted primarily from the recognition $4.0 million of selling and marketing expense relating to the acquisition of Various in addition to a Super Bowl party held for promotional purposes in 2007, which cost $1.7 million.

General and Administrative.   General and administrative expense for the year ended December 31, 2007 and 2006 was $24.5 million and $24.4 million, respectively, representing an increase of $0.1 million or 0.0%. The increase in general and administrative expense was primarily due to a decrease of $2.4 million in salaries and travel expenses for corporate administrative personnel and a $1.6 million decrease in direct mail costs. This decrease was primarily offset by the recognition of general and administrative expense in the amount of $3.7 million relating to the acquisition of Various.

Depreciation and Amortization.   Depreciation and amortization for the year ended December 31, 2007 and 2006 was $5.1 million and $3.3 million, respectively, representing an increase of $1.8 million or 54.5%. The increase in depreciation and amortization costs primarily resulted from the recognition of depreciation and amortization costs in the amount of $2.5 million related to the acquisition of Various.

In addition, as a result of purchase accounting, new values were established for intangibles and internal-use software. The new total value of these intangibles and internal-use software was $182.5 million. We began reflecting the amortization and depreciation of the value of these intangibles and internal-use software in the statement of operations for periods beginning on December 7, 2007. The amortization periods vary from two to five years. Approximately $2.3 million of the depreciation and amortization expense for the period December 7, 2007, through December 31, 2007 was a result of the amortization of these intangibles and internal-use software.

Impairment of Intangible Assets.   Impairment of intangible assets for the year ended December 31, 2007 was $5.1 million . There was no impairment of intangible assets for the year ended December 31, 2006. In 2007, a trademark impairment loss of approximately $5.1 million was recognized, of which approximately $3.7 million was related to licensing intangibles and $1.4 million was related to publishing intangibles. The loss resulted due to the estimated fair value of the trademarks being less than their carrying value.

Impairment of Goodwill.   Impairment of goodwill for the year ended December 31, 2007 and 2006 was $0.9 million and $22.8 million, respectively, representing a decrease of $21.9 million or 96.1%. 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.

Interest Expense.   Interest expense, net of interest income, for the year ended December 31, 2007 and 2006 was $16.0 million and $7.9 million, respectively, representing an increase of $8.1 million or 102.5%. The increase in interest expense resulted primarily from additional interest expense recognized in the amount of $4.8 million relating to the debt incurred in connection with the acquisition of Various and an increase in interest expense of $2.7 million and $0.5 million related to our outstanding indebtedness incurred prior to the acquisition, respectively.

Interest and Penalties Related to VAT.   A provision and related liability have been recorded for interest and penalties related to the unremitted VAT discussed above and the failure to file tax returns based on the applicable law of each country in the European Union.

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Interest and penalties related to VAT for the year ended December 31, 2007 was $1.6 million. There was no interest and penalties related to VAT for the year ended December 31, 2006. We started collecting VAT in connection with the acquisition of Various and for existing internet operations in the relevant E.U. jurisdictions effective July 1, 2008 and assumed the liability for VAT owed by Various at the date of acquisition.

Loss on Modification of Debt.   Loss on modification of debt for the year ended December 31, 2006 was $3.8 million. There was no loss on modification of debt for the year ended December 31, 2007. Debt modifications during the year ended December 31, 2006 were treated as an extinguishment of debt and the creation of new debt. This resulted in a loss attributable to the expensing of unamortized debt discount, new debt issuance costs, and an increase in value of modified warrants due to an increase in the purchase price per share of the warrants. See “Description of Capital Stock—Warrants.”

Foreign Exchange Gain.   Foreign exchange gain for the year ended December 31, 2007 was $0.5 million. There was no foreign exchange loss or gain for the year ended December 31, 2006. The foreign exchange gain in 2007 primarily represented the decrease from the date of acquisition to December 31, 2007 in the U.S. dollar amount of the VAT liability assumed from Various which was denominated in Euros and British pounds due to the strengthening of the U.S. dollar against such currencies from the acquisition date through December 31, 2007.

Income Tax Benefit.   Income tax benefit for the year ended December 31, 2007 was $6.4 million. There was no income tax benefit for the year ended December 31, 2006. The tax benefit in 2007 related to the pretax loss incurred by us subsequent to the acquisition of Various. Tax benefits related to losses incurred by us during 2007 prior to the acquisition of Various was accounted for as a reduction to goodwill arising in connection with the acquisition. No tax benefit was recognized for the loss incurred in 2006 as it resulted in a net operating loss carryforward for which a valuation allowance was recorded against a related deferred tax asset.

Net Loss.   Net loss for the year ended December 31, 2007 and 2006 was $29.9 million and $49.9 million, respectively, representing a decrease of $20.0 million or 40.1%. This larger loss in 2006 was primarily attributable to the net loss resulting from the recognition of $22.8 million in goodwill impairment charges that year.

Year Ended December 31, 2006 as Compared to the Year Ended December 31, 2005

Net Revenue.   Net revenue for the year ended December 31, 2006 and 2005 was $30.0 million and $31.0 million, respectively, representing a decrease of $1.0 million or 3.2%. This decrease was principally due to a decline in entertainment revenue as a result of a decrease in newsstand readership revenue of 20% from $15.6 million in 2005 to $12.5 million in 2006 primarily attributable to the decline of the publishing industry in general and also in part to the loss of readers who may have preferred the old format of our magazine and prior to attracting new readers who were not yet aware of our magazine’s new content and style. This decline was partially offset by the signing of new video and mobile content distribution contracts. Internet revenue increased $1.6 million or 32.0% from $5.0 million in 2005 to $6.6 million in 2006 as a result of increased membership due to enhancements of our websites’ content and the acquisition of Danni.com in October 2006.

Cost of Net Revenue.   Cost of net revenue for the year ended December 31, 2006 and 2005 was $15.9 million and $14.3 million, respectively, representing an increase of $1.6 million or 11.2%. This increase was primarily a result of increased internet costs related to the acquisition of Danni.com by $1.3 million or 1,300.0%, to $1.4 million for the year ended December 31, 2006, as compared to $0.1 million for the year ended December 31, 2005.

Total entertainment costs for the year ended December 31, 2006 and 2005 were $14.5 million and $14.2 million, respectively, representing an increase of $0.3 million, or 2.1%. This increase was primarily due to the commencement in 2006 of the amortization of video production costs which resulted in a $0.7 million increase in cost of net revenue, offset partially by reduced publishing costs of $0.3 million due to a decline in paper and printing, editorial and art costs.

Selling and Marketing.   Selling and marketing expense for the year ended December 31, 2006 and 2005 was $1.4 million and $1.6 million, respectively, representing a decrease of $0.2 million or 12.5%. The decrease was primarily due to expenditures in 2005 not incurred in 2006 for promotion on a national radio show and a reduction in travel related to promotional expenses in 2006.

General and Administrative.   General and administrative expense for the year ended December 31, 2006 and 2005 was $24.4 million and $24.1 million, respectively, representing an increase of $0.3 million or 1.2%. This

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increase was primarily due to a $0.7 million loss in 2006 as a result of abandonment of a lease and the resulting expenses related to the write-off of leasehold improvements, the loss of our security deposit and accrued rent. We did not incur any similar costs for the year ended December 31, 2005.

Depreciation and Amortization.   Depreciation and amortization for the year ended December 31, 2006 and 2005 were $3.3 million and $3.1 million, respectively, representing an increase of $0.2 million or 6.5%. The increase in depreciation and amortization costs primarily resulted from additional property and equipment which was purchased in the year ending December 31, 2006.

Impairment of Intangible Assets.   We did not record any impairment of intangible assets in connection with our annual assessment for the years ended December 31, 2006 and 2005.

Impairment of Goodwill.   Impairment of goodwill for the year ended December 31, 2006 was $22.8 million. We did not record any impairment of goodwill for the year ended December 31, 2005. Our goodwill impairment loss of $22.8 million for the year ended December 31, 2006 was 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.

Interest Expense, Net of Interest Income.   Interest expense, net of interest income, for the year ended December 31, 2006 and 2005 was $7.9 million and $5.8 million, respectively, representing an increase of $2.1 million or 36.2%. The increase resulted from interest expense related to the issuance of our 2006 Notes as well as an increase in the interest rate payable on our 2005 Notes.

Loss on Modification of Debt.   Loss on modification of debt for the year ended December 31, 2006 was $3.8 million. In 2006, debt modifications were treated as an extinguishment of debt and the creation of new debt. This resulted in a loss attributable to the expensing of unamortized debt discount, new debt issuance costs and an increase in the value of modified warrants. There were no debt modifications for the year ended December 31, 2005.

Other (Expense) Income.   Other (expense) income for the year ended December 31, 2006 and 2005 was expenses in the amount of $(0.3) million and income of $1.0 million, respectively, representing a change of $1.3 million. The change was primarily attributable to losses on art sales during the year ended December 31, 2006 compared to gains on art sales and the favorable settlement of a video contract dispute during the year ended December 31, 2005.

Net Loss.   Net loss for the year ended December 31, 2006 and 2005 was $49.9 million and $16.9 million, respectively, representing an increased loss of $33.0 million or 195.3%. This loss was primarily attributable to the goodwill impairment in the amount of $22.8 million discussed above.

Various, Inc. and Subsidiaries

Fiscal Period January 1, 2007 though December 6, 2007 as Compared to the Year Ended
December 31, 2006

Net Revenue.   Net revenue in the 2007 period and the year ended December 31, 2006 was $289.5 million and $289.7 million, respectively, representing a $0.2 million or 0.1% decrease. The decrease was due to the shorter period in 2007 compared to the year ended December 31, 2006 as a result of Various being acquired on December 6, 2007.

Both Various’ social networking and live interactive video revenue have grown on an annualized basis (after giving effect to the 25-day loss of post-acquisition net revenue that Various would have recognized absent the acquisition), with live interactive video revenue growing at a faster rate. Net revenue for Various social networking websites decreased 2.5% to $231.0 million in the 2007 period from $237.0 million for the year ended December 31, 2006 due to the shorter period in 2007 as compared to 2006. Live interactive video revenue increased 11.0% to $58.5 million in the 2007 period from $52.7 million for the year ended December 31, 2006. The increase in revenue was primarily attributable to benefits realized from the continued investment in certain webcam technology enhancements, marketing campaigns and Various’ affiliate commission programs.

Cost of Net Revenue.   The cost of net revenue in the 2007 period and the year ended December 31, 2006 was $75.6 million and $76.1 million, respectively, representing a $0.5 million or 0.7% decrease. As a percentage of

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net revenue, cost of net revenue decreased in the 2007 period to 26.1% from 26.3% for the year ended December 31, 2006. This decrease was primarily attributable to the decline in the cost of studios associated with live interactive video services as a result of a change in the compensation structure for models and studios.

Product Development.   Product development expense in the 2007 period and the year ended December 31, 2006 was $10.3 million and $10.7 million, respectively, representing a decrease of $0.4 million or 3.7%. As a percentage of net revenue, product development expense decreased in the 2007 period to 3.6% from 3.7% of net revenue for the year ended December 31, 2006. This decline was primarily due to the shorter period in 2007 compared to 2006.

Selling and Marketing.   Selling and marketing expense in the 2007 period and the year ended December 31, 2006 was $63.9 million and $58.5 million, respectively, representing an increase of $5.4 million or 9.2%. As a percentage of net revenue, selling and marketing expense increased in the 2007 period to 22.1% from 20.2% of net revenue for the year ended December 31, 2006. The increase was primarily attributable to “ad buy” expense in 2007 in order to generate increased revenue. The largest single selling and marketing expense item for Various were “ad buy” expenses which amounted to $54.8 million and $55.3 million for the 2007 period and the year ended December 31, 2006, respectively, the cost of purchasing key word searches from major search engines, together with expenses related to associated personnel.

General and Administrative.   General and administrative expense in the 2007 period and the year ended December 31, 2006 was $57.8 million and $51.4 million, respectively, representing an increase of $6.4 million or 12.5%. As a percentage of net revenue, general and administrative expense increased in the 2007 period to 20.0% from 17.7% of net revenue for the year ended December 31, 2006. The principal reason for the increase in general and administrative expense in 2007 was approximately $2.5 million of professional expenses incurred by Various in connection with the sale of itself and approximately $7.1 million in incentives paid to management and employees in connection with the sale process offset by a reduction in an accrual for a litigation matter.

VAT Expense.   As previously discussed, effective July 1, 2003, as a result of a change in the law in the European Union, VAT was required to be collected from customers in connection with their use of internet services in the European Union provided by Various and remitted to the taxing authorities in the various European Union countries. As customers were not separately charged VAT and no VAT was remitted, an expense and a related liability have been recorded in the financial statements to reflect the estimated VAT which should have been collected and remitted on the revenues derived from the various European Union countries since July 1, 2003 or other local implementation date.

VAT expense in the 2007 period and the year ended December 31, 2006 was $13.1 million and $12.0 million, respectively, representing an increase of $1.1 million or 9.2%. As a percentage of net revenue, VAT expense increased in the 2007 period to 4.5% from 4.1% of net revenue for the year ended December 31, 2006. The increase was due to an increase in revenues from European Union countries and the resulting VAT owed.

Depreciation and Amortization.   Depreciation and amortization for the 2007 period and the year ended December 31, 2006 was $3.6 million and $4.2 million, respectively, representing a decrease of $0.6 million or 14.3%. As a percentage of net revenue, depreciation and amortization decreased in the 2007 period to 1.2% from 1.4% of net revenue for the year ended December 31, 2006. The decrease is primarily due to a reduction in purchases of property and equipment in the 2007 period.

Interest and Penalties Related to VAT.   A provision and related liability have been recorded for interest and penalties related to the unremitted VAT discussed above and failure to file tax returns based on the applicable law of each country in the European Union.

Interest and penalties related to VAT in the 2007 period and the year ended December 31, 2006 were $11.7 million and $10.9 million, respectively, representing an increase of $0.8 million or 7.3%. As a percentage of net revenue, interest and penalties expense increased in the 2007 period to 4.0% from 3.8% of net revenue for the year ended December 31, 2006. The increase was due to a rise in VAT expense owed in 2007 and the associated interest and penalties computed on the VAT liability.

Foreign Exchange (Loss).   Foreign exchange loss in the 2007 period and the year ended December 31, 2006 was $5.1 million and $4.0 million, respectively, representing an increase of $1.1 million or 27.5%. As a percentage

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of net revenue, foreign exchange loss increased in the 2007 period to 1.8% from 1.4% of net revenue for the year ended December 31, 2006. The foreign exchange loss primarily represents the increase in the U.S. dollar equivalent amount of the VAT liability which was denominated in Euros and British pounds which was a result of the weakening of the U.S. dollar against such currencies from January 1, 2007 through December 6, 2007 and during the year ended December 31, 2006.

Interest Income and Other Expense.   Interest income and other expense for the 2007 period and the year ended December 31, 2006 was $0.9 million and $0.3 million, respectively, representing an increase of $0.6 million or 200.0%. The increase was primarily attributable to a weighted average increase in cash on hand and the related interest earned on the balances.

Provision for Income Taxes.   No provision for federal income taxes was made for Various and certain of its subsidiaries and affiliates as they operated as S corporations and were thus subject only to California state income tax at a 1.54% rate. Provision for income taxes, which primarily relates to state income taxes for the 2007 period and the year ended December 31, 2006 were $0.6 million and $1.1 million, respectively, representing a decrease of $0.5 million or 45.5%. The decrease was primarily attributable to a decreased income in 2007 compared to 2006.

Net Income.   Net income for the 2007 period and the year ended December 31, 2006 was $48.6 million and $61.1 million, respectively, representing a decrease of $12.5 million or 20.5%. The reduction in net income was primarily attributable to increased selling and marketing expenses and general and administrative expenses discussed above and the shorter period in 2007 compared to the year ended December 31, 2006.

Year Ended December 31, 2006 as Compared to Year Ended December 31, 2005

Net Revenue.   Net revenue for the year ended December 31, 2006 and 2005 was $289.7 million and $214.4 million, respectively, representing an increase of $75.3 million, or 35.1%. The increase was primarily attributable to net revenue growth from both Various’ social networking and live interactive video sales, though live interactive video sales grew at a faster rate. Net revenue for social networking websites for the year ended December 31, 2006 and 2005 were $237.0 million and $184.7 million, respectively, representing an increase of $52.3 million or 28.3%. The increase was primarily attributable to an increase in subscribers resulting from an increase in advertising spending of $11.5 million. Live interactive video net revenue for the year ended December 31, 2006 and 2005 was $52.7 million and $29.7 million, respectively, representing an increase of $23.0 million, or 77.4%. The increase in live interactive video net revenue was driven by the adoption of new technologies that allowed for a higher quality of service for customers as well as an overall increase in advertising spending of $4.6 million that collectively resulted in an increase in the number of paid users and additional purchases by existing paid users.

Cost of Net Revenue.   Cost of net revenue for the year ended December 31, 2006 and 2005 was $76.1 million and $56.1 million, respectively, representing an increase of $20.0 million or 35.7%. This increase was primarily caused by the growth of live interactive video services in the product mix because live interactive video, with its associated cost of studios, is a lower margin business than social networking.

Product Development.   Product development expense, for the year ended December 31, 2006 and 2005 was $10.7 million and $6.4 million, respectively, representing an increase of $4.3 million or 67.2%. This increase was primarily the result of increases in the employee headcount due to the growth of Various.

Selling and Marketing.   Selling and marketing expense for the year ended December 31, 2006 and 2005 was $58.5 million and $42.2 million, respectively, representing an increase of $16.3 million or 38.6%. The increase was primarily attributable to a $16.0 million increase in advertising costs to enhance revenue growth.

General and Administrative.   General and administrative expense for the year ended December 31, 2006 and 2005 was $51.4 million and $36.1 million, respectively, representing an increase of $15.3 million or 42.4%. The increase was primarily due to increased spending to provide back office support for the growth in subscribers.

VAT Expense.   VAT expense for the year ended December 31, 2006 and 2005 was $12.0 million and $7.5 million, respectively, representing an increase of $4.5 million or 60.0%. The increase was due to an increase in revenues from European Union countries and the resulting VAT owed thereon.

Depreciation and Amortization.   Depreciation and amortization for the year ended December 31, 2006 and 2005 was $4.2 million and $3.0 million, respectively, representing an increase of $1.2 million or 40.0%. As a

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percentage of net revenue, depreciation and amortization remained the same for the year ended December 31, 2006 and 2005 at 1.4%. The increase was due to additional property and equipment which was purchased during the year ended December 31, 2006.

Interest and Penalties Related to VAT.   Interest and penalties related to VAT for the year ended December 31, 2006 and 2005 were $10.9 million, or 3.8% of net revenue for the year, and $7.3 million, or 3.4% of net revenue for the year, respectively, representing an increase of $3.6 million or 49.3%. The increase was due to a rise in VAT expense owed in 2006 and the associated interest and penalties computed on the VAT liability.

Foreign Exchange (Loss)/ Gain.   Foreign exchange (loss)/gain for the year ended December 31, 2006 and 2005 was ($4.0) million and $1.7 million, respectively, representing a change of $5.7 million. The losses and gains related to the VAT liability denominated in Euros and pounds and the weakening and strengthening of the U.S. dollar against such currencies during the respective years.

Preacquisition Earnings.   Preacquisition earnings of $0.8 million for the year ended December 31, 2005 represented Streamray, Inc.’s preacquisition results in 2005, which are not reflected in net income.

Net Income.   Net income for the year ended December 31, 2006 and 2005 were $61.1 million and $55.8 million, respectively, representing an increase of $5.3 million or 9.5%. The increase in net income was primarily attributable to a significant rise in net revenue.

Liquidity and Capital Resources

As of September 30, 2008 and December 31, 2007, we had cash and cash equivalents of $35.4 million and $7.4 million respectively. Prior to the acquisition of Various, we have historically financed our operations with borrowings from debt issuances, offerings of equity securities and internally generated funds. Subsequent to the acquisition of Various, we have generated cash flows from operations. We have no working capital line of credit.

We believe that our existing cash of $35.4 million as of September 30, 2008, cash provided by operating activities and the proceeds of this offering will provide adequate resources to satisfy our working capital, scheduled principal and interest payments requirements, contractual obligations and anticipated capital expenditure requirements for the foreseeable future. We have had positive operating cash flow for the current year to date and anticipate continued positive cash flow from operating activities.

Cash Flow

Net cash provided by operations was $51.3 million for the nine months ended September 30, 2008 compared to net cash used by operating activities of $3.6 million for the same period in 2007. The increase is primarily due to the cash flows generated from our internet segment as a result of the acquisition of Various in December 2007. In 2007, we had negative operating cash flow due primarily as a result of reduced revenue in the entertainment segment.

Net cash used in investing activities for the nine months ended September 30, 2008 was $8.1 million compared to $2.6 million for the same period in 2007. This increase resulted mainly from purchases of property and equipment in the internet segment due to the acquisition of Various in 2007, and deferred acquisition costs related to the acquisition of Various that did not recur. In our internet segment, we replace computer hardware and software on a recurring basis and such expenditures are normal investments to maintain our websites.

Net cash used in financing activities for the nine months ended September 30, 2008 was $15.2 million compared to net cash provided by financing activities of $3.5 million for the same period in 2007. The decrease is primarily due to required repayments on our First Lien Senior Secured Notes issued in connection with the acquisition of Various. We are required to make quarterly principal payments on the First Lien Senior Secured Notes, in an aggregate amount equal to 90% of the Excess Cash Flow (as defined in the securities purchase agreement governing the First Lien Senior Secured Notes). In November 2007, our existing stockholders invested in a $5.0 million offering of Series B Convertible Preferred Stock, the proceeds of which were used for working capital during 2007 and to pay legal and professional fees related to the Various acquisition.

In December 2007, we acquired Various for approximately $401.0 million. The purchase price of approximately $401.0 million paid to the sellers consisted of approximately $137.0 million in cash and notes valued

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at approximately $248.0 million, together with related warrants to acquire approximately 57.5 million shares of common stock, valued at approximately $16.0 million. The purchase price gives effect to a $61.0 million reduction attributable to a post-closing working capital adjustment which resulted in a $51.0 million reduction in the value of notes issued and a $10.0 million reduction in cash paid which is being held in escrow. In addition, legal and other acquisition costs totaling approximately $4.0 million were incurred. The cash portion of the purchase price was obtained through issuance of notes and warrants, including approximately $110.0 million from our stockholders.

Financing Activities

We are currently highly leveraged and our debt instruments are secured by substantially all of our assets. We intend to repay substantially all of our long-term debt with the proceeds of this offering. The debt instruments contain many restrictions and covenants. To the extent certain of these debt instruments are not repaid in connection with this offering, we will remain subject to the restrictions put forth for such debt instruments. Interest expense for the nine months ended September 30, 2008 totaled $60.0 million.

In their report dated December 22, 2008, our independent registered public accounting firm stated that events of default under certain of our debt agreements raised substantial doubt about our ability to continue as a going concern.

As of September 30, 2008, we had $43.3 million in cash and restricted cash. Due to our failure to comply with certain covenants and restrictions in certain of our existing debt agreements, we have reclassified $417.3 million and $411.0 million in long-term debt to short-term debt on our consolidated financials statements for the year ended December 31, 2007 and the nine months ended September 30, 2008, respectively.

If our efforts to cure such defaults and/or obtain waivers from our noteholders are unsuccessful, it could result in the acceleration of $466.0 million in debt. If all of our indebtedness was accelerated, we would not have sufficient funds at the time of acceleration to repay our indebtedness, which could have a material adverse effect on our ability to continue as a going concern.

First Lien Senior Secured Notes

As of September 30, 2008, we had $242.1 million of First Lien Senior Secured Notes outstanding. In connection with our acquisition of Various on December 6, 2007, our wholly-owned subsidiary, Interactive Network Inc., or INI, issued approximately $257.3 million in principal amount of First Lien Senior Secured Notes. Commencing the quarter ending March 31, 2008, INI was required to make principal payments on the First Lien Senior Secured Notes, in an aggregate amount equal to 90% of the Excess Cash Flow (as defined in the securities purchase agreement governing the First Lien Senior Secured Notes) (if any) of INI and its subsidiaries for such quarterly period. Through September 30, 2008, we have made $15.2 million of such payments.

The First Lien Senior Secured Notes mature on 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) three-month LIBOR, as further defined in the securities purchase agreement governing the First Lien Senior Secured Notes for the applicable interest period. Interest on the First Lien Senior Secured Notes is payable quarterly in arrears on each March 31, June 30, September 30 and December 31.

The First Lien Senior Secured Notes are secured by a first-priority lien on all of INI’s assets and are guaranteed by each of INI’s subsidiaries. These guarantees are the senior secured obligations of each such subsidiary guarantor. We and each of our other direct subsidiaries have guaranteed INI’s obligations under the First Lien Senior Secured Notes. Our guarantee and the guarantees of our other direct subsidiaries of the First Lien Senior Secured Notes are subordinated to our respective obligations under our 2006 Notes and 2005 Notes.

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INI may, at its option, redeem the First Lien Senior Secured Notes, in whole but not in part, at the redemption prices (expressed as percentages of principal amount thereof) set forth below plus accrued and unpaid interest, on the First Lien Senior Secured Notes redeemed, to the applicable redemption date:

•  
  105%, if redeemed on or before December 6, 2009;

•  
  102%, if redeemed on or before December 6, 2010; and

•  
  100%, if redeemed after December 6, 2010.

Commencing December 31, 2008, INI is required to make principal payments on the First Lien Senior Secured Notes in annual installments on the 45th day following the date set forth below, in an aggregate amount equal to the greater of (x) 90% of the Excess Cash Flow (if any) of INI and its subsidiaries for the quarter most recently ended on December 31 and (y) the amount specified below for each such date, less the aggregate amount of all repayments, if any, made in the immediately preceding three quarters:

•  
  December 31, 2008, an installment amount of approximately $25.7 million;

•  
  December 31, 2009, an installment amount of approximately $38.6 million;

•  
  December 31, 2010; an installment amount of approximately $51.5 million; and

•  
  June 30, 2011, an installment amount of approximately $141.5 million.

The securities purchase agreement governing the First Lien Senior Secured Notes contains covenants applicable to us and our subsidiaries, including covenants relating to limitations and requirements with respect to indebtedness, restricted payments, dividends and other payments affecting our subsidiaries, sale-leaseback transactions, consolidations and mergers and provision of financial statements and reports. The restricted payments covenant prohibits dividends or other cash distributions from Various and INI to us subject to certain limited exceptions including our exception that permits INI to dividend to us up to 10% of Excess Cash Flow of INI as defined solely for interest payments on the First Lien Senior Secured Notes, plus not more than $6 million during the first quarter of fiscal 2008 ($5 million of which was to be used for general corporate purposes), plus $1.0 million per quarter through December 31, 2008 solely for third party expenses related to our initial public offering.

We are required to use 50% of the net cash proceeds from an initial public offering of our common stock to prepay the First Lien Senior Secured Notes at a redemption price of 115% of the principal amount redeemed, plus accrued and unpaid interest thereon to such redemption date and we intend to do so with the proceeds of this offering. The balance of the notes will be redeemed at a redemption price of 105% of the principal amount redeemed plus accrued and unpaid interest.

Second Lien Subordinated Secured Notes

As of September 30, 2008, we had $80.0 million of Second Lien Subordinated Secured Notes outstanding. On December 6, 2007, INI issued to the sellers of Various, $80.0 million in principal amount of Second Lien Subordinated Secured Notes in partial payment of the purchase price for Various.

The Second Lien Subordinated Secured Notes mature on December 6, 2011. Interest on the Second Lien Subordinated Secured Notes accrues at a rate of 15% per annum and is payable quarterly in arrears on each March 31, June 30, September 30 and December 31.

The Second Lien Subordinated Secured Notes are secured by a second-priority lien on all of INI’s assets and are guaranteed by each of INI’s subsidiaries, including Various. These guarantees are the senior secured obligations of each such subsidiary guarantor subordinate only to the first-priority lien granted to the purchasers of the First Lien Senior Secured Notes. We and each of our other direct subsidiaries have guaranteed INI’s obligations under the Second Lien Subordinated Secured Notes. Our guarantee and the guarantees of our other direct subsidiaries are also our respective secured obligations, but are subordinate to our respective obligations under our 2006 Notes and 2005 Notes and the First Lien Senior Secured Notes.

We may redeem the Second Lien Subordinated Secured Notes, in whole or in part, at any time subject to the rights of the holders of the First Lien Senior Secured Notes under the intercreditor agreement between the holders of the First Lien Senior Secured Notes and the holders of the Second Lien Subordinated Secured Notes. This

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agreement provides that no redemption of the Second Lien Subordinated Secured Notes may occur until the First Lien Senior Secured Notes are repaid in full after which principal on the Second Lien Subordinated Secured Notes is payable quarterly to the extent of 90% of Excess Cash Flow. The redemption price for the Second Lien Subordinated Secured Notes will be 100% of the outstanding principal amount plus accrued and unpaid interest, if any, on the Second Lien Subordinated Secured Notes to the redemption date.

The sellers’ securities agreement governing the Second Lien Subordinated Secured Notes contains covenants applicable to us and our subsidiaries, including covenants relating to limitations and requirements with respect to indebtedness, restricted payments, dividends and other payments affecting our subsidiaries, sale-leaseback transactions, consolidations and mergers and provision of financial statements and reports. These covenants are substantially identical to those contained in the First Lien Senior Secured Notes.

The holders of the Second Lien Subordinated Secured Notes have the option of requiring INI to repay the Second Lien Subordinated Secured Notes in full upon a Liquidity Event (defined as a liquidation, winding up, change of control (other than resulting from an initial public offering), merger, or a sale of all or substantially all of our assets or the assets of INI). Subject to the prior payment in full of the First Lien Senior Secured Notes, upon an initial public offering, we will cause INI to redeem the Second Lien Subordinated Secured Notes using the proceeds from such initial public offering, net of any amounts required to pay fees and expenses related to such initial public offering for working capital purposes or for strategic acquisitions. Any such repayment of the Second Lien Subordinated Secured Notes will be at a price equal to 100% of the outstanding principal amount plus accrued and unpaid interest, if any, on the Second Lien Subordinated Secured Notes to the repayment date.

Subordinated Convertible Notes

As of September 30, 2008, we had $170.0 million of Subordinated Convertible Notes outstanding subject to a reduction of $64.3 million and an increase of $5.0 million as described below. On December 6, 2007, INI issued Subordinated Convertible Notes in the original aggregate principal amount of $170.0 million in partial payment of the purchase price for Various.

The Subordinated Convertible Notes will mature on December 6, 2011. Interest on the Subordinated Convertible Notes is payable at a rate of 6% per annum and until the First Lien Senior Secured Notes and the Second Lien Subordinated Secured Notes are repaid in full such interest may only be paid in additional Subordinated Convertible Notes. Thereafter, interest may be paid in additional Subordinated Convertible Notes at INI’s option, and may be prepaid at INI’s option, in whole or in part, at 100% of principal amount redeemed plus accrued and unpaid interest. The Subordinated Convertible Notes are the unsecured obligation of INI and we have guaranteed INI’s obligations under the Subordinated Convertible Notes. The Subordinated Convertible Notes are subordinate in right of payment to INI’s First Lien Senior Secured Notes and Second Lien Subordinated Secured Notes. Our guarantee is subordinated to the prior payment of our 2006 Notes and our 2005 Notes and our guarantee of the First Lien Senior Secured Notes and Second Lien Subordinated Secured Notes and pari passu in right of payment with the Subordinated Term Loan Notes described below.

The Subordinated Convertible Notes are convertible, at our or the holder’s option, into shares of our common stock, in whole or in part, at any time through and including the maturity date of such notes after the later to occur of (i) the one-year anniversary of the date of issuance of such notes and (ii) the consummation of an initial public offering. The conversion price will be equal to the per share offering price in this offering. If the notes are converted at the holder’s option, the aggregate number of shares issuable upon the conversion of the notes will be limited in number to the number of shares equal to 17% of our fully diluted equity calculated at the time of the first such conversion. The Subordinated Convertible Notes are being held in escrow to secure indemnity obligations of the sellers of Various stock to INI. 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 June 30, 2008, INI issued additional Subordinated Convertible Notes in the amount of $5.0 million as payment in kind for its interest obligation.

2006 Notes

As of September 30, 2008, we had approximately $6.2 million in principal amount of our 2006 Notes outstanding. In August 2006, we issued $5.0 million in principal amount of 2006 Notes. Since August 2006, we

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have issued $1.0 million in principal amount of 2006 Notes in payment for accrued interest on the outstanding notes. In December 2007, we also issued an additional $140,000 in principal amount of 2006 Notes pro rata to the holders of outstanding 2006 Notes in consideration for their waiver of certain defaults and consent to the incurrence of additional debt in connection with our acquisition of Various.

The 2006 Notes mature on July 31, 2010. Interest on the 2006 Notes accrues at a rate of 15% per annum and is payable quarterly in cash after February 1, 2008 in arrears, on February 15, May 15, August 15 and November 15 of each year.

The 2006 Notes rank pari passu with our 2005 Notes, and are secured by a first-priority security interest in all of our assets and the assets of our subsidiaries other than those of INI, including trademarks and other intellectual property, provided that the assets of INI are subject to a security interest in favor of the 2006 Notes that is subordinate to that of the First Lien Senior Secured Notes and the Second Lien Subordinated Secured Notes. Our obligations under the 2006 Notes are guaranteed by each of our subsidiaries.

We may redeem all or part of the 2006 Notes after the second anniversary of their issuance at:

•  
  101.5% of the principal amount, if after August 17, 2008, but on or before August 17, 2009; and

•  
  100% of the principal amount if after August 17, 2009, plus accrued and unpaid interest.

The securities purchase agreement governing the 2006 Notes contains covenants applicable to us and our subsidiaries, including covenants relating to limitations and requirements with respect to indebtedness, restricted payments, dividends and other payments affecting our subsidiaries, sale-leaseback transactions, consolidations and mergers and provision of financial statements and reports.

We intend to use the net proceeds from this offering to redeem all of the outstanding 2006 Notes at a redemption price of 101.5% of the principal amount redeemed plus accrued and unpaid interest.

2005 Notes

As of September 30, 2008, we had approximately $38.4 million in principal amount of our 2005 Notes outstanding.

We originally issued $33.0 million in principal amount of the 2005 Notes in August 2005 as 11% Senior Notes due 2010 along with 11,777,800 shares of Series A Convertible Preferred Stock. Since August 2005, we have issued $4.5 million in principal amount of 2005 Notes in payment of accrued interest on the outstanding notes. In December 2007, we also issued an additional approximately $0.9 million in principal amount of 2005 Notes pro rata to the holders of outstanding 2005 Notes in consideration for their waiver of certain defaults and consent to the incurrence of additional debt in connection with our acquisition of Various.

In August 2006, in connection with our offering of the 2006 Notes and as consideration for the waiver of certain defaults under the securities purchase agreement governing the 2005 Notes, we amended the terms of the 2005 Notes to provide, among other matters, that interest on the 2005 Notes would accrue at a rate of 14% per annum and would be paid-in-kind.

In December 2007, in connection with our acquisition of Various and as consideration for the waiver of certain defaults under the securities purchase agreement governing the 2005 Notes, we amended the terms of the 2005 Notes to provide that interest on the 2005 Notes would accrue at a rate of 15% per annum, payable in cash quarterly in arrears, on February 15, May 15, August 15 and November 15 of each year.

The 2005 Notes mature on July 31, 2010. The 2005 Notes are pari passu with the 2006 Notes and are secured by a first-priority security interest in all of our assets and the assets of our subsidiaries other than INI and its subsidiaries, including trademarks and other intellectual property provided that the assets of INI are subject to a security interest in favor of the 2005 Notes that is subordinate to that of the First Lien Senior Secured Notes and the Second Lien Subordinated Secured Notes. Our obligations under the 2005 Notes are guaranteed by each of our subsidiaries.

We may redeem all or part of the 2005 Notes after the second anniversary of their issuance at:

•  
  101.5% of the principal amount, if after the third anniversary but on or prior to the fourth anniversary of their issuance; and

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•  
  100% of the principal amount if after the fourth anniversary of their issuance, plus accrued and unpaid interest.

The securities purchase agreement governing the 2005 Notes contains covenants applicable to us and our subsidiaries, including covenants relating to limitations and requirements with respect to indebtedness, restricted payments, dividends and other payments affecting our subsidiaries, sale-leaseback transactions, consolidations and mergers and provision of financial statements and reports.

We intend to use the net proceeds from this offering to redeem all of the outstanding 2005 Notes at a redemption price of 101.5% of the principal amount redeemed plus accrued and unpaid interest.

Subordinated Term Loan Notes

As of September 30, 2008, we had $32.2 million in principal amount of Subordinated Term Loan Notes outstanding.

In October 2004, we issued $32.5 million in aggregate principal amount of the Subordinated Term Loan Notes. From October 2005 to September 30, 2008, we have issued $7.3 million in principal amount of Subordinated Term Loan Notes in payment of accrued interest on the outstanding notes. In October 2006, we issued an additional $0.9 million in principal amount of Subordinated Term Loan Notes to fund part of the purchase price consideration for the Danni.com business.

Interest on the Subordinated Term Loan Notes is payable in arrears annually on October 5 in each year at the rate of 13% per annum. For the three-year period following October 5, 2004, interest is payable in cash or in kind by the issuance of additional Subordinated Term Loan Notes in such principal amount as shall equal the interest payment that is then due, or any combination thereof, at our election; and thereafter until the principal is paid or made available for payment, payable in cash.

In August 2005, concurrent with the completion of our offerings of the 2005 Notes and the Series A Convertible Preferred Stock, we used a portion of the net proceeds from those offerings to repay $11.8 million of the Subordinated Term Loan Notes plus accrued interest. The remaining $24.0 million in principal amount of the Subordinated Term Loan Notes are held by PET and one other stockholder and were reissued as Subordinated Term Loan Notes.

The terms of the Subordinated Term Loan Notes provide that, among other things:

•  
  they are subordinated to the 2006 Notes, the 2005 Notes, the First Lien Senior Secured Notes and the Second Lien Subordinated Secured Notes;

•  
  we may not redeem the Subordinated Term Loan Notes while the 2006 Notes, the 2005 Notes, the First Lien Senior Secured Notes and the Second Lien Subordinated Secured Notes remain outstanding;

•  
  we are restricted from paying cash interest on the Subordinated Term Loan Notes until we attain an interest coverage ratio of at least 3:1; and

•  
  upon the occurrence of a change of control, the holders of the Subordinated Term Loan Notes will have the right to require us to concurrently purchase their notes at 101% of the face value thereof, plus accrued and unpaid interest, if any, provided, however, that such right shall only be exercisable if the holders of the 2006 Notes and the 2005 Notes have exercised their repurchase right.

We intend to use the net proceeds from this offering to redeem all of the outstanding Subordinated Term Loan Notes at a redemption price of 100% of the principal amount redeemed plus accrued and unpaid interest.

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Contractual Obligations

The following table sets forth our contractual obligations as of December 31, 2007:

            Payments due by period
   
        Total
    Less
Than
1 Year
    1-3
Years
    3-5
Years
    More
Than
5
Years
        (in thousands)    
Long-term Notes Payable, including current portion:(1)
                                                                                       
2005 Notes
              $ 38,374          $           $ 38,374          $           $    
2006 Notes
                 6,156                          6,156                             
First Lien Senior Secured Notes(2)
                 257,338                          64,335             193,003                
Second Lien Subordinated Secured Notes
                 80,000                                       80,000                
Subordinated Term Loan Notes
                 32,238                                       32,238                
Subordinated Convertible Notes
                 105,720                                       105,720                
Various, Inc. Consulting Agreement(3)
                 5,000             1,000             4,000                             
Capital Lease Obligations and Miscellaneous Notes(4)
                 162              140              22                              
Operating Leases(5)
                 15,576             1,019             3,438             3,463             7,656   
Other(6)
                 13,200             6,700             6,500                             
Total
              $ 553,764          $ 8,859          $ 122,825          $ 414,424          $ 7,656   
 


(1)  
  Excludes the effects of existing events of default which may result in the acceleration of the maturity of the related notes.

(2)  
  We are required to use 50% of the net cash proceeds from an initial public offering of our common stock to prepay the First Lien Senior Secured Notes at a redemption price of 115% of the principal amount redeemed, plus accrued and unpaid interest thereon to such redemption date. In addition, Excess Cash Flow payments are applied against annual mandatory payment obligations which are shown above.

(3)  
  In connection with the acquisition of Various, we entered into a consulting agreement for which a non-revocable payment obligation to the former owners is treated as a non-interest bearing obligation. The obligation was recorded at a present value of $3.6 million using a discount rate of 15%.

(4)  
  Represents our contractual commitments for lease payments on computer hardware equipment.

(5)  
  Represents our minimum rental commitments for non-cancellable operating leases of office space.

(6)  
  Other commitments and obligations are comprised of contracts with software licensing, communications, computer hosting, and marketing service providers. These amounts totaled $6.7 million for less than one year and $6.5 million between one and three years. Contracts with other service providers are for 30 day terms or less.

Off-Balance Sheet Transactions

As of September 30, 2008, we did not have any off-balance sheet arrangements.

Related Party Transactions

In October 2004, we entered into a management agreement with Bell & Staton, Inc., an entity controlled by our principal stockholders, whereby certain management services are to be performed by these principal stockholders as designated by our board of directors. The agreement is for a term of 5 years with an annual fee of $0.5 million which amount is included in general and administrative expenses for each of the years ended December 31, 2007, 2006 and 2005. The fee is subject to increase at the rate of 10% of EBITDA of our business, exclusive of EBITDA attributable to the acquisition of Various, but annual compensation cannot exceed $1.0 million per year. We have yet to increase the fee as the EBITDA hurdles have not been attained. In addition, the agreement provides that the managers may participate in our future bonus pool and stock option plans. On August 17, 2005, the management agreement was amended to limit the total bonus to be paid to the managers to a maximum of

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$500,000 so long as any of the 2005 Notes or any guaranty thereof remained outstanding and to prohibit the payment of the bonus as long as there is a default occurring on the 2005 Notes. On August 23, 2006, the management agreement was further amended to provide that no management fee, other than reimbursement of expenses, shall be paid to the managers so long as there is a default or an event of default occurring on the 2006 Notes. On December 9, 2008, our board of directors approved forms of employment agreements for each of Messrs. Bell and Staton, which will become effective upon the consummation of this offering, the extinguishment or waiver of the defaults under the existing debt instruments and the obtainment of any other third party consents required.

We have also entered into a lease agreement for rental of office space in Boca Raton, Florida from a company controlled by one of our principal stockholders. The lease, which commenced on January 1, 2005, is for a period of five years and provides for annual rent of approximately $58,000 plus operating expenses. Total rent expense under this lease agreement was approximately $111,000, $159,000 and $183,000 for the years ended December 31, 2007, 2006, and 2005, respectively.

In August 2005, we entered into a Security Holders Agreement with PET Capital Partners LLC, PET Capital Partners II LLC, Messrs. Bell and Staton and certain other investors in our Series A Convertible Preferred Stock whereby, among other things, such group of funds may propose a board designee and each of the security holders party to the Security Holders Agreement agreed to vote all shares of our common stock held by such security holder to elect such board designee as a director. The group of funds has yet to designate a board designee.

In August 2005, in connection with our offering of Series A Convertible Preferred Stock and 2005 Notes, PET Capital Partners II, LLC, whose members consist of Messrs. Bell, Florescue and Staton or their affiliates, purchased 4,206,450 shares of Series A Convertible Preferred Stock for an aggregate purchase price of $5.0 million, or approximately $0.5943 per share.

In August 2006, PET Capital Partners II, LLC purchased an additional 7,571,934 shares of Series A Convertible Preferred Stock for an aggregate purchase price of $4.5 million, or approximately $0.5943 per share.

In October 2006, PET Capital Partners LLC purchased an additional $0.9 million in principal amount of Subordinated Term Loan Notes. We used the proceeds to fund part of the purchase price consideration for the Danni.com business. As of September 30, 2008 there was $32.2 million aggregate principal amount outstanding. We have not repaid any principal of this loan. We have accrued $3.1 million and $3.7 million in interest for the nine months ended September 30, 2008 and the year ended December 31, 2007, respectively, on the Subordinated Term Loan Notes.

In November 2007, certain of our existing stockholders, including Messrs. Bell, Staton and Florescue, purchased an aggregate of 168,897,005 shares of Series B Convertible Preferred Stock at a purchase price of $0.029604 per share. The aggregate proceeds of $5.0 million were used to help fund the acquisition of Various and for general corporate purposes.

At the closing of the Various acquisition on December 6, 2007, PET Capital Partners LLC, Staton Family Investments, LLC, Staton Media, LLC, Staton Family Perpetual Trust and Marc Bell, collectively referred to as the principals, entered into an agreement with the Andrew B. Conru Trust Agreement and the Mapstead Trust, created on April 16, 2002, collectively referred to as the sellers, pursuant to which the principals and sellers agreed, among other things, that:

•  
  the principals granted the sellers an option to purchase from time to time from the principals, shares of our common stock and Series B Convertible Preferred Stock at the exercise price of $0.01 per share, at any time until the consummation of an initial public offering. The option is immediately exercisable for approximately 6,080,000 shares of common stock and 14,300,000 shares of Series B Convertible Preferred Stock and may be exercisable for up to an additional 6,080,000 shares of common stock and 14,300,000 shares of Series B Convertible Preferred Stock if the sellers have not sold their First Lien Senior Secured Notes by certain time benchmarks;

•  
  in the event (i) there is a default under the letter agreement; or (ii) if the outstanding balance of the First Lien Senior Secured Notes held by the sellers is greater than or equal to $50.0 million, and there is an interest

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  or principal payment default under the securities purchase agreement governing the First Lien Senior Secured Notes, which is not cured at least two days prior to the applicable time frame within which cure is permitted under such Securities Purchase Agreement; or (iii) if the outstanding balance of the notes is less than $50.0 million, and there is an interest or principal payment default under such securities purchase agreement that has been called for immediate payment by the Required Holders (as defined in the securities purchase agreement) pursuant to the terms of such securities purchase agreement; or (iv) that the First Lien Senior Secured Notes are not paid in full within 3.5 years after issuance, the sellers shall have the right to require the principals to purchase their outstanding First Lien Senior Secured Notes, in whole or in part, together with the related warrants to purchase shares of our common stock that are then still outstanding, and the principals will purchase such First Lien Senior Secured Notes and related outstanding warrants, at a purchase price equal to the then outstanding principal amount of the First Lien Senior Secured Notes required to be purchased, plus accrued and unpaid interest on such First Lien Senior Secured Notes through the date of purchase;

•  
  the principals granted the sellers a security interest in all our equity securities owned by the principals to secure the performance of the principals’ obligations referenced in the foregoing item;

•  
  in the event that, at any time and from time to time, after the issuance of the First Lien Senior Secured Notes to sellers, any seller receives a bid price equal to or greater than 97% of par plus accrued and unpaid interest to purchase such seller’s First Lien Senior Secured Notes and related outstanding warrants, in whole or in part, such seller shall sell its First Lien Senior Secured Notes and the related outstanding warrants pursuant to such bid; and (ii) each seller shall, at all times for so long as it owns any First Lien Senior Secured Notes, maintain with Imperial Capital, LLC and/or such other broker as the principals shall designate an offer price not greater than par plus accrued and unpaid interest to sell its First Lien Senior Secured Notes and related outstanding warrants; and

•  
  for so long as any First Lien Senior Secured Notes owned by any seller remain outstanding, the principals are restricted from selling, transferring or otherwise disposing of their First Lien Senior Secured Notes except subject to certain exceptions.

The letter agreement terminates upon the (i) sale, transfer or other disposition of all First Lien Senior Secured Notes owned by the sellers to an unrelated third party, or (ii) the repayment in full of such First Lien Senior Secured Notes, or (iii) the consummation of this offering.

On May 14, 2008, the letter agreement was amended to reflect the sellers’ decision to retain their outstanding First Lien Senior Secured Notes, instead of selling them, as contemplated by the original letter agreement. The principals and the sellers agreed, among other things, to the following amendments:

•  
  the principals no longer have an obligation to purchase the sellers’ First Lien Senior Secured Notes or to grant a security interest in any equity securities owned by the principals;

•  
  the sellers no longer have an obligation to sell their First Lien Senior Secured Notes at a certain bid price;

•  
  the sellers retain an option to purchase our equity securities from the principals. The option is immediately exercisable for approximately 20,000,000 shares of our common stock;

•  
  the principals are no longer restricted from selling their First Lien Senior Secured Notes. Instead, until the later of (i) the repayment in full of the First Lien Senior Secured Notes owned by any seller and (ii) the consummation of an initial public offering, no principal may sell, transfer or otherwise dispose of any of our securities or permit them to become subject to any liens; and

•  
  the letter agreement terminates upon the consummation of this offering and the completion of transfer of any equity securities required by the amendment to be transferred.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk attributed to interest and foreign currency exchange rates.

Interest Rate Risk

We are exposed to interest rate fluctuations, primarily as a result of our First Lien Senior Secured Notes issued in connection with the acquisition of Various on which the interest rate is subject to market fluctuations. We do

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not currently use derivative instruments to fix the interest rates of any of our floating rate debt. Our First Lien Senior Secured Notes accrue interest at a rate per annum equal to the sum of the greater of three month LIBOR (4.7% at December 31, 2007) or 4.5%, plus 8.0%. A hypothetical 1% or 100 basis point increase in interest rates would not result in a material impact on our earnings due to the three-month LIBOR rate at December 15, 2008 of 1.9% being substantially lower than the floor of 4.5%.

Foreign Currency Exchange Risk

Our exposure to foreign currency exchange risk is primarily due to our international operations. As of September 30, 2008, we had a $92.9 million liability for VAT denominated in Euros and Pounds Sterling, which represents substantially all of our foreign currency exchange rate exposure. In addition, revenue derived from international websites are paid in advance primarily with credit cards and are denominated in local currencies. Substantially all such currencies are converted into U.S. dollars on the dates of the transactions at rates of exchange in effect on such dates and remitted to us and accordingly, is recorded based on the U.S. dollars received by us. As a result, our foreign currency exchange risk exposure is not material and is limited to the amount of foreign exchange rate changes on any individual day on the portion of our net revenue received in other currencies. Accounts receivable due from restricted cash held by foreign credit card processors and VAT liabilities denominated in foreign currencies are converted into U.S. dollars using current exchange rates in effect as of the balance sheet date. Gains and losses resulting from transactions denominated in foreign currencies are recorded in the statement of operations. The potential loss resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates is approximately $8.1 million. We do not utilize any currency hedging strategies.

Inflation

We are subject to the effects of changing prices. We have, however, generally been able to pass along inflationary increases in our costs by increasing the prices of our products and subscriptions.

Sarbanes-Oxley Compliance and Corporate Governance

As a public company, we will be subject to the reporting requirement of the Sarbanes-Oxley Act of 2002. Beginning immediately, we will be required to establish and regularly evaluate the effectiveness of internal controls over financial reporting. In order to maintain and improve the effectiveness of disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight will be required. We also must comply with all corporate governance requirements of the New York Stock Exchange, including independence of our audit committee and independence of the majority of our board of directors.

We plan to timely satisfy all requirements of the Sarbanes-Oxley Act and the New York Stock Exchange applicable to us. We have taken, and will continue to take, actions designed to enhance our disclosure controls and procedures. We have adopted a Code of Business Conduct and Ethics applicable to all of our directors, officers and employees. We will establish a confidential and anonymous reporting process for the receipt of concerns regarding questionable accounting, auditing or other business matters from our employees. We intend for our General Counsel to assist us in the continued enhancement of our disclosure controls and procedures. In addition, we intend to put additional personnel and systems in place which we expect will provide us the necessary resources to be able to timely file the required periodic reports with the SEC as a publicly traded company. We intend for our Chief Financial Officer, Controller and other financial personnel to lead our existing staff in the performance of the required accounting and reporting functions. In addition, we plan to install a new accounting system and implement additional controls and procedures designed to improve our financial reporting capabilities and improve reporting efficiencies.

On an ongoing basis we intend to conduct a controls evaluation to identify control deficiencies and to confirm that appropriate corrective action, including process improvements, are being undertaken. We expect to conduct this type of evaluation on a quarterly basis so that the conclusions concerning the effectiveness of our controls can be reported in our periodic reports. The overall goals of these evaluation activities will be to monitor our internal controls for financial reporting and our disclosure controls and procedures and to make modifications as necessary. Our intent in this regard is that our internal controls for financial reporting and our disclosure controls and procedures

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will be maintained as dynamic systems that change, including with improvements and corrections, as conditions warrant.

Our ability to enhance our disclosure controls and procedures, to conduct controls evaluations and to modify controls and procedures on an ongoing basis may be limited by the current state of our staffing, accounting system and internal controls since any enhancements and modifications may require additional staffing and improved systems and controls.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board, or FASB, issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures on fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. On February 12, 2008, the FASB issued FASB Staff Position, or FSP, No. FAS 157-2 which delays the effective date of SFAS No. 157 for fair value measurements for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (that is at least annually). The FSP defers the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008. Effective January 1, 2008, we adopted SFAS No. 157 with respect to its financial assets and liabilities. The adoption of this standard had no impact on our consolidated financial statements for the nine months ended September 30, 2008. We are currently evaluating the impact, if any, of the adoption of this statement on our financial statements as it relates to non-financial assets and liabilities.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 became effective for us on January 1, 2008 and had no effect on our financial statements for the nine months ended September 30, 2008, as we did not elect to apply the provisions of SFAS No. 159.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS No.141(R) establishes principles and requirements for how an acquirer in a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, (ii) recognizes and measures the goodwill acquired in a business combination or a gain from a bargain purchase and (iii) determines what information to disclose to enable users of financial statements to evaluate the nature and financial effects of the business combination. Adoption of SFAS No. 141(R) is required for combinations after December 15, 2008. Early adoption and retroactive application of SFAS No. 141(R) to fiscal years preceding the effective date are not permitted. The impact, if any, of the implementation of SFAS No. 141(R) will have on our financial statements is dependent on our future acquisitions.

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OUR INDUSTRY

Overview

Greater worldwide availability and affordability of internet and broadband access has led to the global growth of internet users and their time spent online with the internet becoming an increasingly significant communication and entertainment medium. As part of this trend, social networking has become one of the most popular services on the internet as individuals seek to combine the exchange of information, content and entertainment within an online community environment. In this sphere, adult social networking services have experienced considerable appeal by allowing individuals to search for and communicate online with a large number of potential partners before interacting in face-to-face meetings. Since adult content is mostly a paid service online, the continued increase in worldwide credit card penetration and alternative online payment mechanisms are expected to drive significant growth in the online adult industry. Additionally, given the internet’s interactive nature, reach and ability to target niche audiences, we expect the social networking space to create new opportunities for advertisers to target customers online.

The Growth of the Internet and Broadband Adoption

In recent years the rapid growth of the internet has continued, with the number of internet users worldwide reaching approximately 1.5 billion in June 2008 according to Internet World Statistics, having grown by approximately 306% since 2000. In North America and Europe the number of internet users grew to approximately 248 and 385 million, respectively, in June 2008, having grown by approximately 130% and 266% since 2000. Major Asian markets have grown at an even greater rate, achieving a total growth rate of approximately 406% since 2000, with the total number of users reaching 579 million in June 2008. Notably, broadband internet is the fastest growing segment of the internet allowing for faster delivery of complex content, such as photos and video. According to the Economist Intelligence Unit, in 2007 broadband penetration in North America rose to more than 25% of the population and is expected to reach over 30% by 2010. As seen in the chart below, similar trends in increased broadband adoption are expected worldwide.

Broadband Penetration (as a percentage of population)
 
        2004
    2005
    2006
    2007
    2008E
    2009E
    2010E
Worldwide
                 3 %            4 %            6 %            7 %            8 %            9 %            10 %  
North America
                 15 %            19 %            22 %            25 %            27 %            28 %            30 %  
Europe
                 9 %            13 %            17 %            20 %            23 %            26 %            28 %  
Asia-Pacific
                 2 %            2 %            3 %            4 %            5 %            6 %            7 %  
Middle East & Africa
                 0 %            1 %            1 %            1 %            2 %            2 %            3 %  
Latin America
                 1 %            2 %            3 %            4 %            6 %            7 %            8 %  
 

Source: Economist Intelligence Unit, November 2008

We believe the increase in broadband penetration will have a positive effect on e-commerce transactions, including the purchase of content and services online as broadband connections provide faster, more convenient transaction experiences. According to IDC, e-commerce spending in the United States is expected to increase from $2.4 trillion in 2007 to $3.7 trillion in 2010.

The Growth of Traditional Social Networking

We participate in the online social networking industry in the adult online communities category. Social networking is a communications and personal expression medium that has become one of the most popular services in internet history. In general, traditional online social networking is an online activity in which internet users link personal websites about themselves and their interests to those of their friends or individuals with similar interests. Users engage in a number of activities within social networking environments, including communication, such as e-mailing and instant messaging, content sharing, such as photos and videos, and publishing, such as blogging, to establish a network of social relationships with friends, colleagues and acquaintances and meet other individuals with like interests. Much of the growth in social networking can be explained by its general appeal, as it allows users to communicate in a highly interactive fashion.

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According to comScore, social networking has recently been marked by rapid growth: in September 2007, worldwide social networking accounted for 8% of time spent online and increased to 11% by September 2008. In terms of actual visitors, in September 2008, out of 972 million unique worldwide visitors to internet websites, over 674 million visited social networking websites. Worldwide social networking visitors have grown at a faster rate than internet visitors as a whole. Although social networking growth in North America is starting to level off, the medium is still growing very rapidly in other regions around the world, as shown in the chart below.

Growth of Social Networks and Internet (Unique Visitors), September 2007 – September 2008
 
        Social Networks
    Internet
Worldwide
                 38 %            22 %  
Middle East & Africa
                 62 %            25 %  
Asia-Pacific
                 48 %            34 %  
Europe
                 48 %            21 %  
Latin America
                 43 %            28 %  
North America
                 8 %            1 %  
 

Source: comScore, November 2008

Growth in Adult Online Communities

Within the social networking sphere, we are focused on adult online communities. According to comScore, over 43% of worldwide internet users accessed adult websites in September 2008 and worldwide users accessing adult websites grew 23% from September 2007 to September 2008. In particular, according to comScore, the number of adult visitors (defined as users over 18 years of age) to social networks have increased by 40% from September 2007 to September 2008. Adults as a group have also become more actively engaged over the same time period, spending 50% more total minutes on social networks than in September 2007. Additionally, within the adult segment, social networking in the United States is still under penetrated. According to eMarketer, the number of adult users of social networks in the United States will increase by 50% from 57 million in 2007 to 85 million in 2011, as shown in the chart below.

United States Adult Online Social Networking Users
 
        2007
    2008E
    2009E
    2010E
    2011E
Number of adult social networking users (in millions)
                 57              69              76              81              85    
Percentage of adult internet users
                 37 %            44 %            47 %            48 %            49 %  
 

Source: eMarketer, December. 2007

Adult community websites such as ours offer a similar suite of applications and communications tools as general interest social networking websites. The distinction lies in the user’s purpose for accessing the website. Whereas most general interest social networking users log on to remain generally connected to their friends and interest groups, adult community website members log on specifically to meet a companion or date who they do not know. Adult communities facilitate interaction between individuals by allowing them to search for and communicate with a large number of potential partners at their convenience and afford them the ability to initially meet people in a more secure online setting before meeting face-to-face.

Growth of Online Spending on Adult Services and Entertainment

Adult content dominates the paid online content market, which includes subscription and pay-on-demand services. The main drivers of purchasing adult services online are payment mechanisms, including credit cards and the emergence of alternative online payment methods in emerging markets. According to Euromonitor, by 2010 over 40% of the world’s population is expected to own a credit card, allowing for significant increases in online spending for goods and services. The chart below shows significant increases are expected in credit card penetration across all regions worldwide.

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Credit Card Penetration
 
        2004
    2005
    2006
    2007
    2008E
    2009E
    2010E
Worldwide
                 22 %            24 %            25 %            28 %            31 %            35 %            40 %  
North America
                 212 %            222 %            229 %            242 %            249 %            262 %            275 %  
Europe
                 20 %            22 %            25 %            28 %            33 %            40 %            50 %  
Middle East & Africa
                 22 %            23 %            28 %            32 %            35 %            39 %            43 %  
Latin America
                 22 %            28 %            35 %            44 %            51 %            58 %            64 %  
Asia-Pacific
                 15 %            16 %            17 %            19 %            23 %            27 %            33 %  
 

Source: Euromonitor, November 2008

In developing economies access to credit cards is currently limited due to a less developed banking sector, limited credit histories for customers and customer aversion to debt. For example, in China as of 2007 less than 8% of the population held a credit card, according to Euromonitor. However, as illustrated in the table above, credit cards are expected to grow rapidly in emerging markets. Additionally, a number of alternative payment systems, such as prepaid cards, mobile payments, cash payments and bank transfers, are becoming more and more prevalent for online payments in these markets.

Growth in Online Advertising

Since internet users share a wealth of personal information, such as age, location, occupation and hobbies, the social networking websites are highly attractive to advertisers who are able to target advertisements to specific demographic groups.

Despite the current unenthusiastic outlook for the United States and the global economies, internet advertising spending is expected to grow at a solid pace, maintaining significantly higher growth rates than other advertising mediums, as shown in the chart below. According to ZenithOptimedia, internet advertising worldwide is expected to grow at a compounded annual growth rate of 24% between 2007 and 2010 and, in particular, interactive multimedia and digital video advertising in the United States are expected to grow at a compounded annual growth rate of 48% between 2007 and 2010.

Worldwide Advertising Spending Growth
 
        2004
    2005
    2006
    2007
    2008E
    2009E
    2010E
Total advertising expense
                 7 %            6 %            7 %            7 %            7 %            6 %            7 %  
Internet
                 26 %            44 %            38 %            35 %            27 %            23 %            22 %  
Print
                 5 %            4 %            4 %            3 %            2 %            2 %            3 %  
TV
                 9 %            4 %            7 %            7 %            7 %            5 %            6 %  
Cinema
                 12 %            9 %            4 %            12 %            9 %            9 %            9 %  
Radio
                 6 %            4 %            4 %            4 %            3 %            4 %            4 %  
Outdoor
                 8 %            12 %            10 %            8 %            10 %            9 %            8 %  
 

Source: ZenithOptimedia, June 2008

Furthermore, eMarketer forecasts that worldwide online social networking