SECURITIES AND EXCHANGE COMMISSION
Interactive Network, Inc.
Nevada | 7370 | 13-3750988 | ||||||||
Nevada | 7370 | 42-1745941 | ||||||||
(State or other jurisdiction of incorporation or organization) | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification Number) |
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 and President FriendFinder Networks Inc. 6800 Broken Sound Parkway, Suite 200 Boca Raton, Florida 33487 Telephone: (561) 912-7000 (Name, address, including zip code, and telephone number, including area code, of agent for service) | Please send a copy of all communications to: Bradley D. Houser Esq. Akerman Senterfitt One Southeast Third Ave., 25th Floor Miami, Florida 33131-1714 Telephone: (305) 374-5600 Fax: (305) 374-5095 |
Large accelerated filer | [ ] | Accelerated filer | [ ] | ||||||||||||
Non-accelerated filer | [X] | Smaller reporting company | [ ] | ||||||||||||
(Do not check if a smaller reporting company) |
Title of each class of securities to be registered | Amount to be registered | Proposed maximum offering price per unit | Proposed maximum aggregate offering price | Amount of registration fee | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
14% Senior Secured Notes due 2013 | $ | 235,331,887 | (1) | 100 | %(5) | $ | 235,331,887 | (5) | $ | 26,969.03 | ||||||||
Guarantees of the 14% Senior Secured Notes due 2013 | — | — | — | — | (11) | |||||||||||||
14% Cash Pay Secured Notes due 2013 | $ | 10,630,667 | (2) | 100 | %(6) | $ | 10,630,667 | (6) | $ | 1,218.27 | ||||||||
Guarantees of the 14% Cash Pay Secured Notes due 2013 | — | — | — | — | (11) | |||||||||||||
11.5% Convertible Non-Cash Pay Secured Notes due 2014 | $ | 250,849,125 | (3) | 100 | %(7) | $ | 250,849,125 | (7) | $ | 28,747.31 | ||||||||
Guarantees of the 11.5% Convertible Non-Cash Pay Secured Notes due 2014 | — | — | — | — | (11) | |||||||||||||
11.5% Convertible Non-Cash Pay Secured Notes due 2014 Paid-in-Kind | $ | 93,620,766 | (4) | 100 | % | $ | 93,620,766 | (4) | $ | 10,728.94 | ||||||||
Common Stock, par value $0.001 per share, underlying the 11.5% Convertible Non-Cash Pay Notes | 8,310,763 | (8) | — | — | — | (8) | ||||||||||||
Common Stock, par value $0.001 per share | 22,916,801 | (9) | $ | 2.00 | (10) | $ | 45,833,602 | (10) | $ | 5,252.53 | ||||||||
Common Stock, par value $0.001 per share, underlying Series B common stock | 32,965 | $ | 2.00 | (12) | $ | 65,930 | (12) | $ | 7.55 | |||||||||
Aggregate number of shares being registered in this offering | 31,260,529 | — | — | — | ||||||||||||||
Total amount of registration fee | — | — | — | $ | 72,923.63 | (13) |
(1) | Represents the aggregate principal amount of the 14% Senior Secured Notes due 2013 oustanding being registered. |
(2) | Represents the aggregate principal amount of the 14% Cash Pay Secured Notes due 2013 outstanding being registered. |
(3) | Represents the aggregate principal amount of the 11.5% Convertible Non-Cash Pay Secured Notes due 2014 outstanding, or $250,849,125, being registered. |
(4) | Represents the aggregate principal amount of the 11.5% Convertible Non-Cash Pay Secured Notes due 2014 (the “Non-Cash Pay Notes”) that may be paid-in-kind in respect of future interest payments. |
(5) | Estimated solely for the purpose of calculating the registration fee which was computed in accordance with Rule 457(o) under the Securities Act of 1933, as amended (the “Securities Act”). |
(6) | Estimated solely for the purpose of calculating the registration fee which was computed in accordance with Rule 457(o) under the Securities Act. |
(7) | Estimated solely for the purpose of calculating the registration fee which was computed in accordance with Rule 457(o) under the Securities Act. |
(8) | Based on the number of shares of common stock of FriendFinder Networks Inc. as may be issued upon conversion of all of the 11.5% Convertible Non-Cash Pay Secured Notes due 2014 registered hereby at a conversion price equal to the price per share of common stock offered upon the consummation of FriendFinder Networks Inc.’s initial public offering on May 16, 2011, or $10.00 per share; the shares are not subject to an additional fee pursuant to Rule 457(i) of the Securities Act. |
(9) | Consists of shares held outright which includes 22,453,503 shares of which are subject to a lock-up agreement that expires on November 6, 2011. |
(10) | Estimated solely for the purpose of calculating the registration fee which was computed in accordance with Rule 457(c) under the Securities Act of 1933, as amended. The calculations of the proposed maximum offering price per share and the proposed maximum aggregate offering price are based on the average of the high and low sale prices of FriendFinder Networks Inc.’s common stock on October 13, 2011, as quoted on the NASDAQ Global Market. |
(11) | Pursuant to Rule 457(n) of the Securities Act, no registration fee is required for the Guarantees. |
(12) | Estimated solely for the purpose of calculating the registration fee which was computed in accordance with Rule 457(c) under the Securities Act of 1933, as amended. The calculations of the proposed maximum offering price per share and the proposed maximum aggregate offering price are based on the average of the high and low sale prices of FriendFinder Networks Inc.’s common stock on October 13, 2011, as quoted on the NASDAQ Global Market. |
(13) | Pursuant to Rule 457(p) of the Securities Act, we are offsetting $58,705.58 which was previously paid in connection with a Registration Statement on Form S-4 filed on August 1, 2011, as amended, and withdrawn on October 17, 2011. |
Exact Name of Subsidiary Guarantor | State or Other Jurisdiction of Incorporation or Formation | I.R.S. Employer Identification Number | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
Argus Payments Inc. | Delaware | 45-2494661 | ||||||||
Big Island Technology Group, Inc. | California | 20-8009795 | ||||||||
Blue Hen Group Inc. | Delaware | 45-2539667 | ||||||||
Confirm ID, Inc. | California | 74-3037020 | ||||||||
Danni Ashe, Inc. | California | 95-4665271 | ||||||||
Fastcupid, Inc. | California | 20-2997869 | ||||||||
Fierce Wombat Games Inc. (f/k/a Big Ego Games Inc.) | California | 27-3532019 | ||||||||
Flash Jigo Corp. | Delaware | 27-4660821 | ||||||||
FriendFinder California Inc. | California | 77-0522750 | ||||||||
FriendFinder Ventures Inc. | Nevada | 27-4663125 | ||||||||
FRNK Technology Group | California | 94-3277102 | ||||||||
General Media Art Holding, Inc. | Delaware | 13-4042637 | ||||||||
General Media Communications, Inc. | New York | 13-3502237 | ||||||||
General Media Entertainment, Inc. | New York | 13-3592960 | ||||||||
Giant Swallowtail Inc. | Delaware | 45-2539401 | ||||||||
Global Alphabet, Inc. | California | 77-0527649 | ||||||||
GMCI Internet Operations, Inc. | New York | 13-4097655 | ||||||||
GMI On-Line Ventures, Ltd. | Delaware | 13-4097656 | ||||||||
Magnolia Blossom Inc. | Delaware | 45-2538925 | ||||||||
Medley.com Incorporated | California | 03-0543594 | ||||||||
NAFT News Corporation | California | 27-3634385 | ||||||||
Penthouse Digital Media Productions Inc. | New York | 65-1251056 | ||||||||
Penthouse Images Acquisitions, Ltd. | New York | 13-3599228 | ||||||||
Playtime Gaming Inc. | California | 27-3634371 | ||||||||
PerfectMatch Inc. (f/k/a Goldenrod Spear Inc.) | Delaware | 45-2539020 | ||||||||
PMGI Holdings Inc. | Delaware | 20-1942663 | ||||||||
PPM Technology Group, Inc. | California | 20-8009876 | ||||||||
Pure Entertainment Telecommunications, Inc. | New York | 90-0209626 | ||||||||
Sharkfish, Inc. | California | 56-2471221 | ||||||||
Snapshot Productions, LLC | Texas | 46-0477091 | ||||||||
Streamray Inc. | Nevada | 88-0422716 | ||||||||
Streamray Studios Inc. | California | 26-4311009 | ||||||||
Tan Door Media Inc. | California | 26-4311100 | ||||||||
Traffic Cat, Inc. | California | 56-2471223 | ||||||||
Transbloom, Inc. | California | 74-3021168 | ||||||||
Various, Inc. | California | 77-0477762 | ||||||||
Video Bliss, Inc. | California | 95-4566760 | ||||||||
West Coast Facilities Inc. | California | 59-3814751 |
INTERACTIVE NETWORK, INC.
$235,331,887 14% of Senior Secured Notes due 2013
$10,630,667 14% of Cash Pay Secured Notes due 2013
$344,469,891 11.5% of Convertible Non-Cash Pay Secured Notes due 2014
31,260,529 Shares of Common Stock
sales of the Registrable Notes and Registrable Shares by the selling securityholders pursuant to this prospectus, please read “Plan of Distribution.”
Page | ||||||
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SUMMARY | 1 | |||||
THE OFFERING | 6 | |||||
RATIO OF EARNINGS TO FIXED CHARGES | 12 | |||||
RISK FACTORS | 13 | |||||
USE OF PROCEEDS | 38 | |||||
DILUTION | 38 | |||||
SELLING SECURITYHOLDERS | 39 | |||||
BUSINESS | 47 | |||||
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS | 67 | |||||
SELECTED CONSOLIDATED FINANCIAL DATA | 68 | |||||
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 71 | |||||
FORWARD-LOOKING STATEMENTS | 109 | |||||
DIRECTORS AND EXECUTIVE OFFICERS | 112 | |||||
EXECUTIVE COMPENSATION | 119 | |||||
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS | 135 | |||||
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT | 145 | |||||
PLAN OF DISTRIBUTION | 147 | |||||
DESCRIPTION OF NOTES | 149 | |||||
DESCRIPTION OF CAPITAL STOCK | 160 | |||||
DESCRIPTION OF OTHER INDEBTEDNESS | 166 | |||||
INTERESTS OF NAMED EXPERTS AND COUNSEL | 167 | |||||
LEGAL MATTERS | 167 | |||||
EXPERTS | 167 | |||||
WHERE YOU CAN FIND MORE INFORMATION | 167 | |||||
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS | F-1 |
• | Social Networking. Approximately 68% of our total net revenues for the six months ended June 30, 2011 and 70% of our total net revenues for the year ended December 31, 2010 were generated through our targeted social networking technology platform. Our social networking technology platform provides users who register or purchase subscriptions to one or more of our websites with the ability to communicate and to establish new connections with other users via our personal chat rooms, instant messaging and e-mail applications and to create, post and view content of interest. We have been able to rapidly create and seamlessly maintain multiple websites tailored to specific categories or genres and designed to cater to targeted audiences with mutual interests. We believe that our ability to create and operate a diverse network of specific interest websites with unique, user-generated content in a cost-effective manner is a significant competitive differentiator that allows us to implement a subscription-fee based revenue model while many other popular social networking websites rely primarily upon free-access, advertising-based revenue models. |
• | Live Interactive Video. Approximately 24% of our total net revenues for the six months ended June 30, 2011 and 22% of our total net revenues for the year ended December 31, 2010 were generated through our live interactive video technology platform. Our live interactive video technology platform is a live video broadcast platform that enables models to broadcast from independent studios throughout the world and interact with our users via instant messaging and video. We believe our live interactive video platform provides a unique offering including bi-directional and omni-directional video and interactive features that allow models to communicate with and attract users through a variety of mediums including blogs, |
newsletters and video. In addition, we believe the reliability of our live interactive video technology platform, which had approximately 99.1% uptime during 2010, is a key factor allowing us to maintain a large base of users. |
• | Visitors. Visitors are users who visit our websites but do not necessarily register. 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. We had more than 196 million unique worldwide visitors in the month of December 2010, representing a growth of more than 300% from our approximately 46.9 million unique worldwide visitors in January 2009, according to comScore. |
• | Registrants. Registrants are visitors who complete a free registration form on one of our websites by giving basic identification information and submitting their e-mail address. For the six months ended June 30, 2011, we averaged more than 6.0 million new registrations on our websites each month. For the year ended December 31, 2010, we averaged more than 6.4 million new registrations on our websites each month. Some of our registrants are also members, as described below. |
• | Members. Members are registrants who log into one of our websites and make use of our free products and services. For the six months ended June 30, 2011, we averaged more than 3.5 million new members on our websites each month. For the year ended December 31, 2010, we averaged more than 3.9 million new members on our websites each month. |
• | Subscribers. Subscribers are members who purchase daily, three-day, weekly, monthly, quarterly, annual or lifetime subscriptions for one or more of our websites. Subscribers have full access to our websites and may access special features. For the six months ended June 30, 2011, we had a monthly average of over 900,000 and for the year ended December 31, 2010, we had a monthly average of approximately 1 million paying subscribers. |
• | Paid Users. Paid users are members who purchase products or services on a pay-by-usage basis. For the six months ended June 30, 2011, we averaged approximately 1.5 million purchased minutes by paid users each month. For the year ended December 31, 2010, we averaged approximately 1.6 million purchased minutes by paid users each month. |
• | Average Revenue per Subscriber. We calculate average revenue per subscriber, or ARPU, by dividing net revenue for the period by the average number of subscribers in the period and by the number of months in the period. As such, our ARPU is a monthly calculation. For the six months ended June 30, 2011, our average monthly revenue per subscriber was $20.38. For the year ended December 31, 2010, our average monthly revenue per subscriber was $20.49. |
• | Churn. Churn is calculated by dividing terminations of subscriptions during the period by the total number of subscribers at the beginning of that period. Our average monthly churn rate, which measures the rate |
of loss of subscribers, for the six months ended June 30, 2011 was 15.9% per month. Our average monthly churn rate for the year ended December 31, 2010 was 16.1% per month. |
• | Cost Per Gross Addition. Cost per gross addition, or CPGA, is calculated by adding affiliate commission expense plus ad buy expenses and dividing by new subscribers during the measurement period. Our CPGA for the six months ended June 30, 2011 was $43.65. Our CPGA for the year ended December 31, 2010 was $47.25. |
• | Average Lifetime Net Revenue Per Subscriber. Average Lifetime Net Revenue Per Subscriber is calculated by multiplying the average lifetime (in months) of a subscriber by ARPU for the measurement period and then subtracting the CPGA for the measurement period. Our Average Lifetime Net Revenue Per Subscriber for the six months ended June 30, 2011 was $84.30. Our Average Lifetime Net Revenue Per Subscriber for the year ended December 31, 2010 was $80.17. While we monitor many statistics in the overall management of our business, we believe that Average Lifetime Net Revenue Per Subscriber and the number of subscribers are particularly helpful metrics for gaining a meaningful understanding of our business as they provide an indication of total revenue and profit generated from our base of subscribers inclusive of affiliate commissions and advertising costs required to generate new subscriptions. |
• | Proprietary and Scalable Technology Platform. Our robust, proprietary and highly scalable technology platform supports our social networking, live interactive video and premium content websites. We are able to use our customized back-end interface to quickly and affordably generate new websites, launch new features and target new audiences at a relatively low incremental cost. We believe that our ability to create new websites and provide new features is crucial to cost-effectively maintaining our relationships with existing users and attracting new users. |
• | Paid Subscriber-Based Model. We operate social networking websites that allow our members to make connections with other members with whom they share common interests. Our paid subscriber-based model of social networking websites is distinctly different from the business models of other free social networking websites whose users access the websites to remain connected to their pre-existing friends and interest groups. |
• | Large and Diverse User Base. We operate some of the most heavily visited social networking websites in the world, currently adding on average more than 6.0 million new registrants and more than 3.5 million new members each month. Our websites are designed to appeal to individuals with a diversity of interests and backgrounds. We believe potential members are attracted to the opportunity to interact with other individuals by having access to our large, diverse user base. |
• | Large and Difficult to Replicate Affiliate Network and Significant Marketing Spend. Our marketing affiliates are companies that market our services on their websites, allowing us to market our brand beyond our established user base. As of June 30, 2011 and December 31, 2010, we had more than 280,000 participants in our marketing affiliate program from which we derive a substantial portion of our new members and |
approximately 46% of our net revenues for the six months ended June 30, 2011 and 45% of our net revenues for the year ended December 31, 2010. We believe that the difficulty in building an affiliate network of this large size, together with our combined affiliate and advertising spend for the six months ended June 30, 2011 and the year ended December 31, 2010 of $42.1 million and $103.5 million, respectively, presents a significant barrier to entry for potential competitors. |
• | Convert Visitors, Registrants and Members into Subscribers or Paid Users. We continually seek to convert visitors, registrants and members into subscribers or paid users. We do this by constantly evaluating, adding and enhancing features on our websites to improve our users’ experience. |
• | Create Additional Websites and Diversify Offerings. We are constantly seeking to identify groups of sufficient size who share a common interest in order to create a website intended to appeal to their interests. Our extensive user database serves as an existing source of potential members and subscribers for new websites we create. |
• | Expand into and Monetize Current Foreign Markets. In 2010, nearly 71% of our members were outside the United States, but non-U.S. users accounted for less than half of our total net revenues. We seek to expand in selected geographic markets, including Southeast Europe, South America and Asia. |
• | Pursue Targeted Acquisitions. We intend to expand our business by acquiring and integrating additional social networking websites, technology platforms, owners, creators and distributors of content and payment processing and advertising businesses. Our management team possesses significant mergers and acquisitions and integration expertise and regularly screens the marketplace for strategic acquisition opportunities. |
• | Generate Online Advertising Revenue. To date, online advertising revenue has represented less than 0.1% of our net revenue, averaging approximately $7,000 per month in the six months ended June 30, 2011 and $9,000 per month for the year ended December 31, 2010. With continued worldwide growth in this advertising segment, we see this as a significant growth opportunity. We believe that our broad and diverse user base represents a valuable asset that will provide opportunities for us to offer targeted online advertising to specific demographic groups. We intend to focus our advertising efforts on our general audience social networking websites and maintain our subscription-based model for our adult social networking websites. |
the outstanding principal amounts of the Senior Secured Notes, Cash Pay Notes and Non-Cash Pay Notes were $243.8 million, $11.0 million and $250.9 million, respectively.
Issuers | FriendFinder Networks Inc. and Interactive Network, Inc., as co-issuers. | |||||
Notes Offered by the Selling Securityholders | Up to $ 235,331,887 aggregate principal amount of 14% Senior Secured Notes due 2013 (the “Senior Secured Notes”). | |||||
Maturity Date | September 30, 2013. | |||||
Interest Payment Dates | Quarterly, on March 31, June 30, September 30 and December 31 of each year, commencing December 31, 2010. | |||||
Subsidiary Guarantees | Each of our domestic subsidiaries set forth onSchedule A to this prospectus have guaranteed the Senior Secured Notes. The Senior Secured Notes may be guaranteed by additional subsidiaries in the future under certain circumstances. | |||||
Ranking | The Senior Secured Notes and the guarantees are our and the guarantors’ senior first-priority secured obligations and are: • secured on a first-priority basis, by liens on all of our and the guarantors’ assets, including without limitation, receivables, inventory, furniture, fixtures, equipment, trademarks, copyrights and other intangibles, real property and the capital stock of subsidiaries, including a 100% pledge of the co-issuers’ stock, subject to customary exceptions; • senior in right of payment to the Non-Cash Pay Notes, but not the Cash Pay Notes with certain exceptions; and • pari passu in right of payment to the Cash Pay Notes, with certain exceptions. | |||||
Optional Redemption | The Senior Secured Notes are redeemable prior to maturity at our option in whole but not in part, at 110% of principal, plus accrued and unpaid interest. | |||||
Change of Control | Upon a change of control (as defined in the section entitled “Description of Notes”), we must offer to repurchase the Senior Secured Notes at 110% of the principal amount, plus accrued and unpaid interest to the purchase date. | |||||
Certain Covenants | The Senior Secured Notes Indenture contains certain covenants, including limitations and restrictions on our and our domestic subsidiaries’ ability to: • incur additional indebtedness; • make dividend payments or other restricted payments; • create liens; • change the nature of its business • modify the provisions of any indebtedness, organizational documents and certain other agreements; |
• enter into transactions with affiliates; and • engage in fundamental changes, dispositions or acquisitions with respect to all or any part of our business, property or assets. As of the date of this prospectus, all of our domestic subsidiaries are set forth onSchedule A to this prospectus. Our foreign subsidiaries will not be subject to any of the restrictive covenants in the Senior Secured Notes Indenture. The restrictive covenants set forth in the Senior Secured Notes Indenture are subject to important exceptions and qualifications. See the section entitled “Description of Notes” for more information. | ||||||
Conversion Rights | None. | |||||
Risk Factors | Potential investors in the Senior Secured Notes should carefully consider the matters set forth under the captionRisk Factors prior to making an investment decision with respect to the Senior Secured Notes. | |||||
Use of Proceeds | We are not selling any securities under this prospectus and we will not receive any proceeds from the sale of Senior Secured Notes by the selling securityholders. |
Issuers | FriendFinder Networks Inc. and Interactive Network, Inc., as co-issuers. | |||||
Notes Offered by the Selling Securityholders | Up to $10,630,667 aggregate principal amount of 14% Cash Pay Secured Notes Due 2013 (the “Cash Pay Notes”). | |||||
Maturity Date | September 30, 2013. | |||||
Interest Payment Dates | Quarterly, on March 31, June 30, September 30 and December 31 of each year, commencing December 31, 2010. | |||||
Subsidiary Guarantees | Each of our domestic subsidiaries set forth onSchedule A to this prospectus have guaranteed the Cash Pay Notes. The Cash Pay Notes may be guaranteed by additional subsidiaries in the future under certain circumstances. | |||||
Ranking | The Cash Pay Notes and the guarantees are our and the guarantors’ subordinated second-priority secured obligations and are: • secured on a second-priority basis, by liens on all of our and the guarantors’ assets, including without limitation, receivables, inventory, furniture, fixtures, equipment, trademarks, copyrights and other intangibles, real property and the capital stock of subsidiaries, including a 100% pledge of the co-issuers’ stock, subject to customary exceptions; and • pari passu in right of payment to the Senior Secured Notes, with certain exceptions. | |||||
Optional Redemption | The New Cash-Pay Notes are redeemable prior to maturity at our option in whole but not in part, at 110% of principal, plus accrued and unpaid interest. See the section entitled “Description of Notes” for more information. |
Change of Control | Upon a change of control (as defined in the section entitled “Description of Notes”), we must offer to repurchase the Cash Pay Notes at 110% of the principal amount, plus accrued and unpaid interest to the purchase date. | |||||
Certain Covenants | The Cash Pay Notes Indenture contains certain covenants, including limitations and restrictions on our and our domestic subsidiaries’ ability to: • incur additional indebtedness; • make dividend payments or other restricted payments; • create liens; • change the nature of its business; • modify the provisions of any indebtedness, organizational documents and certain other agreements; • enter into transactions with affiliates; and • engage in fundamental changes, dispositions or acquisitions with respect to all or any part of our business, property or assets. As of the date of this prospectus, all of our domestic subsidiaries are set forth onSchedule A to this prospectus. Our foreign subsidiaries will not be subject to any of the restrictive covenants in the Cash Pay Notes Indenture. The restrictive covenants set forth in the Cash Pay Notes Indenture are subject to important exceptions and qualifications. See the section entitled “Description of Notes” for more information. | |||||
Conversion Rights | None. | |||||
Risk Factors | Potential investors in the Cash Pay Notes should carefully consider the matters set forth under the captionRisk Factors prior to making an investment decision with respect to the Cash Pay Notes. | |||||
Use of Proceeds | We are not selling any securities under this prospectus and we will not receive any proceeds from the sale of Cash Pay Notes by the selling securityholders. |
Issuers | FriendFinder Networks Inc. and Interactive Network, Inc., as co-issuers. | |||||
Notes Offered by the Selling Securityholders | Up to $344,469,891 aggregate principal amount of 11.5% Convertible Non-Cash Pay Secured Notes Due 2014 (the “Non-Cash Pay Notes”), which includes $93,620,766 of Non-Cash Pay Notes that may be paid-in-kind in respect of future interest payments. | |||||
Maturity Date | April 30, 2014. | |||||
Interest Payment Dates | Payable semi-annually, on June 30 and December 31 of each year, commencing on December 31, 2010. While the Senior Secured Notes are in place, interest must be paid-in-kind with additional Non-Cash Pay Notes and after the Senior Secured Notes have been repaid in full, the Issuers may pay interest in cash or with additional Non-Cash Pay Notes. |
Subsidiary Guarantees | Each of our domestic subsidiaries set forth onSchedule A to this prospectus have guaranteed the Non-Cash Pay Notes. The Non-Cash Pay Notes may be guaranteed by additional subsidiaries in the future under certain circumstances. | |||||
Ranking | The Non-Cash Pay Notes and the guarantees are our and the guarantors’ subordinated second-priority secured obligations and are: • secured on a second-priority basis, by liens on all of our and the guarantors’ assets, including without limitation, receivables, inventory, furniture, fixtures, equipment, trademarks, copyrights and other intangibles, real property and the capital stock of subsidiaries, including a 100% pledge of the co-issuers’ stock, subject to customary exceptions; and • subordinate in right of payment to the Senior Secured Notes and the Cash Pay Notes, with certain exceptions. | |||||
Optional Redemption | The Non-Cash Pay Notes are redeemable prior to maturity at our option in whole but not in part, at 100% of principal, plus accrued and unpaid interest, subject to the rights of the holders of the Senior Secured Notes under the intercreditor agreement (the “Intercreditor Agreement”) by and between the holders of the Old Notes, which provides that no redemption of the Non-Cash Pay Notes may occur until the Senior Secured Notes are repaid in full. See section entitled “Description of Notes” for more information. | |||||
Change of Control | Upon a change of control (as defined in the section entitled “Description of Notes”), we must offer to repurchase the Non-Cash Pay Notes at 110% of the principal amount, plus accrued and unpaid interest to the purchase date. | |||||
Certain Covenants | The Non-Cash Pay Notes Indenture contains certain covenants, including limitations and restrictions on our and our domestic subsidiaries’ ability to: • incur additional indebtedness; • make dividend payments or other restricted payments; • create liens; • change the nature of its business, modify the provisions of any indebtedness, organizational documents and certain other agreements; • enter into transactions with affiliates; and • engage in fundamental changes, dispositions or acquisitions with respect to all or any part of our business, property or assets. As of the date of this prospectus, all of our domestic subsidiaries are set forth onSchedule A to this prospectus. Our foreign subsidiaries will not be subject to any of the restrictive covenants in the Non-Cash Pay Notes Indenture. The restrictive covenants set forth in the Non-Cash Pay Notes Indenture are subject to important exceptions and qualifications. See the section entitled “Description of Notes” for more information. |
Conversion Rights | Pursuant to Non-Cash Pay Notes Indenture, you may opt to convert your Non-Cash Pay Notes, or any portion of the principal amount thereof, into shares of our common stock at a conversion price equal to the price per share of common stock offered upon the consummation of our initial public offering on May 16, 2011, or $10.00 per share, up until the close of business on the day prior to the date of payment in full of the Non-Cash Pay Notes. The aggregate shares of our common stock available in such conversion shall be limited to 8,310,763 shares of our common stock, or approximately 21.1% of our fully diluted equity as of the date our initial public offering was consummated, pursuant to the Non-Cash Pay Notes Indenture. For more information on your conversion rights, see the section entitled, “Description of Notes.” | |||||
Risk Factors | Potential investors in the Non-Cash Pay Notes should carefully consider the matters set forth under the captionRisk Factors prior to making an investment decision with respect to the Non-Cash Pay Notes and/or converting the Non-Cash Pay Notes to shares of our common stock. | |||||
Use of Proceeds | We are not selling any securities under this prospectus and we will not receive any proceeds from the sale of Non-Cash Pay Notes by the selling securityholders. |
Issuer | FriendFinder Networks Inc. | |||||
Common Stock Offered by the Selling Securityholders | The selling securityholders are offering up to an aggregate of 31,260,529 shares of common stock, consisting of i) 22,916,801 shares of our common stock held outright by various stockholders of FriendFinder Networks Inc. (the “Outstanding Shares”), 22,453,503 of these Outstanding Shares of which are subject to a lock-up agreement that expires on November 6, 2011; ii) 8,310,763 shares of our common stock issuable upon the conversion of all of the Non-Cash Pay Notes into shares of our common stock (the “Note Shares”); and (iii) 32,965 shares of our common stock issuable in exchange for the outstanding Series B common stock (together with the Note Shares and the Outstanding Shares, the “Registrable Shares”). For information concerning the selling stockholders and the manner in which they may offer and sell shares of our common stock, see “Selling Stockholders” and “Plan of Distribution” in this prospectus. | |||||
Outstanding Shares of Common Stock | As of October 13, 2011, 31,186,679 shares of our common stock were issued and outstanding. | |||||
Risk Factors | Potential investors in the common stock should carefully consider the matters set forth under the captionRisk Factors prior to making an investment decision with respect to the common stock. |
Use of Proceeds | We are not selling any securities under this prospectus and we will not receive any proceeds from the sale of shares by the selling stockholders. No consideration will be paid in connection with the conversion of the Non-Cash Pay Notes to Note Shares or upon the exchange of shares of Series B common stock for shares of common stock. |
No appraisal of the fair market value of the collateral has been prepared in connection with this offering and we therefore cannot assure you that the value of the noteholders’ interest in the collateral equals or exceeds the principal amounts of each of the Registrable Notes. If the value of the collateral is less than the principal amount of the Registrable Notes, then in the event of bankruptcy, you will only have an unsecured claim against FriendFinder, INI and the subsidiary guarantors to the extent of such shortfall. See “—There may not be sufficient collateral to pay all or any portion of the Registrable Notes.”
financing to refinance any such accelerated obligations on terms acceptable to us or on any terms, which could have a material adverse effect on our ability to continue as a going concern.
• | the number of noteholders; |
• | our operating performance and financial condition; |
• | the market for similar securities; |
• | the interest of securities dealers in making a market in the Registrable Notes; and |
• | prevailing interest rates. |
• | incurred the obligations with the intent to hinder, delay or defraud creditors; or |
• | received less than reasonably equivalent value, or did not receive fair consideration, in exchange for incurring those obligations; and |
(1) | was insolvent or rendered insolvent by reason of that incurrence; |
(2) | was engaged in a business or transaction for which the subsidiary’s remaining assets constituted unreasonably small capital; or |
(3) | intended to incur, or believed that it would incur, debts beyond its ability to pay those debts as they mature. |
• | the sum of its debts, including contingent liabilities, is greater than the fair saleable value of all of its assets; |
• | the present fair saleable value of its assets is less than the amount that would be required to pay its probable liabilities on its existing debts, including contingent liabilities, as they become absolute and mature; or |
• | it cannot pay its debts as they become due. |
(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.
• | Quarterly variations in our results of operations or those of our competitors. |
• | Announcements by us or our competitors of acquisitions, new products, significant contracts, commercial relationships or capital commitments. |
• | Disruption to our operations or those of our marketing affiliates. |
• | The emergence of new sales channels in which we are unable to compete effectively. |
• | Our ability to develop and market new and enhanced products on a timely basis. |
• | Commencement of, or our involvement in, litigation. |
• | Any major change in our board or management. |
• | Changes in governmental regulations or in the status of our regulatory approvals. |
• | Changes in earnings estimates or recommendations by securities analysts. |
• | General economic conditions and slow or negative growth of related markets. |
• | establish advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings; |
• | authorize our board of directors to issue “blank check” preferred stock to increase the number of outstanding shares and thwart a takeover attempt; |
• | require the written request of at least 75% of the voting power of our capital stock in order to compel management to call a special meeting of the stockholders; and |
• | prohibit stockholder action by written consent and require that all stockholder actions be taken at a meeting of our stockholders, unless otherwise specifically required by our articles of incorporation or the Nevada Revised Statutes. |
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. 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, repayment of debt at maturity 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. |
• | 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. |
our status as a public company, the promotion of our services and the expansion of our operations, including the launch of new websites and entering into acquisitions, strategic alliances and joint ventures. If our revenue does not grow at a substantially faster rate than these expected increases in our expenses or if our operating expenses are higher than we anticipate, we may not be profitable and we may incur additional losses, which could be significant. Our net losses cause us to be more highly leveraged, increase our cost of debt and make us subject to certain covenants which limit our ability to grow our business organically or through acquisitions. For more information with respect to the covenants to which we are currently subject, see the risk factor entitled “—Our indebtedness could make obtaining additional capital resources difficult and could materially adversely affect our business, financial condition, results of operations and our growth strategy.”
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.
• | if we experience excessive chargebacks and/or credits; |
• | if we experience excessive fraud ratios; |
• | if there is an adverse change in policy of the acquiring banks and/or card associations with respect to the processing of credit card charges for adult-related content; |
• | if there is an increase in the number of European and U.S. banks that will not accept accounts selling adult-related content; |
• | if there is a breach of our security resulting in the theft of credit card data; |
• | if there is continued tightening of credit card association chargeback regulations in international commerce; |
• | if there are association requirements for new technologies that consumers are less likely to use; and |
• | if negative global economic conditions result in credit card companies denying more transactions. |
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.
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.
• | cause our customers to lose confidence in our services; |
• | deter consumers from using our services; |
• | harm our reputation; |
• | require that we expend significant additional resources related to our information security systems and result in a disruption of our operations; |
• | expose us to liability; |
• | subject us to unfavorable regulatory restrictions and requirements imposed by the Federal Trade Commission or similar authority; |
• | cause us to incur expenses related to remediation costs; and |
• | decrease market acceptance of the use of e-commerce transactions. |
“AdultFriendFinder,” “FriendFinder,” “FastCupid,” “Penthouse,” “Penthouse Letters,” “Forum,” and “Variations” names and marks, the One Key Logo, and other proprietary rights are important to our success, potential growth and competitive position. Our inability or failure to protect or enforce these trademarks and other proprietary rights could have a material adverse effect on 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 or prevent others from challenging the validity of our trademarks. In addition, the enforcement of our intellectual property rights, including trademark rights, through legal or administrative proceedings would be costly and time-consuming and would likely divert management from their normal responsibilities. An adverse determination in any litigation or other proceeding could put one or more of our intellectual property rights at risk of being invalidated or interpreted narrowly. On April 13, 2011, Facebook, Inc., or Facebook, filed a complaint against us and certain of our subsidiaries in the U.S. District Court for the Northern District of California, alleging trademark infringement. The parties are currently engaged in discovery and the court has ordered the parties to attend mediation by January 2012. For a description of this complaint, please see “Legal Proceedings” below. 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.
• | 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, e-mail, user privacy, taxation, access charges, liability for third-party activities and personal jurisdiction. New Jersey enacted the Internet Dating Safety Act in 2008, which requires online dating services to disclose whether they perform criminal background screening practices and to offer safer dating tips on their websites. Other states have enacted or considered enacting similar legislation. While online dating and social networking websites are not currently required to verify the age or identity of their members or to run criminal background checks on them, any such requirements could increase our cost of operations or discourage use of our services. The Children’s Online Privacy Protection Act (COPPA) restricts the ability of online services to collect information from minors. The Protection of Children from Sexual Predators Act of 1998 requires online service providers to report evidence of violations of federal child pornography laws under certain circumstances. |
and applied in a manner that is inconsistent with our data practices. If so, in addition to the possibility of fines and other monetary remedies, this could result in an order requiring that we change our data practices. In 2008, Nevada enacted a law prohibiting businesses from transferring a customer’s personal information through an electronic transmission, unless that information is encrypted. In practice, the law requires businesses operating in Nevada to purchase and implement data encryption software in order to send any electronic transmission (including e-mail) that contains a customer’s personal information.
• | Commercial advertising. We receive a significant portion of our print publications advertising revenue from companies that sell tobacco products. Significant limitations on the ability of those companies to advertise in our publications or on our websites because of legislative, regulatory or court action could materially adversely affect our business, financial condition and results of operations. |
• | Adult content. Regulation, investigations and prosecutions of adult content could prevent us from making such content available in certain jurisdictions or otherwise have a material adverse effect on our business, financial condition and results of operations. Government officials may also place additional restrictions on adult content affecting the way people interact on the internet. The governments of some countries, such as China and India, have sought to limit the influence of other cultures by restricting the distribution of products deemed to represent foreign or “immoral” influences. Regulation aimed at limiting minors’ access to adult content both in the United States and abroad could also increase our cost of operations and introduce technological challenges by requiring development and implementation of age verification systems. U.S. government officials could amend or construe and seek to enforce more broadly or aggressively the adult content recordkeeping and labeling requirements set forth in 18 U.S.C. Section 2257 and its implementing regulations in a manner that is unfavorable to our business. Court rulings may place additional restrictions on adult content affecting how people interact on the internet, such as mandatory web labeling. |
are applicable to our operations, then we could be required to collect from our customers and remit additional sales or use taxes and, if any state determines that we should have been collecting such taxes previously, we may be subject to past tax, interest, late fees and penalties.
to the acquisition of Various and its subsidiaries (including, without limitation, VAT issues in other non-European Union jurisdictions) could materialize.
• | unforeseen operating difficulties and expenditures arising from the process of integrating any acquired business, product or technology, including related personnel, and maintaining uniform standards, controls, procedures and policies; |
• | diversion of a significant amount of management’s attention from the ongoing development of our business; |
• | dilution of existing stockholders’ ownership interests; |
• | incurrence of additional debt; |
• | exposure to additional operational risks and liabilities, including risks and liabilities arising from the operating history of any acquired businesses; |
• | negative effects on reported results of operations from acquisition-related charges and amortization of acquired intangibles; |
• | entry into markets and geographic areas where we have limited or no experience; |
• | the potential inability to retain and motivate key employees of acquired businesses; |
• | adverse effects on our relationships with suppliers and customers; and |
• | adverse effects on the existing relationships of any acquired companies, including suppliers and customers. |
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. |
• | 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. |
do not pay severance to Messrs. Bell and Staton and they choose to compete against us or solicit our employees to work for them, our business, financial condition and results of operations could be materially adversely affected.
Name of Selling Securityholder | Principal Amount of Notes Outstanding That are Owned and That May Be Sold Pursuant to This Prospectus* | Principal Amount of Notes Beneficially Owned After Completion of the Offering | Percentage of Aggregate Principal Amount of Notes Beneficially Owned After Completion of the Offering(1) | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
AMERICAN BEACON SIM HIGH YIELD OPPORTUNITIES FUND(2) | $ | 650,000 | 0 | † | ||||||||||
ANDREW B CONRU TRUST AGREEMENT(3) | $ | 77,157,996 | 0 | † | ||||||||||
PERMAL CAPITAL STRUCTURE OPPORTUNITIES, LTD(4) | $ | 1,410,000 | 0 | † | ||||||||||
ROCKVIEW SHORT ALPHA FUND, LTD(5) | $ | 3,351,445 | 0 | † | ||||||||||
ROCKVIEW TRADING, LTD(6) | $ | 24,843,719 | 0 | † | ||||||||||
STONEHILL INSTITUTIONAL PARTNERS LP(7) | $ | 19,300,721 | 0 | † | ||||||||||
STONEHILL MASTER FUND LTD(8) | $ | 23,755,535 | 0 | † | ||||||||||
THORNBURG STRATEGIC INCOME FUND(9) | $ | 578,685 | 0 | † | ||||||||||
VISIUM BALANCED MASTER FUND LTD(10) | $ | 1,424,400 | 0 | † | ||||||||||
VISIUM CREDIT MASTER FUND LTD(11) | $ | 17,304,633 | 0 | † |
Name of Selling Securityholder | Principal Amount of Notes Outstanding That are Owned and That May Be Sold Pursuant to This Prospectus* | Principal Amount of Notes Beneficially Owned After Completion of the Offering | Percentage of Aggregate Principal Amount of Notes Beneficially Owned After Completion of the Offering(1) | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
VISIUM EQUITY GLOBAL MASTER FUND LTD(12) | $ | 4,459,650 | 0 | † | ||||||||||
TOTAL | $ | 174,236,784 | 0 | † |
* | Amounts have been rounded to the nearest dollar. |
† | Less than 1%. |
(1) | Based on the aggregate principal amount of Senior Secured Notes outstanding of $235,331,887. |
(2) | Strategic Income Management is the subadvisor to American Beacon Sim High Yield Opportunities Fund. The address of American Beacon Sim High Yield Opportunities Fund is 4151 Amon Carter Blvd., MD 2450, Fort Worth, TX 76155. |
(3) | To the best of our knowledge, Andrew Conru holds investment and voting power over the notes held by the Andrew B. Conru Trust Agreement. The address of the Andrew B. Conru Trust Agreement is 111 Monument Circle, Suite 2700, Indianapolis, IN 46204. |
(4) | Sandler Capital Management is the Investment Manager for Permal Capital Structure Opportunities, Ltd. (“PCSO”) and SERF Corp. is a General Partner in Sandler Capital Management. The controlling entity of PCSO is Citco Bank and Trust Company, Ltd. The address of PCSO is 711 5th Ave., 15th Floor, New York, NY 10022. |
(5) | Mr. Kevin Schweitzer is the managing member of Zabak Capital, LLC, which is the managing member of Rockview Management, LLC. Rockview Management, LLC is the investment manager to Rockview Short Alpha Fund, Ltd. The address of Rockview Short Alpha Fund Ltd. is MetroCenter, One Station Place, 7th Floor, Stamford, CT 06902. |
(6) | Mr. Kevin Schweitzer is the managing member of Zabak Capital, LLC and holds sole voting and dispositive power over the shares held by RockView Trading, Ltd. Zabak Capital, LLC is the managing member of RockView Management LLC, which is the investment manager to RockView Trading, Ltd. The address of Rockview Trading, Ltd. is MetroCenter, One Station Place, 7th Floor, Stamford, CT 06902. |
(7) | Stonehill Capital Management LLC, a Delaware limited liability company (“SCM”), is the investment advisor of Stonehill Institutional Partners, L.P. (“Stonehill Institutional”) and Stonehill General Partner, LLC, (“Stonehill GP”) is the General Partner of Stonehill Institutional. By virtue of such relationships, SCM and Stonehill GP may be deemed to have voting and dispositive power over the notes owned by Stonehill Institutional. SCM and Stonehill GP disclaim beneficial ownership of such notes. Mr. John Motulsky, Mr. Christopher Wilson, Mr. Wayne Teetsel, Mr. Thomas Varkey, Mr. Jonathan Sacks, Mr. Peter Sisitsky and Mr. Michael Thoyer (collectively, the “Members”) are the managing members of SCM and Stonehill GP and may be deemed to have shared voting and dispositive power over the notes owned by Stonehill Master. The Members disclaim beneficial ownership of such notes except to the extent of their pecuniary interests therein. The address of Stonehill Institutional is c/o Stonehill Capital Management LLC, 885 Third Avenue, 30th Floor, New York, NY 10022. |
(8) | Stonehill Capital Management LLC, a Delaware limited liability company (“SCM”) is the investment advisor of Stonehill Master Fund Ltd (“Stonehill Master”). By virtue of such relationships, SCM may be deemed to have voting and dispositive power over the notes owned by Stonehill Master. SCM disclaims beneficial ownership of such notes. Mr. John Motulsky, Mr. Christopher Wilson, Mr. Wayne Teetsel, Mr. Thomas Varkey, Mr. Jonathan Sacks, Mr. Peter Sisitsky and Mr. Michael Thoyer (collectively, the “ Members”) are the managing members of SCM and may be deemed to have shared voting and dispositive power over the notes owned by Stonehill Master. The Members disclaim beneficial ownership of such notes except to the extent of their pecuniary interests therein. The address of SMF is c/o Stonehill Capital Management LLC, 885 Third Avenue, 30th Floor, New York, NY 10022. |
(9) | Thornburg Strategic Income Fund is an affiliate of a broker-dealer registered pursuant to Section 15 of the Securities and Exchange Act of 1934. The address of Thornburg Strategic Income Fund is 2300 North Ridgetop Road, Santa Fe, NM 87506. |
(10) | Visium Asset Management, LP has discretionary trading authority over these notes. The General Partner of Visium Asset Management, LP is JG Asset, LLC. Mr. Jacob Gottlieb and Mr. Mark Gottlieb are the holders of membership interests in JG Asset, LLC. The address of Visium Balanced Master Fund, Ltd. is c/o Visium Asset Management, LP, 950 Third Avenue, 29th Floor, New York, NY 10022. |
(11) | Visium Asset Management, LP has discretionary trading authority over these notes. The General Partner of Visium Asset Management, LP is JG Asset, LLC. Mr. Jacob Gottlieb and Mr. Mark Gottlieb are the holders of membership interests in JG Asset, LLC. The address of Visium Credit Master Fund, Ltd. is c/o Visium Asset Management, LP, 950 Third Avenue, 29th Floor, New York, NY 10022. |
(12) | Visium Asset Management, LP has discretionary trading authority over these notes. The General Partner of Visium Asset Management, LP is JG Asset, LLC. Mr. Jacob Gottlieb and Mr. Mark Gottlieb are the holders of membership interests in JG Asset, LLC. The address of Visium Equity Global Master Fund, Ltd. is c/o Visium Asset Management, LP, 950 Third Avenue, 29th Floor, New York, NY 10022. |
Name of Selling Securityholder | Principal Amount of Notes Outstanding That are Owned and That May Be Sold Pursuant to This Prospectus* | Principal Amount of Notes Beneficially Owned After Completion of the Offering | Percentage of Aggregate Principal Amount of Notes Beneficially Owned After Completion of the Offering(1) | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
MARC H. BELL(2) | $ | 5,315,333 | 0 | † | ||||||||||
STATON FAMILY INVESTMENTS LTD(3) | $ | 5,315,333 | 0 | † | ||||||||||
TOTAL | $ | 10,630,666 | 0 | † |
* | Amounts have been rounded to the nearest dollar. |
† | Less than 1%. |
(1) | Based on the aggregate principal amount of Cash Pay Notes outstanding of $10,630,666. |
(2) | Marc H. Bell is our Chief Executive Officer, President and a Director. |
(3) | Daniel C. Staton, our Chairman of the Board, is a member of Staton Family Investments, Ltd. and has voting and investment power over its notes. The address of Staton Family Investments, Ltd. is 6800 Broken Sound Parkway, Boca Raton, FL 33487. |
Name of Selling Securityholder | Aggregate Principal Amount of Notes Owned and Outstanding* | Aggregate Principal Amount of Notes Paid-In Kind That May Be Paid(1)* | Aggregate Principal Amount of Notes That May be Sold* | Number of Shares Of Common Stock Owned, Including Upon Full Conversion of Notes | Number of Shares of Common Stock That May Be Sold Pursuant to This Prospectus(2) | Principal Amount of Notes Beneficially Owned After This Offering | Percentage of Aggregate Principal Amount of Notes Beneficially Owned After This Offering(3) | Number of Shares of Common Stock Owned After This Offering | Percentage of Shares of Common Stock Owned After This Offering(4) | |||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
AST ACADEMIC STRATEGIES ASSET ALLOCATION PORTFOLIO(5) | $ | 237,938 | $ | 88,802 | $ | 326,739 | 7,883 | 7,883 | 0 | † | 0 | † | ||||||||||||||||||||||||||
ANDREW B. CONRU TRUST AGREEMENT(6) | $ | 165,409,752 | $ | 61,733,473 | $ | 227,143,225 | 8,860,991 | 5,480,112 | 0 | † | 3,380,879 | 10.8 | % | |||||||||||||||||||||||||
AQR DIVERSIFIED ARBITRAGE FUND(7) | $ | 2,405,813 | $ | 897,886 | $ | 3,303,699 | 79,706 | 79,706 | 0 | † | 0 | † | ||||||||||||||||||||||||||
AQR OPPORTUNISTIC PREMIUM OFFSHORE FUND LP(8) | $ | 264,375 | $ | 98,669 | $ | 363,044 | 8,759 | 8,759 | 0 | † | 0 | † | ||||||||||||||||||||||||||
CEDARVIEW OPPORTUNITIES MASTER FUND, LP(9) | $ | 3,624,243 | $ | 1,352,624 | $ | 4,976,867 | 120,073 | 120,073 | 0 | † | 0 | † | ||||||||||||||||||||||||||
CITIGROUP PENSION PLAN(10) | $ | 846,000 | $ | 315,740 | $ | 1,161,740 | 28,028 | 28,028 | 0 | † | 0 | † | ||||||||||||||||||||||||||
DALTON DISTRESSED CREDIT MASTER FUND LTD(11) | $ | 317,250 | $ | 118,403 | $ | 435,653 | 10,511 | 10,511 | 0 | † | 0 | † | ||||||||||||||||||||||||||
DG VALUE PARTNERS LP(12) | $ | 683,334 | $ | 255,031 | $ | 938,365 | 22,639 | 22,639 | 0 | † | 0 | † | ||||||||||||||||||||||||||
FLORESCUE FAMILY CORPORATION(13) | $ | 1,869,439 | $ | 697,704 | $ | 2,567,143 | 1,148,302 | 61,936 | 0 | † | 1,086,366 | 3.5 | % |
Name of Selling Securityholder | Aggregate Principal Amount of Notes Owned and Outstanding* | Aggregate Principal Amount of Notes Paid-In Kind That May Be Paid(1)* | Aggregate Principal Amount of Notes That May be Sold* | Number of Shares Of Common Stock Owned, Including Upon Full Conversion of Notes | Number of Shares of Common Stock That May Be Sold Pursuant to This Prospectus(2) | Principal Amount of Notes Beneficially Owned After This Offering | Percentage of Aggregate Principal Amount of Notes Beneficially Owned After This Offering(3) | Number of Shares of Common Stock Owned After This Offering | Percentage of Shares of Common Stock Owned After This Offering(4) | |||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
HAYMAN CAPITAL MASTER FUND, L.P.(14) | $ | 12,954,375 | $ | 4,834,773 | $ | 17,789,148 | 429,185 | 429,185 | 0 | † | 0 | † | ||||||||||||||||||||||||||
INVESTIN PRO F.M.B.A. DALTON DISTRESSED CREDIT(15) | $ | 1,374,750 | $ | 513,078 | $ | 1,887,828 | 45,546 | 45,546 | 0 | † | 0 | † | ||||||||||||||||||||||||||
JEFFERIES & COMPANY INC(16) | $ | 902,916 | $ | 336,982 | $ | 1,239,898 | 51,989 | 29,914 | 0 | † | 22,075 | † | ||||||||||||||||||||||||||
MAC & CO(17) | $ | 1,163,250 | $ | 434,143 | $ | 1,597,393 | 38,539 | 38,539 | 0 | † | 0 | † | ||||||||||||||||||||||||||
MAPSTEAD TRUST, CREATED ON APRIL 16, 2002(18) | $ | 22,247,057 | $ | 8,302,945 | $ | 30,550,002 | 1,250,049 | 737,057 | 0 | † | 512,992 | 1.6 | % | |||||||||||||||||||||||||
PERMAL CAPITAL STRUCTURE OPPORTUNITIES LTD(19) | $ | 1,586,250 | $ | 592,013 | $ | 2,178,263 | 52,553 | 52,553 | 0 | † | 0 | † | ||||||||||||||||||||||||||
ROCKVIEW TRADING LTD(20) | $ | 1,057,500 | $ | 394,675 | $ | 1,452,175 | 591,620 | 35,036 | 0 | † | 556,584 | 1.8 | % | |||||||||||||||||||||||||
SG AURORA MASTER FUND LP(21) | $ | 528,750 | $ | 197,338 | $ | 726,088 | 17,518 | 17,518 | 0 | † | 0 | † | ||||||||||||||||||||||||||
STONEHILL INSTITUTIONAL PARTNERS LP(22) | $ | 5,917,274 | $ | 2,208,418 | $ | 8,125,692 | 549,147 | 196,042 | 0 | † | 353,105 | 1.1 | % | |||||||||||||||||||||||||
STONEHILL MASTER FUND LTD(23) | $ | 11,596,359 | $ | 4,327,940 | $ | 15,924,300 | 1,252,917 | 384,193 | 0 | † | 868,724 | 2.8 | % | |||||||||||||||||||||||||
VISIUM BALANCED MASTER FUND LTD(24) | $ | 2,013,480 | $ | 751,462 | $ | 2,764,942 | 66,708 | 66,708 | 0 | † | 0 | † | ||||||||||||||||||||||||||
VISIUM CREDIT MASTER FUND LTD(25) | $ | 3,274,020 | $ | 1,221,915 | $ | 4,495,935 | 108,470 | 108,470 | 0 | † | 0 | † | ||||||||||||||||||||||||||
ZELL CREDIT OPPORTUNITIES MASTER FUND LP(26) | $ | 10,575,000 | $ | 3,946,753 | $ | 14,521,753 | 350,355 | 350,355 | 0 | † | 0 | † | ||||||||||||||||||||||||||
TOTAL | $ | 250,849,125 | $ | 93,620,767 | $ | 344,469,892 | 15,091,488 | 8,310,763 | 0 | † | 6,780,725 | 21.7 | % |
* | Amounts have been rounded to the nearest dollar. |
† | Less than 1%. |
(1) | Equals the maximum aggregate principal amount of Non-Cash Pay Notes that may be paid-in-kind in respect of interest payments. |
(2) | Does not include any shares held prior to full conversion of the Non-Cash Pay Notes that may be sold pursuant to this prospectus as reflected in the selling securityholder table below relating to shares of common stock. |
(3) | Based on the aggregate principal amount of Non-Cash Pay Notes outstanding of $250,849,125 and $93,620,767 of Non-Cash Pay Notes that may be paid-in-kind in respect of interest payments. |
(4) | Based on 31,186,679 shares of our common stock outstanding as of October 13, 2011. |
(5) | The address of AST Academic Strategies Asset Allocation Portfolio is Gateway Center Two, Mccarter Highway & Market Street, Newark, NJ 07102. |
(6) | To the best of our knowledge, Andrew Conru holds investment and voting power over the notes held by the Andrew B. Conru Trust Agreement. The address of the Andrew B. Conru Trust Agreement is 2125 1st Avenue, #2904, Seattle, WA 98121. |
(7) | The address of AQR Diversified Arbitrage Fund is Two Greenwich Plaza, 3rd Floor, Greenwich, CT 06830. |
(8) | The address of AQR Opportunistic Premium Offshore Fund, LP is c/o AQR Capital Management LLC, Two Greenwich Plaza, 3rd Floor, Greenwich, CT 06830. |
(9) | The General Partner of Cedarview Opportunities Master Fund, LP is Cedarview GP, LLC. Mr. Burton Weinstein is the holder of the membership interests in Cedarview GP, LLC. The address of Cedarview Opportunities Master Fund, LP is One Penn Plaza, 45th Floor, New York, NY 10119. |
(10) | The address of Citigroup Pension Plan is 3800 Citibank Center, Tampa, FL 33610. |
(11) | The address of the Dalton Distressed Credit Master Fund Ltd is 1601 Cloverfield Blvd., 5050N, Santa Monica, CA 90404. |
(12) | The address of DG Value Partners, LP is 227 Park Avenue, 49th Floor, New York, NY 10172. |
(13) | Mr. Barry Florescue is President of Florescue Family Corporation and has voting and investment power over its notes. The address of Florescue Family Corporation is 50 E. Sample Rd, Suite 400, Pompano Beach, Florida 30064. |
(14) | Hayman Capital Management, L.P., the controlling entity of Hayman Capital Master Fund L.P., and Hayman Offshore Management, Inc. (Cayman Islands) are the General Partners of Hayman Capital Master Fund L.P. Hayman Investments, LLC is the General Partner of Hayman Capital Management, L.P. Mr. J. Kyle Bass is the owner of Hayman Investments, LLC, Hayman Capital Management, L.P. and Hayman Offshore Management, Inc., individually and through trust vehicles. The address of Hayman Capital Master Fund L.P. is 2101 Cedar Springs Road, Dallas, TX 75201. |
(15) | The address of Investin Pro F.M.B.A Dalton Distressed Credit is Otto Moensteds Plads 9, Copenhagen V DK—1780. |
(16) | The address of Jefferies & Company Inc. is Harborside Financial Center, Plaza 3, Suite 705, Jersey City, NJ 07303. |
(17) | The address of MAC & Co. is P.O. Box 3195, Attn: MBS Income Unit, Pittsburgh, PA 15230. |
(18) | Mr. Lars Mapstead and Mrs. Marin Mapstead are trustees of the Mapstead Trust, created on April 16, 2002 and hold voting and investment power over its notes. The address of Mapstead Trust is c/o Bose Mckinney & Evans LLP, 111 Monument Circle, Suite 2700, Indianapolis, IN 46204. |
(19) | Sandler Capital Management is the investment manager for Permal Capital Structure Opportunities, Ltd. (“PCSO”) and SERF Corp. is a general partner of Sandler Capital Management. The controlling entity of PCSO is Citco Bank and Trust Company, Ltd. The address of PCSO is 711 5th Ave., 15th Floor, New York, NY 10022. |
(20) | Mr. Kevin Schweitzer is the managing member of Zabak Capital, LLC and holds sole voting and dispositive power over the notes held by RockView Trading, Ltd. Zabak Capital, LLC is the managing member of RockView Management LLC, which is the investment manager to RockView Trading, Ltd. The address of Rockview Trading, Ltd. is MetroCener, One Station Place, 7th Floor, Stamford, CT 06902. |
(21) | SG Aurora Master Fund LP has voting and dispositive power over the notes. The address of SG Aurora Master Fund L.P. is 825 Third Ave., 34th Floor, New York, NY 10022. |
(22) | Stonehill Capital Management LLC, a Delaware limited liability company (“SCM”), is the investment advisor of Stonehill Institutional Partners, L.P. (“Stonehill Institutional”) and Stonehill General Partner, LLC, (“Stonehill GP”) is the General Partner of Stonehill Institutional. By virtue of such relationships, SCM and Stonehill GP may be deemed to have voting and dispositive power over the notes owned by Stonehill Institutional. SCM and Stonehill GP disclaim beneficial ownership of such notes. Mr. John Motulsky, Mr. Christopher Wilson, Mr. Wayne Teetsel, Mr. Thomas Varkey, Mr. Jonathan Sacks, Mr. Peter Sisitsky and Mr. Michael Thoyer (collectively, the “Members”) are the managing members of SCM and Stonehill GP and may be deemed to have shared voting and dispositive power over the notes owned by Stonehill Master. The Members disclaim beneficial ownership of such notes except to the extent of their pecuniary interests therein. The address of Stonehill Institutional is c/o Stonehill Capital Management LLC, 885 Third Avenue, 30th Floor, New York, NY 10022. |
(23) | Stonehill Capital Management LLC, a Delaware limited liability company (“SCM”) is the investment advisor of Stonehill Master Fund Ltd (“Stonehill Master”). By virtue of such relationships, SCM may be deemed to have voting and dispositive power over the notes owned by Stonehill Master. SCM disclaims beneficial ownership of such notes. Mr. John Motulsky, Mr. Christopher Wilson, Mr. Wayne Teetsel, Mr. Thomas Varkey, Mr. Jonathan Sacks, Mr. Peter Sisitsky and Mr. Michael Thoyer (collectively, the “ Members”) are the managing members of SCM and may be deemed to have shared voting and dispositive power over the notes owned by Stonehill Master. The Members disclaim beneficial ownership of such notes except to the extent of their pecuniary interests therein. The address of SMF is c/o Stonehill Capital Management LLC, 885 Third Avenue, 30th Floor, New York, NY 10022. |
(24) | Visium Asset Management, LP has discretionary authority over these notes. The General Partner of Visium Asset Management, LP is JG Asset, LLC. Mr. Jacob Gottlieb and Mr. Mark Gottlieb are the holders of membership interests in JG Asset, LLC. The address of Visium Balanced Master Fund, Ltd. is c/o Visium Asset Management, 950 Third Avenue, 29th Floor, New York, NY 10022. |
(25) | Visium Asset Management, LP has discretionary authority over these notes. The General Partner of Visium Asset Management, LP is JG Asset, LLC. Mr. Jacob Gottlieb and Mr. Mark Gottlieb are the holders of membership interests in JG Asset, LLC. The address for Visium Credit Master Fund, Ltd. is c/o Visium Asset Management, 950 Third Avenue, 29th Floor, New York, NY 10022. |
(26) | The address for Zell Credit Opportunities Master Fund LP is 2 North Riverside Plaza, Suite 600, Chicago, IL 60606. |
Name of Selling Securityholder | Number of Shares of Common Stock Owned Prior to This Offering | Number of Shares of Common Stock That May Be Sold Pursuant to This Prospectus(1) | Number of Shares of Common Stock Owned After This Offering | Percentage of Shares of Common Stock Owned After This Offering(2) | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
ABSOLUTE INCOME FUND, LP(3) | 1,991,703 | 1,991,703 | 0 | † | ||||||||||||||
ANDREW B. CONRU TRUST AGREEMENT(4) | 8,860,991 | 3,380,879 | 5,480,112 | 14.9 | % | |||||||||||||
BELL FAMILY 2003 CHARITABLE LEAD ANNUITY TRUST(5) | 184,190 | 184,190 | 0 | † | ||||||||||||||
MARC H. BELL(6) | 5,147,671 | 5,087,668 | 60,003 | † | ||||||||||||||
SHMUEL BRILL AND SUSANNA BRILL(7) | 3,043 | 3,043 | 0 | † | ||||||||||||||
CAMHZN MASTER LDC(8) | 25,345 | 25,345 | 0 | † | ||||||||||||||
CAMOFI MASTER LDC(9) | 157,132 | 157,132 | 0 | † | ||||||||||||||
CMI II LLC(10) | 428,555 | 428,555 | 0 | † | ||||||||||||||
DEL MAR MASTER FUND, LTD(11) | 698,180 | 698,180 | 0 | † | ||||||||||||||
EPIC DISTRESSED DEBT OPPORTUNITY MASTER FUND, LTD(12) | 446,057 | 446,057 | 0 | † | ||||||||||||||
FLORESCUE FAMILY CORPORATION(13) | 1,148,302 | 1,086,366 | 61,936 | † | ||||||||||||||
RUSSELL FRYE(14) | 133,949 | 133,949 | 0 | † | ||||||||||||||
INTERACTIVE BRAND DEVELOPMENT INC(15) | 32,965(14 | ) | 32,965 | 0 | † | |||||||||||||
JEFFERIES & COMPANY INC(16) | 51,989 | 22,075 | 29,914 | † | ||||||||||||||
MAPSTEAD TRUST, CREATED ON APRIL 16, 2002(17) | 1,250,049 | 512,992 | 737,057 | 2.3 | % | |||||||||||||
PAW ASSOCIATES LLC(18) | 11,454 | 11,454 | 0 | † | ||||||||||||||
ANDREW RECHTSCHAFFEN(19) | 30,414 | 30,414 | 0 | † | ||||||||||||||
ROCKVIEW SHORT ALPHA FUND LTD(20) | 82,090 | 82,090 | 0 | † | ||||||||||||||
ROCKVIEW TRADING LTD(21) | 591,620 | 556,584 | 35,036 | † | ||||||||||||||
STATON FAMILY PERPETUAL TRUST(22) | 1,688,970 | 1,688,970 | 0 | † | ||||||||||||||
STATON MEDIA LLC(23) | 149,995 | 149,995 | 0 | † | ||||||||||||||
STATON FAMILY INVESTMENTS LTD(24) | 3,432,893 | 3,432,893 | 0 | † | ||||||||||||||
STONEHILL INSTITUTIONAL PARTNERS LP(25) | 549,147 | 353,105 | 196,042 | † | ||||||||||||||
STONEHILL MASTER FUND LTD(26) | 1,252,917 | 868,724 | 384,193 | 1.2 | % | |||||||||||||
STRATEGIC MEDIA I LLC(27) | 1,274,165 | 1,274,165 | 0 | † | ||||||||||||||
VISIUM EQUITY GLOBAL MASTER FUND LTD(28) | 81,812 | 81,812 | 0 | † | ||||||||||||||
WEISMANN FAMILY LIMITED PARTNERSHIP(29) | 9,748 | 9,748 | 0 | † | ||||||||||||||
THE WEISMANN FOUNDATION(30) | 15,634 | 15,634 | 0 | † | ||||||||||||||
THE 2007 AIDAN STIRLING WEISMANN TRUST(31) | 407 | 407 | 0 | † | ||||||||||||||
DIETRICH WEISMANN REVOCABLE TRUST(32) | 37,454 | 37,454 | 0 | † | ||||||||||||||
THE 2005 OWEN AYRTON WEISMANN TRUST(33) | 507 | 507 | 0 | † |
Name of Selling Securityholder | Number of Shares of Common Stock Owned Prior to This Offering | Number of Shares of Common Stock That May Be Sold Pursuant to This Prospectus(1) | Number of Shares of Common Stock Owned After This Offering | Percentage of Shares of Common Stock Owned After This Offering(2) | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
PAUL A. WEISMANN DESCENDANTS TRUST(34) | 2,866 | 2,866 | 0 | † | ||||||||||||||
TOTAL | 29,772,214 | 22,787,921 | 6,984,293 | 18.3 | % |
† | Less than 1%. |
(1) | Does not include any shares that may be issued to the selling securityholder upon full conversion of the Non-Cash Pay Notes and that may be sold pursuant to this prospectus as reflected in the selling securityholder table above relating to the Non-Cash Pay Notes. |
(2) | Based on 31,186,679 shares of our common stock and 32,965 shares of our Series B common stock outstanding as of October 13, 2011. |
(3) | Shares of common stock beneficially owned consist of 1,753,028 shares of common stock and 238,675 shares of common stock held at Cede & Co. through a brokerage account with J.P. Morgan Bank. Income Fund GP Limited (“IFGPL”) is the general partner of Absolute Income Fund, L.P. and has shared voting and dispositive power over the shares held by Absolute Income Fund, L.P. Ben Christian Rispoli is the sole director of IFGPL. Greymoor International Limited is the sole stockholder of IFGPL and is a wholly-owned subsidiary of Neville Holdings Group Limited. Olivier Claude Michel Bassou and Olivier Pierre Adam are the directors of Greymoor International Limited and Neville Holdings Group Limited. Mr. Rispoli, Mr. Bassou and Mr. Adam share voting and dispositive power over the shares held by Absolute Income Fund, L.P. The address of Absolute Income Fund, L.P. is c/o Lainston International Management Ltd., Suite 4-213-4 Governors Square, PO Box 31298, Grand Cayman, KY1-1206, Cayman Islands. |
(4) | To the best of our knowledge, Andrew Conru holds investment and voting power over the common stock held by the Andrew B. Conru Trust Agreement. The address of the Andrew B. Conru Trust Agreement is 2125 1st Avenue, #2904, Seattle, WA 98121. |
(5) | Mr. Marc H. Bell is the trustee and has discretion with respect to the voting and investment of the shares held in trust. However, Mr. Bell disclaims beneficial ownership of these shares. The shares are held in trust for the benefit of Mr. Bell’s children. The address of the Bell Family 2003 Charitable Lead Annuity Trust is 6800 Broken Sound Parkway, Boca Raton, FL 33487. |
(6) | Marc H. Bell is our Chief Executive Officer, President and a Director. The address for Mr. Bell is 6800 Broken Sound Parkway, Boca Raton, FL 33487. |
(7) | The address for Shmuel & Susana Brill is 1 Landmark Square, FL4 Stamford, CT 06901. |
(8) | The address of CAMHZN Master LDC is 351 Madison Avenue 8th Floor, New York, NY 10018. |
(9) | The address of CAMOFI Master LDC is 350 Madison Avenue 8th Floor, New York, NY 10015. |
(10) | CMI II, LLC is a wholly-owned subsidiary of Castlerigg Master Investments Ltd. Sandell Asset Management Corp. is the investment manager of Castlerigg Investments Ltd. Thomas Sandell is the controlling person of Sandell Asset Management Corp. and shares beneficial ownership of the shares beneficially owned by Castlerigg Master Investments Ltd. Castlerigg International Ltd. is the controlling stockholder of Castlerigg International Holdings Limited and Castlerigg GS Holdings, Ltd., who are together the beneficial owners of Castlerigg Offshore Holdings, Ltd. Castlerigg Offshore Holdings, Ltd. is the controlling stockholder of Castlerigg Master Investments Ltd. Each of Castlerigg International Holdings Limited, Castlerigg GS Holdings, Ltd., Castlerigg Offshore Holdings, Ltd. and Castlerigg International Ltd. share beneficial ownership over the shares beneficially owned by Castlerigg Master Investments Ltd. The address of CMI II LLC is c/o Sandell Asset Management Corp., 40 West 57th Street, 26th Floor, New York, New York 10019. |
(11) | Mr. Marc Simon is the Director of Del Mar Master Fund, Ltd. Del Mar Asset Management, LP is the advisor to Del Mar Master Fund, Ltd. The general partner of Del Mar Asset Management, LP is Del Mar Management, LLC. David Freelove is the president, chief executive officer and a managing member of Del Mar Management, LLC and has sole voting and dispositive power over the securities managed by Del Mar Asset Management, LP. The address of Del Mar Master Fund, Ltd. is c/o Walkers Financial Svcs, 83 Mary St., Georgetown, Grand Cayman KY1-9005 Cayman Islands. |
(12) | Epic Special Purpose Vehicle and CAI Distressed Debt Opportunity Master Fund, Ltd. are the beneficial owners of the shares held by Epic Distressed Debt Opportunity Master Fund, Ltd. through a participation agreement. Citigroup Alternative Investments LLC is the registered investment advisor to the above-listed funds and is the entity that directs voting and dispositive power over the shares held by Epic Distressed Debt Opportunity Master Fund, Ltd. The address of Epic Distressed Debt Opportunity Master Fund, Ltd. is c/o Citi Alternative Investments, 399 Park Avenue, 7th Floor, New York, New York 10022. |
(13) | Mr. Barry Florescue is President of Florescue Family Corporation and has voting and investment power over its shares. The address of Florescue Family Corporation is 50 E. Sample Rd, Suite 400, Pompano Beach, Florida 30064. |
(14) | The address for Russell Frye is 4045 NW 58th Place, Boca Raton, FL 33496. |
(15) | Shares of common stock beneficially owned consist of 32,965 shares of common stock underlying shares of Series B common stock. Each share of Series B common stock is exchangeable into one share of our common stock. The address of Interactive Brand Development, Inc. is 934 N University Drive, Coral Springs, FL 33071. |
(16) | The address of Jefferies & Company Inc. is Harborside Financial Center, Plaza 3, Suite 705, Jersey City, NJ 07303. |
(17) | Mr. Lars Mapstead and Mrs. Marin Mapstead are trustees of the Mapstead Trust, created on April 16, 2002 and hold voting and investment power over its securities. The address of Mapstead Trust is c/o Bose Mckinney & Evans LLP, 111 Monument Circle, Suite 2700, Indianapolis, IN 46204. |
(18) | Mr. Paul Weismann is the Manager of PAW Associates, LLC. The address of PAW Associates, LLC is 1 Landmark Square, FL4, Stamford, CT 06901. |
(19) | The address for Mr. Andrew Rechtschaffen is JP Morgan Chase FAO Andrew Rechtschaffen, 500 Stanton Christiana Road, Newark, DE 19713. |
(20) | Mr. Kevin Schweitzer is the managing member of Zabak Capital, LLC, which is the managing member of Rockview Management, LLC. Rockview Management, LLC is the investment manager to Rockview Short Alpha Fund, Ltd. The address of Rockview Short Alpha Fund Ltd. is MetroCenter One Station Place, 7th Floor, Stamford, CT 06902. |
(21) | Mr. Kevin Schweitzer is the managing member of Zabak Capital, LLC and holds sole voting and dispositive power over the shares held by Rockview Trading, Ltd. Zabak Capital, LLC is the managing member of Rockview Management LLC, which is the investment manager to RockView Trading, Ltd. The address of Rockview Trading, Ltd. is MetroCenter, One Station Place, 7th Floor, Stamford, CT 06902. |
(22) | Mr. Staton is the trustee of Staton Family Perpetual Trust and has voting and investment power over its shares, which are held in trust for the benefit of his minor children. The address of Staton Family Perpetual Trust is 6800 Broken Sound Parkway, Boca Raton, FL 33487. |
(23) | Mr. Staton is a member and the manager of Staton Media LLC. The address of Staton Media LLC is 6800 Broken Sound Parkway, Boca Raton, FL 33487. |
(24) | Mr. Staton is a member of Staton Family Investments, Ltd. and has voting and investment power over its shares. The address of Staton Family Investments, Ltd. is 6800 Broken Sound Parkway, Boca Raton, FL 33487. |
(25) | Stonehill Capital Management LLC, a Delaware limited liability company (“SCM”), is the investment advisor of Stonehill Institutional Partners, L.P. (“Stonehill Institutional”) and Stonehill General Partner, LLC, (“Stonehill GP”) is the General Partner of Stonehill Institutional. By virtue of such relationships, SCM and Stonehill GP may be deemed to have voting and dispositive power over the notes owned by Stonehill Institutional. SCM and Stonehill GP disclaim beneficial ownership of such notes. Mr. John Motulsky, Mr. Christopher Wilson, Mr. Wayne Teetsel, Mr. Thomas Varkey, Mr. Jonathan Sacks, Mr. Peter Sisitsky and Mr. Michael Thoyer (collectively, the “Members”) are the managing members of SCM and Stonehill GP and may be deemed to have shared voting and dispositive power over the notes owned by Stonehill Master. The Members disclaim beneficial ownership of such notes except to the extent of their pecuniary interests therein. The address of Stonehill Institutional is c/o Stonehill Capital Management LLC, 885 Third Avenue, 30th Floor, New York, NY 10022. |
(26) | Stonehill Capital Management LLC, a Delaware limited liability company (“SCM”) is the investment advisor of Stonehill Master Fund Ltd (“Stonehill Master”). By virtue of such relationships, SCM may be deemed to have voting and dispositive power over the notes owned by Stonehill Master. SCM disclaims beneficial ownership of such notes. Mr. John Motulsky, Mr. Christopher Wilson, Mr. Wayne Teetsel, Mr. Thomas Varkey, Mr. Jonathan Sacks, Mr. Peter Sisitsky and Mr. Michael Thoyer (collectively, the “ Members”) are the managing members of SCM and may be deemed to have shared voting and dispositive power over the notes owned by Stonehill Master. The Members disclaim beneficial ownership of such notes except to the extent of their pecuniary interests therein. The address of SMF is c/o Stonehill Capital Management LLC, 885 Third Avenue, 30th Floor, New York, NY 10022. |
(27) | Shares of common stock beneficially owned consist of: 318,541 shares held by the Bell Family 2000 Trust, which is a member of Strategic Media I LLC. The shares held by the Bell Family 2000 Trust are held in trust for the benefit of Mr. Bell’s children, of which Mr. Bell does not have discretion over the voting and investment of such shares and disclaims beneficial ownership; 318,541 shares held by Staton Family Investments, Ltd. Staton Family Investments, Ltd. holds sole dispositive and voting power over the shares held by Strategic Media I LLC. Mr. Staton is a member of Staton Family Investments, Ltd. and has voting and investment power over its shares; 79,635 shares held by James LaChance, a member of the Board of Directors of FriendFinder Networks Inc., and his wife, Hilary LaChance; 238,906 shares held by Equity Acquisition LLC; 159,271 shares held by PJJZRL, LLC; and 159,271 shares held by the Millenium Gift Trust. The address of Strategic Media I LLC is 6800 Broken Sound Parkway, Boca Raton, FL 33487. |
(28) | Visium Asset Management, LP has discretionary trading authority over these notes. The General Partner of Visium Asset Management, LP is JG Asset, LLC. Mr. Jacob Gottlieb and Mr. Mark Gottlieb are the members of JG Asset, LLC. The address of Visium Equity Global Master Fund, Ltd. is c/o Visium Asset Management, LP, 950 Third Avenue, 29th Floor, New York, NY 10022. |
(29) | The address of the Weismann Family Limited Partnership is 115 Central Park West, Apartment 8FE, New York, NY 10023. |
(30) | Mr. Paul Weismann is the trustee of the Weismann Foundation. The address of the Weismann Foundation is 1 Landmark Square, FL4, Stamford, CT 06901. |
(31) | Mr. Paul Weismann is the trustee for the 2009 Aidan Stirling Weismann Trust. The address of the 2009 Aidan Stirling Weismann Trust is 1 Landmark Square, FL4, Stamford, CT 06901. |
(32) | Mr. Lawrence Flynn is the trustee of the Dietrich Weismann Revocable Trust. The address of the Dietrich Weismann Revocable Trust is 645 Madison Avenue, Floor 14, New York, NY 10022. |
(33) | Mr. Paul Weismann is the trustee for the Owen Ayrton Weismann Trust. The address for the 2005 Owen Ayrton Weismann Trust is 1 Landmark Square, FL4, Stamford, CT 06901. |
(34) | Mr. Paul Weismann is the trustee for the Paul A. Weismann Descendants Trust. The address for the Paul A. Weismann Descendants Trust is 1 Landmark Square, FL4, Stamford, CT 06901. |
• | Social Networking. Approximately 68% and 70% of our total net revenues for the six months ended June 30, 2011 and the year ended December 31, 2010, respectively, were generated through our targeted social networking technology platform. Our social networking technology platform provides users who register or purchase subscriptions to one or more of our websites with the ability to communicate and to establish new connections with other users via our personal chat rooms, instant messaging and e-mail applications and to create, post and view content of interest. The content on our social networking sites is generated by our users for our users. Our social networking technology platform is extremely scalable and requires limited incremental cost to add additional users or to create new websites catering to additional unique audiences. As a result, we have been able to rapidly create and seamlessly maintain multiple websites tailored to specific categories or genres and designed to cater to targeted audiences with mutual interests. We believe that our ability to create and operate a diverse network of specific interest websites with unique, user-generated content in a cost-effective manner is a significant competitive differentiator that allows us to implement a subscription-fee based revenue model while many other popular social networking websites rely primarily upon free-access, advertising-based revenue models. |
• | Live Interactive Video. Approximately 24% and 22% of our total net revenues for the six months ended June 30, 2011 and the year ended December 31, 2010, respectively, were generated through our live interactive video technology platform. Our live interactive video technology platform is a live video broadcast platform that enables models to broadcast from independent studios throughout the world and interact with our users via instant messaging and video. Users are charged on a per-minute basis to interact with models. We pay a percentage of the revenues we generate to the studios that employ the models. We believe our live interactive video platform provides a unique offering including bi-directional and omni-directional video and interactive features that allow models to communicate with and attract users through a variety of mediums including blogs, newsletters and video. As a result, many studios and their models prefer our platform given our audience size and international reach, and our users prefer our platform as a result of the quality and variety of our models, the reliability of our network and the diversity of interactive features our platform provides. In addition, we believe the reliability of our live interactive video technology platform, which had approximately 99.1% uptime during 2010, is a key factor allowing us to maintain a large base of users. |
maximize their revenue for our mutual benefit. These systems include proprietary white-labeling solutions, in which we provide back-end technology solutions to permit affiliates and marketing partners to deliver our products and services while maintaining the affiliate’s and marketing partner’s own branding and style, self-optimizing ad spots, and a robust banner optimization engine that automatically chooses the best possible site and banner to promote in a given ad spot. Our marketing technology has also enabled the creation and continued growth of our network of more than 280,000 affiliates, which we believe is one of the largest of its kind in the world and a significant barrier to entry to potential and existing competitors. Similarly, our proprietary analytics technology provides us with an advantage relative to less sophisticated competitors by enabling us to estimate future revenue based on short-term response to our advertising campaigns, as well as providing for analysis of key data and metrics in order to optimize our marketing spend and maximize the revenues our websites generate. Our robust billing platform allows our customers to pay using many of the widely-adopted methods of e-commerce, both domestically as well as internationally. In addition, as a result of our size and technical sophistication, we can collect monies from regions and customers that other companies cannot, using payment methods that go beyond traditional credit card billing, like SMS billing.
• | 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. We had more than 196 million unique worldwide visitors in the month of December 2010, representing a growth of more than 300% from our approximately 46.9 million unique worldwide visitors in January 2009, according to comScore. |
• | Registrants. Registrants are visitors who complete a free registration form on one of our websites by giving basic identification information and submitting their e-mail address. For the six months ended June 30, 2011, we averaged more than 6.0 million new registrations on our websites each month. For the year ended December 31, 2010, we averaged more than 6.4 million new registrations on our websites each month. Some of our registrants are also members, as described below. |
• | Members. Members are registrants who log into one of our websites and make use of our free products and services. Members are able to complete their personal profile and access our searchable database of members but do not have the same full-access rights as subscribers. For the six months ended June 30, 2011, we averaged more than 3.5 million new members on our websites each month. For the year ended December 31, 2010, we averaged more than 3.9 million new members on our websites each month. |
• | Subscribers. Subscribers are members who purchase daily, three-day, weekly, monthly, quarterly, annual or lifetime subscriptions for one or more of our websites. Subscribers have full access to our websites and may access special features. For the six months ended June 30, 2011, we had a monthly average of over 900,000 paying subscribers and for the year ended December 31, 2010, we had a monthly average of approximately 1 million paying subscribers, respectively. |
• | Paid Users. Paid users are members who purchase products or services on a pay-by-usage basis. For the six months ended June 30, 2011, we averaged approximately 1.5 million purchased minutes by paid users each month. For the year ended December 31, 2010, we averaged approximately 1.6 million purchased minutes by paid users each month. |
• | Average Revenue per Subscriber. We calculate average revenue per subscriber, or ARPU, by dividing net revenue for the period by the average number of subscribers in the period and by the number of months in the period. As such, our ARPU is a monthly calculation. For the six months ended June 30, 2011, our average monthly revenue per subscriber was $20.38. For the year ended December 31, 2010, our average monthly revenue per subscriber was $20.49. For more information regarding our revenue, see the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Six Months Ended June 30, 2011 as Compared to the Six Months Ended June 30, 2010” and “ — Year Ended December 31, 2010 as Compared to the Year Ended December 31, 2009.” |
• | Churn. Churn is calculated by dividing terminations of subscriptions during the period by the total number of subscribers at the beginning of that period. Our average monthly churn rate, which measures the rate of loss of subscribers, for the six months ended June 30, 2011 was approximately 15.9%. Our average monthly churn rate for the year ended December 31, 2010 was 16.1% per month. |
• | Cost Per Gross Addition. Cost per gross addition, or CPGA, is calculated by adding affiliate commission expense plus ad buy expenses and dividing by new subscribers during the measurement period. Our CPGA for the six months ended June 30, 2011 was $43.65. Our CPGA for the year ended December 31, 2010 was $47.25. |
• | Average Lifetime Net Revenue Per Subscriber. Average Lifetime Net Revenue Per Subscriber is calculated by multiplying the average lifetime (in months) of a subscriber by ARPU for the measurement period and then subtracting the CPGA for the measurement period. Our Average Lifetime Net Revenue Per Subscriber for the six months ended June 30, 2011 was $84.30. Our Average Lifetime Net Revenue Per Subscriber for the year ended December 31, 2010 was $80.17. While we monitor many statistics in the overall management of our business, we believe that Average Lifetime Net Revenue Per Subscriber and the number of subscribers are particularly helpful metrics for gaining a meaningful understanding of our business as they provide an indication of total revenue and profit generated from our base of subscribers inclusive of affiliate commissions and advertising costs required to generate new subscriptions. |
• | Proprietary and Scalable Technology Platform. |
• | Paid Subscriber-Based Model. |
based model of social networking websites is distinctly different from the business models of other free social networking websites whose users access the websites to remain connected to their pre-existing friends and interest groups.
• | Large and Diverse User Base. |
• | Large and Difficult to Replicate Affiliate Network and Significant Marketing Spend. |
• | Convert Visitors, Registrants and Members into Subscribers or Paid Users. |
• | Create Additional Websites and Diversify Offerings. |
• | Expand into and Monetize Current Foreign Markets. |
• | Pursue Targeted Acquisitions. |
• | Generate Online Advertising Revenue. |
• English | • German | • Portuguese | ||||||||
• Chinese | • Italian | • Spanish | ||||||||
• Dutch | • Japanese | • Swedish | ||||||||
• French | • Korean | • Tagalog |
such as contests, newsletters and articles as well as the loyalty program we administer. We believe that this variety of revenue-enhancing features encourages visitors to join as members. The ability to initiate communication with other members and subscribers via our e-mail communications platform and view the full profiles of the members in our database requires payment of a subscription fee. Depending on the specific website, subscribers also have access to additional functionality and increased or enhanced levels of services and content. Described below are several of the features that are accessible on many of our websites.
• | Blogs — Blogs are a simple way to create a regularly updated home page where members can express themselves, learn about others, get more noticed and attract new friends. There are numerous blogs, grouped by subject. |
• | Chatrooms — Chatrooms are areas where members can discuss a specific topic or join rooms established by region. A private chatroom lets a member host a chat party by invitation only. |
• | Contests — Contests are a means of engaging our members by offering rewards for member-generated content. Examples include Best Holiday Greeting Card, Silly Photos with Clever Captions and many more. Prizes include upgraded memberships, free points, DVDs, T-shirts and mugs. |
• | Cupid Reports — Once a member has described an ideal match, the member is automatically notified by e-mail when a person matching that description becomes a member. |
• | Friends Network — A member can invite specified members into a personal group, keep track of them, share private photos and send personalized bulletins. |
• | Get Local — Websites list local events that are geographically targeted according to a member’s location. |
• | Groups — Groups are the place to find people who share interests and to develop new friendships. Members search for groups by topics, names or keywords and correspond, exchanging ideas. All groups have their own discussion boards and chatrooms, which facilitate communication and relationship building. Popular groups include “Single again? Let’s get together!,” “Dancing” and “Adventures, Romantic Getaways.” |
• | Instant Messaging — Two different types of our instant messaging system are available: a standard service and a faster Flash system, which offers extra options such as live video and sound. |
• | Loyalty Program — Our point based loyalty program is designed to increase participation in our websites membership activities, such as participating in blogs and online magazines and creating video introductions as members are awarded points for participating in these activities. Points can be redeemed for other membership services such as upgraded memberships or more prominence of member profiles in online searches. |
• | Newsletters — Our most popular websites periodically send newsletters to members, including photos and brief descriptions of other members, advice on enhancing one’s profile to attract more responses from other members and practical tips on dating and relationships. |
• | Online Magazine — At magazine pages, members can participate in many ways: read articles with expert advice on dating and relationships, enjoy fiction serials, submit their own articles, vote and comment on their reading, post original polls they have created, give advice and exchange opinions on various subjects, and view archives of articles. |
• | Photo, Video and Voice Sharing — Members can post their photographs and create webcam video introductions and voice introductions of themselves, which generates member-to-member contact. |
• | Posting Profiles — Members include personal details, such as city of residence and birthday, physical information, such as height and hair color, personal information, such as education, and occupation as well as other information. They describe themselves, specifying hobbies, the type of person they are seeking for a friend or for dating and can present up to 20 photographs. Members are encouraged to make their profiles as unique as possible by including personal details. |
• | Search — Members can conduct searches for compatible members according to a substantial list of criteria, including gender, geographical proximity, availability of photos and interests. Search criteria can be saved for repeated use. |
Website | Description | Registrants Since Inception (in thousands) | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
AdultFriendFinder.com | Our most popular adult social networking and dating website. | 248,274 | ||||||||
Amigos.com | Spanish version of FriendFinder.com, translated into Spanish, Portuguese and English. | 56,892 | ||||||||
Cams.com | Adult content live interactive video website where members pay per minute to chat with models who broadcast on the website via their webcams. | 46,364 | ||||||||
AsiaFriendFinder.com | Chinese version of FriendFinder.com, features traditional and simplified Chinese character sets as well as an English interface. | 45,427 | ||||||||
FriendFinder.com | Website targeted toward singles looking for love, romance and marriage. Also includes many social networking aspects. | 17,450 | ||||||||
ALT.com | Alternative lifestyle personals website, catering to users with fetish, role-playing and other alternative sexuality interests. | 16,009 | ||||||||
GetItOn.com | Adult social networking and personals website where members from around the world log on to chat and view each other via their webcams. | 13,723 | ||||||||
OutPersonals.com | Adult-oriented dating website for gay men. | 7,924 | ||||||||
Penthouse.com | Premium content-based website with varying levels of access to Penthouse pictorials, articles, videos and live webcams shows with Penthouse Pets. | 4,516 | ||||||||
GradFinder.com | Alumni directory where members can contact friends from elementary school through college. | 3,451 | ||||||||
IndianFriendFinder.com | Indian version of FriendFinder.com, where users can narrow their searches by specific criteria, including language, religion, diet, and caste. | 3,310 | ||||||||
BigChurch.com | Christian dating website with searchable bible passages and daily bible chapter e-mails. | 2,535 | ||||||||
SeniorFriendFinder.com | Website targeted toward people over 40 years of age. | 2,372 | ||||||||
FrenchFriendFinder.com | French version of FriendFinder.com, translated into French and English. | 2,048 | ||||||||
FilipinoFriendFinder.com | Filipino version of FriendFinder.com, translated into Tagalog and English. | 2,025 | ||||||||
GermanFriendFinder.com | German version of FriendFinder.com, translated into German and English. | 1,482 | ||||||||
FastCupid.com | Social networking and personals website for dating, romance and friendship. | 1,318 |
Website | Description | Registrants Since Inception (in thousands) | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
Bondage.com | World’s largest BDSM community | 1,265 | ||||||||
GayFriendFinder.com | Dating website for gay men. | 1,228 | ||||||||
NoStringsAttached.com | Adult Discreet Relationship Site | 1,167 | ||||||||
ItalianFriendFinder.com | Italian version of FriendFinder.com, translated into Italian and English. | 1,163 | ||||||||
KoreanFriendFinder.com | Korean version of FriendFinder.com, translated into Korean and English. | 1,053 | ||||||||
Millionairemate.com | Dating website targeted toward like-minded people who understand that intelligence, success and drive are key elements to attraction. | 934 | ||||||||
stripshow.com | Low cost cams site which offers group viewing | 671 | ||||||||
JewishFriendFinder.com | Jewish dating website. | 633 | ||||||||
icams.com | Cams site dedicated to amateur videos | 421 | ||||||||
AllPersonals.com | Allows users to join multiple top personal sites at one time | 301 | ||||||||
Slim.com | Health and wellness website. | 148 | ||||||||
HotBox.com | Premium content-based website that allows members to search a database of adult movies by favorite actor or by category of movie. | 118 |
• | Notice. Users are provided meaningful notice about the information collected and used for internet related advertising. Users visiting our websites are provided notice via links to our privacy policies usually located on every one of our web pages and other methods of the types of individual information collected for advertising purposes, the technologies employed to collect such information, and how such information is used, including if applicable that other companies operate on the website and may collect such information. |
• | Choice. Users are provided with a choice on how certain information is used. We provide for an opt-out mechanism for e-mail advertising and members of our social networking websites have access to a control panel that allows them to make choices on the type of data that is stored on our servers or made available to the public or other members using our websites. |
• | Security. We strive to provide reasonable security for consumer data. Our security methods are based on the sensitivity of the data, the nature of the services provided, the types of risks related to such data and the reasonable protections available to us for practical implementation. We require our business service providers, such as credit card processors, to contractually maintain appropriate information security procedures based upon the sensitivity of the data and industry practices. We also ask registrants and members to provide their age and we review all member-generated content prior to its appearing on our websites. |
• | Responsiveness. Users have a readily accessible means to contact us to express concerns and complaints regarding privacy matters and we have a team associated with handling such concerns and complaints. Most of our web pages have a link directly to a web based form for providing complaints to us for processing. |
• number of users | • number of registrants completing registration | |||||
• number of paid subscriptions | • number of messages sent |
• number of images uploaded | • number of customer service requests | |||||
• number of blogs created | • number of videos uploaded and viewed |
• referring link/domain | • referring affiliate/ad buy/traffic source | |||||
• country | • language | |||||
• gender | • email domain |
• number of requests served | • time spent per request | |||||
• central processing unit utilization | • memory utilization | |||||
• disc utilization |
solution using our technology platform for social networking and live interactive video websites. Many of these websites have the look and feel of the affiliate’s website with the affiliate’s logo and website name but are operated by us. Users who click through the affiliate’s website are tagged with the affiliate’s identifier that tracks the user to calculate the payment due to the affiliate. Private labeling allows our affiliates to preserve their brand while generating revenue for us. Generally our websites have different programs from which our affiliates may derive revenue.
• | a percentage of revenue generated and collected; |
• | per registrant or member; and |
• | per subscriber. |
• | Social Networking Websites — Unlike most other social networking websites which are free, we have a paid subscription-based business model, which we believe is a significant competitive advantage. Our adult-themed community websites from which the majority of our revenue and earnings are derived, |
including AdultFriendFinder.com, do not directly compete with other general interest social networking websites because of the adult nature of the content. Our general audience websites, which contribute substantially less of our revenue and earnings, compete with other companies offering social networking websites such as MySpace, Inc., Facebook, Inc. and Friendster, Inc. Our general audience websites provide a wide range of social networking tools including blogs, chatrooms and messaging similar to our competitors. We also believe that a significant advantage to our websites is the ease with which members meet other members who were not known to them prior to joining our network. |
• | Internet Personals Websites — We compete with certain elements of the internet personals business provided by companies including Match.com, L.L.C., Yahoo!Personals, a website owned and operated by Yahoo! Inc., Windows Live Profile, run by Microsoft Corporation, eHarmony, Inc., Lavalife Corp., Plentyoffish Media Inc. and Spark Networks Limited websites, including jdate.com, americansingles.com and relationships.com, as well as companies offering adult-oriented internet personals websites such as Cytek Ltd., the operator of SexSearch.com, and Fling Incorporated. |
• | Adult Audience Websites — We compete with many adult-oriented and live interactive video websites, such as RedTube.com, Pornhub.com, YouPorn.com, Playboy.com and LiveJasmin.com. These websites are largely distinguished by the quality of the video and the quantity and caliber of the video content. We continue to seek to be at the forefront of video technology by seeking to offer our users the best available experience. As adult content receives wider mainstream acceptance, we expect our websites to benefit from an increased volume of member-generated content that will enhance our large library of adult content which is frequently updated and refreshed. |
• | Adult Entertainment Providers — We compete with other publishers of branded men’s lifestyle magazines, such as Maxim and Playboy, and we compete with other producers of adult pictorial and video content, such as Playboy Enterprises Inc., tmc Content Group AG and Total Media Agency. |
harm our business, financial condition or operating results. If we are not successful in defending against such claims, our financial condition or operating results would be materially adversely affected.
Location/Principal Use | Square Feet | Lease Expiration Date | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
Sunnyvale, California — internet | 50,112 | October 31, 2015 | ||||||||
Los Angeles, California — entertainment | 35,400 | April 30, 2014 | ||||||||
New York, New York — entertainment | 16,431 | January 31, 2019 | ||||||||
Boca Raton, Florida — corporate administrative offices | 8,533 | December 31, 2015 | ||||||||
Las Vegas, Nevada — internet | 6,976 | December 31, 2012 |
award to Broadstream of at least $10.0 million but not more than $47.0 million. In December 2010, Broadstream elected arbitration and as a result, we recognized a loss in connection with the matter of $13.0 million as of December 31, 2010. The mediation was held on April 14, 2011 and resulted in an impasse. On July 6, 2011, we entered into a settlement agreement with Broadstream that obligates us to pay Broadstream a total of $15 million, in three installments of $8.0 million, $5.0 million and $2.0 million, the first two of which were due on July 13, 2011 and September 29, 2011 and have been paid and the third of which is due on and January 2, 2012.
claims. On December 21, 2010, Antor filed a request for rehearing before the Board. On March 23, 2011, the Board denied Antor’s request for rehearing. On May 23, 2011, Antor filed its Notice of Appeal of the Board’s October 21, 2010 decision rejecting its claims. The case will remain stayed pending the appeal. We and our subsidiary believe that we have meritorious defenses to all claims and intend to vigorously defend the lawsuit.
in violation of California law by providing free, apparently professionally produced adult content. The plaintiff is seeking $10.0 million in damages, trebled to at least $30.0 million, plus injunctive relief and attorneys’ fees. On May 8, 2009, the Court denied the Plaintiff’s request for an Order to Show Cause concerning its request for preliminary injunction, citing insufficient evidence among other factors. On May 26, 2009, we filed an “Anti-SLAPP” Motion to Strike the Complaint along with a Motion to Dismiss the claims in the Complaint. On or about July 24, 2009, Plaintiff stipulated to the form of an Order on the Anti-SLAPP Motion that finds in favor of us, effectively terminating the case. On August 10, 2009, Plaintiff filed his Notice of Appeal. In January 2011, the Order was affirmed by the appellate court.
Price Range of Common Stock | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
High | Low | ||||||||||
2011 | |||||||||||
Second Quarter (commencing May, 11, 2011) | $ | 10.01 | $ | 3.61 | |||||||
Third Quarter (through September 30, 2011) | $ | 5.22 | $ | 1.81 | |||||||
Fourth Quarter (through October 13, 2011) | $ | 2.20 | $ | 1.50 |
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(a) | (b) | (c) | ||||||||||||
Equity compensation plans approved by security holders | — | — | — | |||||||||||
Equity compensation plans not approved by security holders | 551,750 | (1) | $ | 10.00 | 1,186,122 | (1) | ||||||||
Total | 551,750 | (1) | $ | 10.00 | 1,186,122 | (1) |
(1) | The information set forth above pertains to our 2008 Stock Option Plan and our 2009 Restricted Stock Plan as of December 31, 2010. For a discussion of our 2008 Stock Option Plan please refer to the section entitled “— Executive Compensation — Executive Compensation Components — Long Term Equity Incentive Compensation” or refer to Note 11, “Stock Options” of our consolidated financial statements included elsewhere in this prospectus. |
Consolidated Data | |||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Six Months Ended June 30, | Year Ended December 31, | ||||||||||||||||||||||||||||||
2011 | 2010 | 2010 | 2009 | 2008(1) | 2007(1) | 2006 | |||||||||||||||||||||||||
(in thousands, except per share data) | |||||||||||||||||||||||||||||||
Statements of Operations and Per Share Data: | |||||||||||||||||||||||||||||||
Net revenue | $ | 166,891 | $ | 170,828 | $ | 345,997 | $ | 327,692 | $ | 331,017 | $ | 48,073 | $ | 29,965 | |||||||||||||||||
Cost of revenue | 51,893 | 57,858 | 110,490 | 91,697 | 96,514 | 23,330 | 15,927 | ||||||||||||||||||||||||
Gross profit | 114,998 | 112,970 | 235,507 | 235,995 | 234,503 | 24,743 | 14,038 | ||||||||||||||||||||||||
Operating expenses | |||||||||||||||||||||||||||||||
Product development | 8,056 | 6,040 | 12,834 | 13,500 | 14,553 | 1,002 | — | ||||||||||||||||||||||||
Selling and marketing | 14,400 | 23,166 | 37,258 | 42,902 | 59,281 | 7,595 | 1,430 | ||||||||||||||||||||||||
General and administrative | 44,671 | 40,251 | 79,855 | 76,863 | 88,280 | 24,466 | 24,354 | ||||||||||||||||||||||||
Amortization of acquired intangibles and software | 7,846 | 12,528 | 24,461 | 35,454 | 36,347 | 2,262 | — | ||||||||||||||||||||||||
Depreciation and other amortization | 2,355 | 2,396 | 4,704 | 4,881 | 4,502 | 2,829 | 3,322 | ||||||||||||||||||||||||
Impairment of goodwill | — | — | — | — | 9,571 | 925 | 22,824 | ||||||||||||||||||||||||
Impairment of other intangible assets | — | — | 4,660 | 4,000 | 14,860 | 5,131 | — | ||||||||||||||||||||||||
Total operating expenses | 77,328 | 84,381 | 163,772 | 177,600 | 227,394 | 44,210 | 51,930 | ||||||||||||||||||||||||
Income (loss) from operations | 37,670 | 28,589 | 71,735 | 58,395 | 7,109 | (19,467 | ) | (37,892 | ) | ||||||||||||||||||||||
Interest expense, net of interest income | (43,951 | ) | (46,398 | ) | (88,508 | ) | (92,139 | ) | (80,510 | ) | (15,953 | ) | (7,918 | ) | |||||||||||||||||
Other finance expenses | — | — | (4,562 | ) | — | — | — | — | |||||||||||||||||||||||
Interest related to VAT liability not charged to customers | (934 | ) | (1,076 | ) | (2,293 | ) | (4,205 | ) | (8,429 | ) | (1,592 | ) | — | ||||||||||||||||||
Net loss on extinguishment and modification of debt | (7,312 | ) | — | (7,457 | ) | (7,240 | ) | — | — | (3,799 | ) | ||||||||||||||||||||
Foreign exchange gain (loss) principally related to VAT liability not charged to customers | (2,953 | ) | 5,034 | 610 | (5,530 | ) | 15,195 | 546 | — | ||||||||||||||||||||||
Gain on elimination of liability for United Kingdom VAT not charged to customers | — | — | — | 1,561 | — | — | — | ||||||||||||||||||||||||
Gain on settlement of VAT liability not charged to customers | — | — | — | 232 | 2,690 | — | — | ||||||||||||||||||||||||
Gain on liability related to warrants | 391 | 484 | 38 | 2,744 | — | — | — | ||||||||||||||||||||||||
Other non-operating (expense) income, net | (3,913 | ) | 20 | (13,202 | ) | (366 | ) | (197 | ) | 119 | (332 | ) | |||||||||||||||||||
Loss before income tax benefit | (21,002 | ) | (13,347 | ) | (43,639 | ) | (46,548 | ) | (64,142 | ) | (36,347 | ) | (49,941 | ) | |||||||||||||||||
Income tax (expense) benefit | (5,460 | ) | (147 | ) | 486 | 5,332 | 18,176 | 6,430 | — |
Consolidated Data | |||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Six Months Ended June 30, | Year Ended December 31, | ||||||||||||||||||||||||||||||
2011 | 2010 | 2010 | 2009 | 2008(1) | 2007(1) | 2006 | |||||||||||||||||||||||||
(in thousands, except per share data) | |||||||||||||||||||||||||||||||
Net loss | $ | (15,542 | ) | $ | (13,200 | ) | $ | (43,153 | ) | $ | (41,216 | ) | $ | (45,966 | ) | $ | (29,917 | ) | $ | (49,941 | ) | ||||||||||
Non-cash dividends on convertible preferred stock | — | — | — | — | — | (4,396 | ) | — | |||||||||||||||||||||||
Net loss attributable to common stock | $ | (15,542 | ) | $ | (13,200 | ) | $ | (43,153 | ) | $ | (41,216 | ) | $ | (45,966 | ) | $ | (34,313 | ) | $ | (49,941 | ) | ||||||||||
Net loss per common share — basic and diluted(2) | $ | (0.88 | ) | $ | (0.96 | ) | $ | (3.14 | ) | $ | (3.00 | ) | $ | (3.35 | ) | $ | (5.19 | ) | $ | (8.99 | ) | ||||||||||
Weighted average common shares outstanding — basic and diluted(2) | 17,580 | 13,735 | 13,735 | 13,735 | 13,735 | 6,610 | 5,554 | ||||||||||||||||||||||||
Pro forma net loss per common share — basic and diluted(3) | $ | (1.37 | ) | ||||||||||||||||||||||||||||
Pro forma weighted average common shares outstanding — basic and diluted(3) | 27,703 |
Consolidated Data | |||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
June 30, | December 31, | ||||||||||||||||||||||||||||||
2011 | 2010 | 2010 | 2009 | 2008(2) | 2007(2) | 2006 | |||||||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||||||||||
Consolidated Balance Sheet Data (at period end): | |||||||||||||||||||||||||||||||
Cash and restricted cash | $ | 40,243 | $ | 41,970 | $ | 41,970 | $ | 28,895 | $ | 31,565 | $ | 23,722 | $ | 2,998 | |||||||||||||||||
Total assets | 505,336 | 532,817 | 532,817 | 551,881 | 599,913 | 649,868 | 70,770 | ||||||||||||||||||||||||
Long-term debt classified as current due to events of default, net of unamortized discount | 9,442 | — | — | — | 415,606 | 417,310 | — | ||||||||||||||||||||||||
Long-term debt, net of unamortized discount | 457,783 | 510,551 | 510,551 | 432,028 | 38,768 | 35,379 | 63,166 | ||||||||||||||||||||||||
Deferred revenue | 45,334 | 48,302 | 48,302 | 46,046 | 42,814 | 27,214 | 6,974 | ||||||||||||||||||||||||
Total liabilities | 626,707 | 682,597 | 682,597 | 657,523 | 657,998 | 661,987 | 91,516 | ||||||||||||||||||||||||
Redeemable preferred stock | — | — | — | 26,000 | 26,000 | 26,000 | 21,000 | ||||||||||||||||||||||||
Accumulated deficit | (246,163 | ) | (230,621 | ) | (230,621 | ) | (187,468 | ) | (144,667 | ) | (98,701 | ) | (68,784 | ) | |||||||||||||||||
Total stockholders’ deficiency | (121,371 | ) | (149,780 | ) | (149,780 | ) | (131,642 | ) | (84,085 | ) | (38,119 | ) | (41,746 | ) |
Consolidated Data | |||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Six Months Ended June 30, | Year Ended December 31, | ||||||||||||||||||||||||||||||
2011 | 2010 | 2010 | 2009 | 2008(1) | 2007(1) | 2006 | |||||||||||||||||||||||||
(in thousands, except per share data) | |||||||||||||||||||||||||||||||
Other Data | |||||||||||||||||||||||||||||||
Net cash provided by (used in) operating activities | $ | 21,293 | $ | 15,524 | $ | 42,640 | $ | 39,679 | $ | 50,948 | $ | 4,744 | $ | (16,600 | ) | ||||||||||||||||
Net cash provided by (used in) investing activities | (3,510 | ) | (434 | ) | (1,250 | ) | 4,204 | (9,289 | ) | (149,322 | ) | (3,414 | ) | ||||||||||||||||||
Net cash provided by (used in) financing activities | (24,363 | ) | (14,728 | ) | (29,405 | ) | (44,987 | ) | (25,336 | ) | 148,961 | 10,569 |
(1) | Net revenue for the years ended December 31, 2008 and 2007 does not reflect $19.2 million and $8.5 million, respectively, due to a non-recurring purchase accounting adjustment that required the deferred revenue at the date of the acquisition of Various to be recorded at fair value. Management believes that it is appropriate to add back the deferred revenue adjustment because the average renewal rate of the subscriptions that were the basis for the deferred revenue was approximately 63%. The renewal rate on subscriptions that had already been renewed at least one time since the acquisition was 78%. Therefore, management believes that historical results of Various are reflective, including those revenues that were added back to the adjusted net revenue, of our future results. Please refer to the table contained in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” above entitled “Reconciliation of GAAP Net Loss to EBITDA and Adjusted EBITDA”. |
(2) | Basic and diluted loss per share is based on the weighted average number of shares of common stock outstanding, including Series B common stock, and shares underlying common stock purchase warrants which are exercisable at the nominal price of $0.0002 per share. For information regarding the computation of per share amounts, refer to Note C(25), “Summary of Significant Accounting Policies — Per share data” of our consolidated financial statements included elsewhere in this prospectus. |
(3) | The following pro forma information reflects the following transactions as if they occurred on January 1, 2010: (i) the sale of 5,000,000 shares of our common stock at an initial offering price of $10.00 per share and the receipt of net proceeds of $44.9 million, (ii) the repayment of principal of $40.8 million on outstanding notes, (iii) the issuance of 8,444,853 shares of common stock upon the conversion of the outstanding shares of Series B convertible preferred stock and (iv) the issuance of 4,526,471 shares of common stock underlying 4,003,898 warrants with an exercise price of $0.0002 per share which if not exercised expired upon the closing of the initial public offering. |
Net loss as reported | $ | (43,153 | ) | |||
Pro forma adjustments: | ||||||
1. A reduction in interest expense resulting from the repayment of a portion of the former Senior Secured Notes and Second Lien Notes using a weighted average effective interest rate of 20.3% | 8,300 | |||||
2. Amortization of the $13.0 million beneficial conversion feature in the Old Non-Cash Pay Notes which mature on April 30, 2014 | (3,200 | ) | ||||
Pro forma net loss | $ | (38,053 | )(a) | |||
Weighted average common shares outstanding — basic and diluted | 13,735 | |||||
Pro forma adjustments: | ||||||
1. Issuance of common stock upon the conversion of all of the outstanding shares of Series B Convertible Preferred Stock | 8,445 | |||||
2. An increase in the shares of common stock underlying certain of our warrants resulting from the anti-dilution provisions of such warrants | 523 | |||||
3. The sale of common stock in the IPO | 5,000 | |||||
Pro forma weighted average shares outstanding | 27,703 | |||||
Pro forma net loss per common share — basic and diluted | $ | (1.37 | )(a) |
(a) | The pro forma net loss per common share excludes (i) loss on extinguishment of our Old Senior Secured Notes and Old Cash Pay Notes of $8.5 million and (ii) $2.2 million of cumulative compensation expense related to stock options deemed granted upon the completion of the IPO, representing non-recurring charges directly attributable to the IPO. |
RESULTS OF OPERATIONS
Six Months Ended June 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2011 | 2010 | ||||||||||
Percentage of revenue contributed by affiliates | 46 | % | 44 | % | |||||||
Compensation to affiliates (in millions) | $ | 30.7 | $ | 38.6 |
Year Ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2010 | 2009 | 2008 | |||||||||||||
Percentage of revenue contributed by affiliates | 45 | % | 44 | % | 43 | % | |||||||||
Compensation to affiliates (in millions) | $ | 71.2 | $ | 56.7 | $ | 62.3 |
Subordinated Convertible Notes held by the sellers, and subsequently continues to be recorded on the unpaid amounts. On October 14, 2008, we made an indemnity claim against these notes under the acquisition agreement for Various in the amount of $64.3 million. On June 10, 2009, the United Kingdom taxing authority notified us that it had reversed its previous position and that we were not subject to VAT, which resulted in an approximately $39.5 million reduction in the VAT liability. On October 8, 2009, we settled and released all indemnity claims against the sellers (whether claims are VAT related or not) by reducing the original principal amount of the Subordinated Convertible Notes by the full value of the then-outstanding VAT liability. In addition, the sellers agreed to make available to us, to pay VAT and certain VAT-related expenses, $10.0 million held in a working capital escrow account established at the closing of the Various transaction. As of June 30, 2011, the total $10.0 million has been released from the escrow to reimburse us for VAT-related expenses already incurred. If the actual costs to us of eliminating the VAT liability are less than $29.0 million, after applying amounts from the working capital escrow, then the principal amount of the Non-Cash Pay Notes (notes issued in exchange for the Subordinated Convertible Notes in the New Financing) will be increased by the issuance of new Non-Cash Pay Notes to reflect the difference between $29.0 million and the actual VAT liability, plus interest on such difference. For more information regarding the reductions of the principal amount of Subordinated Convertible Notes as a result of our VAT liability, see the section entitled “ — Legal Proceedings.”
• | a significant decline in actual or 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. |
Six Months Ended June 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2011 | 2010 | ||||||||||
(in thousands) | |||||||||||
Net revenue | |||||||||||
Internet | $ | 156,172 | $ | 160,030 | |||||||
Entertainment | 10,719 | 10,798 | |||||||||
Total | 166,891 | 170,828 | |||||||||
Cost of revenue | |||||||||||
Internet | 44,280 | 51,648 | |||||||||
Entertainment | 7,613 | 6,210 | |||||||||
Total | 51,893 | 57,858 | |||||||||
Gross profit | |||||||||||
Internet | 111,892 | 108,382 | |||||||||
Entertainment | 3,106 | 4,588 | |||||||||
Total | 114,998 | 112,970 | |||||||||
Income (loss) from operations | |||||||||||
Internet | $ | 42,693 | $ | 30,297 | |||||||
Entertainment | (44 | ) | 1,180 | ||||||||
Unallocated corporate | (4,979 | ) | (2,888 | ) | |||||||
Total | $ | 37,670 | $ | 28,589 |
Year Ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2010 | 2009 | 2008 | |||||||||||||
(in thousands) | |||||||||||||||
Net revenue | |||||||||||||||
Internet | $ | 321,605 | $ | 306,213 | $ | 306,129 | |||||||||
Entertainment | 24,392 | 21,479 | 24,888 | ||||||||||||
Total | 345,997 | 327,692 | 331,017 | ||||||||||||
Cost of revenue | |||||||||||||||
Internet | 97,959 | 78,627 | 81,815 | ||||||||||||
Entertainment | 12,531 | 13,070 | 14,699 | ||||||||||||
Total | 110,490 | 91,697 | 96,514 | ||||||||||||
Gross profit | |||||||||||||||
Internet | 223,646 | 227,586 | 224,314 | ||||||||||||
Entertainment | 11,861 | 8,409 | 10,189 | ||||||||||||
Total | 235,507 | 235,995 | 234,503 | ||||||||||||
Income (loss) from operations | |||||||||||||||
Internet | 76,142 | 64,962 | 34,345 | ||||||||||||
Entertainment | 1,140 | (439 | ) | (17,748 | ) | ||||||||||
Unallocated corporate | (5,547 | ) | (6,128 | ) | (9,488 | ) | |||||||||
Total | $ | 71,735 | $ | 58,395 | $ | 7,109 |
Six Months Ended June 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2011 | 2010 | ||||||||||
Adult Social Networking Websites | |||||||||||
New members | 17,499,022 | 18,929,854 | |||||||||
Beginning subscribers | 928,314 | 916,005 | |||||||||
New subscribers(1) | 789,061 | 941,943 | |||||||||
Terminations | 883,218 | 888,406 | |||||||||
Ending subscribers | 834,157 | 969,542 | |||||||||
Conversion of members to subscribers | 4.5 | % | 5.0 | % | |||||||
Churn | 15.9 | % | 16.2 | % | |||||||
ARPU | $ | 20.44 | $ | 20.09 | |||||||
CPGA | $ | 44.47 | $ | 53.43 | |||||||
Average lifetime net revenue per subscriber | $ | 84.43 | $ | 70.85 | |||||||
Net revenue (in millions) | $ | 108.1 | $ | 113.7 | |||||||
General Audience Social Networking Websites | |||||||||||
New members | 3,839,846 | 4,854,614 | |||||||||
Beginning subscribers | 53,198 | 57,431 | |||||||||
New subscribers(1) | 45,155 | 59,741 | |||||||||
Terminations | 54,802 | 59,126 | |||||||||
Ending subscribers | 43,551 | 58,046 | |||||||||
Conversion of members to subscribers | 1.2 | % | 1.2 | % | |||||||
Churn | 17.2 | % | 17.2 | % | |||||||
ARPU | $ | 19.44 | $ | 20.84 | |||||||
CPGA | $ | 29.36 | $ | 30.77 | |||||||
Average lifetime net revenue per subscriber | $ | 83.87 | $ | 90.69 | |||||||
Net revenue (in millions) | $ | 5.6 | $ | 7.2 | |||||||
Live Interactive Video Websites | |||||||||||
Total minutes | 8,961,833 | 9,631,282 | |||||||||
Average revenue per minute | $ | 4.46 | $ | 3.80 | |||||||
Net revenue (in millions) | $ | 40.0 | $ | 36.6 |
(1) | New subscribers are subscribers who have paid subscription fees to one of our websites during the period indicated in the table but who were not subscribers in the immediately prior period. Members who previously were subscribers, but discontinued their subscriptions either by notifying us of their decisions to discontinue or allowing their subscriptions to lapse by failing to pay their subscription fees, are considered new subscribers when they become subscribers again at any point after their previous subscriptions ended. If a current subscriber to one of our websites becomes a subscriber to another one of our websites, such new subscription would also be counted as a new subscriber since such subscriber would be paying the full subscription fee for each subscription. |
Year Ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2010 | 2009 | 2008 | |||||||||||||
Adult Social Networking Websites | |||||||||||||||
New members | 38,216,689 | 22,461,322 | 20,738,807 | ||||||||||||
Beginning subscribers | 916,005 | 896,211 | 919,146 | ||||||||||||
New subscribers(1) | 1,771,837 | 1,776,916 | 1,935,533 | ||||||||||||
Terminations | 1,759,528 | 1,757,122 | 1,958,468 | ||||||||||||
Ending subscribers | 928,314 | 916,005 | 896,211 | ||||||||||||
Conversion of members to subscribers | 4.6 | % | 7.9 | % | 9.3 | % | |||||||||
Churn | 16.0 | % | 16.3 | % | 17.8 | % | |||||||||
ARPU | $ | 20.47 | $ | 20.73 | $ | 22.28 | |||||||||
CPGA | $ | 48.43 | $ | 47.24 | $ | 51.26 | |||||||||
Average lifetime net revenue per subscriber | $ | 79.45 | $ | 79.64 | $ | 74.22 | |||||||||
Net revenue(2) (in millions) | $ | 226.6 | $ | 225.4 | $ | 242.7 | |||||||||
General Audience Social Networking Websites | |||||||||||||||
New members | 8,985,965 | 8,994,757 | 11,221,993 | ||||||||||||
Beginning subscribers | 57,431 | 68,647 | 85,893 | ||||||||||||
New subscribers(1) | 114,709 | 116,608 | 174,290 | ||||||||||||
Terminations | 118,942 | 127,824 | 191,536 | ||||||||||||
Ending subscribers | 53,198 | 57,431 | 68,647 | ||||||||||||
Conversion of members to subscribers | 1.3 | % | 1.3 | % | 1.6 | % | |||||||||
Churn | 17.3 | % | 15.5 | % | 18.6 | % | |||||||||
ARPU | $ | 20.72 | $ | 18.05 | $ | 19.21 | |||||||||
CPGA | $ | 29.04 | $ | 41.61 | $ | 36.68 | |||||||||
Average lifetime net revenue per subscriber | $ | 91.02 | $ | 74.71 | $ | 66.70 | |||||||||
Net revenue(2) (in millions) | $ | 13.8 | $ | 13.7 | $ | 17.8 | |||||||||
Live Interactive Video Websites | |||||||||||||||
Total minutes | 19,566,551 | 17,293,702 | 19,101,202 | ||||||||||||
Average revenue per minute | $ | 3.90 | $ | 3.49 | $ | 2.87 | |||||||||
Net revenue(2) (in millions) | $ | 76.3 | $ | 60.4 | $ | 54.9 |
(1) | See the previous Footnote 1 on page 82. |
(2) | Net revenue for the year ended December 31, 2008 includes the adding back of $19.2 million due to a non-recurring purchase accounting adjustment that required deferred revenue at the date of acquisition of Various to be recorded at fair value. To provide meaningful comparisons between the years shown, management believes that the historical results of Various are reflective of our future results. |
• | our consolidated results of operations for the six months ended June 30, 2011 compared to the six months ended June 30, 2010; |
• | an analysis of internet segment operating data which are key to an understanding of our operating results and strategies for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010; |
• | our consolidated results of operations for the year ended December 31, 2010 compared to the year ended December 31, 2009; |
• | our consolidated results of operations for the year ended December 31, 2009 compared to the year ended December 31, 2008. |
• | an analysis of internet segment operating data which are key to an understanding of our operating results and strategies for the year ended December 31, 2010 as compared to the year ended December 31, 2009, and for the year ended December 31, 2009 as compared to the year ended December 31, 2008. |
Six Months Ended June 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2011 | 2010 | ||||||||||
Net revenue | 100.0 | % | 100.0 | % | |||||||
Cost of revenue | 31.1 | 33.9 | |||||||||
Gross profit | 68.9 | 66.1 | |||||||||
Operating expenses: | |||||||||||
Product development | 4.8 | 3.5 | |||||||||
Selling and marketing | 8.6 | 13.6 | |||||||||
General and administrative | 26.8 | 23.6 | |||||||||
Amortization of acquired intangibles and software | 4.7 | 7.3 | |||||||||
Depreciation and other amortization | 1.4 | 1.4 | |||||||||
Total operating expenses | 46.3 | 49.4 | |||||||||
Income from operations | 22.6 | 16.7 | |||||||||
Interest expense, net of interest income | (26.3 | ) | (27.2 | ) | |||||||
Interest and penalty related to VAT liability not charged to customers | (0.6 | ) | (0.6 | ) | |||||||
Foreign exchange (loss) gain principally related to VAT liability not charged to customers | (1.8 | ) | 3.0 | ||||||||
Gain on liability related to warrants | 0.2 | 0.3 | |||||||||
Loss on extinguishment of debt | (4.4 | ) | — | ||||||||
Other non-operating expense (income), net | (2.3 | ) | 0.0 | ||||||||
Loss before income tax (benefit) provision | (12.6 | ) | (7.8 | ) | |||||||
Income tax (benefit) provision | (3.3 | ) | (0.1 | ) | |||||||
Net loss | (9.3 | )% | (7.7 | )% |
Year Ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2010 | 2009 | 2008 | |||||||||||||
Net revenue | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||
Cost of revenue | 31.9 | 28.0 | 29.2 | ||||||||||||
Gross profit | 68.1 | 72.0 | 70.8 | ||||||||||||
Operating expenses: | |||||||||||||||
Product development | 3.7 | 4.1 | 4.4 | ||||||||||||
Selling and marketing | 10.8 | 13.1 | 17.9 | ||||||||||||
General and administrative | 23.1 | 23.5 | 26.7 | ||||||||||||
Amortization of acquired intangibles and software | 7.1 | 10.8 | 11.0 | ||||||||||||
Depreciation and other amortization | 1.3 | 1.5 | 1.3 | ||||||||||||
Impairment of goodwill | — | — | 2.9 | ||||||||||||
Impairment of other intangible assets | 1.4 | 1.2 | 4.5 | ||||||||||||
Total operating expenses | 47.4 | 54.2 | 68.7 | ||||||||||||
Income from operations | 20.7 | 17.8 | 2.1 | ||||||||||||
Interest expense, net of interest income | (25.6 | ) | (28.1 | ) | (24.3 | ) | |||||||||
Other finance expenses | (1.3 | ) | — | — | |||||||||||
Interest and penalty related to VAT liability not charged to customers | (0.7 | ) | (1.3 | ) | (2.5 | ) | |||||||||
Net loss on extinguishment and modification of debt | (2.1 | ) | (2.2 | ) | — | ||||||||||
Foreign exchange (gain) loss principally related to VAT liability not charged to customers | 0.2 | (1.7 | ) | 4.6 |
Year Ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2010 | 2009 | 2008 | |||||||||||||
Gain on elimination of liability for United Kingdom VAT not charged to customers | — | 0.5 | — | ||||||||||||
Gain on settlement of liability related to VAT not charged to customers | — | 0.1 | 0.8 | ||||||||||||
Gain on liability related to warrants | 0.0 | 0.8 | — | ||||||||||||
Other non-operating expense net | (3.8 | ) | (0.1 | ) | (0.1 | ) | |||||||||
Loss before income tax benefit | (12.6 | ) | (14.2 | ) | (19.4 | ) | |||||||||
Income tax benefit | 0.1 | 1.6 | 5.5 | ||||||||||||
Net loss | (12.5 | )% | (12.6 | )% | (13.9 | )% |
for the increase in product development expense was due to an increase in headcount to support new initiatives and expected growth.
prematurely terminating a broadcast contract. We also had an increase in our entertainment revenue of $1.2 million due to entering into new video contracts. The above increase was offset by a decrease in publication revenue of $1.3 million as a result of a decline in the number of magazines sold from 4.3 million to 3.5 million issues, as well as a $0.2 million decrease in our licensing revenue.
The losses for 2010 and 2009 were attributable to the entertainment segment and due to the estimated fair value of trademarks being less than their carrying value.
million. This gain was due to the United Kingdom taxing authority notifying us that it had reversed its previous position and that we were not subject to VAT in the United Kingdom in connection with providing internet services.
Year Ended December 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
($ in millions) | 2009 | 2008 | |||||||||
Net revenue | $ | 327.7 | $ | 331.0 | |||||||
Purchase accounting adjustment | — | 19.2 | |||||||||
Adjusted revenue | $ | 327.7 | $ | 350.2 | |||||||
Internet revenue | $ | 306.2 | $ | 306.1 | |||||||
Purchase accounting adjustment | — | 19.2 | |||||||||
Adjusted net internet revenue | 306.2 | 325.3 | |||||||||
Entertainment revenue | 21.5 | 24.9 | |||||||||
Total adjusted revenue | $ | 327.7 | $ | 350.2 |
expenses of $1.4 million and in consulting and professional fees of $2.7 million due to the majority of integration work being completed by March 31, 2008; and a $2.5 million decrease in other corporate expenses. The decreases were offset by a $2.6 million increase in our salaries, wages and benefits to help enhance our corporate infrastructure.
million. This gain was due to the United Kingdom taxing authority notifying us that it had reversed its previous position and that we were not subject to VAT in the United Kingdom in connection with providing internet services. There were no gains for the same period in 2008, since we discovered our VAT liability in July 2008 and subsequently began settlement conversations with the United Kingdom.
by an increase in our affiliate expense on our adult social networking websites from $51.8 million in the year ended December 31, 2009 to $59.3 million in the year ended December 31, 2010 driven by affiliates switching to upfront payment plans.
December 31, 2008 to 1.8 million for the year ended December 31, 2009, which was partially offset by a decrease in new subscribers from 1.9 million for the year ended December 31, 2008 to 1.8 million for the year ended December 31, 2009. New subscribers result from marketing activities that drive visitors to our websites, encouraging visitors to become registrants, providing limited services to members and the up-selling of special features including premium content. Churn is influenced by a combination of factors including the perceived value of the content and quality of the user experience.
driven by a decrease in new subscribers on our general audience social networking websites from 174,290 for the year ended December 31, 2008 to 116,608 for the year ended December 31, 2009, which was partially offset by a decrease in ad buy expense from $2.6 million for the year ended December 31, 2008 to $1.5 million for the year ended December 31, 2009.
Six Months Ended June 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2011 | 2010 | ||||||||||
(in thousands) (unaudited) | |||||||||||
GAAP net loss | $ | (15,542 | ) | $ | (13,200 | ) | |||||
Add: Interest expense, net | 43,951 | 46,398 | |||||||||
Add (subtract): Income tax provision (benefit) | (5,460 | ) | (147 | ) | |||||||
Add: Amortization of acquired intangible assets and software | 7,846 | 12,528 | |||||||||
Add: Depreciation and other amortization | 2,355 | 2,396 | |||||||||
EBITDA | $ | 33,150 | $ | 47,975 | |||||||
Add: Broadstream arbitration provision, including related legal fees | 7,394 | — | |||||||||
Add (subtract): Loss (gain) related to VAT liability not charged to customers | 3,887 | (3,958 | ) | ||||||||
Add: Loss of extinguishment of debt | 7,312 | — | |||||||||
Add: Stock Compensation Expense | 2,285 | — | |||||||||
Adjusted EBITDA | $ | 54,028 | $ | 44,017 |
Consolidated Data | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Year Ended December 31, | |||||||||||||||
2010 | 2009 | 2008 | |||||||||||||
(in thousands) | |||||||||||||||
GAAP net loss | $ | (43,153 | ) | $ | (41,216 | ) | $ | (45,966 | ) | ||||||
Add: Interest expense, net | 88,508 | 92,139 | 80,510 | ||||||||||||
Subtract: Income tax benefit | (486 | ) | (5,332 | ) | (18,176 | ) | |||||||||
Add: Amortization of acquired intangible assets and software | 24,461 | 35,454 | 36,347 | ||||||||||||
Add: Depreciation and other amortization | 4,704 | 4,881 | 4,502 | ||||||||||||
EBITDA | $ | 74,034 | $ | 85,926 | $ | 57,217 | |||||||||
Add: Deferred revenue purchase accounting adjustment(1) | — | — | 19,200 | ||||||||||||
Add: Impairment of goodwill | — | — | 9,571 | ||||||||||||
Add: Impairment of other intangible assets | 4,660 | 4,000 | 14,860 | ||||||||||||
Add: Broadstream arbitration provision | 13,000 | — | — | ||||||||||||
Add (subtract): Loss (gain) related to VAT liability not charged to customers | 1,683 | 7,942 | (9,456 | ) | |||||||||||
Add: Net Loss on extinguishment and modification of debt | 7,457 | 7,240 | — | ||||||||||||
Add: Other finance expenses | 4,562 | — | — | ||||||||||||
Subtract: Non-recurring refund by former owner of litigation costs for legacy patent case | — | (2,685 | ) | — | |||||||||||
Adjusted EBITDA(2) | $ | 105,396 | $ | 102,423 | $ | 91,392 |
(1) | Net revenue for the year ended December 31, 2008 does not reflect $19.2 million due to a non-recurring purchase accounting adjustment that required the deferred revenue at the date of the acquisition of Various to be recorded at fair value. Management believes that it is |
appropriate to add back the deferred revenue adjustment because the average renewal rate of the subscriptions that were the basis for the deferred revenue was approximately 63%. The renewal rate on subscriptions that had already been renewed at least one time since the acquisition was 78%. Therefore, management believes that historical results of Various are reflective of our future results, including those revenues that were added back to adjusted EBITDA. |
(2) | For the year ended December 31, 2008 and for the quarters ended March 31, 2008, June 30, 2008, September 30, 2008, March 31, 2009 and June 30, 2009, we failed to satisfy our EBITDA covenants with respect to our 2006 Notes and 2005 Notes because of operating performance. For the quarters ended March 31, 2008, June 30, 2008 and September 30, 2008 we failed to satisfy our EBITDA covenants with respect to the New First Lien Notes and the Second Lien Subordinated Secured Notes due to the liability related to VAT not charged to customers and the purchase accounting adjustment due to the required reduction of the deferred revenue liability to fair value. On October 8, 2009, these events of default were cured. For the quarter ended September 30, 2009, we met our EBITDA covenants with respect to our 2006 Notes and 2005 Notes, each as amended. For the year ended December 31, 2009 and the quarters ended March 31, 2010, June 30, 2010 and September 30, 2010, we met our EBITDA covenants with respect to the New First Lien Notes and the Second Lien Subordinated Secured Notes. For more information regarding this and other events of default under our note agreements, see the section entitled “Description of Indebtedness.” The above mentioned debt was paid off with the proceeds of the New Financing. Our new note agreements contain material debt covenants based on our maintaining specified levels of EBITDA (as it is defined in the particular agreement as noted below). Specifically, we are required to maintain the following EBITDA levels for our outstanding debt: |
• | For each of the fiscal quarters ending through September 30, 2011, September 30, 2012 and September 30, 2013, our EBITDA (as defined) on a consolidated basis for the four consecutive fiscal quarters ending on such date needs to be greater than $85 million, $90 million and $95 million, respectively. Our EBITDA for the four quarters ended December 31, 2010, as defined in the relevant documents, was $105.4 million. |
Quarter Ended | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
March 31, | June 30, | September 30, | December 31, | ||||||||||||||||
(in thousands, except per share data) | |||||||||||||||||||
2011 | |||||||||||||||||||
Net revenue | $ | 83,520 | $ | 83,371 | — | — | |||||||||||||
Gross profit | 56,759 | 58,324 | — | — | |||||||||||||||
Income from operations | 19,675 | 17,996 | — | — | |||||||||||||||
Net loss | (3,681 | ) | (11,861 | ) | — | — | |||||||||||||
Net loss per common share — basic and diluted | (0.27 | ) | (0.55 | ) | — | — | |||||||||||||
2010 | |||||||||||||||||||
Net revenue | $ | 86,205 | $ | 84,623 | $ | 86,663 | $ | 88,506 | |||||||||||
Gross profit | 56,563 | 56,407 | 59,731 | 62,806 | |||||||||||||||
Income from operations | 12,974 | 15,615 | 21,714 | 21,432 | |||||||||||||||
Net loss | (8,269 | ) | (4,931 | ) | (6,281 | ) | (23,672 | ) | |||||||||||
Net loss per common share — basic and diluted | (0.60 | ) | (0.36 | ) | (0.47 | ) | (1.71 | ) | |||||||||||
2009 | |||||||||||||||||||
Net revenue | $ | 84,125 | $ | 80,800 | $ | 79,514 | $ | 83,253 | |||||||||||
Gross profit | 59,146 | 58,300 | 58,260 | 60,289 | |||||||||||||||
Income from operations | 15,017 | 14,545 | 15,839 | 12,994 | |||||||||||||||
Net loss | (3,140 | ) | (17,651 | ) | (6,623 | ) | (13,802 | ) | |||||||||||
Net loss per common share — basic and diluted | (0.23 | ) | (1.29 | ) | (0.48 | ) | (1.00 | ) |
were $21.2 million. We have no working capital line of credit. Our current Senior Secured Notes and Cash Pay Notes require us to make principal payments equivalent to 75% of Excess Cash Flow, as defined at 102% of principal 35 calendar days after each quarter end. During the six months ended June 30, 2011, principal of such notes was reduced by $24.4 million from excess cash flow. On August 4, 2011 we made an Excess Cash Flow payment which resulted in a principal reduction of $8.4 million and $0.4 million of the Senior Secured Notes and Cash Pay Notes respectively. Our next Excess Cash Flow payment is scheduled for November 5, 2011.
with 2009 offset by reductions in accounts payable and lower interest payments and increases in restricted cash for processing reserve requirements. The reduced level of accounts receivable is primarily attributable to a repayment for certain VAT taxes from the United Kingdom in 2010. The reduced level of prepaid expenses is attributable to prepaid commissions and state taxes paid in 2009. Reduced interest payments are attributable to reduction on principal amounts of long-term debt due to prepayments from excess cash flow.
• | For the last four quarters for any period ended through September 30, 2011, September 30, 2012 and September 30, 2013, our EBITDA on a consolidated basis for the year ended on such date needs to be greater than $85.0 million, $90.0 million and $95.0 million, respectively. Our EBITDA for the six months ended June 30, 2011 and the four quarters ended December 31, 2010 was $33.2 million and $74.0 million, respectively. |
EBITDA. As disclosed in the risk factor entitled“We breached certain covenants contained in our previously existing note agreements and our Indentures....” above, we breached and subsequently cured a covenant in our Indentures. We are currently in compliance with the covenants under our outstanding notes, including all financial covenants. See the section entitled “ — Information Regarding EBITDA Covenants” above. To the extent that our notes are not fully repaid, we will remain subject to such restrictions and covenants. Interest expense for the six months ended June 30, 2011 and the year ended December 31, 2010 totaled $43.95 million and $88.5 million, respectively.
are identical to the terms of the Senior Secured Notes except as to matters regarding collateral, subordination, enforcement and voting. Cash Pay Notes are secured by a fully subordinated second lien on substantially all of our assets, parri passu with the Non-Cash Pay Notes, and will be included with the Senior Secured Notes on a dollar for dollar basis for purposes of determining required consents or waivers on all matters except for matters relating to collateral, liens and enforcement of rights and remedies. As to such matters, the Cash Pay Notes will be included with the Non-Cash Pay Notes for purposes of determining required consents or waivers.
were not extinguished. Accordingly, a new effective interest rate has been determined for the outstanding notes based on the carrying amount of such notes and the revised cash flows of the newly issued notes. In connection therewith, commitment fees paid to the note holders, together with an allocable portion of existing unamortized discount, and debt issuance and modification costs will be amortized as an adjustment of interest expense over the remaining term of the new notes using the effective interest method. Private placement fees related to the Senior Secured Notes together with legal and other fees aggregating approximately $4.6 million allocated to the exchanges was charged to other finance expense.
Payments due by period | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | |||||||||||||||||||
($ in thousands) | |||||||||||||||||||||||
Long-term Notes Payable, including current portion: | |||||||||||||||||||||||
Senior Secured Notes(1) | $ | 243,785 | $ | 8,543 | $ | 235,242 | — | — | |||||||||||||||
Cash Pay Notes(1) | 11,013 | 382 | 10,631 | — | |||||||||||||||||||
Non-Cash Pay Notes(1) | 250,849 | — | 250,849 | — | — |
Payments due by period | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | |||||||||||||||||||
($ in thousands) | |||||||||||||||||||||||
Sellers Agreements(2) | $ | 2,250 | $ | 1,000 | $ | 1,250 | $ | — | $ | — | |||||||||||||
Operating Leases(3) | 11,851 | 2,270 | 6,515 | 1,202 | 1,864 | ||||||||||||||||||
Other(4) | 5,823 | 3,318 | 2,505 | — | — | ||||||||||||||||||
Total(5) | $ | 525,571 | $ | 15,513 | $ | 506,992 | $ | 1,202 | $ | 1,864 |
(1) | We are required to use the net cash proceeds from the IPO of our common stock to repay a portion of the Senior Secured Notes and Cash Pay Notes pro rata at a redemption price of 110%, plus accrued and unpaid interest. The First Lien and Cash Pay Notes mature on September 30, 2013. The Non-Cash Pay Notes mature on April 30, 2014. |
(2) | Agreements with the former owners of Various recorded at present value of 2.3 million using discount rate of 15%. |
(3) | Represents our minimum rental commitments for non-cancellable operating leases of office space. |
(4) | Other commitments and obligations are comprised of contracts with software licensing, communications, computer hosting, and marketing service providers. These amounts totaled $3.3 million for less than one year and $2.5 million between one and three years. Contracts with other service providers are for 30 day terms or less. |
(5) | Interest expense has been excluded from the Contractual Obligations table above. As of June 30, 2011, the Company had $243.8 million and $11.0 million of Senior Secured Notes and Cash Pay Notes, respectively, which would result in an annual cash interest expense obligation of $42.6 million before giving effect to required principal reductions from excess cash flow. No cash interest payments are payable in respect of Non-Cash Pay Notes. |
exchange rates as of June 30, 2011 and December 31, 2010 was approximately $4.8 million and $4.2 million, respectively. We do not utilize any currency hedging strategies.
• | our ability to service and repay our indebtedness, including our repayment obligations in the event of a change of control; |
• | the insufficiency of the collateral relating to the Registrable Notes or any failure to record and/or perfect security interests in such collateral; |
• | our history of breaching certain covenants in our note agreements and the Indentures and the risk of future breaches; |
• | our failure to maintain financial ratios, satisfy financial tests and remain in compliance with the Indentures; |
• | the lack of a public market for the Registrable Notes; |
• | a court’s ability to void the subsidiary guarantees based on fraudulent conveyance laws; |
• | any dilutive effect experienced as a result of purchasing Registrable Shares from the selling securityholders or as a result of future equity issuances; |
• | our ability to raise capital in the future; |
• | the ability of our executive officers, directors and their affiliates to control matters requiring stockholder approval by virtue of their ownership of a substantial percentage of common stock; |
• | our ability to continue to pay the increased costs relating to being a public company; |
• | our ability to maintain effective internal controls; |
• | the volatility of our stock price; |
• | the effect of anti-takeover provisions in our articles of incorporation or provisions of Nevada law on any potential change in control; |
• | our history of significant operating losses and the risk of incurring additional net losses in the future; |
• | our reliance on subscribers to our websites for most of our revenue; |
• | competition from other social networking, internet personals and adult-oriented websites; |
• | our reliance on our affiliate network to drive traffic to our websites; |
• | increased subscriber churn or subscriber upgrade and retention costs’ impact on our financial performance; |
• | our ability to generate significant revenue from internet advertising; |
• | our ability to maintain and enhance our 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; |
• | we may be held secondarily liable for the actions of our affiliates; |
• | our reliance on internet search websites to direct traffic to our websites; |
• | our reliance on member-generated content to our websites; |
• | security breaches may cause harm to our subscribers or our systems; |
• | we may be subject to liability arising from our media content; |
• | our ability to safeguard the privacy of the users of our websites; |
• | our ability to enforce and protect our intellectual property rights; |
• | we may be subject to claims that we have violated the intellectual property rights of others; |
• | our ability to obtain or maintain key website addresses; |
• | our ability to scale and adapt our network infrastructure; |
• | the loss of our main data center or backup 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 or misuses our websites; |
• | risks associated with additional taxes being imposed by any states or countries; |
• | we may have unforeseen liabilities from our acquisition of Various and our recourse may be limited; |
• | we may not be successful in integrating any future acquisitions we make; |
• | risks of international expansion; |
• | our reliance on key personnel; |
• | our ability to attract internet traffic to our websites; |
• | risks associated with currency fluctuations; and |
• | risks associated with our litigation and legal proceedings. |
Name | Age | Position | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
Marc H. Bell | 44 | Chief Executive Officer, President and Director | ||||||||
Daniel C. Staton | 58 | Chairman of the Board and Treasurer | ||||||||
Ezra Shashoua | 56 | Chief Financial Officer | ||||||||
Anthony Previte | 46 | Chief Operating Officer | ||||||||
Robert Brackett | 34 | President, internet group | ||||||||
David Gellen | 43 | Senior Vice President and General Counsel | ||||||||
Robert B. Bell | 72 | Director | ||||||||
Barry W. Florescue | 67 | Director | ||||||||
James “Jim” LaChance | 46 | Director | ||||||||
Toby E. Lazarus | 44 | Director | ||||||||
Jason Smith | 39 | Director |
an operating business, since its inception in July 2007 until November 2009. Mr. Staton has served as Managing Director of Staton Capital LLC, a private investment firm, since 2003.
to 2006, Mr. Brackett served as Chief Technology Officer of Various. Over the last four years he has spearheaded Various’ infrastructure and software growth. From 1999 to 2001, Mr. Brackett was software developer at iPrint Technologies, the internet’s first online print shop. Mr. Brackett developed software at iPrint to allow the easy creation of custom print shops for many large businesses such as Oracle, Washington Mutual and 3M. Mr. Brackett graduated from the University of California-Santa Cruz with highest honors in computer science and honors in language studies.
Check LLC will be receiving a percentage of the net management fees earned by ARRM. These services may include serving as a consultant to ARRM with respect to the periodic review of the “guidelines” (as defined in the sub-management agreement); identifying for ARRM potential new lines of business and investment opportunities for ARMOUR; identifying for and advising ARRM with respect to selection of independent contractors that provide investment banking, securities brokerage, mortgage brokerage and other financial services, due diligence services, underwriting review services, legal and accounting services, and all other services as may be required relating to the investments of ARMOUR and its subsidiaries; advising ARRM with respect to ARMOUR’s stockholder and public relations matters; advising and assisting ARRM with respect to ARMOUR’s capital structure and capital raising; and advising ARRM on negotiating agreements relating to programs established by the U.S. government. The sub-management agreement requires the consent of ARRM (not to be unreasonably withheld) prior to any transfer of any membership interests in Staton Bell Blank Check LLC that would result in Messrs. Staton and Bell, and certain of their respective affiliates and other permitted transferees, no longer holding a majority-interest in Staton Bell Blank Check LLC. We expect that Messrs. Bell and Staton will devote approximately ten percent of their combined time to ARMOUR. Each of Messrs. Bell and Staton expect to devote a small percentage of their time to Marc Bell Capital Partners LLC and Staton Capital LLC, respectively, as is required from time to time. While the amount of time devoted to each of these entities will vary, we remain the primary focus of each of Messrs. Bell and Staton.
• | appointing, replacing and overseeing the work of the registered independent public accounting firm, including compensation and any fees paid to such accounting firm in relation to its services; |
• | appointing an internal audit officer to handle the internal audit function of the Company, and reviewing such appointment as necessary; |
• | reviewing and discussing with management, the internal audit officer and the registered independent accounting firm our quarterly and annual financial statements and discussing with management our earnings releases; |
• | pre-approving all auditing services and permissible non-audit services provided by our registered independent public accounting firm; |
• | engaging in a dialogue with the registered independent public accounting firm regarding relationships that may adversely affect the independence of the registered independent public accounting firm and, based on such review, assessing the independence of the registered independent public accounting firm; |
• | taking appropriate steps to confirm the independence of the independent public accounting firm, including recommending to the board of directors to take appropriate action to oversee the independence of the independent public accounting firm; |
• | providing the audit committee report to be filed with the SEC in our annual proxy statement; |
• | establishing procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters, including the confidential anonymous submission by our employees of concerns regarding questionable accounting or auditing matters; |
• | reviewing and discussing with our Chief Executive Officer, Chief Financial Officer, management, internal audit officer and registered independent accounting firm, management’s annual assessment of the effectiveness of the internal controls; |
• | reviewing and discussing with our Chief Executive Officer, Chief Financial Officer, management, internal audit officer and registered independent accounting firm the adequacy and effectiveness of our internal controls over our financial reporting including any significant deficiencies in the design or operation of our internal controls or material weaknesses and the adequacy and effectiveness of our disclosure controls and procedures; |
• | reviewing and approving related party transactions in accordance with our related party transaction policy; |
• | reporting on its activities in our annual proxy statement; and |
• | reviewing and assessing annually the adequacy of the audit committee charter. |
• | reviewing and determining the compensation of our executive officers; |
• | recommending to the Board the cash compensation of the Company’s directors; |
• | granting equity and other incentive awards to executive officers, directors and other eligible individuals under our equity plans and determining the terms and conditions of such awards; |
• | making recommendations to the board of directors with respect to amendments to our equity plans and changes in the number of shares reserved for issuance thereunder; |
• | issuing a report on executive compensation in accordance with applicable rules and regulations of the SEC for inclusion in our annual proxy statement; |
• | evaluating the performance of our Chairman of the Board and Chief Executive Officer (and such other executive officers as it deems appropriate) in light of the our current business environment and our strategic objectives; |
• | evaluating the need for, and provisions of, employment agreements or severance arrangements for the executive officers or, if so directed, our board of directors or other officers; |
• | reviewing trends in executive compensation, overseeing the development of new compensation plans, and, when necessary, approving the revision of existing executive compensation plans; and |
• | reviewing and assessing annually the compensation committee’s performance. |
• | leading the search for and recommending qualified candidates or nominees for the board of directors to be proposed for election by the stockholders and individuals to be considered by the board of directors to fill vacancies; |
• | reviewing periodically the criteria for the selection of new directors and recommending any proposed changes to our board of directors; |
• | developing and recommending to our board of directors a set of corporate governance principles applicable to us; |
• | monitoring and overseeing matters of corporate governance, including the evaluation of board performance and processes and the “independence” of directors; and |
• | reviewing and assessing annually the performance of the nominating and corporate governance committee. |
• | Marc H. Bell, Chief Executive Officer and President |
• | Daniel C. Staton, Chairman of the Board and Treasurer |
• | Ezra Shashoua, Chief Financial Officer |
• | Anthony Previte, Chief Operating Officer |
• | Robert Brackett, President, internet group |
regarding the compensation of our Chief Executive Officer and our Chairman of the Board. Mr. Previte, in consultation with Mr. Shashoua, also served a role in making compensation decisions during 2010 through the establishment of bonus pools that were allocated amongst management and staff of certain divisions of our company if financial and performance objectives were met.
• | base salary; |
• | bonuses; |
• | long-term equity incentive compensation in the form of stock options under our 2008 Stock Option Plan and, subject to the approval of our compensation committee, restricted stock following the consummation of this offering; and |
• | retirement benefits. |
evaluates on a periodic basis the overall competitiveness of our executive compensation packages as compared to packages offered in the marketplace for which we compete for executive talent. Overall, our committee believes that our executive compensation packages are currently appropriately balanced and structured to retain and motivate our named executive officers.
• | the executive officer’s total compensation package, both individually and relative to other executive officers; and |
• | the individual performance of the executive officer. |
for 2010. Following the IPO, Messrs. Bell and Staton are eligible for annual bonuses of up to 100% of their annual base salaries, subject to the terms of our note agreements, as amended. To incentivize Mr. Shashoua to stay with us through our IPO, Mr. Shashoua’s employment agreement also contemplates a bonus of up to 50% of annual base salary, contingent upon his continued employment upon the completion of the IPO. Mr. Shashoua did not receive any bonus with respect to 2009. We have not entered into any formal bonus arrangement with Mr. Previte. In December 2010, in recognition of the efforts of Messrs. Previte and Shashoua in the successful consummation of the New Financing, they were each granted a discretionary bonus of $150,000 by our Chief Executive Officer and our Chairman of the Board. In January 2011, Mr. Shashoua received a discretionary bonus of $233,333.
in certain cases, but we may not materially impair the rights of an existing option holder without his or her consent. Unless it is terminated earlier, the plan will terminate on December 31, 2017.
vesting period. Each option will have an exercise price equal to the offering price of $10.00, and will vest ratably over the five years following the date of the agreement. Each of our named executive officers will be eligible to receive additional awards under our 2008 Stock Option Plan periodically thereafter or in connection with employment terms or agreements. Additional grants of stock options under our 2008 Stock Option Plan will be made both pursuant to employment agreements and ad hoc as to be determined by our Chief Executive Officer and our Chairman of the Board or our compensation committee, as applicable. To date, we have not established any formal option granting policies. Pursuant to the terms of their employment agreements. Messrs. Bell and Staton were each awarded 4,167 stock options upon consummation of the IPO.
by the participant in respect of the shares received by the participant upon the exercise of the incentive stock option if the requirements of the plan and the Code described above are met. The number of shares received equal to the number of shares surrendered will have a tax basis equal to the tax basis of the surrendered shares. Shares of common stock received in excess of the number of shares surrendered will have a tax basis of zero. The holding period of the shares received equal to the number of shares tendered will be the same as such tendered shares’ holding period, and the holding period for the excess shares received will begin on the date of exercise. Solely for purposes of determining whether such shares received upon the exercise of the incentive stock option are disposed of in a Disqualifying Disposition, all shares are deemed to have a holding period beginning on the date of exercise.
shares, the participant will realize short-term or long-term capital gain or loss, depending upon whether the shares have been held for more than one year at the time of sale. Such gain or loss will be equal to the difference between the amount realized upon the sale of the shares and the tax basis of the shares in the participant’s hands. If we exercise our option to repurchase the shares prior to their vesting date, the participant will realize compensation in an amount equal to the repurchase price paid, which is taxable as ordinary income.
Name and Principal Position | Year | Salary ($) | Bonus ($) | All Other Compensation ($) | Total ($) | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Marc H. Bell, | 2010 | 291,666 | (1) | — | 22,582 | (2) | 314,248 | |||||||||||||||
Chief Executive Officer and President | 2009 | 250,000 | (1) | — | 15,634 | (2) | 265,634 | |||||||||||||||
2008 | 250,000 | (1) | — | 5,404 | (2) | 255,404 | ||||||||||||||||
Daniel C. Staton, | 2010 | 291,666 | (3) | — | 69,414 | (4) | 361,080 | |||||||||||||||
Chairman of the Board and Treasurer | 2009 | 250,000 | (3) | — | 72,296 | (4) | 322,296 | |||||||||||||||
2008 | 250,000 | (3) | — | 16,316 | (4) | 266,316 | ||||||||||||||||
Ezra Shashoua, | 2010 | 460,000 | 266,667 | (5) | — | 726,667 | ||||||||||||||||
Chief Financial Officer | 2009 | 400,000 | — | — | 400,000 | |||||||||||||||||
2008 | 300,000 | — | — | 300,000 | ||||||||||||||||||
Anthony Previte, | 2010 | 574,999 | 150,000 | — | 724,999 | |||||||||||||||||
Chief Operating Officer | 2009 | 500,000 | — | — | 500,000 | |||||||||||||||||
2008 | 475,000 | (6) | — | 39,149 | (7) | 514,149 | ||||||||||||||||
Robert Brackett, | 2010 | 365,000 | 111,200 | — | 477,200 | |||||||||||||||||
President, internet group | 2009 | 337,917 | 288,667 | (8) | 626,584 | |||||||||||||||||
2008 | 328,326 | 413,167 | (9) | — | 741,493 |
(1) | This amount reflects the portion of the payment to Bell & Staton, Inc., pursuant to the management agreement, that is attributable to Mr. Bell. |
(2) | This amount represents certain subsidies we provide Mr. Bell for the cost of healthcare coverage. |
(3) | This amount reflects the portion of the payment to Bell & Staton, Inc., pursuant to the management agreement, that is attributable to Mr. Staton. |
(4) | This amount represents reimbursement for car lease expenses and the amount of certain subsidies we provide Mr. Staton for the cost of healthcare coverage. |
(5) | This amount includes cash compensation of $116,667 for Mr. Shashoua in 2010 pursuant to his amended and restated employment agreement, dated April 1, 2010, which provided for additional cash compensation of $233,333 in connection with his continued employment through the completion of the IPO. The Company has determined that half of the compensation was earned in 2010 and the other half will be earned in 2011. |
(6) | This amount reflects $50,000 in consulting fees paid under a consulting agreement pursuant to which Mr. Previte served as head of our entertainment group prior to becoming our Chief Operating Officer on February 26, 2008 as well as $425,000 in salary related to his service as our Chief Operating Officer. |
(7) | This amount represents relocation expenses for Mr. Previte from Los Angeles, California to Sunnyvale, California. |
(8) | This amount reflects $241,667 which is the second installment of Mr. Brackett’s retention bonus and bonus payments with respect to the first, second and fourth fiscal quarters of 2009 as follows: $14,000 for the first quarter, $23,000 for the second quarter, $10,000 for the fourth quarter. |
(9) | This amount reflects bonus payments with respect to each fiscal quarter of 2008 as follows: $43,750 for the first quarter, $48,125 for the second quarter, $48,125 for the third quarter and $31,500 for the fourth quarter, plus a $241,667 retention bonus. |
him for good reason, we will become obligated to pay him severance equal to the lesser of (i) 2.99 times the base salary in the year of such termination or (ii) the amount of base salary owed to the executive for the remainder of the term of the agreement, to be made in 24 monthly payments, beginning within 60 days following the termination date plus; an amount equal to the executives’ bonus actually earned for the year prior to the year of termination; and the same level of health coverage and benefits as in effect on the day immediately prior to termination until the earlier to occur of the date that such executive is no longer eligible for continued coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 or twelve months from the executive’s termination date. In addition the vesting of the executive’s stock options will accelerate to that number of shares that would have become vested if the executive had remained employed by us until the date twelve months following the termination date. Severance benefits are contingent upon each of Mr. Bell and Mr. Staton signing and not revoking a release of claims. In the event that the executive’s employment is terminated by us for cause or is terminated by the executive without Good Reason, which we refer to as a Discretionary Severance Event, our Board of Directors, without the executive’s participation, in its sole and absolute discretion, may choose to pay the executive the severance payment, payable in 24 monthly payments, beginning within 60 days following the termination date. “Cause” is defined in the employment agreement as (i) a willful failure or refusal on the executive’s part to perform his duties under the employment agreement, (ii) a willful failure or refusal to carry out the lawful directions of our Board of Directors, (iii) willful gross misconduct, willful dishonesty or fraud on the executive’s part in connection with his employment, regardless of whether it results in economic harm to us or our subsidiaries or affiliates, (iv) conviction of or a plea ofnolo contendere to a crime other than a minor traffic infraction, following an opportunity by the executive to appear and be heard by our Board of Directors, or (v) a material breach of any provision of the employment agreement. “Good Reason” includes, without the executive’s written consent, a material reduction in the executive’s duties, position or responsibilities; a significant reduction in the executive’s then current base salary or bonus; or the requirement that the executive relocate to an office more than fifty miles from its then current location. The employment agreements further provide that if we determine that any payment or benefit received or to be received by Mr. Bell or Mr. Staton, whether pursuant to the employment agreements or otherwise, would be subject to the excise tax imposed by Section 4999 of the Code, such payments shall be reduced so that the excise tax will not apply. The employment agreements provide that each of Messrs. Bell and Staton is permitted to devote up to twenty percent of his business time to other business activities. Under the employment agreements, Messrs. Bell and Staton are entitled to four weeks paid vacation and reimbursement of reasonable out-of-pocket expenses and are eligible to participate in each of our existing or future benefit plans, whether made available to employees generally or for the benefit of executives.
of his then current annual base salary, which bonus is contingent upon his continued employment through the completion of an initial public offering and the achievement of certain goals and objectives as agreed to between Mr. Shashoua and senior management. The employment agreement also provides for Mr. Shashoua to be eligible to receive options upon pricing of an initial public offering equal to 0.6% of our total outstanding equity, with an exercise price equal to the initial public offering stock price. On July 8, 2008, Mr. Shashoua’s employment agreement was amended and restated, increasing his base salary to $400,000 per year and identifying that he would be eligible for a grant of options to purchase 50,000 shares of common stock in lieu of an amount equal to 0.6% of our then outstanding equity, or in an amount equal to other top tier senior executives. On April 1, 2010, Mr. Shashoua’s employment agreement was again amended and restated to increase his base salary to $480,000 and providing for a one-time additional payment of $233,333, which was made in January, 2011. In addition, upon the consummation of the IPO, Mr. Shashoua will became entitled to receive a bonus of up to 50% of his then current annual base salary and will become eligible to receive restricted stock from time to time. Mr. Shashoua is subject to a confidentiality provision and a provision acknowledging our ownership of intellectual property created by him during the term of his employment. Mr. Shashoua is entitled to at least four weeks paid vacation and is eligible to participate in our health, welfare and other employee benefit programs, including our 401(k) savings plan, and, as described in greater detail below, he is entitled to severance payments on the termination of his employment under certain circumstances.
a transaction bonus on the closing date of the Various transaction, $517,857 as a post-closing bonus on or before the one-month anniversary of the closing date, and he also became entitled to receive payment of $241,667 on each of the first three anniversaries of the closing date as retention bonuses, assuming Mr. Brackett’s continued employment.
Termination | Severance | |||||
---|---|---|---|---|---|---|
Without Cause/For Good Reason | $ | 480,000 |
entitled to receive his base salary, but no bonus payments, from the date his employment terminated until the end of the term of the employment agreement. If we terminate his employment for cause, we are not required to make any additional payments under the employment agreement, other than his unpaid salary through the date his employment is terminated. In the event Mr. Previte terminates the employment relationship, we will continue to pay his base salary, but not bonus payments, for a period of one year following his termination. The continued payments upon his termination without cause or termination by Mr. Previte is contingent upon his compliance with his one year post-termination covenants not to solicit our employees or customers, his agreements with respect to intellectual property and confidentiality (described above) and his covenant not to accept employment with or provide consulting services to any web-based provider of adult-oriented social networking, chat or cams services worldwide during any period in which he is entitled to such post-termination payments.
Termination | Severance | |||||
---|---|---|---|---|---|---|
Without Cause | $ | 1,800,000 |
Termination | Severance | |||||
---|---|---|---|---|---|---|
Without Cause | $ | 1,188,000 |
Option Awards | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Number of Securities Underlying Unexercised Options | |||||||||||||||||||||||
Name | Exercisable | Unexercisable | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options | Option Exercise Price(1) | Option Expiration Date | ||||||||||||||||||
Marc H. Bell | 50,000 | — | — | $ | 10.00 | 07/07/18 | |||||||||||||||||
Daniel C. Staton | 50,000 | — | — | $ | 10.00 | 07/07/18 | |||||||||||||||||
Ezra Shashoua | 50,000 | — | — | $ | 10.00 | 07/07/18 | |||||||||||||||||
Anthony Previte | 37,500 | — | — | $ | 10.00 | 07/07/18 | |||||||||||||||||
Robert Brackett | 25,000 | — | — | $ | 10.00 | 07/07/18 |
(1) | Based upon an initial public offering price of $10.00 per share of common stock. |
Name | Fees Earned or Paid in Cash ($) | Total ($) | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
Robert Bell | 30,000 | 30,000 | ||||||||
Barry Florescue | 30,000 | 30,000 | ||||||||
James LaChance | 30,000 | 30,000 | ||||||||
Toby Lazarus | 30,000 | 30,000 | ||||||||
Jason Smith | 30,000 | 30,000 |
years and provided for an annual fee of $0.5 million which amount was included in general and administrative expenses for each of the years ended December 31, 2008, 2007 and 2006. On August 17, 2005, the management agreement was amended to limit the total annual fee to be paid to the managers to a maximum of $500,000 so long as any of the 2005 Notes or any guaranty thereof remained outstanding and to prohibit the payment of the annual fee 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 October 8, 2009, we amended the management agreement to extend the term of the management agreement until the consummation of an initial public offering of our common stock as described in such amendment. We amended the agreement to increase the annual fee to $1.0 million and to remove all other bonus opportunities effective November 1, 2010. The term of the amended and restated agreement concludes upon the consummation of an initial public offering of our common stock in which either our aggregate gross proceeds are at least $25.0 million or we have an implied pre-money equity value of at least $100.0 million. The amended and restated management agreement also provides that we may grant stock options directly to the managers, but does not provide for their participation in a bonus pool. The amended and restated agreement may only be terminated prior to the consummation of an initial public offering with the mutual written consent of the parties or, if neither manager is able to provide the services contemplated thereunder, upon our 30 days’ written notice. An aggregate of $0.5 million and $0.6 million in management fees were paid in 2009 and 2010, respectively, under the management agreement. On December 9, 2008, our board of directors approved forms of employment agreements for each of Messrs. Bell and Staton. On March 14, 2011, our Board approved revised forms of these agreements, each of which became effective upon the consummation of the initial public offering.
of our voting securities, participated in the offering of our 2006 Notes and related warrants. Such stockholders purchased $3.9 million in principal amount of 2006 Notes and warrants to purchase 344,347 shares of our common stock, subject to adjustment for certain anti-dilution provisions, at an exercise price of $0.0002 per share for an aggregate purchase price of approximately $3.9 million, of which approximately $172,000 was allocated to the purchase of the warrants. In addition, Satellite Senior Income Fund, LLC, or Satellite, owners of shares of our Series A Convertible Preferred Stock and, at the time of the transaction, holders of five percent or more of a class of our voting securities, participated in the offering of our 2006 Notes and related warrants. Satellite purchased $1.1 million in principal amount of 2006 Notes and warrants to purchase 97,123 shares of our common stock, subject to adjustment for certain anti-dilution provisions, at an exercise price of $0.0002 per share for an aggregate purchase price of approximately $1.1 million, of which approximately $48,500 was allocated to the purchase of the warrants.
purchase a total of 2,251,007 shares of our common stock, subject to adjustment for certain anti-dilution provisions, at an exercise price of $0.0002 concurrently with the issuance of shares of our Series B Convertible Preferred Stock.
• | 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 $0.20 per share, at any time until the consummation of an initial public offering. The option was subject to a vesting schedule pursuant to which the option vested in part immediately, and in part after each of six, nine and twelve months; |
• | in the event (i) there is a default under the letter agreement; (ii) the outstanding balance of the First Lien Notes held by the sellers is greater than or equal to $50.0 million, and there is an interest or principal payment default under the 2007 Securities Purchase Agreement, which is not cured at least two days prior to the applicable time frame within which cure is permitted under the 2007 Securities Purchase Agreement; (iii) the outstanding balance of the notes is less than $50.0 million, and there is an interest or principal payment default under the 2007 Securities Purchase Agreement that has been called for immediate payment by the Required Holders (as defined in the 2007 Securities Purchase Agreement) pursuant to the terms of the 2007 Securities Purchase Agreement; or (iv) the First Lien 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 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 Notes and related outstanding warrants, at a purchase price equal to the then outstanding principal amount of the First Lien Notes required to be purchased, plus accrued and unpaid interest on such First Lien 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 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 Notes and related outstanding warrants, in whole or in part, such seller shall sell its First Lien 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 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 Notes and related outstanding warrants; and |
• | for so long as any First Lien Notes owned by any seller remain outstanding, the principals are restricted from selling, transferring or otherwise disposing of their First Lien Notes except subject to certain exceptions. |
• | the principals no longer have an obligation to purchase the sellers’ First Lien 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 Notes at a certain bid price; |
• | the principals granted the sellers an immediately exercisable option to purchase from time to time from the principals, an aggregate of approximately 1,000,000 shares of our common stock at the exercise price of $0.20 per share, at any time until the consummation of an initial public offering; |
• | the principals are no longer restricted from selling their First Lien Notes. Instead, until the consummation of an initial public offering, no principal could sell, transfer or otherwise dispose of any of our securities subject to the purchase option or permit them to become subject to any liens; and |
• | the letter agreement terminates upon the consummation of the initial public offering and the completion of transfer of any equity securities required by the amendment to be transferred. |
facilitate the consummation of the Various acquisition and to pay a consent fee to each of Messrs. Conru and Mapstead. Each of Messrs. Bell and Staton will receive cash equal to the product of (i) 37.5% of the initial per share offering price of our common stock in the initial public offering times (ii) 573,982 shares of our common stock that such individual or his affiliates contributed toward the consummation of the Various acquisition. Messrs. Conru and Mapstead will together receive cash in the aggregate equal to product of (i) 37.5% of the initial per share offering price of our common stock in the initial public offering times (ii) 1,147,963 shares of our common stock, which cash will be allocated between the sellers. The reimbursement agreements provide that we will become obligated to make payments to Messrs. Bell, Staton, Conru and Mapstead upon the closing of a public or private offering of any debt or equity securities after the consummation of the initial public offering. Upon such a subsequent offering, based upon an initial offering price of $10.00 per share of common stock, Messrs. Bell, Staton and Conru and Mapstead will be entitled to payments of $2.2 million, $2.2 million and $4.3 million (to be allocated between Messrs. Conru and Mapstead), respectively, in respect of these reimbursement agreements. We are not obligated to make any payments pursuant to these agreements unless the per share trading price of our common stock is equal to or greater than fifty percent of the initial per share offering price of our common stock in the IPO. These reimbursement agreements were entered into as of December 17, 2009.
After discussing and negotiating the exchange ratios with unaffiliated third parties, we determined that the 2% exchange premium was a key deal term necessary to incentive the parties to effect the exchange. Mr. Staton is president of Staton Family Investments, Ltd. and has beneficial interest over all the Senior Secured Notes and Cash Pay Notes owned by Staton Family Investments, Ltd. On December 31, 2010, we paid $0.1 million, $0.1 million and $2.5 million of cash interest on the Senior Secured Notes to Mr. Bell, Staton Family Investments Ltd. and the Andrew C. Conru Trust, respectively. On February 4, 2011, we paid $0.1 million, $0.1 million and $3.4 million of principal payments, representing cash payments of 102% of principal, to Mr. Bell, Staton Family Investments, Ltd. and the Andrew C. Conru Trust, respectively. On March 3, 2011 we paid $0.05 million, $0.05 million and $1.3 million of principal payments, representing cash payment of 102% of principal to each Mr. Bell, Staton Family Investments, Ltd. and the Andrew C. Conru Trust, respectively. In addition, on December 31, 2010, we paid $0.2 million of cash interest on the Cash Pay Notes to each of Mr. Bell and Mr. Staton. On February 4, 2011, we paid $0.2 million of principal payments representing cash payments of 102% of principal to each of Mr. Bell and the Staton Family Investments Ltd. On March 3, 2011 we paid $0.1 million and $0.1 million of principal payments representing cash payments of 102% of principal to each Mr. Bell and Staton Family Investments Ltd. Upon the consummation of the initial public offering, based upon an initial public offering price of $10.00 per share of common stock, Messrs. Bell, Staton and Conru would receive $1.5 million, $1.5 million and $14.2 million, respectively, in connection with the redemption of their Senior Secured Notes and Cash Pay Notes.
post-exchange. All of the Subordinated Convertible Notes and Subordinated Term Notes, with outstanding principal amounts of $180.1 million and $42.8 million respectively, together with accrued interest, were exchanged for $232.5 million in principal amount of Non-Cash Pay Notes. Mr. Bell and Staton Family Investments, Ltd. are members and the majority stockholders of PET Capital Partners I LLC and have beneficial interest over 99% of the Non-Cash Pay Notes owned by PET Capital Partners I LLC. Barry Florescue, one of our directors, is the president and a majority stockholder of Florescue Family Corporation and has beneficial interest over all the Non-Cash Pay Notes owned by Florescue Family Corporation. On December 31, 2010, we issued $0.4 million, $0.4 million, $3.2 million, $0.5 million and $0.04 million of additional Non-Cash Pay Notes to Mr. Bell, Staton Family Investments, Ltd., Andrew C. Conru Trust, Mapstead Trust and the Florescue Family Corporation, respectively. We do not expect to make any payments in respect of the Non-Cash Pay Notes.
Entity | Cash Pay Notes | |||||
---|---|---|---|---|---|---|
Marc H. Bell | $5.3 million | |||||
Staton Family Investments Ltd. | $5.3 million |
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent of Class(1) | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
Directors and Executive Officers: | ||||||||||
Daniel C. Staton | 6,606,020 | (2) | 21.2 | % | ||||||
Marc H. Bell | 5,147,671 | (3) | 16.5 | % | ||||||
Robert Brackett | — | — | ||||||||
Anthony Previte | — | — | ||||||||
Ezra Shashoua | 10,000 | (4) | † | |||||||
Robert B. Bell | — | — | ||||||||
Barry Florescue | 1,148,302 | (5) | 3.7 | % | ||||||
Jim LaChance | — | — | ||||||||
Toby E. Lazarus | — | — | ||||||||
Jason H. Smith | — | — | ||||||||
Directors and Executive Officers as a group (11 persons) | 12,911,993 | 41.4 | % | |||||||
5% Stockholders: | ||||||||||
Absolute Income Fund, L.P. | 1,991,703 | (6) | 6.4 | % | ||||||
Andrew B. Conru Trust Agreement. | 8,860,991 | (7) | 24.2 | % | ||||||
Global Investment Ventures LLC. | 5,687,990 | (8) | 15.9 | % | ||||||
Staton Family Perpetual Trust. | 1,688,970 | (9) | 5.4 | % | ||||||
Staton Family Investments Ltd. | 4,707,058 | (10) | 15.1 | % |
† | The person beneficially owns less than 1% of FriendFinder’s outstanding common stock. |
(1) | Based on 31,186,679 shares of our common stock and 32,965 shares of our Series B common stock outstanding as of October 13, 2011. |
(2) | Shares of common stock beneficially owned include: 59,997 shares of common stock, 3,432,893 shares of common stock owned by Staton Family Investments, Ltd.; 1,274,165 shares of common stock purchased from IBD by Strategic Media LLC over which Staton Family Investments, Ltd. holds sole dispositive and voting power; 149,995 shares of common stock owned by Staton Media LLC; and 1,688,970 shares of common stock owned by Staton Family Perpetual Trust. Mr. Staton is a member of Staton Family Investments, Ltd. and has voting and investment power over its shares. Mr. Staton is a member and the manager of Staton Media LLC and has voting and investment power over its shares. Mr. Staton is also the trustee of Staton Family Perpetual Trust and has voting and investment power over its shares, which are held in trust for the benefit of his minor children. |
(3) | Shares of common stock beneficially owned include: 5,147,671 shares of common stock. Shares of common stock beneficially owned do not include 184,190 shares of common stock held by the Bell Family 2003 Charitable Lead Annuity Trust for which Mr. Bell does not hold voting or dispositive power. Mr. Bell disclaims beneficial ownership over the shares held by the Bell Family 2003 Charitable Lead Annuity Trust. |
(4) | These shares are owned by The Shashoua Children’s Trust UAD January 1, 1994, Abraham Shashoua, Trustee. Mr. Shashoua disclaims beneficial ownership of these securities except to the extent of his pecuniary interest therein. |
(5) | Shares of common stock beneficially owned include: 1,086,366 shares of common stock owned by Florescue Family Corporation and 61,936 shares of common stock issuable upon the conversion of its Non-Cash Pay Notes. Mr. Florescue is President of Florescue Family Corporation and has voting and investment power over its shares. Mr. Florescue disclaims beneficial ownership over the shares held by PET II for which he does not have voting and investment power. |
(6) | Shares of common stock beneficially owned include: 1,991,703 shares of common stock. Income Fund GP Limited (“IFGPL”) is the general partner of Absolute Income Fund, L.P. and has shared voting and dispositive power over the shares held by Absolute Income Fund, L.P. Ben Christian Rispoli is the sole director of IFGPL. Greymoor International Limited is the sole shareholder of IFGPL and is a wholly-owned subsidiary of Neville Holdings Group Limited. Olivier Claude Michel Bassou and Olivier Pierre Adam are the directors of Greymoor International Limited and Neville Holdings Group Limited. Mr. Rispoli, Mr. Bassou and Mr. Adam share voting and dispositive power over the shares held by Absolute Income Fund, L.P. The address of Absolute Income Fund, L.P. is Suite 4-213-4 Governors Square, PO Box 31298, Grand Cayman, KY1-1206, Cayman Islands. |
(7) | Shares of common stock beneficially owned include: 3,380,879 shares of common stock and 5,480,112 shares of common stock issuable upon the conversion of its Non-Cash Pay Notes. To the best of our knowledge, Andrew Conru holds investment and voting power over the securities held by the Andrew B. Conru Trust Agreement. The address of the Andrew B. Conru Trust Agreement is 2125 1st Avenue #2904, Seattle, Washington 98121. |
(8) | This number is based solely on the Schedule 13D filed with the SEC on September 16, 2011 by Global Investment Ventures LLC (“Global Investment”). The shares of common stock beneficially owned include vested warrants to purchase 4,500,170 shares of common stock. According to the Schedule 13D, Global Investment shares voting and dispositive power with Anthony Bobulinski, the managing member and sole member of Global Investment. The principal business address of Global Investment is 10330 Santa Monica Blvd., Los Angeles, CA 90025. |
(9) | Shares of common stock beneficially owned include: 1,688,970 shares of common stock. Mr. Staton is the trustee of Staton Family Perpetual Trust and has voting and investment power over its shares, which are held in trust for the benefit of his minor children. The address for Staton Family Perpetual Trust is 6800 Broken Sound Parkway, Boca Raton, FL 33487. |
(10) | Shares of common stock beneficially owned include: 3,432,893 shares of common stock and 1,274,165 shares of common stock purchased from IBD by Strategic Media LLC over which Staton Family Investments, Ltd. holds sole dispositive and voting power. Mr. Staton is a member of Staton Family Investments, Ltd. and has voting and investment power over its shares. The address for Staton Family Investments, Ltd. is 6800 Broken Sound Parkway, Boca Raton, FL 33487. |
person who is not an affiliate of INI, FFN or any initial Conru/Mapstead Notes holder or family member such Conru/Mapstead Notes shall no longer be subject to the aforesaid limitations.
becomes the Beneficial Owner, directly or indirectly, of more than 50% of the Voting Stock of any Issuer, measured by voting power rather than number of shares;
(a) | any Person that is a Subsidiary on such Determination Date (or would become a Subsidiary on such Determination Date in connection with the transaction that requires the determination of the Consolidated Coverage Ratio) shall be deemed to have been a Subsidiary at all times during such Measurement Period, |
(b) | any Person that is not a Subsidiary on such Determination Date (or would cease to be a Subsidiary on such Determination Date in connection with the transaction that requires the determination of the Consolidated Coverage Ratio) will be deemed not to have been a Subsidiary at any time during such Measurement Period, |
(c) | if any Obligor shall have in any manner (i) acquired (including through an asset acquisition or the commencement of activities constituting such operating business), or (ii) disposed of (including by way of an Asset Sale or the termination or discontinuance of activities constituting such operating business) any operating business during such Measurement Period or after the end of such Measurement Period and on or prior to the Determination Date, such calculation shall be made on a pro forma basis in accordance with GAAP as if, in the case of an asset acquisition or the commencement of activities constituting such operating business, all such transactions had been consummated on the first day of such Measurement Period and, in the case of an Asset Sale or termination or discontinuance of activities constituting such operating business, all such transactions had been consummated prior to the first day of such Measurement Period; provided, however, that such pro forma adjustment shall not give effect to the Consolidated EBITDA of any acquired Person to the extent that such Person’s net income would be excluded pursuant to clauses (a) through (g) of the definition of Consolidated Net Income; and |
(d) | any Indebtedness incurred and proceeds thereof received and applied as a result of the transaction giving rise to the need to calculate the Consolidated Coverage Ratio will be deemed to have been so incurred, received and applied on the first day of such Measurement Period. |
(a) | the net income (or loss) of any Person that is not a Subsidiary of FFN except to the extent of the amount of dividends or other distributions actually paid to FFN or such Subsidiary by such Person during such period, |
(b) | gains or losses on Asset Sales by FFN or its Subsidiaries, |
(c) | all extraordinary gains and extraordinary losses, including such gains and losses derived from Extraordinary Receipts, |
(d) | the cumulative effect of changes in accounting principles, |
(e) | any net income of any Subsidiary if such Subsidiary is subject to restrictions, directly or indirectly, by contract, operation of law, pursuant to its charter or otherwise on the payment of dividends or the making of distributions by such Subsidiary to such Person except that: |
(i) | such Person’s equity in the net income of any such Subsidiary for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash that could have been paid or distributed during such period to such Person as a dividend or other distribution (provided that such ability is not due to a waiver of such restriction), and |
(ii) | such Person’s equity in a net loss of any such Subsidiary for such period shall be included in determining such Consolidated Net Income regardless of any such restriction, |
(f) | in the case of a successor to such Person by consolidation or merger or as a transferee of such Person’s assets, any net income or loss of the successor corporation prior to such consolidation, merger or transfer of assets; and |
(g) | the tax effect of any of the items described in clauses (a) through (f) above. |
(a) | the aggregate amounts payable in connection with, and other consideration for (in each case, including all transaction costs and all Indebtedness, liabilities and Contingent Obligations incurred or assumed in connection therewith or otherwise reflected in a consolidated balance sheet of any Obligor and the proposed acquisition target and including any “earnout” or similar payment obligations), any acquisition, whether in one transaction or a series of related transactions, shall not exceed $20,000,000; |
(b) | if such acquisition is of Capital Stock in any Person, the acquisition shall be of 100% of the Capital Stock of such Person; |
(c) | the Holders (including Holders of Conru/Mapstead Definitive Securities) shall have received (i) reasonable advance notice of such acquisition including a reasonably detailed description thereof at least 15 days prior to the consummation of such acquisition, (ii) substantially final drafts of the acquisition agreement and related documents at least 5 Business Days prior to the consummation of such acquisition and (iii) on or prior to the date of such acquisition, copies of the final acquisition agreement and related documents certified by an Authorized Officer as being true, correct and complete copies thereof and any other information reasonably requested by the Required Holders; provided, however, no Obligor shall be required to comply with this clause (c) upon the consummation of a Qualified Initial Public Offering or if the value of the acquisition, whether in one transaction or a series of related transactions, and calculated in accordance with clause (a) above does not exceed $500,000; and |
(d) | as of the date of consummation of such acquisition and after giving effect to all transactions to occur on such date as part of such acquisition, (i) the representations and warranties set forth in each Note Document shall be true and correct in all material respects on and as of such date or, to the extent such representations and warranties expressly relate to an earlier date, on and as of such earlier date and (ii) no Default or Event of Default shall be continuing. |
Sweep until such date that he and his affiliates hold at any one time less than $50.0 million of the principal amount of the Non-Cash Pay Notes and (b) any refinancing of the Senior Secured Notes described below shall be subject to the terms set forth in those notes.
• | Minimum EBITDA. We shall not permit our Consolidated EBITDA to be less than the amount specified for the applicable period below: |
Period | Minimum Consolidated EBITDA | |||||
---|---|---|---|---|---|---|
Four Fiscal Quarters Ending: | ||||||
December 31, 2010 | $ | 85,000,000 | ||||
March 31, 2011 | $ | 85,000,000 | ||||
June 30, 2011 | $ | 85,000,000 | ||||
September 30, 2011 | $ | 85,000,000 |
Period | Minimum Consolidated EBITDA | |||||
---|---|---|---|---|---|---|
December 31, 2011 | $ | 90,000,000 | ||||
March 31, 2012 | $ | 90,000,000 | ||||
June 30, 2012 | $ | 90,000,000 | ||||
September 30, 2012 | $ | 90,000,000 | ||||
December 31, 2012 | $ | 95,000,000 | ||||
March 31, 2013 | $ | 95,000,000 | ||||
June 30, 2013 | $ | 95,000,000 | ||||
September 30, 2013 | $ | 95,000,000 |
• | Minimum Liquidity. Our unrestricted cash that is on deposit in accounts that are subject to account control agreements in favor of the Trustee shall not be less than $10,000,000 at any time. |
• | Maximum Senior Leverage. Our ratio of outstanding principal under the Senior Secured Notes to Consolidated EBITDA shall not be greater than the amount specified for the applicable period below: |
Four Fiscal Quarters Ending: | Senior Leverage Ratio | |||||
---|---|---|---|---|---|---|
December 31, 2010 | 3.5:1.0 | |||||
March 31, 2011 | 3.5:1.0 | |||||
June 30, 2011 | 3.3:1.0 | |||||
September 30, 2011 | 3.3:1.0 | |||||
December 31, 2011 | 3.0:1.0 | |||||
March 31, 2012 | 3.0:1.0 | |||||
June 30, 2012 | 2.8:1.0 | |||||
September 30, 2012 | 2.8:1.0 |
Four Fiscal Quarters Ending: | Senior Leverage Ratio | |||||
---|---|---|---|---|---|---|
December 31, 2012 | 2.5:1.0 | |||||
March 31, 2013 | 2.5:1.0 | |||||
June 30, 2013 | 2.2:1.0 | |||||
September 30, 2013 | 2.2:1.0 |
• | Maximum Total Leverage. Our ratio of total indebtedness to Consolidated EBITDA shall not be greater than the amount specified for the applicable period below: |
Four Fiscal Quarters Ending: | Total Leverage Ratio | |||||
---|---|---|---|---|---|---|
December 31, 2010 | 6.5:1.0 | |||||
March 31, 2011 | 6.5:1.0 | |||||
June 30, 2011 | 6.5:1.0 | |||||
September 30, 2011 | 6.5:1.0 | |||||
December 31, 2011 | 6.1:1.0 | |||||
March 31, 2012 | 6.1:1.0 | |||||
June 30, 2012 | 6.1:1.0 | |||||
September 30, 2012 | 6.1:1.0 | |||||
December 31, 2012 | 5.7:1.0 | |||||
March 31, 2013 | 5.7:1.0 | |||||
June 30, 2013 | 5.7:1.0 | |||||
September 30, 2013 | 5.7:1.0 |
• | Minimum Coverage Ratio. We shall not permit our ratio of Consolidated EBITDA to Annualized Consolidated Interest Expense to be less than the amount specified for the applicable period below: |
Period | Consolidated Coverage Ratio | |||||
---|---|---|---|---|---|---|
Four Fiscal Quarters Ending: | ||||||
December 31, 2010 | 1.9:1.0 | |||||
March 31, 2011 | 1.9:1.0 | |||||
June 30, 2011 | 2.0:1.0 | |||||
September 30, 2011 | 2.0:1.0 | |||||
December 31, 2011 | 2.2:1.0 | |||||
March 31, 2012 | 2.2:1.0 | |||||
June 30, 2012 | 2.3:1.0 | |||||
September 30, 2012 | 2.3:1.0 | |||||
December 31, 2012 | 2.7:1.0 | |||||
March 31, 2013 | 2.7:1.0 | |||||
June 30, 2013 | 2.9:1.0 | |||||
September 30, 2013 | 2.9:1.0 |
• | Maximum Operating Lease Obligations. Our operating lease obligations shall not, in the aggregate, exceed $4,000,000 annually. |
• | Maximum Capitalized Lease Obligations. We shall not incur new capitalized lease obligations that, in the aggregate, exceed $800,000 annually; provided, however the amortization of the capitalized lease obligations shall count against the $4,000,000 basket for operating lease obligations. |
• | Limitations on Loans, Advances, Capital Expenditures and Investments. None of us shall make any loan, advance, guarantee, other extension of credit, capital contribution or investment, except for certain specified exceptions, including, without limitation, (1) listed existing investments, (2) loans and advances |
in the ordinary course of business by any Issuer to any wholly owned subsidiary and by any such subsidiary to any Issuer, (3) any acquisition not exceeding $20,000,000 and otherwise satisfying specified conditions, and (4) specified permitted investments, including, without limitation, investment in any Issuer or a wholly owned subsidiary of any Issuer, aggregate investments in any Person not exceeding $1,000,000 and investments in foreign subsidiaries up to $100,000 in the aggregate. |
• | Limitations on Indebtedness and Liens. None of us shall create, assume, guarantee or allow to exist any lien or indebtedness, except for Permitted Liens and Permitted Indebtedness, including, without limitation, listed existing indebtedness and liens, hedging agreements for up to $5,000,000, liens imposed by law in the ordinary course of business and purchase money liens. |
• | Limitations on Dividends and other Restricted Payments. None of us shall make any of various specified restricted payments, including, without limitation, dividends or other distributions, redemptions or sinking fund payments, compensation to any affiliate or employee, and payments or prepayments on subordinated debt, all subject to certain described exceptions, including, without limitation, in-kind interest payments on the Non-Cash Pay Notes and certain specified payments on the Cash Pay Notes. |
• | Limitations on Transactions with Affiliates. None of us shall enter into any transaction with or for the benefit of any affiliate, except for certain specified transactions, including, without limitation, those in the ordinary course of business in a manner and to an extent consistent with past practice and necessary or desirable for the prudent operation of our business, for fair consideration and on terms no less favorable than would be obtainable in a comparable arm’s length transaction with a non-affiliated Person. |
• | Limitations on Sale-Leaseback Transactions. None of us shall incur any obligations as lessee in connection with any sale and leaseback transaction. |
• | Limitations on Consolidations, Mergers, Acquisitions and Dispositions of Assets. None of us shall liquidate or dissolve, or merge or consolidate with any Person, or conduct any sale with respect to our business, property or assets, or purchase or otherwise acquire the assets of any Person, except for (1) assets acquired in the ordinary course of business, (2) mergers and consolidations between FFN and its wholly owned subsidiaries satisfying certain conditions, (3) specified permitted acquisitions, (4) dispositions of obsolete or worn-out equipment in the ordinary course of business, and (5) liquidation or dissolution of any subsidiary that has no material assets or liabilities. |
• | Reporting requirements. The Issuers are required to file with the Securities and Exchange Commission or make publicly available all information required under Rule 144(c) of the Securities Act of 1933 and comply with Section 314 of the Trust Indenture Act of 1939. In addition, we are required to provide the Trustee and the holders of the New Notes with (1) periodic compliance certificates, (2) notice of any change of name, structure or jurisdiction of organization for any of us, (3) notice of default, material adverse change or material action, suit or proceeding, (4) copies of all information which any of us provides to holders of its debt or securities or to any securities exchange, and (5) notice of any material development with respect to value added tax liability. |
any ambiguity, omission, defect or inconsistency, to add guarantees or release a guarantor in accordance with the Indentures, to pledge or grant a security interest as additional security, to add to the covenants for the benefit of the holders, to make any change that does not adversely affect the legal rights of any holder and to add additional events of default. However, except with respect to other specified amendments or waivers requiring particular additional consents, no other amendment or waiver of any provision of the Indentures, the Registrable Notes and the related documents, and no consent to any departure from those provisions, shall be effective unless the same shall be in writing and signed by (a) the Issuers, (b) the “Required Holders” as specified in the applicable Indenture or by the Trustee with the consent of the Required Holders and (c) as applicable, the Guarantors.
at the holder’s option into shares of common stock at the rate of 1.13 shares of common stock for each share of Series A Convertible Preferred Stock. Shares of Series A Convertible Preferred Stock carry voting rights on all matters to be voted upon by our stockholders, and on any particular matter each holder of Series A Convertible Preferred Stock is entitled to the number of votes equal to the number of whole shares of common stock into which such holder’s Series A Convertible Preferred Stock shares would be convertible as of the record date for determining the stockholders entitled to vote on the matter. Shares of our Series A Convertible Preferred Stock are entitled to receive ratably such dividends, if any, as may be declared by the board of directors. Each share of Series A Convertible Preferred Stock has a liquidation preference equal to the greater of (x) the “original issue price” (as defined in our articles of incorporation) for such share (currently $11.89 per share), plus declared and accrued but unpaid dividends, and (y) such amount as would have been payable had such share been converted into common stock immediately prior to the liquidation, dissolution or winding up. On January 25, 2010, the certificate of designation for our Series A Convertible Preferred Stock was amended and restated, eliminating our obligation to obtain the consent of certain holders of the Series A Convertible Preferred Stock (or an affiliate of such holders) before taking certain actions, including, among other things, purchasing or acquiring any of our capital stock, effecting a change of control, or declaring or paying dividends. In addition, among other things, redemption payments in the event of a change of control or a qualified IPO and redemption rights were eliminated.
• | restricting dividends on the common stock; |
• | diluting the voting power of the common stock; |
• | impairing the liquidation rights of the common stock; or |
• | delaying or preventing a change in control of us without further action by the stockholders. |
have determined in our reasonable judgment, and based on applicable interpretations of the SEC, to file a shelf registration statement covering the resale of the Registrable Notes and the Registrable Shares issuable upon the conversion of the Non-Cash Pay Notes, pursuant to the registration provisions in the applicable indentures. We have agreed to use our reasonable best efforts, subject to applicable law, to cause to file the shelf registration statement within 210 calendar days following the consummation of the IPO on May 16, 2011 and to cause such shelf registration statement to be declared effective on or prior to 75 days after such filing. In the event that we fail to satisfy the registration requirements within the prescribed time periods, the interest rate on the Senior Secured Notes, Cash Pay Notes and Non-Cash Pay Notes will be increased by 3.5%.
• | acquisition of us by means of a tender offer; |
• | acquisition of us by means of a proxy contest or otherwise; or |
• | removal of our incumbent officers and directors. |
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” to which the voting restrictions described above apply. 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.
FRIENDFINDER NETWORKS INC. AND SUBSIDIARIES
FriendFinder Networks Inc. and Subsidiaries | ||||||
Unaudited Financial Statements as of June 30, 2011 and the Six Months Ended June 30, 2011 and 2010 | ||||||
Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010 (Audited) | F-2 | |||||
Consolidated Statements of Operations for the Six Months Ended June 30, 2011 and 2010 | F-3 | |||||
Consolidated Statement of Changes in Stockholders’ Deficiency for the Six Months Ended June 30, 2011 | F-4 | |||||
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010 | F-5 | |||||
Notes to Consolidated Financial Statements | F-6 | |||||
FriendFinder Networks Inc. and Subsidiaries | ||||||
Audited Financial Statements as of December 31, 2010 and 2009 and the Three Years ended December 31, 2010, 2009 and 2008 | ||||||
Report of Independent Registered Public Accounting Firm | F-22 | |||||
Consolidated Balance Sheets as of December 31, 2010 and 2009 | F-23 | |||||
Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008 | F-24 | |||||
Consolidated Statements of Changes in Redeemable Preferred Stock and Stockholders’ Deficiency | F-25 | |||||
Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008 | F-26 | |||||
Notes to Consolidated Financial Statements | F-28 |
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
June 30, 2011 | December 31, 2010 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
(unaudited) | ||||||||||
ASSETS | ||||||||||
Current assets: | ||||||||||
Cash | $ | 28,005 | $ | 34,585 | ||||||
Restricted cash | 12,238 | 7,385 | ||||||||
Accounts receivable, less allowance for doubtful accounts of $2,018 and $2,236, respectively | 9,817 | 9,886 | ||||||||
Inventories | 722 | 1,028 | ||||||||
Prepaid expenses | 4,726 | 4,534 | ||||||||
Deferred tax asset | 6,968 | 5,522 | ||||||||
Total current assets | 62,476 | 62,940 | ||||||||
Film costs, net | 4,204 | 4,312 | ||||||||
Property and equipment, net | 7,399 | 6,666 | ||||||||
Goodwill | 326,540 | 326,540 | ||||||||
Domain names | 55,939 | 55,890 | ||||||||
Trademarks | 9,213 | 9,213 | ||||||||
Other intangible assets, net | 21,288 | 29,134 | ||||||||
Unamortized debt costs | 15,636 | 22,336 | ||||||||
Deferred offering costs | — | 13,267 | ||||||||
Other assets | 2,641 | 2,519 | ||||||||
$ | 505,336 | $ | 532,817 | |||||||
LIABILITIES | ||||||||||
Current liabilities: | ||||||||||
Current installment of long-term debt, net of unamortized discount of $393 and $744, respectively | $ | 9,442 | $ | 15,009 | ||||||
Accounts payable | 6,316 | 9,481 | ||||||||
Accrued expenses and other liabilities | 75,910 | 65,420 | ||||||||
Deferred revenue | 45,334 | 48,302 | ||||||||
Total current liabilities | 137,002 | 138,212 | ||||||||
Deferred tax liability | 31,922 | 30,275 | ||||||||
Long-term debt, net of unamortized discount of $40,280 and $31,935, respectively | 457,783 | 510,551 | ||||||||
Liability related to warrants | — | 3,559 | ||||||||
Total liabilities | 626,707 | 682,597 | ||||||||
Contingencies (Note 15) | ||||||||||
STOCKHOLDERS’ DEFICIENCY | ||||||||||
Preferred stock, $0.001 par value — authorized 22,500,000 shares; issued and outstanding no shares in 2011 and 10,211,556 shares in 2010, | ||||||||||
Series A Convertible Preferred Stock, $0.001 per share — authorized 2,500,000 shares; issued and outstanding, 0 in 2011, 1,766,703 shares in 2010 (liquidation preference $21,000) | — | 2 | ||||||||
Series B Convertible Preferred Stock, $0.001 per share — authorized 10,000,000 shares; issued and outstanding, 0 in 2011, 8,444,853 shares in 2010 (liquidation preference $5,000) | — | 8 | ||||||||
Common stock, $0.001 par value — authorized 125,000,000 shares in 2011 and 2010 | ||||||||||
Common stock voting — authorized 112,500,000 shares, issued and outstanding 29,504,829 shares in 2011 and 6,517,746 shares in 2010 | 29 | 6 | ||||||||
Series B common stock non-voting — authorized 12,500,000 shares; issued and outstanding 32,965 shares in 2011 and 1,839,825 shares in 2010 | — | 2 | ||||||||
Capital in excess of par value | 124,763 | 80,823 | ||||||||
Accumulated deficit | (246,163 | ) | (230,621 | ) | ||||||
Total stockholders’ deficiency | (121,371 | ) | (149,780 | ) | ||||||
$ | 505,336 | $ | 532,817 |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Six Months Ended June 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2011 | 2010 | ||||||||||
Net revenue | |||||||||||
Service | $ | 157,208 | $ | 161,371 | |||||||
Product | 9,683 | 9,457 | |||||||||
Total | 166,891 | 170,828 | |||||||||
Cost of revenue | |||||||||||
Service | 44,280 | 51,648 | |||||||||
Product | 7,613 | 6,210 | |||||||||
Total | 51,893 | 57,858 | |||||||||
Gross profit | 114,998 | 112,970 | |||||||||
Operating expenses: | |||||||||||
Product development | 8,056 | 6,040 | |||||||||
Selling and marketing | 14,400 | 23,166 | |||||||||
General and administrative | 44,671 | 40,251 | |||||||||
Amortization of acquired intangibles and software | 7,846 | 12,528 | |||||||||
Depreciation and other amortization | 2,355 | 2,396 | |||||||||
Total operating expenses | 77,328 | 84,381 | |||||||||
Income from operations | 37,670 | 28,589 | |||||||||
Interest expense | (43,951 | ) | (46,398 | ) | |||||||
Interest related to VAT liability not charged to customers | (934 | ) | (1,076 | ) | |||||||
Foreign exchange (loss) gain, principally related to VAT liability not charged to customers | (2,953 | ) | 5,034 | ||||||||
Gain on liability related to warrants | 391 | 484 | |||||||||
Loss on extinguishment of debt | (7,312 | ) | — | ||||||||
Other non-operating (expense) income net | (3,913 | ) | 20 | ||||||||
Loss before income tax (benefit) | (21,002 | ) | (13,347 | ) | |||||||
Income tax (benefit) | $ | (5,460 | ) | $ | (147 | ) | |||||
Net loss | $ | (15,542 | ) | $ | (13,200 | ) | |||||
Net loss per common share — basic and diluted | $ | (0.88 | ) | $ | (0.96 | ) | |||||
Weighted average shares outstanding — basic and diluted | 17,580 | 13,735 |
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS’ DEFICIENCY
FOR THE SIX MONTHS ENDED JUNE 30, 2011
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
Preferred Stock | ||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Series A Convertible | Series B Convertible | Common Stock | ||||||||||||||||||||||||||||||||||||||||||||
Voting | Series B Non-Voting | |||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital in Excess of Par Value | Accumulated Deficit | Total | ||||||||||||||||||||||||||||||||||||
Balance at December 31, 2010 | 1,766,703 | $ | 2 | 8,444,853 | $ | 8 | 6,517,746 | $ | 6 | 1,839,825 | $ | 2 | $ | 80,823 | $ | (230,621 | ) | $ | (149,780 | ) | ||||||||||||||||||||||||||
Conversion of Series A convertible preferred stock into common stock at ratio of 1:13 to 1:00 | (1,766,703 | ) | 2 | 2,000,452 | (2 | ) | ||||||||||||||||||||||||||||||||||||||||
Conversion of Series B convertible preferred stock into common stock | (8,444,853 | ) | (8 | ) | 8,444,853 | 8 | ||||||||||||||||||||||||||||||||||||||||
Exchange of Series B common stock into common stock | 1,806,860 | 2 | (1,806,860 | ) | (2 | ) | ||||||||||||||||||||||||||||||||||||||||
Exercise of common stock purchase warrants | 5,560,672 | 6 | (6 | ) | ||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock in initial public offering | 5,000,000 | 5 | 49,995 | 50,000 | ||||||||||||||||||||||||||||||||||||||||||
Costs related to initial public offering | (19,992 | ) | (19,992 | ) | ||||||||||||||||||||||||||||||||||||||||||
Beneficial conversion feature on Non-Cash Pay Second Lien Notes recorded in connection with initial public offering net of $5.7 million of related deferred taxes | 8,490 | 8,490 | ||||||||||||||||||||||||||||||||||||||||||||
Reclassification of warrant liability due to exercise of stock warrants | 174,246 | 3,168 | 3,168 | |||||||||||||||||||||||||||||||||||||||||||
Recognition of stock option compensation expense upon initial public offering | 2,285 | 2,285 | ||||||||||||||||||||||||||||||||||||||||||||
Net Loss | (15,542 | ) | (15,542 | ) | ||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2011 | 0 | $ | 0 | 0 | $ | 0 | 29,504,829 | $ | 29 | 32,965 | $ | 0 | $ | 124,763 | $ | (246,163 | ) | $ | (121,371 | ) |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended June 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2011 | 2010 | ||||||||||
Cash flows from operating activities | |||||||||||
Net loss | $ | (15,542 | ) | $ | (13,200 | ) | |||||
Adjustment to reconcile net loss to net cash provided by operating activities: | |||||||||||
Amortization of acquired intangibles and software | 7,846 | 12,528 | |||||||||
Depreciation and other amortization | 2,355 | 2,396 | |||||||||
Amortization of film costs | 1,773 | 1,884 | |||||||||
Deferred income tax benefit | (5,460 | ) | (387 | ) | |||||||
Non-cash interest, including amortization of discount and debt costs | 22,842 | 25,109 | |||||||||
Provision for doubtful accounts | 215 | 188 | |||||||||
Gain on warrant liability | (391 | ) | (485 | ) | |||||||
Loss on extinguishment of debt | 7,312 | — | |||||||||
Stock option compensation expense | 2,285 | — | |||||||||
Other | 373 | 236 | |||||||||
Changes in operating assets and liabilities: | |||||||||||
Restricted cash | (4,852 | ) | (636 | ) | |||||||
Accounts receivable | (147 | ) | 2,376 | ||||||||
Inventories | 306 | 175 | |||||||||
Prepaid expenses | (192 | ) | 1,536 | ||||||||
Film costs | (1,665 | ) | (1,782 | ) | |||||||
Deferred offering costs | — | (3,109 | ) | ||||||||
Deferred debt costs | — | (3,512 | ) | ||||||||
Other assets | (122 | ) | (1,582 | ) | |||||||
Accounts payable | (3,165 | ) | (967 | ) | |||||||
Accrued expenses and other liabilities | 10,490 | (9,991 | ) | ||||||||
Deferred revenue | (2,968 | ) | 4,747 | ||||||||
Net cash provided by operating activities | 21,293 | 15,524 | |||||||||
Cash flows from investing activities: | |||||||||||
Cash received from escrow in connection with acquisition | — | 1,312 | |||||||||
Purchases of property and equipment | (3,461 | ) | (1,667 | ) | |||||||
Other | (49 | ) | (79 | ) | |||||||
Net cash (used in) investing activities | (3,510 | ) | (434 | ) | |||||||
Cash flows from financing activities: | |||||||||||
Gross proceeds from sale of common stock voting from initial public offering | 50,000 | — | |||||||||
Payment of underwriter discount and other offering costs in connection with initial public offering | (6,724 | ) | — | ||||||||
Recovery of debt issuance costs | 296 | — | |||||||||
Repayment of long-term debt | (67,935 | ) | (14,728 | ) | |||||||
Net cash (used in) financing activities | (24,363 | ) | (14,728 | ) | |||||||
Net (decrease) increase in cash | (6,580 | ) | 362 | ||||||||
Cash at beginning of period | 34,585 | 22,600 | |||||||||
Cash at end of period | $ | 28,005 | $ | 22,962 | |||||||
Supplemental disclosures of cash flow information: | |||||||||||
Cash Paid for: | |||||||||||
Interest paid | $ | 20,676 | $ | 21,235 | |||||||
Estimated income taxes paid | 30 | — | |||||||||
Non-Cash Investing and Financing Activities: | |||||||||||
Accrued fee in connection with debt restructuring | — | 2,658 | |||||||||
Recording of beneficial conversion feature on Non-Cash Pay Second Lien Notes in connection with initial public offering, net of $5,660 of related deferred taxes | 8,490 | — | |||||||||
Deferred offering costs written off to capital in excess of par value | 13,267 | — | |||||||||
Conversion of Series A and B convertible preferred stock and series B common stock to common stock | 12 | — |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Six Months Ended June 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2011 | 2010 | ||||||||||
Common Stock | 12,049 | 6,518 | |||||||||
Series B common stock | 1,398 | 1,840 | |||||||||
Common stock purchase warrants | 4,133 | 5,377 | |||||||||
17,580 | 13,735 |
Six Months Ended June 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2011 | 2010 | ||||||||||
Series A Convertible Preferred Stock | — | 2,000 | |||||||||
Series B Convertible Preferred Stock | — | 8,445 | |||||||||
Warrants | — | 502 | |||||||||
Convertible Non Cash pay Second Lien Notes | 8,311 | — | |||||||||
Employee stock options | 612 | — | |||||||||
Total common shares issuable | 8,923 | 10,947 |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 2011 | December 31, 2010 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Principal | Unamortized Discount | Principal | Unamortized Discount | ||||||||||||||||
Debt issued by FriendFinder and INI on October 27, 2010(a) | |||||||||||||||||||
14% Senior Secured Notes due 2011-2013(b)(e) | $ | 243,785 | $ | 7,426 | $ | 305,000 | $ | 10,974 | |||||||||||
14% Cash Pay Second Lien Notes due 2013(c)(e) | 11,013 | 183 | 13,778 | 262 | |||||||||||||||
11.5% Non-Cash Pay Second Lien Notes, due 2014(d)(e) | 250,849 | 32,757 | 237,211 | 20,986 | |||||||||||||||
Other (f) | 2,250 | 306 | 2,250 | 457 | |||||||||||||||
$ | 507,897 | $ | 40,672 | $ | 558,239 | $ | 32,679 | ||||||||||||
Less: unamortized discount | (40,672 | ) | (32,679 | ) | |||||||||||||||
Less: current installment of long-term debt, net of unamortized discount $393 and $744, respectively | (9,442 | ) | (15,009 | ) | |||||||||||||||
$ | 457,783 | $ | 510,551 |
(a) | On October 27, 2010, $305,000,000 principal amount of 14% Senior Secured Notes due 2013 were co-issued by FriendFinder and its wholly-owned subsidiary Interactive Network, Inc (“INI”), the parent of Various, (the “New First Lien Notes”) of which (a) $200,185,000 was exchanged for $130,485,000 outstanding principal amount of the former First Lien Notes, $49,361,000 outstanding principal amount of the former Second Lien Notes and $14,551,000 outstanding principal amount of the former Senior Secured Notes, (b) $91,400,000 was issued for cash proceeds of $89,572,000 before payment of related fees and expenses of $5,834,000 and (c) $13,415,000 was issued to pay commitment fees to the holders of the former First and Second Lien Notes. Cash of $86,237,000 was used to redeem $36,608,000 outstanding principal amount of the former First Lien Notes at 102% of principal, $30,639,000 outstanding principal amount of former Second Lien Notes (representing the remaining outstanding principal amounts of First and Second Lien Notes) and $18,258,000 outstanding principal amount of former Senior Secured Notes. Cash was also used to pay $4,132,000 of accrued interest on the exchanged and redeemed notes, an $825,000 redemption premium on certain exchanged First Lien Notes and $435,000 in commitment fees to certain noteholders. |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(b) | The New First Lien Notes, approximately $79,930,000 principal amount of which are held by a more than 10% stockholder at June 30, 2011, were issued with an original issue discount of $6,100,000, or 2.0%. The notes mature on September 30, 2013 and accrue interest at a rate per annum equal to 14.0%. Interest on the notes is payable quarterly on March 31, June 30, September 30 and December 31 of each year. Principal on the New First Lien Notes is payable quarterly to the extent of 75% of Excess Cash Flow, as defined, at 102% of principal, subject to the pro-rata sharing with the Cash Pay Second Lien Notes. Principal of $23.4 million was paid on the New First Lien Notes from excess cash flow in the quarters prior to our IPO in May 2011, of which $14.1 million was paid in the quarter ended March 31, 2011 and $9.3 million was paid in May 2011. An additional $8.5 million of principal was redeemed in August 2011 with excess cash flow in the quarter |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
ended June 30, 2011. The New First Lien Notes are guaranteed by domestic subsidiaries of FriendFinder and INI and are collateralized by a first-priority lien on all of the Company’s assets as well as a pledge of stock of subsidiaries. The New First Lien Notes are redeemable prior to maturity at the option of the Company, in whole but not in part, at 110% of principal, plus accrued and unpaid interest. Noteholders have the option of requiring the Company to repay the New First Lien Notes and Cash Pay Second Lien Notes in full upon a Change of Control, as defined, at 110% of principal. The Company shall also repay the New First Lien Notes and, in certain circumstances, the Cash Pay Second Lien Notes, with proceeds received from any debt or equity financing (including a secondary offering) and asset sales of more than $25 million at 110% of principal, and with proceeds from other asset sales, insurance claims, condemnation and other extraordinary cash receipts at principal, subject to certain exceptions. |
(c) | The Cash Pay Second Lien Notes, all of which were issued to entities controlled by stockholders who are also officers and directors, were issued with an original issue discount of $276,000, or 2%, mature on September 30, 2013 and have identical terms to those of the New First Lien Notes, except as to matters regarding collateral, subordination, enforcement and voting. Principal of $1.1 million was paid on the Cash Pay Second Lien Notes from excess cash flow in the quarters prior to our IPO in May 2011, of which $0.6 million was paid in the quarter ended March 31, 2011 and $0.5 million was paid in May 2011. An additional $0.4 million of principal was redeemed in August 2011 with Excess Cash Flow from the quarter ended June 30, 2011. The Cash Pay Second Lien Notes are collateralized by a fully subordinated second lien on substantially all of the assets of the Company, pari passu with the Non-Cash Pay Second Lien Notes, and will vote with the New First Lien Notes on a dollar for dollar basis on all matters except for matters relating to collateral, liens and enforcement of rights and remedies. As to such matters, the Cash Pay Second Lien Notes will vote with the Non-Cash Pay Second Lien Notes. |
(d) | The Non-Cash Pay Second Lien Notes, approximately $200,101,000 principal amount of which are held by more than 10% stockholders and affiliates, including $1,869,000 to entities controlled by certain officers and directors at June 30, 2011, mature on April 30, 2014 and bear interest at 11.5%, payable semi-annually on June 30 and December 31, which may be paid in additional notes at the Company’s option. While the New First Lien Notes are in place, interest must be paid with additional notes. During 2010 and 2011, interest amounting to $4,752,000 and $13,640,000, respectively, was paid through the issuance of additional Non-Cash Pay Second Lien Notes. The Non-Cash Pay Second Lien Notes are guaranteed by the domestic subsidiaries of FriendFinder and INI and collateralized by a second priority lien on all of the Company’s assets and a pledge of the stock of subsidiaries; however, such security interest is subordinate to the prior payment of the New First Lien Notes. The Non-Cash Pay Second Lien Notes are redeemable, at the option of the Company, in whole but not in part, at 100% of principal plus accrued and unpaid interest. Upon the payment in full of the New First Lien Notes, principal on the Non-Cash Pay Second Lien Notes is payable quarterly to the extent of 75% of Excess Cash Flow, as defined, at 102% of principal subject to pro-rata sharing with the Cash Pay Second Lien Notes. Upon an IPO, if the New First Lien Notes are paid in full, the net proceeds must be used to redeem the Non-Cash Pay Second Lien Notes and Cash Pay Second Lien Notes on a pro-rata basis at 110% of principal plus accrued and unpaid interest. In addition, noteholders have the option of requiring the Company to repay the Non-Cash Pay Second Lien Notes in full upon a Change of Control, as defined, at 110% of principal plus accrued and unpaid interest. If the New First Lien Notes are paid in full, the Company shall repay the Non-Cash Pay Second Lien Notes and Cash Pay Second Lien Notes on a pro-rata basis with proceeds received from any debt or equity financing (including a secondary offering), and asset sales of more than $25 million at 110% |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
of principal plus accrued and unpaid interest and with proceeds of other asset sales, insurance claims, condemnation and other extraordinary cash receipts at principal, subject to certain exceptions. |
(e) | The New First Lien Notes, the Cash Pay Second Lien Notes and Non-Cash Pay Second Lien Notes (1) require the Company to maintain minimum specified levels of EBITDA and liquidity and financial ratios, including debt and coverage ratios, all as defined; (2) provides for certain limitations including limits on indebtedness, lease obligations, VAT payments and investments; and (3) prohibits dividends and other payments with respect to the Company’s equity securities. |
(f) | In connection with the restructuring of Subordinated Convertible Notes issued in connection with the acquisition of Various, the Company agreed to pay $3.2 million of fees to the former owners of Various of which $1 million is payable in each of 2010 through 2012 and $250,000 is payable in the first quarter of 2013. The obligation was recorded at a present value of $2.3 million using a discount rate of 15%. |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Twelve months ending June 30, | ||||||
2012 | $ | 9,835 | ||||
2013 | 1,250 | |||||
2014 | 496,812 | |||||
Total | $ | 507,897 |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Expiration Date(1) | Exercise Price | Number of Shares | Number of Shares as Adjusted Based on IPO(2) (3) | Shares Exercised | Shares Outstanding | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
August 2015 | $ | 6.20 | 476,573 | 457,843 | 457,843 | — | ||||||||||||||||
August 2015 | $ | 10.25 | 25,090 | 24,104 | 24,104 | — | ||||||||||||||||
August 2015 | $ | 0.0002 | 243,287 | 233,726 | 204,135 | 29,591 | ||||||||||||||||
August 2016 | $ | 0.0002 | 441,474 | 424,120 | 370,427 | 53,693 | ||||||||||||||||
December 2017 | $ | 0.0002 | 4,692,996 | 5,188,509 | 4,986,172 | 202,337 | ||||||||||||||||
5,879,420 | 6,328,302 | 6,042,681 | 285,621 |
(1) | Except for warrants to purchase 1,373,859 shares of common stock at $0.0002 per share, which were amended on October 8, 2009, all warrants would have terminated if not exercised concurrently with the consummation of the IPO. |
(2) | The number of shares of common stock for which each warrant was exercisable, except for warrants exercisable at $10.25, were decreased immediately prior to the closing of the IPO as the Company has issued prior to such IPO fewer than 1,343,997 shares or options pursuant to an equity incentive or benefit plan. The adjustment provision for warrants exercisable at $10.25 was triggered as the Company had issued fewer than 588,890 shares or options pursuant to an equity incentive or benefit plan prior to the closing of the IPO. |
(3) | With respect to warrants to acquire 2,441,989 common shares at $0.0002 per share, in order to maintain the warrant holders’ percentage of fully diluted equity, the number of shares of common stock for which such warrants were exercisable was increased by 680,034 immediately prior to the closing of the IPO based on the number of shares of common stock into which the Non-Cash Pay Second Lien Notes which were exchanged for Subordinated Convertible Notes issued to selling stockholders in the acquisition of Various, were convertible based on the IPO price. |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
20% on the first anniversary of the grant date and 20% on each succeeding four anniversaries of the grant date, provided, however, that an optionee may exercise the vested portion of a stock option only after that date which is 18 months after the date of the Company’s IPO on May 16, 2011. The exercise price of an option shall be the closing price of the common stock on a national securities exchange on the date immediately preceding the date of grant. The exercise price per share of any stock option agreement issued prior to May 16, 2011 was set at $10.00 per share, representing the price per share that the Company’s common stock was sold to the public pursuant to the IPO on May 16, 2011.
For the Six Months Ended June 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2011 | 2010 | ||||||||||
Current: | |||||||||||
Federal | $ | — | $ | 53 | |||||||
State | — | 187 | |||||||||
$ | — | $ | 240 | ||||||||
Deferred: | |||||||||||
Federal | $ | (4,778 | )- | $ | (334 | ) | |||||
State | (682 | ) | (53 | ) | |||||||
(5,460 | ) | (387 | ) | ||||||||
Total tax (benefit) | $ | (5,460 | ) | $ | (147 | ) |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
to a beneficial conversion feature which was charged to additional paid-in capital in the six month period ended June 30, 2011 (see Note 8(d)). Of such benefit, $4.9 million, which relates to the reversal in future years of debt discount arising from the beneficial conversion feature, has been recognized as a discrete event in the six month period. The remaining benefit of $0.8 million resulting from the reduction in the valuation allowance which relates to the reversal of debt discount in the current year, is being accounted for as an adjustment to the estimated annual effective tax rate and is being allocated to the current and subsequent interim periods in 2011. As the Company anticipates that its net deferred tax assets at December 31, 2011 will be fully offset by a valuation allowance, no additional tax benefit has been recognized for the six months ended June 30, 2011.
June 30, 2011 | December 31, 2010 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Assets: | ||||||||||
Internet | $ | 478,804 | $ | 506,297 | ||||||
Entertainment | 17,678 | 17,739 | ||||||||
Unallocated corporate | 8,854 | 8,781 | ||||||||
Total | $ | 505,336 | $ | 532,817 |
For the Six Months Ended June 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2011 | 2010 | ||||||||||
Net revenue from external customers: | |||||||||||
Internet | $ | 156,172 | $ | 160,030 | |||||||
Entertainment | 10,719 | 10,798 | |||||||||
Total | $ | 166,891 | $ | 170,828 | |||||||
Income from operations: | |||||||||||
Internet | $ | 42,693 | $ | 30,297 | |||||||
Entertainment | (44 | ) | 1,180 | ||||||||
Total segment income | $ | 42,649 | $ | 31,477 | |||||||
Unallocated corporate | (4,979 | ) | (2,888 | ) | |||||||
Total | $ | 37,670 | $ | 28,589 |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Six Months Ended June 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2011 | 2010 | ||||||||||
Internet: | |||||||||||
Subscription based service | $ | 116,221 | $ | 123,381 | |||||||
Pay by usage service | 39,951 | 36,625 | |||||||||
Advertising | — | 24 | |||||||||
156,172 | 160,030 | ||||||||||
Entertainment | |||||||||||
Magazine | 5,043 | 5,921 | |||||||||
Video entertainment | 4,593 | 3,535 | |||||||||
Licensing | 1,083 | 1,342 | |||||||||
10,719 | 10,798 | ||||||||||
Total revenue | $ | 166,891 | $ | 170,828 |
Six Months Ended June 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2011 | 2010 | ||||||||||
Net revenue: | |||||||||||
United States | $ | 89,673 | $ | 89,482 | |||||||
Europe | 44,277 | 50,096 | |||||||||
Canada | 8,859 | 8,349 | |||||||||
Other | 24,082 | 22,901 | |||||||||
Total | $ | 166,891 | $ | 170,828 |
(a) | On December 28, 2007, Broadstream Capital Partners, Inc. (“Broadstream”) filed a lawsuit against the Company in the State Superior Court of California, County of Los Angeles, Central District, and the Company subsequently removed the case to the Federal District Court for the Central District of California. The complaint alleged breach of contract, breach of covenant of good faith and fair dealing, breach of fiduciary duty and constructive fraud arising out of a document titled “Non-Disclosure Agreement.” The complaint alleged, among other things, that Broadstream entered into a Non-Disclosure Agreement with the Company that required Broadstream’s prior written consent for the Company to knowingly acquire Various or any of its subsidiaries and that such consent was not obtained. On April 7, 2008, Broadstream filed its First Amended Complaint, which added a new cause of action for intentional interference with prospective economic advantage. On February 20, 2009, Broadstream filed its Third Amended Complaint, which dismisses the allegations of breach of fiduciary duty and constructive fraud. The complaint seeks damages which plaintiff alleges to be in excess of $20 million, plus interest, costs and punitive damages. Broadstream later asserted up to $557 million in damages plus punitive damages. On July 20, 2009, the Company entered into an agreement with Broadstream under which, without admitting liability, the Company agreed to pay Broadstream $3.0 million in $1.0 million installments due no later than July 2009, January 2010 and July 2010. Such |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
payments were timely made. The agreement provides that upon the earlier of twelve months after the Company has securities registered under Section 12(b) of the Securities Exchange Act of 1934, as amended, or eighteen months after the effective date of the agreement, but not later than twelve months following such earlier date, Broadstream must choose either to (i) refile its complaint in Federal District Court provided that it first repay the Company the $3.0 million or (ii) demand arbitration. If Broadstream elects arbitration, the parties have agreed that there will be an arbitration award to Broadstream of at least $10.0 million but not more than $47.0 million. Giving consideration of the limitation of the arbitration award in relation to damages sought in litigation, management had not concluded that it was probable that Broadstream would demand arbitration. Accordingly, no loss had been provided for as a result of entering into the agreement. In the event that Broadstream elected arbitration, at such time the Company would recognize a loss in connection with the matter of $13.0 million to $50.0 million. |
(b) | On December 23, 2005, Robert Guccione, our former president, filed an action against the Company and some of its officers, among other defendants, in New York State Court for breach of contract, fraud, unjust enrichment, promissory estoppel, failure to pay severance and conspiracy to defraud. The amount of damages requested in the complaint against the Company is approximately $9.0 million and against the officers is in excess of $10.0 million. Some of the counts in the complaint also demand an unspecified amount of damages. Guccione filed an amended complaint on June 5, 2007 to include additional claims relating to ownership of certain United Kingdom, Jersey and Guernsey trademarks and added as a party Penthouse Publications Limited, an entity with no current affiliation with the Company, as party plaintiff. Guccione agreed to dismiss the count for conspiracy to defraud only. Guccione filed a Second Amended Complaint on December 14, 2007 adding General Media International, Inc. (an entity with no current affiliation with the Company) as party plaintiff and a new claim for inducement to breach of contract. The Company filed its motion to dismiss the Second Amended Complaint on January 31, 2008, which was granted in part and denied in part. The court dismissed the claims for unjust enrichment and promissory estoppel. The Company filed its Answer and Affirmative Defenses to the Second Amended Complaint on June 25, 2009. On August 14, 2008, Guccione filed a voluntary petition for Chapter 7 Bankruptcy. Guccione filed a dismissal of the bankruptcy proceedings on November 4, 2009. The Court dismissed the bankruptcy action on November 9, 2009. The settlement agreement between Guccione and his judgment creditors assigns all rights to the New York state court action to his judgment creditors. On January 8, 2010, the Company filed an Amended Answer with counterclaims against Guccione and Penthouse Publications Limited for conversion, breach of fiduciary duty, declaratory relief and indemnification. No specific amount of damages has been requested in the counterclaims. On January 27, 2010, Plaintiffs filed a Reply to the Company’s counterclaims. In January and February 2010, certain defendants filed Answers to Plaintiffs’ Second Amended Complaint with cross-claims against the Company for contribution and indemnification. No specific amount of damages has been requested. In February |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
and March 2010, the Company filed its Answer and Affirmative Defenses to the cross-claims. On October 20, 2010, Guccione passed away. As such, the case is stayed pending substitution of his estate as a party. The Company believes it has meritorious defenses to all claims and intends to vigorously defend the lawsuit. |
(c) | On or about November 27, 2006, a claimant filed a consumer class action arbitration at Judicial Arbitration and Mediation Services, Inc. or JAMS in San Jose, California, alleging a nationwide class action against Various under a variety of legal theories related to, among other things, representations regarding the number of active users on its internet dating websites, causing the appearance of erroneous member profiles, and a failure to adequately remove or account for alleged erroneous member profiles. The claimantis seeking unspecified damages. Various disputes the claims and intends to defend the arbitration vigorously. |
(d) | On November 28, 2006, Antor Media Corporation (“Antor”) filed a complaint against FriendFinder, its subsidiary, General Media Communications, Inc. (“GMCI”), and several non-affiliate media/entertainment defendants in the U.S. District Court for the Eastern District of Texas, Texarkana Division, for infringement of a Patent titled “Method and Apparatus for Transmitting Information Recorded on Information Storage Means from a Central Server to Subscribers via a High Data Rate Digital Telecommunications Network.” No specific amount of damages has been requested. Injunctive relief is also sought. The Company and its subsidiary filed an Answer, Affirmative Defenses and Counterclaims. The United States Patent and Trademark Office (“USPTO”) issued a non-final office action rejecting Antor’s patent claims. Antor filed a response to the office action which added 83 new claims to the original 29 rejected claims. In August 2008, the USPTO issued its final office action sustaining its rejection of the original 29 claims and rejecting the 83 new claims. Antor filed its Petition to Vacate Finality of Office Action on the grounds it introduced new grounds for the rejection. Based on the final office action, the Company, GMCI and all other defendants filed an expedited motion to stay the case. In December 2008, pursuant to an order granting a re-examination proceeding, the USPTO issued a non-final office action again rejecting the original 29 claims and the new 83 claims. In February 2009, Antor filed a response in which it agreed to cancel the 83 new claims previously proposed. On May 11, 2009, the Court entered an Order granting Defendants’ Motion to Stay as modified. On May 22, 2009, the defendant accepted the terms of the Court’s proposed Stipulation regarding the use of prior art at trial and filed their Stipulation. On June 5, 2009, the USPTO issued a Final Office Action rejecting all of the Plaintiff’s claims. Plaintiff filed an appeal on July 7, 2009 and an appellate brief on October 8, 2009. On February 18, 2010, the USPTO filed an answer brief. On October 21, 2010, the USPTO Board of Patent Appeals entered an order affirming the rejection of Antor’s claims. On December 21, 2010, Antor filed a request for rehearing which was denied in March 2011. On May 23, 2011, Antor filed its notice of appeal. The case will remain stayed pending the appeal. |
(e) | Effective July 1, 2008, Various registered in the European Union and on July 29, 2008, began separately charging VAT to its customers. For periods prior thereto, Various recorded a liability for VAT and related interest and penalties in connection with revenue from internet services derived from its customers in the various European Union countries. Various reduced its VAT liability for periods prior to July 1, 2008 in the countries where the liability was either paid in full or payments were made pursuant to settlement and payment plans or where determinations were made that payments were not due. Various continues to negotiate settlements of the liabilities or challenge the liability related to VAT for periods prior to July 1, 2008 (see Note 7). |
(f) | On May 19, 2009 representatives for Summit Trading Limited (“Summit”) sent a letter to the Company’s outside legal counsel, alleging that the Company, Interactive Brand Development, Inc., (an owner of the Company’s Series B Common Stock) and entities affiliated with two of the Company’s principal stockholders defrauded Summit of financial compensation for services provided to the Company’s predecessor entity, General Media, Inc. Among the claims, Summit asserted bad faith, breach of contract and fraud by the Company’s management and the Company, and claimed that it is owed an equity interest in the Company, as well as compensatory, punitive and exemplary damages in excess of $500 million. Management believes |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
that the allegations stated in the letter are vague and lack factual basis and merit. Summit has not taken any legal action against the Company. Should Summit take legal action, the Company would vigorously defend the lawsuit. |
(g) | On April 13, 2011, Facebook, Inc., or Facebook, filed a complaint against FriendFinder and certain of its subsidiaries in the U.S. District Court for the Northern District of California, alleging trademark infringement with regard to the use of the terms “facebook of sex” and Facebook’s use of the “FRIENDFINDER” mark. The Complaint contains causes of action for: trademark dilution, false designation of origin, trademark infringement, violation of the Anti-Cybersquating Consumer Protection Act, and for unfair competition. The Complaint also seeks a declaratory judgment that Facebook’s use of “friend finder” is a descriptive fair use that does not infringe Various’ trademark rights in the “FRIENDFINDER” mark. No specific amount of damages has been sought. However, the Complaint requests monetary relief, injunctive relief, punitive damages, cancellation of the “FRIENDFINDER” marks, attorneys’ fees, other equitable relief, and costs amongst other things. On May 23, 2011, the Company, and its subsidiaries, filed their Answer, Affirmative Defenses and Counterclaims to the Complaint. On June 16, 2011, Facebook filed its Answer and Affirmative Defenses to the Counterclaims. The parties are currently engaged in discovery. The Company believes that it has meritorious defenses to the claims asserted and intends to vigorously defend this lawsuit and prosecute the Counterclaims against Facebook. |
(a) | On July 12, 2011, the Company acquired substantially all the assets of PerfectMatch.com from Matrima, Inc. for $2,000,000 in cash and $500,000 in common shares, the number of which will be calculated based upon the 10 day trailing closing price average ending two days prior to the closing of the transaction. PerfectMatch.com is an online relationship service helping adults seeking successful lasting connections. The impact of the acquisition on the Company’s financial statements is not material. |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(b) | On September 7, 2011, pursuant to a merger agreement, a newly-formed wholly-owned subsidiary of FriendFinder acquired the assets and assumed the liabilities of BDM Global Ventures Limited (“BDM”), a British Virgin Islands limited company which owns and operates JigoCity, a global social commerce organization committed to providing members with high quality daily deals that are relevant to their individual lifestyles. As consideration therefore, FriendFinder issued to the shareholders of BDM 1,555,555 shares of FriendFinder’s common stock and warrants exercisable for 6,436,851 shares of FriendFinder’s common stock. |
FriendFinder Networks Inc.
March 15, 2011, except for Notes Q(l) and T and the last paragraph of Note Q(a) as to which the dates are April 13, 2011, May 19, 2011, and July 6, 2011, respectively
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
December 31, | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2010 | 2009 | |||||||||||||
ASSETS | ||||||||||||||
Current assets: | ||||||||||||||
Cash | $ | 34,585 | $ | 22,600 | ||||||||||
Restricted cash | 7,385 | 6,295 | ||||||||||||
Accounts receivable, less allowance for doubtful accounts of $2,236 and $2,152, respectively | 9,886 | 12,142 | ||||||||||||
Inventories | 1,028 | 1,339 | ||||||||||||
Prepaid expenses | 4,534 | 7,980 | ||||||||||||
Deferred tax asset | 5,522 | 11,366 | ||||||||||||
Total current assets | 62,940 | 61,722 | ||||||||||||
Film costs, net | 4,312 | 4,526 | ||||||||||||
Property and equipment, net | 6,666 | 13,812 | ||||||||||||
Goodwill | 326,540 | 326,540 | ||||||||||||
Domain names | 55,890 | 55,491 | ||||||||||||
Trademarks | 9,213 | 13,873 | ||||||||||||
Other intangible assets, net | 29,134 | 48,183 | ||||||||||||
Deferred debt costs, net | 22,336 | 12,318 | ||||||||||||
Deferred offering costs | 13,267 | 9,050 | ||||||||||||
Receivable from escrow fund | — | 2,679 | ||||||||||||
Other assets | 2,519 | 3,687 | ||||||||||||
$ | 532,817 | $ | 551,881 | |||||||||||
LIABILITIES | ||||||||||||||
Current liabilities: | ||||||||||||||
Current installment of long-term debt, net of unamortized discount of $744 and $1,931, respectively | 15,009 | 56,116 | ||||||||||||
Accounts payable | 9,481 | 12,612 | ||||||||||||
Accrued expenses and other liabilities | 65,420 | 69,727 | ||||||||||||
Deferred revenue | 48,302 | 46,046 | ||||||||||||
Total current liabilities | 138,212 | 184,501 | ||||||||||||
Deferred tax liability | 30,275 | 37,397 | ||||||||||||
Long-term debt, net of unamortized discount of $31,935 and $44,118, respectively | 510,551 | 432,028 | ||||||||||||
Liability related to warrants | 3,559 | 3,597 | ||||||||||||
Total liabilities | 682,597 | 657,523 | ||||||||||||
Commitments and contingencies (Notes P and Q) | ||||||||||||||
REDEEMABLE PREFERRED STOCK | ||||||||||||||
Series A Convertible Preferred Stock, $0.001 per share — authorized 2,500,000 shares; issued and outstanding 1,766,703 shares in 2009 (at liquidation preference) | — | 21,000 | ||||||||||||
Series B Convertible Preferred Stock, $0.001 per share — authorized 10,000,000 shares; issued and outstanding 8,444,853 shares in 2009 (at liquidation preference) | — | 5,000 | ||||||||||||
STOCKHOLDERS’ DEFICIENCY | ||||||||||||||
Preferred stock, $0.001 par value — authorized 22,500,000 shares; issued and outstanding 10,211,556 shares in 2010 and redeemable shares in 2009, shown above | ||||||||||||||
Series A Convertible Preferred Stock $0.001 per share — authorized 2,500,000 shares; issued and outstanding 1,766,703 shares in 2010 (liquidation preference $21,000) | 2 | — | ||||||||||||
Series B Convertible Preferred Stock $0.001 per share — authorized 10,000,000 shares; issued and outstanding 8,444,853 shares in 2010 (liquidation preference $5,000) | 8 | — | ||||||||||||
Common stock, $0.001 par value — authorized 125,000,000 shares in 2010 and 2009 | ||||||||||||||
Common stock voting — authorized 112,500,000 shares, issued and outstanding 6,517,746 in 2010 and 2009. | 6 | 6 | ||||||||||||
Series B common stock non-voting — authorized 12,500,000 shares; issued and outstanding 1,839,825 shares in 2010 and 2009 | 2 | 2 | ||||||||||||
Capital in excess of par value | 80,823 | 55,818 | ||||||||||||
Accumulated deficit | (230,621 | ) | (187,468 | ) | ||||||||||
Total stockholders’ deficiency | (149,780 | ) | (131,642 | ) | ||||||||||
$ | 532,817 | $ | 551,881 |
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2010 | 2009 | 2008 | |||||||||||||
Net revenue | |||||||||||||||
Service | $ | 324,211 | $ | 309,033 | $ | 309,388 | |||||||||
Product | 21,786 | 18,659 | 21,629 | ||||||||||||
Total | 345,997 | 327,692 | 331,017 | ||||||||||||
Cost of revenue | |||||||||||||||
Service | 97,959 | 78,627 | 81,815 | ||||||||||||
Product | 12,531 | 13,070 | 14,699 | ||||||||||||
Total | 110,490 | 91,697 | 96,514 | ||||||||||||
Gross profit | 235,507 | 235,995 | 234,503 | ||||||||||||
Operating expenses: | |||||||||||||||
Product development | 12,834 | 13,500 | 14,553 | ||||||||||||
Selling and marketing | 37,258 | 42,902 | 59,281 | ||||||||||||
General and administrative | 79,855 | 76,863 | 88,280 | ||||||||||||
Amortization of acquired intangibles and software | 24,461 | 35,454 | 36,347 | ||||||||||||
Depreciation and other amortization | 4,704 | 4,881 | 4,502 | ||||||||||||
Impairment of goodwill | — | — | 9,571 | ||||||||||||
Impairment of other intangible assets | 4,660 | 4,000 | 14,860 | ||||||||||||
Total operating expenses | 163,772 | 177,600 | 227,394 | ||||||||||||
Income from operations | 71,735 | 58,395 | 7,109 | ||||||||||||
Interest expense, net of interest income | (88,508 | ) | (92,139 | ) | (80,510 | ) | |||||||||
Other finance expenses | (4,562 | ) | — | — | |||||||||||
Interest and penalties related to VAT liability not charged to customers | (2,293 | ) | (4,205 | ) | (8,429 | ) | |||||||||
Net loss on extinguishment and modification of debt | (7,457 | ) | (7,240 | ) | — | ||||||||||
Foreign exchange gain (loss), principally related to VAT liability not charged to customers | 610 | (5,530 | ) | 15,195 | |||||||||||
Gain on settlement of VAT liability not charged to customers | — | 232 | 2,690 | ||||||||||||
Gain on elimination of liability for United Kingdom VAT not charged to customers | — | 1,561 | — | ||||||||||||
Gain on liability related to warrants | 38 | 2,744 | — | ||||||||||||
Other non-operating expenses, net | (13,202 | ) | (366 | ) | (197 | ) | |||||||||
Loss before income tax benefit | (43,639 | ) | (46,548 | ) | (64,142 | ) | |||||||||
Income tax benefit | (486 | ) | (5,332 | ) | (18,176 | ) | |||||||||
Net loss | $ | (43,153 | ) | $ | (41,216 | ) | $ | (45,966 | ) | ||||||
Net loss per common share — basic and diluted | $ | (3.14 | ) | $ | (3.00 | ) | $ | (3.35 | ) | ||||||
Weighted average shares outstanding — basic and diluted | 13,735 | 13,735 | 13,735 |
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS’ DEFICIENCY
YEARS ENDED DECEMBER 31, 2010, 2009 and 2008
(IN THOUSANDS, EXCEPT SHARE DATA)
Redeemable Preferred Stock | Stockholders’ Deficiency | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Series A Convertible | Series B Convertible | Preferred Stock | Common Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Voting | Series B Non-Voting | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital in Excess of Par Value | Accumulated Deficit | Total | |||||||||||||||||||||||||||||||||||||||||||
Balance at January 1, 2008 | 1,766,703 | $ | 21,000 | 8,444,853 | $ | 5,000 | 0 | $ | 0 | 3,561,127 | $ | 4 | 1,839,825 | $ | 2 | $ | 60,576 | $ | (98,701 | ) | $ | (38,119 | ) | ||||||||||||||||||||||||||||||||
Exercise of warrants | 1,686,700 | 1 | (1 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | (45,966 | ) | (45,966 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2008 | 1,766,703 | 21,000 | 8,444,853 | 5,000 | 0 | 0 | 5,247,827 | 5 | 1,839,825 | 2 | 60,575 | (144,667 | ) | (84,085 | ) | ||||||||||||||||||||||||||||||||||||||||
Classification of warrants as a liability | (4,756 | ) | (1,585 | ) | (6,341 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of warrants | 1,269,919 | 1 | (1 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | (41,216 | ) | (41,216 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2009 | 1,766,703 | 21,000 | 8,444,853 | 5,000 | 0 | 0 | 6,517,746 | 6 | 1,839,825 | 2 | 55,818 | (187,468 | ) | (131,642 | ) | ||||||||||||||||||||||||||||||||||||||||
Transfer of preferred stock from temporary equity to stockholders’ deficiency | (1,766,703 | ) | (21,000 | ) | (8,444,853 | ) | (5,000 | ) | 10,211,556 | 10 | 25,990 | 26,000 | |||||||||||||||||||||||||||||||||||||||||||
Other | (985 | ) | (985 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | (43,153 | ) | (43,153 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2010 | 0 | $ | 0 | 0 | $ | 0 | 10,211,556 | $ | 10 | 6,517,746 | $ | 6 | 1,839,825 | $ | 2 | $ | 80,823 | $ | (230,621 | ) | $ | (149,780 | ) |
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2010 | 2009 | 2008 | |||||||||||||
Cash flows from operating activities: | |||||||||||||||
Net loss | $ | (43,153 | ) | $ | (41,216 | ) | $ | (45,966 | ) | ||||||
Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||||||
Deferred income tax benefit | (1,278 | ) | (5,332 | ) | (18,550 | ) | |||||||||
Impairment of intangibles | 4,660 | 4,000 | 24,431 | ||||||||||||
Net loss on extinguishment and modification of debt | 7,457 | 7,240 | — | ||||||||||||
Amortization of acquired intangibles and software | 24,461 | 35,454 | 36,347 | ||||||||||||
Depreciation and other amortization | 4,702 | 4,881 | 4,502 | ||||||||||||
Amortization of film costs | 3,763 | 4,001 | 3,899 | ||||||||||||
Non-cash interest, including amortization of discount | 45,148 | 47,139 | 30,725 | ||||||||||||
Provision for doubtful accounts | 839 | 249 | 1,505 | ||||||||||||
Gain on elimination of liability for United Kingdom VAT not charged to customers | — | (1,561 | ) | — | |||||||||||
Gain on settlement of VAT liability not charged to customers | — | (232 | ) | (2,690 | ) | ||||||||||
Gain on warrant liability | (38 | ) | (2,744 | ) | — | ||||||||||
Other | 504 | 209 | 32 | ||||||||||||
Changes in operating assets and liabilities: | |||||||||||||||
Restricted cash | (1,090 | ) | 1,566 | 8,480 | |||||||||||
Accounts receivable | 1,417 | (3,050 | ) | 5,101 | |||||||||||
Inventories | 311 | 288 | 88 | ||||||||||||
Prepaid expenses | 3,446 | (1,652 | ) | (2,820 | ) | ||||||||||
Film costs | (3,549 | ) | (3,705 | ) | (4,461 | ) | |||||||||
Deferred debt costs | (4,265 | ) | (5,594 | ) | — | ||||||||||
Deferred offering costs | (4,217 | ) | (6,974 | ) | (2,076 | ) | |||||||||
Other assets | 1,169 | (1,133 | ) | (864 | ) | ||||||||||
Accounts payable | (3,132 | ) | 3,579 | (2,775 | ) | ||||||||||
Accrued expenses and other liabilities | 3,230 | 1,034 | 440 | ||||||||||||
Deferred revenue | 2,255 | 3,232 | 15,600 | ||||||||||||
Net cash provided by operating activities | 42,640 | 39,679 | 50,948 | ||||||||||||
Cash flows from investing activities: | |||||||||||||||
Cash received from escrow in connection with acquisition | 2,679 | 7,321 | — | ||||||||||||
Purchases of property and equipment | (3,530 | ) | (3,542 | ) | (9,161 | ) | |||||||||
Reduction of goodwill attributable to reimbursement from prior owners of Various | — | 915 | — | ||||||||||||
Other | (399 | ) | (490 | ) | (128 | ) | |||||||||
Net cash (used in) provided by investing activities | (1,250 | ) | 4,204 | (9,289 | ) | ||||||||||
Cash flows from financing activities: | |||||||||||||||
Debt issuance costs | (5,834 | ) | — | — | |||||||||||
Repayment of long-term debt | (25,921 | ) | (44,987 | ) | (25,336 | ) | |||||||||
Redemption of long-term debt | (86,237 | ) | — | — | |||||||||||
Issuance of New First and Second Lien Notes | 89,572 | — | — | ||||||||||||
Other | (985 | ) | — | — | |||||||||||
Net cash (used in) financing activities | (29,405 | ) | (44,987 | ) | (25,336 | ) | |||||||||
Net increase (decrease) in cash | 11,985 | (1,104 | ) | 16,323 | |||||||||||
Cash at beginning of period | 22,600 | 23,704 | 7,381 | ||||||||||||
Cash at end of period | $ | 34,585 | $ | 22,600 | $ | 23,704 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2010 | 2009 | 2008 | |||||||||||||
Supplemental disclosures of cash flow information: | |||||||||||||||
Cash paid for: | |||||||||||||||
Interest paid | $ | 43,541 | $ | 45,531 | $ | 53,592 | |||||||||
Income taxes | — | 1,343 | 17 | ||||||||||||
Non-cash investing and financing activities: | |||||||||||||||
Reduction of Subordinated Convertible Notes and goodwill for bonus indemnification from former stockholders of Various | — | $ | 1,202 | $ | 1,074 | ||||||||||
Accrual and issuance of notes for debt modification costs | — | $ | 6,041 | — | |||||||||||
Effect of elimination of United Kingdom VAT liability: | |||||||||||||||
Reduction in accrued expenses and other liabilities | — | $ | 39,520 | — | |||||||||||
Increase in Subordinated Convertible Notes payable | — | $ | 28,989 | — | |||||||||||
Reduction of goodwill | — | $ | 5,381 | — | |||||||||||
Increase in deferred tax liability | — | $ | 3,587 | — | |||||||||||
Exchange of New First Lien Notes for outstanding First ($126,124) and Second ($48,275) Lien Notes | $ | 174,399 | — | — | |||||||||||
Issuance of New First Lien Notes for commitment fees | $ | 13,146 | — | — | |||||||||||
Exchange of New First Lien Notes and Cash Pay Second Lien Notes for Senior Secured Notes | $ | 28,053 | — | — | |||||||||||
Exchange of Non-Cash Pay Second Lien Notes for outstanding Subordinated Convertible Notes ($161,560) plus $3,514 of accrued interest | $ | 165,074 | — | — | |||||||||||
Exchange of Non-Cash Pay Second Lien Notes for $42,811 of Subordinated Term Notes plus $5,949 of accrued interest | $ | 45,726 | — | — |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. | Principles of consolidation: |
2. | Stock splits: |
3. | Use of estimates: |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. | Cash and cash equivalents: |
5. | Restricted cash: |
6. | Accounts receivable: |
7. | Inventories: |
8. | Property and equipment: |
9. | Software costs: |
10. | Film costs: |
11. | Goodwill, trademarks and other intangibles: |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
combinations, representing the excess of the purchase price over the fair value of the identifiable net assets acquired. These assets, together with domain names that were recorded in the Various acquisition and were also deemed to have an indefinite useful life based primarily on the Company’s plans for continued indefinite use, are not amortized, but are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test for indefinite-lived trademarks and domain names consists of a comparison of their fair value with their carrying amount. See Notes G and H with respect to impairment of goodwill and trademarks, respectively.
12. | Deferred debt costs: |
13. | Deferred offering costs: |
14. | Revenue recognition: |
a) | Internet: |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
b) | Entertainment: |
15. | Cost of revenue: |
16. | Product development: |
17. | Advertising: |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. | Loyalty program: |
19. | Stock-based compensation: |
20. | Income taxes: |
21. | Value added taxes: |
22. | Foreign currency transactions: |
23. | Concentration of credit risk: |
24. | Fair value of financial instruments: |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
on unobservable inputs (see Note K). As of December 31, 2010, the carrying value of long-term debt was $525,560,000 compared to its estimated fair value of $550,082,000. As of December 31, 2009, the carrying amount of long-term debt was $488,144,000 compared to its estimated fair value of $420,638,000. The fair value is estimated by discounting the projected cash flows using the estimated rates at which similar amounts of debt could be borrowed at such date and through third party pricing information.
25. | Per share data: |
Year Ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2010 | 2009 | 2008 | |||||||||||||
Common stock | 6,518 | 6,518 | 5,248 | ||||||||||||
Series B common stock | 1,840 | 1,840 | 1,840 | ||||||||||||
Common stock purchase warrants | 5,377 | 5,377 | 6,647 | ||||||||||||
13,735 | 13,735 | 13,735 |
Year Ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2010 | 2009 | 2008 | |||||||||||||
Series A Convertible Preferred Stock | 2,000 | 2,000 | 2,000 | ||||||||||||
Series B Convertible Preferred Stock | 8,445 | 8,445 | 8,445 | ||||||||||||
Warrants | 502 | 502 | 502 | ||||||||||||
Total common shares issuable | 10,947 | 10,947 | 10,947 |
26. | Reclassifications |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2010 | 2009 | ||||||||||
Paper and printing costs | $ | 693 | $ | 804 | |||||||
Editorials and pictorials | 335 | 535 | |||||||||
$ | 1,028 | $ | 1,339 |
Year Ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2010 | 2009 | 2008 | |||||||||||||
Opening balance | $ | 4,526 | $ | 4,822 | $ | 4,260 | |||||||||
Content produced | 3,549 | 3,705 | 4,461 | ||||||||||||
Amortization | (3,763 | ) | (4,001 | ) | (3,899 | ) | |||||||||
Ending balance | $ | 4,312 | $ | 4,526 | $ | 4,822 |
December 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2010 | 2009 | ||||||||||
Property and equipment: | |||||||||||
Leasehold improvements | $ | 1,004 | $ | 757 | |||||||
Computer hardware and software | 39,318 | 36,035 | |||||||||
40,322 | 36,792 | ||||||||||
Less accumulated depreciation and amortization | 33,656 | 22,980 | |||||||||
$ | 6,666 | $ | 13,812 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Internet | Entertainment | Total | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance as of December 31, 2008 | $ | 334,037 | $ | — | $ | 334,037 | ||||||||
Reduction for elimination of VAT liability (see Note J(f)) | (5,380 | ) | (5,380 | ) | ||||||||||
Reduction for reimbursement from sellers of Various | (915 | ) | — | (915 | ) | |||||||||
Reduction for indemnification from sellers of Various (see Note J(f)) | (1,202 | ) | — | (1,202 | ) | |||||||||
Balance as of December 31, 2009 and 2010 | $ | 326,540 | $ | — | $ | 326,540 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and an expected long-term growth rate of 3%. In addition, in calculating the implied fair value of goodwill, a royalty rate of 7% was derived from analysis of comparable companies in order to determine the value of trademarks utilized by the online reporting unit.
December 31, | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2010 | 2009 | |||||||||||||||||||||
Gross Amount | Accumulated Amortization | Gross Amount | Accumulated Amortization | Estimated Useful Lives (Years) | ||||||||||||||||||
Amortizable intangible assets: | ||||||||||||||||||||||
Non-compete agreements | $ | 10,600 | $ | 10,600 | $ | 10,600 | $ | 7,305 | 3 | |||||||||||||
Customer lists | 23,626 | 23,280 | 28,666 | 27,988 | 2–4 | |||||||||||||||||
Service contracts | 72,800 | 44,782 | 72,800 | 30,185 | 3–5 | |||||||||||||||||
Studio contracts | 3,300 | 2,530 | 3,300 | 1,705 | 4 | |||||||||||||||||
Other | 2,840 | 2,840 | 2,840 | 2,840 | 3 | |||||||||||||||||
$ | 113,166 | $ | 84,032 | $ | 118,206 | $ | 70,023 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2010 | 2009 | ||||||||||
Accrued liability related to VAT | $ | 42,235 | $ | 45,719 | |||||||
Chargeback reserve | 1,137 | 860 | |||||||||
Compensation and benefits | 1,273 | 1,193 | |||||||||
Accrued marketing | 1,148 | 1,328 | |||||||||
Legal and related expenses | 510 | 1,055 | |||||||||
Accrued interest | — | 7,538 | |||||||||
Accrued commissions to third party websites | 3,147 | 2,774 | |||||||||
Accrued waiver fees | — | 2,613 | |||||||||
Accrued loss related to claim in arbitration (see Note Q (a)) | 10,000 | — | |||||||||
Other | 5,970 | 6,647 | |||||||||
$ | 65,420 | $ | 69,727 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
has been recorded as a gain in the amount of $1,561,000 in the consolidated statement of operations for the year ended December 31, 2009, and the liability balance has been eliminated.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2010 | 2009 | ||||||||||||||||||
Principal | Unamortized Discount | Principal | Unamortized Discount | ||||||||||||||||
Debt issued by FriendFinder and INI on October 27, 2010 (a): | |||||||||||||||||||
First Lien Notes due 2011–2013, including principal of $112,020 ($108,154 net of discount) issued to Company’s stockholders (b)(e) | $ | 305,000 | $ | 10,974 | — | — | |||||||||||||
Cash Pay Second Lien Notes due 2013 issued to entities controlled by stockholders who are officers and directors (c)(e) | 13,778 | 262 | — | — | |||||||||||||||
Non-Cash Pay Second Lien Notes, due 2014, including principal of $233,191 ($212,560 net of discount) issued to Company stockholders, including $45,310 ($41,302 net of discount) to entities controlled by certain officers and directors(d)(e) | 237,211 | 20,986 | — | — | |||||||||||||||
Debt issued by INI in connection with the acquisition of Various: | |||||||||||||||||||
New First Lien Notes due 2009–2011, including principal of $75,722 ($70,715 net of discount) issued to selling stockholders (f) | — | — | $ | 189,014 | $ | 12,497 | |||||||||||||
Second Lien Subordinated Secured Notes due 2011 issued to selling stockholders (f) | — | — | 80,000 | 3,300 | |||||||||||||||
Subordinated Convertible Notes due 2011 issued to selling stockholders (g) | — | — | 169,807 | 28,265 | |||||||||||||||
Other (h) | 2,250 | 457 | 6,250 | 1,142 | |||||||||||||||
Senior Secured Notes of FriendFinder due 2010 (i) | — | — | 46,311 | 845 | |||||||||||||||
Subordinated Term Notes of FriendFinder due 2011 (j) | — | — | 42,811 | — | |||||||||||||||
$ | 558,239 | $ | 32,679 | $ | 534,193 | $ | 46,049 | ||||||||||||
Less unamortized discount | (32,679 | ) | (46,049 | ) | |||||||||||||||
Less current installment of long-term debt, net of unamortized discount of $744 and $1,931, respectively | (15,009 | ) | (56,116 | ) | |||||||||||||||
$ | 510,551 | $ | 432,028 |
(a) | On October 27, 2010, $305,000,000 principal amount of 14% Senior Secured Notes due 2013 were co-issued by FriendFinder and its wholly-owned subsidiary Interactive Network, Inc (“INI”), the parent of Various (the “New First Lien Notes”), of which (a) $200,185,000 was exchanged for $130,485,000 outstanding principal amount of First Lien Notes, $49,361,000 outstanding principal amount of Second Lien Notes and $14,551,000 outstanding principal amount of Senior Secured Notes, (b) $91,400,000 was issued for cash proceeds of $89,572,000 before payment of related fees and expenses of $5,834,000 and (c) $13,415,000 was issued to pay commitment fees to the holders of First Lien Notes and Second Lien Notes. Cash of $86,237,000 was used to redeem $36,608,000 outstanding principal amount of First Lien Notes at 102% of principal, $30,639,000 outstanding principal amount of Second Lien Notes (representing the remaining outstanding principal amounts of First Lien Notes and Second Lien Notes) and $18,258,000 outstanding principal amount |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of Senior Secured Notes. Cash was also used to pay $4,132,000 of accrued interest on the exchanged and redeemed notes, an $825,000 redemption premium on certain exchanged First Lien Notes and $435,000 in commitment fees to certain noteholders. |
(b) | The New First Lien Notes, of which approximately $112,020,000 principal amount were issued to the Company’s stockholders, including $7,460,000 to entities controlled by certain officers and directors, were issued with an original issue discount of $6,100,000, or 2.0%. The notes mature on September 30, 2013 and accrue interest at a rate per annum equal to 14.0%. Interest on the notes is payable quarterly on March 31, June 30, September 30 and December 31 of each year. Principal on the New First Lien Notes is payable quarterly to the extent of 75% of Excess Cash Flow, as defined, at 102% of principal, subject to pro-rata sharing |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
with the Cash Pay Second Lien Notes. The New First Lien Notes are guaranteed by domestic subsidiaries of FriendFinder and INI and are collateralized by a first-priority lien on all of the Company’s assets as well as a pledge of stock of subsidiaries. The New First Lien Notes are redeemable prior to maturity at the option of the Company, in whole but not in part, at 110% of principal, plus accrued and unpaid interest. In the event of an IPO, the net proceeds must be used to redeem the New First Lien Notes and Cash Pay Second Lien Notes pro-rata at 110% of principal plus accrued and unpaid interest. In addition, noteholders have the option of requiring the Company to repay the New First Lien Notes and Cash Pay Second Lien Notes in full upon a Change of Control, as defined, at 110% of principal. The Company shall also repay the New First Lien Notes and, in certain circumstances, the Cash Pay Second Lien Notes, with proceeds received from any debt or equity financing (including a secondary offering) and asset sales of more than $25 million at 110% of principal, and with proceeds from other asset sales, insurance claims, condemnation and other extraordinary cash receipts at principal, subject to certain exceptions. |
(c) | The Cash Pay Second Lien Notes, all of which were issued to entities controlled by stockholders who are also officers and directors, were issued with an original issue discount of $276,000, or 2%, mature on September 30, 2013 and have identical terms to those of the New First Lien Notes, except as to matters regarding collateral, subordination, enforcement and voting. The Cash Pay Second Lien Notes are collateralized by a fully subordinated second lien on substantially all of the assets of the Company, pari passu with the Non-Cash Pay Second Lien Notes, and will vote with the New First Lien Notes on a dollar for dollar basis on all matters except for matters relating to collateral, liens and enforcement of rights and remedies. As to such matters, the Cash Pay Second Lien Notes will vote with the Non-Cash Pay Second Lien Notes. |
(d) | The Non-Cash Pay Second Lien Notes, of which approximately $228,519,000 principal amount were issued to the Company’s stockholders, including $44,402,000 to entities controlled by certain officers and directors, mature on April 30, 2014 and bear interest at 11.5%, payable semi-annually on June 30 and December 31, which may be paid in additional notes at the Company’s option. While the New First Lien Notes are in place, interest must be paid with additional notes. During 2010, interest amounting to $4,752,000 was paid through the issuance of additional Non-Cash Pay Second Lien Notes. The Non-Cash Pay Second Lien Notes are guaranteed by the domestic subsidiaries of FriendFinder and INI and collateralized by a second priority lien on all of the Company’s assets and a pledge of the stock of subsidiaries; however, such security interest is subordinate to the prior payment of the New First Lien Notes. The Non-Cash Pay Second Lien Notes are redeemable, at the option of the Company, in whole but not in part, at 100% of principal plus accrued and unpaid interest. Upon the payment in full of the New First Lien Notes, principal on the Non-Cash Pay Second Lien Notes is payable quarterly to the extent of 75% of Excess Cash Flow, as defined, at 102% of principal subject to pro-rata sharing with the Cash Pay Second Lien Notes. Upon an IPO, if the New First Lien Notes are paid in full, the net proceeds must be used to redeem the Non-Cash Pay Second Lien Notes and Cash Pay Second Lien Notes on a pro-rata basis at 110% of principal plus accrued and unpaid interest. In addition, noteholders have the option of requiring the Company to repay the Non-Cash Pay Second Lien Notes in full upon a Change of Control, as defined, at 110% of principal plus accrued and unpaid interest. If the New First Lien Notes are paid in full, the Company shall repay the Non-Cash Pay Second Lien Notes and Cash Pay Second Lien Notes on a pro-rata basis with proceeds received from any debt or equity financing (including a secondary offering), and asset sales of more than $25 million at 110% of principal plus accrued and unpaid interest and with proceeds of other asset sales, insurance claims, condemnation and other extraordinary cash receipts at principal, subject to certain exceptions. The Non-Cash Pay Second Lien Notes will become convertible into shares of the Company’s common stock upon or after an IPO solely at the option of the holders. The conversion price of the notes will be at the per share offering price for the Company’s common stock upon consummation of the IPO provided that such conversion option shall be limited to approximately 21.1% of the Company’s fully diluted equity. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(e) | The New First Lien Notes, the Cash Pay Second Lien Notes and Non-Cash Pay Second Lien Notes (1) require the Company to maintain minimum specified levels of EBITDA and liquidity and financial ratios, including debt and coverage ratios, all as defined, (2) provides for certain limitations including limits on indebtedness, lease obligations, VAT payments and investments and (3) prohibits dividends and other payments with respect to the Company’s equity securities. |
(f) | The New First Lien Notes (“First Lien Notes”), of which approximately $110,000,000 principal amount were issued to the Company’s stockholders including $10,000,000 to entities controlled by certain officers and directors, were issued with an original issue discount of $7,720,000, or approximately 3.0%, were to mature on June 30, 2011, and accrued interest at a rate per annum equal to the sum of the greater of three month LIBOR (0.25% at December 31, 2009) or 4.5%, plus 8.0%. Interest on the notes was payable quarterly on March 31, June 30, September 30 and December 31 of each year. Principal on the First Lien Notes was payable quarterly to the extent of 90% of Excess Cash Flow, as defined, subject to minimum amounts. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(g) | The Subordinated Convertible Notes (“Convertible Notes”) were to mature on December 6, 2011 and bore interest at 6% which was paid in additional Convertible Notes at INI’s option. The notes had been recorded at estimated fair value at the date of issuance, resulting in an effective interest rate of approximately 13% and discount of $24,977,000, which was being amortized as interest expense (by use of the interest method) over the term of the notes. During 2008, interest amounting to $6,892,000 was paid through issuance of additional Convertible Notes. The notes were the unsecured obligation of INI and were guaranteed by FriendFinder. The notes were subordinate in right of payment to the First Lien Notes and Second Lien Notes. The guarantee was subordinate to the prior payment of FriendFinder’s Senior Notes and the guarantee of the First Lien Notes and Second Lien Notes and pari passu in right of payment with FriendFinder’s Subordinated Term Notes. The notes which had an original principal amount of $170,000,000 were subject to reduction to the extent certain post-closing bonuses of up to $3.5 million were paid by Various over a three-year period and for a post-closing working capital adjustment. During 2009 and 2008, respectively, as a result of payment of $1.3 and $1.4 million in bonuses which were charged to expense, the principal amount of the notes was reduced and the carrying value of the notes was reduced by $1.1 and $1.1 million, respectively, with a corresponding reduction in goodwill. The post-closing working capital adjustment determined by the Company resulted in an indemnity claim which has been reflected as a reduction of $64,279,357 in the principal amount of the notes and a $10,000,000 receivable from an escrow fund set up in connection with the acquisition. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Further, the former owners agreed to allow the $10 million escrow fund set up in connection with the acquisition to be used to pay pre-acquisition VAT liabilities and related expenses. To the extent such payments are less than $10 million, any balance then remaining in the fund was to be released to the former owners. As of December 31, 2010, the escrow fund balance had been fully expended. If the costs of eliminating the pre-acquisition VAT liabilities was less than $29 million, exclusive of costs paid from the escrow fund, then the principal of the Convertible Notes was to be increased by the issuance of additional Convertible Notes for the unused portion of the $29 million, plus interest at 6% on the increased principal from the date of acquisition. The agreements further provide, among other matters, for the Company to pay fees to the former owners aggregating $3.2 million during the period from 2010 to the first quarter of 2013, subject to payment in full of the First Lien Notes and the Senior Secured Notes and also pay a consent fee in an amount equivalent to the amount paid to the Company’s Chairman and the Company’s Chief Executive Officer subject to the same terms and conditions described in the fourth paragraph of Note R.
(h) | In connection with the acquisition of Various, INI issued a non-interest bearing obligation with a principal balance of $5.0 million to a former owner. In each of 2009 and 2008, $1.0 million of the notes were paid and 3.0 million was paid in 2010. The obligation was recorded at a present value of $3.6 million using a discount rate of 15%. |
(i) | The Senior Secured Notes were scheduled to mature on July 31, 2010 and bore interest at 15% payable quarterly in cash. The notes were collateralized by a first-priority security interest in all of the Company’s assets, other than those of INI and its subsidiaries for which a third-priority secured interest had been granted. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the amendments and waivers, the Company issued approximately $1.8 million of additional notes to the holders of the Senior Secured Notes, equal to 4% of the outstanding principal amount.
(j) | The Subordinated Term Notes, which were held by entities controlled by certain principal stockholders of the Company who are also officers and directors, were to mature on October 1, 2011 and bore interest at 13% payable annually principally through the issuance of additional subordinated notes. The Subordinated Term Notes were collateralized by a second priority security interest in all assets of the Company other than those held by INI and its subsidiaries and were subordinate to the notes issued by INI as well as the Senior Secured Notes issued by FriendFinder. |
Year | Amount | |||||
---|---|---|---|---|---|---|
2011 | $ | 15,753 | ||||
2012 | 1,000 | |||||
2013 | 304,275 | |||||
2014 | 237,211 | |||||
$ | 558,239 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
price if certain equity events occur. Under the provisions of authoritative guidance which became effective for the Company at January 1, 2009, such a reset provision no longer makes the warrants eligible for equity classification and as such, effective January 1, 2009, the Company classified these warrants as a liability at a fair value of $6,341,000 with a corresponding increase of $1,585,000 to accumulated deficit and a $4,756,000 reduction to capital in excess of par value. The liability is measured at fair value with changes in fair value reflected in operations. In connection therewith, for the years ended December 31, 2009 and 2010, a gain of $2,744,000 and $38,000, respectively, on remeasurement of the liability is included in the accompanying consolidated statement of operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Series A Preferred shares carry voting rights on all matters to be voted upon by the stockholders, and on any particular matter each holder of Series A Preferred is entitled to the number of votes equal to the number of whole shares of voting common stock into which such holder’s Series A Preferred shares would be convertible as of the record date for determining the stockholders entitled to vote on the matter. Under certain circumstances, the written consent of certain holders of Series A Preferred (or an affiliate of such holders) was required to take certain actions, including, for example, to amend FriendFinder’s articles of incorporation, effect a change of control, and declare any dividend or make any distribution on any of FriendFinder’s capital stock. Series A Preferred shares are entitled to receive ratably such dividends, if any, as may be declared by the board of directors. Dividends are not cumulative. Each share of Series A Preferred has a liquidation preference equal to the greater of (x) the original issue price for such share ($11.89 per share), plus declared and accrued but unpaid dividends, and (y) such amount as would have been payable had such share been converted into voting common stock immediately prior to the liquidation, dissolution or winding up of the Company (“Liquidation Preference Amount”). Subject to certain conditions, the holders of the Series A Preferred have preemptive rights on any sale by FriendFinder of any shares of, or any securities convertible into or exercisable for shares of, any class of FriendFinder’s capital stock. Such preemptive rights expire immediately prior to an IPO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Expiration Date(1) | Exercise Price | Number of Shares(2) | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
August 2015 | $ | 6.20 | (4) | 476,573 | (4) | |||||
August 2015 | $ | 10.25 | (4) | 25,090 | ||||||
August 2015 | $ | 0.0002 | 243,287 | |||||||
August 2016 | $ | 0.0002 | 441,474 | |||||||
December 2017 | $ | 0.0002 | 4,692,996 | (3) | ||||||
5,879,420 |
(1) | Except for warrants to purchase 1,373,859 shares of common stock at $0.0002 per share which were amended on October 8, 2009, warrants terminate if not exercised concurrently with the consummation of an IPO, if earlier than their stated expiration date. |
(2) | The number of shares of common stock for which each warrant is exercisable will be decreased immediately prior to the closing of an IPO in the event that the Company has issued prior to such IPO fewer than 1,343,997 shares or options pursuant to an equity incentive or benefit plan except for the warrants exercisable at $10.25. The adjustment provision for such warrants is triggered if the Company has issued fewer than 588,890 shares or options pursuant to an equity incentive or benefit plan prior to the closing of an IPO. |
(3) | With respect to warrants to acquire 2,441,989 common shares, in order to maintain the warrant holders’ percentage of fully diluted equity, the number of shares of common stock for which each such warrant is exercisable shall be increased immediately prior to the closing of an IPO based on the number of shares of common stock into which the Non-Cash Pay Second Lien Notes which were exchanged for Convertible Notes issued to selling stockholders in the acquisition of Various, will be convertible based on the IPO price. |
(4) | Adjusted for subsequent dilutive issuances of equity securities. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to adjustment. Stock options may be issued to employees, directors and consultants, selected by a committee of the Board of Directors.
2010 | 2009 | 2008 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Current: | ||||||||||||||
Federal | $ | 162 | $ | — | $ | 374 | ||||||||
State | 630 | — | — | |||||||||||
792 | — | 374 | ||||||||||||
Deferred: | ||||||||||||||
Federal | (1,118 | ) | (4,688 | ) | (13,615 | ) | ||||||||
State | (160 | ) | (644 | ) | (4,935 | ) | ||||||||
(1,278 | ) | (5,332 | ) | (18,550 | ) | |||||||||
Total tax benefit | $ | (486 | ) | $ | (5,332 | ) | $ | (18,176 | ) |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2010 | 2009 | 2008 | |||||||||||||
Tax benefit at federal statutory rate (35%) | $ | 15,274 | $ | 16,292 | $ | 22,450 | |||||||||
State taxes, net of federal effect | 1,552 | 435 | 3,208 | ||||||||||||
Impairment of goodwill | — | — | (3,350 | ) | |||||||||||
Net operating loss for which no tax benefit is recognized | (16,679 | ) | (4,881 | ) | (4,842 | ) | |||||||||
Non-deductible penalties including related foreign exchange gain | — | 97 | 1,119 | ||||||||||||
Write off of deferred tax asset related to United Kingdom VAT liability which was eliminated (see Note I) | — | (7,785 | ) | — | |||||||||||
Gain on warrant liability | 14 | 960 | — | ||||||||||||
Other | 326 | 214 | (409 | ) | |||||||||||
Tax benefit | $ | 486 | $ | 5,332 | $ | 18,176 |
December 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2010 | 2009 | ||||||||||
Deferred tax assets: | |||||||||||
Net operating loss carryforwards | $ | 27,424 | $ | 30,430 | |||||||
Allowance for doubtful accounts | 894 | 861 | |||||||||
Accrued liability related to VAT | 12,264 | 13,733 | |||||||||
Accrued loss related to claim in arbitration | 5,200 | — | |||||||||
Other | 590 | 427 | |||||||||
Gross deferred tax assets | 46,372 | 45,451 | |||||||||
Less valuation allowance | (28,627 | ) | (11,948 | ) | |||||||
Net deferred tax assets | 17,745 | 33,503 | |||||||||
Deferred tax liabilities: | |||||||||||
Trademarks and domain names not subject to amortization | (23,794 | ) | (25,644 | ) | |||||||
Intangible assets subject to amortization | (11,654 | ) | (19,273 | ) | |||||||
Long-term debt | (5,875 | ) | (10,634 | ) | |||||||
Property and equipment, including software | (217 | ) | (3,222 | ) | |||||||
Other | (958 | ) | (761 | ) | |||||||
(42,498 | ) | (59,534 | ) | ||||||||
Net deferred tax liabilities | $ | (24,753 | ) | $ | (26,031 | ) |
December 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2010 | 2009 | ||||||||||
Deferred tax asset — current | $ | 5,522 | $ | 11,366 | |||||||
Deferred tax liability — non-current | (30,275 | ) | (37,397 | ) | |||||||
Net deferred tax liability | $ | (24,753 | ) | $ | (26,031 | ) |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2010 | 2009 | 2008 | |||||||||||||
Assets: | |||||||||||||||
Internet | $ | 506,297 | $ | 522,179 | $ | 568,999 | |||||||||
Entertainment | 22,399 | 23,520 | 26,724 | ||||||||||||
Unallocated corporate | 4,121 | 6,182 | 4,190 | ||||||||||||
Total | $ | 532,817 | $ | 551,881 | $ | 599,913 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2010 | 2009 | 2008 | |||||||||||||
Net revenue from external customers: | |||||||||||||||
Internet | $ | 321,605 | $ | 306,213 | $ | 306,129 | |||||||||
Entertainment | 24,392 | 21,479 | 24,888 | ||||||||||||
Total | $ | 345,997 | $ | 327,692 | $ | 331,017 | |||||||||
Income from operations: | |||||||||||||||
Internet | $ | 76,142 | $ | 64,962 | $ | 34,345 | |||||||||
Entertainment | 1,140 | (439 | ) | (17,748 | ) | ||||||||||
Total segment income from operations | 77,282 | 64,523 | 16,597 | ||||||||||||
Unallocated corporate | (5,547 | ) | (6,128 | ) | (9,488 | ) | |||||||||
Total | $ | 71,735 | $ | 58,395 | $ | 7,109 | |||||||||
Amortization of acquired intangibles and software (included in income from operations): | |||||||||||||||
Internet | $ | 24,461 | $ | 35,454 | $ | 36,347 | |||||||||
Entertainment | — | — | — | ||||||||||||
Unallocated corporate | — | — | — | ||||||||||||
Total | $ | 24,461 | $ | 35,454 | $ | 36,347 | |||||||||
Depreciation and other amortization (included in income from operations): | |||||||||||||||
Internet | $ | 4,527 | $ | 4,587 | $ | 4,052 | |||||||||
Entertainment | 177 | 294 | 450 | ||||||||||||
Unallocated corporate | — | — | — | ||||||||||||
Total | $ | 4,704 | $ | 4,881 | $ | 4,502 | |||||||||
Impairment of goodwill and other assets (included in income from operations): | |||||||||||||||
Internet | $ | — | $ | — | $ | 6,829 | |||||||||
Entertainment | 4,660 | 4,000 | 17,602 | ||||||||||||
Total | $ | 4,660 | $ | 4,000 | $ | 24,431 |
Year Ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2010 | 2009 | 2008 | |||||||||||||
Internet: | |||||||||||||||
Subscription based service | $ | 245,174 | $ | 245,015 | $ | 246,978 | |||||||||
Pay by usage service | 76,321 | 60,434 | 56,729 | ||||||||||||
Advertising | 110 | 764 | 2,422 | ||||||||||||
321,605 | 306,213 | 306,129 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2010 | 2009 | 2008 | |||||||||||||
Entertainment: | |||||||||||||||
Magazine | 10,894 | 12,218 | 15,581 | ||||||||||||
Video entertainment | 10,892 | 6,441 | 6,048 | ||||||||||||
Licensing | 2,606 | 2,820 | 3,259 | ||||||||||||
24,392 | 21,479 | 24,888 | |||||||||||||
Total revenues | $ | 345,997 | $ | 327,692 | $ | 331,017 |
Year Ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2010 | 2009 | 2008 | |||||||||||||
Net revenue: | |||||||||||||||
United States | $ | 178,873 | $ | 177,753 | $ | 192,102 | |||||||||
Europe | 103,224 | 97,317 | 86,797 | ||||||||||||
Canada | 17,200 | 15,364 | 16,381 | ||||||||||||
Other | 46,700 | 37,258 | 35,737 | ||||||||||||
Total | $ | 345,997 | $ | 327,692 | $ | 331,017 |
Year | Operating Leases | |||||
---|---|---|---|---|---|---|
2011 | $ | 2,076 | ||||
2012 | 2,125 | |||||
2013 | 2,125 | |||||
2014 | 2,070 | |||||
2015 | 1,800 | |||||
Thereafter | 2,217 | |||||
Total | $ | 12,413 |
(a) | On December 28, 2007, Broadstream Capital Partners, Inc. (“Broadstream”) filed a lawsuit against the Company in the State Superior Court of California, County of Los Angeles, Central District, and the Company subsequently removed the case to the Federal District Court for the Central District of California. The complaint alleged breach of contract, breach of covenant of good faith and fair dealing, breach of fiduciary duty and constructive fraud arising out of a document entitled “Non-Disclosure Agreement.” The complaint |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
alleged, among other things, that Broadstream entered into a Non-Disclosure Agreement with the Company that required Broadstream’s prior written consent for the Company to knowingly acquire Various or any of its subsidiaries and that such consent was not obtained. On April 7, 2008, Broadstream filed its First Amended Complaint, which added a new cause of action for intentional interference with prospective economic advantage. On February 20, 2009, Broadstream filed its Third Amended Complaint, which dismisses the allegations of breach of fiduciary duty and constructive fraud. The complaint seeks damages which plaintiff alleges to be in excess of $20 million, plus interest, costs and punitive damages. Broadstream later asserted up to $557 million in damages plus punitive damages. On July 20, 2009, the Company entered into an agreement with Broadstream under which, without admitting liability, the Company agreed to pay Broadstream $3.0 million in $1.0 million installments due no later than July 2009, January 2010 and July 2010. Such payments were timely made. The agreement provides that upon the earlier of twelve months after the Company has securities registered under Section 12(b) of the Securities Exchange Act of 1934, as amended, or eighteen months after the effective date of the agreement, but not later than twelve months following such earlier date, Broadstream must choose either to (i) refile its complaint in Federal District Court provided that it first repay the Company the $3.0 million or (ii) demand arbitration. If Broadstream elects arbitration, the parties have agreed that there will be an arbitration award to Broadstream of at least $10.0 million but not more than $47.0 million. Giving consideration of the limitation of the arbitration award in relation to damages sought in litigation, management had not concluded that it was probable that Broadstream would demand arbitration. Accordingly, no loss had been provided for as a result of entering into the agreement. In the event that Broadstream elected arbitration, at such time the Company would recognize a loss in connection with the matter of $13.0 million to $50.0 million. |
(b) | On December 23, 2005, Robert Guccione, our former president, filed an action against the Company and some of its officers, among other defendants, in New York State Court for breach of contract, fraud, unjust enrichment, promissory estoppel, failure to pay severance and conspiracy to defraud. The amount of damages requested in the complaint against the Company is approximately $9.0 million and against the officers is in excess of $10.0 million. Some of the counts in the complaint also demand an unspecified amount of damages. Guccione filed an amended complaint on June 5, 2007 to include additional claims relating to ownership of certain United Kingdom, Jersey and Guernsey trademarks and added as a party Penthouse Publications Limited, an entity with no current affiliation with the Company, as party plaintiff. Guccione agreed to dismiss the count for conspiracy to defraud only. Guccione filed a Second Amended Complaint on December 14, 2007 adding General Media International, Inc. (an entity with no current affiliation with the Company) as party plaintiff and a new claim for inducement to breach of contract. The Company filed its motion to dismiss the Second Amended Complaint on January 31, 2008, which was granted in part and denied in part. The court dismissed the claims for unjust enrichment and promissory estoppel. The Company filed its Answer and |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Affirmative Defenses to the Second Amended Complaint on June 25, 2009. On August 14, 2008, Guccione filed a voluntary petition for Chapter 7 Bankruptcy. Guccione filed a dismissal of the bankruptcy proceedings on November 4, 2009. The Court dismissed the bankruptcy action on November 9, 2009. The settlement agreement between Guccione and his judgment creditors assigns all rights to the New York state court action to his judgment creditors. On January 8, 2010, the Company filed an Amended Answer with counterclaims against Guccione and Penthouse Publications Limited for conversion, breach of fiduciary duty, declaratory relief and indemnification. No specific amount of damages has been requested in the counterclaims. On January 27, 2010, Plaintiffs filed a Reply to the Company’s counterclaims. In January and February 2010, certain defendants filed Answers to Plaintiffs’ Second Amended Complaint with cross-claims against the Company for contribution and indemnification. No specific amount of damages has been requested. In February and March 2010, the Company filed its Answer and Affirmative Defenses to the cross-claims. On October 20, 2010, Guccione passed away. As such, the case is stayed pending substitution of his estate as a party. The Company believes it has meritorious defenses to all claims and intends to vigorously defend the lawsuit. |
(c) | On November 28, 2006, Antor Media Corporation (“Antor”) filed a complaint against the Company, its subsidiary, General Media Communications, Inc. (“GMCI”), and several non-affiliate media/entertainment defendants in the U.S. District Court for the Eastern District of Texas, Texarkana Division, for infringement of a Patent entitled “Method and Apparatus for Transmitting Information Recorded on Information Storage Means from a Central Server to Subscribers via a High Data Rate Digital Telecommunications Network.” No specific amount of damages has been requested. Injunctive relief is also sought. The Company and its subsidiary filed an Answer, Affirmative Defenses and Counterclaims. The United States Patent and Trademark Office (“USPTO”) issued a non-final office action rejecting Antor’s patent claims. Antor filed a response to the office action which added 83 new claims to the original 29 rejected claims. In August 2008, the USPTO issued its final office action sustaining its rejection of the original 29 claims and rejecting the 83 new claims. Antor filed its Petition to Vacate Finality of Office Action on the grounds it introduced new grounds for the rejection. Based on the final office action, the Company, GMCI and all other defendants filed an expedited motion to stay the case. In December 2008, pursuant to an order granting a re-examination proceeding, the USPTO issued a non-final office action again rejecting the original 29 claims and the new 83 claims. In February 2009, Antor filed a response in which it agreed to cancel the 83 new claims previously proposed. On May 11, 2009, the Court entered an Order granting Defendants’ Motion to Stay as modified. On May 22, 2009, the defendants accepted the terms of the Court’s proposed Stipulation regarding the use of prior art at trial and filed their Stipulation. On June 5, 2009, the USPTO issued a Final Office Action rejecting all of the Plaintiff’s claims. Plaintiff filed an appeal on July 7, 2009 and an appellate brief on October 8, 2009. On February 18, 2010, the USPTO filed an answer brief. On October 21, 2010, the USPTO Board of Patent Appeals entered an order affirming the rejection of Antor’s claims. On December 21, 2010, Antor filed a request for rehearing which was denied in March 2011. The case will remain stayed pending the appeal. |
(d) | On or about November 27, 2006, a claimant filed a consumer class action arbitration at Judicial Arbitration and Mediation Services, Inc. or JAMS in San Jose, California, alleging a nationwide class action against Various under a variety of legal theories related to, among other things, representations regarding the number of active users on its internet dating websites, causing the appearance of erroneous member profiles, and a failure to adequately remove or account for alleged erroneous member profiles. The claimant is seeking unspecified damages. Various disputes the claims and intends to defend the arbitration vigorously. |
(e) | In or about March 2009, a complaint was filed against the Company’s subsidiary FriendFinder California, Inc. and other defendants in the State Superior Court of California, County of Los Angeles in connection with their advertising on a free adult content website run by a third party known as Bright Imperial Limited. In April 2009, Various and the Company were added as defendants. The complaint alleges that the defendants aided and abetted Bright Imperial Limited in engaging in below cost competition and unlawful use of “loss leaders” |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
in violation of California law by providing free, apparently professionally produced adult content. The plaintiff is seeking $10.0 million in damages, trebled to at least $30.0 million, plus injunctive relief and attorneys’ fees. On May 8, 2009, the Court denied the plaintiff’s request for an Order to Show Cause concerning its request for preliminary injunction, citing insufficient evidence among other factors. On May 26, 2009, the Company filed an “Anti-SLAPP” Motion to Strike the Complaint along with a Motion to Dismiss the claims in the Complaint. On or about July 24, 2009, after the Court granted the Anti-SLAPP motion the plaintiff then stipulated to the form of an Order on the Anti-SLAPP motion that finds in favor of the Company, effectively terminating the case. On August 10, 2009, plaintiff filed his Notice of Appeal to the California Court of Appeal. On January 26, 2011, the California Appellate Court affirmed the trial court’s ruling in the Company’s favor. |
(f) | On November 4, 2008, Balthaser Online, Inc. filed a lawsuit for patent infringement against the Company among other defendants, in the U.S. District Court for the Eastern District of Texas, Texarkana Division, seeking unspecified monetary damages as well as injunctive relief. The complaint alleged infringement of Patent entitled “Methods, Systems, and Processes for the Design and Creation of Rich-Media Applications via the Internet.” The plaintiff filed a first amended complaint naming Various, Inc., FriendFinder California Inc. and Global Alphabet, Inc. as defendants on January 15, 2009. On or about August 28, 2009, pursuant to local rule, the Company served its invalidity contentions. On September 15, 2009, the Court granted the Company’s motion to transfer the case to the U.S. District Court for the Northern District of California. The lawsuit was settled on November 30, 2010 for an immaterial amount and the action was dismissed with prejudice. |
(g) | In or about December 2007, Spark Network Services, Inc. served Various with a complaint for patent infringement seeking unspecified monetary damages as well as injunctive relief. The complaint alleges infringement of a U.S. Patent entitled “System for Data Collection and Matching Compatible Profiles.” Various moved for a stay of the federal case due to the USPTO’s re-examination of the patent at issue and the Federal Court granted the stay. The USPTO issued a final rejection of the patent at issue on September 18, 2009, and the plaintiff filed a notice of appeal on December 17, 2009. In March 2010, the parties entered into a settlement agreement resolving the case and the Federal action was dismissed with prejudice. The settlement did not have a material effect on the Company’s financial statements. |
(h) | On November 5, 2009, Joao Control and Monitoring Systems of Texas, LLC filed a patent infringement lawsuit in the United States District Court for the Eastern District of Texas against the Company and its indirect wholly-owned subsidiary Streamray Inc., and a number of other unrelated adult entertainment companies, alleging infringement of a patent entitled “Monitoring Apparatus and Method” and seeking unspecified monetary damages as well as injunctive relief. The lawsuit was served on the Company and Streamray Inc. on November 12, 2009. In or about June 2010 the Company filed a motion related to the propriety of the forum and Streamray Inc. answered the complaint. On or around July 2010, the parties entered into a settlement agreement resolving the case and the action was dismissed with prejudice. The settlement did not have a material effect on the Company’s financial statements. |
(i) | Effective July 1, 2008, Various registered in the European Union and on July 29, 2008, began separately charging VAT to its customers. For periods prior thereto, Various recorded a liability for VAT and related interest and penalties in connection with revenue from internet services derived from its customers in the various European Union countries. Various reduced its VAT liability for periods prior to July 1, 2008 in the countries where the liability was either paid in full or payments were made pursuant to settlement and payment plans or where determinations were made that payments were not due. Various continues to negotiate settlements of the liabilities or challenge the liability related to VAT for periods prior to July 1, 2008 (see Note I). |
(j) | On May 19, 2009 representatives for Summit Trading Limited (“Summit”) sent a letter to the Company’s outside legal counsel, alleging that the Company, Interactive Brand Development, Inc., (an owner of the Company’s Series B Common Stock) and entities affiliated with two of the Company’s principal stockholders |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
defrauded Summit of financial compensation for services provided to the Company’s predecessor entity, General Media, Inc. Among the claims, Summit asserted bad faith, breach of contract and fraud by the Company’s management and the Company, and claimed that it is owed an equity interest in the Company, as well as compensatory, punitive and exemplary damages in excess of $500 million. Management believes that the allegations stated in the letter are vague and lack factual basis and merit. Summit has not taken any legal action against the Company. Should Summit take legal action, the Company would vigorously defend the lawsuit. |
(k) | On November 16, 2010, Patent Harbor, LLC filed a Complaint for patent infringement against, among others, Penthouse Digital Media Productions Inc. (PDMP), in the United States District Court for the Eastern District of Texas. The Complaint alleges an infringement of a U.S. Patent entitled “Apparatus and Method for Assembling Content Addressable Video”. No specific amount of damages has been requested. However, on November 16, 2010, the Company received a settlement demand from plaintiff in the amount of $800,000. Plaintiff later lowered its demand to $500,000. On January 28, 2011, the Company filed an Answer, Affirmative Defenses and Counterclaims. On February 25, 2011, plaintiff filed its Answer to the Counterclaims. The Company has no insurance coverage for patent infringement claims. The Company disputes the allegations and believes it has meritorious defenses, and plans to vigorously defend the allegations. |
(l) | On April 13, 2011, Facebook, Inc., or Facebook, filed a complaint against the Company and certain of its subsidiaries in the U.S. District Court for the Northern District of California, alleging trademark infringement with regard to the use of the terms “face book of sex”. The Complaint contains causes of action for: trademark dilution, false designation of origin, trademark infringement, violation of the Anti-Cybersquatting Consumer Protection Act, and for unfair competition. The Complaint also seeks a declaratory judgment that Facebook’s use of “friend finder” on its website is a descriptive fair use that does not infringe Various’ trademark rights in the “FRIENDFINDER” mark. No specific amount of damages has been sought. However, the Complaint requests monetary relief, injunctive relief, punitive damages, cancellation of the “FRIENDFINDER” marks, attorneys’ fees, other equitable relief, and costs among other things. The Company intends to vigorously defend the lawsuit. |
The Company currently is a party to other legal proceedings and claims. While management presently believes that the ultimate outcome of these proceedings, including the ones discussed above, individually and in the aggregate, will not have a material adverse effect on the Company’s financial position, cash flows, or overall trends in results of operations, litigation and arbitration is subject to inherent uncertainties and unfavorable rulings could occur. An unfavorable ruling could include monetary damages or, in cases for which injunctive relief is sought, an injunction prohibiting the Company from selling one or more products or services. Were an unfavorable ruling to occur there exists the possibility of a material adverse impact on the business or results of operations for the period in which the ruling occurs or future periods. Other than as disclosed above, the Company is unable to estimate the possible loss or range of loss which may result from pending legal proceedings or claims. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company at a price of $2.00 per share. Prior to vesting, the restricted shares may not be sold, assigned, transferred or pledged by the recipient.
$235,331,887 14% of Senior Secured Notes due 2013
$10,630,667 14% of Cash Pay Secured Notes due 2013
$344,469,891 11.5% of Convertible Non-Cash Pay Secured Notes due 2014
31,260,529 Shares of Common Stock
PROSPECTUS
�� , 2011
INFORMATION NOT REQUIRED IN PROSPECTUS
Amount | ||||||
Securities and Exchange Commission Registration Fee | $ | 72,923.63 | ||||
Legal Fees and Expenses | 50,000 | |||||
Accounting Fees and Expenses | 25,000 | |||||
Miscellaneous Expenses | 15,000 | |||||
Total | $ | 162,923.63 |
to its officers and directors as incurred in connection with proceedings against them for which they may be indemnified.
• | to the extent a present or former director or officer of a corporation has been successful on the merits or otherwise in the defense of any action, suit or proceeding referred to in subsections (a) and (b) of Section 145 or in the defense of any claim, issue or matter therein, such person shall be indemnified against expenses, including attorneys’ fees, actually and reasonably incurred by such person in connection therewith; |
• | the indemnification and advancement of expenses provided for pursuant to Section 145 shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise; and |
• | the corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person’s status as such, whether or not the corporation would have the power to indemnify such person against such liability under Section 145. |
capacity or any other capacity while serving as a director, officer, employee or agent. Flash Jigo Corp. shall pay the expenses (including attorneys’ fees) incurred by such person in defending any proceeding in advance of its final disposition, provided, however, that, to the extent required by law, such payment of expenses in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking by such person to repay all amounts advanced if it should be ultimately determined that such person is not entitled to be indemnified. Flash Jigo Corp.’s bylaws further provide that such right of indemnification shall not be exclusive of any right to which any such person may be entitled as a matter of law.
is or was serving as such of another corporation, partnership, joint venture, trust or other enterprise, at the request of the corporation against expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any threatened, pending, or completed action or proceeding, whether civil, criminal or administrative, as provided in Section 317 of the CAGL.
is not entitled to indemnification under the CAGL. The corporation shall also, to the extent and in the manner specified in the CAGL, have the power to indemnify each of its agents (other than directors for whom indemnification is mandatory as described above) against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding arising by reason of the fact that such person is or was an agent of the corporation. The corporation shall have the power to advance expenses incurred in defending any proceeding prior to the disposition of the proceeding upon receipt of an undertaking by or on behalf of the agent to repay that amount if it shall be determined that the person is not entitled to indemnification under the CAGL. The indemnification provided in the bylaws of the corporation are not deemed to be exclusive of any additional rights to which an agent may be entitled under any law, agreement, vote of shareholders, or disinterested directors.