Thursday, February 4, 2010

Friendfinder "IPO" is an interesting one (FFN)

Any day now....we'll welcome Friendfinder into the public markets. It's a prime example of "know what you own" when buying common stock.

Per their updated S1, Penthouse - oops they're now named Friendfinder - will offer 20million shares to the public in an initial public offering. Only problem is, NONE of the proceeds will be used for the benefit of the company. Not only that, but they'll use existing (pre-IPO) cash to pay back some of their creditors, and after all this they'll still be in debt:

"We intend to use all of the net proceeds to pay waiver fees equal to (i) 1% of the outstanding principal amount of the First Lien Senior Secured Notes on the date we consummate this offering which we expect to be approximately $1.9 million, and (ii) 1% of the outstanding principal amount of the Second Lien Subordinated Secured Notes on the date we consummate this offering which we expect to be approximately $0.8 million, each in connection with the waiver or amendment of our note agreements, as well as to repay our First Lien Senior Secured Notes on the terms as further described under the section entitled “Use of Proceeds.” In addition, cash on hand will be used to repay the remaining portion of First Lien Senior Secured Notes. After this offering, we will still have outstanding debt."

In the company's defense, they have big gross profits, and an interesting business model based on a growing subscriber base. But it throws me for a loop when the company's celebrated IPO proceeds will be used EXCLUSIVELY to pay off a different part of the capital structure.

More concerning, they might be on the hook for future costs due to the company's improper actions, including their name change. They ran into trouble with debt holders when they changed their name from Penthouse to Friendfinder - the creditors were likely upset at the new name's weaker brand recognition. From the risks section of the filing:

". We also failed to obtain the consent of the noteholders prior to taking certain corporate actions such as changing our name from Penthouse Media Group Inc. to FriendFinder Networks Inc. and our subsidiary’s name from FriendFinder Network, Inc. to FriendFinder California Inc., making certain restricted payments and incurring additional liens. In addition, in connection with the Various acquisition, we failed to meet certain operating targets and timely deliver certain agreed-upon documents and take certain actions with respect to the granting and perfection of security interests after the acquisition of Various was completed, although such documents and actions were subsequently completed.

On October 8, 2009 we cured these events of default by obtaining waivers or amendments to our note agreements. However, if additional defaults occur in the future and our efforts to cure such events of default are unsuccessful it could result in the acceleration of our then outstanding debt. If all of our indebtedness was accelerated, we may not have sufficient funds at the time of acceleration to repay most of our indebtedness, which could have a material adverse effect on our ability to continue as a going concern."

For fun, here's a sampling of their portfolio of websites. And oh the irony! They own which is a "Christian dating website with searchable bible passages" while also owning,, and the ever-so-entertaining, which specializes in, um, "live video."

Prove me wrong, Friendfinder, and be a shareholder-friendly success!

Copyright 2010 AlphaNinja

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