Penthouse Magazine Owner Files Chapter 11 Bankruptcy

The owner of Penthouse magazine filed for Chapter 11 bankruptcy protection last week.

Financial Struggles for Adult Entertainment Industry

FriendFinder Network, which is based in Sunnyvale, California, has approximately 425 employees.  The goal of FriendFinder Network was to combine social networking and sex, two industries the company believed fit together.  To that end, the company owns the well-known Penthouse magazine and operates over 8,000 pornography sites and legitimate dating web sites.

However, the combination of these industries has not gone according to plan to date.  Based on documents filed in the United States Bankruptcy Court of Wilmington, Delaware, FriendFinder Network lost almost $50 million on income of $294 million in its 2012 fiscal year ending June 30.  The company’s income for 2012 was down 10 percent from 2011 levels.

The cause of the decrease in revenue and loss was several fold.

First, the company has seen its magazine and adult web site income drop in recent years.  Penthouse magazine has seen its number of subscribers decrease to just over 700,000 and the number of paying users of its adult web sites likewise decline.  The availability of free adult content on the Internet has made the need for the company’s paid services increasingly obsolete.

Second, income from the company’s dating and social-networking web sites has likewise declined in the face of numerous competing sites.  Although FriendFinder Network’s sites still have over 220 million members, site membership has declined from previous years.  Facebook and other social networking sites have taken away the need for paid dating sites in the eyes of many.

Finally, FriendFinder Network has struggled in its relationship with credit card companies.  Credit card companies consider the adult entertainment industry high-risk because of the number of fraudulent transactions.  In the end, FriendFinder Network and similar companies have to eat the losses from such transactions.

FriendFinder Network has not made a profit since 2008.

Chapter 11 Bankruptcy Details

As a result of the decrease in revenue, the company was unable to make interest payments to lienholders at the end of its most recent fiscal year.  The company now owes those lienholders over $520 million.

The company, which has been traded publicly since 2011, noted that over 80 percent of its lienholders have agreed to its restructuring proposal.  The Chapter 11 restructuring plan will allow the company to emerge from bankruptcy by January 31, 2014.  When the company emerges from bankruptcy, it will have reduced its secured debt by more than $300 million.  In addition, the company will no longer be traded publicly.

“The agreement with the overwhelming majority of our noteholders will allow FriendFinder Networks to refinance our long-term debt, permit us to reinvest in our business, and position some of the strongest brands in the market for additional growth,” noted Anthony Previte, an executive with FriendFinder Networks.

Under the bankruptcy deal, first-lien noteholders would receive new notes worth more additional principal than their current notes.  Second-lien non-cash noteholders would receive common stock and a cash payout.  Those second-lien noteholders would effectively control the company.

Andrew Conru and Lars Mapstead hold a majority of those second-lien notes.  Conru and Mapstead sold a number of web sites to FriendFinder in 2007.

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Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.