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When sex fails to sell: Penthouse publisher goes bust

Tuesday, 17 Sep 2013 | 2:21 PM ET
Paul J. Richards | AFP | Getty Images

Maybe sex doesn't sell that well after all.

FriendFinder Networks, publisher of Penthouse magazine and numerous adult-entertainment websites, filed for Chapter 11 bankruptcy on Tuesday.

The company, which sought to combine social networking and sex, said it had struck a deal with noteholders that will reduce its debt by $300 million if approved by the U.S. Bankruptcy Court in Delaware.

Under the plan, one group of noteholders will take ownership of the sex entertainment business, which traces its roots to the late Penthouse publisher Bob Guccione. As is typical in bankruptcy, shareholders will likely be left with nothing.

(Read more: Advertising on porn sites: Don't knock it until you try it)

Control of the company would go to Andrew Conru and Lars Mapstead, two noteholders who sold various social networking websites to FriendFinder in 2007.

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Through a network of thousands of websites, FriendFinder provides live video, chat rooms, and photo and video sharing. It also sought to tap the powers of social networking with websites such as adultfriendfinder.com, which promoted casual sex, and bigchurch.com, which aimed for spiritual connections.

The company and its affiliates are composed of a global network of more than 8,000 websites with 220 million members and 750,000 subscribers, according to court documents.

But while Facebook, LinkedIn and other social sites have boomed, FriendFinder's limped. Its revenue in the year ended June 30 totaled $293.7 million, down 10 percent from the previous year.

Hardest hit were the company's social networking websites, where revenue fell 17.6 percent, according to court filings. Some of that drop was offset by a 7.8 percent rise in live interactive video revenue.

Ezra Shashoua, the company's chief financial officer, blamed the lower revenue on a drop in membership and increased advertising costs for affiliates, according to court documents. Shashoua also said credit card companies had refused to process transactions for the company's Internet businesses. No reason was given.

FriendFinder has not turned in a net profit since at least 2008, according to Thomson Reuters data.

The company was formed by Marc Bell and Daniel Staton in 2003 when they acquired out of bankruptcy the publisher ofPenthouse, Guccione's racier rival to Playboy. In 2007 the company bought Various Inc. and its dating websites from Conru and Mapstead for $400 million.

(Read more: Porn group lifting HIV-prompted filming moratorium)

A year later it filed with regulators to raise $460 million in an initial public offering, but when it finally completed the IPO in 2011, FriendFinder had raised just $46 million.

In 2010, the company offered to buy rival Playboy Enterprises for $210 million. That deal fell through.

FriendFinder said in court papers it plans to issue cash and new debt to holders of $234 million of first-lien notes. It also plans to cancel about $330 million in second-lien notes and issue new stock to those debtholders, who will own the company when it exits bankruptcy if the plan receives creditor and court approval.

FriendFinder said the plan was supported by 80 percent of its noteholders but has not yet been put to a creditor vote.

Bell and Staton, who resigned their executive positions with the company last year, each agreed to a $500,000 cash payment to end their consulting agreements with the company, according to court documents.

Earlier this year, LodgeNet Interactive, which provided adult films and video games to hotels and their guests, filed for bankruptcy, partly due to Internet competition.

—By Reuters.

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