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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2001
or
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-26395
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SALON MEDIA GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 94-3228750
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
22 Fourth Street, 16th Floor
San Francisco, CA 94103
(Address of principal executive offices)
(415) 645-9200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value
(Title of Class)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [_]
The number of outstanding shares of the Registrant's Common Stock, par value
$0.001 per share, on June 8, 2001 was 14,155,276 shares.
Parts of the definitive proxy statement for Registrant's 2001 Annual Meeting
of Stockholders to be filed with the Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this Report are
incorporated by reference into Part III of this Report.
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FORM 10-K
SALON MEDIA GROUP, INC.
INDEX
Page
Number
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PART I
ITEM 1. Business.................................................... 3
ITEM 2. Properties.................................................. 10
ITEM 3. Legal Proceedings........................................... 10
ITEM 4. Submission of Matters to a Vote of Security Holders......... 10
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................ 12
ITEM 6. Selected Consolidated Financial Data........................ 12
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Result of Operations................................... 12
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.. 30
ITEM 8. Consolidated Financial Statements and Supplementary Data.... 31
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures.................................. 53
PART III
ITEM 10. Directors and Executive Officers of the Registrant.......... 53
ITEM 11. Executive Compensation...................................... 53
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management................................................. 53
ITEM 13. Certain Relationships and Related Transactions.............. 53
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K........................................................ 54
SIGNATURES............................................................ 56
2
PART I
This report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") that involve risks and
uncertainties, including but not limited to statements regarding our strategy,
plans, objectives, expectations, intentions, financial performance, cash-flow
breakeven timing, financing, economic conditions, on-line advertising market
performance, subscription service plans, non-web opportunities and revenue
sources. Although Salon Media Group, Inc. believes its plans, intentions and
expectations reflected in such forward-looking statements are reasonable, they
can give no assurance that such plans, intentions or expectations will be
achieved. Our actual results may differ significantly from those anticipated or
implied in these forward-looking statements as a result of the factors set
forth above and in Salon's public filings. Salon assumes no obligation to
update any forward-looking statements as circumstances change.
Our actual results may differ significantly from those anticipated or
implied in these forward-looking statements as a result of the factors set
forth below and in "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" and "Factors That May Affect Our
Operating Results and Market Price of Stock." In this report, the words
"anticipates," "believes," "expects," "estimates," "intends," "future," and
similar expressions identify forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof.
ITEM 1. Business
Salon Media Group, Inc. (Salon) is a leading Internet media company that
produces a total network of ten subject-specific websites, and hosts two online
communities--Table Talk, a free interactive forum and The Well, a paid
subscription service. In May 2000, Salon acquired MP3Lit.com (MP3Lit), a
website offering quality spoken word and audio literature recordings in MP3 and
Real Audio formats. MP3Lit was incorporated into Salon's web site as Salon
Audio. Salon believes that its network of websites combines the thoughtfulness
of print, the timeliness of television and the interactivity of talk radio.
Salon was originally incorporated in July 1995 in the state of California
and reincorporated in Delaware in June 1999. On June 22, 1999, Salon had its
initial public offering, with its common stock quoted on the NASDAQ National
Market under the symbol "SALN." Effective May 16, 2001 the company adopted the
name Salon Media Group, Inc.
The main entry and navigation point to Salon's ten websites is Salon's home
page at www.salon.com. Salon's websites provide a continuously updated array of
news, features, interviews and regular columnists and include the following:
News..................... News features breaking stories, investigative
journalism and commentary, as well as interviews
with newsmakers, politicians and pundits. Salon
News columnists include political commentators Joe
Conason and David Horowitz and sports writer Allen
Barra. In addition, author and broadcaster Arianna
Huffington contributes regularly to the site.
Technology & Business.... Smart, opinionated coverage of Internet news and
digital culture from today's best technology
writers, along with in-depth features about the
business world and the economy. Technology &
Business offers daily feature stories; reviews of
books, hardware, software and web sites; the In
Box, our frequently updated blotter of breaking Net
news; Scott Rosenberg's column of Internet
commentary; and the Free Software Project, a
totally unique approach to book publishing using
the interactivity of the Internet to present Andrew
Leonard's groundbreaking reporting on Linux and the
open source movement.
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Arts & Entertainment..... Arts & Entertainment features movie, music and
television reviews and interviews. The site
includes Joyce Millman's daily Blue Glow and
frequent television features; extended film
coverage including actor and director interviews;
and Real Life Rock Top 10, Greil Marcus' weekly
music column.
Life..................... Life (formerly known as Mothers Who Think) features
articles by thought-provoking writers about family
life, motherhood and women's lives. Includes our
weekly "Mothers Who Think" feature and a weekly
"Style of Life" column of witty, thoughtful
commentary on style and fashion.
Books.................... Books includes ahead-of-the-curve daily book
reviews; interviews with today's most interesting
writers; Book Bag, a weekly dose of must-reads
recommended by celebrated authors; and the Salon
Book Awards, an annual literary event honoring the
year's best books. The Books site is also home to
Garrison Keillor's beloved column of advice on
literature and love, "Ask Mr. Blue."
People................... This site takes a discerning look at celebrity and
the culture of celebrity. People includes Brilliant
Careers, Salon's weekly series of profiles of
today's outstanding achievers; Camille Paglia's
column on culture and politics; and Nothing
Personal, a daily gossip and news column by Amy
Reiter.
Comics................... The site features the works of comic luminaries Tom
Tomorrow, Ruben Bolling, Carol Lay and Keith
Knight.
Politics................. Salon Politics features some of the most in-depth
and hard-hitting political coverage found anywhere,
and hosts daily features like "Bushed," our
opinionated chronicle of the George W. Bush era,
and "Red Vs. Blue," a compendium of popular
observations from across the political spectrum.
The site is home to the writing of Jake Tapper,
Salon's Washington correspondent, and "one of the
best young reporters in D.C.," according to
Business Week.
Sex...................... The site features articles about sex, society and
culture, and features David Thompson's column about
sex in movies and popular culture.
Salon Audio.............. Salon Audio offers hundreds of free recordings of
short stories, novel excerpts, poems, essays,
interviews and more. Authors include such American
legends as Ernest Hemingway and Edgar Allen Poe,
plus contemporary favorites such as John Grisham,
Michael Crichton, Anne Rice, Tom Wolfe, John
Updike, Maya Angelou, Henry Rollins and many more.
The acceptability of websites can be measured by the number of unique
visitors to a site and the number of page views generated by site visitors. To
Salon, a unique user is an individual visitor to its network of web sites while
page views are the total number of complete pages retrieved and viewed by
visitors. Salon's unique visitors to its websites and communities have stayed
constant during the past year. Unique visitors the last three months in its
fiscal year ended March 31, 2001 averaged approximately 3.5 million per month
versus an approximate 3.7 million in the same time period last year when Salon
was aggressively purchasing traffic. The unique visitors generated on average
50.7 million page views per month during the last quarter of the fiscal year
ended March 31, 2001 compared to 24 million in the same time period last year.
The increase in page views demonstrates the acceptability of the Salon brand of
journalism and content acceptance.
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Unique users are audited by Audit Bureau Verification Service (ABVS), an
independent contractor, who identifies and counts the individual Internet
protocol address of each user who visits the Salon network. Salon has been
using the services of ABVS since July 1999. Salon independently prepares unique
visitor tallies by analyzing site server log files. Page views have been
calculated automatically using Accrue software within Salon since December
1999. Prior to that time, the log files were manually downloaded and analyzed.
Salon has two online communities, The Well and Table Talk, which allow users
to discuss Salon content and interact with other users and Salon's editorial
staff. Salon frequently arranges for featured guests, including well-known
commentators and writers, to join discussions. Salon's Table Talk is a free
interactive community and The Well is a paid subscription service. The Well had
approximately 4,200 paying subscribers as of March 31, 2001.
Salon believes that its original, award-winning content allows Salon to
attract and retain users who are younger, more affluent, better educated and
more likely to make online purchases than typical Internet users. Salon
believes its user profile makes its network of web sites and online communities
a valuable media property for advertisers and retailers who are allocating
marketing resources to target consumers online. Web awards that Salon has won
include:
. 2000 "General Excellence in Online Journalism Original to the Web" and
"Enterprise Journalism Original to the Web"--Online Journalism Awards
sponsored by the Online News Association and the Columbia Graduate
School of Journalism
. "Top 100 Websites"--PC Magazine
. "Best Online Magazine"--Yahoo Internet Life
. 1999 "Best Technology Site" and "Best Parenting Site"--Forbes Magazine
. 1999 "David Talbot, one of the 20 Stars of the New News"--Newsweek
. 1999, 1998 & 1997 "Top of the Net"--Yahoo Internet Life
. 1999, 1998 & 1997 Webby Award for "Best Online Magazine"
. 1998 "Best of Multimedia"--Entertainment Weekly
. 1997 "Best of the Web"--Business Week
. 1997 "Best Website"--Entertainment Weekly
. 1997 "Best Online Magazine of the Year"--Advertising Age
. 1996 "Web Site of the Year"--Time Magazine
According to a user survey conducted by Cyber Dialogue, an independent
research firm, the demographics of the Salon user base includes: (a) 88% are
between the ages of 18 and 49; (b) average household income of $71,300; (c) 90%
have earned a college degree, or are pursuing one; (d) 70% have professional,
managerial or technical positions; (e) at least 80% have shopped on the
Internet in the last 6 months; and (f) 91% are online everyday or more often.
The Cyber Dialogue survey also found that Salon's users spend an average of
26.3 minutes each time they visited Salon's network of websites.
Internet Advertising
The Internet was originally thought to be an attractive medium for
advertisers because it would allow more flexibility, interactivity and
measurement capabilities than traditional media, such as newspapers, magazines,
television and radio, and provide users with immediate access to information
about advertisers and their products. It was hoped that the Internet would
allow advertisers to gather demographic information about users and to deliver
targeted messages and products to specific consumer groups. Because of these
factors, advertisers purchased advertising in websites based on the number of
"clicks" to one's advertising or the
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revenue directly generated by the advertising, matrices which could be
quantified by readily available software. In practical terms, this has not
proven to be profitable to publishers such as Salon. As a consequence, Salon
now concentrates its efforts on the basis that the main strength of Internet
advertising closely mimics that of traditional media advertising, that of
forging brand loyalty.
Online advertisers and retailers have spent most of their marketing budgets
on web sites with the highest traffic volume. These sites include portals such
as Yahoo.com, which bring together and organize a wide variety of content,
search engines such as Google.com, which allow users to search for specific
information, and major online media publications such as CNN.com. As Internet
advertising and electronic commerce mature, however, Salon believes online
advertisers and retailers will increasingly spend their marketing dollars on
more focused websites to reach specific demographic groups, as has occurred in
traditional advertising media.
Some predict that a major shift in online advertising spending will occur as
advertisers move media campaigns from generalized web sites toward more
narrowly targeted web sites. Targeted sites provide content on designated
topics, and therefore attract users looking for subject-specific information.
Because targeted sites are usually the direct source of information the user
wants, rather than simply a gateway to other collections of information like a
portal or search engine, these sites are frequently referred to as "destination
sites." Destination sites such as Salon may become attractive to advertisers
and retailers because they allow more seamless integration of marketing
campaigns and product sales with related content, and more effectively target
the advertisers' and retailers' most likely customers.
Revenue Sources
Substantially all of Salon's revenues are derived from the sale of
promotional space on its Internet properties. Services offered range from
short-term advertisements to long-term arrangements, which may include the
development of co-branded, integrated websites. Revenues derived from such
arrangements are recognized during the period which the service is provided,
provided that no significant obligations remain at the end of the period.
Salon's obligations typically include the guarantee of a minimum number of
impressions, or times that an advertisement appears in pages viewed by users of
Salon's websites. To the extent the minimum guaranteed impressions are not
delivered, Salon defers recognition of the corresponding revenue until the
remaining guaranteed impression levels are achieved. One customer, Ask Jeeves,
accounted for 10% of total revenue for the fiscal year ended March 31, 2001.
This customer reduced its level of activity during the fourth quarter of the
fiscal year and Salon believes that the loss of this customer would not have a
material adverse impact on Salon. No customer accounted for 10% or more of
total revenue for the fiscal year eneded March 31, 2000. One customer, Borders
Group Inc., accounted for 13% of total revenue for the fiscal year ended
March 31, 1999.
Salon offers The Well, a paid monthly subscription service, as one of its
web sites. Revenue is recognized ratably over the period that services are
provided. Product sales revenues are recognized upon receipt of payment from a
fulfillment contractor. Salon generates revenue from the licensing of content
which has appeared in Salon's websites. Revenue is recognized ratably over the
contract term for major agreements, or upon receipt of amounts due from minor
agreements. Salon generates income by offering HTML leads from content partners
who provide dynamic headlines. Income is recognized ratably over the term of
the contract.
Advertising revenues include barter revenues, which are the exchange by
Salon of advertising space on Salon's web sites for reciprocal advertising
space on other web sites or the exchange of goods or services. Revenues from
these barter transactions are recorded as advertising revenues at the estimated
fair value of the advertisements delivered and are recognized when the
advertisements are run on Salon's web sites. Barter expenses are recorded when
Salon's advertisements are run on the reciprocal web sites, which is typically
in the same period as when advertisements are run on Salon's Web sites. Barter
revenues represented 0.9%, 17.8% and 16.2% of total revenues for the fiscal
years ended March 31, 2001, 2000 and 1999, respectively. Salon does not expect
to have significant barter revenues in the future.
6
Substantially all of Salon's content, as well as participation in Table Talk
are free of charge to users. On April 25, 2001 Salon launched a paid
subscription service for enhanced features, charging rates of $30 for a one-
year subscription and $50 for a two-year subscription. Based on the company's
market research, 1% to 2% of our reader base may subscribe, resulting in
estimated incremental annual revenue of $900,000 to $1.8 million.
Sales and Marketing
Salon has sales offices in New York City and San Francisco with a staff of
sixteen active employees as of March 31, 2001, down from thirty-six employees
as of March 31, 2000. During the current fiscal year, Salon closed offices in
Los Angeles, CA and Chicago, IL in order to reduce expenses. Due to Salon's
operating losses, Salon has experienced difficulties in hiring and retaining
sales personnel.
During the fiscal year ended March 31, 2000, Salon incurred $7.8 million in
advertising costs to promote and attract viewers to its network of websites.
The targeted campaign consisted of online advertising, traditional print, radio
and television advertising as well as local and national events. During the
fiscal year ended March 31, 2001 Salon incurred $1.2 million in advertising
costs, as it has determined that this type of expenditure was no longer the
preferred method to expand the user base. Salon does not expect to incur any
cash outlays for advertising in the next fiscal year. Salon, however does
intend to continue to utilize the benefits of its agreement with Rainbow Media
Holdings which provides advertising in various television networks without the
use of cash.
Competition
The first half of calendar year 2001 has brought on a weakened economy
affecting both traditional and Internet based businesses. The weakened economy
has resulted in the reduction, deferral or elimination of advertising campaigns
by many advertisers. With this event and the estimate that the top nine
websites receive eighty-five percent of all Internet advertising dollars, Salon
is experiencing strong competition for advertising dollars. Because of these
factors, competitive conditions for Internet advertising dollars are likely to
intensify in the future. Increased competition could result in price
reductions, reduced net revenues, or erosion in market share, any of which harm
Salon's business.
Many of Salon's present and potential competitors are likely to enjoy
substantial competitive advantages, including a larger number of users, greater
brand recognition, ability to offer traditional and Internet-based advertising
mediums and substantially greater financial resources.
If Salon does not compete effectively or if it experiences any pricing
pressures, reduced margins or loss of market share resulting from increased
competition, its business could be adversely affected.
Salon's Strategy
Broaden Revenue Base in Advertising
As of March 31, 2001, Salon has derived its revenues from a customer base of
over 500 advertisers, including a large proportion of e-commerce and Internet
businesses. During the fiscal year ended March 31, 2001 e-commerce or Internet
businesses have cut advertising or have gone out of business without
compensating increases from more established advertisers. It is Salon's intent
to make up this shortfall in the future by selling advertising space to the
more than 4,000 companies that currently advertise on the Internet, and in
particular, well established Fortune 1000 companies. In order to entice these
companies to advertise in Salon's sites, Salon has developed new ad units on
the standard adopted by the Interactive Advertising Bureau and CNET. These new
units are bigger, more visually integrated with the site, optimized for
animation and allow interaction with the viewer. Also, these new units more
closely resemble the traditional creative look of print media and television.
Salon expects to receive higher prices from these ad units as compared to
traditional Internet banner ads.
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Continue To Establish Innovative Advertising and Promotion Programs
Salon has established innovative advertising and promotional programs with
some of its major clients. Salon implemented such a plan at the end of its
fiscal year ended March 31, 2001 and the beginning of its fiscal year ending
March 31, 2002 for Intel Corporation as it launched its MP3 pocket player. The
program included new large-format interactive advertising units on the Salon
Arts & Entertainment site, sponsorship of the Salon Audio Hub, XML links for
Shop Intel promotion of their products and an upcoming on-line promotion giving
away the new MP3 players to selected Salon users. In addition, Salon supplied
Intel with audio spoken word content for the pocket player.
Salon provided an advertising program for Lincoln Mercury for the launch of
its new urban SUV Mountaineer with high impact interstitial ad units on the
Salon site and the first ever "road block" on Salon's site cover as part of an
integrated campaign consisting of advertising, sweepstakes and other consumer
offerings. In a "road block" an advertiser in essence acquires all of the
available ad space on the top and sides of a web page.
Lexus, a multi-year client of Salon, has done a variety of on-line and
offline promotions and currently benefits from unique visual Unicast ads that
mirror their offline TV ads, as well as strong promotional integration with the
site.
Expand Subscription-based Revenues
Salon has been generating $0.5 million of subscription revenue from The Well
the last two fiscal years and Salon plans to increase such revenue. To that
purpose, and to capitalize on its brand appeal, Salon began Salon Premium, a
subscription-based service in April 2001. Salon Premium offers readers who pay
either $30 for a one year subscription or $50 for a two year subscription,
access to exclusive new content; the option to view Salon content without
advertising banners and pop-ups; access to select unabridged content that is
currently offered for free (abridged versions will continue to be available
free for non-subscribers) and the ability to easily download content in text
format, a convenience that will enable readers to view additional Salon
articles when not connected to the Internet. Salon believes it is one of the
few web sites whose readers are numerous, affluent and devoted enough to make
this premium strategy succeed. Salon seeks to convert 1% to 2% of its
approximately 3.5 million monthly readers to this premium subscription program
by April 2002.
Expand Salon's Audience
Building on its strength as a premier Internet content producer, Salon has
established non-revenue generating distribution relationship agreements with
major portals. In past years, these have included NBCi, CBS Market Watch, and
CNET. Many of these agreements are "content-for-carriage," in which Salon
provides its proprietary headlines to a distribution partner and receives
prominent placement of its logo and content on the distribution partner's site,
as well as links back to Salon's network. During the fiscal year ended March
31, 2000, Salon has augmented these relationships by adding wireless innovator
AvantGo, and during the fiscal year ended March 31, 2001 added, Omnisky and
MyPalm by Palm.net. Salon intends to continue to establish similar distribution
agreements as opportunity arise.
As a means of expanding its audience, Salon sends out its headlines to over
600 websites. Salon intends to continue this method as a means to increase
visitors to its websites.
Capitalize on its agreement with Rainbow Media Holdings
In December 1999, Salon entered into a ten-year agreement with Rainbow Media
Holdings, a subsidiary of Cablevision Systems (NYSE: CVC), to receive $11.8
million in advertising credits. The advertising is being provided to Salon
through Rainbow Media Holdings television networks, The Bravo Network,
Independent Film Channel, American Movie Classics, entertainment venues Madison
Square Garden, Radio City Music
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Hall, Clearview Cinemas (movie theatres) and the electronics retailer, The Wiz.
Through its fiscal year ended March 31, 2001, Salon has received $1.6 million
of advertising value from this agreement. Salon intends to continue to utilize
the remaining value of this agreement to continue to promote the Salon brand.
Capitalize on the intrinsic value of its website management software
Salon has developed proprietary software to manage its web sites and to
facilitate the publishing of content within the site. This system has been
designed to optimize the Salon network's user experience and advertising
performance. Salon believes its custom-built, Linux-based platform gives Salon
the ability to store Salon's content in a database and automatically assemble
pages. This system facilitates easier navigation of Salon's web sites as well
as printing, bookmarking and e-mailing of Salon content for users. During
Salon's fiscal year ended March 31, 2001, Salon spent $0.7 million to upgrade
the software so that it could be marketed to other parties. Salon expects to
recognize $0.2 million in revenue during the first quarter of its fiscal year
ending March 31, 2002. Salon is exploring further customers for this product.
Infrastructure and Operations
Salon has created a flexible publishing structure which enables it to
develop its content while responding quickly to news events and taking
advantage of the ease of distribution provided by the Internet. Salon content
is developed on its proprietary software platform and captured in an Oracle
database for reuse in web and other formats. The system allows Salon content to
be easily redistributed to other websites, newspapers, magazines, and
electronic devices.
Salon's websites are supported by a variety of servers using the Windows NT,
Solaris and Linux operating systems. Salon's top technical priority is the fast
delivery of pages to its users. Salon's systems are designed to handle
significant traffic growth by balancing the amount of traffic among multiple
servers. Salon relies on server redundancy to help achieve its goal of 24 hour,
seven-day-a-week site availability. Regular automated backups protect the
integrity of Salon data. During the fiscal year ended March 31, 2001, Salon
significantly revised the design of its websites to improve site navigation and
improve the integration of advertising placement.
Salon servers are maintained by a third-party facility in Sunnyvale,
California who provides bandwidth on demand to meet the fluctuating needs of
Salon's network. The third party offers high-speed connections to the Internet,
helping ensure fast serving and delivery of Salon's websites, and monitors all
servers via human or technical means on a continuous basis. Salon follows
strict password management procedures to protect access to its servers. All of
Salon's servers are supported by uninterruptible power supplies for protection
against power outages.
Proprietary Rights
Salon's success and ability to compete are significantly dependent on its
proprietary content. Salon relies exclusively on copyright law to protect its
content. While Salon actively takes steps to protect its proprietary rights,
such steps may not be adequate to prevent the infringement or misappropriation
of its content. Infringement or misappropriation of Salon's intellectual
property could materially harm Salon's business. Salon also licenses content
from various freelance providers and other third-party content providers. While
Salon attempts to insure that third-party content may be freely licensed to
Salon, other parties may assert claims of infringement against Salon relating
to this content.
Salon has licensed in the past, and expects to license in the future,
proprietary rights such as trademarks and copyrighted material to third
parties. While Salon attempts to insure that the quality of its brand is
maintained by these licensees, its licensees may take actions that adversely
affect the value of the Salon brand or Salon's other proprietary rights. Any
such adverse acts could materially harm Salon's reputation and its business.
9
Salon owns the Internet address www.salon.com. Because www.salon.com is the
address of the main home page to Salon's network of websites and incorporates
Salon's company name, it is a vital part of Salon's intellectual property
assets. Salon does not have a registered trademark on the address, and
therefore it may be difficult for Salon to prevent a third party from
infringing its intellectual property rights in the address. If Salon fails to
adequately protect its rights in the address, or if a third party infringes its
rights in the address or otherwise dilutes the value of www.salon.com, Salon's
business could be harmed.
Employees
As of March 31, 2001, Salon had 100 active full-time employees and one
employee on a leave of absence. None of Salon's employees are represented by a
union. Salon's future success is highly dependent on the ability to attract,
retain and motivate highly skilled employees.
ITEM 2. Properties
Salon leases approximately 20,833 square feet of space at 22 Fourth Street
15th and 16th Floor, San Francisco, California. The rent for this space
currently is approximately $70,000 per month, and the lease expires in December
2009. Approximately 10,735 square feet of the space, representing the 15th
floor, is subleased at $44,729 per month with the term expiring February 2003.
Salon leases approximately 7,000 square feet of space at 126 Fifth Avenue,
New York, New York. The rent for this space currently is approximately $16,000
per month, and the lease expires in December 2004.
Salon leases approximately 3,635 square feet of space at 1642 R Street,
Washington, DC. The rent for this space currently is approximately $3,000 per
month, and the lease expires in February 2006.
Salon leases approximately 9,277 square feet of space at 706 Mission, San
Francisco, California. The rent for this space currently is approximately
$15,500 per month, and the lease expires in July 2002. This entire space is
sublet with a term expiring July 2002 at approximately $16,200 per month.
Salon leases approximately 3,903 square feet of space at 1500 Broadway, New
York, New York. The rent for this space currently is approximately $13,400 per
month, and the lease expires in March 2004. This entire space is sublet with a
term expiring March 2004 at approximately $17,600 per month.
ITEM 3. Legal Proceedings
Salon is not a party to any pending legal proceedings which it believes will
materially affect its financial condition or results of operations.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended March 31, 2001.
Executive Officers of the Registrant
The following sets forth certain information with respect to executive
officers of Salon as of March 31, 2001:
Name Age Position
---- --- --------
David Talbot............ 49 Chairman of the Board, Editor-in-Chief
Michael O'Donnell....... 37 Chief Executive Officer, President
Robert O'Callahan....... 50 Chief Financial Officer, Treasurer and Secretary
Scott Rosenberg......... 41 Senior Vice President, Editorial Operations
Patrick Hurley.......... 39 Senior Vice President, Business Operations
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David Talbot co-founded Salon in 1995. He has served as Editor-in-Chief
since Salon's incorporation. He served as Chief Executive Officer from Salon's
incorporation through April 1999. He became Chairman of the Board in April
1999. From 1990 to 1995, Mr. Talbot was the Arts & Features editor for the San
Francisco Examiner newspaper. Mr. Talbot has co-authored three books and
written for numerous publications including The New Yorker, Rolling Stone and
Playboy. Mr. Talbot holds a bachelor of arts degree in sociology from the
University of California at Santa Cruz.
Michael O'Donnell has served as Salon's President since December 1996. He
became Chief Executive Officer in April 1999. In 1996, he served as Vice
President of Sales and Merchandising at SegaSoft, Inc., a consumer software
publisher. From 1995 to 1996, Mr. O'Donnell was Vice President of Worldwide
Sales at Rocket Science Games, Inc., a consumer software publisher. From 1993
to 1995, he served as Vice President of Retail Sales at Mindscape, Inc., a
consumer software publisher. Mr. O'Donnell holds a bachelor of arts degree in
political science from the University of California at Berkeley.
Robert O'Callahan has served as Chief Financial Officer and Treasurer since
July 2000. Since August 2000 he has also served as Secretary. From July 1999
through July 2000, he served as Director, Worldwide Planning and Treasury with
Banter, Inc., a venture funded software development firm. From January 1998 to
July 1999, Mr. O'Callahan worked for John G. Kinnard & Co. as a securities
research analyst. From August 1997 to December 1997, he worked at Dain
Bosworth, Inc., as a research associate. From 1992 to 1997, Mr. O'Callahan was
Chief Financial Officer of Consan, Inc. a wholesale distributor of digital mass
storage equipment. Mr. O'Callahan holds a master's degree in management, with
concentrations in marketing and finance, from the J.L. Kellogg Graduate School
of Management at Northwestern University, a juris doctor degree from the
University of Washington School of Law, and a bachelor of arts degree from the
University of Washington.
Scott Rosenberg has served as Salon's Senior Vice President, Editorial
Operations since October 2000. From January 1999 until then, he served as Vice
President of Site Development. He also serves as Salon's managing editor and
has held that position since June 1999. Previous to that, he served as Senior
Editor/Technology, a position he held from the founding of Salon in 1995.
Before joining Salon, he was the San Francisco Examiner's movie and theater
critic for nearly 10 years. Mr. Rosenberg holds a bachelor of arts degree from
Harvard University.
Patrick Hurley has served as Salon's Senior Vice President, Business
Operations since October 2000. From March 1999 to October 2000 he served as
Vice President of Marketing. From 1998 to 1999, he served as Salon's Marketing
Director. From 1996 to 1998, he was management supervisor at Hal Riney &
Partners, an advertising agency. From 1994 to 1996, he served as account
supervisor for the J. Walter Thompson advertising agency. Mr. Hurley holds a
bachelor of arts degree in journalism from Marquette University.
11
PART II
ITEM 5. Market for Registrant's Common Equity and Related Matters
Salon's common stock has been quoted on the NASDAQ National Market since its
June 22, 1999 initial public offering under the symbol "SALN." Information with
respect to the quarterly high and low market prices for Salon's common stock
for its fiscal years 2001 and 2000, based on sales transactions reported by the
NASDAQ National Market, is provided below:
Fiscal Year Ended Fiscal Year Ended
March 31, 2001 March 31, 2000
----------------- ------------------
High Low High Low
----------------- --------- --------
For the quarters ended
June 30............................. 4.63 1.06 10.81 9.00
September 30........................ 2.25 1.13 15.13 3.75
December 31......................... 1.69 0.38 9.00 4.25
March 31............................ 1.13 0.22 10.06 4.06
There were 180 holders of record of Salon common stock as of June 8, 2001
with a then closing price of $0.35 per share.
Salon has never declared or paid any cash dividends on its capital stock and
does not expect to pay any cash dividends in the foreseeable future.
ITEM 6. Selected Consolidated Financial Data
Year ended March 31,
------------------------------------
2001 2000 1999 1998 1997
------- ------- ------ ------ ------
Dollar amounts in thousands, except
per share
Net revenues............................. $ 7,202 $ 8,002 $2,921 $1,156 $ 280
Net loss attributable to common
stockholders (1)........................ $19,155 $33,405 $6,504 $3,825 $1,944
Net loss per share attributable to common
stockholders............................ $ 1.48 $ 3.63 $16.63 $10.20 $ 3.84
Weighted average common shares
outstanding used in computing per share
amounts................................. 12,962 9,204 391 375 507
Cash and cash equivalents................ $ 3,047 $17,982 $ 754 $1,926 $2,638
Total assets............................. $ 9,223 $27,400 $7,808 $2,707 $2,834
Capital leases--long-term portion........ $ 325 $ 324 $ -- $ -- $ --
Total long-term liabilities.............. $ 478 $ 473 $ 75 $ 95 $ --
- --------
(1) Net loss for fiscal year ended March 31, 2001 includes a write-down of
long-lived assets of $3,517 due to impairments. Net loss attributable to
common stockholders for fiscal year ended March 31, 2000 includes a
preferred deemed dividend of $11,515 which was the difference between the
offering price of Salon's Series C preferred stock sold in April 1999 and
the deemed fair value of Salon's common stock on the date of the
transaction.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Result
of Operations
Overview
Salon Media Group, Inc. (Salon) is a leading Internet media company that
produces a total network of ten subject-specific, web sites, and two online
communities--The Well and Table Talk. Salon was incorporated in July 1995 and
launched its initial Web sites in November 1995. Salon has approximately 3.5
million unique visitors per month, who recently have generated approximately
50.7 million page views per month. Page views are the total number of complete
pages retrieved and viewed by visitors to Salon's network. A unique user is an
individual visitor to Salon's network.
12
The substantial majority of Salon's revenues are derived from the sale of
promotional space on its Internet properties. Services offered range from
short-term advertisements to long-term arrangements, which may include the
development of co-branded, integrated websites. Revenues derived from such
arrangements are recognized during the period which the service is provided,
provided that no significant obligations remain at the end of the period.
Salon's obligations typically include the guarantee of a minimum number of
impressions, or times that an advertisement appears in pages viewed by users of
Salon's websites. To the extent the minimum guaranteed impressions are not
delivered, Salon defers recognition of the corresponding revenue until the
remaining guaranteed impression levels are achieved.
Salon offers The Well, a paid monthly subscription service, as one of its
web sites. Revenue is recognized ratably over the period that services are
provided. Product sales revenues are recognized upon receipt of payment from a
fulfillment contractor. Salon generates revenue from the licensing of content
which has appeared in Salon's websites. Revenue is recognized ratably over the
contract term for major agreements, or upon receipt of amounts due from minor
agreements. Salon generates income by offering HTML leads from content partners
who provide dynamic headlines. Income is recognized ratably over the term of
the contract.
Advertising revenues include barter revenues, which are the exchange by
Salon of advertising space on Salon's web sites for reciprocal advertising
space on other web sites or the exchange of goods or services. Revenues from
these barter transactions are recorded as advertising revenues at the estimated
fair value of the advertisements delivered and are recognized when the
advertisements are run on Salon's web sites. Barter expenses are recorded when
Salon's advertisements are run on the reciprocal web sites, which is typically
in the same period as when advertisements are run on Salon's Web sites. Barter
revenues represented 0.9%, 17.8% and 16.2% of total revenues for the fiscal
years ended March 31, 2001, 2000 and 1999, respectively.
Substantially all of Salon's content, as well as participation in Table Talk
are free of charge to users. On April 25, 2001 Salon launched a paid
subscription service for enhanced features, charging rates of $30 for a one-
year subscription and $50 for a two-year subscription. Based on the company's
market research, 1% to 2% of Salon's reader base may subscribe, resulting in
estimated incremental annual revenue of $900,000 to $1.8 million.
Production, content and product expenses consist primarily of salaries and
related expenses for Salon's editorial, artistic and production staffs, online
communities staff, Salon Audio staffs, payments to freelance writers and
artists, and telecommunications and computer related expenses for the support
and delivery of Salon's web sites and online communities. Also included in
production, content and product expenses are costs associated with electronic
commerce transactions, including the costs of product inventory and
distribution. This category of costs was not material for the fiscal year ended
March 31, 2001.
Sales and marketing expenses consist primarily of salaries, commissions and
related personnel costs, travel, and other costs associated with Salon's sales
force, as well as advertising, promotional and distribution costs.
Research and development expenses consist primarily of salaries and related
personnel costs associated with the development, testing and enhancement of
Salon's software to manage its websites and to enhance Salon's website, and
support editorial operations. To date, Salon has capitalized $0.7 million of
costs related to enhancing Salon's website management software and has expensed
all costs related to enhancing its websites.
General and administrative expenses consist primarily of salaries and
related personnel costs, accounting and legal fees, and other fees associated
with operating a publicly traded company.
The acquisition of The Well LLC in March 1999 and MP3Lit.com (MP3Lit) in May
2000 resulted in Salon recording goodwill and other intangible assets.
Amortization of such assets is being amortized ratably over the estimated
useful lives of the respective assets, generally five years. During the fiscal
year ended March 31, 2001 Salon determined The Well LLC asset was impaired and
recorded an impairment charge of
13
$1.8 million. During the fiscal year ended March 31, 2001 Salon determined the
MP3Lit.com asset was impaired and recorded an impairment charge of $1.7
million, net of $0.2 million amortization previously recorded.
Write-down of long-lived assets relates to an impairment charge against
goodwill to adjust the carrying value of such assets to the present value of
the expected future cash flows associated with these assets.
Salon has incurred significant net losses and negative cash flows from
operations since its inception. As of March 31, 2001, Salon had an accumulated
deficit of $65.3 million. These losses have been funded primarily through the
issue of preferred stock and Salon's initial public offering in June 1999.
Salon believes that it will incur negative cash flows from operations in the
near future. Although Salon had targeted positive cash flows from operations by
the third quarter of fiscal year 2002, because of the rapid and unexpected
sharp deterioration of the general business climate in recent months, Salon
cannot predict when it will achieve either positive cash flows from operations
or financial reporting profitability in the future.
Salon has not recorded a provision for federal or state income taxes for any
period since inception due to incurring operating losses. At March 31, 2001
Salon had net operating loss carryforwards for federal income tax purposes of
$43.0 million, which expire in the years March 31, 2011 through March 31, 2021.
Salon also has net operating loss carryforwards for state income tax purposes
of $22.5 million which begin to expire in 2004. Utilization of Salon's net
operating loss carryforwards may be subject to a substantial annual limitation
due to ownership change limitations provided by the Internal Revenue Code and
similar state provisions. Such an annual limitation could result in the
expiration of the net operating loss carryforwards before utilization. A
valuation allowance has been established and, accordingly, no benefit has been
recognized for such operating losses and other deferred tax assets. The net
valuation allowance increased $6.0 million during the year ended March 31, 2001
to $17.0 million. Salon believes that, based on a number of factors, the
availability of objective evidence creates sufficient uncertainty regarding the
realization of the deferred tax assets such that a full valuation allowance has
been recorded. These factors include Salon's history of net losses since
inception and expected near-term future losses.
Recent Events
On May 16, 2001 Salon.com changed its name to Salon Media Group, Inc.
In June 2001, Salon received a NASDAQ staff determination that the stock no
longer qualified for listing. Salon has appealed, staying the effect of that
determination. The hearing on this matter is set for July 26, 2001 and the
ultimate result and timing of the decision on appeal are uncertain.
Results of Operations
Fiscal Years Ended March 31, 2001 and 2000
Net Revenues
Salon's net revenue decreased 10% to $7.2 million in the fiscal year ended
March 31, 2001 from $8.0 million in the fiscal year ended March 31, 2000.
Excluding non-cash barter sales of $0.1 million for the fiscal year ended March
31, 2001 and $1.4 million for the fiscal year ended March 31, 2000, sales
increased 9% to $7.1 million compared to $6.6 million. The increase in cash-
generating revenue is attributable to growth of the on-line advertising market
and Salon's position in that market. However, revenues dropped markedly in the
later portion of the fiscal year ended March 31, 2001 as the overall United
States economy contracted and e-commerce or Internet businesses cut advertising
without compensating increases from more established advertisers. Subscription
revenue was $0.5 million for the fiscal years ended March 31, 2001 and March
31, 2000.
14
Operating Expenses
Salon's operating expenses decreased 13% to $26.8 million in the fiscal year
ended March 31, 2001 from $30.9 million in the fiscal year ended March 31,
2000. The decrease is primarily attributable to a decrease in sales and
marketing expenditures of $8.4 million partially offset by a write-down of
long-lived assets of $3.5 million. Salon anticipates a substantial decline in
operating expenses during the fiscal year ending March 31, 2002.
Production, Content and Product Expense
Production, content and product expenses decreased $0.4 million or 4% to
$9.8 million for the fiscal year ended March 31, 2001 from $10.2 million for
the fiscal year ended March 31, 2000. The decrease between years is primarily
attributable to a decline in freelance expenditures of $0.7 million and $1.1
million of stock compensation charges partially offset by an increase in
salaries and related expenses of $1.2 million. The increase in salary related
costs resulted from salary increases in the beginning of the fiscal year and
$0.5 million for Salon Audio, a new division of Salon for the year. Subsequent
to March 31, 2001, Salon reduced salaries by 15% for substantially all of its
employees with an approximate annual savings of $0.5 million. Salon anticipates
a decline in production, content and product expenses during the fiscal year
ending March 31, 2002.
The decrease in stock compensation charges reflects the impact of the
accelerated expense recognition method. Additionally, the termination of
employees during the year resulted in lower stock compensation expense by
reversing the excess of expenses recognized in prior years over vested amounts.
Sales and Marketing Expenses
Sales and marketing expenses decreased $8.4 million or 54% to $7.2 million
for the fiscal year ended March 31, 2001 from $15.6 million for the fiscal year
ended March 31, 2000. The drop in sales and marketing reflects a drop in
advertising expenditures of $6.6 million to $1.2 million from $7.8 million as
Salon determined that this type of expenditure was no longer the preferred
method to expand the user base. Advertising costs include barter transactions
of $0.1 million for the fiscal ended March 31, 2001 and $1.4 million for the
fiscal year ended March 31, 2000. In January 2000 Salon issued 1,125,000 shares
of common stock to an advertiser for which Salon recorded an advertising
receivable of $8.1 million. Salon is amortizing this amount over the ten year
period for which advertising services will be provided and recognized expenses
of $0.8 million for the fiscal year ended March 31, 2001 and $0.2 million for
the fiscal year ended March 31, 2000. Salon anticipates a decline in marketing
expenses during the fiscal year ending March 31, 2002, with the exception of
the non-cash expenses for advertising services, which will remain stable.
The decrease in expenses between fiscal years March 31, 2001 and March 31,
2000 includes a reduction in stock compensation of $0.9 million to $0.1
million. The decrease in stock compensation charges reflects the impact of the
accelerated expense recognition method. Additionally, the termination of
employees during the year resulted in lower stock compensation expense by
reversing the excess of expenses recognized in prior years over vested amounts.
Subsequent to March 31, 2001, Salon reduced salaries by 15% for
substantially all of its employees with an approximate annual savings of $0.1
million.
Research and Development Expenses
Research and development expenses were $1.6 million for both fiscal years
ended March 31, 2001 and March 31, 2000. Increases in salaries and other
expenses of $0.2 million were offset by a $0.2 million decrease in stock
compensation expense. Subsequent to March 31, 2001, Salon reduced salaries by
15% for substantially all of its employees with an approximate annual savings
of $0.1 million. Salon anticipates a substantial decline in research and
development expenses during the fiscal year ending March 31, 2002.
15
During the fiscal year ended March 31, 2001 Salon incurred and capitalized
$0.7 million of costs associated with developing its proprietary software used
to manage content on websites which Salon intends to market in future periods.
No comparable expenditures were incurred during the fiscal year ended March 31,
2000. Expenditures were classified as a component of "Property and equipment,
net" in its Consolidated Balance Sheet as of March 31, 2001. Salon does not
expect to incur additional costs in future periods.
General and Administrative Expenses
General and administrative expenses increased $1.0 million or 40% to $3.5
million for fiscal year ended March 31, 2001 from $2.5 million for the fiscal
year ended March 31, 2000. Of the increase, $0.6 million was attributable to
expenses incurred in connection with seeking venture capital and customers for
Salon's proprietary software utilized in managing websites. Subsequent to March
31, 2001, Salon reduced salaries by 15% for substantially all of its employees
with an approximate annual savings of $0.1 million. Salon anticipates a decline
in general and administrative expenses during the fiscal year ending March 31,
2002.
Amortization of Intangibles
Amortization of intangibles increased 18% to $1.2 million for fiscal year
ended March 31, 2001 from $1.0 million in fiscal year ended March 31, 2000. The
increase of $0.2 million is attributable to the amortization of goodwill and
other intangible assets resulting from the acquisition of MP3Lit in May 2000.
Write-down of Long-lived Assets
In May 2000, Salon acquired MP3Lit, a website dedicated to offering spoken
word and audio literature recordings in the MP3 format. The excess of the
purchase price over the fair value of the net tangible and identifiable
intangible assets acquired resulted in $1.9 million of goodwill. During the
fiscal year ended March 31, 2001 Salon determined that no significant income
could be generated in the foreseeable future from the sale of digital
downloadable spoken word recordings which was Salon's original intent in
acquiring MP3Lit. Accordingly, Salon determined that this asset was impaired
and recorded an impairment charge of $1.7 million during the fiscal year ended
March 31, 2001, net of $0.2 million amortization previously recorded.
In March 1999 Salon acquired The Well LLC, an online community. The excess
of the purchase price over the fair value of the net tangible assets acquired
resulted in $3.6 million of goodwill and $1.6 million of other intangible
assets. During the fiscal year ended March 31, 2001 Salon determined that
future cash flows could not justify the current carrying value of The Well's
goodwill and recorded an impairment charge in the fourth quarter of $1.8
million, representing the difference between the carrying value and the
discounted net present value of the expected future net cash flows.
Interest Income
Interest income dropped $0.5 million to $0.6 million for the fiscal year
ended March 31, 2001 compared to $1.1 million for the fiscal year ended March
31, 2000. The decrease between years is primarily attributable to a decrease in
cash between periods as Salon has been utilizing its cash to fund operations.
Preferred Deemed Dividend
During the fiscal year ended March 31, 2000, Salon recorded a preferred
deemed dividend of $11.5 million which was the difference between the offering
price of Salon's Series C preferred stock sold in April 1999 and the deemed
fair value of Salon's common stock on the date of the transaction. No
comparable transaction occurred during the fiscal year ended March 31, 2001.
16
Net Loss Attributable to Common Stockholders
As a result of the above factors, Salon recorded a net loss attributable to
common stockholders of $19.2 million or $1.48 per share for the fiscal year
ended March 31, 2001 compared to a net loss of $33.4 or $3.63 per share for the
fiscal year ended March 31, 2000.
Liquidity and Capital Resources
Since its inception Salon has primarily financed its operations through
private placement of convertible preferred stock and its initial public
offering of common stock. As of March 31, 2001, Salon had $3.0 million in cash
and cash equivalents which was originally obtained through Salon's initial
public offering in June 1999 and the sale of additional common stock in July
1999.
Net cash used in operations was $13.4 million for the fiscal year ended
March 31 2001, compared to $16.8 million for the fiscal year ended March 31,
2000. The principal use of cash during the fiscal year ended March 31, 2001 was
to fund the $19.2 million net loss after taxes for the year, partially offset
by non-cash charges of $6.9 million.
Net cash used in investing activities totaled $1.4 million for the fiscal
year ended March 31, 2001, compared to $1.6 million for fiscal year ended March
31, 2000. During the fiscal year ended March 31, 2001, net cash used in
investing activities consisted primarily of $0.4 million cash consideration for
the MP3Lit acquisition and $0.7 million to fund software development.
Investment activities for the fiscal year ended March 31, 2000 consisted mainly
of purchases of property and equipment.
Net cash from financing activities decreased from an inflow of $35.6 million
for the fiscal year ended March 31, 2000 to an outflow of $0.1 million for the
fiscal year ended March 31, 2001. The cash used in financing activities during
the fiscal year ended March 31, 2001 was primarily for the repayment of leases
and bank borrowings of $0.2 million and $0.1 million, respectively, offset by
cash generated from the exercise of common stock options and employee stock
purchase activity. The cash provided by financing activities during the fiscal
year ended March 31, 2000 was primarily from the net proceeds from the issuance
of preferred stock and common stock warrants and the net proceeds from the
issuance of common stock during Salon's initial public offering.
On September 23, 1999, Salon obtained a revolving line of credit from a bank
for a maximum amount of $2.0 million which included a sub-limit of $1.5 million
for the issuance of standby letters of credit. Borrowings under the agreement
were based on 80% of eligible receivables with interest at the bank's prime
rate. The agreement expired on December 31, 2000 with no amounts then
outstanding and was not renewed by the bank. Standby letters of credit
previously issued by the bank were subsequently collateralized by like amounts
in certificates of deposit with the bank. At March 31, 2001 Salon had $0.9
million in certificates of deposit as collateral for the standby letters of
credit, classified as a component of "Other assets" in its Consolidated Balance
Sheet. Subsequent to March 31, 2001 letters of credit outstanding were reduced
to $0.8 million as were the collateral certificates of deposit.
Salon currently anticipates that its available cash resources will be
sufficient to meet its anticipated needs for working capital and capital
expenditures for approximately the next three to five months, depending on the
revenues generated during the period, the continuing reduction of operating
expenses and the effect of a 15% reduction in employee salaries which was
effective April 1, 2001. Salon will need to raise additional funds, however, to
fund its operations at current levels. If Salon raises additional funds by
selling equity securities, or securities which convert into equity securities,
the percentage ownership of Salon's stockholders will be reduced and its
stockholders will most likely experience additional dilution. Given Salon's
recent low stock price, any dilution will likely be very substantial for
existing shareholders. Salon cannot be sure that additional financing will be
available on terms favorable to Salon, or at all. If adequate funds are not
available on acceptable terms, if at all, Salon's ability to continue
operations, react to competitive pressures, or take
17
advantage of unanticipated opportunities will be substantially limited. In
addition, Salon's business could be significantly adversely affected.
Fiscal Years Ended March 31, 2000 and 1999
Net Revenues
Salon's net revenues increased 174% to $8.0 million in the fiscal year ended
March 31, 2000 from $2.9 million in the fiscal year ended March 31, 1999. The
increase in net revenues is primarily attributable to an increase in
advertisement revenues of $5.7 million which was fueled by the rapid expansion
of Internet based businesses attempting to acquire market share by spending
heavily on advertising. Also included in revenue was $0.5 million of
subscription revenue generated from the acquisition of The Well in March 1999.
Net revenues include revenues recognized from advertising barter
transactions of $1.4 million in the fiscal year ended March 31, 2000 and $0.5
million in the fiscal year ended March 31, 1999.
Operating Expenses
Salon's operating expenses increased 236% to $30.9 million in the fiscal
year ended March 31, 2000 from $9.2 million in the fiscal year ended March 31,
1999. The increase in operating expenses for the fiscal year ended March 31,
2000 is primarily attributable to increased production, content and product
expenses of $5.7 million, as well as increased sales and marketing expenses of
$11.9 million. The increase in operating expenses is primarily attributable to
an increase in the scope of Salon's content and communities, expanding its
marketing efforts and further developing its technology and infrastructure.
Production, Content and Product Expense
Production, content and product expenses increased 126% to $10.2 million in
the fiscal year ended March 31, 2000 from $4.5 million in the fiscal year ended
March 31, 1999. The increase in production, content and product expenses for
the fiscal year ended March 31, 2000 is attributable to Salon's increased
staffing to expand the scope and distribution of its web sites and online
communities and includes recognizing $1.2 million of stock compensation
expense.
Sales and Marketing Expenses
Sales and marketing expenses increased 326% to $15.6 million in the fiscal
year ended March 31, 2000 from $3.7 million in the fiscal year ended March 31,
1999. Sales and marketing expenses include expenses incurred from barter
transactions of $1.4 million for the fiscal year ended March 31, 2000 and $0.5
million for the fiscal year ended March 31, 1999. The increase in sales and
marketing expenses is primarily attributable to an increase in advertising of
$6.5 million for the fiscal year ended March 31, 2000 compared to $0.6 million
for the fiscal year ended March 31, 1999, and additional sales and marketing
personnel expenses of $3.8 million for the fiscal year ended March 31, 2000
compared to $1.1 million for the fiscal year ended March 31, 1999.
Research and Development Expenses
Research and development expenses increased 227% to $1.6 million in the
fiscal year ended March 31, 2000 from $0.5 million in the fiscal year ended
March 31, 1999. The increase in research and development expenses is primarily
attributable to salary and payroll related expenses for new technological
developments undertaken by Salon, including the design and development of
software to manage Salon's websites and to a lesser extent, an increase in
technical support staff.
18
General and Administrative Expenses
General and administrative expenses increased 354% to $2.5 million in the
fiscal year ended March 31, 2000 from $0.6 million in the fiscal year ended
March 31, 1999. The increase in general and administrative expenses is
primarily attributable to salary and related expenses for additional personnel,
higher legal, accounting and other professional fees, and other corporate costs
associated with operating as a publicly traded company.
Amortization of Intangibles
Amortization of intangibles consists of the costs associated with the
amortization of goodwill and intangible assets resulting from the March 1999
acquisition of The Well which are being amortized on a straight-line basis over
five years. Amortization expenses for the fiscal year ended March 31, 2000 were
$1.0 million. There was no similar amortization expense in 1999.
Interest Income
Interest income consists primarily of interest earned on Salon's cash, cash
equivalents and short-term investments. Other income increased to $1.0 million
in the fiscal year ended March 31, 2000 from $45,000 in the fiscal year ended
March 31, 1999. The increase in interest income is primarily attributable to an
increase in the amount of interest earned by Salon due to an increase in
Salon's cash and cash equivalents resulting from Salon's initial public
offering on June 22, 1999.
Preferred Deemed Dividend
The preferred deemed dividend of $11.5 million for the fiscal year ended
March 31, 2000 is the difference between the offering price of Salon's Series C
preferred stock sold in April 1999 and the deemed fair value of Salon's common
stock on the date of the transaction. This is a one-time non-cash expense.
Salon recorded a $0.3 million charge for a similar transaction in its fiscal
year ended March 31, 1999.
Net Loss Attributable to Common Stockholders
Due to the above reasons, Salon recorded a net loss attributable to common
stockholders of $33.4 million or $3.63 per share for the fiscal year ended
March 31, 2000 compared to a net loss of $6.5 million or $16.63 per share for
same period in 1999.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No.133, "Accounting for
Derivatives and Hedging Activities." (SFAS No. 133), SFAS No.133, as amended,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No.133, requires that all derivative instruments be
recognized at fair value as either assets or liabilities in the statement of
financial position. The accounting for changes in the fair value (i.e., gains
or losses) of a derivative instrument depends on whether it has been designated
and qualifies as a part of a hedging relationship and further, on the type of
hedging relationship. Salon will adopt SFAS No. 133, as amended, effective
April 1, 2001 but does not expect that it will have a material impact on its
consolidated financial statements. To date, Salon has not engaged in derivative
or hedging activities.
19
Factors That May Affect Our Future Results and Market Price of Stock
Salon lacks significant revenues, and has a history of losses
Salon has not achieved profitability and expects to incur operating losses
in the near future. If and when Salon does achieve profitability, we may not be
able to sustain or increase profitability on a quarterly or annual basis in the
future. If our revenues grow more slowly than we anticipate or if our operating
expenses exceed our expectations, financial results will most likely be
severely harmed and the ability of Salon to continue its operations will be
seriously jeopardized.
Additional financing may not be available
Salon will need to raise additional funds within the next three to five
months to fund operations at current levels, and to maintain its network of web
sites and on-line communities. If Salon raises additional funds by selling
equity securities, or securities which convert into equity securities, the
percentage ownership of Salon's stockholders will be reduced and its
stockholders will most likely experience additional dilution. Given Salon's
recent low stock price, any dilution will likely be very substantial for
existing shareholders. Salon cannot be sure that additional financing will be
available on terms favorable to Salon, or at all. If adequate funds are not
available on acceptable terms, if at all, Salon's ability to continue
operations, react to competitive pressures, or take advantage of unanticipated
opportunities will be substantially limited. In addition, Salon's business
could be significantly adversely affected. In the event that Salon is unable to
increase revenue levels or financing is unavailable, management will have to
reduce its workforce, reduce discretionary costs, and reduce the size of its
web site and corresponding web site offerings to match revenue levels.
Because we have a limited operating history, it is difficult to evaluate our
business and prospects
We were originally incorporated in July 1995 and launched our initial
websites in November 1995. Because we have a limited operating history, one
must consider the risks and difficulties frequently encountered by early-stage
companies like Salon in new and rapidly evolving markets, including the market
for advertising and commerce on the Internet. Future growth and success will
depend substantially upon our ability to attract and retain a large number of
users to our websites and online communities, to develop subscription
offerings, to increase advertising and sponsorship sales based on that audience
and to meet the challenges described in the risk factors set forth below.
Our quarterly operating results are volatile and may adversely affect our stock
price
Our future revenues and operating results are likely to vary significantly
from quarter to quarter due to a number of factors, many of which are outside
our control, and any of which could severely harm our business. These factors
include:
. our ability to attract and retain advertisers, sponsors, subscribers and
electronic commerce sponsors;
. our ability to attract and retain a large number of users;
. the introduction of new Web sites, services or products by us or by our
competitors;
. the timing and uncertainty of our advertising and sponsorship sales
cycles;
. the mix of advertisements and sponsorships sold by us or our
competitors;
. the economic and business cycle and the recovery speed;
. the level of Internet usage;
. our ability to attract, integrate and retain qualified personnel;
. our ability to successfully integrate operations and technologies from
acquisitions or other business combinations;
20
. technical difficulties or system downtime affecting the Internet
generally or the operation of our Web sites; and
. the amount and timing of operating costs and capital expenditures
relating to the expansion of our business operations and infrastructure.
In order to attract and maintain our user base, we may incur expenditures on
sales and marketing, content development, technology and infrastructure. These
types of expenditures are planned or committed in advance and in anticipation
of future revenues. If our revenues in a particular quarter are lower than we
anticipate, we may be unable to reduce spending in that quarter. As a result,
any shortfall in revenues would likely harm our quarterly operating results.
Due to the factors noted above and the other risks discussed in this
section, one should not rely on quarter-to-quarter comparisons of our results
of operations as an indication of future performance. It is possible that in
some future periods results of operations may be below the expectations of
public market analysts and investors. If this occurs, the price of our common
stock may decline.
We depend on advertising sales for substantially all of our revenues, and our
inability to increase advertising revenues will harm our business
Revenues for the foreseeable future depend substantially on sales of
advertising. In order to increase revenues, Salon needs to attract additional
significant advertisers on an ongoing basis. We may not be able to attract or
retain a sufficient number of advertisers in the future, and if we cannot, our
business would likely be severely harmed. If we do not sell a sufficient number
of advertisements or do not engage a sufficient number of advertisers during a
particular period, our business could be severely harmed.
Increasing our advertising revenues depends upon many factors, including
whether we will be able to:
. successfully sell and market our network to advertisers and sponsors;
. increase our user base;
. increase the amount of revenues we receive per advertisement;
. increase awareness of the Salon brand;
. successfully sell new ad units and formats;
. target advertisements and electronic commerce opportunities to users
with appropriate interests;
. accurately measure the number and demographic characteristics of our
users; and
. retain sales personnel.
Our revenues depend on a limited number of advertisers and sponsors who are not
subject to long-term agreements, and the loss of a number of these advertisers
and sponsors will harm our operating results
Historically, we have relied on a small number of advertisers and
advertising sponsors for a significant percentage of our revenues. The loss of
any of our significant advertisers or advertising sponsors could harm our
business. We anticipate that our financial results in any given period will
continue to significantly depend on revenues from a small number of advertisers
and sponsors.
The length of our sales cycles is uncertain and variable and may lead to
shortfalls in revenues and fluctuations in our operating results
Our dependence on advertising subjects us to the risk of revenue shortfalls
because the sales cycles for advertising vary significantly, and during these
cycles we may expend substantial funds and management resources while not
obtaining advertising revenues. If sales are delayed or do not occur, our
financial results for
21
a particular period may be harmed. The time between the date of initial contact
with a potential customer and the signing of an advertising order may range
from as little as one week to up to nine months. Sales of advertising are
subject to factors over which we have little or no control, including:
. advertisers' and sponsors' budgets;
. internal acceptance reviews by advertisers and their agencies;
. the timing of completion of advertisements and sponsorships; and
. the possibility of cancellation or delay of projects by advertisers or
sponsors.
We must determine whether to establish or maintain distribution relationships
to attract more users to our network
In past periods we have depended on distribution relationships with high-
traffic Web sites to increase our user base. There has been intense competition
for relationships with these sites, and we may not be able to, or want to,
enter into such relationships on favorable terms or at all. Even if we enter
into distribution relationships with these Web sites, their sites may not
attract significant numbers of users, and our Web sites may not attract
additional users from these relationships. Moreover, we have paid, and may in
the future pay, significant fees to establish these relationships.
We must continually develop compelling content to attract Internet users
Our success depends upon our ability to attract and retain a large number of
users by delivering original and compelling Internet content and services. If
we are unable to develop content and services that allow us to attract, retain
and expand a loyal user base possessing high-value demographic characteristics,
we will be unable to generate advertising revenues or enter into sponsorships,
and our revenues and operating results will be severely harmed. The content and
services we provide on our Web sites may not appeal to a sufficient number of
Internet users to generate advertising revenues or attract sponsorships. Our
ability to develop compelling content depends on several factors, including:
. the quality and number of writers and artists who create content for
Salon;
. the quality of our editorial staff; and
. the technical expertise of our production staff.
Consumer tastes and preferences change rapidly and we may not be able to
anticipate, monitor, and successfully respond to these changes to attract and
retain a sufficient number of users for our network of Web sites. Internet
users can freely navigate and instantly switch among a large number of Web
sites, many of which offer content and services that compete with Salon. In
addition, many Web sites offer very specific, highly-targeted content that
could have greater appeal than our network to particular subsets of our target
user base.
The controversial content of our Web sites may limit our revenues from
advertising, advertising sponsorships or electronic commerce sponsorships
Many of our Web sites contain, and will continue to contain, content that is
politically and culturally controversial. As a result of this content, current
and potential advertisers and sponsors may refuse to do business with us. Our
outspoken stance on political issues has and may continue to result in negative
reactions from some users, commentators and other media outlets.
Our promotion of the Salon brand must be successful in order to attract and
retain users as well as advertisers, sponsors and strategic partners
The success of the Salon brand depends largely on our ability to provide
high quality content and services. If Internet users do not perceive our
existing content and services to be of high quality, or if we introduce new
22
content and services or enter into new business ventures that are not favorably
perceived by users, we may not be successful in promoting and maintaining our
brand. Any change in the focus of our operations creates a risk of diluting our
brand, confusing consumers and decreasing the value of our user base to
advertisers. If we are unable to maintain or increase the Salon brand, our
business could be severely harmed.
We need to hire, integrate and/or retain qualified personnel because these
individuals are important to our growth
Our success significantly depends on key editorial and design personnel. In
addition, because our users must perceive the content of our Web as having been
created by credible and notable sources, our success also depends on the name
recognition and reputation of our editorial staff, in particular David Talbot,
Salon's founder and Editor-in-Chief.
Our future success depends to a significant extent on the continued services
of key personnel, particularly, David Talbot, Salon's Editor-in-Chief and
Michael O'Donnell, Chief Executive Officer. We currently have no employment
agreement with Mr. Talbot and we do not maintain "key person" life insurance
for any of our personnel. The loss of the services of Mr. Talbot, Mr.
O'Donnell, or other key employees would likely have a significantly adverse
effect on our business.
Due to recurring operating losses, we may experience difficulty in hiring
and retaining highly skilled employees with appropriate qualifications. We may
be unable to retain our current key employees or attract, integrate or retain
other qualified employees in the future. Additionally, it is often more
difficult to attract employees once a company's stock is publicly traded
because the exercise price of equity awards such as stock options are based on
the public market, which is highly volatile. If we do not succeed in attracting
new personnel or integrating, retaining and motivating our current personnel,
our business could be harmed.
The integration of new management personnel may interfere with our operations
During the fiscal year, we have hired new management personnel and made
management team changes. To integrate into Salon, new individuals must spend a
significant amount of time learning our business model and management system in
addition to performing their regular duties. Accordingly, the integration of
new personnel has resulted in and will continue to result in some disruption to
our ongoing operations.
We may expend significant resources to protect our intellectual property rights
or to defend claims of infringement by third parties, and if we are not
successful we may lose rights to use significant material or be required to pay
significant fees
Our success and ability to compete are significantly dependent on our
proprietary content. We rely exclusively on copyright law to protect our
content. While we actively take steps to protect our proprietary rights, these
steps may not be adequate to prevent the infringement or misappropriation of
our content. Infringement or misappropriation of our content or intellectual
property could severely harm our business. We also license content from various
freelance providers and other third-party content providers. While we attempt
to insure that this content may be freely licensed to us, other parties may
assert claims of infringement against us relating to this content.
We may need to obtain licenses from others to refine, develop, market and
deliver new services. We may not be able to obtain any such licenses on
commercially reasonable terms or at all or rights granted pursuant to any
licenses may not be valid and enforceable.
In April 1999 we acquired the Internet address www.salon.com. Because
www.salon.com is the address of the main home page to our network of Web sites
and incorporates our company name, it is a vital part of our intellectual
property assets. We do not have a registered trademark on the address, and
therefore it may be difficult for us to prevent a third party from infringing
our intellectual property rights in the address. If we fail
23
to adequately protect our rights in the address, or if a third party infringes
our rights in the address or otherwise dilutes the value of www.salon.com, our
business could be harmed.
Our technology development efforts may not be successful in improving the
functionality of our network which could result in reduced traffic on our
network
We have developed a proprietary online publishing system. If this system
does not work as intended, or if we are unable to continue to develop this
system to keep up with the rapid evolution of technology for content delivery
on the Internet, our network of Web sites may not operate properly which could
harm our business. Additionally, software product design, development and
enhancement involves creativity, expense and the use of new development tools
and learning processes. Delays in software development processes are common, as
are project failures, and either factor could harm our business. Moreover,
complex software products like our online publishing system frequently contain
undetected errors or shortcomings, and may fail to perform or scale as
expected. Although we have tested and will continue to test our publishing
system, errors or deficiencies may be found in the system that may impact our
business adversely.
We rely on third parties for several critical functions relating to delivery of
advertising and our Web site performance, and the failure of these third
parties to supply these services in an efficient manner could limit our growth
and impair our business
We rely on a number of third party suppliers for various services, including
Web hosting, advertising delivery software, Internet traffic measurement
software and electronic commerce fulfillment services. While we believe that we
could obtain these services from other qualified suppliers on similar terms and
conditions, a disruption in the supply of these services by our current
suppliers could severely harm our business.
We use third-party software to manage and measure the delivery of
advertising on our network of Web sites. This type of software may fail to
perform as expected. If this software malfunctions or does not deliver the
correct advertisements to our network, our advertising revenues could be
reduced, and our business could be harmed.
We use third-party software to measure traffic on our network of Web sites.
This type of software does not always perform as expected. If this software
malfunctions or does not accurately measure our user traffic, we may not be
able to justify our advertising rates, and our advertising revenues could be
reduced.
Acceptance and effectiveness of Internet advertising is evolving and, to the
extent it does not grow, our market may not develop adequately and our business
could be harmed
Our success is highly dependent on an increase in the use of the Internet
for advertising and electronic commerce. If the markets for Internet
advertising or electronic commerce do not continue to develop, our business may
be severely harmed.
Currently, demand and market acceptance for Internet advertising is
uncertain and may not increase as necessary for our business to grow or
succeed. Many advertisers have little or no experience using the Internet for
advertising purposes. The adoption of Internet advertising, particularly by
companies that have historically relied on traditional media, requires the
acceptance of a new way of conducting business, exchanging information and
advertising products and services. Potential advertisers may believe Internet
advertising to be undesirable or less effective for promoting their products
and services relative to traditional advertising media. If the Internet
advertising market fails to develop or develops more slowly than we expect, our
business could be harmed. Within the industry, our advertising audience may be
low and inhibit our ability to sell advertising.
Different pricing models are used to sell Internet advertising. It is
difficult to predict which pricing models, if any, will emerge as the industry
standard. This uncertainty makes it difficult to project our future advertising
rates and revenues. Any failure to adapt to pricing models that develop or
respond to competitive pressures
24
could reduce our advertising revenues. Moreover, "filter" software programs
that limit or prevent advertising from being delivered to an Internet user's
computer are commonly available. Widespread use of this software could
adversely affect the commercial viability of Internet advertising and our
business.
Tracking and measurement standards for advertising may not evolve to the extent
necessary to support Internet advertising, thereby creating uncertainty about
the viability of our business model
There are currently no standards for the measurement of the effectiveness of
advertising on the Internet, and the industry may need to develop standard
measurements in order to sustain advertising volume or attract new advertisers.
Standardized measurements may not develop and if they do not, our business
could be harmed. In addition, currently available software programs that track
Internet usage and other tracking methodologies are rapidly evolving. The
development of such software or other methodologies may not keep pace with our
information needs, particularly to support our internal business requirements
and those of our advertisers and sponsors. The absence or insufficiency of this
information could limit our ability to attract and retain advertisers and
sponsors.
It is important to our advertisers and sponsors that we accurately measure
the demographics of our user base and the delivery of advertisements on our Web
sites. We depend on third parties to provide certain of these measurement
services. If they are unable to provide these services in the future, we would
need to perform them ourselves or obtain them from another provider, if
available. This could cause us to incur additional costs or cause interruptions
in our business while we are replacing these services. Companies may choose to
not advertise on Salon or may pay less for advertising or sponsorships if they
do not perceive our measurements or measurements made by third parties to be
reliable.
If use of the Internet does not grow, our business could be harmed
Our success is highly dependent upon continued growth in the use of the
Internet generally and in particular as a medium for content, advertising and
electronic commerce. If Internet usage does not grow, we may not be able to
increase revenues from advertising and sponsorships and this may harm our
business. Internet use by consumers is in an early stage of development, and
market acceptance of the Internet as a medium for content, advertising and
electronic commerce is highly uncertain. A number of factors may inhibit the
growth of Internet usage, including the following. If these or any other
factors cause use of the Internet to slow or decline, our results of operations
could be harmed.
. inadequate network infrastructure;
. security concerns;
. inconsistent quality of service; and
. limited availability of cost-effective, high-speed access.
Increasing competition among Internet content providers could reduce our
advertising sales or market share, thereby harming our business
The market for Internet content is relatively new, rapidly changing and
intensely competitive. We expect competition for Internet content to continue
to increase and if we cannot compete effectively our business could be harmed.
Additionally, we expect the number of Web sites competing for the attention and
spending of users, advertisers and sponsors to continue to increase, because
there are so few barriers to entry on the Internet.
Increased competition could result in advertising or sponsorship price
reductions, reduced margins or loss of market share, any of which could harm
our business. Competition is likely to increase significantly as new companies
enter the market and current competitors expand their services. Many of our
present and potential competitors are likely to enjoy substantial competitive
advantages over us. If we do not compete effectively or if we experience any
pricing pressures, reduced margins or loss of market share resulting from
increased competition, our business could be harmed.
25
If the Internet infrastructure continues to be unreliable, access to our
network may be impaired and our business may be harmed
Our success depends in part on the development and maintenance of the
Internet infrastructure. If this infrastructure fails to develop, or be
adequately maintained, our business would be harmed because users may not be
able to access our network of Web sites. Among other things, development and
maintenance of a reliable infrastructure will require a reliable network
backbone with the necessary speed, data capacity, security and timely
development of complementary products for providing reliable Internet access
and services.
The Internet has experienced, and is expected to continue to experience,
significant growth in number of users and amount of traffic. If the Internet
continues to experience increased numbers of users, frequency of use or
increased bandwidth requirements, the Internet infrastructure may not be able
to support these increased demands or perform reliably. The Internet has
experienced a variety of outages and other delays as a result of damage to
portions of its infrastructure, and could face additional outages and delays in
the future. These outages and delays could reduce the level of Internet usage
and traffic on our network of Web sites. In addition, the Internet could lose
its viability due to delays in the development or adoption of new standards and
protocols to handle increased levels of activity. If the Internet
infrastructure is not adequately developed or maintained, use of our network of
Web sites may be reduced.
Even if the Internet infrastructure is adequately developed and maintained,
we may incur substantial expenditures in order to adapt our services and
products to changing Internet technologies. Such additional expenses could
severely harm our financial results.
We may be held liable for content on our Web sites
As a publisher and distributor of content over the Internet, including user-
generated content on our online communities, we face potential liability for
defamation, negligence, copyright, patent or trademark infringement and other
claims based on the nature and content of the material that is published or
distributed on our network of Web sites. These types of claims have been
brought, sometimes successfully, against online services, Web sites and print
publications in the past. Although we carry general liability insurance, our
insurance may not be adequate to indemnify us for all liability that may be
imposed. Any liability that is not covered by our insurance or is in excess of
our insurance coverage could severely harm our financial condition and
business.
We may be liable for our links to third-party web sites
We could be exposed to liability with respect to the selection of third-
party Web sites that may be accessible through Salon.com. These claims might
include, among others, that by linking to Web sites operated by third parties,
we may be liable for copyright or trademark infringement or other unauthorized
actions by these third-party Web sites. Other claims may be based on errors or
false or misleading information provided on linked sites, including information
deemed to constitute professional advice such as legal, medical, financial or
investment advice. Other claims may be based on our links to sexually explicit
Web sites and our provision of sexually explicit advertisements when this
content is displayed. Our business could be seriously harmed due to the cost of
investigating and defending these claims, even to the extent these claims do
not result in liability. Implementing measures to reduce our exposure to this
liability may require us to spend substantial resources and limit the
attractiveness of our service to users.
Concerns about transactional security may hinder any electronic commerce
programs by subjecting us to liability or by discouraging commercial
transactions over the Internet
A significant barrier to electronic commerce is the secure transmission of
confidential information over public networks. Any breach in our security could
expose us to a risk of loss or litigation and possible liability. We rely on
encryption and authentication technology licensed from third parties to provide
secure transmission of confidential information. As a result of advances in
computer capabilities, new discoveries in the field of
26
cryptography or other developments, a compromise or breach of the algorithms we
use to protect customer transaction data may occur. A compromise of our
security could severely harm our business. A party who is able to circumvent
our security measures could misappropriate proprietary information, including
customer credit card information, or cause interruptions in the operation of
our network of Web sites.
We may be required to expend significant capital and other resources to
protect against the threat of security breaches or to alleviate problems caused
by these breaches. However, protection may not be available at a reasonable
price or at all. Concerns over the security of electronic commerce and the
privacy of users may also inhibit the growth of the Internet as a means of
conducting commercial transactions.
Our efforts to engage in electronic commerce may expose us to product liability
claims
We have and may continue to foster relationships with manufacturers or other
companies to offer certain products or services to users through our network of
Web sites. We have very limited experience in the sale of products online and
the development of relationships with manufacturers or suppliers of these
products. Users who purchase products may sue us if any of the products sold on
our network are defective, fail to perform properly or injure the user.
Liability claims could require us to spend significant time and money in
litigation or to pay significant damages. As a result, any such claims, whether
or not successful, could severely harm our business.
Our systems may fail due to natural disasters, telecommunications failures and
other events, any of which would limit user traffic
Substantially all of our communications hardware and computer hardware
operations for our Web sites are located at Exodus facilities in Sunnyvale,
California. Fire, floods, earthquakes, power loss, telecommunications failures,
break-ins and similar events could damage these systems and cause interruptions
in our services. Computer viruses, electronic break-ins or other similar
disruptive problems could cause users to stop visiting our network of Web sites
and could cause advertisers and sponsors to terminate any agreements with us.
In addition, we could lose advertising revenues during these interruptions and
user satisfaction could be negatively impacted if the service is slow or
unavailable. If any of these circumstances occurred, our business could be
harmed. Our insurance policies may not adequately compensate us for any losses
that may occur due to any failures of or interruptions in our systems. We do
not presently have a formal disaster recovery plan.
Our Web sites must accommodate a high volume of traffic and deliver
frequently updated information. It is possible that we will experience systems
failures in the future and that such failures could harm our business. In
addition, our users depend on Internet service providers, online service
providers and other Web site operators for access to our Web sites. Many of
these providers and operators have experienced significant outages in the past,
and could experience outages, delays and other difficulties due to system
failures unrelated to our systems. Any of these system failures could harm our
business.
Hackers may attempt to penetrate our security system; online security breaches
could harm our business
Consumer and supplier confidence in our web sites depends on maintaining
relevant security features. Security breaches also could damage our reputation
and expose us to a risk of loss or litigation. Experienced programmers or
"hackers" have successfully penetrated sectors of our systems and we expect
that these attempts will continue to occur from time to time. Because a hacker
who is able to penetrate our network security could misappropriate proprietary
information or cause interruptions in our products and services, we may have to
expend significant capital and resources to protect against or to alleviate
problems caused by these hackers. Additionally, we may not have a timely remedy
against a hacker who is able to penetrate our network security. Such security
breaches could materially adversely affect our company. In addition, the
transmission of computer viruses resulting from hackers or otherwise could
expose us to significant liability. Our insurance policies may not be adequate
to reimburse us for losses caused by security breaches. We also face risks
associated with security breaches affecting third parties with whom we have
relationships.
27
Governmental regulation and legal uncertainties of the Internet may restrict
our business or raise its costs
There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. Laws and regulations may be adopted
in the future, however, that address issues including content, copyrights,
distribution, antitrust matters, user privacy, pricing, and the characteristics
and quality of products and services. An increase in regulation or the
application of existing laws to the Internet could significantly increase our
costs of operations and harm our business. For example, the Communications
Decency Act of 1996 sought to prohibit the transmission of certain types of
information and content over the Web. Additionally, several telecommunications
companies have petitioned the Federal Communications Commission to regulate
Internet service providers and online service providers in a manner similar to
long distance telephone carriers and to impose access fees on these companies.
Imposition of access fees could increase the cost of transmitting data over the
Internet. Moreover, it may take years to determine the extent to which existing
laws relating to issues such as property ownership, obscenity, libel and
personal privacy are applicable to the Internet or the application of laws and
regulations from jurisdictions whose laws do not currently apply to our
business.
Privacy concerns could impair our business
We have a policy against using personally identifiable information obtained
from users of our site and services without the user's permission. In the past,
the Federal Trade Commission has investigated companies that have used
personally identifiable information without permission or in violation of a
stated privacy policy. If we use this information without permission or in
violation of our policy, we may face potential liability for invasion of
privacy for compiling and providing information to our corporate customers and
electronic commerce merchants. We voluntarily register members in order to
tailor content to them and assist advertisers in fulfilling advertising
campaigns. However, privacy concerns may cause users to resist providing the
personal data necessary to support this capability. Even the perception of
security and privacy concerns, whether or not valid, may indirectly inhibit use
of registration at our site. In addition, legislative or regulatory
requirements may heighten these concerns if businesses must notify Internet
users that the data may be used by marketing entities to direct product
promotion and advertising to the user. Other countries and political entities,
such as the European Union, have adopted such legislation or regulatory
requirements. The United States may adopt similar legislation or regulatory
requirements. If consumer privacy concerns are not adequately addressed, our
business, financial condition and results of operations could be materially
harmed.
Possible state sales and other taxes could adversely affect our results of
operations
We generally do not collect sales or other taxes in respect of goods sold to
users on our network of Web sites. However, one or more states may seek to
impose sales tax collection obligations on out-of-state companies, including
Salon, which engage in or facilitate electronic commerce. A number of proposals
have been made at the state and local level that would impose additional taxes
on the sale of goods and services through the Internet. Such proposals, if
adopted, could substantially impair the growth of electronic commerce and could
reduce our ability to derive revenue from electronic commerce. Moreover, if any
state or foreign country were to successfully assert that we should collect
sales or other taxes on the exchange of merchandise on our network, our
financial results could be harmed.
Our stock may be delisted from the NASDAQ National Market
In connection with our listing on The NASDAQ National Market (NASDAQ) we
must maintain compliance with several requirements related to the trading price
of our stock, our financial condition and our periodic reporting with the
Securities and Exchange Commission (SEC) among other issues. In the event that
we are not able to comply with the NASDAQ requirements we may be delisted from
the NASDAQ. On June 13, 2001, we received a notice from NASDAQ that our common
stock would be delisted in connection with our failure to maintain a minimum
bid price of $1.00. We have appealed the NASDAQ determination, which appeal
will be heard on July 26, 2001. Pending the outcome of the appeal, our common
stock will
28
continue to be listed on NASDAQ. We anticipate seeking stockholder approval for
a reverse stock split which would have the effect of raising our stock price
above $1.00 for an indeterminate period of time. A delisting may negatively
impact the value of our stock as stocks trading on the over-the-counter market,
which will most likely be where our stock will be traded, are typically less
liquid and trade with larger variations between the bid and ask price. The loss
of our NASDAQ listing would most likely harm our business and its financial
condition.
Provisions in Delaware law and our charter, stock option agreements and offer
letters to executive officers may prevent or delay a change of control
We are subject to the Delaware anti-takeover laws regulating corporate
takeovers. These anti-takeover laws prevent Delaware corporations from engaging
in a merger or sale of more than 10% of its assets with any stockholder,
including all affiliates and associates of the stockholder, who owns 15% or
more of the corporation's outstanding voting stock, for three years following
the date that the stockholder acquired 15% or more of the corporation's assets
unless:
. the board of directors approved the transaction where the stockholder
acquired 15% or more of the corporation's assets;
. after the transaction where the stockholder acquired 15% or more of the
corporation's assets, the stockholder owned at least 85% of the
corporation's outstanding voting stock, excluding shares owned by
directors, officers and employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held under the plan will be tendered in a tender or exchange
offer; or
. on or after this date, the merger or sale is approved by the board of
directors and the holders of at least two-thirds of the outstanding
voting stock that is not owned by the stockholder.
A Delaware corporation may opt out of the Delaware anti-takeover laws if its
certificate of incorporation or bylaws so provide. We have not opted out of the
provisions of the anti-takeover laws. As such, these laws could prohibit or
delay mergers or other takeover or change of control of Salon and may
discourage attempts by other companies to acquire us.
Our certificate of incorporation and bylaws include a number of provisions
that may deter or impede hostile takeovers or changes of control or management.
These provisions include:
. our board is classified into three classes of directors as nearly equal
in size as possible with staggered three year-terms; and
. special meetings of the stockholders may be called only by the Chairman
of the Board, the Chief Executive Officer or the board.
These provisions may have the effect of delaying or preventing a change of
control.
Our certificate of incorporation and bylaws provide that we will indemnify
officers and directors against losses that they may incur in investigations and
legal proceedings resulting from their services to us, which may include
services in connection with takeover defense measures. These provisions may
have the effect of preventing changes in our management.
In addition, offer letters with executive officers provide for the payment
of severance and acceleration of options upon the termination of these
executive officers following a change of control of Salon. These provisions in
offer letters could have the effect of discouraging potential takeover
attempts.
29
Salon's stock price may fluctuate significantly regardless of Salon's actual
operating performance
Salon's common stock is listed for trading on the NASDAQ National Market.
The trading price of Salon's common stock may be highly volatile. Salon's stock
price may be subject to wide fluctuations in response to a variety of factors,
including:
. actual or anticipated variations in quarterly operating results and
announcements of technological innovations;
. new products or services offered by Salon or its competitors;
. changes in financial estimates by securities analysts;
. conditions or trends in the Internet services industry and the online
content segment in particular;
. Salon's announcement of significant acquisitions, strategic
partnerships, joint ventures or capital commitments;
. additions or departures of key personnel;
. sales of common stock; and
. other events that may be beyond Salon's control.
In addition, the NASDAQ National Market, where most publicly held Internet
companies are traded, has recently experienced extreme price and volume
fluctuations. These broad market and industry factors may materially adversely
affect the market price of Salon's common stock, regardless of Salon's actual
operating performance. In the past, following periods of volatility in the
market price of an individual company's securities, securities class action
litigation often has been instituted against that company. This type of
litigation, if instituted, could result in substantial costs and a diversion of
management's attention and resources.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Salon's exposure to market risk for changes in interest rates relates
primarily to Salon's investment portfolio. Salon places its investments with
high credit issuers in short-term securities with maturities of up to three
months. The portfolio includes only marketable securities with active secondary
or resale markets to ensure portfolio liquidity. Salon has no investments
denominated in foreign country currencies and therefore is not subject to
foreign exchange risk.
30
ITEM 8. Consolidated Financial Statements and Supplementary Data
Page
----
Consolidated Balance Sheets as of March 31, 2001 and 2000................. 32
Consolidated Statements of Operations for the years ended March 31, 2001,
2000, and 1999........................................................... 33
Statements of Stockholders' Equity for the years ended March 31, 2001,
2000, and 1999........................................................... 34
Consolidated Statements of Cash Flows for the years ended March 31, 2001,
2000, and 1999........................................................... 35
Notes to Consolidated Financial Statements................................ 36
Report of Independent Accountants......................................... 51
Selected Quarterly Financial Data (unaudited)............................. 52
31
SALON MEDIA GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
March 31,
------------------
2001 2000
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................ $ 3,047 $ 17,982
Accounts receivable, net................................. 474 2,425
Prepaid expenses and other current assets................ 201 407
-------- --------
Total current assets................................... 3,722 20,814
Property and equipment, net................................ 2,731 2,312
Other assets............................................... 1,375 186
Intangible assets, net..................................... 1,395 4,088
-------- --------
Total assets........................................... $ 9,223 $ 27,400
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities................. $ 2,517 $ 4,1