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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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, 2002
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
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)
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. [X]
The number of outstanding shares of the Registrant's Common Stock, par value
$0.001 per share, on June 10, 2002 was 14,155,276 shares.
Parts of the definitive proxy statement for Registrant's 2002 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
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PAGE
PART I NUMBER
ITEM 1. Business......................................................... 3
ITEM 2. Properties....................................................... 12
ITEM 3. Legal Proceedings................................................ 12
ITEM 4. Submission of Matters to a Vote of Security Holders.............. 12
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters.......................................................... 13
ITEM 6. Selected Consolidated Financial Data............................. 14
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Result of Operations............................................. 15
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk....... 38
ITEM 8. Consolidated Financial Statements and Supplementary Data......... 39
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures............................................ 63
PART III
ITEM 10. Directors and Executive Officers of the Registrant............... 63
ITEM 11. Executive Compensation........................................... 63
ITEM 12. Security Ownership of Certain Beneficial Owners and Management... 63
ITEM 13. Certain Relationships and Related Transactions................... 63
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 64
SIGNATURES................................................................ 67
Consent of Independent Accountants........................................ 68
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. (Salon) believes its plans, intentions
and expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such plans, intentions or expectations will be
achieved. Salon's 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.
Salon's 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 Condition
and Results of Operations" and "Factors That May Affect Salon's Future 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
OVERVIEW
Salon Media Group, Inc. is an Internet media company providing online
news and information for the sophisticated reader. An online pioneer, Salon
offers award-winning journalism from breaking news and in-depth analysis to
provocative commentary on politics, technology, culture and entertainment. Salon
also offers an audio streaming Website, and hosts two online communities -Table
Talk and The Well. 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 Salon adopted the
name Salon Media Group, Inc. Due to Salon's inability to meet the continued
listing requirements of the NASDAQ National Market, effective September 25,
2001, shares of Salon's common stock commenced trading on the NASDAQ SmallCap
Market under the symbol SALNC.
WEBSITES
The main entry and navigation point to Salon's ten Websites is
Salon's home page at www.salon.com. Salon's content provides a continuously
updated array of news, features, interviews and regular columnists and include
the following:
News Salon News features breaking stories, investigative journalism
and commentary, as well as interviews with newsmakers,
politicians and pundits. 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 Website.
3
Technology & Smart, opinionated coverage of Internet news and digital
Business 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 and reviews
of books, hardware, software and Websites.
Arts & Arts & Entertainment features movie, music and television
Entertainment reviews and interviews. The Website includes frequent
television features; extended film coverage including actor and
director interviews; Real Life Rock Top 10, Greil Marcus'
weekly music column; and Masterpiece, a weekly spotlight on a
great work of art, from pop culture to opera.
Life Life features articles by thought-provoking writers about
family life, motherhood and women's lives and issues. Includes
the 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.
People This Website takes a discerning look at celebrity and the
culture of celebrity. People includes Nothing Personal, a daily
gossip and news column by Amy Reiter.
Comics The Website 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
features like "Bushed," an opinionated chronicle of the George
W. Bush era, and "Red Vs. Blue," a compendium of popular
observations from across the political spectrum.
Sex The Website features articles about sex, society and culture,
and features David Thomson's column about sex in movies and
popular culture and the advice column of Cary Tennis.
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.
Salon has two online subscription 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 on The Well.
The Well is a member-only discussion community while Table Talk is available for
all Internet users to read, but only subscribers may post. The two online
communities had approximately 4,400 paying subscribers as of March 31, 2002.
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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 Websites 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 since 1998
include:
2002
"Best 50 Websites" - Time Magazine
2001
"Best Online Magazine" - Yahoo Internet Life
"Top 100 Websites" - PC Magazine
2000
"General Excellence in Online Journalism Original to the Web" - Online
Journalism Awards
"Enterprise Journalism Original to the Web" - Online Journalism Awards
"Best Technology Website" and "Best Parenting Website" - Forbes
1999
"David Talbot, one of the 20 Stars of the New News" - Newsweek
"Best Online Magazine" - Webby Awards
"Top of the Net" - Yahoo Internet Life
1998
"Best Online Magazine" - Webby Awards
"Best of Multimedia" - Entertainment Weekly
"Top of the Net" - Yahoo Internet Life
DEMOGRAPHICS
According to a Spring 2002 survey by @Plan 2000, an independent
research firm, Salon's user base has the following characteristics: (a) 59% are
between the ages of 25 and 49; (b) an average household income of $79,600; (c)
72% have earned a college degree and 35% have earned a post-graduate degree; (d)
66% have professional, managerial or technical positions; (e) 96% shop online;
and (f) 88% are online every day or more often.
The number of unique visitors to a Websites can measure the
acceptability of the Website. To Salon, a unique visitor is an individual
visitor to its network of Websites. Salon's unique visitors to its Websites and
communities have stayed constant at approximately 3.5-3.8 million during the
last two years. Salon determines unique visitors by analyzing Website server log
files. The circulation, as measured by unique visitors, has stayed constant for
two years, despite the growth of Salon Premium -- which relies on making certain
content exclusive (with resulting Website content restriction changes in April
and October 2001) -- suggests that even though some Internet users probably
stopped visiting Salon's Websites rather than subscribe to the full content
package, Salon continues to attract new visitors to its highly acclaimed and
compelling editorial content to maintain Salon's historical circulation levels.
Salon's editorial viewpoint is still widely available in the free portion of the
Website and in the freely available headers of the Premium content. Such free
material comprises an estimated 65-70% of Website content.
5
INTERNET ADVERTISING
Salon now concentrates its efforts on the basis that the main strength
of Internet advertising closely mimics that of traditional media advertising,
forging brand loyalty. The Internet was originally thought to be a unique 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 and created businesses
based on "click through" revenue directly generated by the advertising. In
practical terms, this approach has not proven to be profitable to most
publishers or advertisers.
Salon believes its viewers are quite attractive to traditional
advertisers and brand campaigns. Jupiter Media Metrix reports that there were
52.8 million at-work Internet users in 2001 and projects that there will be 57.7
million at-work Internet users during the calendar year 2002. In November 2001,
the Online Publishers Association, in partnership with Millward Brown
IntelliQuest conducted a study of these Internet users. The study highlighted
that: a) daytime on the Internet is prime time, b) 67% of all executives use the
Internet at work, c) total online media consumption exceeds total from
television, d) the Internet provides a highly desirable media target of young,
highly compensated, highly educated individuals and e) Internet advertising
works with this audience, as the Internet is considered by this group of
individuals to be particularly appropriate for product information and purchase
decisions.
Online advertisers and retailers have spent most of their marketing
budgets on Websites with the highest traffic volume. These Websites 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 Websites toward more
narrowly targeted Websites. Targeted Websites provide content on designated
topics, and therefore attract users looking for subject-specific information.
Because targeted Websites 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 Websites 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.
PAY FOR CONTENT INITIATIVE
Many Internet based companies, including Salon, have determined that a
revenue model based primarily on advertising is incomplete. Advertising revenue
has been adversely impacted by the current weak demand for advertising space
that companies, such as Salon, provide. User subscriptions or a direct consumer
pay for content approach is a new revenue source for Internet content providers,
and new to most Internet users. At the start of its 2002 fiscal year Salon
launched Salon Premium, a paid subscription service. Salon may have been the
first news and culture Website to charge for content but others, notably The
Wall Street Journal and Consumer Reports, have always charged visitors for
access to their features. Since Salon's launch of Salon Premium, other Internet
based content providers (such as
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The Motley Fool and American Greetings Corporation's Egreetings.com Website)
have either begun pay for content initiatives, or are planning such initiatives.
REVENUE SOURCES
Most of Salon's revenues are advertising revenues, derived from the
sale of promotional space on its Internet properties. Services offered range
from short-term advertisements to long-term arrangements, which have included in
the past the development of co-branded, integrated Websites. Revenues derived
from such arrangements are recognized during the period that 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, Lexus,
accounted for 13% of advertising revenue, but only 8% of total revenue for the
year ended March 31, 2002. Salon believes that the loss of this customer would
not have a material adverse impact on Salon. One customer, Ask Jeeves, accounted
for 11% of advertising revenue, but only 10% of total revenue for the fiscal
year ended March 31, 2001 and was not a source of revenue during the year ended
March 31, 2002. No customer accounted for 10% or more of advertising revenue or
total revenue for the fiscal year ended March 31, 2000. Salon has earned
advertising income by offering HTML leads to content partners who provide
dynamic headlines on Salon's Websites, but did not recognize any revenue from
this source during the last three quarters of the year ended March 31, 2002, and
it does not expect this to be a source of revenue in fiscal year 2003.
Salon began offering Salon Premium, a paid subscription service, in
April 2001. Salon Premium's rates are $6 for a one-month subscription, $30 for a
one-year subscription and $50 for a two-year subscription. Benefits of Salon
Premium include access to exclusive new content; the option to view Salon
content without advertising banners, pop-ups or other forms of advertising;
access to select unabridged content that is currently offered for free (abridged
versions are available free for non-subscribers) and the ability to easily
download content in text format, a convenience that enables readers to view
additional Salon articles when not connected to the Internet. In October 2001,
Salon began featuring its unabridged stories found in its News and Politics
Websites exclusively to Salon Premium members. Revenue is recognized ratably
over the subscription period. During the year ended March 31, 2002 in which
Salon Premium operated for approximately eleven months, Salon received $1.1
million in cash from approximately 35,100 subscribers, recognized $0.6 million
of revenue for this service, and recorded $0.5 million as deferred revenue in
its consolidated balance sheet as of March 31, 2002.
Salon offers The Well and Table Talk, monthly subscription services,
for access to on-line discussion forums. Revenue is recognized ratably over the
subscription period. Salon also generates revenue from the licensing of content
that previously appeared in Salon's Websites. Salon has generated minimal income
from product sales for the last three years.
Salon has generated barter revenue in which Salon exchanges advertising
space on its Websites for reciprocal advertising space on other Websites 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 Websites. Barter expenses are recorded when Salon's advertisements are
run on the reciprocal Websites, which is typically in the same period as when
advertisements are run on Salon's Websites. Barter revenues represented none,
0.9%, and 17.8% of total revenues for the fiscal years ended March 31, 2002,
2001, and 2000, respectively. Salon does not anticipate recording any barter
revenue in fiscal year 2003.
7
SALES AND MARKETING
Salon has sales offices in New York City and San Francisco with ten
active sales employees as of March 31, 2002, down from sixteen employees as of
March 31, 2001. In addition, Salon has three employees engaged in marketing
based in its San Francisco office.
During the fiscal year ended March 31, 2001, Salon incurred $1.2
million in advertising costs to promote and attract viewers to its network of
Websites. In its efforts to reduce expenses, Salon only incurred $0.7 million of
advertising expenses during the year ended March 31, 2002. During the years
ended March 31, 2001 and 2002, Salon utilized $0.8 million of non-cash
advertising credits, which resulted from an investment in Salon by Rainbow Media
Holdings in the form of prepaid advertising rights that provides advertising in
various television networks without the use of cash. Advertising expense for the
year ended March 31, 2002 includes credits of $0.1 million resulting from
adjusting estimated amounts owed to vendors to actual amounts. Salon does not
expect to incur any significant cash related marketing expenditures in fiscal
year 2003.
COMPETITION
The last two years have 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 business climate, Salon is experiencing intense
competition for advertising dollars. What makes the current advertising climate
even more difficult for Salon is that advertising dollars are drawn
disproportionately to the top ten Websites. Therefore, with the remaining pool
of advertising dollars, Salon is competing with a considerable number of
Websites. This competition has resulted in reduced net revenues.
In addition, some of Salon's competitors provide cross platform
advertising mediums such as print and Internet advertising. These competitors
enjoy substantial competitive advantages over Salon since advertisers look for
cross platforms to advertise their goods and services.
If Salon does not compete effectively or if it experiences any pricing
pressures, or loss of market share resulting from increased competition, its
business could be adversely affected.
SALON'S STRATEGY
INCREASING CIRCULATION
Salon has always attracted visitors to its Websites due to its unique,
compelling and highly acclaimed editorial content. Salon plans on continuing
with this strategy to entice individuals to its Websites as evidenced by the
awards it has received. In June 2002, Salon plans on launching its first ever
e-book written exclusively for Salon by John Dean, who will reveal his research
into the identity of "Deep Throat" of Watergate fame. This e-book is
contemplated to increase the awareness of Salon to Internet users and provide
media "buzz" about Salon. In addition, it is contemplated that a major Internet
portal will promote this e-book with links to Salon, further increasing Salon's
circulation.
In early 2002, Salon created a new thirty-second commercial. This
commercial will be run for Salon through Rainbow Media Holdings television
networks, The Bravo Network, Independent Film Channel, and American Movie
Classics. The running of these commercials will not require a cash outlay as
advertising credits obtained in a December 1999 stock agreement with Rainbow
Media Holdings, a subsidiary of Cablevision Systems, will be utilized. Salon
anticipates that the new commercial will result in increased circulation.
8
CONTINUE TO ESTABLISH INNOVATIVE ADVERTISING AND PROMOTION PROGRAMS
With the drop-off in e-commerce and Internet businesses advertising
campaigns on the Internet, Salon now targets well established Fortune 1000
companies to generate advertising revenues. To entice these companies, Salon has
had to develop new ad units. These new units are bigger, more visually
integrated with the Website, optimized for animation and allow interaction with
the viewer and more closely resemble the traditional creative look of print
media and television. Salon plans on continuing to develop new advertising units
in the future.
In addition, in order to provide an advertiser with a unique
advertising experience, Salon has introduced a "Brand Blast" in which an
advertiser will be entitled to all the advertising space within Salon's Websites
for a specified period of time. Salon has also created a "Front Page Roadblock
and Splash Page" in which an advertiser owns all the advertising space on
Salon's home page for a given period of time. Salon contemplates continuing to
develop new advertising mediums for advertisers in order to attract them to
Salon.
EXPAND SUBSCRIPTION-BASED REVENUES
In April 2001 Salon launched Salon Premium, a paid subscription
service. During its first eleven months of operation, Salon received $1.1
million in cash from approximately 35,100 subscribers. The subscribers
represented approximately 1% of the unique visitors to its Websites. Salon
estimates that approximately 10%-11% of the visitors to its Websites would
consider paying for a subscription service such as Salon Premium. It is Salon's
strategy to convince more of these individuals to join Salon Premium. As a
signup promotion, Salon is offering new subscribers free audio book downloads,
free downloads of audio plays courtesy of L.A. Theatre works, and a free
six-month subscription to "Mother Jones." The planned promotional items will be
free to Salon and therefore will not have any impact on Salon's results of
operations. Future plans to increase membership include potentially offering a
wide selection of free magazine subscriptions, e-mailing links of major
headlines and feature stories to subscribers, and the ability to download an
entire issue of Salon to members' PDA. The current and planned features to
increase subscribers to Salon Premium are also geared to maximize renewal rates.
At this time, Salon cannot predict what the renewal rate will be for individuals
who have subscribed for one year of Salon Premium.
In order to increase Salon Premium revenue, Salon is contemplating
subscription sales through third parties. Salon is unable to predict how
successful this strategy will be.
EXPAND AND CREATE NEW BUSINESS OPPORTUNITIES
In the past year, Salon featured a third party-service that offered
personal advertisements on Salon's Websites and for which Salon received a
portion of the revenue generated for the third party. Salon contemplates
expanding this feature to include a classified section, also provided by a third
party, during the fiscal year ending March 31, 2003. Salon intends to pursue
other similar third party services as opportunities warrant, other business
opportunities that may bundle Salon's content with other content providers, but
cannot predict how much revenue will be generated from these potential new
revenue sources, if at all.
INFRASTRUCTURE AND OPERATIONS
Salon has created a flexible publishing structure that 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 a database for
9
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
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 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
Website availability. Regular automated backups protect the integrity of Salon
data. During the fiscal year ended March 31, 2002, Salon revised the design of
its Websites to facilitate searching Salon's archive of previously published
content.
Salon servers are maintained by a third-party facility that 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 password management
procedures to protect access to its servers. Uninterruptible power supplies for
protection against power outages support all of Salon's servers.
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 these licensees maintain the quality of its
brand, 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.
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, 2002, Salon had 3 part-time and 58 full-time employees.
Salon believes its employee relations are good. None of Salon's employees are
represented by a labor union or are subject to a collective bargaining
agreement. Salon's future success is highly dependent on the ability to attract,
hire, retain and motivate qualified personnel.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information with respect to executive officers
of Salon as of March 31, 2002:
Name Age Position
- ----------------------- ---- --------------------------------------------------
David Talbot 50 Chairman of the Board, Editor-in-Chief
Michael O'Donnell 38 Chief Executive Officer, President
Robert O'Callahan 51 Chief Financial Officer, Treasurer and Secretary
Scott Rosenberg 42 Senior Vice President, Editorial Operations
Patrick Hurley 40 Senior Vice President, Business Operations
Cheryl Lucanegro 50 Senior Vice President, Advertising Sales
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 Website 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
11
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.
CHERYL LUCANEGRO has served as Salon's Senior Vice President,
Advertising Sales since January 2002. From June 2001 to January 2002 she was the
founder and President of Excellerate, a consulting company. From October 1997 to
June 2001 she was the Senior Vice President Online and Integrated sales and
other positions with the media company, Standard Media International, Inc. From
June 1997 to September 1997 she was Director of Financial and Direct Markets for
Power Agent, Inc. From March 1992 to June 1997 she was Vice President Associate
Publisher and other positions for Upside Media. From 1983 to March 1992 she was
Regional Sales Manager and held other positions with Ziff/Davis Publishing/
Cahners-Ziff. Ms. Lucanegro holds a Bachelor of Science degree in journalism
from the University of Florida.
ITEM 2. PROPERTIES
Salon leases approximately 20,800 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 10,700 square feet of the space, representing the 15th
floor, is subleased at approximately $45,000 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
$18,000 per month, and the lease expires in December 2004.
Salon leases approximately 1,500 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 9,300 square feet of space at 706 Mission,
San Francisco, California. The rent for this space currently is approximately
$16,000 per month, and the lease expires in July 2002.
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, 2002.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED MATTERS
Salon listed its common stock on the NASDAQ National Market under the
symbol SALN from its June 22, 1999 initial public offering until September 25,
2001, at which time it commenced listing on the NASDAQ SmallCap Market under the
symbol SALNC due to Salon's inability to meet the continued listing requirements
for the NASDAQ National Market. Information with respect to the quarterly high
and low market prices for Salon's common stock for its fiscal years 2002 and
2001, based on sales transactions reported by NASDAQ, is provided below:
FISCAL YEAR ENDED FISCAL YEAR ENDED
MARCH 31, 2002 MARCH 31, 2001
---------------- ----------------
FOR THE QUARTERS ENDED HIGH LOW HIGH LOW
-------- ------- -------- -------
June 30 0.59 0.18 4.63 1.06
September 30 0.65 0.12 2.25 1.13
December 31 0.26 0.10 1.69 0.38
March 31 0.21 0.12 1.13 0.22
There were 240 holders of record of Salon common stock as of June 6,
2002. The closing price of Salon's common stock on June 6, 2002 was $0.14 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.
13
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Dollar amounts in thousands, except per share
-------------------------------------------------------
Year Ended March 31, 2002 2001 2000 1999 1998
- ------------------------------------- ------- ------- ------- ------- -------
Net revenues $ 3,619 $ 7,202 $ 8,002 $ 2,921 $ 1,156
Net loss (1) $ 8,000 $19,155 $21,890 $ 6,233 $ 3,825
Net loss attributable to common
stockholders (2) $11,286 $19,155 $33,405 $ 6,504 $ 3,825
Basic and diluted net loss per share
attributable to common stockholders $ 0.83 $ 1.48 $ 3.63 $ 16.63 $ 10.20
Weighted average common shares
outstanding used in computing
per share amounts 13,547 12,962 9,204 391 375
Cash and cash equivalents $ 1,542 $ 3,047 $17,982 $ 754 $ 1,926
Prepaid advertising rights $ 6,266 $ 7,075 $ 7,884 $ -- $ --
Total assets (3) $11,342 $16,298 $35,284 $ 7,808 $ 2,707
Capital leases - long-term portion $ 77 $ 325 $ 324 $ -- $ --
Total long-term liabilities $ 229 $ 601 $ 473 $ 75 $ 95
(1) Net loss for year ended March 31, 2002 includes a write-down of long-lived
assets of $782 due to impairments. The net loss for fiscal year ended March 31,
2001 includes a write-down of long-lived assets of $3,517 due to impairments.
(2) Net loss attributable to common stockholders for fiscal year ended March 31,
2002 includes a preferred deemed dividend of $3,189 which was the difference
between the offering price of Salon's Series A preferred stock sold in August
and September 2001 and the deemed fair value of Salon's common stock on the date
of the transaction. The net loss attributable to common stockholders for fiscal
year ended March 31, 2000 includes a preferred deemed dividend of $11,515 that
was the difference between the offering price of Salon's then Series C preferred
stock sold in April 1999 and the deemed fair value of Salon's common stock on
the date of the transaction. The net loss attributable to common stockholders
for fiscal year ended March 31, 1999 includes a preferred deemed dividend of
$271 that represents the difference between the offering price of Salon's then
Series C preferred stock sold in September 1998 and the deemed fair value of
Salon's common stock on the date of the transaction
(3) Amounts for the years ended March 31, 2000 and 2001 reflect adoption of
Emerging Issues Task Force Issue 00-18, "Accounting Recognition for Certain
Transactions Involving Equity Instruments Granted to Other Than Employees" for
that year.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS
OVERVIEW
Salon Media Group, Inc. is an Internet media company that produces a
total network of ten subject-specific, Websites, and two online communities -
The Well and Table Talk. Salon was incorporated in July 1995 and launched its
initial Websites in November 1995. Salon has averaged approximately 3.5-3.8
million unique visitors per month. A unique user is an individual visitor to
Salon's network.
Most of Salon's revenues are advertising revenues, derived from the
sale of promotional space on its Websites. Services that have been offered range
from short-term advertisements to long-term arrangements and may have included
the development of co-branded, integrated Websites. During the year ended March
31, 2002, most advertisements were of short duration, generally less than ninety
days, and did not include any co-branded, integrated Websites. Salon also
generated advertising income by offering HTML leads to content partners who
provided dynamic headlines on Salon's Websites.
Salon began offering Salon Premium, a paid subscription service, in
April 2001. Salon Premium's rates are $6 for a one-month subscription, $30 for a
one-year subscription and $50 for a two-year subscription. Benefits of Salon
Premium include access to exclusive new content; the option to view Salon
content without advertising banners, pop-ups or other forms of advertisements;
full access to premium-only content (abridged versions are available free for
non-subscribers) and the ability to easily download content in text format, a
convenience that enables readers to view additional Salon articles when not
connected to the Internet. In October 2001, Salon began featuring its unabridged
stories found in its News and Politics Websites exclusively to Salon Premium
members. Revenue is recognized ratably over the period that services are
provided. During the year ended March 31, 2002, Salon received $1.1 million in
cash, recognized $0.6 million of revenue for this service, and recorded $0.5
million as deferred revenue. Salon can not determine if it will be able to
sustain comparable growth for the year ending March 31, 2003 or what renewal
rate to expect.
Salon offers The Well and Table Talk, monthly subscription services,
for access to on-line discussion forums. Revenue is recognized ratably over the
subscription period. Salon generates revenue from the licensing of content that
previously appeared in Salon's Websites. Salon has generated minimal income from
product sales.
Salon has generated barter revenue in which Salon exchanges
advertising space on its Websites for reciprocal advertising space on other
Websites 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 Websites. Barter expenses are recorded when Salon's advertisements
are run on the reciprocal Websites, which is typically in the same period as
when advertisements are run on Salon's Websites. Barter revenues represented
none, 0.9%, and 17.8% of total revenues for the fiscal years ended March 31,
2002, 2001, and 2000, respectively.
Production, content and product expenses consist primarily of salaries
and related expenses for Salon's editorial, artistic, audio and production
staffs, online communities staff, payments to freelance writers and artists, and
telecommunications and computer related expenses for the support and delivery of
Salon's Websites 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 years ended March 31, 2002, 2001 and 2000.
15
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. During the year ended March 31, 2001, Salon
capitalized $0.7 million of costs related to enhancing Salon's Website
management software. During the year ended March 31, 2002 Salon discontinued all
direct effort to market and sell this software to focus its efforts on its core
content, production and maintenance efforts. Accordingly, Salon determined that
this asset was impaired and recorded an impairment charge of $0.7 million. Prior
to June 2000, Salon expensed all costs related to enhancing its Websites, and
since then, has not incurred any material costs for enhancement or to add
substantial additional functionality on 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.
Through March 31, 2002 amortization of such assets was 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 partially impaired and recorded an impairment charge of $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. As part of the MP3Lit acquisition, 888,000
shares of common stock were issued and held in escrow, of which 317,000 shares
were issued in May 2001. The remaining shares are to be issued over a two-year
period to certain former stockholders of MP3Lit. The issuance of 317,000 shares
was valued at $0.1 million and resulted in additional purchase consideration
classified as goodwill. As determined during the fiscal year ended March 31,
2001, all the goodwill associated with the acquisition was impaired, and as a
result, the additional goodwill resulting from this additional stock award was
written off during the fiscal year ended March 31, 2002. The remaining 571,000
contingent common shares will be recorded at their fair value on the respective
issue dates as additional purchase consideration, classified as goodwill, and
immediately written off as an impaired asset as Salon is no longer attempting to
generate revenue from the acquired business. Contingent shares of 412,100 were
issued subsequent to March 31, 2002 with the value being immaterial. The
remaining contingent shares of 158,500 are to be issued in May 2003 and Salon
cannot predict their financial impact at this time.
Salon has incurred significant net losses and negative cash flows from
operations since its inception. As of March 31, 2002, Salon had an accumulated
deficit of $76.6 million. These losses have been funded primarily through the
issuance of preferred stock and Salon's initial public offering of common stock
in June 1999.
Salon believes that it will incur negative cash flows from operations
for the year ending March 31, 2003. Although Salon has targeted positive cash
flows from operations for the fourth quarter of fiscal year 2003, because of the
rapid and unexpected sharp deterioration of the general business climate in the
past year and a half, Salon may not 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,
2002 Salon had net operating loss carryforwards for federal income tax purposes
of $50.6 million, which expire in the years March 31, 2011 through March 31,
16
2021. Salon also has net operating loss carryforwards for state income tax
purposes of $25.2 million that 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 $2.7 million during the year ended March 31, 2002
to $19.7 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.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires Salon to utilize accounting policies and
make estimates and assumptions that affect our reported amounts. Salon's
significant accounting policies are described in Note 2 to the consolidated
financial statements. Salon believes policies and estimates related to revenue
recognition and prepaid advertising rights represent our critical accounting
policies and estimates. Future results may differ from these estimates under
different assumptions or conditions.
REVENUE RECOGNITION
Salon recognizes revenues once persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable and
collectibility is reasonably assured. Revenues are recognized ratably in the
period over which Salon's obligations are fulfilled. Payments received before
Salon's obligations are fulfilled are classified as "Deferred revenue" in
Salon's consolidated balance sheet.
Most of Salon's revenues are advertising revenues, derived from the
sale of promotional space on its Websites. The duration of the advertisements
are generally short term, usually less than ninety days. Revenues derived from
such arrangements are recognized during the period the advertising space is
provided, as long as no significant obligations remain at the end of the period.
Salon's obligations typically include the guarantee of a minimum number of
impressions, or number of 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, if mutually agreeable with
an advertiser. If these "make good" impressions are not agreeable to an
advertiser, no further revenue is recognized.
Salon began offering Salon Premium, a paid subscription service, in
April 2001. Salon Premium's rates are $6 for a one-month subscription, $30 for a
one-year subscription and $50 for a two-year subscription. Benefits of Salon
Premium include access to exclusive new content; the option to view Salon
content without advertising banners, pop-ups or other forms of advertising; full
access to premium-only content (abridged versions are available free for
non-subscribers) and the ability to easily download content in text format, a
convenience that enables readers to view additional Salon articles when not
connected to the Internet. Revenue is recognized ratably over the subscription
period.
Salon offers The Well and Table Talk, monthly subscription services,
for access to on-line discussion forums. Revenue is recognized ratably over the
subscription period.
17
PREPAID ADVERTISING RIGHTS
In December 1999, Salon sold 1,125,000 shares of common stock to
Rainbow Media Holdings and received $11.8 million of advertising credits that
could be utilized for up to ten years. The credits were valued at $8.1 million,
based on the price of Salon's stock on the date the transaction was finalized.
This long-lived asset is subject to a periodic review of impairment.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED MARCH 31, 2002 AND 2001
NET REVENUES
Salon's net revenue decreased 50% to $3.6 million in the year ended
March 31, 2002 from $7.2 million in the fiscal year ended March 31, 2001.
Advertising revenues decreased 68% to $1.9 million for the year ended
March 31, 2002 from $6.2 million for the year ended March 31, 2001. The decrease
in advertising revenue was attributable to an overall contraction in the United
States economy, e-commerce or Internet businesses reducing advertising without
compensating increases from more established advertisers, most advertisers
choosing to place advertisements in the largest Websites, the September 11, 2001
terrorist acts and advertisers' concern with Salon's financial viability. Salon
did not record any barter sales for the year ended March 31, 2002 and $0.1
million of barter sales during the year ended March 31, 2001. Based on the
continuing weak United States economy, Salon cannot predict what advertising
revenues will be generated during the year ending March 31, 2003.
Subscription revenues increased 121% to $1.2 million for the year
ended March 31, 2002 from $0.5 million for the year ended March 31, 2001. The
increase is attributable to Salon Premium, a paid subscription service launched
in late April 2001, which generated $0.6 million in revenue during its
approximately eleven months of operation. Salon estimates it could generate at
least $1.0 million of Salon Premium revenue for the year ending March 31, 2003.
Salon recognized $0.2 million of Website management software sales
during the year ended March 31, 2002 and no comparable amounts in prior years.
Salon does not anticipate generating additional software sales for the year
ending March 31, 2003.
All other sources of revenue accounted for $0.3 million for the year
ended March 31, 2002 compared to $0.5 million for the year ended March 31, 2001.
The decrease of $0.2 million was primarily due to a decline in licensing
revenues between years.
PRODUCTION AND CONTENT
Production and content expenses during the year ended March 31, 2002 were $5.0
million versus $9.8 million for the year ended March 31, 2001, a decline of $4.8
million or 49%. The decrease is primarily due to an elimination of approximately
forty positions between April 1, 2000 and March 31, 2002, and the effect of a
15% salary reduction initiated April 1, 2001, which combined to reduce expenses
by $2.8 million. Reduced purchases of freelance articles yielded additional
savings of $0.9 million and curtailment of travel activities reduced expenses an
additional $0.3 million. Salon does not anticipate further staff reductions or
reductions in salaries during its fiscal year ending March 31, 2003 and feels
that other expenditures have been reduced to minimal levels.
18
SALES AND MARKETING EXPENSES
Sales and marketing expenses during the year ended March 31, 2002 were
$2.7 million versus $7.2 million for the year ended March 31, 2001, a decline of
$4.5 million or 62%. The decrease in sales and marketing expenses is primarily
attributable to an elimination of approximately thirty positions between April
1, 2000 and March 31, 2002, and the effect of a 15% salary reduction initiated
April 1, 2001, which combined reduced expenses by $2.4 million. Curtailment of
non-essential advertising, marketing and distribution expenditures resulted in
savings of an additional $1.3 million, and a reduction in travel reduced
expenses an additional $0.2 million. Salon does not anticipate further staff
reductions or reductions in salaries during its fiscal year ending March 31,
2003 and feels that other expenditures have been reduced to minimal levels.
Included in sales and marketing expenses are non-cash advertising
expenses related to an investment in Salon by Rainbow Media Holdings, Inc. in
the form of prepaid advertising rights valued at $8.1 million which is being
amortized as used. Amortized amounts were $0.8 million for each of the years
ended March 31, 2002 and 2001.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses during the year ended March 31, 2002
were $0.7 million versus $1.6 million for the year ended March 31, 2001, a
decline of $0.9 million or 56%. Of the decrease, $0.5 million is attributable to
an elimination of approximately fourteen positions between April 1, 2000 and
March 31, 2002, and the effect of a 15% salary reduction initiated April 1, 2001
and $0.4 million is due to a general contraction in spending. Salon does not
anticipate further staff reductions or reductions in salaries during its fiscal
year ending March 31, 2003 and feels that other expenditures have been reduced
to minimal levels.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses during the year ended March 31,
2002 were $1.9 million versus $3.5 million for the year ended March 31, 2001, a
decline of $1.6 million or 45%. Of the decrease, $0.5 million is attributable to
an elimination of approximately five positions between April 1, 2000 and March
31, 2002 and the effect of a 15% salary reduction initiated April 1, 2001, a
decline in general corporate expenses, partially offset by an increase in bad
debt expense due to the write-off of a $0.2 million long-term note receivable.
The results for the year ended March 31, 2001 included $0.6 million of
administrative expenses related to attempts to seek venture capital and to
market and sell Salon's proprietary software used to manage content on Websites.
No comparable expenses were incurred during the year ended March 31, 2002 as
Salon discontinued such efforts. Salon does not anticipate further staff
reductions or reductions in salaries during its fiscal year ending March 31,
2003 and feels that other expenditures have been reduced to minimal levels.
AMORTIZATION OF INTANGIBLES
Amortization of intangible expenses during the year ended March 31,
2002 was $0.5 million versus $1.2 million for the year ended March 31, 2001, a
decline of $0.7 million or 61%. During the year ended March 31, 2001 goodwill
resulting from the acquisition of The Well and MP3Lit.com was written-off as
impaired. The resulting reduction in these components of intangible assets
resulted in the $0.7 million decline in amortization expense.
19
WRITE-DOWN OF LONG-LIVED ASSETS
During the year ended March 31, 2001, Salon capitalized $0.7 million of
expenditures to enhance Salon's proprietary software as Salon contemplated
marketing the software. During the quarter ended June 30, 2001, Salon
discontinued all development and dedicated internal marketing efforts to focus
on its core content, production and maintenance. Accordingly, Salon determined
that this asset was impaired and recorded an impairment charge of $0.7 million
during the year ended March 31, 2002.
In May 2000, Salon acquired MP3Lit.com in a transaction that included
contingently issuable common stock. As a consequence, Salon issued 317,000
shares of common stock valued at $0.1 million in May 2001 resulting in
additional purchase consideration classified as goodwill. As determined during
the fiscal year ended March 31, 2001, all the goodwill associated with the
acquisition was impaired, and as a result, the goodwill resulting from this
additional stock award was written off during the year ended March 31, 2002.
Contingent shares of 412,100 were issued subsequent to March 31, 2002 with the
value being immaterial. Additional contingent shares of 158,500 are to be issued
in May 2003 and Salon cannot predict their financial impact at this time.
INTEREST INCOME
Interest income during the year ended March 31, 2002 was $0.1 million
versus $0.6 million for the year ended March 31, 2001, a decline of $0.5 million
or 86%. 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
The preferred deemed dividend of $3.2 million for the year ended March
31, 2002 represents a non-cash charge resulting from the difference between the
offering price of Salon's Series A redeemable convertible preferred stock sold
in August and September 2001 and the fair value of Salon's common stock into
which the preferred stock is convertible on the dates of the transactions, as
well as the effect of an immediate redemption right of the preferred stock
issued, after allocating the proceeds between preferred stock and warrants.
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
As a result of the above factors, Salon recorded a net loss
attributable to common stockholders of $11.3 million or $0.83 per share for the
fiscal year ended March 31, 2002 compared to a net loss of $19.2 or $1.48 per
share for the fiscal year ended March 31, 2001.
FISCAL YEARS ENDED MARCH 31, 2001 AND 2000
NET REVENUES
Salon's net revenue decreased 10% to $7.2 million in the year ended
March 31, 2001 from $8.0 million in the 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.
20
PRODUCTION AND CONTENT
Production and content expenses during the year ended March 31, 2001
was $9.8 million versus $10.2 million for the year ended March 31, 2000, a
decline of $0.4 million or 4%. 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.
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 during the year ended March 31, 2001 was
$7.2 million versus $15.6 million for the year ended March 31, 2000, a decline
of $8.4 million or 54%. 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 ended March 31, 2001 and $1.4 million for the year ended
March 31, 2000.
The decrease in expenses between 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.
Included in sales and marketing expenses are non-cash advertising
expenses related to an investment in Salon by Rainbow Media Holdings, Inc. in
the form of prepaid advertising rights valued at $8.1 million which is being
amortized as used. Amortized amounts were $0.8 million and $0.2 million for the
year ended March 31, 2002 and March 31, 2001, respectively.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $1.6 million for both 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.
During the 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. No comparable expenditures were incurred during
the 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.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses during the year ended March 31,
2001 was $3.5 million versus $2.5 million for the year ended March 31, 2000, an
increase of $1.0 million or 40%. 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.
21
AMORTIZATION OF INTANGIBLES
Amortization of intangibles increased 18% to $1.2 million for year
ended March 31, 2001 from $1.0 million in the 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 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 that 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 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 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 year ended
March 31, 2001 compared to $1.1 million for the 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 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 year ended March 31, 2001.
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
As of March 31, 2002, Salon had approximately $1.5 million in available
cash from the issuance of preferred stock during the year ended March 31, 2002.
Salon also had $0.6 million of restricted cash held primarily as deposits for
various lease arrangements.
Net cash used in operations was $5.0 million for the year ended March
31, 2002, compared to $13.4 million for the year ended March 31, 2001. The
principal use of cash during the year ended March
22
31, 2002 was to fund the $8.0 million net loss for the period and a $0.8 million
decrease in liabilities, offset partly by non-cash charges of $3.3 million and
an increase in deferred revenue of $0.3 million. The principal use of cash
during the year ended March 31, 2001 was to fund the $19.2 million net loss for
the period and a $1.8 million decrease in liabilities, offset partly by non-cash
charges of $6.9 million and a decrease of $1.7 million in receivables.
Net cash used in investing activities was immaterial for the year ended
March 31, 2002, compared to $1.4 million for the year ended March 31, 2001.
Salon does not expect any significant capital expenditures during the next
fiscal year. During the year ended March 31, 2001, net cash used for investing
activities consisted of $0.4 million for an acquisition and $1.0 million for the
purchase of property and equipment.
Net cash from financing activities provided $3.5 million for the year
ended March 31, 2002 from the issuance of preferred stock with net proceeds of
$3.7 million, offset by $0.2 million from nominal payments for capital lease
obligations. This compares to an outflow of $0.1 million for the year ended
March 31, 2001 primarily for nominal payments of capital lease obligations.
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 or reestablished with another
financial institution. Standby letters of credit previously issued by the bank
were subsequently collateralized by like amounts in certificates of deposit with
the bank. Lessors required the standby letters of credit. As of March 31, 2002,
Salon had $0.6 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.
The following summarizes Salon's contractual obligations as of March
31, 2002, and the effect these contractual obligations are expected to have on
our liquidity and cash flows in future periods (in thousands):
Payments Due By Period
----------------------------------------------------
1 Year 1 - 3 After 3
Total or Less Years Years
---------- ---------- ---------- ----------
Operating leases $ 7,752 $ 1,093 $ 3,173 $ 3,486
Capital leases 344 262 82 --
---------- ---------- ---------- ----------
Total $ 8,096 $ 1,355 $ 3,255 $ 3,486
========== ========== ========== ==========
As of March 31, 2002, Salon's available cash resources were sufficient
to meet working capital needs for approximately three to four months depending
on revenues generated during the period. Salon's auditors have included a
paragraph in their report indicating that substantial doubt exists as to its
ability to continue as a going concern because it has recurring operating losses
and negative cash flows, and an accumulated deficit. Salon has eliminated
various positions, not filled positions opened by attrition, implemented a wage
reduction of 15% effective April 1, 2001, and has cut discretionary spending to
minimal amounts, but due to a weak U.S. economy in general, and limited
visibility of advertising activity, it is unable to accurately predict if and
when it will reach cash-flow break even.
Salon needs to raise additional funds and is currently in the process
of exploring financing options. If it is unable to complete the financial
transactions it is pursuing or if it is unable to fund its other liquidity
needs, then it may be unable to continue as a going concern. Liquidity continues
to be a
23
constraint on business operations, including Salon's ability to react to
competitive pressures or to take advantage of unanticipated opportunities. If
Salon raises additional funds by selling equity securities, or instruments that
convert into equity securities, the percentage ownership of Salon's current
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 stockholders.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, "Business Combinations" (SFAS No. 141). This standard eliminates
the pooling-of-interests method of accounting for business combinations, except
for qualifying business combinations that were initiated prior to July 1, 2001,
and applies to all business combinations accounted for under the purchase method
that are completed after June 30, 2001. The implementation of SFAS No. 141 did
not have a significant impact on Salon's financial condition or results of
operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets" (SFAS No. 142). This standard eliminates the amortization of
goodwill, and requires goodwill to be reviewed at least annually for impairment,
the useful lives of previously recognized intangible assets to be reassessed and
the remaining amortization periods to be adjusted accordingly. Salon will
implement this standard effective April 1, 2002. The effect of such
implementation will be to reduce goodwill amortization expense by $0.1 million
annually. No material changes to the $0.2 million carrying value of goodwill or
the $0.7 million carrying value of intangible assets are anticipated as a result
of the adoption of SFAS No. 142.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). SFAS No. 144
supersedes "Accounting for the Impairment of Long- Lived Assets and for
Long-Lived Assets to Be Disposed Of" (SFAS No.121), however it retains the
fundamental provisions of SFAS No. 121 for (1) the recognition and measurement
of the impairment of long-lived assets to be held and used and (2) the
measurement of long-lived assets to be disposed of by sale. SFAS No. 144
develops a single accounting model for long-lived assets to be disposed of by
sale, whether previously held and used or newly acquired assets and consequently
amends Accounting Principles Board Opinion No. 30, "Reporting Results of
Operations -Reporting the Effects of Disposal of a Division of a Business."
Additionally, SFAS No. 144 expands the scope of discontinued operations to
include all components of an entity with operations that (1) can be
distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001, and interim
periods within those fiscal years. Salon is currently assessing the impact of
the adoption of this standard on its financial statements.
In November 2001, the Emerging Issues Task Force (EITF) reached a
consensus on Issue 1(a) of EITF Issue 00-18, "Accounting Recognition for Certain
Transactions Involving Equity Instruments Granted to Other Than Employees" that
an asset acquired in exchange for the issuance of fully vested, non-forfeitable
equity instruments should be displayed in the balance sheet of the grantor as an
asset rather than as a reduction of stockholders' equity. While no specific
transition guidance was provided in connection with this consensus, Salon has
adopted this consensus effective December 31, 2001 and such adoption resulted in
reclassifying prepaid advertising rights received from a stockholder in exchange
for common stock as a non-current asset as of December 31, 2001. The March 31,
2001 balance sheet has been reclassified to conform to this presentation. The
impact of this reclassification was to increase total assets by $6,266 and
$7,075 at March 31, 2002 and March 31, 2001 respectively, and to increase total
stockholders' equity and total liabilities and stockholders' equity by similar
amounts at the same dates. In connection with this reclassification, Salon has
updated its assessment of the carrying value of this long-
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lived asset and believes, based on the credit worthiness of the stockholder from
which Salon acquired the advertising rights, as well as Salon's ability and
intention to utilize this right, that the asset is not impaired at March 31,
2002.
In May 2000, the EITF issued EITF Issue No. 00-14, "Accounting for
Certain Sales Incentives." EITF Issue No. 00-14 addresses the recognition,
measurement, and income statement classification for sales incentives that a
vendor voluntarily offers to customers (without charge), which the customer can
use in, or exercise as a result of, a single exchange transaction. Salon adopted
EITF 00-14 on January 1, 2002 and there was no impact on the results of
operations, or its financial position upon adoption and no reclassifications of
prior results were required for the years ending March 31, 2002, 2001 and 2000.
FACTORS THAT MAY AFFECT SALON'S FUTURE RESULTS AND MARKET PRICE OF STOCK
SALON LACKS SIGNIFICANT REVENUES, HAS A HISTORY OF LOSSES, AND AS A RESULT, MAY
NOT BE ABLE TO CONTINUE AS A GOING CONCERN
Salon has a history of significant losses and expects to incur
operating losses in the near future. For the year ended March 31, 2002, Salon
had net losses attributable to common stockholders of $11.3 million and had an
accumulated deficit of $76.6 million. If and when Salon does achieve
profitability, Salon may not be able to sustain or increase profitability on a
quarterly or annual basis in the future. If revenues grow more slowly than Salon
anticipates or operating expenses exceed expectations, financial results will
most likely be severely harmed and the ability of Salon to continue its
operations will be seriously jeopardized.
Salon's independent outside auditors provided a "going-concern" audit
opinion on the consolidated financial statements for the years ended March 31,
2002, 2001 and 2000. The audit opinion reported substantial doubt about Salon's
ability to continue as a going concern, citing issues such as the history of
losses and absence of current profitability. As a result of the "going-concern"
opinion Salon's stock price and investment prospects may be adversely affected,
thus limiting financing choices and raising concerns about the realization of
value on assets and operations.
SALON REQUIRES ADDITIONAL FUNDING THAT MAY NOT BE AVAILABLE ON FAVORABLE TERMS,
IF AT ALL
During August and September 2001 and March 2002 Salon raised
approximately $3.7 million in a private placement of Series A and B preferred
stock. Even though Salon has eliminated various positions, not filled positions
opened by attrition, implemented a wage reduction of 15% effective April 1, 2001
and has cut discretionary spending to minimum amounts, due to a weak U.S.
economy in general, and a weak advertising market in particular, it is unable to
predict if and when it will reach cash-flow break even. Salon therefore needs to
raise additional funds within the next three to four months. If Salon raises
additional funds by selling equity securities, or instruments that 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 may be unable to
continue as a going concern and its ability to react to competitive pressures
and take advantage of unanticipated opportunities will be substantially limited.
In addition, Salon's business could be significantly adversely affected.
25
The "going-concern" opinion from Salon's auditors limits Salon's
ability to access certain types of financing, and the circumstances which
prompted this opinion, may limit or prevent Salon from obtaining suitable
financing, if at all.
SALON'S STOCK LISTING HAS CHANGED AND MAY CHANGE AGAIN
Shares of Salon's common stock were listed on the NASDAQ National
Market until September 25, 2001, at which time they were moved to the NASDAQ
SmallCap Market due to Salon's inability to meet the continued listing
requirements of the NASDAQ National Market. Listing retention on the NASDAQ
SmallCap Market requires continuing compliance with NASDAQ listing standards.
One of the conditions of continued listing is that Salon's common stock achieve
and maintain a closing bid price of at least $1.00 per share for at least ten
consecutive trading days. After panel review, NASDAQ agreed to continue the date
by which Salon must demonstrate that its stock has traded above $1.00 until
August 13, 2002. Salon cannot predict whether the price of its common stock will
meet the minimum bid requirements in that time period, which creates a risk of
possible delisting proceedings due to Salon's inability to meet the minimum bid
requirements.
If the market price for Salon's common stock remains below $1.00 per
share, its common stock may be deemed to be penny stock. If its common stock
were considered penny stock, it would be subject to rules that impose additional
sales practices on broker-dealers who sell its securities. For example, broker
dealers must make a special suitability determination for the purchaser, receive
the purchaser's written consent to the transaction prior to sale, and make
special disclosures regarding sales commissions, current stock price quotations,
recent price information and information on the limited market in penny stock.
Because of these additional obligations, some brokers may not effect
transactions in penny stocks, which could adversely affect the liquidity of
Salon's common stock.
If the market price for Salon's common stock stays above $1.00 but the
value of Salon's common stock not held by its directors, executive officers and
affiliates does not stay above $1,000,000 for a sustained period of time, Salon
may not qualify for continued listing on the NASDAQ SmallCap Market. Listing on
the NASDAQ SmallCap Market would enable Salon to return to the NASDAQ National
Market if and when it achieved compliance with the other NASDAQ National Market
continuing listing requirements. If Salon's shares are not eligible for listing
on the NASDAQ SmallCap Market, then they would not be eligible for listing again
on any NASDAQ market absent compliance with the NASDAQ initial listing
requirements, which are significantly more stringent than the continued listing
requirements.
If Salon's common stock is delisted from NASDAQ SmallCap Market, it
will likely be traded on the over-the-counter bulletin board (OTCBB). If Salon's
common stock is traded on the OTCBB, its value may be negatively impacted
because stocks, which trade over-the-counter, tend to be less liquid and trade
with larger variations between the bid and ask price.
SALON'S COMMON STOCK PRICE MAY FLUCTUATE SIGNIFICANTLY REGARDLESS OF ITS ACTUAL
OPERATING PERFORMANCE
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:
o the presence of a bid price under $1.00;
o actual or anticipated variations in quarterly operating results and
announcements of technological innovations;
26
o new products or services offered by Salon or its competitors;
o changes in financial estimates by securities analysts;
o conditions or trends in the Internet services industry and the online
content segment in particular;
o Salon's announcement of significant acquisitions, strategic
partnerships, joint ventures or capital commitments;
o additions or departures of key personnel;
o sales of common stock; and
o other events that may be beyond Salon's control.
In addition, the NASDAQ SmallCap Market 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.
REVENUE GENERATED FROM SUBSCRIBERS TO SALON PREMIUM MAY NOT BE SUFFICIENT TO
OFFSET POTENTIAL LOWER ADVERTISING REVENUE DUE TO A DECREASE IN AVAILABLE
IMPRESSIONS TO ADVERTISERS
With the weakened demand for advertising, Salon has begun to depend
more on cash generated from Salon Premium, a paid subscription service
implemented in April 2001. Salon estimates that as of March 31, 2002,
approximately thirty to thirty-five percent of its content is available to Salon
Premium subscribers only. The implementation of Salon Premium may therefore
adversely restrict and reduce the number of impressions available to sell to
advertisers. Salon believes recent content restrictions and reduction in
sellable impressions have reduced theoretical advertising capacity but have not
created practical shortages, and Salon has the means to create useful space as
demand increases.
SALON HAS AN ACTIVE SUBSCRIPTION PROGRAM BUT THE REVENUE RESULTS ARE NOT CERTAIN
Salon has had a subscription business since it acquired The Well, an
online forum, in March 1999. The Well has now been in operation for over ten
years. In July 2001, Salon's previously free Table Talk online forum, which it
developed internally, was transitioned to a subscription service. In April 2001,
Salon launched Salon Premium, which provides Salon readers with certain benefits
in exchange for a subscription for a year or more. In October 2001, Salon
continued its efforts to expand its subscriber base, in part, by making
unabridged News and Politics stories only available to Salon Premium members. In
December 2001, Salon began offering one-month subscriptions to Salon Premium.
Salon Premium members for the most part, however, choose to view Salon's content
without any advertisements. While traditional media properties commonly operate
with advertising within subscriber-purchased pages, Salon has not implemented
this model. Dividing some of our Websites between abridged content accompanied
by advertising and unabridged content accompanied by subscription revenue may
not achieve acceptable circulation or revenue goals.
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IF SALON PREMIUM DOES NOT ACHIEVE AN ACCEPTABLE RENEWAL RATE, SALON'S RESULTS OF
OPERATION WILL SUFFER
Salon began offering one and two year subscriptions to Salon Premium in
April 2001. In December 2001, Salon began offering one-month subscriptions to
Salon Premium. Since Salon Premium is still within its first year of operation,
Salon does not have operating history to utilize in predicting renewal rates. If
it does not achieve significant renewal rates, its results of operations will
suffer.
SALON'S QUARTERLY OPERATING RESULTS ARE VOLATILE AND MAY ADVERSELY AFFECT ITS
COMMON 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:
o Salon's ability to attract and retain advertisers and subscribers;
o Salon's ability to attract and retain a large number of users;
o the introduction of new Websites, services or products by Salon or by
its competitors;
o the timing and uncertainty of Salon's advertising sales cycles;
o the mix of advertisements sold by Salon or its competitors;
o the economic and business cycle and the recovery speed;
o the level of Internet usage;
o Salon's ability to attract, integrate and retain qualified personnel;
o technical difficulties or system downtime affecting the Internet
generally or the operation of Salon's Websites;
o the impact of national economic and diplomatic concerns on the
advertising and news business; and,
o the amount and timing of operating costs.
In order to attract and maintain Salon's user base, Salon 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 Salon's revenues in a particular
quarter are lower than it anticipates, Salon may be unable to reduce spending in
that quarter. As a result, any shortfall in revenues would likely harm its
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 Salon's
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 its common
stock may decline.
28
SALON DEPENDS ON ADVERTISING SALES FOR MUCH OF ITS REVENUES, AND ITS INABILITY
TO INCREASE ADVERTISING REVENUES WILL HARM ITS BUSINESS
Revenues depend substantially on sales of advertising. In order to
increase revenues, Salon needs to attract additional significant advertisers on
an ongoing basis. Salon may not be able to attract or retain a sufficient number
of advertisers in the future, and if Salon cannot, its business would likely be
severely harmed. If Salon does not sell a sufficient number of advertisements or
does not engage a sufficient number of advertisers during a particular period,
its business could be severely harmed.
Increasing Salon's advertising revenues depends upon many factors,
including whether it will be able to:
o successfully sell and market its network to advertisers;
o increase its user base;
o increase the amount of revenues it receives per advertisement;
o have a sufficient number of impressions available to advertisers;
o increase awareness of the Salon brand;
o successfully sell new ad units and formats;
o target advertisements and electronic commerce opportunities to users
with appropriate interests;
o accurately measure the number and demographic characteristics of its
users;
o retain sales personnel; and
o convince advertisers that Salon will continue as a going concern.
THE LENGTH OF SALON'S SALES CYCLES IS UNCERTAIN AND VARIABLE AND MAY LEAD TO
SHORTFALLS IN REVENUES AND FLUCTUATIONS IN ITS OPERATING RESULTS
Salon's dependence on advertising subjects it to the risk of revenue
shortfalls because the sales cycles for advertising vary significantly, and
during these cycles Salon may expend substantial funds and management resources
while not obtaining advertising revenues. If sales are delayed or do not occur,
Salon's financial results for 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 Salon has little or no
control, including:
o advertisers' budgets;
o internal acceptance reviews by advertisers and their agencies;
o the possibility of cancellation or delay of projects by advertisers or
sponsors.
29
SALON HAS VARIOUS OFFICE LEASE AGREEMENTS AND ASSOCIATED LEASEHOLD IMPROVEMENTS
AND DEPOSITS THAT MAY BE ADVERSELY IMPACTED IF LEASE TERMS WERE SHORTENED FOR
ANY REASON
As of March 31, 2002 Salon had leasehold improvements recorded at cost
at $1.0 million with a net book value of $0.7 million, as well as $0.6 million
of office lease deposits. The leasehold improvements are being depreciated over
the term of its respective lease. If Salon were to shorten the lease term of
various lease agreements for any reason, or terminate lease agreements, these
assets could be adversely affected.
SALON MUST DETERMINE WHETHER TO ESTABLISH OR MAINTAIN DISTRIBUTION RELATIONSHIPS
TO ATTRACT MORE USERS AND SUBSCRIBERS TO ITS NETWORK
In past periods Salon depended on distribution relationships with
high-traffic Websites to increase its user base. There has been intense
competition for relationships with these Websites, and Salon may not be able to,
or want to, enter into such relationships on favorable terms or at all. Even if
Salon enters into distribution relationships with these Websites, its Websites
may not attract significant numbers of users, and its Websites may not attract
additional users from these relationships. Moreover, Salon has paid, and may in
the future pay, significant fees to establish these relationships. Salon also
has commenced relationships designed to promote and sell subscriptions to Salon
Premium. These relationships are new and Salon is unable to predict they will
prove effective and economic.
SALON MUST CONTINUALLY DEVELOP COMPELLING CONTENT TO ATTRACT INTERNET USERS
Salon's success depends upon its ability to attract and retain a large
number of users by delivering original and compelling Internet content and
services. If Salon is unable to develop content and services that allow it to
attract, retain and expand a loyal user base possessing high-value demographic
characteristics, Salon will be unable to generate advertising revenues, and its
revenues and operating results will be severely harmed. The content and services
Salon provides on its Websites may not appeal to a sufficient number of Internet
users to generate advertising revenues. Salon's ability to develop compelling
content depends on several factors, including:
o the quality and number of writers and artists who create content for
Salon;
o the quality of Salon's editorial staff;
o the technical expertise of Salon's production staff; and
o working capital constraints of Salon.
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 Salon's network of Websites. Internet
users can freely navigate and instantly switch among a large number of Websites,
many of which offer content and services that compete with Salon. In addition,
many Websites offer very specific, highly targeted content that could have
greater appeal than Salon's network to particular subsets of its target user
base.
30
THE CONTROVERSIAL CONTENT OF SALON'S WEBSITES MAY LIMIT ITS REVENUES
Many of our Websites contain, and will continue to contain, content
that is politically and culturally controversial. As a result of this content,
current and potential advertisers and Salon Premium subscribers may refuse to do
business with us. Salon's outspoken stance on political issues has and may
continue to result in negative reactions from some users, commentators and other
media outlets.
SALON'S PROMOTION OF THE SALON BRAND MUST BE SUCCESSFUL IN ORDER TO ATTRACT AND
RETAIN USERS AS WELL AS ADVERTISERS AND STRATEGIC PARTNERS
The success of the Salon brand depends largely on its ability to
provide high quality content and services. If Internet users do not perceive
Salon's existing content and services to be of high quality, or if it introduces
new content and services or enters into new business ventures that are not
favorably perceived by users, it may not be successful in promoting and
maintaining its brand. Any change in the focus of its operations creates a risk
of diluting its brand, confusing consumers and decreasing the value of its user
base to advertisers. If Salon is unable to maintain or increase the Salon brand,
its business could be severely harmed.
SALON NEEDS TO HIRE, INTEGRATE AND/OR RETAIN QUALIFIED PERSONNEL BECAUSE THESE
INDIVIDUALS ARE IMPORTANT TO ITS GROWTH
Salon's success significantly depends on key editorial and design
personnel. In addition, because its users must perceive the content of its
Websites as having been created by credible and notable sources, Salon's success
also depends on the name recognition and reputation of its editorial staff, in
particular David Talbot, Salon's founder and Editor-in-Chief.
Salon's future success depends to a significant extent on the continued
services of key personnel, particularly, David Talbot, and Michael O'Donnell,
Chief Executive Officer. Salon currently has no employment agreement with Mr.
Talbot and it does not maintain "key person" life insurance for any of its
personnel. The loss of the services of Mr. Talbot, Mr. O'Donnell, or other key
employees would likely have a significantly adverse effect on its business.
Due to recurring operating losses, our current financial position and
potential NASDAQ SmallCap delisting, Salon may experience difficulty in hiring
and retaining highly skilled employees with appropriate qualifications. Salon
may be unable to retain its current key employees or attract, integrate or
retain other qualified employees in the future. If Salon does not succeed in
attracting new personnel or integrating, retaining and motivating its current
personnel, its business could be harmed.
SALON MAY EXPEND SIGNIFICANT RESOURCES TO PROTECT ITS INTELLECTUAL PROPERTY
RIGHTS OR TO DEFEND CLAIMS OF INFRINGEMENT BY THIRD PARTIES, AND IF SALON IS NOT
SUCCESSFUL IT MAY LOSE RIGHTS TO USE SIGNIFICANT MATERIAL OR BE REQUIRED TO PAY
SIGNIFICANT FEES
Salon's success and ability to compete are significantly dependent on
its proprietary content. Salon relies exclusively on copyright law to protect
our content. While Salon actively take steps to protect its proprietary rights,
these steps may not be adequate to prevent the infringement or misappropriation
of its content. Infringement or misappropriation of its content or intellectual
property could severely harm its business. Salon also licenses content from
various freelance providers and other third-party content providers. While Salon
attempts to insure that this content may be freely licensed to us, other parties
may assert claims of infringement against us relating to this content.
31
Salon may need to obtain licenses from others to refine, develop,
market and deliver new services. Salon 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 Salon acquired the Internet address www.salon.com.
Because www.salon.com is the address of the main home page to its network of
Websites and incorporates its company name, it is a vital part of our
intellectual property assets. Salon does 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 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, its
business could be harmed.
SALON'S TECHNOLOGY DEVELOPMENT EFFORTS MAY NOT BE SUCCESSFUL IN IMPROVING THE
FUNCTIONALITY OF ITS NETWORK, WHICH COULD RESULT IN REDUCED TRAFFIC ON ITS
NETWORK
Salon has developed a proprietary online publishing system. If this
system does not work as intended, or if Salon is unable to continue to develop
this system to keep up with the rapid evolution of technology for content
delivery on the Internet, its network of Websites may not operate properly which
could harm its business. Additionally, software product design, development and
enhancement involve 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 its business. Moreover, complex
software products like its online publishing system frequently contain
undetected errors or shortcomings, and may fail to perform or scale as expected.
Although Salon has tested and will continue to test its publishing system,
errors or deficiencies may be found in the system that may impact its business
adversely.
SALON RELIES ON THIRD PARTIES FOR SEVERAL CRITICAL FUNCTIONS RELATING TO
DELIVERY OF ADVERTISING AND ITS WEBSITE PERFORMANCE, AND THE FAILURE OF THESE
THIRD PARTIES TO SUPPLY THESE SERVICES IN AN EFFICIENT MANNER COULD LIMIT ITS
GROWTH AND IMPAIR ITS BUSINESS
Salon relies on a number of third party suppliers for various services,
including Web hosting, advertising delivery, and Internet traffic measurement.
While Salon believes that it could obtain these services from other qualified
suppliers on similar terms and conditions, a disruption in the supply of these
services by its current suppliers could severely harm its business.
Salon uses third-party software to manage and measure the delivery of
advertising on its network of Websites. This type of software may fail to
perform as expected. If this software malfunctions, or does not deliver the
correct advertisements to its network, its advertising revenues could be
reduced, and its business could be harmed.
Salon uses third-party software to measure traffic on its network of
Websites. This type of software does not always perform as expected. If this
software malfunctions or does not accurately measure its user traffic, Salon may
not be able to justify its advertising rates, and its advertising revenues could
be reduced.
For certain clients, Salon uses third-party services to deliver
advertising features and/or measure advertising delivery. This type of service
is outside its direct control, and if the service arrangement under performs,
its advertising delivery may perform below expectations and its advertising
revenues could be adversely affected.
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ACCEPTANCE AND EFFECTIVENESS OF INTERNET ADVERTISING IS EVOLVING AND, TO THE
EXTENT IT DOES NOT GROW, SALON'S MARKET MAY NOT DEVELOP ADEQUATELY AND ITS
BUSINESS COULD BE HARMED
Salon's success is highly dependent on an increase in the use of the
Internet. If the markets for Internet advertising or electronic commerce does
not continue to develop, its 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 Salon expects, its business could be
harmed. Within the industry, its advertising audience may be low and inhibit its
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 its future advertising
rates and revenues. Any failure to adapt to pricing models that develop or
respond to competitive pressures could reduce its 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 its business.
ADVERTISING PRODUCT OFFERINGS CONTINUE TO CHANGE AND THIS CREATES ADDITIONAL
EFFORT AND UNCERTAINTY ABOUT THIS REVENUE STREAM
Advertisers continue to be attracted by new products, promotional
vehicles and offerings delivered via the Internet. This interest in new products
requires that the company identify advertiser interests, develop and launch new
advertising products or formats, create appropriate pricing schedules, train the
sales force in the use and sale of new products, manage the obsolescence of
earlier products, and restructure the Salon.com Website to effectively deliver,
track and report new products. New product design, development and launch
involve creativity, expense, technology modifications and learning processes.
While the company has integrated this activity into its existing operations, the
rate of change could create an environment where the company is unable to
effectively develop, deliver or track the delivery of products acceptable to the
market.
Advertisers are increasingly selecting shorter campaign lengths with
less lead-time until launch. These campaigns have less flexibility in delivery
requirements and limit the ability of the company to precisely identify future
revenues.
TRACKING AND MEASUREMENT STANDARDS FOR ADVERTISING MAY NOT EVOLVE TO THE EXTENT
NECESSARY TO SUPPORT INTERNET ADVERTISING, THEREBY CREATING UNCERTAINTY ABOUT
THE VIABILITY OF SALON'S 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,
Salon's 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
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methodologies may not keep pace with its information needs, particularly to
support its internal business requirements and those of its advertisers and
sponsors. The absence or insufficiency of this information could limit its
ability to attract and retain advertisers and sponsors.
It is important to its advertisers that Salon accurately measures the
demographics of its user base and the delivery of advertisements on its
Websites. Salon depends on third parties to provide certain of these measurement
services. If they were unable to provide these services in the future, Salon
would need to perform them themselves or obtain them from another provider, if
available. This could cause them to incur additional costs or cause
interruptions in its business while they are replacing these services. Companies
may choose to not advertise on Salon or may pay less for advertising if they do
not perceive our measurements or measurements made by third parties to be
reliable.
IF USE OF THE INTERNET DOES NOT GROW, SALON'S BUSINESS COULD BE HARMED
Salon's 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, it may not be able to
increase revenues from advertising and this may harm our business. 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, its
results of operations could be harmed.
o inadequate network infrastructure;
o security concerns;
o charging for content;
o inconsistent quality of service; and
o limited availability of cost-effective, high-speed access.
INCREASING COMPETITION AMONG INTERNET CONTENT PROVIDERS COULD REDUCE ITS
ADVERTISING SALES OR MARKET SHARE, THEREBY HARMING ITS BUSINESS
The market for Internet content is relatively new, rapidly changing and
intensely competitive. Salon expects competition for Internet content to
continue to increase, and if it cannot compete effectively, its business could
be harmed. The number of Websites competing for the attention and spending of
users and advertisers may continue to increase with the most trafficked Websites
receiving a disproportionate share of advertising dollars. Salon is not one of
the most trafficked Websites, or even one of the top ten Websites.
Increased competition could result in advertising 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 its present and
potential competitors are likely to enjoy substantial competitive advantages
over us. 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 harmed.
SALON MAY BE HELD LIABLE FOR CONTENT ON ITS WEBSITES OR CONTENT DISTRIBUTED TO
THIRD PARTIES
As a publisher and distributor of content over the Internet, including
user-generated content on Salon's online communities, Salon faces potential
liability for defamation, negligence, copyright, patent
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or trademark infringement and other claims based on the nature, content or
ownership of the material that is published on or distributed from its network
of Websites. These types of claims have been brought, sometimes successfully,
against online services, Websites and print publications in the past. Although
Salon carries general liability insurance, its insurance may not be adequate to
indemnify us for all liability that may be imposed. Any liability that is not
covered by its insurance or is in excess of its insurance coverage could
severely harm its financial condition and business.
SALON MAY BE LIABLE FOR ITS LINKS TO THIRD-PARTY WEBSITES
Salon could be exposed to liability with respect to the selection of
third-party Websites that may be accessible through Salon.com. These claims
might include, among others, that by linking to Websites operated by third
parties, Salon may be liable for copyright or trademark infringement or other
unauthorized actions by these third-party Websites. Other claims may be based on
errors or false or misleading information provided on linked Websites, including
information deemed to constitute professional advice such as legal, medical,
financial or investment advice. Other claims may be based on its links to
sexually explicit Websites and our provision of sexually explicit advertisements
when this content is displayed. Salon's 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 its
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 ELECTRONIC COMMERCE PROGRAMS BY
SUBJECTING US TO LIABILITY OR BY DISCOURAGING COMMERCIAL TRANSACTIONS OVER THE
INTERNET
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