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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, 2004
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.
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(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, 11TH FLOOR
SAN FRANCISCO, CA 94103
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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(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. [_]
Indicate by check mark whether the registrant is an accelerated filer as defined
in Rule 12b-2 of the Act. Yes [_] No [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the closing sale price of the registrant's common stock on
September 30, 2003 was approximately $500,000. Shares of common stock held by
each then current executive officer and director and by each person who is known
by the registrant to own 5% or more of the outstanding common stock have been
excluded from this computation in that such persons may be deemed to have been
affiliates of Salon. This determination of affiliate status is not a conclusive
determination for other purposes.
The number of outstanding shares of the Registrant's Common Stock, par value
$0.001 per share, on June 21, 2004 was 14,155,276 shares.
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FORM 10-K
SALON MEDIA GROUP, INC.
INDEX
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PAGE
PART I NUMBER
ITEM 1. Business........................................................ 4
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........................................ 16
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk....... 37
ITEM 8. Consolidated Financial Statements and Supplementary Data......... 38
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures....................................... 68
ITEM 9A. Controls and Procedures.......................................... 68
PART III
ITEM 10. Directors and Executive Officers of the Registrant............... 69
ITEM 11. Executive Compensation........................................... 73
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters...................... 75
ITEM 13. Certain Relationships and Related Transactions................... 84
ITEM 14. Principal Accountant Fees and Services........................... 86
PART IV
ITEM 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K........................................................ 86
SIGNATURES................................................................. 94
2
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FORM 10-K
SALON MEDIA GROUP, INC.
INDEX - (CONTINUED)
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Consent of Independent Registered Public Accounting Firms.................... 96
3
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
Result 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. 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 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 Market, on November 21, 2002, Salon's common stock
began trading in the OTC (Over-The-Counter) Bulletin Board marketplace under the
symbol SALN.OB.
WEBSITE CONTENT AREAS
The main entry and navigation point to Salon's eight primary
subject-specific sections is Salon's home page at www.salon.com. Salon's content
provides a regularly updated array of news, features,
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interviews and regular columnists and include the following:
News & Politics Salon News & Politics features breaking
stories, investigative journalism and
commentary, as well as interviews with
newsmakers, politicians and pundits.
Opinion Provocative commentary on timely issues,
including regular columns by Sidney
Blumenthal and Joe Conason. In addition,
author and broadcaster Arianna Huffington
contributes regularly to the Website.
Technology & Business Smart, opinionated coverage of
Internet news and digital culture from
today's best technology writers, along with
in-depth features about the business world
and the economy. Featuring Patrick Smith's
regular Ask the Pilot column.
Arts & Entertainment Arts & Entertainment
features movie, music and television reviews
and interviews. The section includes
frequent television features; extended film
coverage including actor and director
interviews.
Life Life features articles by thought-provoking
writers about family life, motherhood and
women's lives and issues. Cary Tennis'
popular advice column, Since You Asked,
appears daily.
Books Books include ahead-of-the-curve daily book
reviews and interviews with today's most
interesting writers.
Comics The Comics section features the works of
comic luminaries Tom Tomorrow, Ruben
Bolling, Carol Lay and Keith Knight.
Salon Audio Salon Audio offers hundreds of free
recordings of short stories, novel excerpts,
poems, essays, and interviews.
Salon has two online subscription communities, The Well and Table Talk,
which allow users to discuss Salon content and interact with other users. The
Well is a member-only discussion community in which members use their real names
to post and only members can view the postings. Table Talk is available for all
Internet users to read, but only subscribers may post. The two online
communities had a total of approximately 3,900 paying subscribers as of March
31, 2004.
Salon believes that its original, award-winning content allows Salon to
attract and retain users who are more affluent, better educated and more likely
to make online purchases than typical Internet users. Salon believes its user
profile makes its Website a valuable media property for advertisers and
retailers who are allocating marketing resources to target consumers online. Web
awards that Salon has won since 2000 include:
2004
David Talbot, Salon's Chairman and CEO received Carr Van Anda Award for
"Outstanding Journalist"
"Outstanding Digital Journalism Article" - GLAAD
2003
"Top 100 Classics - News and Entertainment Categories" - PC Magazine
"Feature Journalism - Independent" - Online Journalism Awards
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2002
"Best 50 Websites" - Time Magazine
"Best Print and Zine" - Webby Awards
"Best of the Web - Book Clubs" - Forbes
"Outstanding Digital Journalism Overall Coverage" - GLAAD
2001
"Best Online Magazine" - Yahoo Internet Life
"Best Independent Enterprise Journalism" - Online Journalism Awards
"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
TRAFFIC AND DEMOGRAPHICS
The number of unique visitors to a Website is used as a measure of it
vitality and popularity. Salon analyzes its server log files to determine this
metric. As defined by Salon, a unique visitor is an individual (non-duplicated)
visitor to its Website. Unique visitors during the years ending March 31, 2002
and March 31, 2001 ranged from 3.5-3.8 million per month. During the year ending
March 31, 2003, Salon began to restrict access to its content, thereby
suppressing unique visitors, which for the last six months of 2003 ranged from
2.6-3.0 million per month. The busy news cycle due to the war in Iraq and the
2004 presidential campaign has boosted the number of unique visitors to Salon,
which increased to 2.7-3.2 million during the last six months of the fiscal year
and averaged 3.1 million during the last quarter of the fiscal year ending March
31, 2004.
Salon believes its viewers are attractive to advertisers and brand
campaigns. According to Spring 2004 results from @Plan, an independent
syndicated research firm, Salon's user base has the following characteristics:
(a) 58% are between the ages of 25 and 49, with an overall mean average of 41;
(b) an average household income of $80,500; (c) 74% have earned a college degree
and 43% have earned a post-graduate degree; (d) 44% have professional or
managerial positions; (e) 98% shop online; and (f) 77% are online every day.
INTERNET ADVERTISING
Internet companies such as Salon, provide platforms or advertising units
for companies to advertise their goods and services. Advertising units initially
consisted of 468x60 pixel banners, which for Salon resided at the top of any
given Website page and 125x125 pixel buttons. Companies such as Salon typically
sell these advertising units to advertisers based on a guaranteed number of
Website page views by a Website visitor. As this medium has matured, advertisers
have demanded improved advertising units to deliver their messages to potential
customers. Salon and other companies responded by increasing the mix of
advertisement unit sizes to include, among other sizes, 336x280 pixel rectangles
and 728x90 pixel leader boards, with the later supplanting the original 468x60
pixel banner. The 728x90 pixel leader board is the number one advertising unit
approved by the Interactive Advertising Bureau (IAB) and sold by Salon as of
March 31, 2004, followed by 336x280 pixel rectangles. For the industry as a
whole, according to online advertising industry leader DoubleClick, the 728x90
pixel leader board is
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now the number one selling advertising unit, experiencing a 900% growth from
2002 to 2003, while the 468x60 pixel banner experienced a 13% decline during the
same time period.
During 2002, Salon began to offer advertisers an ability to present "rich
media" dynamic advertisements, defined as non-static images, which was sold at a
premium to other advertising units. In January 2003, Salon began to restrict
access to its content solely to Salon Premium subscribers, with access allowed
to non-subscribers willing to watch a rich media "Access Pass" advertisement. In
May 2003, Salon expanded its Access Pass advertisement to include advertisements
triggered before a non Salon Premium subscriber reached Salon's home page at
www.salon.com. After watching the advertisement, which lasts up to approximately
one minute, the individual is then granted the ability to view all of Salon's
content. This strategy has enabled Salon to bundle in its orders the sale of
traditional banner and leader board advertising units, and Access Pass rich
media advertisements, increasing overall advertising revenues. During the year
ended March 31, 2004, approximately 47% of Salon's overall advertising revenues
resulted from offering Access Pass advertisements.
According to a survey conducted by PricewaterhouseCoopers and sponsored by
the IAB, revenues from Internet advertising was approximately $7.27 billion
during calendar year 2003 versus $6.01 billion during calendar year 2002, a 21%
increase. However, the study indicated that approximately 95% of advertising was
garnered by the top fifty ad-selling companies. The study therefore implies that
Salon competed for approximately $300-$400 million of advertising dollars with
all the other ad-selling Websites. Salon's ability to capitalize significantly
on this portion of the market was hampered by its financial viability as
perceived by potential advertisers, and its low number of unique Website
visitors, as advertisers on average tend to seek Websites with a minimum ten
million monthly unique Website visitors versus approximately three million for
Salon. As a result of these factors, Salon's advertising revenues for the year
ended March 31, 2004 increased by approximately $0.1 million to $1.8 million as
compared to the year ended March 31, 2003.
Overall, Internet advertising during calendar year 2003 was estimated to
comprise only 3% of the total dollars spent for advertising, compared to
approximately 2.5% during calendar year 2002. It is estimated by eMarketer that
calendar year 2004 Internet advertising will be approximately $8.4 billion,
which considering that approximately 95% of the advertising market will go
towards the top fifty Websites, will leave approximately $400-$500 million
available for companies such as Salon.
PAY FOR ONLINE CONTENT
When activity first surged on the Internet, access to content was rarely
restricted and was available free of charge. A few Websites, notably the Wall
Street Journal's online edition, realized that to be profitable, they had to
charge for access to content. This initiative was originally viewed with
skepticism by other Internet media companies, but is now more widely adopted.
The Online Publishers Association (OPA) has reported, based on a study conducted
in partnership with comScore Networks, that U.S. consumers spent $1.56 billion
for online content during calendar year 2003, compared to $1.31 billion in
calendar year 2002. The 18.8% increase year over year was attributable to a
greater number of consumers purchasing content and not additional dollars spent
per consumer. Even though the average price for an annual online subscription of
$48.65 was relatively unchanged from the previous calendar year, Salon increased
its annual subscription fee to Salon Premium with no advertising from $30 to $35
and increased its annual subscription with ads from $18.50 to $22.50 in August
2003. The largest three categories, personals/dating, business/investment and
entertainment/lifestyle, accounted for 64% of all spending for content. The
general news category, which includes Salon, reportedly generated a total of
$87.5 million in subscription revenues during calendar year 2003, or
approximately 5.6% of all online content spending, compared to $70 million
during calendar year 2002. Salon's niche in this category is its independence
and award winning content.
7
REVENUE SOURCES
Salon's primary revenue sources are from advertising, and subscriptions to
Salon Premium and The Well/Table Talk.
Advertising revenues are derived from the sale of promotional space on
Salon's Website. Traditionally, this was the major source of revenue for Salon.
With the introduction of the Salon Premium subscription service in April 2001,
the dependency on advertising revenues diminished. Advertising as a percentage
of all revenues has decreased from 54% for the year ended March 31, 2002 to 42%
for the year ended March 31, 2003 to 39% for the year ended March 31, 2004.
During the first quarter of the year ending March 31, 2005, Salon has
experienced resurgence in advertising sales, while subscriptions to Salon
Premium have reached a plateau of approximately 72,000 active subscribers. Salon
cannot estimate if this trend will continue for the remainder its year ending
March 31, 2005.
Most of the advertising campaigns are short duration, generally less than
ninety days. Salon's obligations typically include the guarantee of a minimum
number of impressions, or views of an advertisement by a Website visitor, a set
number of "Access Pass" advertisement downloads by a Website visitor, or a set
number of days that an Access Pass advertisement will be run. To the extent the
minimum guaranteed amounts are not provided, Salon defers recognition of the
corresponding revenue until the remaining guaranteed amounts are achieved, if
mutually agreeable with an advertiser. If these "make good" amounts are not
agreeable to an advertiser, no further revenue is recognized. No customer
accounted for over ten percent of either total revenue or advertising revenue
for the years ended March 31, 2004 or March 31, 2003. One customer, Lexus,
accounted for 13% of advertising revenue and 8% of total revenue for the year
ended March 31, 2002.
Salon began offering Salon Premium, a pay for online content subscription
service, in April 2001. Subscription durations were originally for one-month,
one-year and two-years, with the two-year subscription plan being suspended in
November 2002. Initially, some content was restricted to Salon Premium
subscribers only. In January 2003, Salon modified its business model by granting
"Access Passes," which allows access to substantially all of Salon's content to
non Salon Premium subscribers willing to view some form of advertisement. The
annual subscription rate for Salon Premium with no ads, the primary plan offered
by Salon and originally priced at $30, was increased in August 2003 to $35, with
no detrimental effects on subscriptions. Benefits of Salon Premium include the
option to view Salon content without advertising banners, pop-ups or other forms
of advertisements; the ability to easily download content in text or PDF format,
a convenience that enables readers to view additional Salon articles when not
connected to the Internet; access to certain Premium-only events; membership to
Table Talk; and free of charge print magazines.
Salon Premium revenue is recognized ratably over the period that services
are provided. During the year ended March 31, 2004, Salon received $1.9 million
in cash and recognized $1.8 million of revenue for this service from
approximately 76,000 new and renewal subscription sales. For the year ended
March 31, 2003, Salon received $1.6 million in cash and recognized $1.3 million
of revenue for this service from approximately 70,000 new and renewal
subscription sales. For the year ended March 31, 2002, in which Salon Premium
operated for approximately eleven months, Salon received $1.1 million in cash
and recognized $0.6 million of revenue from approximately 35,000 subscription
sales. Salon had approximately 72,000 active subscribers and a renewal rate for
purchased subscriptions of 64 percent as of March 31, 2004.
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. The revenues recognized
8
and the cash received of $0.6 million has stayed constant for the years ended
March 31, 2004, March 31, 2003 and March 31, 2002.
Salon generates nominal revenue from the licensing of content that
previously appeared in Salon and for providing links to a third party's Website.
The third party offers a personals/dating services.
SALES AND MARKETING
Salon has sales offices in New York City and San Francisco with six active
advertising sales employees as of March 31, 2004, down from seven employees as
of March 31, 2003. Salon has an employee engaged in marketing and another in
Salon Premium customer support at its San Francisco office.
During the year ended March 31, 2004, Salon incurred $1.1 million in
advertising costs to promote and attract viewers to its Website, compared to
$0.8 million for the year ended March 31, 2003 and $0.7 million for the year
ended March 31, 2002. The advertising costs of $1.1 million for the year ended
March 31, 2004 were primarily 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 costs for the years ended March 31, 2003
and March 31, 2002 include the usage of approximately $0.8 million of such
non-cash advertising credits.
During the year ended March 31, 2003, Rainbow Media Holdings transferred a
portion of its obligation to provide Salon with advertising credits to NBC's
Bravo channel, while still retaining a portion of the overall obligation. The
transfer occurred due to the sale by Cablevision, which owns Rainbow Media
Holdings, of its Bravo channel to NBC.
COMPETITION
Salon competes for advertising revenues from a multitude of Internet
Websites, with the 50 largest Websites attracting an estimated 95% of all the
advertising dollars. The Websites include major portals such as Yahoo.com, major
search engines such as Google and major online media publications such as
CNN.com.
Salon believes it has no competitors for its pay for online content, or
Salon Premium subscription plan. Even though some Websites such as
CBCMarketWatch.com and the Wall Street Journal Online edition have online
subscription plans, they do not provide general interest news and information,
as does Salon. Salon's pricing for its annual subscription of $35 without
advertisements is under the 2003 average of approximately $49 as reported by the
OPA, which Salon feels allows it to compete for subscription dollars. Salon
believes that its award winning content and independence attract individuals to
Salon's Website, and to ultimately subscribe to its Salon Premium pay for online
content service.
SALON'S STRATEGY
INCREASING CIRCULATION
Salon has limited cash resources to market its Website in order to increase
circulation. However, Salon does have unique, compelling and highly acclaimed
editorial content desirable by other media properties. Salon has undertaken
various media partnerships that strive to expand its reach. Salon has entered
into an editorial partnership with Rolling Stone Magazine, whereby Rolling Stone
and Salon collaborate on special reports that are published in Rolling Stone
Magazine. Salon's first special report,
9
entitled "Bush's War on Gay Marriage" was published in the March 18, 2004
edition of Rolling Stone, and several additional stories are planned during the
2004 Presidential election campaign. In March 2004, Salon entered into a
six-month editorial exchange relationship with The Guardian of London newspaper
whereby both companies are to exchange up to three stories daily, with prominent
links to each other's respective Website. Also in March 2004, Salon entered an
agreement with Air America, a network of radio stations currently in
approximately 15 major US cities, to broadcast a "Salon story of the Day " as
part of its daily news offering. Even though activity with The Guardian and Air
America was minimal through March 31, 2004, it is hoped that these agreements
with print publications and radio will increase Salon's visibility and
ultimately increase circulation.
Salon has also initiated a strategy to increase circulation by making
content available to advocacy groups that want to send Salon articles directly
to their members. For example, in March 2004, Moveon.org sent a Salon story,
Karen Kwiatkowski's "The New Pentagon Papers," directly to members on its e-mail
list. This initial e-mailing by Moveon.org, was followed up later again in March
2004 and in April 2004 to links to Salon stories. Salon will continue to make
editorial available to advocacy groups to distribute to their members, and hopes
this will expose it to a pool of new users who will become regular visitors of
the Website.
In order to increase the number of unique visitors to its Website, and
therefore become more attractive to advertisers, Salon is exploring
collaboration and/or distribution agreements with a major Internet site. Even
though Salon is in discussions to further this goal, prior efforts, such as with
AOL approximately a year ago, have not resulted in noticeable increases in
circulation, if at all.
CONTINUE TO ESTABLISH INNOVATIVE ADVERTISING PROGRAMS
In January 2003, Salon began to enable those readers who were not Salon
Premium subscribers' to access all new content if they were willing to view some
form of rich media advertising "Access Pass." Performance matrices for the
Access Pass have exceeded IAB banner standard performances, and therefore Salon
has been able to charge a premium for this ad unit. The new format results in a
Website visitor interacting with an advertisement for approximately one minute
and in return is given a pass to access Salon's Website for 8 hours. Salon's
strategy is to continue to promote the benefits of this new ad format, and
experiment with new technology to increase non-banner advertising inventory.
EXPAND SUBSCRIPTION-BASED REVENUES
In January 2003, Salon began to "gate" all content and require a user
either to view an advertisement, or to become a Salon Premium subscriber. To
further entice Website visitors to join Salon Premium, Salon offers free
promotions, such as magazine subscriptions to "U.S. News and World Report" and
"Wired," which it continuously updates and expands. In addition, Salon
occasionally offers potential new subscribers free DVDs and books. The
respective publishers provide the offering of magazines, books and DVDs free to
Salon in return for promotion of the product by Salon.
Salon has also offered Premium memberships to advocacy groups to bundle in
with their membership or fundraising drives. NARAL Pro-Choice America has
bundled a Salon Premium subscription to donors who contribute $35 or more to
NARAL. Human Rights Campaign also has bundled in Salon Premium subscriptions for
new members who subscribe at a minimum $35 annual fee. In both programs, Salon
receives $3.50 per person. Even though the revenues generated from such programs
have been minimal as of this filing, Salon hopes that similar programs will
attract additional visitors to its Website and make more individuals aware of
Salon.
10
Salon has begun to implement technology to track user behavior and
customize messaging based on the information gathered. Special messaging, via
pop-ups to frequent users, has been implemented, as well as customized messaging
for lapsed members. Tracking and messaging actions are geared towards increasing
Salon Premium subscriptions, and to improve the 64 percent renewal rate for
purchased subscriptions that Salon has experienced through March 31, 2004.
In order to increase Salon Premium revenue, Salon has entered into two
agreements in which third parties will aggregate Salon's content with other
content providers to be distributed through telephone companies, ISPs and cable
companies. The combined content is to be sold to individuals for a monthly
charge, and Salon will get a remit for each new subscriber. One of the third
parties initiated a private labeled Web subscription service in May 2004 for a
small independent telephone company that will market the bundled subscription
service to its telephone, cable and ISP customers. It is uncertain when the
other third party will initiate its service. Salon is unable to predict how
successful this strategy will be.
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 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 Website is 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.
Salon servers are maintained by a third-party facility that provides bandwidth
on demand to meet the fluctuating needs of Salons network. The third party
offers high-speed connections to the Internet, helping ensure fast serving and
delivery of Salon's Website, 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.
Software to maintain and manage Salon Premium was created in-house. In May
2003, Salon re-developed and re-deployed its subscription sign-up system in
order to improve customer experience and level of customer support, and to
increase the flexibility of service offerings. During the year ended March 31,
2003, account and subscription management systems were re-engineered in order to
apply additional control mechanisms and to improve the level of performance
reporting related to the subscription service offering.
PROPRIETARY RIGHTS
Salon's success and ability to compete is dependent in part on the goodwill
associated with its trademarks, trade names, service marks and other proprietary
rights and on its ability to use U.S. laws to protect its intellectual property,
including its original content, content provided by third parties, and content
provided by columnists. Salon also claims common law protection on certain names
and marks that it has used in connection with business activities.
Salon owns the Internet address WWW.SALON.COM. Because WWW.SALON.COM is the
address of the main home page to Salon's Website and incorporates Salon's
company name, it is a vital part of Salon's
11
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.
EMPLOYEES
As of March 31, 2004, Salon had 6 part-time and 49 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.
ITEM 2. PROPERTIES
As of March 31, 2004, Salon leases the 11th floor at 22 Fourth Street, San
Francisco, California, representing approximately 10,500 square feet of office
space at approximately $21,000 per month, with the lease expiring in February
2005.
Salon leases approximately 7,000 square feet of space at 126 Fifth Avenue,
New York, New York. The rent for this space is approximately $19,000 per month,
with the lease expiring in December 2004. Salon has subleased these premises
since April 2003, with approximately $13,000 per month being paid directly to
the lessor from the sub-lessee for the duration of the original lease.
Salon leases nominal office space at 41 East 11th Street, 11th Floor, New
York, NY for approximately $9,000 per month with the lease terminating on May
31, 2004. Subsequent to March 31, 2004, Salon amended the lease for an
additional twelve-month period for approximately $10,000 per month.
Subsequent to March 31, 2004, Salon entered into a lease agreement for
minimal office space in Washington, DC. for three years commencing on June 1,
2004 for approximately $1,600 per month.
ITEM 3. LEGAL PROCEEDINGS
Salon is not a party to any pending legal proceedings that 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, 2004.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED MATTERS
On June 22, 1999, Salon had its initial public offering, with its common
stock quoted on the NASDAQ National Market under the symbol SALN. Due to Salon's
inability to meet the continued listing requirements of the NASDAQ Market, on
November 21, 2002 Salon's common stock instead began trading in the OTC
(Over-The-Counter) Bulletin Board marketplace under the symbol SALN.OB
Information with respect to the quarterly high and low bid prices for
Salon's common stock for its fiscal years 2004 and 2003, based on sales
transactions reported by NASDAQ through November 20, 2002 and in the OTC
(Over-The-Counter) Bulletin Board after November 20, 2002, is provided below:
FISCAL YEAR ENDED FISCAL YEAR ENDED
MARCH 31, 2004 MARCH 31, 2003
--------------------- ---------------------
FOR THE QUARTERS ENDED HIGH LOW HIGH LOW
---------- ---------- ---------- ----------
June 30 0.08 0.04 0.17 0.02
September 30 0.10 0.02 0.14 0.04
December 31 0.07 0.03 0.09 0.01
March 31 0.40 0.03 0.08 0.04
There were 247 holders of record of Salon common stock as of June 21, 2004.
This number was derived from Salon's stockholder records, and does not include
beneficial owners of Salon's voting common stock whose shares are held in the
names of various dealers, clearing agencies, banks, brokers, and other
fiduciaries. The closing price of Salon's common stock on June 21, 2004 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, 2004 2003 2002 2001 2000
- ---------------------------------------------------- ------- ------- ------- ------- -------
Net revenues $ 4,499 $ 4,003 $ 3,619 $ 7,202 $ 8,002
Net loss (1) $ 6,046 $ 5,597 $ 8,000 $19,155 $21,890
Net loss attributable to common
stockholders (2) $ 8,661 $ 5,678 $11,286 $19,155 $33,405
Basic and diluted net loss per share attributable to
common stockholders $ 0.61 $ 0.41 $ 0.83 $ 1.48 $ 3.63
Weighted average common shares
outstanding used in computing
per share amounts 14,099 13,938 13,547 12,962 9,204
Cash and cash equivalents $ 696 $ 162 $ 1,542 $ 3,047 $17,982
Prepaid advertising rights $ 4,430 $ 5,480 $ 6,266 $ 7,075 $ 7,884
Total assets (3) $ 6,270 $ 7,590 $11,342 $16,298 $35,284
Capital leases - long-term portion $ -- $ 18 $ 77 $ 325 $ 324
Total long-term liabilities (4) $ 2,621 $ 569 $ 229 $ 601 $ 473
(1) The net loss for the year ended March 31, 2003 includes write-down of
long-lived assets of $345 related to certain leasehold improvements. The net
loss for the year ended March 31, 2002 includes a write-down of long-lived
assets of $782 due to impairments. The net loss for the year ended March 31,
2001 includes a write-down of long-lived assets of $3,517 due to impairments.
(2) The net loss attributable to common stockholders for fiscal year ended March
31, 2004 includes a preferred deemed dividend of $2,615 that included $2,040
resulting from the difference between the offering price of Salon's Series C
preferred stock and warrants sold in February 2004 and the deemed fair value of
Salon's common stock on the date of the transaction and $575 from the change in
value during the year ended March 31, 2004 of warrants issued to preferred
stockholders. The 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.
(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.
(4) Salon's charter allows for the issuance of 50,000,000 shares of common
stock. Since the year ended March 31, 2003, Salon has had an insufficient number
of authorized shares to satisfy all obligations
14
under convertible instruments, warrant agreements and options. Therefore, since
that time, the value of warrants issued is classified as a long-term liability,
with the fair value re-measured at each balance sheet period. The valuation of
warrants will continue until such time as Salon has amended its Certificate of
Incorporation and upon receiving the requisite approval of Salon's Board of
Directors and stockholders to increase the number of authorized common stock.
The March 31, 2004 balance of $2,621 represents such value and $354 was the
value of the warrants as of March 31, 2003.
15
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
content Website with eight primary sections, and two online communities - The
Well and Table Talk. Salon was incorporated in July 1995 and launched its
initial Website in November 1995.
A significant portion of Salon's revenues is advertising revenues, derived
from the sale of promotional space on its Website. The sale of promotional space
is generally less than ninety days in duration. Advertising platforms sold
included "rich media" streaming advertisements, as well as traditional banner
and pop-up advertisements.
Salon began offering Salon Premium, a pay for online content subscription
service, in April 2001. Subscription durations were originally for one-month,
one-year and two-years, with the two-year subscription plan being suspended in
November 2002. Initially, some unabridged content on Salon's Website was
restricted to only Salon Premium subscribers. In January 2003, Salon modified
its restrictions to allow access to substantially all of its content to Salon
Premium subscribers or to non Salon Premium subscribers willing to view some
form of advertisement by granting this pool of individuals an "Access Pass."
Salon Premium revenue is recognized ratably over the period that services are
provided. During the year ended March 31, 2004, Salon received $1.9 million in
cash and recognized $1.8 million of revenue for this service.
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 nominal revenue from the licensing of
content that previously appeared in Salon's Website and for hosting links to a
third party's personals/dating Website.
Production and content 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 Website and online communities.
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 and the
amortization of prepaid advertising rights.
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 Website, and to maintain and enhance the software
utilized in managing Salon Premium, as well as supporting marketing and sales
efforts.
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 efforts to market and sell
this software to focus on its core content, production and maintenance business.
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 Website, and since then, has not incurred any material
costs for enhancement or to add substantial additional functionality on its
Website.
16
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.
Salon has incurred significant net losses and negative cash flows from
operations since its inception. As of March 31, 2004, Salon had an accumulated
deficit of $90.9 million. These losses have been funded primarily through the
issuance of common stock from Salon's initial public offering in June 1999,
issuance of preferred stock, and from the issuance of convertible notes payable.
Salon believes that it will incur negative cash flows from operations for the
year ending March 31, 2005.
Salon has not recorded a provision for federal or state income taxes for
any period since inception due to reoccurring operating losses. At March 31,
2004 Salon had net operating loss carryforwards for federal income tax purposes
of $61.3 million and $31.1 million for California, that begin to expire in the
years March 31, 2006 through March 31, 2014. 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 California 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 $1.5 million during the year ended March 31, 2004
to $24.2 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 accounting policies and estimates related
to revenue recognition and prepaid advertising rights are the most critical to
Salon's financial statements. Future results may differ from current estimates,
assumptions or change in 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.
Advertising revenues, derived from the sale of promotional space on its
Website, comprised 39% of Salon's revenues for the year ended March 31, 2004.
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. Salon's obligations typically include
the guarantee of a minimum number of impressions, a set number of "Access Pass"
advertisement downloads, or a set number of days that an Access Pass
advertisement will run. To the extent minimum guaranteed amounts are not
provided for, Salon defers recognition of the corresponding revenue until the
remaining guaranteed amounts are achieved, if mutually agreeable with an
advertiser. If these "make good" impressions are not agreeable to an advertiser,
no further revenue is recognized.
17
Salon Premium, a pay for online content subscription service, provides
unrestricted access to Salon's content and the ability to easily download
content in text or PDF format, a convenience that enables readers to view
additional Salon articles when not connected to the Internet. Subscription
durations are primarily one-year. Non Salon Premium subscribers generally can
gain access to Salon's content after viewing some form of advertisement
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.
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 were to 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. As of
March 31, 2004, Salon has $5.4 million advertising credits resulting from the
transaction, valued at $4.4 million.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED MARCH 31, 2004 AND 2003
NET REVENUES
Salon's net revenue increased 12% to $4.5 million in the year ended March
31, 2004 from $4.0 million in the fiscal year ended March 31, 2003.
Advertising revenues increased 3% to $1.8 million for the year ended March
31, 2004 from $1.7 million for the year ended March 31, 2003. The modest
increase in advertising revenues generally reflects an acceptance by advertisers
of Salon's Access Pass advertisement format with rich media that results in a
more favorable advertising experience than traditional banner advertising.
Viewing Access Pass advertisements allow non Salon Premium subscribers access to
Salon's content. Overall, Salon was not able to capitalize on the 21% increase
in Internet advertising experienced in calendar year 2003 due to the relatively
small number of Website visitors that it generates and concerns of Salon's
financial viability.
As advertising campaigns are normally short in duration and finalized
shortly before implementation, Salon cannot predict full year amounts. However,
Salon estimates that for its quarter ending June 30, 2004 advertising revenues
will be approximately $0.9-$1.0 million.
Salon Premium and Well/Table Talk subscription revenues increased 28% to
$2.4 million for the year ended March 31, 2004 from $1.9 million for the year
ended March 31, 2003. The increase is attributable to revenues earned from
subscriptions to Salon Premium, which generated $1.8 million in revenue during
the year versus $1.3 million the prior year. Salon Premium revenues increased
from a growth in overall subscriptions, as new and renewed one-year paid
subscriptions for the year ended March 31, 2004 were approximately 63,600,
versus approximately 53,300 for the year ended March 31, 2003. However, the
number of active subscribers has stabilized at approximately 72,000 primarily
from a decline in the renewal rate. The approximate current renewal rate for
purchased subscriptions is 64% versus 71% last year. The decline is attributable
to the January 2003 decision to make all of Salon's content available to non
Salon Premium subscribers as long as a Website visitor were willing to view an
Access Pay advertisement. The easing of access to Salon's content removed a
major inducement for a
18
Website visitor to spend cash and subscribe to Salon Premium. However, Salon has
made up for this loss of cash by increasingly being able to sell more Access
Pass advertisement opportunities to advertisers. Salon does not anticipate the
number of subscriptions increasing at the same rate during its year ending March
31, 2005 as it during the year ended March 31, 2004 and estimates that it will
recognize Salon Premium revenues of approximately $2.0 for the year ending March
31, 2005.
All other sources of revenue accounted for $0.3 million for the year ended
March 31, 2004 compared to $0.4 million for the year ended March 31, 2003. The
decrease of $0.1 million was primarily due to a decrease in the licensing of
content, as Salon did not actively pursue this weak market during the second
half of its year ended March 31, 2004.
PRODUCTION AND CONTENT
Production and content expenses during the year ended March 31, 2004 was
$4.6 million versus $4.4 million for the year ended March 31, 2003, an increase
of $0.2 million or 5%. The increase reflects a credit during the year ended
March 31, 2003 of $0.2 million from the reversal of previously accrued bonuses
that were not going to be paid and a non cash charge this year of $0.2 million
related to the value of warrants issued for editorial collaboration with a print
publisher, offset by a $0.1 million reduction of Internet hosting costs and a
$0.1 million reduction in general operating costs. Salon does not anticipate
production and content cash related expenditures to vary significantly for the
year ending March 31, 2005 from the current year results.
SALES AND MARKETING EXPENSES
Sales and marketing expenses during the year ended March 31, 2004 were $2.4
million versus $2.3 million for the year ended March 31, 2003, an increase of
$0.1 million or 4%. The minor overall increase reflects utilizing an additional
$0.3 million of advertising credits this year versus last year, offset by
reductions of $0.1 million in payroll related costs from the elimination three
positions during the year, and $0.1 million from reduced general operating
costs. Salon anticipates utilizing $0.5-$0.8 million of advertising credits
during the year ending March 31, 2005, with overall expenses of approximately
$1.6-$1.9 million.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the years ended March 31, 2004 and
March 31, 2003 were $0.6 million. Salon does not anticipate research and
development expenditures to vary significantly for the year ending March 31,
2005 from the current year results.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the years ended March 31, 2004 and
March 31, 2003 were $1.4 million. While the March 31, 2003 results reflected a
credit from reversing a bonus accrual of $0.2 million and the March 31, 2004
results included a charge of $0.1 million related to the issuance of warrants to
a former employee, the March 31, 2004 results also include a $0.1 million
reduction in legal expenses from a reduction in matters requiring outside
counsel guidance and a $0.1 million reduction in general operating costs. Salon
estimates that general and administrative expenses will be approximately
$0.8-$1.0 million for the year ending March 31, 2005.
19
AMORTIZATION OF INTANGIBLES
Amortization of intangible expenses during the years ended March 31, 2004
and March 31, 2003 were $0.4 million. As all intangible assets except for $0.2
million of goodwill have been amortized as of March 31, 2004, Salon does not
anticipate incurring any amortization of intangibles expenses for its year
ending March 31, 2005.
WRITE-DOWN OF LONG-LIVED ASSETS
In 1999, Salon entered into a ten-year lease for two floors of office space
in San Francisco. In February 2001, Salon began to sublease one of the two
floors with the sublease agreement terminating during the year ended March 31,
2003. Salon determined that the office space previously subleased would not be
utilized or subleased, and as a consequence, wrote-down the value of the assets
associated with the office space by $0.3 million during the year ended March 31,
2003. No comparable charge was incurred during the year ended March 31, 2004.
INTEREST AND OTHER INCOME
Interest and other income for the year ended March 31, 2004 is primarily
$0.1 million of realized income from monies received by Salon to finance
editorial content that was completed during the period. The nominal interest and
other income for the year ended March 31, 2003 was interest income from
certificates of deposit.
INTEREST AND OTHER EXPENSE
Interest and other expense for the year ended March 31, 2004 was $1.3
million compared to $0.1 million for the year ended March 31, 2004. As Salon has
insufficient common stock authorized to satisfy all obligations under
convertible instruments, warrant agreements and options, Salon revalues its
warrants at each balance sheet period. The results for the year ended March 31,
2004 include a charge of $0.8 million related to the revaluation of warrants
held by convertible note holders. Salon contemplates securing Board of Directors
and stockholder approval by its third quarter of its year ending March 31, 2005
increasing the authorized number of common shares, which would cure such a
deficiency. If such approvals were to be received and the price of Salon's
common stock were to not fluctuate significantly from $0.14 per share, Salon
does not contemplate incurring such a charge to its results of operations for it
year ending March 31, 2005. The year ended March 31, 2004 results also include a
charge of $0.1 million of interest on convertible notes and $0.3 million related
to amortizing the initial value of warrants issued to the holders of the
convertible notes. Salon converted all outstanding convertible notes to
preferred stock on December 30, 2003 and as such does not contemplate incurring
similar charges on its results of operations for the year ending March 31, 2005.
The results for the year ending March 31, 2004 also includes $0.1 million
of various other interest expense charges related to capital lease agreements
and a bank borrowing agreement. The $0.1 million charge for the year ending
March 31, 2003 includes nominal charges under capital leases, convertible note
interest and the value of warrants issued to convertible note holders.
PREFERRED DEEMED DIVIDEND
The non-cash preferred deemed dividend of $2.6 million for the year ended
March 31, 2004 includes $2.0 million resulting from the difference between the
offering price of Salon's Series C preferred stock and warrants sold in February
2004 and the deemed fair value of Salon's common stock
20
on the date of the transaction and $0.6 million from the change in value during
the year ended March 31, 2004 of warrants issued to preferred stockholders.
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
As a result of the above factors, Salon recorded a net loss attributable to
common stockholders of $8.7 million or $0.61 per share for the fiscal year ended
March 31, 2004 compared to a net loss of $5.7 million or $0.41 per share for the
fiscal year ended March 31, 2002.
FISCAL YEARS ENDED MARCH 31, 2003 AND 2002
NET REVENUES
Salon's net revenue increased 11% to $4.0 million in the year ended March
31, 2003 from $3.6 million in the fiscal year ended March 31, 2002.
Advertising revenues decreased 13% to $1.7 million for the year ended March
31, 2003 from $1.9 million for the year ended March 31, 2002. The decrease in
advertising revenues reflected an apprehension by advertisers to place orders
with Salon given Salon's going concern uncertainty and corresponding uncertainty
of Salon's ability to fulfill an order. In addition, the decrease reflects the
majority of advertising dollars being allocated by advertisers to the largest
Websites and not to Websites of Salon's size.
Subscription revenues increased 60% to $1.9 million for the year ended
March 31, 2003 from $1.2 million for the year ended March 31, 2002. The increase
is attributable largely to Salon Premium, a pay for online content subscription
service launched in late April 2001, which generated $1.3 million in revenue
during the year versus $0.6 million last year, its inaugural year in which it
operated for eleven months.
All other sources of revenue accounted for $0.4 million for the year ended
March 31, 2003 compared to $0.3 million for the year ended March 31, 2002. The
increase of $0.1 million was primarily due to an increase in revenue from a
third party for which Salon provides links to its dating/personals Website.
PRODUCTION AND CONTENT
Production and content expenses during the year ended March 31, 2003 was
$4.4 million versus $5.0 million for the year ended March 31, 2002, a decline of
$0.6 million or 12%. The decrease primarily reflects reducing approximately
eighteen positions during the year ended March 31, 2002, to a staffing level
that stayed relatively constant throughout the year ended March 31, 2003, and
the reversal of previously accrued bonuses that resulted in salary related costs
decreasing by $0.4 million. In addition, during the year ended March 31, 2003,
Internet hosting costs were reduced by $0.1 million as Salon found a new
provider for this service, depreciation expense declined by $0.1 million as
assets became more fully depreciated and general operating costs were reduced by
$0.1 million. These reductions were offset by a $0.1 million increase in
freelance expenditures.
SALES AND MARKETING EXPENSES
Sales and marketing expenses during the year ended March 31, 2003 were $2.3
million versus $2.7 million for the year ended March 31, 2002, a decline of $0.4
million or 16%. The decrease primarily
21
reflects reducing approximately six positions during the year ended March 31,
2002, and then reducing an additional three positions during the year ended
March 31, 2003, resulting in salary related costs decreasing by $0.2 million. A
general reduction in expenditures in order to preserve Salon's limited cash
resources resulted in general expenditures decreasing by $0.2 million.
Sales and marketing expenses include a charge for the use of advertising
credits. For the years ending March 31, 2003 and March 31, 2002 Salon used $0.8
million of such credits.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses during the year ended March 31, 2003 were
$0.6 million versus $0.7 million for the year ended March 31, 2002, a decline of
$0.1 million or 11%. The decrease primarily reflects reducing approximately
three positions during the year ended March 31, 2002, to a staffing level that
stayed relatively constant throughout the year ended March 31, 2003, resulting
in salary related costs decreasing by $0.1 million.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses during the year ended March 31, 2003
were $1.4 million versus $1.9 million for the year ended March 31, 2002, a
decline of $0.5 million or 30%. The decrease is attributable to reversing $0.2
million in previously accrued bonuses. In addition, March 31, 2002 results
include $0.3 million of bad debt expense, with this year's results only
reflecting marginal bad debt expense.
AMORTIZATION OF INTANGIBLES
Amortization of intangible expenses during the year ended March 31, 2003
was $0.4 million versus $0.5 million for the year ended March 31, 2002, a
decline of $0.1 million or 13%. The decrease is attributable to the suspension
in amortizing goodwill in accordance with the April 1, 2002 adoption of
Financial Accounting Standards Board (FASB) Statement of Financial Accounting
Standard No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142).
WRITE-DOWN OF LONG-LIVED ASSETS
In 1999, Salon entered into a ten-year lease for two floors of office space
in San Francisco. In February 2001, Salon began to sublease one of the two
floors with the sublease agreement terminating during the year ended March 31,
2003. Salon determined that the office space previously subleased would not be
utilized or subleased, and as a consequence, wrote-down the value of the assets
associated with the office space by $0.3 million as of March 31, 2003.
The results for Salon's year ending March 31, 2002 includes a write-down of
long-lived assets of $0.7 million associated with the discontinuance in
marketing proprietary software to manage Websites and $0.1 million of goodwill
associated with issuing 317,000 shares of common stock stipulated in the May
2000 acquisition agreement of MP3Lit.com by Salon.
INTEREST AND OTHER EXPENSE
Interest and other expense for both years ended March 31, 2003 and 2002 was
$0.1 million of interest related expenses. The interest expense for the year
ended March 31, 2002 was primarily related
22
to lease obligations of Salon, while the interest expense for the year ended
March 31, 2003 primarily relates to the bridge notes issued during the year.
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 was 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 $5.7 million or $0.41 per share for the fiscal year ended
March 31, 2003 compared to a net loss of $11.3 million or $0.83 per share for
the fiscal year ended March 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2004, Salon had approximately $0.7 million in available
cash remaining from the issuance Series C preferred stock in December 2003 and
February 2004. Salon received a total of $0.9 million from the issuance of
Series C preferred stock.
Net cash used in operations was $2.8 million for the year ended March 31,
2004, compared to $2.9 million for the year ended March 31, 2003. The principal
use of cash during the year ended March 31, 2004 was to fund the $6.0 million
net loss for the period, offset partly by non-cash charges of $3.4 million and
use of assets and liabilities of $0.1 million. The principal use of cash during
the year ended March 31, 2003 was to fund the $5.6 million net loss for the
period, offset partly by non-cash charges of $2.2 million and changes in assets
and liabilities of $0.5 million. The principal use of cash during the year ended
March 31, 2002 was to fund the $8.0 million net loss for the period and a $0.8
million decrease in liabilities, partly offset by non-cash charges of $3.3
million and an increase in deferred revenues of $0.3 million.
Net cash used in investing activities was immaterial for the years ended
March 31, 2004, March 31, 2003 and March 31, 2002. Salon anticipates purchases
of $0.1 million of property and equipment during the year ending March 31, 2005.
For the year ended March 31, 2004, net cash from financing activities was
$3.3 million, which was comprised of $2.5 million from the issuance of notes
payable, $0.9 million from the issuance of Series C preferred stock and $0.2
million from bank borrowings, offset by $0.2 million of re-payments to the bank
and $0.1 million of payments under capital leases. For the year ended March 31,
2003, net cash from financing activities was $1.5 million, which was comprised
of $1.7 million from the issuance of notes payable, offset by $0.2 million from
nominal payments for capital lease obligations. For the year ended March 31,
2002, net cash from financing activities consisted of $3.7 million from the
issuance of Series A and B preferred stock, offset by $0.2 million from nominal
payments for capital lease obligations.
In October 2002, Salon entered into an Accounts Receivable Purchase
Agreement with a bank. As Salon determined that the agreement was no longer
required to meet short-term cash needs, the
23
agreement was allowed to expire in January 2004. Salon has no immediate plans to
reactivate a similar agreement. As of March 31, 2004 Salon has immaterial
amounts owed under capital leases and does not anticipate entering into similar
debt instruments during its year ending March 31, 2005.
Salon, as permitted under Delaware law and in accordance with its Bylaws,
indemnifies its officers, key employees and directors for certain events or
occurrences, subject to certain limits, while the officer is or was serving at
Salon's request in such capacity. The term of the indemnification period is for
the officer's, key employee's or director's lifetime. The maximum amount of
potential future indemnification is unlimited; however, Salon does have a
Director and Officer Insurance Policy that limits Salon's exposure and enables
Salon to recover a portion of any future amounts paid. As a result of the
insurance policy coverage, Salon believes the fair value of these
indemnification agreements is minimal.
The following summarizes Salon's contractual obligations as of March 31,
2004, as amended and in effect subsequent to March 31, 2004, and the effect
these contractual obligations are expected to have on Salon's liquidity and cash
flows in future periods (in thousands):
Payments Due By Period
---------------------------------------------------------
Total 1 Year or Less 1-3 Years After 3 Years
---------- -------------- ----------- -------------
Operating leases $ 475 $ 434 $ 41 $ --
Capital leases 18 18 -- --
---------- -------------- ----------- -------------
Total $ 493 $ 452 $ 41 $ --
========== ============== =========== =============
PricewaterhouseCoopers LLP, Salon's independent accountants through
November 13, 2003 have included a paragraph in their report indicating that
substantial doubt exists as to Salon's ability to continue as a going concern
because of Salon's recurring operating losses, negative cash flow and an
accumulated deficit for the for the years ended March 31, 2002 and March 31,
2003. Salon's current independent accountants, Burr, Pilger & Mayer LLP make the
same assertions in their report for Salon's year ended March 31, 2004.
As of March 31, 2004, Salon's available cash resources were sufficient to
meet working capital needs for approximately two months. Subsequent to March 31,
2004, Salon received consent from its Board of Directors and stockholders to
issue 2,085 shares of Series D preferred stock at $800 per share. In June 2004,
Salon received $0.5 million from the issuance of 417 shares of Series D
preferred stock. Salon believes that it will be able to sell an additional 834
shares for $1.0 million during the remainder of its year ending March 31, 2005.
However, Salon estimates that with the cash on hand as of March 31, 2004, the
cash anticipated to be provided from operations, and $0.5 million from the June
2004 issuance of Series D stock, that it will only have to issue an additional
417 shares of Series D preferred stock to fund operations during the remainder
of the year ending March 31, 2005.
Salon's common stock holders have experienced considerable dilution from
the issuance of Series A, B and C preferred stock. As of March 31, 2004, the
holders of Salon's preferred stock control approximately 95% of the voting
securities of Salon, with related parties holding approximately 66% of such
securities. Of the related parties, Director John Warnock holds approximately
40% of the total voting securities, with the father of Salon's President, Chief
Financial Officer and Secretary either directly or indirectly, controlling
approximately 20% of the total voting securities. As stated in Note 11 of
Salon's consolidated financial statement, in the event of a liquidation event,
the liquidation preferences of holders of Salon's preferred stock will most
likely preclude any common stockholder from receiving little, if any,
liquidation distributions. The issuance of Series D preferred stock will result
in additional
24
dilution to Salon's common stock holders. The 417 shares of preferred stock
issued in June 2004 were sold at an effective common stock purchase price of
$0.093 per share and can be converted to approximately 5.4 million shares of
common stock.
Salon's lease for office space, located at 22 Fourth Street, San Francisco,
CA was originally to expire in 2009. During the year ending March 31, 2004,
Salon amended its lease to terminate in February 2005, for which it forfeited a
$0.4 million deposit and lowered its monthly rent from approximately $70,000 per
month to approximately $21,000 per month. Salon amended it lease again to
relocate from the 16th floor to the 11th floor for which the landlord forgave
approximately $145,000 in arrears rents owed. Between now and February 2005,
Salon will either extend the term of its existing lease agreement or relocate to
similar office space. Salon believes that it will be able to secure a revised or
new lease agreement on similar or improved terms.
Effective January 13, 2004 Salon and Rolling Stone, a wholly owned entity
of Wenner Media LLC, entered into an editorial collaboration agreement for which
both entities agreed to jointly finance, produce and publish content. On January
15, 2004, the President of Wenner Media LLC joined Salon's Board of Directors.
As of March 31, 2004, the two entities have jointly produced one story published
on March 18, 2004.
Salon has no off-balance sheet arrangements.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the Emerging Issues Task Force (EITF) reached a consensus
on Issue No. 00-21 "Accounting for Revenue Arrangements With Multiple
Deliverables" which provides guidance on how to account for arrangements that
involve the delivery or performance of multiple products, services and/or rights
to use assets. The provisions of EITF No. 00-21 apply to revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. The adoption of
EITF No. 00-21 did not have a significant affect on Salon's financial position
and results of operations.
In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity." This Statement establishes standards for how an
issuer classifies and measures in its statement of financial position certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances) because that financial
instrument embodies an obligation of the issuer. This Statement is effective for
financial instruments entered into or modified after May 31, 2003 and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. It is to be implemented by reporting the cumulative effect of a change
in an accounting principle for financial instruments created before the issuance
date of the statement and still existing at the beginning of the interim period
of adoption. The adoption of SFAS No. 150 did not have an adverse affect on
Salon's financial position or results of operations.
FACTORS THAT MAY AFFECT SALON'S FUTURE RESULTS AND MARKET PRICE OF STOCK
SALON MAY CEASE OPERATIONS IN ITS CURRENT FORM IF IT IS UNABLE TO RAISE
ADDITIONAL CASH RESOURCES
Salon has $0.7 million in cash as of March 31, 2004. These funds, in
conjunction with collections of accounts receivable, Salon Premium
subscriptions, and $0.5 million from the issuance of
25
417 shares of Series D preferred stock on June 4, 2004, have been used to fund
operations as of this filing. Salon believes that it can receive $1.0 million
from the issuance of an additional 834 shares of Series D preferred stock. If
Salon does not secure additional funds from the issuance of Series D preferred
stock, other equity securities or instruments that convert into equity
securities, Salon may be unable to continue as a going concern and cease
operations.
SALON MAY ISSUE ADDITIONAL PREFERRED STOCK AT EFFECTIVE PRICES LOWER THAN
CURRENT COMMON STOCK MARKET PRICES THAT WOULD RESULT IN NON-CASH CHARGES TO
OPERATIONS
The certificate of designation and preferences and rights of the Series D
preferred stock approved by Salon's Board of Directors subsequent to March 31,
2004, stipulates that the Series D conversion price will be equal to 70% of the
average closing sales price of Salon's common stock for the thirty days prior to
the date of issue of the Series D preferred stock. Such a discount will trigger
a non-cash preferred deemed dividend charge. The June 2004 issuance of 417
shares of Series D preferred stock will result in an approximate $0.2 million
preferred deemed dividend charge to Salon's results of operations. Salon cannot
predict to what extent it will incur preferred deemed dividend charges for
subsequent issuances of Series D preferred stock.
SALON HAS RELIED ON RELATED PARTIES FOR SIGNIFICANT INVESTMENT CAPITAL
Salon has been relying on cash from related parties to fund operations. The
related parties are primarily John Warnock, a Director of Salon, and William
Hambrecht, either directly or indirectly. Mr. Hambrecht is the father of Salon's
President, Chief Financial Officer, and Secretary. Out a total of $4.2 million
of cash received by Salon from the issuance of convertible notes payable, $3.5
million was from related parties. In addition, of the $0.9 million received from
the issuance of Series C preferred stock in December 2003 and February 2004,
$0.5 million was from Salon Director John Warnock and $0.2 million was from the
father of Salon's President, Chief Financial Officer, and Secretary. Of the $0.5
million received in the June 2004 issuance of Series D preferred stock, $249,600
was from Salon Director John Warnock and $225,600 was either directly or
indirectly from the father of Salon's President, Chief Financial Officer, and
Secretary. Curtailment of cash investments by related parties could
detrimentally impact Salon's ability to continue its operations and Salon may be
unable to continue as a going concern.
SALON'S PRINCIPAL STOCKHOLDERS CAN EXERCISE A CONTROLLING INFLUENCE OVER SALON'S
BUSINESS AFFAIRS AND THEY MAY MAKE BUSINESS DECISIONS WITH WHICH NON-PRINCIPAL
STOCKHOLDERS DISAGREE THAT WILL AFFECT THE VALUE OF THEIR INVESTMENT
The holders of Salon's Series A, B and C preferred stock collectively own
approximately 95% of all voting securities as of March 31, 2004. These
stockholders therefore own a controlling interest in Salon. Of this amount,
approximately 66% is by related parties, of which approximately 20% is
controlled directly or indirectly by the father of Salon's President, Chief
Financial Officer, and Secretary and approximately 40% by a Director of Salon.
Therefore, related parties by themselves own a controlling interest in Salon.
If these stockholders were to act together, they would be able to exercise
control over most matters requiring approval by other stockholders, including
the election of directors and approval of significant corporate transactions.
This concentration of ownership could also have the effect of delaying or
preventing a change in control of Salon, which could cause Salon's stock price
to decline.
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SALON'S PREFERRED STOCKHOLDERS ARE ENTITLED TO POTENTIALLY SIGNIFICANT
LIQUIDATION PREFERENCES OF SALON'S ASSETS OVER COMMON STOCKHOLDERS IN THE EVENT
OF SUCH AN OCCURRENCE
Salon's Series A, B and C preferred stockholders have liquidation
preferences of Salon's assets over common stockholders of a minimum of
approximately $18.9 million as of March 31, 2004. In the event of a liquidation
event, these holders would have preference over common stockholders of $18.9
million, or more, and therefore could affect the value of an investment in
Salon's common stock. Future issuance of preferred stock will increase this
liquidation preference.
SALON LACKS SIGNIFICANT REVENUES AND HAS A HISTORY OF LOSSES
Salon has a history of significant losses and expects to incur operating
losses in the near future. For the year ended March 31, 2004, Salon had net
losses attributable to common stockholders of $8.7 million and had an
accumulated deficit of $90.9 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.
Burr, Pilger & Mayer LLP, Salon's independent registered public accounting
firm for the year ended March 31, 2004 have included a "going-concern" audit
opinion on the consolidated financial statements for that year.
PricewaterhouseCoopers LLP, Salon's independent registered public accounting
firm for the years ended March 31, 2003, and 2002 have included a
"going-concern" audit opinion on the consolidated financial statements for those
years. The audit opinions report 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" opinions,
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'S OPERATIONS REQUIRE ATTRACTIVE CONTENT, SUBSCRIBER INTEREST, AND
CONFIDENCE BY SUBSCRIBERS AND SUPPLIERS THAT THE SUBSCRIPTION OFFERING WARRANTS
THEIR LONG-TERM SUPPORT AND INVESTMENT. THE ABSENCE OF ANY OF THESE FACTORS
COULD IMPAIR THE RESULTS, REVENUE AND CASH FLOW FROM SUBSCRIPTIONS.
Salon is under severe budgetary constraints to limit expenditures. These
constraints affect editorial staffing levels and the purchase of content from
freelance writers. These constraints affect the amount and quality of content
published on Salon's Website and consequently, the positive experience of
Website visitors. The positive experience leads to reoccurring Website visits,
new subscriptions to Salon Premium, and corresponding high renewal rates of
Salon Premium subscribers. For the year ended March 31, 2004 Salon's estimated
renewal rate for one-year paid subscription to Salon Premium was approximately
64%. Salon cannot predict if this rate will continue in the future or how many
new Salon Premium subscriptions it will acquire.
SALON HAS DEPENDED ON ADVERTISING SALES FOR MUCH OF ITS REVENUES, AND ITS
INABILITY TO MAINTAIN OR INCREASE ADVERTISING REVENUES WILL HARM ITS BUSINESS
Maintaining or increasing Salon's advertising revenues depends upon many
factors, including whether it will be able to:
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o successfully sell and market its Access Pass advertisements;
o entice non Salon Premium Website visitors to view and advertisers to
sell new ad units and formats;
o maintain a significant number of unique Website visitors and
corresponding significant reach of Internet users;
o maintain a significant number of sellable impressions available to
advertisers;
o successfully sell and market it network to advertisers;
o increase the amount of revenues it receives per advertisement;
o increase awareness of the Salon brand;
o accurately measure the number and demographic characteristics of its
users; and
o attract and retain key sales personnel.
THE LENGTH OF SALON'S SALES CYCLE 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 several
months. Sales of advertising are subject to factors over which Salon has little
or no control, including:
o advertisers' budgets;
o the acceptability of Access Pass and other forms of rich media
advertisements;
o internal acceptance reviews by advertisers and their agencies;
o the possibility of cancellation or delay of projects by advertisers.
SALON'S STOCK HAS BEEN AND WILL LIKELY CONTINUE TO BE SUBJECT TO SUBSTANTIAL
PRICE AND VOLUME FLUCTUATIONS DUE TO A NUMBER OF FACTORS, MANY OF WHICH WILL BE
BEYOND OUR CONTROL, THAT MAY PREVENT OUR STOCKHOLDERS FROM RESELLING OUR COMMON
STOCK AT A PROFIT
The securities markets have experienced significant price and volume
fluctuations, and the market prices of the securities of Internet companies have
been especially volatile. This market volatility, as well as general economic,
market or political conditions have, and may continue to reduce the market price
of our common stock, regardless of our operating performance. In addition,
Salon's operating results could be below the expectations of public market
analysts and investors, and in response, the market price of our common stock
could decrease significantly.
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WITH A VOLATILE SHARE PRICE, SALON MAY BE THE TARGETS OF SECURITIES LITIGATION,
WHICH IS COSTLY AND TIME-CONSUMING TO DEFEND
In the past, following periods of market volatility in the price of a
company's securities, security holders have instituted class action litigation.
Our share price has, in the past, experienced price volatility, and may continue
to do so in the future. Many companies have been subject to this type of
litigation. If the market value of our common stock experiences adverse
fluctuations and we become involved in this type of litigation, regardless of
the merits or outcome, we could incur substantial legal costs and our
management's attention could be diverted, causing our business, financial
condition and operating results to suffer. To date, Salon has not been subject
to such litigation.
SALON'S QUARTERLY OPERATING RESULTS ARE VOLATILE AND MAY ADVERSELY AFFECT ITS
COMMON STOCK PRICE
Salon's 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 Salon's control, and any of which could severely harm Salon's
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 Website;
o the impact of national economic and diplomatic concerns on the
advertising and news business; and,
o the amount and timing of operating costs.
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.
29
THE CONTROVERSIAL CONTENT OF SALON'S WEBSITE MAY LIMIT ITS REVENUES
Salon's Website contains, and will continue to contain, content that is
politically and culturally controversial. As a result of this content, current
and potential advertisers, potential Salon Premium subscribers, or third parties
who contemplate aggregating content, may refuse to do business with Salon.
Salon's outspoken stance on political issues has and may continue to result in
negative reactions from some users, commentators and other media outlets. From
time to time, certain advocacy groups have successfully targeted Salon's
advertisers in an attempt to persuade such advertisers to cease doing business
with Salon. These efforts may be a material impediment to Salon's ability to
grow and maintain advertising revenue.
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 grow 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 personnel. In
addition, because Salon's users must perceive the content of Salon's Website as
having been created by credible and notable sources, Salon's success also
depends on the name recognition and reputation of its editorial staff. Due to
Salon's current operating difficulties, 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 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 its
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 ensure that this content may be freely licensed to us, other parties
may assert claims of infringement against us relating to this content.
30
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 Website 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 Website 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 OR A LOSS OF SALON PREMIUM SUBSCRIBERS
Salon has developed a proprietary online publishing system and has
developed software to manage its Salon Premium subscription service. If these
systems do not work as intended, or if Salon is unable to continue to develop
these systems to keep up with the rapid evolution of technology for content
delivery and subscription management, its Website or subscription management
systems may not operate properly, which could harm Salon's 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 Salon's business. Moreover, complex software
products like its online publishing and subscription management systems
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
systems, errors or deficiencies may be found in these systems 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.
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 Website. This type of software may fail to perform as
expected. If this software malfunctions or does not deliver the correct
advertisements to its network, Salon's advertising revenues could be reduced,
and its business could be harmed.
Salon uses third-party software to measure traffic on its Website. 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.
31
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 do not
continue to develop, its business may be severely harmed.
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 Salon 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
Salon has integrated this activity into its existing operations, the rate of
change could create an environment where Salon 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 Salon to precisely identify future
revenues.
TRACKING AND MEASUREMENT STANDARDS FOR INTERNET BASED ADVERTISING MAY NOT EVOLVE
TO THE EXTENT NECESSARY TO SUPPORT INTERNET ADVERTISING, THEREBY CREATING
UNCERTAINTY ABOUT THE VIABILITY OF SALON'S BUSINESS MODEL
Measurement standards for Internet based advertising are evolving. In
addition, software to track Internet usage is also evolving. The development of
such software or other methodologies may not keep pace with Salon's information
needs, particularly to support Salon's internal business requirements and those
of its advertisers. The absence or insufficiency of this information could limit
Salon's ability to attract and retain advertisers.
It is important to Salon's advertisers that Salon accurately presents the
demographics of its user base and the delivery of advertisements on its Website.
Salon depends on third parties to provide certain of the advertiser-requested
services. If they were unable to provide these services in the future, Salon
would need to perform this function itself or obtain them from another provider,
if available. This could cause Salon to incur additional costs or lose revenue
due to a lower level of service. 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.
32
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 subscriptions, and this may harm Salon's
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 or loss
of market share, any of which could harm Salon's business. Competition is likely
to increase significantly as new companies enter the market and current
competitors expand their services. Many of Salon's present and potential
competitors are likely to enjoy substantial competitive advantages over Salon.
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 harmed.
SALON MAY BE HELD LIABLE FOR CONTENT OR THIRD PARTY LINKS ON ITS WEBSITE 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 and links to third party
Websites that may be accessible through Salon.com, Salon faces potential
liability for defamation, negligence, copyright, patent or trademark
infringement and other claims based on the nature, content or ownership of the
material that is published on or distributed from its Website. These types of
claims have been brought, sometimes successfully, against online services,
Websites and print publications in the past. 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 links to sexually
explicit Websites. Although Salon carries general liability insurance, its
insurance may not be adequate to indemnify Salon for all liabilities imposed.
Any liability that is not covered by its
33
insurance or is in excess of its insurance coverage could severely harm its
financial condition and business. Implementing measures to reduce its exposure
to these forms if liability may require Salon to spend substantial resources and
limit the attractiveness of Salon's 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
A significant barrier to sale of subscriptions and electronic commerce is
the secure transmission of confidential information over public networks. Any
breach in Salon's security could expose it to a risk of loss or litigation and
possible liability. Salon relies on encryption and authentication technology
licensed from third parties to provide secure transmission of confidential
information. As a result of advances in the capabilities of Internet hackers, or
other developments, a compromise or breach of the algorithms we use to protect
customer transaction data may occur. A compromise of Salon's security could
severely harm its business. A party who is able to circumvent our security
measures could misappropriate proprietary information, including customer credit
card information, or cause interruptions in the operation of its Website.
Salon may be required to expend significant capital and other resources to
protect against the threat of security breaches or to alleviate problems caused
by these breaches. However, protection may not be available at a reasonable
price or at all. Concerns over the security of electronic commerce and the
privacy of users may also inhibit the growth of the Internet as a means of
conducting commercial transactions.
SALON'S INTERNALLY DEVELOPED SOFTWARE AND SOFTWARE PLATFORMS PROVIDED BY A THIRD
PARTY TO MANAGE SALON'S SUBSCRIPTION BUSINESS MIGHT FAIL RESULTING IN LOST
SUBSCRIPTION INCOME
Salon's software to manage its subscription business was developed
internally to interface with the software provided by a third party. The third
party's software provides a gateway to authenticate credit card transactions. If
these systems were to fail or not function as intended, credit card transactions
might not be processed and Salon's revenues would therefore be harmed.
SALON'S SYSTEMS MAY FAIL DUE TO NATURAL DISASTERS, TELECOMMUNICATIONS FAILURES
AND OTHER EVENTS, ANY OF WHICH WOULD LIMIT USER TRAFFIC
Substantially all of Salon's communications hardware and computer hardware
operations for its Website are in facilities in San Francisco, California. Fire,
floods, earthquakes, power loss, telecommunications failures, break-ins,
supplier failure to meet commitments, and similar events could damage these
systems and cause interruptions in its services. Computer viruses, electronic
break-ins or other similar disruptive problems could cause users to stop
visiting Salon's Website and could cause advertisers to terminate any agreements
with Salon. In addition, Salon could lose advertising revenues during these
interruptions and user satisfaction could be negatively impacted if the service
is slow or unavailable. If any of these circumstances occurred, Salon's business
could be harmed. Salon's insurance policies may not adequately compensate it for
any losses that may occur due to any failures of or interruptions in our
systems. Salon does not presently have a formal disaster recovery plan.
Salon's Website must accommodate a high volume of traffic and deliver
frequently updated information. It is possible that it will experience systems
failures in the future and that such failures could harm its business. In
addition, its users depend on Internet service providers, online service
providers and other Website operators for access to its Website. Many of these
providers and operators have experienced significant outages in the past, and
could experience outages, delays and other difficulties due to system failures
unrelated to its systems. Any of these system failures could harm its business.
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HACKERS MAY ATTEMPT TO PENETRATE SALON'S SECURITY SYSTEM; ONLINE SECURITY
BREACHES COULD HARM ITS BUSINESS
Consumer and supplier confidence in Salon's Website depends on maintaining
relevant security features. Security breaches also could damage its reputation
and expose us to a risk of loss or litigation. Experienced programmers or
"hackers" have successfully penetrated sectors of its systems and Salon expects
that these attempts will continue to occur from time to time. Because a hacker
who is able to penetrate its network security could misappropriate proprietary
information or cause interruptions in its products and services, Salon may have
to expend significant capital and resources to protect against or to alleviate
problems caused by these hackers. Additionally, Salon may not have a timely
remedy against a hacker who is able to penetrate its network security. Such
security breaches could materially adversely affect Salon. In addition, the
transmission of computer viruses resulting from hackers or otherwise could
expose us to significant liability. Salon's insurance policies may not be
adequate to reimburse us for losses caused by security breaches. Salon also
faces risks associated with security breaches affecting third parties with whom
it has relationships.
GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES OF THE INTERNET MAY RESTRICT
SALON'S BUSINESS OR RAISE ITS COSTS
There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. Laws and regulations may be adopted
in the future, however, that address issues including content, copyrights,
distribution, antitrust matters, user privacy, pricing, and the characteristics
and quality of products and services. An increase in regulation or the
application of existing laws to the Internet could significantly increase
Salon's costs of operations and harm Salon's business. For example, the
Communications Decency Act of 1996 sought to prohibit the transmission of
certain types of information and content over the Web. Additionally, several
telecommunications companies have petitioned the Federal Communications
Commission to regulate Internet service providers and online service providers
in a manner similar to long distance telephone carriers and to impose access
fees on these companies. Imposition of access fees could increase the cost of
transmitting data over the Internet. Moreover, it may take years to determine
the extent to which existing laws relating to issues such as property ownership,
obscenity, libel and personal privacy are applicable to the Internet or the
application of laws and regulations from jurisdictions whose laws do not
currently apply to its business.
PRIVACY CONCERNS COULD IMPAIR SALON'S BUSINESS
Salon has a policy against using personally identifiable information
obtained from users of its Website and services without the user's permission.
In the past, the Federal Trade Commission has investigated companies that have
used personally identifiable information without permission or in violation of a
stated privacy policy. If Salon uses this information without permission or in
violation of its policy, Salon may face potential liability for invasion of
privacy for compiling and providing information to its corporate customers and
electronic commerce merchants. In addition, legislative or regulatory
requirements may heighten these concerns if businesses must notify Internet
users that the data may be used by marketing entities to direct product
promotion and advertising to the user. Other countries and political entities,
such as the European Union, have adopted such legislation or regulatory
requirements. The United States may adopt similar legislation or regulatory
requirements. If consumer privacy concerns are not adequately addressed, our
business, financial condition and results of operations could be materially
harmed.
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POSSIBLE STATE SALES AND OTHER TAXES COULD ADVERSELY AFFECT SALON'S RESULTS OF
OPERATIONS
Salon generally does not collect sales or other taxes from individuals who
sign up for Salon subscriptions. During the year ended March 31, 2003, the State
of California audited Salon's sales tax returns and found Salon in compliance
with its filings and did not object to the fact that it did not collect sales
tax on subscriptions. However, one or more other states may seek to impose sales
tax collection obligations on out-of-state companies, including Salon, which
engage in or facilitate electronic commerce. State and local governments have
discussed and made proposals imposing taxes on the sale of goods and services
through the Internet. Such proposals, if adopted, could substantially impair the
growth of electronic commerce and could reduce Salon's ability to derive revenue
from electronic commerce. Moreover, if any state or foreign country were to
assert successfully that Salon should collect sales or other taxes on the
exchange of merchandise on its network or to tax revenue generated from Salon
subscriptions, its financial results could be harmed.
PROVISIONS IN DELAWARE LAW AND OUR CHARTER, STOCK OPTION AGREEMENTS AND OFFER
LETTERS TO EXECUTIVE OFFICERS MAY PREVENT OR DELAY A CHANGE OF CONTROL
Salon is subject to the Delaware anti-takeover laws regulating corporate
takeovers. These anti-takeover laws prevent Delaware corporations from engaging
in a merger or sale of more than 10% of its assets with any stockholder,
including all affiliates and associates of the stockholder, who owns 15% or more
of the corporation's outstanding voting stock, for three years following the
date that the stockholder acquired 15% or more of the corporation's assets
unless:
o the board of directors approved the transaction where the stockholder
acquired 15% or more of the corporation's assets;
o after the transaction where the stockholder acquired 15% or more of
the corporation's assets, the stockholder owned at least 85% of the
corporation's outstanding voting stock, excluding shares owned by
directors, officers and employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held under the plan will be tendered in a tender or exchange
offer; or
o on or after this date, the merger or sale is approved by the board of
directors and the holders of at least two-thirds of the outstanding
voting stock that is not owned by the stockholder.
A Delaware corporation may opt out of the Delaware anti-takeover laws if
its certificate of incorporation or bylaws so provide. We have not opted out of
the provisions of the anti-takeover laws. As such, these laws could prohibit or
delay mergers or other takeover or change of control of Salon and may discourage
attempts by other companies to acquire Salon.
Salon's certificate of incorporation and bylaws include a number of
provisions that may deter or impede hostile takeovers or changes of control or
management. These provisions include:
o Salon's board is classified into three classes of directors as nearly
equal in size as possible with staggered three year-terms; and
o special meetings of the stockholders may be called only by the
Chairman of the Board, the Chief Executive Officer or the Board of
Directors.
These provisions may have the effect of delaying or preventing a change of
control.
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Salon's certificate of incorporation and bylaws provide that it will
indemnify officers and directors against losses that they may incur in
investigations and legal proceedings resulting from their services to Salon,
which may include services in connection with takeover defense measures. These
provisions may have the effect of preventing changes in Salon's management.
In addition, offer letters with executive officers may provide for the
payment of severance and acceleration of options upon the termination of these
executive officers following a change of control of Salon. These provisions in
offer letters could have the effect of discouraging potential