================================================================================
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, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 0-26395
SALON MEDIA GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 94-3228750
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
101 Spear Street, Suite 203
San Francisco, CA 94105
(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 [ ] No [X]
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 was approximately $908,000 based on the closing sale price of the
registrant's common stock on September 30, 2004, which was the last business day
of the registrant's most recently completed second fiscal quarter. 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, 2005 was 15,346,609 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...................................................... 15
ITEM 3. Legal Proceedings............................................... 15
ITEM 4. Submission of Matters to a Vote of Security Holders............. 15
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................. 16
ITEM 6. Selected Consolidated Financial Data............................ 17
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Result of Operations........................................ 19
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk...... 40
ITEM 8. Consolidated Financial Statements and Supplementary Data........ 41
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures....................................... 73
ITEM 9A. Controls and Procedures......................................... 73
ITEM 9B. Other Information............................................... 73
PART III
ITEM 10. Directors and Executive Officers of the Registrant.............. 74
ITEM 11. Executive Compensation.......................................... 74
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters...................... 75
ITEM 13. Certain Relationships and Related Transactions.................. 75
ITEM 14. Principal Accountant Fees and Services.......................... 75
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FORM 10-K
SALON MEDIA GROUP, INC.
INDEX - (continued)
- --------------------------------------------------------------------------------
PART IV
ITEM 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K........................................................ 75
SIGNATURES ................................................................ 84
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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
Founded in 1995, Salon is an Internet publishing pioneer. Salon's
award-winning journalism combines original investigative stories and provocative
personal essays along with quick-take commentary and staff-written Weblogs about
politics, technology, culture and entertainment. Committed to interactivity, the
Website also hosts two online communities, Table Talk and The Well, a user
blogging program and recently added two popular features, the daily music
download column Audiofile, and the Daou Report, an opinionated guide to the
blogosphere.
In its editorial product Salon balances two crucial missions: Providing
original and provocative content on topics that the mainstream media overlook,
and providing a filter to help sort through the media chatter and clutter to
help readers find the stories that matter.
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. Built around
six daily features - War Room, the Fix, Audiofile, the Daou Report, King
Kaufman's Sports Daily and Since you Asked, Salon provides a rapidly updated
array of news, features, interviews, columnists and blogs, including the
following:
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News & Politics Salon News & Politics features breaking stories,
investigative journalism and commentary, as well as
interviews with newsmakers, politicians and pundits. News
features Salon's War Room, a daily politics blog by chief
political writer Tim Grieve.
Opinion Provocative commentary on timely issues, including weekly
columns by Sidney Blumenthal, Joe Conason and Arianna
Huffington. Opinion also features the Daou Report, an
opinionated guide to the blogosphere.
Technology & Smart, opinionated coverage of Internet news and digital
Business culture from today's best technology writers, along with
in-depth features about the business world and the economy.
Featuring Patrick Smith's regular Ask the Pilot column and
Andrew Leonard's groundbreaking series on globalization.
Arts & Arts & Entertainment features movie, music and television
Entertainment reviews and interviews. The section includes frequent
television features, extended film coverage including actor
and director interviews, and a popular gossip column, The
Fix. One popular new feature is Audiofile, a daily music
download column. Anchored by TV critic Heather Havrilesky
and film critic Stephanie Zacharek, this is Salon's most
widely-read site after News.
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. Nationally
renowned critics Laura Miller and Andrew O'Hehir anchor this
site.
Comics The Comics section features the works of comic luminaries
Tom Tomorrow, Ruben Bolling, Carol Lay and Keith Knight.
Sports King Kaufman's Sports Daily provides sports news and
commentary with an edge.
Salon has two online communities, The Well and Table Talk, which allow
users to discuss Salon content and interact with other users. The Well is a
member-only subscription 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 Salon Premium subscribers may post. The
Well online community had a total of approximately 2,900 paying subscribers as
of March 31, 2005.
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.
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
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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.
Web awards that Salon has won since 2000 include:
2004
David Talbot, Salon's then Chairman and CEO received the 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
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
Salon's position as a platform for advertisers is directly related to the
traffic to our Website, with the best measure of traffic being unique visitors.
Unique visitors to a Website generate page views or interactions with an
advertisement, which in turn generate various matrixes utilized by advertisers
to determine the effectiveness of an advertising campaign. To determine its
unique visitors, Salon analyzes its server log files. 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. However, the launch of Salon Premium in
April 2001, which restricted access to Salon's content, suppressed the number of
unique monthly visitors, which declined to 2.6-3.0 million the last six months
of the year ended March 31, 2003. Even though Salon has experienced periods of
higher Website traffic during recent busy news cycles related to the war in Iraq
and the 2004 presidential elections, the average number of unique visitors has
averaged 2.7 million visitors per month for the years ended March 31, 2005 and
March 31, 2004. The plateau experienced by Salon in the number of unique
visitors to its Website mimics what has been happening throughout the Internet,
which has seen only a negligible growth in the overall number of unique visitors
during calendar year 2004.
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Salon believes its viewers are attractive to advertisers and brand
campaigns. According to the Summer 2005 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 42;
(b) an average household income of $81,700; (c) 72% have earned a college degree
and 41% have earned a post-graduate degree; (d) 49% have professional or
managerial positions; and (e) 82% are online every day.
Internet Advertising
Universal McCann, PricewaterhouseCoppers LLP and the Interactive
Advertising Bureau estimate that during 2004, the total market for all forms of
advertising in the United States was approximately $260 billion, of which
according to a study conducted by PricewaterhouseCoopers and sponsored by the
Interactive Adverting Bureau (the PWC study), Internet advertising was $9.6
billion. Of the total spent in 2004 on Internet advertising, approximately 94%
of this market was directed to the top fifty companies, which is consistent with
the 95% reported for 2003. Even though the PWC study indicated that Internet
advertising had tremendous growth, increasing 32% from the $7.2 billion
experienced in 2003, the majority of the growth was in search advertising, which
grew from $2.5 billion in 2003 to $3.9 billion in 2004. In the market that Salon
competes in, the study indicated that display forms of advertising grew from
$3.2 billion in 2003 to $3.8 billion in 2004, a 17% growth rate.
As the PWC study indicates that the majority of Internet advertising
dollars are going to the largest companies and that 39% of all Internet
advertising is for display advertising therefore suggests that Salon, and all
other companies like Salon, are competing for a display advertising market of
approximately $225 million, based on 2004 results.
Salon has noted that in December 2004 it ran out of inventory of available
page views and ad impressions to sell to advertisers. In June 2004, Salon nearly
ran out of ad inventory as well. In a report published by DoubleClick, it also
noted that in 2004 many online publishers sold out their advertising inventory.
It appears a switch from a buyers market to a sellers market has begun according
to DoubleClick as the number of unique Website visitors has reached a plateau,
the inventory for ad impressions has shrunken as fewer smaller ad formats such
as "buttons" are being served, and are being replaced by larger formats, and
more importantly, advertisers have begun to more broadly accept the need to have
a presence and advertise on the Internet. The potential overall industry
shortage of inventory should present to Salon opportunities to increase its
advertising revenues.
Pay For Online Content
In a recent report, the Online Publishers Association (OPA) estimated that
U.S. consumers spent $1.8 billion for online content in 2004 compared to $1.6
billion in 2003. While this may imply a large market for Salon, the bulk of
these purchases are related to personals/dating and digital music, both segments
that Salon only has a minimal presence in. A market segment for online content
in which Salon does participate is in the general news category, in which the
OPA reported annual purchases of $88 million by consumers for 2004 and 2003. The
OPA report indicated that 79% of all subscription revenues in the general news
category were for monthly subscriptions. Almost all of the subscriptions to
Salon Premium are for an annual subscription, while subscriptions to The Well
online discussion forum are predominantly on a monthly basis.
The OPA indicated that Websites such as CNN.com, NYTimes.com and the
Washingtonpost.com generate revenue from their content. What these Websites
offer for sale is primarily archived stories or video streaming of current news.
The New York Times recently announced that it would begin charging for some of
its editorial content. Other newspapers have begun to put current content
"behind a gate"
7
accessible only to paid subscribers in an attempt to stem a decline in
circulation. None of these factors lend themselves to why individuals subscribe
to Salon Premium. Salon believes that individuals subscribe and pay for Salon
Premium primarily to support Salon's original journalism efforts, and to view
its content without any advertisements.
Revenue Sources
When Salon first started conducting business, its primary source of revenue
was from the sale of promotional space on its Website that generates advertising
revenue. The dependence on one main source of revenue was detrimental during a
contracting economy when advertisers were either curtailing or reducing
marketing efforts. To lessen the dependence on advertising revenues, Salon began
Salon Premium, its subscription service in April 2001. Advertising revenues
comprised 81% of all revenues for the year ended March 31, 2001, but decreased
to 55% for the year ended March 31, 2002 while Salon Premium revenues increased
to 16% of all revenues during that year. For the year ended March 31, 2003,
advertising revenues were 43% of all revenues, while Premium revenues climbed to
32% of total revenues. This cycle continued onto the year ended March 31, 2004
which saw ad revenues comprising 39% of all revenues and Salon Premium revenues
increasing to 41% of all revenues. With the rebound in advertising, the trend
was reversed for the year ended March 31, 2005, as ad revenues comprised 54% of
all revenues and Salon Premium of 33% of all revenues.
During the first quarter of the year ending March 31, 2006, Salon has
experienced a marginal decline in advertising sales compared to the same period
last year, while subscriptions to Salon Premium have declined. Salon cannot
estimate if these trends will continue for the remainder its year ending March
31, 2006.
Most of the advertising campaigns are of 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 "Site Pass" advertisement downloads by a Website
visitor, or a set number of days that a Site Pass advertisement will be run. To
the extent the minimum guaranteed amounts are not achieved, Salon defers
recognition of the corresponding revenue until the remaining guaranteed amounts
are provided, 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, 2005, March 31, 2004 or March
31, 2003.
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 suspended in
November 2002. Initially, some content was restricted to Salon Premium
subscribers only. In January 2003, Salon modified its business model by granting
site passes, which allows access to 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
unrestrictive access to Salon's content with no banners, pop-ups or site pass
advertisements, and include free magazine subscriptions, free access to the
Table Talk on-line discussion forum, and the ability to download content in text
or PDF format.
Salon Premium revenue is recognized ratably over the period that services
are provided. For the year ended March 31, 2005, Salon received $2.3 million in
cash and recognized $2.2 million of revenue for this service from approximately
84,000 paid new and renewed subscriptions. For the year ended March 31, 2004,
Salon received $1.9 million in cash and recognized $1.8 million of revenue for
8
this service from approximately 79,000 paid new and renewed subscriptions. 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
paid new and renewed subscriptions. Salon had approximately 84,500 active
subscribers and a renewal rate for purchased subscriptions of 69 percent as of
March 31, 2005.
Salon offers The Well on-line discussion forum. Revenue is recognized
ratably over the subscription period. The revenues recognized and the cash
received was $0.5 million for the year ended March 31, 2005, and $0.6 million
for the years ended March 31, 2004 and March 31, 2003.
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 Website offers personals/dating services.
Sales and Marketing
Salon has sales offices in New York City and San Francisco with seven
active advertising sales employees as of March 31, 2005, of which three actively
solicit orders. For most of the year ended March 31, 2005, Salon had one
employee engaged in marketing, with such position being eliminated by the end of
such year. Salon currently has two employees associated with Salon Premium
membership activities and a third person involved in general marketing support
efforts.
During the year ended March 31, 2005, Salon incurred $0.5 million in
advertising costs to promote and attract viewers to its Website, compared to
$1.1 million for the year ended March 31, 2004 and $0.8 million for the year
ended March 31, 2003. The advertising costs of $0.5 million for the year ended
March 31, 2005 were primarily non-cash advertising credits. These credits
resulted from an investment in Salon by Rainbow Media Holdings in 1999 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, 2004 and March 31, 2003 include the usage of approximately $1.1
million and $0.8 million, respectively, 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 wide number of Internet
Websites, with the 50 largest companies attracting an estimated 94% of all the
advertising dollars. These companies have Websites that include major portals
such as Yahoo.com, major search engines such as Google and major online media
publications such as CNN.com.
As of March 31, 2005, Salon believes it has no competitors for its Salon
Premium subscription payment plan. Even though some Websites such as the Wall
Street Journal Online edition have online subscription plans, and others such as
the Washington Post charge for archive stories, they do not provide general
interest news and information as presented by Salon. Salon believes that its
award winning content and independence attract individuals to Salon's Website,
and ultimately to subscribe to its Salon Premium pay-for-online-content service.
9
Salon's Strategy
Increasing Circulation
Growing circulation is key to increasing Salon's revenues, as more readers
lead to higher potential advertising revenue and more potential Salon Premium
subscribers. With that in mind, Salon is exploring ways to widen its readership
and has made growing circulation a priority among its business goals. Since
Salon has limited cash resources, it has had to rely on partnerships and other
forms of outreach to bring Salon's unique, compelling and highly acclaimed
editorial content to a wider audience.
Some of the strategies to grow circulation are as follows:
o Salon has entered into an editorial partnership with Rolling
Stone Magazine, whereby Rolling Stone and Salon collaborate on
special reports that are jointly published in Rolling Stone
Magazine and Salon's Website. Salon's first special report,
entitled "Bush's War on Gay Marriage" was jointly published in
the March 18, 2004 edition of Rolling Stone, and since then 3
other stories were published. Recently, a report entitled "Deadly
Immunity" by Robert Kennedy, Jr. appeared in the June 30, 2005
edition of Rolling Stone as well as on Salon's Website.
o Salon has initiated a redesign of the Salon Website, the first
since 2000, which is described in more detail below. The redesign
will enable readers to see and sample Salon's content more
quickly, and add interactive features to keep readers coming back
to the Website.
o Salon has added new content. In the last few months Salon added
Audiofile, a daily music-download column, and the Daou Report,
Salon's new blog about the growing blogosphere. More new features
are planned.
o Salon is actively marketing reader signups for RSS feeds and
newsletters.
o Salon has begun initiatives to increase awareness of our
free-access "Site-Pass" feature, to encourage more linking by
bloggers and by other media.
Aside from the site-specific strategies and editorial strategies to grow
readership, Salon is also 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 two years ago, did not
result in noticeable increases in circulation, if at all.
Increasing Interactivity & New Multi-Media Formats Through a Website Redesign
Salon is in the process of redesigning its website, with new components of
the redesign anticipated to be testing publicly in July-September 2005. Several
goals of the redesign are to improve the navigation and accessibility of content
on the site, to increase user interactivity, add multimedia content and offer
members the opportunity to find and interact with one another. By undertaking
this redesign process, Salon should be well-positioned to take advantage of
three media trends:
o More people get their news on the Web - but they expect to talk
back to it, and maybe even write about it themselves.
o They log on for entertainment, but they're not just there to
consume media passively, they want to mix it up, get it when and
how they want it, and create it as well.
10
o Online remains a space to find likeminded people and interact,
around hobbies, politics, research, romance.
Moving forward, Salon is developing new products and enhancing existing products
to improve the reader experience. These products and features include: user
comments and automatic posting of letters to the editor; User song lists and
other content, in Audiofile and other blogs; More multimedia features; Site
personalization and social networking features.
Furthermore, in April 2005, Salon launched a service provided by Technorati
that posts links to active blogs that are following stories that Salon has
published. This is a first step toward linking Salon readers to the greater
blogosphere.
Continue To Promote Innovative Advertising Programs
Salon has reinvigorated its advertising sales offering by striving to make
use of the interactivity and new technologies provided by the Internet. In
January 2003, Salon began to enable those readers who were not Salon Premium
subscribers to access all new content for free if they were willing to view some
form of rich media advertising "Site Pass." The performance matrices for the
Site Pass often exceed IAB banner standard performances. Salon has recently
experienced click-through-rates ranging from 5%-9% compared to an industry
average of 0.62% for all on-line ads as reported by CoubleClick's November 2004
ad serving Trend Report. Over the past two years, the Site Pass advertising unit
has increasingly been accepted by Salon's advertising clients, and now accounts
for the majority of Salon's advertising revenues.
Salon's strategy is to continue to promote the benefits of this new "Site
Pass" format, and experiment with new technology to increase non-banner
advertising inventory. As an example, Salon has worked with advertisers to offer
streaming video clips of its TV advertisements as part of its "Site Pass"
offering. In the first half of calendar 2005, advertisers such as Target, Audi,
Cadillac, MGM, Home Box Office, and Microsoft have used this format to advertise
on Salon. Video streaming inventory commands a premium due to higher levels of
accountability and market scarcity. Another area of innovation is using blogs
and other viral messaging to generate interest for an advertiser. In this case,
Salon's upcoming Website redesign is intending to offer advertisers blogs and
other video streaming opportunities.
Expand Subscription-based Revenues
Salon began its "Premium" subscription program in April 2001 when it
"gated" the majority of its content. In January 2003 Salon modified this
business model to require a user to either view an advertisement or become a
Salon Premium subscriber in order to get access to Salon's content. Salon's
subscriber base steadily increased to a high of approximately 89,000
subscribers, reached in December 2004. However, in part due to the strong
advertising market and the need to use Salon's inventory for advertising clients
rather then to promote Salon's subscription program, subscriber numbers has
since declined to approximately 81,000 as of June 20, 2005. To address this
decline in subscribers, Salon is reevaluating the Premium offering through
surveys and analysis of user data. Salon plans to launch new products and
promotions in order to begin again to grow its subscription base, as described
below.
As part of Salon's site redesign process, Salon Premium intends to
transition its product from a subscription to a membership program. As a
membership product, Salon hopes to build out more interactivity for its readers,
including potentially its own letter to editor function, member chatrooms, and
member blogs, among others. Other new personalization and interactive features
for members may include making available "Most Read" or "Most e-mailed" stories
by members, or a story referral based
11
on the behavior of other members. Lastly, Salon anticipates launching features
such as Personals and other forms of user-generated-content that are intended to
round out the membership offering.
Lastly, Salon will continue to implement technology to track user behavior
and customize messaging based on the information gathered. Special messaging,
via pop-ups to frequent users, was implemented in 2004, as well as customized
messaging for lapsed members. Tracking and messaging actions are geared towards
increasing Salon Premium subscriptions, and helped successfully improve the 64
percent renewal rate for purchased subscriptions that Salon has experienced
through March 31, 2004 to 69 percent through March 31, 2005.
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 Salon's 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. In May 2005, Salon relocated its servers in San
Francisco to a building capable of withstanding a major earthquake. 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.
Salon is currently in the process of updating its subscription management
system to comply with Section 404 of the Sarbanes-Oxley Act. Subsequent to March
31, 2005, Salon began to analyze the requirements to comply with the security
provisions of the Cardholder Information Security Program, required by all major
issuers of credit cards.
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.
12
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 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, 2005, Salon has 55 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.
13
Executive Officers of the Registrant
The following sets forth certain information of respect to executive officers as
of March 31, 2005:
Name Age Position
- ------------------------ ----- -----------------------------------------------
David Talbot(1) 53 Chairman of the Board, Director
Elizabeth Hambrecht(1) 42 Chief Executive Officer and President, Director
Joan Walsh(1,2) 46 Editor-in-Chief
Conrad Lowry(1) 53 Chief Financial Officer and Secretary
Melissa Barron 47 Senior Vice President, Sales
Sidney Blumenthal(3) 56 Senior Vice President, Editorial Development
(former)
Patrick Hurley(4) 43 Senior Vice President, Business Operations
(former)
Scott Rosenberg(2) 45 Senior Vice President, Editorial Operations
(former)
(1) On February 10, 2005 David Talbot resigned his position as Chief
Executive Officer and Editor-in-Chief, and Elizabeth Hambrecht was
appointed Chief Executive Officer, retained her position as President
and resigned her position as Chief Financial Officer and Secretary.
Joan Walsh, who had been serving as Senior Vice President, Editorial
Operations since November 2004, was appointed Editor-in-Chief and
Conrad Lowry, who had been serving as Controller since joining Salon
in September, 2000, was appointed Chief Financial Officer and
Secretary
(2) Joan Walsh was appointed in November 2004 to serve as Senior Vice
President, Editorial Operations upon the resignation of Scott
Rosenberg
(3) Ceased serving as an officer in January 2005.
(4) Employment with Salon ceased in February 2005
David Talbot co-founded Salon in 1995. He served as Chief Executive Officer
from 1995 through April 1999 and again from October 2003 through February 2005.
He became Chairman of the Board in April 1999. He served as Editor-in-Chief from
Salon's incorporation in 1995 through February 2005. From 1990 to 1995, Mr.
Talbot was the Arts & Features editor for the San Francisco Examiner newspaper.
Mr. Talbot has co-authored three books and written for numerous publications
including The New Yorker, Rolling Stone and Playboy. Mr. Talbot holds a Bachelor
of Arts degree in sociology from the University of California at Santa Cruz.
Elizabeth Hambrecht has served as Salon's Chief Executive Officer since
February 2005 and Salon's President since October 2003. Previously, she served
as Salon's Chief Financial Officer and Secretary from May 2003 until February
2005. From 1999 to March 2003, she was co-founder and Director of
Asiacontent.com, an online media company focused on Asian markets. From 1997 to
2000 she was co-founder, Chief Financial Officer and Director of Boom.com, a
Hong Kong-based online stock trading company. From 1992 to 1995 she was
Executive Director at Goldman Sachs (Hong Kong) Ltd. From 1987 to 1992 she was
Assistant Director at Barings Securities (Hong Kong) Ltd. Ms Hambrecht holds a
Bachelor of Arts degree in history from Vassar College. She sits on the Board of
Trustees of the San Francisco Friends School, the Asian Art Museum of San
Francisco, and of KQED, a public broadcast company for Northern California.
Melissa Barron has served as Salon's Senior Vice President, Sales since
October 2003. From 2001 to 2003, she served as Vice President, Western Region
Sales. Upon joining Salon in April 1999 to 2001 she served as a Senior Sales
Manager. From 1996 to 1997 she held various advertising positions with Conde
Nast Publications, Inc. and The New Yorker. From 1987 to 1996, she was initially
an
14
Advertising Account Manager and then Western Sales Manager for Fairchild
Publications. From 1984 to 1987 she was a buyer for Nordstrom, a retail
merchant. Ms. Barron holds a Bachelor of Science degree in environmental
planning and management from University of California, Davis.
Joan Walsh was appointed Editor-in-Chief in February 2005. From November
2004 through February 2005 she held the position of Senior Vice President -
Editorial Operations. From November 2003 to November 2004 she served as Vice
President Co-Managing Editor. From October 1999 to November 2003 she served as
Vice President of News. Ms. Walsh served as Salon's News Editor from October
1998 to October 1999. Prior to joining Salon, Ms. Walsh was a freelance writer
for approximately ten years and was a consultant to national and regional
foundations including the Rockefeller Foundation, the Annie E Casey Foundation
and the James Irvine Foundation. Ms. Walsh is currently a Board of Director of
PolicyLink, a research and advocacy group. Ms. Walsh holds a Bachelor of Arts in
history from the University of Wisconsin.
Conrad Lowry, who had been serving as Controller since joining Salon in
September 2003, was appointed Chief Financial Officer and Secretary in February
2005. Mr. Lowry served as Controller for Crescent Jewelers from November 1999 to
September 2000. From 1998 to November 1999 he served as Controller for New York
Transit, Inc. From 1997 to 1998 he served as Controller for Ariat International,
Inc. From 1987 to 1997 he served as Senior Accountant and Assistant Controller -
Finance for Fibreboard Corporation. From 1978 to 1987 he held various positions
with Louisiana-Pacific Corporation including Accountant, Senior Accountant and
Chief Accountant, a position he held for two years. Mr. Lowry holds Bachelor of
Science degrees in business administration and forestry from Humboldt State
University.
ITEM 2. Properties
On January 13, 2005, Salon entered into a lease for 8,623 square feet of
office space at 101 Spear Street, San Francisco, California. The lease term is
four years and commenced on March 1, 2005.
Salon leases nominal office space at 41 East 11th Street, 11th Floor, New
York, NY. The lease terminated on May 31, 2005 and was renewed for an additional
one year term. Salon also leases nominal office space at 3409 1/2 M Street NW,
Washington, DC, with the lease terminating in May 2007.
We believe that our existing properties are in good condition and are
suitable for the conduct of our business.
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, 2005.
15
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 sales prices for
Salon's common stock for its fiscal years 2005 and 2004, based on sales
transactions reported by the OTC (Over-The-Counter) Bulletin Board, is provided
below:
Fiscal Year Ended Fiscal Year Ended
March 31, 2005 March 31, 2004
------------------ ------------------
For the quarters ended High Low High Low
-------- -------- -------- --------
June 30 0.24 0.10 0.08 0.04
September 30 0.24 0.10 0.10 0.02
December 31 0.18 0.09 0.07 0.03
March 31 0.69 0.10 0.40 0.03
There were 246 holders of record of Salon common stock as of June 16, 2005.
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 16, 2005 was
$0.19 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.
Salon has never repurchased any of its equity securities.
16
ITEM 6. Selected Consolidated Financial Data
Dollar amounts in thousands, except per share
----------------------------------------------------
Year Ended March 31, 2005 2004 2003 2002 2001
- ------------------------------------------ -------- -------- -------- -------- --------
Net revenues $ 6,628 $ 4,499 $ 4,003 $ 3,619 $ 7,202
Net loss (1) $ 518 $ 6,046 $ 5,597 $ 8,000 $ 19,155
Net loss attributable to common
stockholders (2) $ 358 $ 8,661 $ 5,678 $ 11,286 $ 19,155
Basic and diluted net loss per share
attributable to common stockholders $ 0.02 $ 0.61 $ 0.41 $ 0.83 $ 1.48
Weighted average common shares
outstanding used in computing
per share amounts 14,390 14,099 13,938 13,547 12,962
Cash and cash equivalents $ 686 $ 696 $ 162 $ 1,542 $ 3,047
Prepaid advertising rights $ 3,970 $ 4,430 $ 5,480 $ 6,266 $ 7,075
Total assets $ 6,069 $ 6,270 $ 7,590 $ 11,342 $ 16,298
Capital leases - long-term portion $ - $ - $ 18 $ 77 $ 325
Total long-term liabilities (3) $ 82 $ 2,621 $ 569 $ 229 $ 601
(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 the fiscal year ended
March 31, 2005 includes a net preferred deemed dividend benefit of $160 that
includes a benefit of $470 from a decrease in value of warrants previously
issued to preferred stockholders and a charge of $310 from the issuance of
Series D preferred stock during the year. The charge represented the difference
between the offering price of Salon's Series D preferred stock and the fair
value of Salon's common stock into which the preferred stock was convertible on
the date of the transaction and the value of the warrants issued in the
transaction. The net loss attributable to common stockholders for the 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 the 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.
(3) From July 2003 through November 2004, Salon has had an insufficient number
of authorized shares to satisfy all obligations under convertible instruments,
warrant agreements and options. As a consequence, the value of warrants issued
was classified as a long-term liability, with the fair value re-
17
measured at each balance sheet period. The March 31, 2004 balance of $2,621
represents such value and $354 was the value of the warrants as of March 31,
2003. In November 2004, Salon amended its Certificate of Incorporation,
increasing the number of authorized shares from 50,000,000 to 600,000,000,
thereby relieving the requirement for Salon to record the value of warrants as a
long-term liability.
18
ITEM 7. Management's Discussion and Analysis of Financial Condition and Result
of Operations
Overview
Salon 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 derived from advertising
revenues from the sale of promotional space on its Website. The sale of
promotional space is generally less than ninety days in duration. Advertising
units 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 who would view some form
of advertisement in exchange for a time allotted "Site Pass." Salon Premium
revenue is recognized ratably over the period that services are provided. During
the years ended March 31, 2005 and 2004, Salon received $2.3 million and $1.8
million in cash and recognized $2.2 million and $1.8 million of revenue for this
service, respectively.
Through March 31, 2004, Salon offered The Well and Table Talk online
discussion forums as monthly subscription services. During the year ended March
31, 2005, Salon made access to Table Talk free to Salon Premium members. Revenue
from the on-line discussion forums has been 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, and production staff, online
communities staff, payments to freelance writers and artists, bandwidth costs
associated with serving pages and hosting our online communities on our Website,
credit card transaction costs and costs of serving ads.
Sales and marketing expenses consist primarily of salaries, commissions and
related personnel costs, travel, and other costs associated with Salon's sales
force and its Salon premium service, 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.
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, 2005, Salon had an accumulated
deficit of $91.3 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.
If certain advertising revenue goals are attained, Salon forecasts that it may
attain cash flow break-even from
19
operations for the year ending March 31, 2006. Concurrent with potentially
attaining this goal, Salon may incur periods of limited cash resources. Salon
anticipates issuing additional shares of Series D preferred stock to help fund
operations and to fund a Website redesign. However, there is no guarantee that
Salon will be successful in issuing additional securities.
Salon has not recorded a provision for federal or state income taxes since
inception due to reoccurring operating losses. At March 31, 2005 Salon had net
operating loss carryforwards for federal income tax purposes of $62.8 million
that begin to expire in March 2015, and $31.9 million for California that begin
to expire in March 2006. 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 $0.6
million during the year ended March 31, 2005 to $24.8 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
if different assumptions or conditions were to prevail.
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 54% and 39% of Salon's revenues for the years ended March 31,
2005 and 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 Site Pass advertisement downloads, or a set number of days that
a Site 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.
Salon Premium, a pay for online content service, provides unrestricted
access to Salon's content with no banners, pop-ups or site pass advertisements,
and includes free magazine subscriptions, free access to Table Talk, an on-line
forum, and the ability to download easily content in text or PDF format, a
convenience that enables readers to view Salon's content when not connected to
the Internet. The
20
subscription duration for Salon Premium is generally one year. Non Salon Premium
subscribers can gain access to Salon's content after viewing some form of
advertisement
Salon offers The Well as a monthly subscription service 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. As the per share price of Salon's common stock
declined from the time the agreement was made and the date the agreement was
finalized and signed, the advertising credits were valued for financial
reporting purposes at $8.1 million. As of March 31, 2005, Salon has $5.8 million
advertising credits resulting from the transaction, valued at $4.0 million for
financial reporting purposes.
Results of Operations
Fiscal Years Ended March 31, 2005 and 2004
Net Revenues
Salon's net revenue increased 47% to $6.6 million in the year ended March
31, 2005 from $4.5 million in the year ended March 31, 2004.
Advertising revenues increased 103% to $3.6 million for the year ended
March 31, 2005 from $1.8 million for the year ended March 31, 2004. The increase
in advertising revenues reflects the success of Salon's site pass advertisement
format, which generates the majority of the ad revenue, in conjunction with
traditional advertising banners. This combination of advertisements has gained
wide acceptance with advertisers. The increase also reflects the overall
increase in advertising dollars being allocated to Internet properties by
companies that wish to brand their products and services.
As advertising campaigns are normally short in duration and finalized
shortly before implementation, Salon cannot accurately predict full year
advertising sales. However, Salon estimates that for its quarter ending June 30,
2004 advertising revenues will be approximately $0.9 million.
During the month of December 2004, based on visitor Website traffic that
month, Salon sold the maximum advertisement space on its Website that could be
generated. In order to increase this monthly threshold, Salon will have to
increase the number of unique visitors to its Website, either through
partnerships with other websites, marketing efforts, or other business
relationships, to draw additional traffic to its website, thereby increasing the
number of impressions potentially available to be sold to advertisers.
Salon Premium subscription revenues increased by 20% to $2.2 million for
the year ended March 31, 2005 from $1.8 million for the year ended March 31,
2004. The revenue increase reflects a greater number of individuals signing up
for this service, as new and renewed subscriptions during the year ended March
31, 2005 were approximately 84,000 compared to approximately 79,000 during the
year ended March 31, 2004. The increase in the number of subscribers acquired
during the year ended March 31, 2005 compared to the prior year is largely
attributed to reader interest in Salon's political coverage during the 2004
presidential campaign, which created opportunities to promote membership drives,
either singly or in conjunction with third parties.
21
For the first time since inception, membership to Salon Premium decreased
during the year. The number of subscribers to Salon Premium at March 31, 2004
was approximately 72,000, and increased during the year to approximately 89,000
on December 31, 2004 and decreased to approximately 84,000 as of March 31, 2005.
As of June 20, 2005, the number of subscribers decreased further to
approximately 81,000. This trend also mirrored Salon's renewal rate for one year
paid subscriptions to Salon Premium, which began the year at approximately 64%,
increased to approximately 73% as of December 31, 2004, and dropped to
approximately 69% as of March 31, 2005. Salon cannot predict if the reduction in
membership and the renewal rate will continue. Salon estimates that it will
recognize approximately $2.0 million of Salon Premium revenue for the year ended
March 31, 2006.
All other sources of revenue accounted for $0.8 million for the year ended
March 31, 2005 compared to $0.9 million for the year ended March 31, 2004. The
decrease of $0.1 is primarily attributable to a decrease in membership to The
Well. Salon recognized $0.1 million of revenue for its year ended March 31, 2005
for hosting links to a third party's personals/dating Website. This source of
revenue became uncertain during Salon's fourth quarter, and Salon cannot predict
if it will recognize much, if any, revenue from this source in its fiscal year
ending March 31, 2006.
Production and Content
Production and content expenses during the year ended March 31, 2005 were
$4.4 million versus $4.6 million for the year ended March 31, 2004, a decrease
of $0.2 million or 4%. The decrease reflects, among other items, recognizing
$0.2 million related to the value of warrants issued for editorial collaboration
with a print publisher during the year ended March 31, 2004, with no comparable
amounts this year. During the year ended March 31, 2005, salary related expenses
increased by $0.2 million due to the opening of an office in Washington, DC, ad
serving charges increased by $0.1 million from an increase in the number of ads
served, while purchased content was reduced by $0.1 million, depreciation
decreased by $0.1 million as assets became more fully depreciated, and other
general expenditures were cut by $0.1 million.
Salon does not anticipate production and content cash related expenditures
to vary significantly for the year ending March 31, 2006 from the current year
results.
Sales and Marketing Expenses
Sales and marketing expenses during the year ended March 31, 2005 were $1.9
million versus $2.4 million for the year ended March 31, 2004, a decrease of
$0.5 million or 21%. The decrease primarily reflects utilizing $0.6 million
fewer advertising credits this year versus last year, offset by a $0.1 million
charge from the value of warrants issued to a former employee. Salon anticipates
utilizing $0.4 - $0.7 million of advertising credits during the year ending
March 31, 2006, with overall expenses of approximately $1.7 - $2.0 million.
Research and Development Expenses
Research and development expenses for the years ended March 31, 2005 and
March 31, 2004 were $0.6 million. Salon does not anticipate research and
development expenditures to vary significantly for the year ending March 31,
2006 from the current year results.
22
General and Administrative Expenses
General and administrative expenses the year ended March 31, 2005 were $0.8
million versus $1.4 million for the year ended March 31, 2004, a decrease of
$0.6 million or 45%. The decrease reflects $0.4 million in reduction in salary
related costs from the elimination of three positions and $0.1 million reduction
in general operating costs. The March 31, 2004 results include a charge of $0.1
million related to the issuance of warrants to a former employee with no
comparable charge during the year ended March 31, 2005. Salon estimates that
general and administrative expenses will be approximately $0.9 - $1.0 million
for the year ending March 31, 2006.
Amortization of Intangibles
Salon did not recognize any amortization of intangibles for its year ended
March 31, 2005 as all amounts required to be amortized have previously been
charged to operations. For the year ended March 31, 2004, Salon amortized $0.4
million of intangible assets.
Interest and other income/ expense
Net interest and other income/expense for the year ended March 31, 2005 was
a benefit of $0.6 million compared to a charge of $1.2 million for the year
ended March 31, 2005.
The results for the year ended March 31, 2005 includes a benefit of $0.4
million from a decrease in value of warrants previously issued to convertible
note holders and approximately $0.2 million from monies received to finance
editorial content.
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,
a charge of $0.2 million of interest on convertible notes and other interest
related charges, and $0.3 million related to amortizing the initial value of
warrants issued to the then holders of convertible notes. Salon converted all
outstanding convertible notes to preferred stock on December 30, 2003. The
results for the year ending March 31, 2004 also includes a benefit of $0.1
million from monies received to finance editorial content.
During the year ended March 31, 2005, Salon amended its Certificate of
Incorporation, increasing the number of authorized shares from 50,000,000 to
600,000,000, thereby relieving the requirement for Salon to record charges or
benefits in future periods relating to the value of warrants.
Preferred Deemed Dividend
The non-cash preferred deemed dividend benefit of $0.2 million for the year
ended March 31, 2005 includes a benefit of $0.5 million from a decrease in value
of warrants previously issued to preferred stockholders and a charge of $0.3
million from the issuance of Series D preferred stock during the year. The
charge represented the difference between the offering price of Salon's Series D
preferred stock and the fair value of Salon's common stock into which the
preferred stock was convertible on the date of the transaction and the value of
the warrants issued in the transaction.
The non-cash preferred deemed dividend charge 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 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.
23
Net Loss Attributable to Common Stockholders
As a result of the above factors, Salon recorded a net loss attributable to
common stockholders of $0.4 million or $0.02 per share for the fiscal year ended
March 31, 2005 compared to a net loss of $8.7 million or $0.61 per share for the
fiscal year ended March 31, 2004.
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 Site Pass advertisement format with rich media that results in a more
favorable advertising experience than traditional banner advertising. Overall,
Salon was not able to capitalize on the industry wide 21% increase in Internet
advertising experienced in calendar year 2003 due to the relatively small number
of Website visitors that it generated and concerns about Salon's financial
viability.
Salon Premium subscription revenues increased by 45% to $1.8 million for
the year ended March 31, 2004 from $1.3 million for the year ended March 31,
2003. Salon Premium revenues increased due to a growth in overall subscriptions,
as new and renewed subscriptions for the year ended March 31, 2004 were
approximately 79,000, versus approximately 70,000 for the year ended March 31,
2003. The approximate renewal rate as of March 31, 2004 for purchased one year
subscriptions was 64% versus 71% the prior 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 a Site
Pass advertisement. The easing of access to Salon's content removed a major
inducement for a 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 Site Pass advertisement opportunities to advertisers.
All other sources of revenue accounted for $0.9 million for the year ended
March 31, 2004 compared to $1.0 million for the year ended March 31, 2003. The
decrease of $0.1 is primarily attributable to a decrease in the licensing of
content which previously appeared in Salon's Website, 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 were
$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 in the year ended March 31,
2004 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.
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
24
increase reflects utilizing an additional $0.3 million of advertising credits
during the year ended March 31, 2004 compared to the amount used during the year
ended March 31, 2003, offset by reductions of $0.1 million in payroll related
costs from the elimination of three positions and $0.1 million from reduced
general operating costs during the year ended March 31, 2004.
Research and Development Expenses
Research and development expenses for the years ended March 31, 2004 and
March 31, 2003 were $0.6 million.
General and Administrative Expenses
General and administrative expenses for the years ended March 31, 2004 and
March 31, 2003 were $1.4 million. The March 31, 2003 results include a credit
from reversing a bonus accrual of $0.2 million. The March 31, 2004 results
included a charge of $0.1 million related to the issuance of warrants to a
former employee, as well as $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.
Amortization of Intangibles
Amortization of intangible expenses during the years ended March 31, 2004
and March 31, 2003 were $0.4 million. All intangible assets except for $0.2
million of goodwill were amortized as of March 31, 2004.
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/ expense
Net interest and other income/expense for the year ended March 31, 2004 was
a charge of $1.2 million versus a net charge of $0.1 million for the year ended
March 31, 2003.
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.
The charge was required as Salon at the time had an insufficient number of
shares of common stock authorized to satisfy all obligations under convertible
instruments, warrant agreements and options. The year ended March 31, 2004
results also include a charge of $0.1 million from interest on convertible notes
then outstanding, 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.
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.
25
For the year ended March 31, 2004, Salon recognized $0.1 million of other
income from monies received by Salon to finance editorial content that was
completed during the period.
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 and warrants 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, 2003.
Liquidity and Capital Resources
As of March 31, 2005, Salon has approximately $0.7 million in available
cash, which included $0.3 million from the issuance of Series D preferred stock
in February 2005.
Net cash used in operations was $0.8 million for the year ended March 31,
2005, compared to $2.8 million for the year ended March 31, 2004. The principal
use of cash during the year ended March 31, 2005 was to fund the $0.5 million
net loss, the $0.3 million increase in accounts receivable and the $0.3 million
decrease in accounts payable offset partly by non-cash charges of $0.5 million.
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.
Net cash used in investing activities was $0.2 million for the year ended
March 31, 2005 to fund the acquisition of computer related hardware and
software, and for leasehold improvements. Net cash used in investing activities
was immaterial for the years ended March 31, 2004 and March 31, 2003. Salon
anticipates capital expenditures of $0.2 million during the year ending March
31, 2006 for computer related equipment and to redesign its Website.
For the year ended March 31, 2005, net cash from financing activities was
$1.0 million primarily from the issuance of Series D preferred stock. 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.
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
26
agreement was allowed to expire in January 2004. Salon has no immediate plans to
implement a similar agreement.
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.
As of March 31, 2005, Salon has no outstanding capital leases and does not
anticipate entering into similar debt instruments during its year ending March
31, 2006. The following summarizes Salon's contractual obligations as of March
31, 2005, and which are in effect subsequent to March 31, 2005 for a renewed
office lease agreement, 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
---------------------------------------------------------
1 Year More than
Total or Less 1 - 3 Years 3 Years
------------ ------------ ------------ ------------
Operating leases $ 1,046 $ 319 $ 498 $ 229
------------ ------------ ------------ ------------
Total $ 1,046 $ 319 $ 498 $ 229
============ ============ ============ ============
On January 13, 2005, Salon entered into a four year lease for 8,623 square
feet of office space in San Francisco, California. Under the lease agreement,
which commenced on March 1, 2005, Salon does not have to make lease payments for
the first four months, and thereafter is to make lease payments of $18,683 per
month for the remainder of the first year, $19,402 per month for the second
year, $20,120 per month for the third year and $20,839 per month on the fourth
year. As part of the agreement, Salon provided to the landlord a cash deposit of
$98,805 and the landlord provided a leasehold improvement incentive of
approximately $65,000. Salon utilized the entire incentive for tenant
improvements to the office space. The lease agreement does not provide for a
renewal period.
Salon's accounting treatment for office leases is to: 1) record rent
holidays as a long term liability as incurred, 2) capitalize utilized leasehold
improvement incentives as a component of fixed costs, with the offset amount
recorded as a long term liability and 3) aggregate all monthly rent payments to
be made, the value of rent holidays, and landlord provided incentives to a
composite monthly rate, which is then charged to operations. Amounts capitalized
as a fixed cost are depreciated over the initial lease term.
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 year ended March 31, 2003. Salon's current
independent accountants, Burr, Pilger & Mayer LLP make the same assertions in
their report for Salon's years ended March 31, 2004 and March 31, 2005.
Salon believes that it can accurately predict its cash position two months
in advance, and forecasts its cash position for future periods. Based on Salon's
cash on hand as of the date of this filing and projected cash flows from
operations, Salon believes that it will have sufficient cash to meet operating
needs through approximately August 2005. Even though Salon projects that it will
have
27
sufficient cash through August 2005, Salon may experience periods of very
limited cash resources. Salon can not accurately predict the amount of cash that
it will have on hand after that point, or the amount of cash to be generated
from operations, due to the unpredictability in securing advertising campaigns
and the attrition being experienced in membership to Salon's subscription
services. Securing advertising campaigns has been hindered as of June 1, 2005
when Salon's Senior Vice President - Sales recused herself on a medical leave of
absence for an undetermined length of time, leaving only two individuals to
actively pursue advertising campaigns.
Since Salon implemented its Salon Premium subscription service in April
2001, the number of subscribers has steadily grown, to a peak of approximately
89,100 on December 31, 2004. Since that date, Salon has experienced erosion in
the number of subscriptions, which declined to approximately 84,500 as of March
31, 2005, and declined further to 81,000 as of June 20, 2005. Commensurate with
the reduction in subscribers, Salon has experienced a decline in the renewal
rate for one year paid subscriptions, which declined from approximately 73% as
of December 31, 2004 to 69% as of March 31, 2005. There is no guarantee that
such trends will continue.
Under "The Purchase Agreement" and the "Certificate of Designation of
Preferences and Rights of the Series D-1 Preferred Stock, Series D-2 Preferred
Stock, Series D-3 Preferred Stock, Series D-4 Preferred Stock and Series D-5
Preferred Stock", collectively, the "Series D preferred stock," Salon is allowed
to sell and issue an additional 1,251 shares of Series D preferred stock, for
which Salon could receive approximately $1.5 million in cash. As Salon forecasts
periods of limited cash resources through August 2005, and is unable to
accurately project cash to be generated from operations subsequent to August
2005, Salon anticipates that it will seek purchasers for some or all of the
remaining 1,251 shares of Series D preferred stock. There is no guarantee that
Salon will be successful in finding buyers for these securities.
Off-Balance Sheet Arrangements
Salon has no off-balance sheet arrangements.
Reverse Stock Split
In November 2004, Salon's stockholders granted to its Board of Directors
the right to effect a reverse stock split of Salon's common stock in four ratios
between 1-for-10 and 1-for-20. The right is to expire the earlier of Salon's
2005 Annual Meeting of Stockholders or December 31, 2005. Currently, Salon's
Board of Directors does not plan to exercise such right and effect a reverse
stock split.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued
Standard Financial Accounting Standard (SFAS) No. 123R (revised 2004),
"Share-Based Payment" (SFAS 123R). In annual periods beginning after June 15,
2005, as amended by the Securities and Exchange Commission (SEC), SFAS 123R
would eliminate the ability to account for equity-based compensation using the
intrinsic value-based method under Accounting Principles Board (APB) Opinion No.
25. SFAS 123R requires companies' to calculate equity-based compensation expense
for stock compensation awards based on the fair value of the equity instrument
at the time of grant. Salon currently uses, and will upon adoption of SFAS 123R,
utilize the Black-Scholes option pricing model to determine the value of its
stock compensation awards, but may later determine that an alternative model may
be more appropriate.
Under SFAS 123R, public companies are allowed to select from three
alternative transition methods: the Modified Prospective Application, which
allows for the adoption of SFAS 123R without
28
restatement of prior interim periods in the year of adoption; the Modified
Prospective Application with restatement of prior interim periods in the year of
adoption; and the Modified Retrospective Application which allows companies to
restate prior financial statements. Salon expects to adopt SFAS 123R beginning
in the first quarter of fiscal year 2007, as required, using the Modified
Prospective method, and will not restate prior periods for the adoption of SFAS
123R.
Currently, Salon discloses pro forma net income (loss) and related pro
forma net income (loss) per share in accordance with SFAS 123 and SFAS 148
"Accounting for Stock-Based Compensation-Transition and Disclosure - An
Amendment of FASB Statement No. 123". Under SFAS 123R, equity-based compensation
expense is required to be recognized in companies' financial statements. For the
years ended March 31, 2005, 2004 and 2003, had SFAS 123R been effective, Salon
would have recognized additional non-cash equity-based compensation expense of
$1,561, $219, and $737, respectively, applying the provisions of SFAS 123R.
The amounts disclosed within the footnotes are not necessarily indicative
of the amounts that will be expensed upon the adoption of SFAS No. 123R.
Compensation expense calculated under SFAS No. 123R may differ materially from
amounts currently disclosed within the footnotes, based on changes in the fair
value of our common stock, the term in which the options vest, changes in the
number of options granted, the treatment of tax benefits that may result, and
changes in interest rates or other factors.
Factors That May Affect Salon's Future Results and Market Price of Stock
Salon's projected cash flows may not meet expectations
Salon relies on projections of cash to be generated from operations to run
its operations. The most significant component of its cash projections is cash
to be generated from advertising sales, and to a lesser extent, cash projected
to be generated from subscription services. Forecasting cash receipts from
advertising sales for an extended period of time is problematic due to the short
duration of most advertising sales. If projected amounts of cash do not meet
expectations, Salon's ability to continue as a going concern may be adversely
affected.
If Salon forecasts that it will experience periods of limited, or
diminishing cash resources, Salon may need to issue additional securities. There
is no guarantee that Salon will be able to issue additional securities in future
periods to meet cash needs, and if it is unable to raise additional cash,
Salon's ability to continue as a going concern may be adverse affected.
Salon may issue additional preferred stock at effective prices lower than
current common stock market prices that may result in non-cash charges to
operations
The certificate of designation and preferences and rights of the Series D
preferred stock 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 the issue of Series D preferred stock is called by Salon.
Such a discount may trigger a non-cash preferred deemed dividend charge. The
June 2004 issuance of 417 shares of Series D-1 preferred stock resulted in a
$0.2 million preferred deemed dividend charge to Salon's results of operations
and the February 2, 2005 issuance of 209 shares of Series D-2 resulted in a $0.1
million preferred deemed dividend charge to Salon's results of operations.
However, the issuance of Series D-2 in September 30, 2004 resulted in a
negligible $23,000 preferred deemed dividend charge to Salon's results of
operations. Salon cannot predict to what extent it may incur preferred deemed
dividend charges for subsequent issuances of Series D preferred stock, if any.
29
Salon has relied on related parties for significant investment capital
Salon has been relying on cash infusions from related parties to fund
operations. The related parties are primarily John Warnock, a Director of Salon,
and William Hambrecht. William Hambrecht is the father of Salon's President and
Chief Executive Officer. Out of a total of $4.2 million of cash received by
Salon from the issuance of convertible notes payable, approximately $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 William
Hambrecht. Of the $0.5 million received in the June 2004 issuance of Series D-1
preferred stock, $249,600 was from Salon Director John Warnock and $225,600 was
either directly or indirectly from William Hambrecht. Salon also received from
Director John Warnock approximately $250,000 on September 30, 2004 from the
issuance of Series D-2 preferred stock. On February 2, 2005, Salon received
approximately $251,000 either directly or indirectly from William Hambrecht,
with one of the entities, HAMCO Capital Corporation, being indirectly held by
Elizabeth Hambrecht, Salon's President and Chief Executive Officer. Curtailment
of cash investments by related parties could detrimentally impact Salon's cash
availability and its ability to fund its operations.
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 may affect the value of their investment
The holders of Salon's Series A, B, C and D preferred stock collectively
own approximately 95% of all voting securities as of March 31, 2005. These
stockholders therefore own a controlling interest in Salon. Of this amount,
approximately 69% is held by related parties, of which approximately 21% is
controlled directly or indirectly by William Hambrecht and approximately 41% by
Director John Warnock. 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 all 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.
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, C and D preferred stockholders have liquidation
preferences to common stockholders of the first approximately $20.7 million in
potential sales proceeds as of March 31, 2005, which includes the effect of
undeclared dividends of $1.6 million. If a liquidation event were to occur, and
preferred stock dividends were declared, the holders of preferred stock would be
entitled to the first $20.7 million of cash distributions, while the holders of
common stock would receive none of this amount. If a liquidation event were to
occur in excess of $20.7 million and if preferred stock dividends were to be
declared, the holders of preferred stock would be entitled to receive a
relatively large distribution than the holders of common stock would be entitled
to receive.
Salon has historically lacked significant revenues and has a history of losses
Salon has a history of significant losses and expects to incur a loss from
operations for its fiscal year ending March 31, 2006 and potentially in future
years. Once Salon attains profitability, it may not be able to sustain or
increase profitability on a quarterly or annual basis in the future. If revenues
grow
30
slower 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 and March 31, 2005, included a
"going-concern" audit opinion on the consolidated financial statements for those
years. PricewaterhouseCoopers LLP, Salon's independent registered public
accounting firm for the year ended March 31, 2003 included a "going-concern"
audit opinion on the consolidated financial statements for that year. 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 have been and will continue to 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. As of March 31, 2005 Salon's renewal rate for
one-year paid subscription to Salon Premium was approximately 69%. 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:
o successfully sell and market its Website Site 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 generated from
Website visitors available to advertisers;
o successfully sell and market it network to advertisers;
o increase the amount of the advertising order it receives;
o increase awareness of the Salon brand;
31
o improve the technology for serving advertising on our Website;
o handle temporary high volume traffic spikes to its Website;
o accurately measure the number and demographic characteristics of its
users; and
o attract and retain key sales personnel.
Legislative Action and Potential New Accounting Pronouncements are likely to
cause our general and administrative expenses and other operating expenses to
increase
In order to comply with the newly adopted Sarbanes-Oxley Act of 2002 and
proposed accounting changes by the Securities and Exchange Commission, Salon may
be required to hire additional personnel and utilize additional outside legal,
accounting and advisory services, all of which will cause our general and
administrative costs to increase. Proposed changes in the accounting rules,
including legislative and other proposals to account for employee stock options
as a compensation expense, among others, could materially increase the expenses
that we report under generally accepted accounting principles and adversely
affect our operating results.
Complying with the Data Security Standard known as the Payment Card Industry
Data Security Standard is likely to cause our general and administrative
expenses and other operating expenses to increase and potential financial harm
to Salon for non-compliance in the event of a breach in credit card data
security
Salon, as a merchant who conducts business with credit card data, must
comply with the Data Security Standard known as the Payment Card Industry Data
Security Standard as promulgated by all major issuers of credit cards. The
deadline for compliance of June 30, 2005 will not be met by Salon, which could
cause severe harm to Salon if a breach in credit card data were to occur before
Salon attains compliance. Salon is taking steps to comply with this directive
and to minimize its exposure to unauthorized access to credit card data.
Complying with the directive could materially increase the expenses that we
report under generally accepted accounting principles and adversely affect our
operating results.
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 our reputation
and expose us to a risk of loss or litigation. Experienced programmers or
"hackers" have successfully penetrated sectors of our systems and Salon expects
that these attempts will continue to occur from time to time. Because a hacker
who is able to penetrate 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.
32
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 the Website Site 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. 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.
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;
33
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; 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.
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 our
brand. Any change in the focus of its operations creates a risk of diluting our
brand, confusing consumers and decreasing the value of our user base to
advertisers. If Salon is unable to maintain or grow the Salon brand, its
business could be severely harmed.
34
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 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
history of losses, 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, which 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.
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 on 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.
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Salon relies on software, purchased from an independent supplier, to deliver and
report some of its advertising, the failure of which could impair our business
Salon uses software, purchased from an independent supplier, to manage and
measure the delivery of advertising on its Website. The software is essential to
Salon whenever an advertiser does not stipulate ad serving from a third party
such as Doubleclick. This type of software may fail to perform as expected. If
this software malfunctions, advertisements may not be served correctly on our
Website, or if the software does not accurately capture impression information,
then Salon's advertising revenues could be reduced, and its business could be
harmed.
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.
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
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
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not advertise on Salon or may pay less for advertising if they do not perceive
our measurements or measurements made by third parties to be reliable.
If use of the Internet does not grow, Salon's business could be harmed
Salon's success is highly dependent upon continued growth in the use of the
Internet generally and in particular as a medium for content, advertising and
electronic commerce. If Internet usage does not grow, it may not be able to
increase revenues from advertising and 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 Salon's
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 fifty 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