<PAGE>
As filed with the Securities and Exchange Commission on May 27, 1999
Registration No. 333-76511
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
SALON INTERNET, INC.
(Exact name of Registrant as specified in its charter)
---------------
<TABLE>
<S> <C> <C>
California 7373 94-3228750
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Number) Identification No.)
</TABLE>
706 Mission Street, San Francisco, California 94103
(415) 882-8720
(Address and telephone number of principal executive offices)
---------------
Michael O'Donnell
Chief Executive Officer and President
Salon Internet, Inc.
706 Mission Street, San Francisco, California 94103
(415) 882-8720
(Name, address and telephone number of agent for service)
Copies to:
<TABLE>
<S> <C>
Thomas W. Furlong, Esq. Bruce Alan Mann, Esq.
Christopher P. Bifone, Esq. James H. Laws, Esq.
William A. Rodoni, Esq. Valerie A. Villanueva, Esq.
Michael B. Gebhardt, Esq. Morrison & Foerster llp
Matthew E. Horsley, Esq. 425 Market Street
Gray Cary Ware & Freidenrich llp San Francisco, California 94105-2482
400 Hamilton Avenue (415) 268-7000
Palo Alto, California 94301-1825
(650) 328-6561
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
---------------
If the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 of the Securities Act, please
check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the
"Securities Act"), please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
<CAPTION>
Title of Each Class of Proposed Maximum Aggregate Amount of Registration
Securities to be Registered Offering Price(1) Fee(2)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock ($0.001 par value)................ $38,812,500 $10,790
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purposes of determining the registration fee
pursuant to Rule 457(o) promulgated under the Securities Act.
(2) Previously paid in connection with the filing of Salon's Registration
Statement on Form S-1 (File No. 333-76511) on April 19, 1999.
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act or until the Registration Statement shall
become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Initial Public Offering Prospectus
Subject to Completion, May 27, 1999
2,500,000 shares of common stock
$ per share
[LOGO OF SALON.COM]
Salon.com is a leading
Salon.com Internet media company
706 Mission Street, 2nd that produces a
Floor network of ten
San Francisco, California subject-specific,
94103 demographically-
targeted Web sites and
a variety of online
communities designed
to attract premium
Internet advertisers
and electronic
commerce partners.
The Offering
<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public Price................. $ $
Underwriting discounts and
commissions................. $ $
Proceeds to Salon............ $ $
</TABLE>
This is our initial
public offering and no
public market
currently exists for
our shares. We expect
that the price will be
between $10.50 and
$13.50 per share. This
price may not reflect
the market price of
our shares after this
offering.
Proposed Trading Symbol:
The Nasdaq National Market - SALN
----------------------
This offering involves a high degree of risk. You should purchase shares only
if you can afford to lose your entire investment. See "Risk Factors" beginning
on page 5.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
We have entered into a firm commitment underwriting agreement with the
underwriters for the sale of the shares in this offering. We have granted the
underwriters a 30-day option to purchase up to an additional 375,000 shares of
our common stock to cover over-allotments. The underwriters expect to deliver
shares of our common stock to purchasers on , 1999.
WR HAMBRECHT+CO DAIWA SECURITIES AMERICA INC.
, 1999
<PAGE>
[INSIDE FRONT COVER ART DESCRIPTION]
Images depicting views of Salon Web sites and online communities. The images
include views of Salon's main home page, www.salon.com, each of Salon's ten Web
sites, Table Talk and The Well. The images incorporate logos of various Salon
advertisers.
<PAGE>
[GATEFOLD ART DESCRIPTION]
[LOGO OF SALON.COM]
Distributing Salon.com content to high traffic portals
[Images depicting web pages of various Salon.com distributors and images of
such distributors' logos.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUMMARY......................................................... 1
THE OFFERING............................................................... 3
SUMMARY FINANCIAL DATA..................................................... 4
RISK FACTORS............................................................... 5
FORWARD-LOOKING STATEMENTS................................................. 17
USE OF PROCEEDS............................................................ 18
DIVIDEND POLICY............................................................ 18
CAPITALIZATION............................................................. 19
DILUTION................................................................... 20
SELECTED FINANCIAL DATA.................................................... 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..................................................... 22
BUSINESS................................................................... 34
MANAGEMENT................................................................. 48
CERTAIN TRANSACTIONS....................................................... 55
PRINCIPAL STOCKHOLDERS..................................................... 56
DESCRIPTION OF CAPITAL STOCK............................................... 59
SHARES ELIGIBLE FOR FUTURE SALE............................................ 63
PLAN OF DISTRIBUTION....................................................... 64
LEGAL MATTERS.............................................................. 67
EXPERTS.................................................................... 67
WHERE TO FIND ADDITIONAL INFORMATION ABOUT SALON........................... 67
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
</TABLE>
----------------
"Salon" and the Salon logo are trademarks of Salon.com. All other trademarks
or tradenames referred to in this prospectus are the property of their
respective owners.
i
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information described more fully elsewhere in this
prospectus. This summary is not complete and may not contain all of the
information that you should consider before investing in our common stock. You
should read the entire prospectus carefully.
SALON.COM
Our Business: We are a leading Internet media company that produces a network
of ten subject-specific, demographically-targeted Web sites and
a variety of online communities designed to attract premium
Internet advertisers and electronic commerce partners. We
believe that our network of Web sites combines the
thoughtfulness of print, the timeliness of television and the
interactivity of talk radio.
Our Strategy: Our strategy is to build a premier network of Internet
destination sites through compelling content that appeals to
users with high-value demographics. To establish our network of
premier Internet destinations, we intend to:
. broaden our revenue base in advertising and electronic
commerce;
. expand our content and communities;
. expand our network of distribution partners;
. grow our brand recognition through advertising and
syndication; and
. enhance our technology to improve production, user
experience, advertising delivery and circulation analysis.
Our Market: The Internet is becoming one of the most important mediums for
global communication and business. Industry analysts estimate
that the number of Internet users worldwide will increase to
319.8 million in 2002 from 68.7 million in 1997. The dramatic
increase in Internet use provides a tremendous opportunity for
both online advertising and electronic commerce, which industry
experts believe will realize significant revenue growth in the
near future.
Our Network: Our network of subject-specific Web sites includes:
.Salon News .Salon Books
.Salon Technology .Salon Media
.Salon Arts & Entertainment .Salon Travel
.Salon Mothers Who Think .Salon People
.Salon Health & Body .Salon Comics
Our other media offerings consist of Table Talk and The Well,
our interactive Web communities; and Salon Shopping, an
electronic commerce destination aimed at marketing upscale
Salon branded and third party products to our high-value
demographic base. The main entry and navigation point for our
network is www.salon.com.
We believe the scope of our product offerings and the high-
value demographics of our user base offer the opportunity to
build a premier Internet destination capable of highly targeted
advertising and electronic commerce marketing.
1
<PAGE>
We were incorporated in California in July 1995 and intend to reincorporate
in Delaware and change our name to "Salon.com" prior to the closing of this
offering. We currently employ 99 people in San Francisco, Sausalito, New York,
Washington, D.C., Chicago, Los Angeles, Boston and Tacoma, Washington. Our
headquarters are located at 706 Mission Street, 2nd Floor, San Francisco,
California 94103 and our telephone number is (415) 882-8720. Our principal Web
site is located at www.salon.com. Information contained on our Web sites does
not constitute a part of this prospectus.
Unless otherwise indicated, all information contained in this prospectus
assumes that:
. the underwriters will not exercise their over-allotment option;
. all outstanding convertible preferred stock will be converted to common
stock before this offering is completed;
. we will reincorporate in Delaware and change our name to Salon.com before
this offering is completed; and
. we will complete a 1 for 2 split of our common stock before this offering
is completed.
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of our common stock only in jurisdictions where offers and sales
are permitted. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
2
<PAGE>
THE OFFERING
Type of security............ Common stock
Common stock offered........ 2,500,000 shares
Common stock to be
outstanding after this
offering...................
10,730,623 shares
Use of proceeds............. For expansion of our sales force, marketing and
distribution activities, expansion of our
business operations and general corporate
purposes. See "Use of Proceeds" for more
information.
Proposed Nasdaq National
Market Symbol..............
SALN
The method of distribution being used by the underwriters in this offering
differs somewhat from that traditionally employed in firm commitment
underwritten public offerings. In particular, the public offering price and
allocation of shares will be determined primarily by an auction process
conducted by the underwriters and other securities dealers participating in
this offering. A more detailed description of this process is included in "Plan
of Distribution."
3
<PAGE>
SUMMARY FINANCIAL DATA
Summary Financial Information
(In thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year Ended
March 31,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Statement of Operations Data:
Net revenues....................................... $ 280 $ 1,156 $ 2,921
------- ------- -------
Operating expenses:
Production, content, and product................. 1,555 2,832 4,503
Sales and marketing.............................. 419 1,655 3,655
Research and development......................... 176 276 469
General and administrative....................... 129 291 518
------- ------- -------
Total operating expenses....................... 2,279 5,054 9,145
------- ------- -------
Loss from operations............................... (1,999) (3,898) (6,224)
Other income, net.................................. 55 73 (9)
------- ------- -------
Net loss........................................... (1,944) (3,825) (6,233)
Preferred dividend................................. -- -- 271
------- ------- -------
Net loss attributable to common stockholders....... $(1,944) $(3,825) $(6,504)
======= ======= =======
Basic and diluted net loss per share attributable
to common stockholders............................ $ (3.84) $(10.20) $(16.62)
======= ======= =======
Weighted average shares used in computing basic and
diluted net loss per share attributable to common
stockholders...................................... 507 375 391
======= ======= =======
Pro forma basic and diluted net loss per share
attributable to common stockholders (unaudited)... $ (1.51)
=======
Weighted average shares used in computing pro forma
basic and diluted net loss per share attributable
to common stockholders (unaudited)................ 4,308
=======
</TABLE>
<TABLE>
<CAPTION>
As of March 31, 1999
------------------------
Pro As
Actual forma adjusted
------ ------- --------
(unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.............................. $ 754 $11,354 $38,654
Working capital (deficit).............................. (525) 10,075 37,375
Total assets........................................... 4,598 15,198 42,498
Long-term liabilities, net of current portion.......... 75 75 75
Total stockholders' equity............................. 2,142 12,742 40,042
</TABLE>
The pro forma information above reflects the net proceeds of approximately
$10.6 million from the sale of 2,967,782 shares of Series C preferred stock on
April 14, 1999.
The as adjusted information above is adjusted to give effect to our receipt
of the estimated net proceeds of $27.3 million from the sale of 2,500,000
shares of common stock in this offering at an assumed public offering price of
$12 per share.
4
<PAGE>
RISK FACTORS
You should carefully consider the following risks before you decide to buy
our common stock.
Risks Related to Our Operations
Because we have a limited operating history, it is difficult to evaluate our
business and prospects
We originally incorporated in July 1995 and launched our initial Web sites in
November 1995. Because we have a limited operating history, you must consider
the risks and difficulties frequently encountered by early-stage companies like
us in new and rapidly evolving markets, including the market for advertising
and commerce on the Internet. Any future growth and success in our business
will depend substantially upon our ability to attract a larger number of users
to our Web sites and online communities, to increase advertising and
sponsorship sales based on that audience and to meet the challenges described
in the risk factors set forth below. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" for detailed information on
our limited operating history.
We lack significant revenues, we have a history of losses and we anticipate
increased losses
We have not achieved profitability and expect to incur operating losses for
the foreseeable future. We incurred net losses of $3.8 million in the fiscal
year ended March 31, 1998 and $6.2 million in the fiscal year ended March 31,
1999. As of March 31, 1999, our accumulated deficit was $12.8 million. We
expect these operating losses to increase for at least the foreseeable future.
We will need to generate significant revenues to achieve and maintain
profitability, and we may not be able to do so. Even if we do achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis in the future. If our revenues grow more slowly than
we anticipate or if our operating expenses exceed our expectations, our
financial results would be severely harmed. See "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for more detailed information.
Our quarterly operating results are volatile and may adversely affect our stock
price
Our future revenues and operating results are likely to vary significantly
from quarter to quarter due to a number of factors, many of which are outside
our control, and any of which could severely harm our business. These factors
include:
. our ability to attract and retain banner advertisers, advertising
sponsors and electronic commerce sponsors;
. our ability to attract and retain a large number of users;
. the introduction of new Web sites, services or products by us or by our
competitors;
. the timing and uncertainty of our advertising and sponsorship sales
cycles;
. the mix of banner advertisements and sponsorships sold by us or our
competitors;
. seasonal declines in advertising sales, which typically occur in the
first and third calendar quarters;
. the level of Internet usage;
. our ability to attract, integrate and retain qualified personnel;
. our ability to successfully integrate operations and technologies from
acquisitions or other business combinations;
. technical difficulties or system downtime affecting the Internet
generally or the operation of our Web sites; and
. the amount and timing of operating costs and capital expenditures
relating to the expansion of our business operations and infrastructure.
5
<PAGE>
In order to attract and retain a larger user base, we plan to significantly
increase our expenditures on sales and marketing, content development,
technology and infrastructure. Many of these expenditures are planned or
committed in advance and in anticipation of future revenues. If our revenues in
a particular quarter are lower than we anticipate, we may be unable to reduce
spending in that quarter. As a result, any shortfall in revenues would likely
adversely affect our quarterly operating results.
Due to the factors noted above and the other risks discussed in this section,
you should not rely on quarter-to-quarter comparisons of our results of
operations as an indication of future performance. It is possible that in some
future periods our results of operations may be below the expectations of
public market analysts and investors. If this occurs, the price of our common
stock may decline. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for detailed information on our quarterly
operating results.
We depend on banner advertising and sponsorship sales for substantially all of
our revenues, and our inability to increase banner advertising and sponsorship
revenues would harm our business
Our revenues for the foreseeable future will depend substantially on sales of
advertising and sponsorships. In the fiscal year ended March 31, 1998,
advertising and sponsorship sales accounted for 99% of our net revenues, and in
the fiscal year ended March 31, 1999, they accounted for 94% of our net
revenues. In order to increase our revenues, we will need to attract additional
significant banner advertisers, advertising sponsors and electronic commerce
sponsors on an ongoing basis. We may not be able to attract or retain a
sufficient number of banner advertisers or advertising sponsors in the future,
and if we cannot, our business would likely be severely harmed. Increasing our
advertising and sponsorship revenues depends upon many factors, including
whether we will be able to:
. successfully sell and market our network to advertisers and sponsors;
. increase our user base;
. increase the amount of revenues we receive per sponsorship;
. increase awareness of the Salon brand;
. target advertisements and electronic commerce opportunities to users with
appropriate interests;
. accurately measure the number and demographic characteristics of our
users; and
. attract and retain sales personnel.
If we do not sell a sufficient number of advertisements or sponsorships or do
not engage a sufficient number of advertisers or sponsors during a particular
period, our business could be severely harmed.
Our revenues depend on a limited number of advertisers and sponsors who are not
subject to long-term agreements, and the loss of a number of these advertisers
and sponsors could adversely affect our operating results
Historically, we have relied on a small number of banner advertisers and
advertising sponsors for a significant percentage of our revenues. In the
fiscal year ended March 31, 1998, Borders accounted for approximately 37% and
IBM accounted for approximately 16% of our revenues. In the fiscal year ended
March 31, 1999, Borders accounted for approximately 13% of our revenues. The
loss of any of our significant banner advertisers or advertising sponsors could
adversely affect our business. We anticipate that our financial results in any
given period will continue to significantly depend on revenues from a small
number of banner advertisers and advertising sponsors. In addition,
particularly because few banner advertisers and advertising sponsors are
contractually obligated to purchase any advertising in the future, we are
unable to anticipate our mix of banner advertisers and advertising sponsors in
future fiscal periods.
6
<PAGE>
The length of our sales cycles is uncertain and variable and may lead to
shortfalls in our revenue and fluctuations in our operating results
Our dependence on banner advertising and sponsorships subjects us to the risk
of revenue shortfalls because the sales cycles for advertising and sponsorships
vary significantly, and during these cycles we may expend substantial funds and
management resources while not obtaining advertising or sponsorship revenues.
If sales are delayed or do not occur, our financial results for a particular
period may be harmed. The time between the date of initial contact with a
potential banner advertiser or sponsor and receipt of a purchase order from the
advertiser may range from as little as one week to up to nine months. Sales of
banner advertising and sponsorships are subject to factors over which we have
little or no control, including:
. advertisers' and sponsors' budgets;
. internal acceptance reviews by advertisers and their agencies;
. the timing of completion of advertisements and sponsorships; and
. the possibility of cancellation or delay of projects by advertisers or
sponsors.
We must increase our user base to attract advertisers and sponsors and to
generate additional revenue
Increasing the size of our user base is critical to selling advertising and
sponsorships and to increasing our revenues. If we cannot increase the size of
our user base we may not be able to generate additional revenues, which could
leave us unable to maintain or grow our business. To increase our user base, we
must:
. expand our content and communities;
. expand our network of distribution partners;
. grow Salon brand recognition through advertising and syndication;
. enhance our technology to improve the functionality of our network of Web
sites; and
. offer attractive electronic commerce opportunities to electronic commerce
sponsors and users.
If we do not achieve these objectives to increase our user base, our business
could be severely harmed. Additionally, a significant element of our business
strategy is to build loyal online communities because we believe communities
help retain actively engaged users. However, the concept of developing these
communities on the Web is unproven, and if it is not successful, then it may be
more difficult to increase the size of our user base.
We must establish and maintain distribution relationships to attract more users
to our network
We depend on establishing and maintaining distribution relationships with
high-traffic Web sites to increase our user base. There is intense competition
for relationships with these sites, and we may not be able to enter into such
relationships on favorable terms or at all. Even if we enter into distribution
relationships with these Web sites, their sites may not attract significant
numbers of users, and our Web sites may not attract additional users from these
relationships. Moreover, we have paid and may in the future pay significant
fees to establish these relationships.
We must continually develop compelling content to attract Internet users
Our success depends upon our ability to attract and retain a large number of
users by delivering original and compelling Internet content and services. If
we are unable to develop content and services that allow us to attract, retain
and expand a loyal user base possessing high-value demographic characteristics,
we will be unable to generate advertising revenues or enter into sponsorships,
and our revenues and operating results will be severely harmed. The content and
services we provide on our Web sites may not appeal to a sufficient number of
Internet users to generate banner advertising revenues or attract sponsorships.
Our ability to develop compelling content depends on several factors,
including:
7
<PAGE>
. the quality and number of writers and artists who create content for
Salon;
. the quality of our editorial staff; and
. the technical expertise of our production staff.
Consumer tastes and preferences change rapidly and we may not be able to
anticipate, monitor, and successfully respond to these changes to attract and
retain a sufficient number of users for our network of Web sites. Internet
users can freely navigate and instantly switch among a large number of Web
sites, many of which offer content and services that compete with Salon. In
addition, many Web sites offer very specific, highly targeted content that
could have greater appeal than our network to particular subsets of our target
user base.
The new design of our network of Web sites may not appeal to users which could
result in reduced traffic on our network
We recently made significant changes to the design of our network of Web
sites. If the new design of our network does not appeal to our existing users
or new users, the amount of traffic on our network could be reduced, which
would make it more difficult for us to enter into agreements with banner
advertisers, advertising sponsors and electronic commerce sponsors, because
these agreements are based on the quantity and quality of users that visit our
network. A loss of advertisers or sponsors could harm our business.
The controversial content of our Web sites may limit our revenues from banner
advertising, advertising sponsorships or electronic commerce sponsorships
Many of our Web sites contain, and will continue to contain, content that is
politically and culturally controversial. As a result of this content, current
and potential advertisers and sponsors may refuse to do business with us. Our
outspoken stance on political issues, including the investigation and
impeachment of President Clinton, as well as much of our other published
content, has and may continue to result in negative reactions from some users,
commentators and other media outlets.
Our promotion of the Salon brand must be successful in order to attract and
retain users as well as advertisers, sponsors and strategic partners
The success of the Salon brand depends largely on our ability to provide high
quality content and services. If Internet users do not perceive our existing
content and services to be of high quality, or if we introduce new content and
services or enter into new business ventures that are not favorably perceived
by users, we may not be successful in promoting and maintaining our brand. Any
expansion of the focus of our operations creates a risk of diluting our brand,
confusing consumers and decreasing the value of our user base to advertisers.
In order to attract and retain users, and to promote the Salon brand, we may
need to increase our budgets for content and services or otherwise
substantially increase our financial commitment to establishing and maintaining
loyalty for the Salon brand name. If we are unable to establish the Salon brand
or are forced to substantially increase our expenditures to promote the Salon
brand, our business could be severely harmed.
We need to hire, integrate and retain qualified editorial and design personnel
because these individuals are important to our growth
Our success significantly depends on the continued services of our key
editorial and design personnel. In addition, because the content of our Web
sites must be perceived by our users as having been created by credible and
notable sources, our success also depends on the name recognition and
reputation of our editorial staff, in particular David Talbot, Salon's editor-
in-chief. The loss of these individuals or other key editorial or design
personnel would likely harm our business.
8
<PAGE>
We have recently hired a chief financial officer and a senior vice president
of sales. If we cannot integrate each of these persons into our management
team, we may not be able to retain their services, and may have to search for
other persons to fill these positions.
We expect that we will need to hire additional personnel in all areas in
1999. Competition for personnel in the Internet industry is intense. We may be
unable to retain our current key employees or attract, integrate or retain
other qualified employees in the future. If we do not succeed in attracting new
personnel or integrating, retaining and motivating our current personnel, our
business could be harmed.
We may expend significant resources to protect our intellectual property rights
or to defend claims of infringement by third parties, and if we are not
successful we may lose rights to use significant material or be required to pay
significant fees
Our success and ability to compete are significantly dependent on our
proprietary content. We rely exclusively on copyright law to protect our
content. While we actively take steps to protect our proprietary rights, these
steps may not be adequate to prevent the infringement or misappropriation of
our content. Infringement or misappropriation of our content or intellectual
property could materially harm our business. We also license content from
various freelance providers and other third-party content providers. While we
attempt to insure that this content may be freely licensed to us, other parties
may assert claims of infringement against us relating to this content.
We may need to obtain licenses from others to refine, develop, market and
deliver new services. We cannot assure you that we will be able to obtain any
such licenses on commercially reasonable terms or at all or that rights granted
pursuant to any licenses will be valid and enforceable.
We recently acquired the Internet address www.salon.com. Because
www.salon.com is the address of the main home page to our network of Web sites
and incorporates our company name, it is a vital part of our intellectual
property assets. We do not have a registered trademark on the address, and
therefore it may be difficult for us to prevent a third party from infringing
our intellectual property rights in the address. If we fail to adequately
protect our rights in the address, or if a third party infringes our rights in
the address or otherwise dilutes the value of www.salon.com, our business could
be harmed.
Our technology development efforts may not be successful in improving the
functionality of our network which could result in reduced traffic on our
network
We have recently developed a proprietary online publishing system. If this
system does not work as intended, or if we are unable to continue to develop
this system to keep up with the rapid evolution of technology for content
delivery on the Internet, our network of Web sites may not operate properly
which could harm our business. Additionally, software product development
schedules are difficult to predict because they involve creativity and the use
of new development tools and learning processes. Delays in our software
development process could harm our business. Moreover, complex software
products like our online publishing system frequently contain undetected errors
or shortcomings, and may fail to perform or scale as expected. Although we have
tested and will continue to test our publishing system, errors or deficiencies
may be found in the system.
We rely on third parties for several critical functions relating to delivery of
advertising and our Web site performance, and the failure of these third
parties to supply these services in an efficient manner could limit our growth
and impair our business
We rely on a number of third party suppliers for various services, including
Web hosting, banner advertising delivery software, Internet traffic measurement
software and electronic commerce fulfillment services. While we believe that we
could obtain these services from other qualified suppliers on similar terms and
conditions, a disruption in the supply of these services by our current
suppliers could materially harm our business.
9
<PAGE>
We have recently begun to use new third-party software to manage the delivery
of banner advertising on our network of Web sites. If this software
malfunctions or does not deliver the correct banner advertisements to our
network, our advertising revenues could be reduced, and our business could be
harmed.
We have also recently begun to use new third-party software to measure
traffic on our network of Web sites. If this software malfunctions or does not
accurately measure our user traffic, we may not be able to justify our
advertising rates, and our advertising revenues could be reduced.
Growth in our operations is placing a strain on our resources, and failure to
manage growth effectively could harm our business
We have experienced and are currently experiencing a period of significant
growth. For example, in the last 12 months the number of employees we have has
increased 83% from approximately 54 to 99, and in the fiscal year ended March
31, 1999 our total revenues increased approximately 153% and our total expenses
increased approximately 81%. If we cannot manage our growth effectively, we may
not be able to coordinate the activities of our technical, accounting, finance,
marketing, sales and production staffs, and our business could be harmed. We
intend to add new subject-specific Web sites to our network, hire additional
staff in all departments, expand existing offices and open new offices. As part
of this growth, we will have to implement new operational procedures and
controls to train and manage our employees and to expand and coordinate the
operations of our various departments. If we acquire new businesses, we will
also need to integrate new operations, technologies and personnel. If we cannot
manage the growth of our network of Web sites, staff, offices and business
generally, our business could be harmed.
We may not be able to successfully integrate our acquisitions, and any failure
to integrate could diminish the value of an acquired business or cause
disruptions in our ongoing operations
Acquisitions and business combinations entail numerous operational risks,
including:
. difficulty in the assimilation of acquired operations, technologies or
products;
. diversion of management's attention from other business operations;
. risks of entering markets in which we have limited or no experience; and
. potential loss of key employees of acquired businesses.
We acquired The Well LLC, an online community provider, in March 1999. We may
not be able to successfully integrate The Well LLC or any businesses, products,
technologies or personnel that we might acquire in the future, and if we
cannot, our business could be harmed.
We will need more working capital to expand our network and achieve our
business objectives, and securing financing may be difficult because of the
condition of our business or the uncertain nature of the financial markets
We believe that our current cash resources, combined with the net proceeds
from this offering, will meet our anticipated working capital and capital
expenditure requirements for at least the 12 months following the date of this
prospectus. We may need to raise additional capital to do the following:
. expand our network of Web sites and interactive communities;
. increase our electronic commerce opportunities;
. aggressively promote awareness of the Salon brand;
. make payments under distribution relationships;
. respond to competitive pressures; or
. acquire complementary businesses or technologies.
10
<PAGE>
If we raise additional capital by issuing equity or convertible debt
securities, the percentage ownership of our then-current stockholders will be
reduced, and such securities may have rights, preferences or privileges senior
to those of our current stockholders. Additionally, we may not be able to
obtain additional financing on favorable terms, or at all. If adequate capital
is not available on acceptable terms, our ability to expand, take advantage of
unanticipated opportunities, develop or enhance services or otherwise respond
to competitive pressures would be significantly limited. This limitation could
harm our business. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" for a discussion of our working capital and capital
expenditures.
Provisions contained in our charter documents may delay or prevent a takeover
of Salon that could involve a premium stock price or other benefits to our
stockholders
We intend to reincorporate in Delaware prior to the completion of this
offering. Provisions of our Delaware certificate of incorporation and bylaws
and of the Delaware general corporation law could make it more difficult for a
third-party to acquire us, even if a change-in-control would be beneficial to
our stockholders. These provisions also may prevent changes in the management
of Salon. See "Description of Capital Stock" for more detailed information.
Risks Related to Our Internet Business and Prospects
Acceptance and effectiveness of Internet advertising and electronic commerce is
unproven and, to the extent they do not continue to grow, our market may not
develop adequately and our business could be harmed
Our success is highly dependent on an increase in the use of the Internet for
advertising and electronic commerce. If the markets for Internet advertising or
electronic commerce do not develop, our business may be severely harmed.
Currently, demand and market acceptance for Internet advertising is uncertain
and may not increase as necessary for our business to grow or succeed. Many
advertisers have little or no experience using the Internet for advertising
purposes. The adoption of Internet advertising, particularly by companies that
have historically relied on traditional media, requires the acceptance of a new
way of conducting business, exchanging information and advertising products and
services. Potential advertisers may believe Internet advertising to be
undesirable or less effective for promoting their products and services
relative to traditional advertising media. If the Internet advertising market
fails to develop or develops more slowly than we expect, our business could be
harmed.
Different pricing models are used to sell Internet advertising. It is
difficult to predict which pricing models, if any, will emerge as the industry
standard. This uncertainty makes it difficult to project our future advertising
rates and revenues. Any failure to adapt to pricing models that develop or
respond to competitive pressures could reduce our advertising revenues.
Moreover, "filter" software programs that limit or prevent advertising from
being delivered to an Internet user's computer are commonly available.
Widespread use of this software could adversely affect the commercial viability
of Internet advertising and our business.
Many retailers have little or no experience using the Internet for electronic
commerce. The adoption of electronic commerce, particularly by companies that
have historically relied on traditional channels to sell their products and
services, requires the acceptance of a new way of conducting business,
exchanging information and completing commercial transactions. Potential
electronic commerce partners may believe electronic commerce to be undesirable
or less effective for selling their products and services relative to
traditional channels. If the electronic commerce market fails to develop or
develops more slowly than we expect, our business could be harmed.
11
<PAGE>
Tracking and measurement standards for advertising may not evolve to the extent
necessary to support Internet advertising, thereby creating uncertainty about
the viability of our business model
There are currently no standards for the measurement of the effectiveness of
advertising on the Internet, and the industry may need to develop standard
measurements in order to sustain advertising volume or attract new advertisers.
Standardized measurements may not develop and if they do not, our business
could be harmed. In addition, currently available software programs that track
Internet usage and other tracking methodologies are rapidly evolving. The
development of such software or other methodologies may not keep pace with our
information needs, particularly to support our internal business requirements
and those of our advertisers and sponsors. The absence or insufficiency of this
information could limit our ability to attract and retain advertisers and
sponsors.
It is important to our advertisers and sponsors that we accurately measure
the demographics of our user base and the delivery of advertisements on our Web
sites. We depend on third parties to provide certain of these measurement
services. If they are unable to provide these services in the future, we would
need to perform them ourselves or obtain them from another provider, if
available. This could cause us to incur additional costs or cause interruptions
in our business while we are replacing these services. Companies may choose to
not advertise on Salon or may pay less for advertising or sponsorships if they
do not perceive our measurements or measurements made by third parties to be
reliable.
If use of the Internet does not grow, our business could be harmed
Our success is highly dependent upon continued growth in the use of the
Internet generally and in particular as a medium for content, advertising and
electronic commerce. If Internet usage does not grow, we may not be able to
increase revenues from advertising and sponsorships and this may harm our
business. Internet use by consumers is in an early stage of development, and
market acceptance of the Internet as a medium for content, advertising and
electronic commerce is highly uncertain. A number of factors may inhibit the
growth of Internet usage, including:
. inadequate network infrastructure;
. security concerns;
. inconsistent quality of service; and
. limited availability of cost-effective, high-speed access.
If these or any other factors cause use of the Internet to slow or decline, our
results of operations could be adversely affected.
Increasing competition among Internet content providers could reduce our
advertising sales or market share, thereby harming our business
The market for Internet content is relatively new, rapidly changing and
intensely competitive. We expect competition for Internet content to continue
to increase and if we cannot compete effectively our business could be harmed.
Additionally, we expect the number of Web sites competing for the attention and
spending of users, advertisers and sponsors to continue to increase, because
there are so few barriers to entry on the Internet.
Increased competition could result in advertising or sponsorship price
reductions, reduced margins or loss of market share, any of which could harm
our business. Competition is likely to increase significantly as new companies
enter the market and current competitors expand their services. Many of our
present and potential competitors are likely to enjoy substantial competitive
advantages over us. If we do not compete effectively or if we experience any
pricing pressures, reduced margins or loss of market share resulting from
increased competition, our business could be adversely affected. See
"Business--Competition."
12
<PAGE>
If the Internet infrastructure continues to be unreliable, access to our
network may be impaired and our business may be harmed
Our success depends in part on the development and maintenance of the
Internet infrastructure. If this infrastructure fails to develop or be
adequately maintained, our business would be harmed because users may not be
able to access our network of Web sites. Among other things, development and
maintenance of a reliable infrastructure will require a reliable network
backbone with the necessary speed, data capacity, security and timely
development of complementary products for providing reliable Internet access
and services.
The Internet has experienced, and is expected to continue to experience,
significant growth in number of users and amount of traffic. If the Internet
continues to experience increased numbers of users, frequency of use or
increased bandwidth requirements, the Internet infrastructure may not be able
to support these increased demands or perform reliably. The Internet has
experienced a variety of outages and other delays as a result of damage to
portions of its infrastructure, and could face additional outages and delays in
the future. These outages and delays could reduce the level of Internet usage
and traffic on our network of Web sites. In addition, the Internet could lose
its viability due to delays in the development or adoption of new standards and
protocols to handle increased levels of activity. If the Internet
infrastructure is not adequately developed or maintained, use of our network of
Web sites may be reduced.
Even if the Internet infrastructure is adequately developed and maintained,
we may incur substantial expenditures in order to adapt our services and
products to changing Internet technologies. Such additional expenses could
severely harm our financial results.
We may be held liable for content on our Web sites
As a publisher and distributor of content over the Internet, including user-
generated content on our online communities, we face potential liability for
defamation, negligence, copyright, patent or trademark infringement and other
claims based on the nature and content of the material that is published or
distributed on our network of Web sites. These types of claims have been
brought, sometimes successfully, against online services, Web sites and print
publications in the past. Although we carry general liability insurance, our
insurance may not be adequate to indemnify us for all liability that may be
imposed. Any liability that is not covered by our insurance or is in excess of
our insurance coverage could severely harm our business.
Concerns about transactional security may hinder our electronic commerce
strategy by subjecting us to liability or by discouraging commercial
transactions over the Internet
A significant barrier to electronic commerce is the secure transmission of
confidential information over public networks. Any breach in our security could
expose us to a risk of loss or litigation and possible liability. We rely on
encryption and authentication technology licensed from third parties to provide
secure transmission of confidential information. As a result of advances in
computer capabilities, new discoveries in the field of cryptography or other
developments, a compromise or breach of the algorithms we use to protect
customer transaction data may occur. A compromise of our security could
severely harm our business. A party who is able to circumvent our security
measures could misappropriate proprietary information, including customer
credit card information, or cause interruptions in the operation of our network
of Web sites.
We may be required to expend significant capital and other resources to
protect against the threat of security breaches or to alleviate problems caused
by these breaches. However, protection may not be available at a reasonable
price or at all. Concerns over the security of electronic commerce and the
privacy of users may also inhibit the growth of the Internet as a means of
conducting commercial transactions.
13
<PAGE>
Our efforts to engage in electronic commerce may expose us to product liability
claims
We have and continue to foster relationships with manufacturers or other
companies to offer certain products to users through our network of Web sites.
We have very limited experience in the sale of products online and the
development of relationships with manufacturers or suppliers of these products.
Users who purchase products may sue us if any of the products sold on our
network are defective, fail to perform properly or injure the user. Liability
claims could require us to spend significant time and money in litigation or to
pay significant damages. As a result, any such claims, whether or not
successful, could severely harm our business.
Our systems may fail due to natural disasters, telecommunications failures and
other events, any of which would limit user traffic
Substantially all of our communications hardware and computer hardware
operations for our Web sites are located at Frontier GlobalCenter's facilities
in Sunnyvale, California. Fire, floods, earthquakes, power loss,
telecommunications failures, break-ins and similar events could damage these
systems and cause interruptions in our services. Computer viruses, electronic
break-ins or other similar disruptive problems could cause users to stop
visiting our network of Web sites and could cause advertisers and sponsors to
terminate any agreements with us. If any of these circumstances occurred, our
business could be harmed. Our insurance policies may not adequately compensate
us for any losses that may occur due to any failures of or interruptions in our
systems. We do not presently have a formal disaster recovery plan.
Our Web sites must accommodate a high volume of traffic and deliver
frequently updated information. In the past year, our Web sites have
experienced slower response times or decreased traffic on approximately three
different occasions due to a variety of reasons including hardware and software
failures and intermittent Internet traffic routing problems beyond our control.
For example, in March 1999, users were unable to access Table Talk for
approximately two weeks as we upgraded our technology to compensate for
unexpected growth in user activity. It is possible that we will experience
similar systems failures in the future and that such failures could adversely
affect our business. In addition, our users depend on Internet service
providers, online service providers and other Web site operators for access to
our Web sites. Many of these providers and operators have experienced
significant outages in the past, and could experience outages, delays and other
difficulties due to system failures unrelated to our systems. Any of these
system failures could harm our business.
Governmental regulation of the Internet may restrict our business
There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. Laws and regulations may be adopted
in the future, however, that address issues including user privacy, pricing,
and the characteristics and quality of products and services. An increase in
regulation or the application of existing laws to the Internet could
significantly increase our costs of operations and harm our business. For
example, the Communications Decency Act of 1996 sought to prohibit the
transmission of certain types of information and content over the Web.
Additionally, several telecommunications companies have petitioned the Federal
Communications Commission to regulate Internet service providers and online
service providers in a manner similar to long distance telephone carriers and
to impose access fees on these companies. Imposition of access fees could
increase the cost of transmitting data over the Internet.
Possible state sales and other taxes could adversely affect our results of
operations
We generally do not collect sales or other taxes in respect of goods sold to
users on our network of Web sites. However, one or more states may seek to
impose sales tax collection obligations on out-of-state companies, including
Salon, which engage in or facilitate electronic commerce. A number of proposals
have been made at the state and local level that would impose additional taxes
on the sale of goods and services through the Internet. Such proposals, if
adopted, could substantially impair the growth of electronic commerce and could
reduce our ability to derive revenue from electronic commerce. Moreover, if any
state or foreign country were to successfully assert that we should collect
sales or other taxes on the exchange of merchandise on our network, our
financial results could be harmed.
14
<PAGE>
If we, or third parties on which we rely, fail to achieve year 2000 compliance,
our business could be impaired
We may discover year 2000 readiness problems in our internally developed
systems that will require substantial revision. In addition, third-party
software, hardware or services incorporated into our systems may need to be
revised or replaced, all of which could be time-consuming and expensive. If we
cannot fix or replace our internally developed proprietary software or third-
party software, hardware or services before January 1, 2000 our operating costs
could be increased and we could experience business interruptions which could
harm our business. Additionally, if we cannot adequately address year 2000
readiness issues in our internally developed proprietary software, we could be
subject to claims of mismanagement, misrepresentation or breach of contract and
related litigation, which could be costly and time consuming to defend.
In addition, the software and systems of governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside of our control may not be year 2000 ready. If these entities are not
year 2000 ready, a systemic failure beyond our control could result, including
a prolonged Internet, telecommunications or general electrical failure. This
type of failure would make it difficult or impossible to use the Internet or
access our network of Web sites and would prevent us from publishing our
content. If a prolonged failure of this type occurred, our business would be
severely harmed. If our advertisers and sponsors are not year 2000 ready, they
may defer or cancel advertising scheduled to appear on our network of Web
sites, which could adversely affect our financial results. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000 Readiness" for more detailed information.
Risks Related to This Offering
Our executive officers, directors and major stockholders will retain
significant control over Salon after this offering, which may lead to conflicts
with other stockholders over corporate governance matters
After this offering, executive officers, directors and holders of 5% or more
of our outstanding common stock will, in the aggregate, own approximately 67.7%
of our outstanding common stock. These stockholders would be able to
significantly influence all matters requiring approval by our stockholders,
including the election of directors and the approval of significant corporate
transactions. This concentration of ownership may also delay, deter or prevent
a change in control of Salon and may make some transactions more difficult or
impossible without the support of these stockholders.
Our stock price may be volatile which may lead to losses by investors and
securities litigation
The stock market has experienced significant price and volume fluctuations
and the market prices of securities of technology companies, particularly
Internet-related companies, have been highly volatile. Investors may not be
able to resell their shares at or above the initial public offering price. See
"Plan of Distribution" for more detailed information.
In the past, securities class action litigation has often been instituted
against a company following periods of volatility in the company's stock price.
This type of litigation could result in substantial costs and could divert our
management's attention and resources.
Our management will retain broad discretion in the use of proceeds from this
offering, and may fail to use such funds effectively to grow our business or to
achieve our other business goals
We intend to use the net proceeds from the sale of our common stock for
expansion of sales and marketing, brand promotion, working capital and general
corporate purposes, including content development or expansion of our offices
and possible acquisitions. Accordingly, our management will have significant
flexibility in applying the net proceeds of this offering. Until the proceeds
are needed, we plan to invest them in investment-grade, interest-bearing
securities. The failure of our management to apply such funds effectively could
harm our business. See "Use of Proceeds" for more detailed information.
15
<PAGE>
Sales of additional shares of our common stock could cause our stock price to
decline and could harm our ability to raise funds from stock offerings in the
future
Sales of a large number of shares of our common stock in the market after the
offering, or the belief that such sales could occur, could cause a drop in the
market price of our common stock and could impair our ability to raise capital
through offerings of our equity securities. Upon completion of this offering,
there will be 10,730,623 shares of our common stock outstanding. All of the
2,500,000 shares sold in this offering will be freely tradable without
restrictions or further registration under the Securities Act, unless such
shares are purchased by our "affiliates," as that term is defined under the
Securities Act. The remaining 8,230,623 shares of common stock held by existing
stockholders will be "restricted securities" as that term is defined in
Rule 144 of the Securities Act. These restricted shares will be available for
sale in the public market as follows:
. 75,000 restricted shares will be eligible for sale on the date of this
prospectus pursuant to Rule 144(k) of the Securities Act;
. 3,804,361 restricted shares will be eligible for sale 90 days after the
date of this prospectus pursuant to Rule 144 and Rule 701 of the
Securities Act; and
. the remainder of the restricted shares will be eligible for sale from
time to time thereafter upon expiration of one-year holding periods and
subject to the requirements of Rule 144.
After the completion of this offering, we intend to file a registration
statement on Form S-8 under the Securities Act to register 2,875,000 shares
reserved for issuance under our 1995 stock option plan and 500,000 shares
reserved for our issuance under our 1999 employee stock purchase plan. Upon
registration, all of these shares will be freely tradable when issued.
Because there has been no public market for our common stock prior to this
offering, trading our stock could be difficult or unsuccessful following this
offering
While we have applied to list our common stock on the Nasdaq National Market,
a trading market for our common stock may not develop or, if a market does
develop, the common stock may still be difficult to trade. You may not be able
to resell your shares at or above the initial public offering price. See "Plan
of Distribution" for more detailed information.
Investors in this offering will suffer immediate dilution, and existing
stockholders are likely to have achieved significant unrealized appreciation in
their stock
The initial public offering price is expected to be substantially higher than
the pro forma net tangible book value per share of the outstanding common stock
immediately after the offering. Accordingly, purchasers of common stock in this
offering will experience immediate and substantial dilution of approximately
$8.45 in net tangible book value per share, or approximately 70% of the assumed
offering price of $12 per share. In contrast, existing stockholders paid an
average price of $2.95 per share and, assuming an offering price of $12 per
share, will have, in the aggregate, achieved unrealized appreciation in their
stock in the amount of approximately $74.5 million. Investors will incur
additional dilution upon the exercise of outstanding stock options and
warrants.
16
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements" which may include
statements about our:
. business strategy;
. timing of and plans for the introduction or phase-out of services;
. enhancements;
. plans for hiring additional personnel;
. entering into sponsorships or distribution partnerships;
. anticipated sources of funds, including the proceeds from this offering,
to fund our operations for at least the 12 months following the date of
this prospectus; and
. plans, objectives, expectations and intentions contained in this
prospectus that are not historical facts.
When used in this prospectus, the words "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates" and similar expressions are generally
intended to identify forward-looking statements. Because these forward-looking
statements involve risks and uncertainties, actual results could differ
materially from those expressed or implied by these forward-looking statements
for a number of reasons, including those discussed under "Risk Factors" and
elsewhere in this prospectus. We assume no obligation to update any forward-
looking statements.
17
<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds of $27.3 million from the sale
of the 2,500,000 shares of common stock in this offering, assuming an initial
public offering price of $12 per share and after deducting estimated
underwriting discounts and offering expenses. While we cannot predict with
certainty how the proceeds of this offering will be used, we currently intend
to use them approximately as follows:
. $6.0 million for expansion of our sales force, marketing and distribution
activities;
. $9.0 million for expansion of our business operations, including
increased staffing, content production and technology infrastructure; and
. $12.3 million for general corporate purposes including working capital.
Pending these uses, the net proceeds of the offering will be invested in
short-term, interest-bearing investments or accounts.
The cost, timing and amount of funds we need cannot be precisely determined
at this time and will be based on numerous factors. Our board of directors has
broad discretion in determining how the proceeds of this offering will be
applied.
DIVIDEND POLICY
We have never paid cash dividends on our common stock and do not anticipate
paying such dividends in the foreseeable future. We currently intend to retain
any future earnings to develop and expand our business.
18
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999:
. on an actual basis;
. on a pro forma basis to reflect:
--our proposed reincorporation in Delaware;
-- the net proceeds of approximately $10.6 million from the sale of
2,967,782 shares of Series C preferred stock at $3.88 per share on
April 14, 1999; and
--the conversion of all outstanding shares of convertible preferred stock
to common stock; and
. on an as-adjusted basis after giving effect to our receipt of the
estimated net proceeds from the sale of the 2,500,000 shares of common
stock in this offering at an assumed public offering price of $12 per
share.
This table only presents summary information. In reading it, you should refer
to our financial statements and related notes, which are included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
March 31, 1999
----------------------------
Pro As
Actual Forma Adjusted
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Long-term debt--including current portion........ $ 439 $ 439 $ 439
-------- -------- --------
Stockholders' equity
Preferred stock, $0.001 par value; 5,000,000
shares authorized and none outstanding (pro
forma and as adjusted)........................ -- -- --
Convertible preferred stock, no par value;
8,108,750 shares authorized and 4,815,345
shares outstanding (actual); none authorized
and outstanding (pro forma and as adjusted)... 12,579 -- --
Common stock, $0.001 par value; 12,500,000
shares authorized and 447,496 issued and
outstanding (actual); 50,000,000 authorized
(pro forma and as adjusted); 8,230,623 issued
and outstanding (as adjusted); 10,730,623
issued and outstanding (pro forma)............ -- 8 10
Additional paid in capital..................... 3,147 26,318 53,616
Unearned compensation.......................... (834) (834) (834)
Accumulated deficit............................ (12,750) (12,750) (12,750)
-------- -------- --------
Total stockholders' equity..................... 2,142 12,742 40,042
-------- -------- --------
Total capitalization............................. $ 2,581 $ 13,181 $ 40,481
======== ======== ========
</TABLE>
The common stock outstanding as shown above is based on shares outstanding as
of March 31, 1999 and excludes:
. 1,683,593 shares of common stock reserved for issuance pursuant to
outstanding options granted under our 1995 stock option plan;
. 1,136,411 shares of common stock reserved for issuance pursuant to future
grants under our 1995 stock option plan;
. 500,000 shares of common stock reserved for issuance under our employee
stock purchase plan; and
. 333,752 shares of common stock issuable upon exercise of outstanding
warrants or upon conversion of preferred stock issuable upon exercise of
outstanding warrants.
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<PAGE>
DILUTION
Pro forma net tangible book value per share represents total assets less
intangible assets, net and total liabilities, after giving effect to our
receipt of the net proceeds of approximately $10,600,000 from our sale of
2,967,782 shares of Series C preferred stock at a price of $3.88 per share on
April 14, 1999, divided by the number of shares outstanding as of March 31,
1999, including the Series C preferred stock issued on April 14, 1999, and
assuming the conversion into common stock of all of our outstanding shares of
preferred stock. Our pro forma net tangible book value at March 31, 1999 was
approximately $10,842,000 or approximately $1.32 per share.
After giving effect to our sale of the 2,500,000 shares of common stock in
this offering at an assumed initial public offering price of $12 per share, and
after deducting the estimated fee payable to the underwriters and offering
expenses payable by us, our as adjusted net tangible book value as of March 31,
1999 would have been approximately $38,142,000 million, or $3.55 per share.
This represents an immediate dilution of $8.45 per share to new investors
purchasing shares in this offering. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $12.00
------
Pro forma tangible book value per share as of March 31,
1999....................................................... $1.32
Increase per share attributable to new investors............ $2.23
-----
As adjusted net tangible book value after this offering..... $ 3.55
------
Dilution per share to new investors in this offering.......... $ 8.45
======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1999,
assuming conversion into common stock of all of our outstanding shares of
preferred stock including 2,967,782 shares of preferred stock issued on April
14, 1999, and after giving effect to this offering, the number of shares
purchased from us, the total consideration paid and the average price per share
paid by existing stockholders and by the new investors purchasing the shares
offered hereby assuming an initial public offering price of $12 per share:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 8,230,623 77% $24,269,000 45% $ 2.95
New public investors... 2,500,000 23% 30,000,000 55% 12.00
---------- --- ----------- ---
Total................ 10,730,623 100% $54,269,000 100%
========== === =========== ===
</TABLE>
This information is based on pro forma shares outstanding as of March 31,
1999 and excludes:
. 1,683,593 shares of common stock reserved for issuance pursuant to
outstanding options granted under our 1995 stock option plan;
. 1,136,411 shares of common stock reserved for issuance pursuant to future
grants under our 1995 stock option plan;
. 500,000 shares of common stock reserved for issuance under our employee
stock purchase plan; and
. 333,752 shares of common stock issuable upon exercise of outstanding
warrants or upon conversion of preferred stock issuable upon exercise of
outstanding warrants.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
Our selected consolidated financial data set forth below as of March 31, 1998
and 1999 and for the fiscal years ended March 31, 1997, 1998 and 1999 are
derived from our consolidated financial statements that have been audited by
PricewaterhouseCoopers LLP, independent accountants, and are included elsewhere
in this prospectus. Our selected consolidated financial data set forth below as
of March 31, 1996 and 1997 and for the period July 27, 1995 (inception) to
March 31, 1996 are derived from our consolidated financial statements that have
been audited by PricewaterhouseCoopers LLP, independent accountants, and are
not included in this prospectus. The following information is qualified by
reference to, and should be read in connection with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
financial statements and related notes, included in this prospectus.
<TABLE>
<CAPTION>
Fiscal Year
July 27, 1995 Ended March 31,
(inception) to -------------------------
March 31, 1996 1997 1998 1999
-------------- ------- ------- -------
<S> <C> <C> <C> <C>
Statement of Operations Data (in
thousands, except per share
amounts):
Net revenues......................... $ 196 $ 280 $ 1,156 $ 2,921
------ ------- ------- -------
Operating expenses:
Production, content, and product... 463 1,555 2,832 4,503
Sales and marketing................ 124 419 1,655 3,655
Research and development........... 52 176 276 469
General and administrative......... 43 129 291 518
------ ------- ------- -------
Total operating expenses.......... 682 2,279 5,054 9,145
------ ------- ------- -------
Loss from operations................. (486) (1,999) (3,898) (6,224)
Other income, net.................... 10 55 73 (9)
------ ------- ------- -------
Net loss............................. (476) (1,944) (3,825) (6,233)
Preferred dividend................... -- -- -- 271
------ ------- ------- -------
Net loss attributable to common
stockholders........................ $ (476) $(1,944) $(3,825) $(6,504)
====== ======= ======= =======
Basic and diluted net loss per share
attributable to common
stockholders........................ $(1.26) $ (3.84) $(10.20) $(16.62)
====== ======= ======= =======
Weighted average shares used in
computing basic and diluted net loss
per share attributable to common
stockholders........................ 376 507 375 391
====== ======= ======= =======
Pro forma basic and diluted net loss
per share attributable to common
stockholders (unaudited)............ $ (1.51)
=======
Weighted average shares used in
computing pro forma basic and
diluted net loss per share
attributable to common stockholders
(unaudited)......................... 4,308
=======
</TABLE>
<TABLE>
<CAPTION>
As of March 31, As of March 31, 1999
-------------------- ------------------------
Pro As
1996 1997 1998 Actual forma Adjusted
------ ------ ------ ------ ------- --------
Balance Sheet Data (in thousands): (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents....... $1,231 $2,638 $1,926 $ 754 $11,354 $38,654
Working capital (deficit)....... 1,150 2,560 1,894 (525) 10,075 37,375
Total assets.................... 1,340 2,834 2,707 4,598 15,198 42,498
Long-term liabilities, net of
current portion................ -- -- 95 75 75 75
Total stockholders' equity...... 1,247 2,697 2,194 2,142 12,742 40,042
</TABLE>
The pro forma information above reflects the net proceeds of approximately
$10.6 million from the sale of 2,967,782 shares of Series C preferred stock on
April 14, 1999.
The as adjusted information above is adjusted to give effect to our receipt
of the estimated net proceeds of $27.3 million from the sale of 2,500,000
shares of common stock in this offering at an assumed public offering price of
$12 per share.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and related notes included elsewhere in this prospectus.
In addition to historical information, the discussion in this prospectus
contains certain forward-looking statements that involve risks and
uncertainties. Salon's actual results could differ materially from those
anticipated by these forward-looking statements due to factors discussed under
"Risk Factors," "Business" and elsewhere in this prospectus.
Overview
Salon.com is a leading Internet media company that produces a network of ten
subject-specific, demographically-targeted Web sites and a variety of online
communities. Salon was incorporated in July 1995 and launched its initial Web
sites in November 1995. Circulation of Salon's original content has grown
consistently since inception to a total of approximately 1.2 million unique
users and 16.1 million page views in April 1999. Page views are the total
number of complete pages retrieved and viewed by visitors to Salon's network. A
unique user is an individual visitor to Salon's network. Salon calculates its
unique user and page view figures internally by analyzing the log files that
record traffic to Salon's network of Web sites. Unique users are calculated by
identifying the individual Internet protocol address of each user who visits
the Salon network. Page views are calculated by counting actual page views as
recorded in Salon's log files. Since December 1998, these calculations have
been performed automatically through the use of Accrue software. Prior to that
time, the log files were manually downloaded and analyzed.
Through April 30, 1999, approximately 166,000 users had registered for
Salon's online communities, including approximately 104,000 for Table Talk and
62,000 for The Well.
Salon has incurred significant net losses and negative cash flows from
operations since its inception. As of March 31, 1999, Salon had an accumulated
deficit of approximately $12.8 million. Salon intends to continue to make
significant financial investments in content, marketing and promotion and the
development of technology and infrastructure. As a result, Salon believes that
it will incur additional operating losses and negative cash flows from
operations for the foreseeable future.
During the period from its inception in July 1995 to date, Salon's activities
have primarily involved the following:
. recruiting editorial and business personnel;
. creating and expanding content;
. licensing content to distribution partners;
. establishing relationships with advertisers and sponsors;
. developing and enhancing Salon's technical infrastructure;
. developing Salon's online retail capabilities; and
. raising capital.
To date, Salon's revenues have been derived primarily from the sale of banner
advertising, advertising sponsorships and electronic commerce sponsorships. To
a lesser extent, Salon has derived revenues from the sale of goods and services
through its online store, Salon Shopping, and from the syndication of its
original content to other media outlets.
Salon's advertising rates vary depending primarily on the particular content
site on which advertisements are placed, the total number of impressions
purchased and the length of the advertiser's commitment. Advertising revenue is
recognized in the period in which the advertisement is displayed, provided that
no significant obligations remain and collection of the resulting receivable is
probable. Revenues related to upfront fees in connection with advertising
sponsorships and electronic commerce sponsorships are recognized ratably
22
<PAGE>
over the sponsorship term. Certain agreements may provide that Salon receives
commissions on revenues generated from electronic commerce transactions and
shares in advertising revenue generated on co-branded pages. These revenues are
recognized by Salon upon notification from the advertiser or distribution
partner which notification is generally received quarterly.
Advertising revenues include barter revenues, which are the exchange by Salon
of advertising space on Salon's Web sites for reciprocal advertising space on
other Web sites or the exchange of goods and services. In the fiscal year ended
March 31, 1999, barter revenues represented 16% of Salon's advertising
revenues. Revenues from these barter transactions are recorded as advertising
revenues at the estimated fair value of the advertisements received or
delivered, whichever is more reliably measurable, and are recognized when the
advertisements are run on Salon's Web sites. Barter expenses are recorded in
sales and marketing in the consolidated statement of operations when Salon's
advertisements are run on the reciprocal Web sites, which is typically in the
same period as when advertisements are run on Salon's Web sites. The percentage
of revenues received from barter transactions has increased from 0% of
advertising revenues in the fiscal year ended March 31, 1997 to 7% in the
fiscal year ended March 31, 1998 and 16% in the fiscal year ended March 31,
1999. Salon believes that these barter transactions have been important to the
establishment of the Salon brand and expects to continue to engage in these
transactions in the future.
Revenues related to the sale of goods from Salon Shopping are recognized when
goods are shipped. Revenues related to the syndication and licensing of Salon
content to other media outlets are recognized on notification that the content
has been published. Subscription revenues are recognized ratably over the
period that services are to be provided.
Substantially all of Salon's content, as well as participation in Table Talk
and Salon's third-party sponsored Internet communities are free of charge to
users. In October 1998, Salon launched Salon Members, a paid membership program
that provides subscribers with discounts on purchases through Salon, access to
a members-only live chat session, free e-mail and other benefits. In March
1999, Salon acquired The Well, a paid online community that charges its
participants a monthly subscription fee. Salon expects to continue to derive a
portion of its revenues from fees charged to Salon Members and subscribers to
The Well.
Recent Events
Sale of Series C Convertible Preferred Stock
In April 1999, Salon completed the sale of 2,967,782 shares of Series C
preferred stock at a price of $3.88 per share, with total proceeds of
approximately $11.5 million. Each share of Series C preferred stock is
convertible into one share of common stock upon closing of this offering. The
Series C preferred stock has identical anti-dilution and dividend preferences
to Salon's Series A and Series B preferred stock, and priority as to
liquidation over common stock and all other series of preferred stock. Upon the
closing of the sale of the Series C preferred stock on April 14, 1999, Salon's
cash and cash equivalents totaled approximately $12.3 million.
Acquisition of The Well LLC
Salon acquired The Well LLC in March 1999. Through this acquisition, Salon
obtained a long-standing online community business, increased its presence as a
provider of established online communities and created a stronger platform for
future growth in the development of online communities.
Salon's acquisition of The Well LLC was accounted for using the purchase
method of accounting. In connection with the acquisition, Salon recorded
intangibles and goodwill of approximately $1.9 million which are being
amortized on a straight line basis over 24 months. The future operating and
financial performance of Salon will depend in part on its ability to integrate
and operate The Well LLC successfully and to enhance the operating results of
The Well LLC's business.
23
<PAGE>
Salon expects to continue to enter into similar business acquisitions that
may result in similar or greater non-cash charges. Because Internet business
acquisitions typically involve significant amounts of intangible assets, future
operating results may be adversely affected by amortization of the intangible
assets acquired.
Salon Results of Operations
The following table sets forth Salon's results of operations expressed as a
percentage of net revenues:
<TABLE>
<CAPTION>
Fiscal Year
Ended
March 31,
------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net revenues................ 100 % 100 % 100 %
---- ---- ----
Operating expenses:
Production, content and
product.................. 557 245 154
Sales and marketing....... 150 143 125
Research and development.. 63 24 16
General and
administrative........... 46 25 18
---- ---- ----
Total operating
expenses............... 816 437 313
---- ---- ----
Loss from operations........ (716) (337) (213)
Other income, net........... 20 6 0
---- ---- ----
Net loss.................... (696)% (331)% (213)%
==== ==== ====
</TABLE>
Fiscal Years Ended March 31, 1999 and 1998
Net Revenues
Salon's net revenues consist of the following:
. Banner advertising revenues and revenues related to sponsorship
advertising;
. Electronic commerce sponsorship revenues, including slotting fees and
commissions related to sales of products and services offered by online
retailing partners through Salon;
. Revenues from the sale of products through Salon Shopping;
. Revenues derived from the syndication of Salon's original content and the
development of content for media sources other than Salon's Web sites;
and
. Fees derived from paid subscription and membership programs.
Salon's net revenues increased 153% to approximately $2.9 million in the
fiscal year ended March 31, 1999 from approximately $1.2 million in the fiscal
year ended March 31, 1998. The increase in net revenues is primarily
attributable to an increase in revenues derived from banner advertisements of
approximately $1.0 million, advertising sponsorships of approximately $435,000
and electronic commerce sponsorships of approximately $166,000. Salon expects
that sponsorship and advertising revenues will continue to represent the most
significant portion of its net revenues for the foreseeable future. Net
revenues derived from subscription fees are expected to increase in future
periods as subscription fees related to membership in The Well are recognized
by Salon.
Net revenues include revenues recognized from advertising barter transactions
of approximately $472,000 in the fiscal year ended March 31, 1999 and
approximately $75,000 in the fiscal year ended March 31, 1998.
Operating Expenses
Salon's operating expenses consist of the following:
. Production, content and product expenses;
. Sales and marketing expenses;
. Research and development expenses; and
. General and administrative expenses.
24
<PAGE>
Salon's operating expenses increased 81% to approximately $9.1 million in the
fiscal year ended March 31, 1999 from approximately $5.1 million in the fiscal
year ended March 31, 1998, but decreased as a percentage of net revenues to
313% from 437% over these respective periods. The increase in operating
expenses for the fiscal year ended March 31, 1999 is primarily attributable to
increased production, content and product expenses of approximately $1.7
million, as well as increased sales and marketing expenses of approximately
$2.0 million. The decrease in operating expenses as a percentage of net
revenues is primarily attributable to an increase in sales of sponsorships and
advertising without a corresponding increase in operational expenses and the
fact that some operating expenses are relatively fixed. Salon expects that
operating expenses will continue to increase substantially as it increases the
scope of its content and communities, expands its marketing efforts and further
develops its technology and infrastructure.
Production, Content and Product Expenses. Production, content and product
expenses consist primarily of payroll and related expenses for Salon's
editorial, artistic and production staff, payments to freelance writers and
artists, and telecommunications and computer related expenses for the support
and delivery of Salon's Web sites. Also included in production, content and
product expenses are costs associated with electronic commerce transactions,
including the costs of product inventory and distribution.
Production, content and product expenses increased 59% to approximately $4.5
million in the fiscal year ended March 31, 1999 from approximately $2.8 million
in the fiscal year ended March 31, 1998, but decreased as a percentage of net
revenues to 154% from 245% over these respective periods. The increase in
production, content and product expenses for the fiscal year ended March 31,
1999 is primarily attributable to increased costs relating to growth in Salon's
editorial and production staff of approximately $838,000 and payments to
freelance writers and artists of approximately $168,000. The decrease in
production, content and product expenses as a percentage of net revenues is
primarily attributable to an increase in sales of sponsorships and advertising,
and due to the fact that some production and content expenses are relatively
fixed and may be utilized to deliver an expanding number of advertisements.
Salon anticipates that its production, content and product expenses will
continue to grow substantially as it increases staffing to expand the scope and
distribution of its Web sites and online communities and increases its online
retailing efforts.
Sales and Marketing Expenses. Sales and marketing expenses consist of payroll
and related expenses, including commissions, travel expenses and other costs
associated with Salon's advertising and sponsorship sales force, as well as
Salon related advertising, promotional and distribution costs. Sales and
marketing expenses increased 121% to approximately $3.7 million in the fiscal
year ended March 31, 1999 from approximately $1.7 million in the fiscal year
ended March 31, 1998, but decreased as a percentage of net revenues to 125%
from 143% over these respective periods. Sales and marketing expenses include
expenses incurred from barter transactions of approximately $472,000 for the
fiscal year ended March 31, 1999 and approximately $75,000 for the fiscal year
ended March 31, 1998. The increase in sales and marketing expenses is primarily
attributable to additional hiring of sales and marketing personnel of
approximately $812,000 and additional marketing costs associated with barter
transactions and the distribution of Salon content of approximately $748,000.
The decrease in sales and marketing expenses as a percentage of net revenues is
primarily attributable to increased sales of advertisements and sponsorships.
Salon anticipates that sales and marketing expenses will increase substantially
in the future as it increases its sales force and undertakes advertising and
other marketing campaigns to further promote the Salon brand and attempt to
increase revenue.
Research and Development Expenses. Research and development expenses consist
of costs associated with the development of technology, including Salon's
publishing platform software and archival database. Research and development
expenses increased 70% to approximately $469,000 in the fiscal year ended
March 31, 1999 from approximately $276,000 in the fiscal year ended March 31,
1998, but decreased as a percentage of net revenues to 16% from 24% over these
respective periods. The increase in research and development expenses is
primarily attributable to salary and payroll related expenses for the design
and development of a new publishing platform and advertising delivery system
and an increase in technical support staff. The decrease in research and
development expenses as a percentage of net revenues is primarily
25
<PAGE>
attributable to an increase in sales of advertising and sponsorships. Salon
expects that research and development expenses will continue to increase
substantially in the future as it further develops and refines its publishing
platform, advertising delivery technology and online retailing capabilities.
General and Administrative Expenses. General and administrative expenses
consist primarily of payroll and related expenses and related costs for general
corporate functions. General and administrative expenses increased 78% to
approximately $518,000 in the fiscal year ended March 31, 1999 from
approximately $291,000 in the fiscal year ended March 31, 1998, but decreased
as a percentage of net revenues to 18% from 25% over these respective periods.
The increase in general and administrative expenses is primarily attributable
to salary and related expenses for additional personnel of approximately
$112,000 and higher professional fees of approximately $174,000. The decrease
in general and administrative expenses as a percentage of net revenues is
primarily attributable to an increase in advertising and sponsorship sales and
due to the fact that certain general and administrative expenses are relatively
fixed. Salon expects that general and administrative expenses will continue to
increase as it expands its operations and incurs additional costs related to
becoming a public company.
Other Income, Net
Other income consists primarily of interest earned on Salon's cash, cash
equivalents and short term investments, offset by interest expense on
borrowings. Other expense, net was approximately $9,000 in the fiscal year
ended March 31, 1999. Other income, net was approximately $73,000 in the fiscal
year ended March 31, 1998. The decrease in other income in the aggregate is
primarily attributable to a decrease in the amount of interest earned by Salon
due to a decrease in Salon's cash and cash equivalents and an increase in
interest expense associated with additional borrowing under Salon's line of
credit.
Income Taxes
No provision for federal and state income taxes has been recorded as Salon
has incurred net operating losses through the fiscal year ended March 31, 1999.
As of March 31, 1999, Salon had approximately $11.2 million of federal and
approximately $8.7 million of state net operating loss carryforwards available
to offset future taxable income each of which will expire in 2019 and 2006. Due
to the change in Salon's ownership interests in connection with this offering
and prior private placements, Salon's use of these federal and state net
operating loss carryforwards may be subject to certain annual limitations.
Fiscal Years Ended March 31, 1998 and 1997
Net Revenues
Net revenues increased 314% to approximately $1.2 million in the fiscal year
ended March 31, 1998 from approximately $280,000 in the fiscal year ended March
31, 1997. The increase in net revenues is primarily attributable to an increase
in revenues derived from banner advertisements of approximately $490,000 and
advertising sponsorships of approximately $176,000. Net revenues include
revenues recognized from barter transactions of approximately $75,000 for the
fiscal year ended March 31, 1998 and zero for the fiscal year ended March 31,
1997.
Operating Expenses
Operating expenses increased 122% to approximately $5.1 million in the fiscal
year ended March 31, 1998 from approximately $2.3 million in the fiscal year
ended March 31, 1997, but decreased as a percentage of net revenues to 437%
from 815% over these respective periods. The increase in operating expenses for
the fiscal year ended March 31, 1998 is primarily attributable to increased
production, content and product expenses of approximately $1.3 million as well
as increased sales and marketing expenses of approximately $1.2 million. The
decrease in operating expenses as a percentage of net revenues is primarily
attributable to an increase
26
<PAGE>
in sales of sponsorships and advertising without a corresponding increase in
operational expenses and the fact that certain production expenses are
relatively fixed.
Production, Content and Product Expenses. Production, content and product
expenses increased 82% to approximately $2.8 million for the fiscal year ended
March 31, 1998 from approximately $1.6 million in the fiscal year ended March
31, 1997, but decreased as a percentage of net revenues to 245% from 557% in
these respective periods. The increase in production, content and product
expenses for the year ended March 31, 1998 is primarily attributable to
increased costs relating to growth in Salon's editorial and production staff of
approximately $573,000 and payments to freelance writers and artists of
approximately $418,000. The decrease in production, content and product
expenses as a percentage of net revenues is primarily attributable to an
increase in sales of advertising and sponsorships and the fact that some
production and content expenses are relatively fixed and may be utilized to
deliver an expanding number of advertisements.
Sales and Marketing Expenses. Sales and marketing expenses increased 295% to
approximately $1.7 million in the fiscal year ended March 31, 1998 from
approximately $419,000 in the fiscal year ended March 31, 1997, but decreased
as a percentage of net revenues to 143% from 150% over these respective
periods. Sales and marketing expenses include expenses incurred from barter
transactions of approximately $75,000 for the fiscal year ended March 31, 1998
and zero for the fiscal year ended March 31, 1997. The increase in sales and
marketing expenses is primarily attributable to additional hiring of sales and
marketing personnel of approximately $639,000 and barter advertising of
approximately $75,000.
Research and Development Expenses. Research and development expenses
increased 57% to approximately $276,000 in the fiscal year ended March 31, 1998
from approximately $176,000 in the fiscal year ended March 31, 1997, but
decreased as a percentage of net revenues to 24% from 63% over these respective
periods. The increase in research and development expenses is primarily
attributable to payroll and related expenses for upgrading and maintaining
Salon's Web site infrastructure. The decrease in research and development
expenses as a percentage of net revenues is primarily attributable to an
increase in sales of advertising and sponsorships.
General and Administrative Expenses. General and administrative expenses
increased 126% to approximately $291,000 in the fiscal year ended March 31,
1998 from approximately $129,000 in the fiscal year ended March 31, 1997, but
decreased as a percentage of net revenues to 25% from 46% over these respective
periods. The increase in general and administrative expenses is primarily
attributable to payroll and related expenses for additional personnel of
approximately $67,000 and higher professional fees of approximately $31,000.
The decrease in general and administrative expenses as a percentage of net
revenues is primarily attributable to an increase in sales of advertising and
sponsorships and the fact that some general and administrative expenses are
relatively fixed.
Other Income, Net
Other income increased 33% to approximately $73,000 in the fiscal year ended
March 31, 1998 from approximately $55,000 in the fiscal year ended March 31,
1997. The increase in other income is primarily attributable to an increase in
the amount of interest earned by Salon due to an increase in Salon's cash and
cash equivalents.
27
<PAGE>
The Well LLC Results of Operations
The following table sets forth The Well LLC's and its predecessor business'
results of operations expressed as a percentage of net revenues. For purposes
of the following discussion, results of operations for the predecessor business
for the period January 1, 1997 through June 30, 1997 and for The Well LLC for
the period July 1, 1997 through December 31, 1997 are combined.
<TABLE>
<CAPTION>
The Well LLC,
Predecessor period from The Well LLC,
Business, period July 1 to Combined, year year ended
from January 1 December 31, ended December December 31,
to June 30, 1997 1997 31, 1997 1998
---------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Subscription revenues... 100% 100% 100% 100%
--- --- --- ---
Operating expenses
Cost of subscription
revenues............. 44 46 46 45
Selling and
marketing............ 19 17 18 16
General and
administrative....... 53 62 57 53
--- --- --- ---
Total operating
expenses........... 116 125 121 114
--- --- --- ---
Net loss................ (16)% (25)% (21)% (14)%
=== === === ===
</TABLE>
Fiscal Years Ended December 31, 1998 and 1997
Subscription Revenues
Subscription revenues consists of conferencing service revenues derived from
monthly subscription fees charged to members of The Well LLC's online
community. Net revenues decreased 6% to approximately $485,000 in the year
ended December 31, 1998 from approximately $518,000 in the year ended December
31, 1997. The decrease in subscription revenues is primarily attributable to a
decrease in subscription fees resulting from a decrease in registered members
of The Well LLC's online community.
Cost of Subscription Revenues
Cost of subscription revenues consists primarily of telecommunications and
computer expenses. Cost of revenues decreased to approximately $218,000 or 45%
of subscription revenues in the year ended December 31, 1998 from approximately
$237,000 or 46% of subscription revenues in the year ended December 31, 1997.
The decrease in cost of subscription revenues is primarily attributable to
reduced fees from The Well LLC's server maintenance provider.
Selling and Marketing Expenses
Selling and marketing expenses consist of payroll and related expenses,
including commissions and other costs associated with The Well LLC's
advertising and promotional costs. Sales and marketing expenses decreased to
approximately $78,000 or 16% of subscription revenues in the year ended
December 31, 1998 from approximately $93,000 or 18% of subscription revenues in
the year ended December 31, 1997. The decrease in selling and marketing
expenses in the aggregate and as a percentage of subscription revenues is
primarily attributable to reduced expenses for community development and
promotional materials.
General and Administrative Expenses
General and administrative expenses consist primarily of payroll and related
expenses for general corporate functions. General and administrative expenses
decreased to approximately $258,000 or 53% of subscription revenues in the year
ended December 31, 1998 from approximately $297,000 or 57% of subscription
revenues in the year ended December 31, 1997. The decrease in general and
administrative expenses in the aggregate and as a percentage of subscription
revenues is primarily attributable to operating efficiencies in general
corporate functions.
28
<PAGE>
Selected Quarterly Results of Operations
The following table presents Salon's results of operations for each of the
last seven quarters. The quarterly information is unaudited, but management
believes that the information regarding these quarters has been prepared on the
same basis as the audited financial statements appearing elsewhere in this
prospectus. In the opinion of management, all necessary adjustments have been
included to present fairly the unaudited quarterly results when read in
conjunction with the financial statements and related notes appearing elsewhere
in this prospectus.
Salon Quarterly Results of Operations
<TABLE>
<CAPTION>
September 30, December 31, March 31, June 30, September 30, December 31, March 31,
1997 1997 1998 1998 1998 1998 1999
------------- ------------ --------- -------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ $ 212 $ 381 $ 467 $ 408 $ 619 $ 1,031 $ 863
------- ------ ------- ------- ------- ------- -------
Production, content and
product................ 715 684 764 913 1,032 1,190 1,368
Sales and marketing..... 416 396 446 747 850 983 1,075
Research and
development............ 70 66 75 88 101 116 164
General and
administrative......... 75 72 79 98 111 129 180
------- ------ ------- ------- ------- ------- -------
Total operating
expenses............. 1,276 1,218 1,364 1,846 2,094 2,418 2,787
------- ------ ------- ------- ------- ------- -------
Loss from operations.... (1,064) (837) (897) (1,438) (1,475) (1,387) (1,924)
Other income (expense),
net.................... 27 10 19 13 (9) (2) (11)
------- ------ ------- ------- ------- ------- -------
Net loss................ (1,037) (827) (878) (1,425) (1,484) (1,389) (1,935)
Preferred dividend...... -- -- -- -- 213 58 --
------- ------ ------- ------- ------- ------- -------
Net loss attributable to
common stockholders.... $(1,037) $ (827) $ (878) $(1,425) $(1,697) $(1,447) $(1,935)
======= ====== ======= ======= ======= ======= =======
</TABLE>
The increase in net revenues during the quarter ended December 31, 1998, as
compared to the immediately preceding quarter ended September 30, 1998, was due
to the growth of the Internet as an advertising medium and seasonal promotions
related to holiday shopping and planning. In addition, the fourth calendar
quarter is seasonally strong for most kinds of advertising. Net revenues for
the quarter ended March 31, 1999 increased over the year-ago quarter ended
March 31, 1998 and decreased as compared to the quarter ended December 31,
1998. The decrease from the immediately preceding quarter was primarily because
the first calendar quarter follows the seasonally strong fourth calendar
quarter holiday shopping season. In addition, Salon's sales force and sales
management team were reorganized during the quarter ended March 31, 1999, as
part of an effort to upgrade and expand the selling team.
Because Salon manages its business to achieve long-term strategic objectives,
it may make decisions that it believes will enhance its long-term growth and
profitability, even if such decisions adversely affect quarterly earnings.
Salon believes that advertising sales in traditional media, such as television,
generally are lower in the first and third calendar quarters of each year, and
that advertising expenditures fluctuate significantly with economic cycles.
Depending on the extent to which the Internet is accepted as an advertising
medium, seasonality and cyclicality in the level of Internet advertising
expenditures could become more pronounced. These factors could have a material
adverse affect on Salon's business, results of operations and financial
condition. Historical results are not necessarily indicative of the results to
be expected in the future, and results of interim periods are not necessarily
indicative of results for the entire year. The market price of Salon's common
stock may fluctuate significantly in response to these quarter-to-quarter
variations.
29
<PAGE>
Liquidity and Capital Resources
Salon has funded its capital requirements primarily through the sale of
preferred stock and a mix of short-term and long-term borrowing. Cash and cash
equivalents totaled approximately $754,000 at March 31, 1999, as compared to
$1.9 million at March 31, 1998.
Net cash used for operations was approximately $4.5 million in the fiscal
year ended March 31, 1999, as compared to approximately $3.5 million in the
fiscal year ended March 31, 1998 and approximately $1.8 million in the fiscal
year ended March 31, 1997. The principal use of cash from operations was the
net loss generated from operations due to the expansion of Salon's editorial,
marketing, sales and production staff.
Net cash used for investing activities totaled approximately $466,000 in the
fiscal year ended March 31, 1999, as compared to approximately $382,000 for the
fiscal year ended March 31, 1998 and approximately $81,000 for the fiscal year
ended March 31, 1997. Net cash used for investing activities in each of these
respective periods consisted primarily of purchases of certain property and
equipment, including computer equipment.
Net cash provided by financing activities was approximately $3.8 million in
the fiscal year ended March 31, 1999, as compared to approximately $3.2 million
in the fiscal year ended March 31, 1998 and approximately $3.3 million in the
fiscal year ended March 31, 1997. The principal sources of cash provided by
financing activities in each of these respective periods was the sale of shares
of Salon's preferred stock, as described below. To a lesser extent, cash
provided by financing activities also resulted from borrowings under Salon's
line of credit in the fiscal years ended March 31, 1999 and 1998.
In September and November 1998 and April 1999, Salon raised approximately
$2.75 million, $750,000 and $11.5 million through the issuance of 3,869,844
shares of its Series C preferred stock at a price of $3.88 per share. Each
share of Series C preferred stock is convertible into one share of common
stock. The Series C preferred stock has anti-dilution and dividend preferences
similar to Salon's Series A and Series B preferred stock, and priority as to
liquidation over common stock and all other series of preferred stock. The
Series C preferred stock will convert into common stock upon closing of this
offering.
In November 1997, Salon raised approximately $3.0 million through the
issuance of 949,365 shares of its Series B preferred stock at a price of $3.16
per share. Each share of Series B preferred stock is convertible into one share
of common stock. The Series B preferred stock has anti-dilution and dividend
preferences similar to Salon's Series A and Series C preferred stock, and
shares liquidation preferences with shares of Salon's Series A preferred stock.
The Series B preferred stock will convert into common stock upon closing of
this offering.
In December 1995, August 1996, and February 1997 Salon raised an aggregate of
approximately $5.0 million through the issuance of 2,500,000 shares of its
Series A preferred stock at a price of $2.00 per share. Each share of Series A
Preferred stock is convertible into one share of common stock. The Series A
preferred stock has anti-dilution and dividend preferences similar to Salon's
Series B and Series C preferred stock, and shares liquidation preferences with
shares of Salon's Series B preferred stock. The Series A preferred stock will
convert into common stock upon closing of this offering.
In April 1998, Salon entered into a borrowing agreement with a bank which
provides for revolving loans of the lesser of $250,000 plus 80% of eligible
accounts receivable as defined by the bank, or $500,000. The revolving
borrowing amount was increased to a maximum of $1,000,000 upon the closing of
Salon's Series C financing on April 14, 1999. These borrowings bear interest at
the bank's prime rate. The agreement also provides for an equipment term loan
up to $300,000. Borrowings under this equipment term loan bear interest at the
bank's prime rate plus 0.5%. As of March 31, 1999, Salon had drawn
approximately $211,000 against the equipment loan and approximately $221,000
against the revolving borrowing amount.
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In April 1997, Salon entered into a borrowing agreement with the same bank
referenced in the previous paragraph which provides for borrowing up to
$500,000 for working capital and equipment advances. Borrowings bear interest
at the bank's prime rate plus 0.5% and are collaterized by all assets of Salon,
including intellectual property. As of March 31, 1998 and 1999, the principal
balances for equipment advances outstanding under this agreement were
approximately $198,000 and $99,000, bearing interest at 8.25%. Borrowings are
repayable in monthly installments of principal plus accrued interest through
March 31, 2000. According to the terms of the agreement, Salon is required to
comply with financial covenants including net worth and working capital levels.
Salon's capital requirements depend on numerous factors, including the
success of Salon's strategies for generating revenues and the amount of
resources it devotes to investments in its network, sales, marketing and brand
promotion. Salon's expenditures have substantially increased since inception as
its operations and staff have grown and Salon anticipates that its expenditures
will continue to increase substantially for the foreseeable future. In
addition, Salon will continue to evaluate possible investments in businesses,
products and technologies complementary to its existing business.
Salon currently anticipates that its available cash resources, combined with
the net proceeds of this offering, will be sufficient to meet its anticipated
needs for working capital and capital expenditures for at least the 12 months
following the date of this prospectus. Salon may need to raise additional
funds, however, in order to fund more rapid expansion, to develop new or
enhance existing services, to respond to competitive pressures or to acquire
complementary businesses, products or technologies. If Salon raises additional
funds by selling equity securities, the percentage ownership of Salon's
stockholders will be reduced and its stockholders may experience additional
dilution. Salon cannot be sure that additional financing will be available on
terms favorable to Salon, or at all. If adequate funds are not available on
acceptable terms, Salon's ability to fund expansion, react to competitive
pressures, or take advantage of unanticipated opportunities would be
substantially limited. If this occurred, Salon's business would be
significantly harmed.
Year 2000 Readiness
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and software used by many companies and governmental agencies may need
to be upgraded to comply with these year 2000 requirements or risk system
failure or miscalculations that could cause disruptions of normal business
activities.
State of Readiness
Salon has made a preliminary assessment of the year 2000 readiness of its
operating financial and administrative systems, including the hardware and
software that support Salon's systems. Salon's assessment plan consists of:
. quality assurance testing of its internally developed proprietary
software;
. contacting third-party vendors and licensors of material hardware,
software and services that are both directly and indirectly related to
the delivery of Salon's services to its users;
. contacting vendors of third-party systems;
. assessing repair or replacement requirements;
. implementing repair or replacement; and
. creating contingency plans in the event of year 2000 failures.
Salon's year 2000 task force is currently conducting an inventory of and
developing testing procedures for all software and other systems that it
believes might be affected by year 2000 issues. Since third parties
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developed and currently support many of the systems that Salon uses, a
significant part of this effort will be to ensure that these third-party
systems are year 2000 ready. Salon plans to confirm this compliance through a
combination of the representation by these third parties of their products'
year 2000 readiness, as well as specific testing of these systems. Salon plans
to complete this process prior to the end of the third calendar quarter of
1999. Until such testing is completed and such vendors and providers are
contacted, Salon will not be able to completely evaluate whether its systems
will need to be revised or replaced.
Costs
To date, Salon has spent an immaterial amount on year 2000 readiness issues,
but expects to incur an additional $350,000 to $500,000 in the future in
connection with identifying, evaluating and addressing year 2000 readiness
issues. Most of Salon's expenses have related to, and are expected to continue
to relate to, the operating costs associated with time spent by employees and
consultants in the evaluation process and year 2000 readiness matters
generally. Such expenses, if higher than anticipated, could have a material
adverse effect on Salon's business, results of operations and financial
condition.
Risks
Salon is not currently aware of any year 2000 readiness problems relating to
its internally-developed proprietary systems that would have a material adverse
effect on Salon's business. Salon may discover year 2000 readiness problems in
these systems that will require substantial revision. In addition, third-party
software, hardware or services incorporated into Salon's material systems may
need to be revised or replaced, all of which could be time-consuming and
expensive. The failure of Salon to fix or replace its internally developed
proprietary software or third-party software, hardware or services on a timely
basis could result in lost revenues, increased operating costs, the loss of
users, advertisers or sponsors and other business interruptions, any of which
could have a material adverse effect on Salon's business, results of operations
and financial condition. Moreover, the failure to adequately address year 2000
readiness issues in its internally developed proprietary software could result
in claims of mismanagement, misrepresentation or breach of contract and related
litigation, which could be costly and time-consuming to defend.
Salon is heavily dependent on a significant number of third-party vendors to
provide both network services and equipment. A significant year 2000-related
disruption of the services or equipment that third-party vendors provide to
Salon could cause Salon's users, advertisers or sponsors to consider seeking
alternate content providers or cause an unmanageable burden on its technical
support, which in turn could materially and adversely affect Salon's business.
In addition, governmental agencies, utility companies, Internet access
companies, third-party service providers and others outside of Salon's control
may not be year 2000 ready. The failure by such entities to be year 2000 ready
could result in a systemic failure beyond the control of Salon, such as a
prolonged Internet, telecommunications or electrical failure, which could also
prevent Salon from delivering its services to its customers, decrease the use
of the Internet or prevent users from accessing its Web sites which could have
a material adverse effect on Salon's business.
Contingency Plan
As discussed above, Salon is engaged in an ongoing year 2000 assessment and
has not yet developed any contingency plans. The results of Salon's year 2000
simulation testing and the responses received from third-party vendors and
service providers will be taken into account in determining the nature and
extent of any contingency plans Salon adopts.
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Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosure About Segments of an Enterprise and Required Information, which
established standards for reporting information about operating segments in
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic area and major customers.
The adoption of SFAS No. 131 in fiscal 1999 did not have an impact on Salon's
financial statement disclosures since Salon operates in only one business
segment.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use. SOP 98-1 is effective for financial
statements for years beginning after December 15, 1998. SOP 98-1 provides
guidance over accounting for computer software developed or obtained for
internal use including the requirement to capitalize specified costs and
amortization of such costs. Salon does not expect the adoption of this standard
to have a material impact on Salon's results of operations, financial position
or cash flows.
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-up
Activities. SOP 98-5, which is effective for fiscal years beginning after
December 15, 1998, provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. As Salon has historically
expensed these costs, the adoption of SOP 98-5 is not expected to have a
significant impact on Salon's results of operations, financial position or cash
flows.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which established accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, which are collectively referred to as derivatives,
and for hedging activities. SFAS No. 133 is effective for all fiscal quarters
for fiscal years beginning after June 15, 1999. Salon is assessing the
potential impact of this pronouncement on its financial statements; however,
Salon does not expect any significant impact since Salon currently does not
have any derivative instruments and does not anticipate acquiring any.
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BUSINESS
Overview
Salon.com is a leading Internet media company that produces a network of ten
subject-specific, demographically-targeted Web sites and a variety of online
communities. Salon believes that its network of Web sites combines the
thoughtfulness of print, the timeliness of television and the interactivity of
talk radio. Salon's ten content sites provide news, features, interviews and
regular columnists on specific topics, from arts and entertainment to parenting
and health. The main entry and navigation point to Salon's various content
sites is Salon's home page at www.salon.com. Salon's online communities allow
users to interact and discuss Salon content and other topics via electronic
messaging. Salon's online communities include Table Talk, a free interactive
forum, and The Well, a paid subscription community. Because of Salon's
reputation for community building, Salon also has agreed with third parties to
host communities within its network. Salon's users can access Table Talk or The
Well through www.salon.com or through Salon's ten content Web sites.
Salon believes that its original, award-winning content and highly regarded
interactive communities allow Salon to attract and retain users who are
younger, more affluent, better educated and more likely to make online
purchases than typical Internet users. Salon believes its user profile makes
its network of Web sites and online communities a valuable media property for
advertisers and retailers who are increasingly allocating marketing resources
to target consumers online.
In April 1999, approximately 1.2 million unique users visited Salon's network
of Web sites, generating about 16.1 million page views, compared to
approximately 542,000 unique users and 7.6 million page views in April 1998. A
unique user is an individual visitor to Salon's network. Page views are the
total number of complete pages retrieved and viewed by visitors to Salon's
network.
Through April 30, 1999, approximately 166,000 users had registered for
Salon's interactive communities, compared to approximately 146,000 registered
users as of April 30, 1998. Through April 30, 1999, approximately 104,000 users
had registered for Salon's Table Talk forum, compared to approximately
86,000 registered users as of April 30, 1998. Through April 30, 1999,
approximately 62,000 users had registered for The Well, compared to
approximately 60,000 registered users as of April 30, 1998.
Through April 30, 1999, Salon had approximately 190 advertisers and
advertising sponsors. Salon has also recently begun to extend its electronic
commerce efforts throughout its network and to develop electronic commerce
sponsorships and its own online retailing capabilities through Salon Shopping.
Salon believes that the online spending habits of its users present
opportunities for Salon to capture additional revenues, both within Salon
Shopping and on the Web pages of its commercial partners.
Industry Background
The following discussion of Salon's industry contains market projections
prepared by various research firms. These market projections may not be
achieved.
Growth in Internet Usage
The Internet is fast becoming one of the most important mediums for global
communication and business, allowing millions of people to gather and transfer
information instantly. International Data Corporation, a market research firm,
predicts that worldwide Internet use will grow to 319.8 million users in 2002
from 68.7 million users in 1997, representing 366% growth over this period. The
growth in Internet users is driven by numerous factors, including:
. increased public awareness of the Internet;
. the growing base of personal computers and improved Internet access;
. increased quantity and quality of Web content; and
. growing selection and acceptance of electronic commerce.
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The Internet provides a unique opportunity for content providers to reach a
broad base of readers on a real-time basis with a diverse body of information.
Unlike traditional media, the Internet permits dissemination of content without
geographic limits, print production costs or broadcast capacity constraints.
Growth in Online Advertising
The Internet is an attractive medium for advertisers because it allows more
flexibility, interactivity and measurement capabilities than traditional media,
including print, television and radio, and provides users with immediate access
to information about advertisers and their products. For example, the Internet
allows advertisers to change messages frequently in response to market
developments or current events. The Internet also allows advertisers to gather
demographic information about users and to deliver targeted messages to
specific consumer groups. According to Jupiter Communications, an independent
industry research firm, total Internet advertising revenues grew from $300
million in 1996 to $1.9 billion in 1998. Jupiter Communications projects total
Internet advertising revenues will grow to $7.7 billion in 2002, representing
an average annual growth rate of 45% from 1998 to 2002.
[GRAPH OF TOTAL INTERNET ADVERTISING REVENUES]
Source: Jupiter Communications
According to International Data Corporation, of the $187 billion spent on
advertising in 1997, 0.3% was spent on Internet media. In 1998, 0.8% of all
dollars spent on advertising were spent on Internet media. Salon believes that
the potential to shift advertising spending away from traditional media to the
Internet presents a significant growth opportunity for Internet advertising.
Growth in Electronic Commerce
The growing popularity of the Internet represents a substantial opportunity
for companies to take advantage of the potential for conducting commercial
transactions online, or "electronic commerce." IDC estimates that commerce over
the Internet will increase from over $12 billion worldwide at the end of 1997
to approximately $425 billion worldwide by the end of 2002. Jupiter
Communications predicts that by 2002, 44% of Internet users will make purchases
online, as compared to the 22% who did so in 1998. While electronic commerce is
expected to have broad application, industry experts believe that the most
significant growth in electronic commerce activity will be in the markets for
computer products, travel, entertainment, apparel, financial services and
information services.
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The Need for Compelling Internet Destinations
As Internet companies compete to attract and retain users, unique content has
become increasingly valuable. Salon believes compelling, original content
produced by talented editorial staff is a principal feature that distinguishes
Web sites from each other.
Web sites built around focused, proprietary content provide advertisers with
targeted channels for reaching their desired market. To date, online
advertisers and retailers have spent most of their marketing budgets on Web
sites with the highest traffic volume, including "portals," which bring
together and organize a wide variety of content, and "search engines," which
allow users to search for specific information. As Internet advertising and
electronic commerce mature, however, Salon believes online advertisers and
retailers will increasingly spend their marketing dollars on more focused Web
sites to reach specific demographic groups, as has occurred in traditional
advertising media.
According to a 1998 study by Forrester Research, a market research firm, a
major shift in online advertising spending will occur as advertisers move media
campaigns from generalized portals toward more narrowly targeted Web sites.
Targeted sites provide content on designated topics, and therefore attract
users looking for subject-specific information. Because targeted sites are
usually the direct source of information the user wants, rather than simply a
gateway to other collections of information like a portal or search engine,
these sites are frequently referred to as "destination sites." Forrester
estimates that portals currently receive 59% of all Internet advertising
dollars while only accounting for 15% of Web traffic. However, Forrester
predicts that by 2002, destination sites will attract 70% of online advertising
dollars. Destination sites are attractive to advertisers and retailers because
these sites allow more seamless integration of marketing campaigns and product
sales with related content, and more effectively target the advertisers' and
retailers' most likely customers. In addition, destination sites tend to have
longer use periods, or "stickiness," further enhancing marketing and retailing
opportunities.
To address the perceived lack of compelling content available through
portals, a number of skillfully produced destination sites have been developed
to target specific demographic groups. Examples of such sites include
technology-oriented sites such as C/Net and ZDNet, financial news sites
including MarketWatch.com and TheStreet.com, sports-related sites such as
Sportsline.com and ESPN.com and women-oriented sites including iVillage and
Women.com.
While Internet destinations like these provide advertisers and retailers with
targeted marketing opportunities, they also lack the varied appeal necessary to
facilitate broad-based marketing campaigns. Salon believes that the best
opportunity for matching users' needs with those of advertisers and retailers
on the Internet is to develop a network of destination sites that combines the
quality and depth of subject-specific destination sites with the broad reach of
portals and search engines. Salon believes its network of ten subject-specific
Web sites and communities offers advertisers and retailers these benefits.
Salon's Strategy: To Build a Network of Premier Destination Sites
Salon's strategy is to build a network of leading destination sites with
compelling content and engaging interactive communities that will attract
demographically valuable users, premier Internet advertisers and electronic
commerce partners. To establish itself as a leading Internet network, Salon is
pursuing the following goals:
Broaden Revenue Base in Advertising and Electronic Commerce
Through April 30, 1999, Salon had derived revenues from a customer base of
approximately 190 online advertisers. Salon believes it can substantially
increase its advertiser base by targeting the more than 4,000 companies that
currently advertise online. Salon intends to increase its revenue from
advertising and electronic commerce through new editorial, marketing and
technological initiatives.
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Salon has and intends to continue to develop content-driven, long-term
advertising sponsorships with leading corporate clients. These sponsorships go
beyond simple banner advertising to focus on the advertiser's broader marketing
objectives including branding or product introduction. Salon's sponsorships
also occasionally involve offline marketing events in addition to advertising
on the Salon network. Salon believes that forming these types of arrangements
forges more valuable relationships between Salon and its advertisers.
To increase its electronic commerce revenues, Salon has developed strategic
arrangements with sponsors including Visa International, barnesandnoble.com,
Microsoft Expedia, drkoop.com and 911gifts.com. Salon will continue to pursue
electronic commerce sponsorships with premier online retailers to expand the
breadth of its electronic commerce offerings. Salon has created a marketplace
designed to sell Salon-branded products as well as high-quality third-party
products through Salon Shopping.
Expand Content and Communities
With the recent launch of its Web sites Salon Health & Body and Salon People,
Salon has expanded its network to ten subject-specific Web sites. Salon
believes that by regularly introducing new editorial categories it will
continue to draw and retain new users and advertisers. In addition, Salon
recently changed its publishing cycle. Instead of publishing new items only
once each day, Salon now posts headline stories, features, columns, reviews and
news updates throughout the day on all ten of its Web sites. This dynamic
publishing strategy is designed to attract a more consistent flow of users
during the daily news cycle, and to significantly increase traffic to Salon's
network of sites.
Salon has recently expanded its online community offerings through its
acquisition of The Well, a paid membership community. Salon intends to further
its focus on developing online communities by aggregating its community
offerings under a primary gateway URL. This new structure will consist of The
Well along with Table Talk, Salon's existing free interactive forum. Salon also
intends to use its expertise in developing interactive communities to custom-
build forums for corporate, professional and educational clients.
Expand Salon's Distribution Partnerships
Building on its strength as a premier Internet content producer, Salon has
established distribution relationships with major portals including America
Online, Lycos, Go.com, AltaVista, @Home and Snap! These arrangements typically
place Salon's logo and content on the distribution partner's site, and provide
links back to Salon's network. Salon also has distribution arrangements with
other major content sites and distributors, including CNN.com and Reuters.
Online and print versions of leading technology publications including Wired
Digital and the Industry Standard also link or refer to Salon content. In order
to further broaden awareness of the Salon brand and drive more users to Salon's
network, Salon continues to pursue distribution arrangements with additional
portals and other leading Internet destination sites.
Grow Salon's Brand Recognition Through Advertising and Syndication
Salon believes that the further establishment of the Salon brand is critical
to drawing more users to its network. Salon believes it has derived
considerable publicity through its award-winning content and can significantly
grow its brand awareness through increased advertising and syndication.
To date, Salon has made limited investments in advertising to promote the
Salon brand. In April 1999, Salon launched its first national marketing
campaign to increase its brand awareness within key consumer groups and urban
markets. Salon's efforts will include online, radio and print advertising
introducing the slogan "Salon. . . Makes You Think." Salon believes this
campaign will capitalize on its appeal to high-value users.
Salon currently licenses its content to magazines around the world through
Salon's own syndication efforts and to daily newspapers through United Features
Syndicate. In addition, Salon has arranged for the publication of two books
derived from Salon's original content: Mothers Who Think: Tales of Real-Life
Parenthood,
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published in April 1999, and The Salon Readers Guide to Contemporary
Literature, expected to be published in 2000. Salon believes that continued
exposure through these and other traditional media outlets will be crucial to
increasing awareness of the Salon brand.
Enhance Salon Technology to Improve Production, User Experience, Advertising
Delivery and Circulation Analysis
Salon has begun to substantially invest in personnel and software development
tools to create a state-of-the-art online publishing system. This system is
designed to optimize the Salon network's user experience and advertising
performance. Salon believes its new custom-built, Linux-based platform will
give Salon the ability to store Salon's content in a database and automatically
assemble pages. This system facilitates easier navigation of Salon's Web sites
as well as printing, bookmarking and e-mailing of Salon content for users.
Salon's technological upgrade also includes new circulation management software
to improve user traffic analysis and reporting as well as an enhanced
advertising delivery system.
The Salon Network
Salon's network consists of ten subject-specific destination sites as well as
free and subscription-based interactive communities. The main gateway to these
Web sites and communities is the Salon home page at www.salon.com.
Destination Sites
Salon's subject-specific Web sites provide a continuously updated array of
news, features, interviews and regular columnists.
News Salon News provides headline stories, investigative
features and commentary on daily events. Salon's news
operation distinguished itself in 1998 by breaking
national news stories on the independent counsel's
investigation of President Clinton and the resulting
impeachment proceedings. Salon is investing further in
its news-gathering operations by opening a Washington
news bureau and adding experienced political reporters to
its staff.
Technology Salon Technology posts news stories, exclusive features
and commentary on the business and culture of the digital
world. Salon believes its technology site offers users an
understandable perspective on major trends, including the
Linux "open source" movement, the MP3 format for digital
music and Microsoft's antitrust case. Salon believes that
its technology coverage goes beyond the headlines and
"trade talk" content of other technology Web sites, and
is an important reason that popular sites like C/Net link
to Salon content on a regular basis.
Arts & Salon Arts & Entertainment publishes up-to-the-minute
Entertainment coverage of movies, television and music. Salon's staff
of entertainment critics and reporters is based in
Salon's New York office, and was assembled from
established publications including The New Yorker, Vanity
Fair and the Boston Phoenix. Salon believes its coverage
of popular culture is more insightful and edgy than that
of other online and traditional media.
Mothers Who Salon Mothers Who Think is a critically acclaimed
Think parenting site that features the work of well-known
writers including Anne Lamott, Jayne Anne Phillips,
Bobbie Ann Mason, Julia Alvarez, Katie Roiphe and Sallie
Tisdale. Salon Mothers Who Think publishes essays and
reporting with an honest, unsentimental view of family
life and related social issues. An anthology of Salon
Mothers Who Think stories was published in April 1999 by
Random House/Villard.
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Health & Body Salon Health & Body features reporting, commentary and
headline news on the healthcare industry, biomedical
research, alternative medicine, sexual health, nutrition
and fitness. In addition, Salon Health & Body users can
access a database of health information, as well as buy
pharmaceutical products online through Salon's
partnership with drkoop.com, the health services Web site
developed by the former U.S. Surgeon General.
Books Salon Books publishes daily reviews of fiction and non-
fiction titles as well as author interviews and exclusive
news coverage of the publishing industry. Salon believes
its presence in the book industry is highlighted and
reinforced each year by the Salon Book Awards, an online
and offline event recognizing Salon editors' choices for
the ten best books of the year. Salon Books is sponsored
by barnesandnoble.com, Salon's electronic commerce
partner for book retailing.
Media Salon Media covers the broadcast, print and electronic
press in a critical and irreverent manner. The site
features the work of three columnists who offer scoops as
well as timely analysis on the media industry.
Travel Salon Travel is an award-winning site known for its
literary quality, featuring well-known writers including
Paul Theroux, Peter Mayle, Isabel Allende and Jan Morris.
Salon Travel also offers service features including a
traveler's advice column, a readers' tips department and
a flight attendant's diary. In addition, the site
provides users the opportunity to buy airline tickets and
hotel accommodations through Salon's electronic commerce
partnership with Microsoft Expedia.
People Salon People focuses on the world of celebrities,
covering notable figures in entertainment, politics,
business, technology and other fields that compel public
interest. Salon People includes a weekly profile series,
Brilliant Careers, sponsored by Lexus, as well as a daily
column of celebrity "dish," obituaries and interviews.
Comics Salon Comics serves as a showcase for regular Salon
cartoonists including Tom Tomorrow and Ruben Bolling, as
well as Bob Callahan and Spain Rodriguez's original comic
serial, "Dark Hotel."
Online Communities
Salon's online communities allow users to discuss Salon content, as well as
to interact with other users and Salon's editorial staff. Salon's network of
communities is accessible through www.salon.com and Salon's ten subject-
specific sites. Salon believes that well-developed online communities help
foster user loyalty and stickiness, qualities valued by Internet advertisers
and online retailers, because users can contribute to and be actively involved
in the discussion that makes up the communities' content, and can interact with
people with similar interests. In April 1999, the average Salon user visited
Salon's network 23 times per month, for an average of 23 minutes per visit, or
a total of approximately 8.8 hours. In July 1998, the average Salon user
visited Salon's network 23 times per month for an average of 22 minutes per
visit, or a total of approximately 8.4 hours. From May 1998 to May 1999,
Salon's online communities, including Table Talk and The Well, received
approximately 2.9 million posted messages from users.
Table Talk
Salon's Table Talk is a free interactive community where Salon users can
share their opinions on a wide variety of topics with Salon editors and with
each other. Salon also frequently arranges for featured guests, including well-
known commentators and writers, to join Table Talk discussions. Salon's Table
Talk is one of the most popular communities on the Web, according to a survey
conducted in May 1998 by Forum One, an Internet community measurement service,
which ranked online discussion groups by their number of postings. Through
April 30, 1999, approximately 104,000 users had registered for Table Talk and
there were more than 4,400 different ongoing Table Talk discussions on a wide
range of subjects.
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The Well
The Well, a community which Salon acquired in March 1999, has been operating
since 1985 and is one of the most established Internet community brands, with
approximately 62,000 users having registered through April 30, 1999. In
contrast to Table Talk, The Well is a paid subscription community that provides
Salon with direct revenues from its users. Active members of The Well pay a fee
of $10 to $15 per month to participate in private discussion groups. Since May
1997, The Well has experienced less than 5% turnover in its membership. Salon
intends to build on The Well's established reputation as a premier interactive
community and promote The Well on Salon's network to its established user base
as a forum for highly focused and engaged discussion.
Community Partnerships
Salon's reputation for building online communities creates opportunities to
establish communities for other content providers. Recently, Salon entered into
agreements to establish communities for National Public Radio and Go.com. No
revenues have been derived to date from establishing community partnerships.
However, Salon believes that building third-party communities provides it with
attractive cross-marketing opportunities. It also gives Salon the opportunity
to derive additional advertising, sponsorship and electronic commerce
transaction revenues by providing user-driven forums outside of Salon's natural
user base. Salon intends to develop additional community partnerships to
establish Salon as the preferred destination for compelling online discussions.
Distribution Agreements
Salon has entered into a number of distribution agreements to generate
traffic and to promote the Salon brand name. Many of these agreements are
"content-for-carriage," in which Salon provides its proprietary content to a
distribution partner and receives prominent placement of its logo and content
on the distribution partner's site, as well as links back to Salon's network.
Salon has entered into distribution and content relationships with many of
the major portal and content aggregation sites on the Web, including:
<TABLE>
<S> <C> <C>
. America Online . TheStreet.com . EchoStar
. AltaVista . CNN.com . PointCast
. Lycos . @Home . WebTV
. Go.com . C/Net . Snap!
. Netscape . Rocket eBook . Reuters
</TABLE>
In August 1998, Salon entered into a two-year interactive services agreement
with America Online. Under the agreement, Salon has an anchor tenancy position
on the AOL service, including a dedicated Salon home page. Salon pays AOL a
carriage fee and AOL guarantees Salon a minimum number of impressions per year.
In September 1998, Salon entered into a three-year content distribution
arrangement with One Zero Media Inc. Under the agreement, Salon receives top-
level positioning within AltaVista's entertainment channel, and is guaranteed a
minimum number of click-throughs from the AltaVista service. Salon pays One
Zero Media a carriage fee, consisting of a combination of cash and barter
advertising.
In March 1999, Salon entered into a one-year content distribution agreement
with Lycos. Under the agreement, Salon content is co-branded and marketed
throughout the Lycos site. The resulting traffic is directed to Salon's
servers. Salon receives a percentage of advertising revenue generated on these
co-branded pages and numerous links from top level pages on Lycos' site to
Salon's network.
In November 1998, Salon entered into a one-year content distribution
arrangement with Go.com. Under the agreement, Salon became the anchor tenant of
Go.com's books area, providing book-oriented content that appears on co-branded
pages on the Go.com site. In addition, Salon arranges for and moderates guest
"chats"
40
<PAGE>
in the co-branded area. Salon receives a percentage of advertising revenue
generated on these co-branded pages and numerous links from top level pages on
Go.com to Salon's network.
In April 1998, Salon entered into a one-year agreement with Netscape. Under
the agreement, Salon receives prominent placement in Netscape's In-Box Direct
program. Netscape users can subscribe to an e-mail version of Salon featuring
links to Salon's network. In March 1999, Salon extended its relationship with
Netscape to provide headlines to Netscape's My Netscape area. In exchange,
Salon receives links back to Salon's network.
In March 1999, Salon entered into a one-year agreement with TheStreet.com.
Under the agreement, Salon receives TheStreet.com content and presents it in
Salon News. Salon receives a percentage of advertising revenue generated on
these co-branded pages.
In October 1998, Salon entered into a month-to-month agreement with CNN
Interactive. Under the agreement, Salon Books content is co-branded on
CNN.com's books area. Salon also receives links back to Salon's network.
In December 1996, Salon entered into an agreement with @Home under which
Salon content and headlines appear on the @Home service, and Salon receives
links back to Salon's network.
In February 1999, Salon entered into a three-month, renewable agreement with
C/Net. Under this agreement, links to two Salon Technology stories per week are
presented on C/Net's News.com site, and Salon links to one News.com story per
day.
In December 1998, Salon entered into a two-year agreement with NuvoMedia's
Rocket eBook. Under the agreement, Salon content is distributed to users of the
Rocket eBook service via a Web site operated by Rocket eBook. Salon receives
prominent branding on the NuvoMedia Web site and has the right to sell Rocket
eBooks from Salon's network. Salon will receive a percentage of sales of Rocket
eBooks sold on Salon's network.
In January 1999, Salon entered into a three-year data broadcasting agreement
with EchoStar. Under the agreement, Salon content, including multimedia
components, will be distributed via satellite as a paid "interactive channel"
available to EchoStar's 1.7 million subscribers through PCs and televisions.
Salon receives a share of the subscription revenue generated by the paid
interactive channel.
In July 1997, Salon entered into a agreement with PointCast under which Salon
content is "pushed" to PointCast users via headlines provided by Salon to
PointCast on a daily basis.
In June 1997, Salon entered into a month-to-month agreement with WebTV, under
which Salon content is distributed on WebTV's entertainment channel.
In July 1997, Salon entered into a month-to-month agreement with Snap!, under
which Salon provides headlines which are featured on Snap!'s Web site, in
exchange for links back to Salon's network.
In April 1999, Salon entered into an two-year agreement with Reuters, under
which Salon provides technology-related content to Reuters' new digital news
service in exchange for links back to Salon's network.
Revenue Sources
Salon has derived a significant amount of its revenues to date from Internet
advertising and sponsorships from electronic commerce partners and advertisers.
For the fiscal year ended March 31, 1998, advertising and sponsorship revenues
accounted for 99% of Salon's net revenues, and barter revenues accounted for 7%
of Salon's net revenues. For the fiscal year ended March 31, 1999, advertising
and sponsorship revenues accounted for 94% of Salon's net revenues, and barter
revenues accounted for 16% of Salon's net revenues.
41
<PAGE>
Advertising Sponsorships and Banner Advertising
Salon has adopted a strategy of selling long-term advertising sponsorships in
addition to short-term banner advertising. Salon's sponsorship arrangements
differ from traditional banner advertising in that they are designed to achieve
broad marketing objectives including brand awareness, product introduction and
occasional editorial content integration. Salon's sponsors often place their
advertising adjacent to related editorial content to enhance their marketing
campaigns. Salon's sponsorship arrangements generally have longer terms than
typical banner advertising placements and provide for value-added components.
Salon also offers exclusive category opportunities to sponsors, including
Lexus' sponsorship of Salon's Brilliant Careers editorial series.
Salon has a large and growing base of advertisers and consistently sells a
high percentage of its advertising space. Due to the high-value demographics of
its users, Salon believes that it is able to attract premier Internet
advertisers willing to pay higher CPM's, or cost per thousand impressions, than
are paid to other Internet destinations. Salon's average CPM of $23 per
contract is approximately 53% higher than most portals, for which Jupiter
Communications estimates a CPM average of $15.
According to a user survey conducted by Cyber Dialogue, an independent
research firm, the Salon user base includes the following valuable
demographics:
. 90% are between the ages of 18 and 49;
. 44% earn $60,000 or more per year;
. 32% earn $75,000 or more per year;
. 19% earn $100,000 or more per year;
. 98% have earned a college degree, or are pursuing one;
. 43% have earned a post-graduate degree, or are pursuing one;
. 69% have professional, managerial or technical positions; and
. At least 77% have conducted electronic commerce transactions.
Additionally, the Cyber Dialogue survey also found that Salon users spend an
average of 23 minutes on Salon's network each time they visit.
For the fiscal year ended March 31, 1998, IBM accounted for approximately 16%
of Salon's revenues and Borders accounted for approximately 37% of Salon's
revenues. For the fiscal year ended March 31, 1999, Borders accounted for
approximately 13% of Salon's revenues. Some of Salon's premier advertisers and
sponsors include:
<TABLE>
<S> <C> <C> <C>
. Mercedes-Benz . Visa International . Starbucks . Apple
. Lexus . Discover Brokerage . Macy's . IBM
. Ford . Ameritrade . PolyGram . Intel
. Budget Rent-a-Car . AT&T . JCPenney's . Microsoft
</TABLE>
In April 1999, Salon significantly revised the design of its network of Web
sites to increase advertising space per page, including new space for network-
wide and content-specific sponsorships. Salon believes the increased
advertising inventory provided by the redesign of its network will enable it to
deliver significantly more advertising impressions and revenue opportunities in
the future.
Electronic Commerce Sponsorships and Transactions
Salon believes that the buying patterns of its user base make its network of
Web sites uniquely suited to online retailing. According to Cyber Dialogue, at
least 77% of Salon's users have made purchases over the Internet, compared to
an industry average of 22% in 1998, as estimated by Jupiter Communications.
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<PAGE>
Salon's strategy for capturing electronic commerce revenues is to enter into
sponsorships with premium online retailers. Sponsorship fees are paid to Salon
by a particular retailer for a measure of exclusivity in the retailer's
industry segment.
In April 1999, Salon entered into a one-year agreement with 911gifts.com,
under which 911gifts.com was granted the right to become the exclusive third-
party gift product retailer for Salon. The agreement requires Salon to provide
a guaranteed number of impressions and links to 911gifts.com. In addition to
sponsorship fees, Salon receives a percentage of net profits from the sale of
gift products through a co-branded storefront on Salon's site, and a percentage
of advertising revenue on co-branded pages.
In March 1999, Salon entered into a three-year agreement with drkoop.com.
Under the agreement, Salon Health & Body content is presented in a co-branded
fashion on both Salon's and drkoop.com's sites. Salon receives a percentage of
net sales of pharmaceutical products through a co-branded storefront on Salon's
site, and a percentage of advertising revenues from the co-branded pages on
Salon's site. Salon guarantees a minimum number of impressions over the term of
the agreement.
In November 1998, Salon entered into a two-year agreement with
barnesandnoble.com under which barnesandnoble.com was granted the right to
become the exclusive book retailer for Salon. The agreement requires Salon to
provide a guaranteed number of impressions and links to the barnesandnoble.com
site. In addition to sponsorship fees, barnesandnoble.com has agreed to provide
Salon with a percentage of all purchases made through Salon beyond a minimum
amount of purchases.
In October 1998, Salon entered into a six-month agreement with online travel
service Microsoft Expedia, under which Expedia was granted the right to become
the exclusive Internet travel agency for Salon. The agreement requires Salon to
provide a guaranteed number of transfers to Expedia and the establishment of
accounts. In addition to sponsorship fees, Expedia has agreed to pay Salon a
royalty for each Expedia account opened through Salon and a fee for airline
tickets purchased by Salon users.
Salon intends to continue to develop similar electronic commerce partnerships
with retailers that provide goods and services tied closely to specific areas
of its content. Salon's architectural design provides each of its destination
sites with opportunities for electronic commerce tie-ins.
In addition to electronic commerce sponsorships, Salon has established its
own online store, Salon Shopping. Salon Shopping offers an expanding range of
upscale Salon-branded and third party products, as well as goods offered by its
retailing partners. As Salon expands its relationships with online retailing
sponsors, it expects Salon Shopping to provide a destination where Salon users
can benefit from the range of commerce opportunities available throughout the
Salon network.
Syndication and Licensing
Since its inception, Salon has syndicated and licensed its content to media
companies worldwide for publication on Web sites, and in newspapers and
magazines. In addition to revenues, syndication and licensing provide Salon
with valuable exposure for the Salon brand and additional traffic to Salon's
network. These arrangements also require prominent placement of Salon's logo
and primary Internet address in reproductions of its content.
Since 1997, Salon has maintained a worldwide agreement with United Features
Syndicate to distribute Salon content to newspapers, both in print and on the
Internet. As of April 30, 1999, Salon content had been syndicated in 72
newspapers. Salon also directly licenses and syndicates to publications not
associated with United Features Syndicate. Salon has generated syndication
revenues from more than 56 domestic and international magazines and other
reprint vehicles.
In addition to its syndication efforts, Salon has entered into agreements
with publishers to produce two books created by Salon's editors. Mothers Who
Think: Tales of Real-Life Parenting was published by Random House/Villard in
April 1999 and The Salon Readers Guide to Contemporary Literature is to be
published by
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Viking/Penguin in 2000. In addition to creating additional revenues from
previously produced content, Salon believes that such arrangements are
tremendously valuable in promoting the Salon brand beyond its traditional user
base.
Subscription Services
Salon derives revenue from two paid subscription services: The Well and Salon
Members. The Well, a paid subscription online community, was acquired by Salon
in March 1999. Through April 30, 1999, approximately 62,000 users had
registered for The Well. The Well generated approximately $485,000 in revenues
in its fiscal year ended December 31, 1998. Salon intends to generate
additional subscription revenues from The Well by promoting the community on
Salon's network as a forum for highly focused and engaging discussions.
Salon has also established Salon Members, an annual membership program, to
provide specific products and services to its user base. Salon Members receive
discounts on purchases from Salon Shopping, Salon's online store, access to the
Members Lounge, a live chat session, free e-mail and Salon merchandise. Through
April 30, 1999, 1,100 users had enrolled in the Salon Members program.
Sales and Marketing
Sales
In order to reach a broad range of potential sponsors, advertisers and
electronic commerce partners, Salon has built its own direct sales organization
of 13 employees located in San Francisco, New York City, Chicago and Los
Angeles. Salon believes its direct sales approach allows it to form stronger
relationships with its advertisers and sponsors. The sales force consists of
regional sales managers, account executives, sales planners and sales
operations staff, under a senior vice president of sales. Salon's sales
organization consults regularly with advertisers, sponsors and their agencies
on design and placement of advertisements and the production and management of
sponsorship campaigns. Salon hires and continues to seek out sales force
representatives with experience in selling advertising in a variety of media.
Salon intends to continue to expand its sales force to establish additional
advertising and sponsorship arrangements.
The majority of Salon's banner advertising and advertising sponsorship sales
are conducted through media buying divisions of advertising agencies. These
agencies determine whether to recommend advertising on Salon's network. In some
instances, Salon may conduct its sales activities directly with banner
advertisers and advertising sponsors. The time between the date of initial
contact with a potential banner advertiser or advertising sponsor and receipt
of a purchase order from the advertiser may range from as little as one week to
up to nine months.
Salon's electronic commerce sponsorships are sold as joint projects by
Salon's sales, business development and electronic commerce staff. These
agreements are typically negotiated directly with the electronic commerce
sponsor, and have a similar sales cycle to advertising sponsorships. Salon's
sales staff works closely with electronic commerce sponsors to integrate
advertising, branding and buying opportunities throughout the Salon network.
Marketing
Over the last three years, Salon's visibility has increased through extensive
publicity. Salon and its staff have been featured on some of the nation's
leading media outlets and programs, including:
<TABLE>
<S> <C> <C>
. ABC .The Wall Street Journal .Meet the Press
. MSNBC .The Washington Post .Good Morning America
. CNBC .The New York Times .Politically Incorrect
. NPR .Time .Morning Edition
. CNNfn .Newsweek .Crossfire
</TABLE>
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<PAGE>
Salon also uses event marketing to build awareness among influential opinion
leaders in the publishing, advertising and entertainment industry. In January
1999, Salon sponsored the Third Annual Salon Book Awards, celebrating top books
selected by Salon editors. For its new Brilliant Careers editorial series,
Salon will host, with advertising sponsor Lexus, an event honoring successful
individuals from different fields including science, technology, arts and
culture.
Salon has increased its investment in building brand awareness on and off the
Internet and currently has five employees dedicated to marketing. Salon intends
to utilize online advertising, traditional print, radio and television
advertising as well as local and national events to communicate its marketing
message and has engaged an advertising firm to assist in this effort. As part
of its efforts to increase awareness for the Salon brand and drive additional
users to its network, Salon has developed a significant media plan for the
promotion of the Salon brand. This media effort will include online, radio and
print advertising introducing the slogan "Salon . . . Makes You Think."
Competition
The market for Internet content is relatively new, rapidly changing and
intensely competitive. Traditional media companies, such as television
broadcasters, magazine publishers and radio stations, are constantly refining
their content and strategies to increase their audiences and advertising and
sponsorship revenues. Additionally, the number of Web sites competing for the
attention and spending of users, advertisers and sponsors has increased, and
Salon expects it to continue to increase, particularly because there are so few
barriers to entry on the Internet. Salon competes for users, advertisers and
sponsors with the following types of companies:
. portals, including Excite, Infoseek, Lycos, Yahoo! and Netscape, which
are increasingly trying to deepen their sites with content as a way of
encouraging user stickiness;
. mass consumer online services including America Online and the Microsoft
Network and online services focused on news, politics, technology,
parenting, health and pop culture including CNN.com, MSNBC.com, Slate,
iVillage, Women.com, Feed, Nerve, Thrive, Entertainment Weekly Online,
TimeDigital, C/Net and ZDNet;
. community sites including Cafe Utne, Tripod, Talk City and GeoCities;
. electronic commerce services including Amazon.com, Epicurious Travel and
Sharper Image; and
. traditional print and broadcast media outlets and programs targeted at
high-value audiences, including the New York Times, The Washington Post,
Vanity Fair, Time, Newsweek, Entertainment Weekly, the New Yorker,
Dateline, Politically Incorrect, Entertainment Tonight and Biography.
Increased competition could result in advertising or sponsorship price
reductions, reduced margins 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, including the following:
. larger numbers of users;
. larger numbers of advertisers;
. greater brand recognition;
. more fully-developed electronic commerce opportunities;
. larger technical, production and editorial staffs; and
. substantially greater financial, marketing, technical and other
resources.
If Salon does not compete effectively or if it experiences any pricing
pressures, reduced margins or loss of market share resulting from increased
competition, its business could be adversely affected.
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<PAGE>
Infrastructure and Operations
Salon has developed a flexible publishing structure that enables it to
develop compelling and original content while responding quickly to news events
and taking advantage of the ease of distribution provided by the Internet.
Editors work with staff writers as well as with a variety of experienced
contributing writers, freelance contributors and columnists. Ideas for Salon
content flow from editor to writer and writer to editor, as well as from
readers to editors. Weekly editorial meetings serve as a filter for content
proposals and determine what content will occupy the featured position on
Salon's home page at www.salon.com. All content that appears on Salon's network
of Web sites goes through a rigorous editorial process. Site editors work with
writers from assignment through final editing of material.
Salon has deployed a versatile technical infrastructure and backend systems
to support its mission of providing first-rate content, community and commerce
on the Internet. Salon content is developed on a proprietary software platform
and captured in an Oracle database for reuse in Web and other formats. This
system allows Salon content to be easily redistributed to other Web sites,
newspapers and magazines, electronic devices including electronic books, pagers
and handheld devices, and other print or electronic media.
Salon's Web sites are supported by a variety of servers using the Windows NT,
Solaris and Linux operating systems. Salon's top technical priority is the fast
delivery of pages to its users. Salon's systems are designed to handle
significant traffic growth by balancing the amount of traffic among multiple
servers. Salon also relies on server redundancy to help achieve its goal of 24
hour, seven-day-a-week site availability. Regular automated backups protect the
integrity of Salon data.
Salon servers are maintained at Frontier GlobalCenter's media distribution
center in Sunnyvale, California. Salon's contract with Frontier GlobalCenter
provides bandwidth on demand to meet the fluctuating needs of Salon's network.
Frontier GlobalCenter offers high-speed connections to the Internet, helping
ensure fast serving and delivery of Salon's Web sites, and monitors all servers
via human or technical means on a continuous basis. Salon follows strict
password management procedures to protect access to its servers. Salon
technical staff monitors alerts from Frontier GlobalCenter and, where relevant,
undertakes recommended actions to address security issues and vulnerabilities.
All of Salon's servers are supported by uninterruptable power supplies for
protection against power outages.
Frontier GlobalCenter provides the following features to protect against
natural disaster, human error, and malicious acts:
. Multi-level card key system to control all areas of its facility;
. Visitor and vendor escorts;
. Redundant air conditioning systems;
. Intruder alarms and fire system alarms, monitored 24 hours a day;
. Dual zone, dual sensor, gas-based suppression system;
. Floors, racks, and other support systems with seismic reinforcements to
protect against earthquakes; and
. Redundant power systems consisting of uninterruptable power supplies and
a high-capacity diesel generator.
Although Salon does not yet have a formal disaster recovery plan, one is
currently in development. At Salon's San Francisco and New York offices and
Frontier GlobalCenter, nightly, weekly and monthly backups are performed and
sent to an off-site facility.
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Proprietary Rights
Salon's success and ability to compete are significantly dependent on its
proprietary content. Salon relies exclusively on copyright law to protect its
content. While Salon actively takes steps to protect its proprietary rights,
such steps may not be adequate to prevent the infringement or misappropriation
of its content. Infringement or misappropriation of Salon's intellectual
property could materially harm Salon's business. Salon also licenses content
from various freelance providers and other third-party content providers. While
Salon attempts to insure that third-party content may be freely licensed to
Salon, other parties may assert claims of infringement against Salon relating
to this content.
Salon has licensed in the past, and expects to license in the future,
proprietary rights such as trademarks and copyrighted material to third
parties. While Salon attempts to insure that the quality of its brand is
maintained by these licensees, its licensees may take actions that adversely
affect the value of the Salon brand or Salon's other proprietary rights. Any
such adverse acts could materially harm Salon's reputation and its business.
Salon recently acquired the Internet address www.salon.com. Because
www.salon.com is the address of the main home page to Salon's network of sites
and incorporates Salon's company name, it is a vital part of Salon's
intellectual property assets. Salon does not have a registered trademark on the
address, and therefore it may be difficult for Salon to prevent a third party
from infringing its intellectual property rights in the address. If Salon fails
to adequately protect its rights in the address, or if a third party infringes
its rights in the address or otherwise dilutes the value of www.salon.com,
Salon's business could be harmed.
Legal Proceedings
There are no material legal proceedings pending to which Salon is a party.
Salon's management knows of no legal actions being contemplated against Salon.
Employees
As of May 15, 1999, Salon had 99 full-time employees, including 50 in
production and content, 26 in sales and marketing, nine in research and
development, seven in administration and seven in the Well LLC. As of April 15,
1999, 75 employees were located in San Francisco, 11 employees were located in
New York City, six were located in Sausalito, three were located in Washington,
D.C. and one was located in each of Chicago, Los Angeles, Boston and Tacoma,
Washington.
None of Salon's employees are represented by a union. Salon believes that its
relationship with its employees is good.
Facilities
Salon leases approximately 9,277 square feet of space at 706 Mission Street,
2nd floor, San Francisco, California. The rent for this space is currently
$13,916 per month, and the lease expires on July 31, 2002. Salon has an option
to renew its lease for this space for one five-year term.
Salon leases approximately 3,903 square feet of space at 1500 Broadway, Suite
1402, New York, New York. The rent for this space is currently $13,036 per
month, and the lease expires in March 2004.
Salon also leases office space in Chicago, Los Angeles and Sausalito.
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MANAGEMENT
Executive Officers and Directors
Salon's executive officers and directors and their ages as of April 15, 1999
are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
David Talbot............... 47 Chairman of the board, editor-in-chief and
director
Michael O'Donnell.......... 35 Chief executive officer, president and
director
Andrew Ross................ 52 Vice president of business and strategic
development
Todd Hagen................. 39 Chief financial officer, vice president of
finance and administration and secretary
Bruce Roberts.............. 41 Senior vice president of sales
Patrick Hurley............. 37 Vice president of marketing
Chad Dickerson............. 26 Vice president of technology
Ron Celmer................. 37 Director
Sada Chidambaram........... 54 Director
Norman Lear................ 76 Director
Standish O'Grady........... 38 Director
Jim Rosenfield............. 69 Director
</TABLE>
David Talbot co-founded Salon in 1995. He has served as editor-in chief and
director since Salon's incorporation. He served as chief executive officer from
Salon's incorporation through April 1999. He became chairman of the board in
April 1999. From 1990 to 1995, Mr. Talbot was the arts & features editor for
the San Francisco Examiner newspaper. Mr. Talbot has co-authored three books
and written for numerous publications including The New Yorker, Rolling Stone
and Playboy. Mr. Talbot holds a bachelor of arts degree in sociology from the
University of California at Santa Cruz.
Michael O'Donnell has served as Salon's president and director since December
1996. He became chief executive officer in April 1999. In 1996, he served as
vice president of sales and merchandising at SegaSoft, Inc., a consumer
software publisher. From 1995 to 1996, Mr. O'Donnell was vice president of
worldwide sales at Rocket Science Games, Inc., a consumer software publisher.
From 1993 to 1995, he served as Vice President of Retail Sales at Mindscape,
Inc., a consumer software publisher. Mr. O'Donnell holds a bachelor of arts
degree in political science from the University of California at Berkeley.
Andrew Ross co-founded Salon in 1995. He has served as vice president of
business and strategic development since 1998. From 1995 to 1998, he served as
Salon's managing editor. From 1994 to 1995, Mr. Ross was the foreign/national
editor of the San Francisco Examiner newspaper. Mr. Ross holds a bachelor of
science degree in economics and politics from the University of London and also
attended Columbia University's Graduate School of Journalism.
Todd Hagen has served as Salon's chief financial officer, vice president of
finance and administration and secretary since April 1999. From 1998 to 1999,
he was chief financial officer, vice president, finance and administration at
Worldtalk Corp., an Internet security software company. From 1994 to 1998, he
was chief financial officer and vice president, finance and administration at
HyperMedia Communications, Inc., an Internet publishing company. Mr. Hagen
holds a bachelor of science degree in finance and marketing from The Wharton
School at the University of Pennsylvania and a master of business
administration in finance and accounting from the Anderson Graduate School of
Management at the University of California at Los Angeles.
Bruce Roberts has served as Salon's senior vice president of sales since
April 1999. From 1995 to 1999, he was the general sales manager of KGO-TV/ABC,
Inc., a broadcast affiliate of ABC owned by Disney. From 1989 to 1995 he was a
sales manager at KABC-TV/ABC, Inc., a broadcast affiliate of ABC. Mr. Roberts
holds a bachelor of science degree in physical education from Springfield
College.
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Patrick Hurley has served as Salon's vice president of marketing since March
1999. From 1998 to 1999, he served as Salon's marketing director. From 1996 to
1998, he was management supervisor at Hal Riney & Partners, an advertising
agency. From 1994 to 1996, he served as account supervisor for the J. Walter
Thompson advertising agency. Mr. Hurley holds a bachelor of arts degree in
journalism from Marquette University.
Chad Dickerson has served as Salon's vice president of technology since July
1998. From 1997 until joining Salon, Mr. Dickerson served as director of
applications development for CNN/SI Interactive, an Internet content provider.
From 1996 to 1997, he was the technical product manager for CNN Interactive.
From 1995 to 1996, Mr. Dickerson served as webmaster for the Atlanta Journal-
Constitution newspaper. Mr. Dickerson holds a bachelor of arts degree in
English literature from Duke University.
Ron Celmer has served as a director of Salon since April 1999. Mr. Celmer has
been a managing director of Bear, Stearns & Co. Inc., an investment bank, and a
general partner of Constellation Ventures, a venture capital firm, since 1998.
In 1998 he was president of Airmedia, a software company. From 1994 to 1998 he
was a general partner of Prospect Street Ventures, a venture capital firm. Mr.
Celmer holds bachelor of arts degrees in economics and psychology from the
University of Pennsylvania.
Sada Chidambaram has served as a director of Salon since November 1997. Mr.
Chidambaram has served as president and director of ASCII Investment
Management, Inc., the venture investment manager for DOTCOM Ventures, L.P.,
(formerly ASCII Ventures, L.P.), since 1998. From 1988 to 1998, he served as
president and director of ASCII of America, Inc., the U.S. representative of
ASCII Corporation, an information, entertainment and education publishing
company. Mr. Chidambaram holds a bachelor of science degree in chemistry from
Loyola College University in Madras, India and a master of science degree in
chemical engineering from the Tokyo Institute of Technology in Japan.
Norman Lear has served as a director of Salon since April 1999. Mr. Lear has
been the chairman of Act III Communications Holdings, LP, a multimedia
entertainment company, since it was founded in 1986. He founded Tandem
Productions, Inc. in 1959 and produced television programs including All in the
Family, Sanford & Son and The Jeffersons. Mr. Lear is a member of the
Television Academy Hall of Fame.
Standish O'Grady has served as a director of Salon since December 1995. Mr.
O'Grady has been a managing member of H&Q Venture Associates, LLC, a venture
capital firm, since its formation in 1998. From 1996 to 1998, he was a managing
director in the venture capital department of Hambrecht & Quist Group, an
investment banking firm. Mr. O'Grady holds a bachelor of science degree in
chemical engineering from Princeton University and a master of business
administration from the Amos Tuck School of Business Administration at
Dartmouth College.
Jim Rosenfield has served as a director of Salon since April 1998. Mr.
Rosenfield has been the president of JHR & Associates, a media consulting firm,
since 1998. From 1994 to 1998, Mr. Rosenfield was managing director at the
investment banking firm of Veronis Suhler & Associates. From 1987 to 1994, he
was chairman and chief executive officer of John Blair Communications, Inc., a
television sales and syndication company. From 1965 to 1985, Mr. Rosenfield
held various executive positions at CBS Corporation, a television broadcasting
and media company, including executive vice president of the Broadcast Group.
Mr. Rosenfield holds a bachelor of arts degree in English from Dartmouth
College.
The board of directors is divided into three classes, with each class holding
office for staggered three-year terms. The terms of Messrs. O'Grady and
Chidambaram will expire upon the election and qualification of directors at the
annual meeting of stockholders to be held in 2000, the terms of Messrs. Celmer
and Talbot will expire upon the election and qualification of directors at the
annual meeting of stockholders to be held in 2001 and the terms of Messrs.
O"Donnell, Lear and Rosenfield will expire upon the election and qualification
of directors at the annual meeting of stockholders to be held in 2002. Officers
are elected by the board of directors and serve at the direction of the board
of directors. There are no family relationships among any of Salon's directors
or officers.
49
<PAGE>
Audit Committee
The board of directors has established an audit committee consisting of Mr.
Chidambaram and Mr. Celmer. The audit committee reviews with Salon's
independent auditors the scope and timing of their audit services and any other
services that they are asked to perform, the auditor's report on Salon's
financial statements following completion of their audit, and Salon's policies
and procedures with respect to internal accounting and financial controls. In
addition, the audit committee makes annual recommendations to the board of
directors for the appointment of independent auditors for the ensuing year.
Compensation Committee
The board of directors has established a compensation committee consisting of
Mr. O'Grady, Mr. Chidambaram, Mr. Rosenfield and Mr. Celmer. The compensation
committee makes recommendations to the board concerning salaries and incentive
compensation for Salon's officers and employees and administers Salon's
employee benefit plans.
Director Compensation
Directors receive no compensation for serving as directors of Salon, except
that Mr. Rosenfield receives $2,500 for each board meeting he attends. Salon
also granted to Mr. Rosenfield options to purchase 37,500 shares of common
stock on April 28, 1998, at an exercise price of $0.32 per share, and options
to purchase 7,500 shares of common stock on April 8, 1999, at an exercise price
of $2.92 per share. The options are subject to vesting over four years.
Compensation Committee Interlocks and Insider Participation
None of Salon's executive officers has served as a member of a compensation
committee or board of directors of any other entity which has an executive
officer serving as a member of Salon's board of directors.
Employment Contracts, Termination of Employment and Change of Control
Arrangements
In November 1996, Salon entered into an employment agreement with Mr.
O'Donnell under which he currently receives an annual salary of $175,000, and
an annual bonus of up to $50,000. Mr. O'Donnell also received options to
purchase 8% of Salon's then-outstanding capital stock at a purchase price of
$0.20 per share, as well as the right to participate in future sales of stock
by Salon to maintain his percentage ownership at 8%. This participation right
will terminate upon the closing of this offering. If Mr. O'Donnell voluntarily
resigns from his employment with Salon or is terminated for cause by Salon, he
will be entitled to no compensation or benefits from Salon other than those
earned through the date of his resignation. If Mr. O'Donnell is terminated
without cause, he will be entitled to salary payments until the earlier of nine
months following his termination or until he begins other employment. If Mr.
O'Donnell resigns within one year of a change of control of Salon because of
(a) a decrease in his base salary or a material decrease in any of his then-
existing bonus plans or employee benefits; or (b) a material adverse change in
his title, authority, responsibilities or duties, then he will be entitled to
salary payments until the earlier of nine months following his resignation or
change in title or authority or until he begins other employment.
In March 1999, Salon entered into a letter agreement with Mr. Hagen under
which he receives an annual salary of $140,000, and an annual bonus of up to
$35,000. Mr. Hagen also received options to purchase 75,000 shares of Salon's
common stock at an exercise price of $2.92 per share. If Salon is acquired
within one year of the date Mr. Hagen began working for Salon and Mr. Hagen is
terminated by the acquiror, Salon agreed to accelerate the vesting of
Mr. Hagen's options by one year. If Salon is acquired more than one year
following the date Mr. Hagen began working for Salon and Mr. Hagen is
terminated by the acquiror, Salon will accelerate Mr. Hagen's options to the
next year anniversary of the date he began working for Salon.
50
<PAGE>
In April 1999, Salon entered into a letter agreement with Mr. Roberts under
which he received an annual salary of $175,000, and an annual bonus of up to
$50,000. Mr. Roberts also received options to purchase 87,500 shares of Salon's
common stock at an exercise price of $2.92 per share. If Mr. Roberts is
terminated by Salon without cause within one year of the date he began working
for Salon, he will be entitled to salary payments until the earlier of one year
following his termination or the date he begins other employment, and his
options will immediately become fully vested. If Mr. Roberts is terminated by
Salon without cause more than one year following the date he began working for
Salon, he will be entitled to salary payments until the earlier of six months
following his termination or the date he begins other employment, and the
vesting of his options will accelerate by one year.
Mr. Roberts' options will immediately become fully vested if, within two
years of a change of control of Salon, he is terminated without cause, or
resigns because of:
. a decrease in his base salary or a material decrease in any of his then-
existing bonus plans or employee benefits;
. a material adverse change in his title, authority, responsibilities or
duties; or
. the relocation of his work place for Salon to a location that is more
than 75 miles from San Francisco.
Executive Compensation
The following table contains summary information for the fiscal year ended
March 31, 1999 regarding the compensation earned by Salon's chief executive
officer and each of Salon's most highly compensated executive officers other
than the chief executive officer whose salary plus bonus exceeded $100,000 for
the fiscal year ended March 31, 1999. In accordance with the rules of the SEC,
the compensation described in this table does not include perquisites and other
personal benefits received by the executive officers named in the table below
which do not exceed the lesser of $50,000 or 10% of the total salary and bonus
reported for these officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation
Compensation Awards
---------------- ------------
Securities
Underlying
Name and Principal Position Salary Bonus Options/SARs
--------------------------- -------- ------- ------------
<S> <C> <C> <C>
David Talbot................................. $145,000 $30,304 --
Chairman of the board and editor-in-chief
Michael O'Donnell............................ 145,000 30,304 --
Chief executive officer and president
Andrew Ross ................................. 108,646 20,304 15,000
Vice president of business and strategic
development
Chad Dickerson............................... 82,500 20,325 37,500
Vice president of technology
Liza Parker ................................. 77,284 52,956 5,000
Vice president of advertising sales
</TABLE>
Liza Parker was Salon's vice president of advertising sales from May 12, 1997
to February 5, 1999.
51
<PAGE>
Option Grants
The following table sets forth information concerning grants of stock options
to each of the executive officers named in the table above during the fiscal
year ended March 31, 1999. All options granted to these executive officers in
the last fiscal year were granted under the 1995 stock option plan. Each option
vests and becomes exercisable over a period of four years. The percentage of
total options set forth below is based on an aggregate of 376,250 options
granted to employees in fiscal 1999. All options were granted at a fair market
value as determined by the board of directors on the date of grant. The board
of directors determined the fair market value based on Salon's financial
results and prospects and the share price in arms-length transactions. The
exercise price may in some cases be paid by delivery of other shares or by
offset of the shares subject to options. The deemed value for the date of grant
has been adjusted solely for financial accounting purposes. Potential
realizable values are net of exercise price, but before taxes associated with
exercise. Amounts represent hypothetical gains that could be achieved for the
options if exercised at the end of the option term. The assumed 0%, 5% and 10%
rates of stock price appreciation are provided in accordance with rules of the
SEC and do not represent Salon's estimate or projection of the future common
stock price. The assumed 0%, 5% and 10% rates of stock price appreciation are
based on the assumed offering price of $12 per share. The assumed rate of 0%
indicates the value at the effective date of the offering based on the deemed
value for financial accounting purposes less the exercise price.
Options Granted in Fiscal Year Ended March 31, 1999
<TABLE>
<CAPTION>
Individual Grants
------------------------------- Potential Realizable Value
Number of % of Total Deemed at Assumed Annual Rates
Securities Options Value Per of Stock Price Appreciation
Underlying Granted to Exercise Share For for Option Term
Options Employees Price Expiration Date ----------------------------
Granted in Year ($/Share) Date of Grant 0% 5% 10%
---------- ---------- --------- ---------- --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David Talbot............ -- -- -- -- -- -- -- --
Chairman of the board
and editor-in-chief
Michael O'Donnell....... -- -- -- -- -- -- -- --
Chief executive officer
and president
Andrew Ross ............ 15,000 4.0 $ 0.52 09/24/08 $3.50 $172,200 $285,401 $ 459,074
Vice president of
business and strategic
development
Chad Dickerson.......... 37,500 10.0 0.32 07/07/08 2.38 438,000 721,003 1,155,184
Vice president of
technology
Liza Parker............. 5,000 1.3 0.52 12/11/08 3.50 57,400 95,134 153,025
Vice president of
advertising sales
</TABLE>
Aggregate Option Exercises in Fiscal Year Ended March 31, 1999 and Option
Values at March 31, 1999
The following table sets forth information concerning exercisable and
unexercisable stock options held by the executive officers named in the summary
compensation table at March 31, 1999. The value of unexercised in-the-money
options is based on the offering price of $12 per share minus the actual
exercise prices. All options were granted under Salon's 1995 stock option plan.
These options vest over four years and otherwise generally conform to the terms
of Salon's 1995 stock option plan.
Fiscal Year Ended March 31, 1999 Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options
Shares Options at March 31, 1999 at March 31, 1999
Acquired on Value ------------------------- -------------------------
Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
----------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David Talbot ........... -- -- 94,791 80,209 $1,118,534 $ 946,467
Chairman of the board
and editor-in chief
Michael O'Donnell....... -- -- 144,166 115,834 1,701,159 1,366,842
Chief executive officer
and president
Andrew Ross ............ -- -- 104,895 55,105 1,237,761 645,439
Vice president of
business strategic
development
Chad Dickerson.......... -- -- -- 37,500 -- 438,000
Vice president of
technology
Liza Parker............. 6,978 $2,233 -- -- -- --
Vice president of
advertising sales
</TABLE>
52
<PAGE>
Stock Plans
1995 Stock Option Plan. Salon's 1995 stock option plan was approved by
Salon's board of directors in December 1995 and was later approved by Salon's
stockholders. The plan provides for the grant of incentive stock options,
within the meaning of Section 422 of the Internal Revenue Code, to employees,
and for grants of nonstatutory stock options to employees, including officers,
non-employee directors and consultants.
The plan is administered by Salon's board of directors or a committee of the
board. Under the plan, the board or its committee has the authority to select
the persons to whom options are granted and determine the terms of each option,
including:
. the number of shares of common stock covered by the option;
. when the option becomes exercisable;
. the per share option exercise price, which in the case of incentive stock
options must be at least equal to the fair market value of a share of
common stock on the grant date or 110% of such fair market value for
incentive stock options granted to 10% stockholders, and, in the case of
nonstatutory stock options, must be at least 85% of the fair market value
of a share of common stock on the grant date; and
. the duration of the option, which may not exceed ten years, or, with
respect to incentive stock options granted to 10% stockholders, five
years.
Generally, options granted under the plan become exercisable as the
underlying shares vest. Options granted under the plan generally vest over four
years, although the board or its committee may specify a different vesting
schedule for a particular grant. Options granted under the plan are non-
transferable other than by will or the laws of descent and distribution.
In the event of a change in control of Salon, the acquiring or successor
corporation may assume or substitute for the outstanding options granted under
the plan. The outstanding options will terminate if these options are neither
exercised nor assumed or substituted for by the acquiring corporation.
Currently, the maximum number of shares issuable under the plan is 2,875,000.
The share reserve will automatically be increased on the first day of each
calendar year of Salon beginning on and after January 1, 2001 by 5% of the
number of shares of Salon's common stock that was issued and outstanding on the
last day of the preceding fiscal year. As of March 31, 1999, 54,996 shares have
been issued upon the exercise of options, options to purchase of a total of
1,683,593 shares at a weighted average exercise price of $0.24 per share were
outstanding and 1,136,411 shares were available for future option grants.
1999 Employee Stock Purchase Plan. Currently, a total of 500,000 shares of
common stock have been reserved for issuance under Salon's 1999 employee stock
purchase plan, none of which have been issued as of the effective date of this
offering. The plan's share reserve will automatically be increased on June 1 of
each year by 250,000 shares, or a lower number of shares determined by the
board. The first annual increase will occur on June 1, 2000 and the last annual
increase will occur on June 1, 2009. The plan, which is intended to qualify
under Section 423 of the Internal Revenue Code, is administered by Salon's
board or by a committee of the board. Employees, including officers and
employee directors, of Salon or any subsidiary designated by the board for
participation in the plan are eligible to participate in the plan if they are
customarily employed for more than 20 hours per week and more than five months
per year.
The plan will be implemented by sequential offerings of approximately six
months duration, the first of which will commence on the effective date of this
offering and will terminate on January 31, 2000. Shares will be purchased on
the last day of each offering period. After the effective date of this
offering, offering periods under the plan will generally begin on February 1
and August 1 of each year. The board may change the dates or duration of one or
more offerings, but no offering may exceed 27 months. The plan permits eligible
employees to purchase common stock through payroll deductions at a price no
less than 85% of the lower of
53
<PAGE>
the fair market value of the common stock on the first day of the offering, or
the purchase date. Participants generally may not purchase more than 1,000
shares in a six-month offering period or stock having a value greater than
$25,000 in any calendar year as measured at the beginning of the offering. In
the event of a change in control of Salon, the board may accelerate the
purchase date of the then current offering period to a date prior to the change
in control, unless the acquiring or successor corporation assumes or replaces
the purchase rights outstanding under the plan.
401(k) Savings Plan
Salon provides a tax-qualified employee savings and retirement plan, commonly
known as a 401(k) plan, which covers its eligible employees. Pursuant to the
401(k) plan, employees may elect to reduce their current annual compensation up
to the lesser of 15% or the statutorily prescribed limit, which is $10,000 in
calendar year 1999, and have the amount of the reduction contributed to the
401(k) plan. The 401(k) plan is intended to qualify under Sections 401(a) and
401(k) of the Internal Revenue Code, so that contributions by Salon or its
employees to the 401(k) plan, and income earned on plan contributions, are not
taxable to employees until withdrawn from the 401(k) plan, and so that
contributions will be deductible by Salon when made. The trustee of the 401(k)
plan invests the assets of the 401(k) plan in the various investment options as
directed by the participants.
Limitation of Liability and Indemnification
Salon's certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit. This limitation of liability does not apply to liabilities
arising under the federal securities laws and does not affect the
availability of equitable remedies such as injunctive relief or
rescission.
Salon's certificate of incorporation and bylaws provide that Salon will
indemnify its directors and executive officers and may indemnify its other
officers and employees and other agents to the fullest extent permitted by law.
Salon believes that indemnification under its bylaws covers at least negligence
and gross negligence on the part of indemnified parties. Salon's bylaws also
permit it to secure insurance on behalf of any officer, director, employee or
other agent for any liability arising out of his or her actions in such
capacity, regardless of whether Delaware law would permit indemnification.
In addition to indemnification provisions in Salon's bylaws, upon the closing
of this offering, Salon will have entered into agreements to indemnify its
directors and executive officers. These agreements will provide for
indemnification of Salon's directors and executive officers for some types of
expenses, including attorneys' fees, judgments, fines and settlement amounts
incurred by persons in any action or proceeding, including any action by or in
the right of Salon, arising out of their services as a director or executive
officer of Salon. Salon believes that these provisions and agreements are
necessary to attract and retain qualified persons as directors and executive
officers.
54
<PAGE>
CERTAIN TRANSACTIONS
Since April 1, 1997 there has been no transaction or series of transactions
to which Salon was a party involving $60,000 or more and in which any director,
executive officer or holder of more than five percent of Salon's capital stock
had a material interest other than agreements which are described where
required under the caption "Management" and the transactions described below.
On November 28, 1997, Salon sold an aggregate of 949,365 shares of Series B
preferred stock at a price of $3.16 per share for an aggregate of approximately
$3.0 million to four investors, including Adobe Ventures II, L.P., DOTCOM
Ventures, L.P., formerly ASCII Ventures, L.P., and H&Q Salon Investors, L.P.
On September 18, 1998, November 3, 1998 and April 14, 1999, Salon sold an
aggregate of 3,869,844 shares of Series C preferred stock at a price of $3.88
per share for an aggregate of approximately $15.0 million to thirty-five
investors, including Adobe Ventures II, L.P., DOTCOM Ventures, L.P., entities
affiliated with Constellation Ventures, H&Q Salon Investors, L.P., Wasserstein
Adelson Ventures, L.P. and entities affiliated with Bruce R. Katz. In addition,
on September 18, 1998, Salon issued warrants to purchase an aggregate of
219,582 shares of common stock to Adobe Ventures II, L.P., DOTCOM Ventures,
L.P. and H&Q Salon Investors, L.P. at an exercise price of $0.52 per share.
On March 29, 1999, Salon issued 463,918 shares of Series C preferred stock to
Whole Earth Lectronic Link, Inc. and Bruce R. Katz in exchange for all of the
membership interests of The Well LLC.
On April 14, 1999, Salon issued warrants to purchase an aggregate of 148,389
shares of Series C preferred stock at an exercise price of $3.88 to entities
affiliated with Daiwa Securities America Inc., as well as a warrant to purchase
25,773 shares of Series C preferred stock at an exercise price of $3.88 per
share to Act III Communications.
Upon the consummation of this offering, all outstanding shares of Series A
preferred stock, Series B preferred stock and Series C preferred stock will
automatically convert into shares of common stock on a one-for-one basis.
Salon intends to enter into indemnification agreements with each of its
directors and officers. These indemnification agreements will require Salon to
indemnify such individuals to the fullest extent permitted by Delaware law.
Salon believes that all transactions with affiliates described above were
made on terms no less favorable to Salon than could have been obtained from
unaffiliated third parties. Salon's charter documents require that any
transactions between Salon and its directors, officers or other affiliates must
be no less favorable to Salon than would be identical arm's length transactions
with an unrelated third party. Such transactions will continue to be on terms
no less favorable to Salon than could obtain from unaffiliated third parties.
55
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of Salon's common
stock as of April 15, 1999 and as adjusted to reflect the sale of the shares of
common stock offered hereby by:
. the chief executive officer, each of the executive officers named in the
summary compensation table and each of Salon's directors;
. all executive officers and directors as a group; and
. each person or entity who is known by Salon to beneficially own more than
5% of Salon's outstanding common stock.
Unless otherwise indicated, the address for each of the named individuals is
c/o Salon.com, 706 Mission Street, 2nd Floor, San Francisco, California 94103.
Except as otherwise indicated, and subject to applicable community property
laws, the persons named in the table have sole voting and investment power with
respect to all shares of common stock held by them.
Applicable percentage ownership in the table is based on 8,230,623 shares of
common stock outstanding as of April 15, 1999 and 10,730,623 shares outstanding
immediately following the completion of this offering. Beneficial ownership is
determined in accordance with the rules of the SEC. Shares of common stock
subject to options or warrants that are presently exercisable or exercisable
within 60 days of April 15, 1999 are deemed outstanding for the purpose of
computing the percentage ownership of the person or entity holding options or
warrants, but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person or entity. If any shares are issued
upon exercise of options, warrants or other rights to acquire Salon's capital
stock that are presently outstanding or granted in the future or reserved for
future issuance under Salon's stock plans, there will be further dilution to
new public investors.
<TABLE>
<CAPTION>
Percentage of
Shares
Outstanding
-----------------
Number of Shares Prior to After
Name and Address of Beneficial Owner Beneficially Owned Offering Offering
- ------------------------------------ ------------------ -------- --------
<S> <C> <C> <C>
Named Executive Officers and Directors
David Talbot............................. 402,083 4.8% 3.7%
Michael O'Donnell........................ 158,333 1.9 1.5
Andrew Ross.............................. 113,124 1.4 1.0
Chad Dickerson........................... 0 * *
Liza Parker.............................. 6,978 * *
Standish O'Grady......................... 3,777,863 44.9 34.6
Sada Chidambaram......................... 476,690 5.8 4.4
Jim Rosenfield........................... 10,156 * *
Norman Lear.............................. 283,505 3.4 2.6
Ronald Celmer............................ 644,330 7.8 6.0
All executive officers and directors as a
group (12 persons)...................... 5,866,084 66.2 51.6
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Shares
Outstanding
-----------------
Number of Shares Prior to After
Name and Address of Beneficial Owner Beneficially Owned Offering Offering
- ------------------------------------ ------------------ -------- --------
<S> <C> <C> <C>
5% Stockholders
Adobe Ventures........................... 2,833,397 33.8 26.1
c/o H&Q Venture Associates, LLC
One Bush Street,
San Francisco, CA 94104
Bruce R. Katz............................ 973,003 11.8 9.1
c/o Rosewood Stone Group
2320 Marinship Way, Ste. 240
Sausalito, CA 94965
H&Q Salon Investors, L.P................. 944,466 11.4 8.8
c/o H&Q Venture Associates, LLC
One Bush Street,
San Francisco, CA 94104
Constellation Venture Capital............ 644,330 7.8 6.0
575 Lexington Avenue,
New York, NY 10022
Wasserstein Adelson Ventures, L.P........ 515,464 6.3 4.8
31 W. 52nd Street, 26th Floor,
New York, NY 10019
DOTCOM Ventures, L.P..................... 476,690 5.8 4.4
3945 Freedom Circle, Suite 730,
Santa Clara, CA 95054
</TABLE>
- --------
* Less than 1%
Shares listed as held by Mr. Talbot include 102,083 shares subject to options
exercisable within 60 days of April 15, 1999.
Shares listed as held by Mr. O'Donnell are shares subject to options
exercisable within 60 days of April 15, 1999.
Shares listed as held by Mr. Ross are shares subject to options exercisable
within 60 days of April 15, 1999.
Shares listed as held by Mr. Dickerson are shares subject to options
exercisable within 60 days of April 15, 1999.
Shares listed as held by Mr. O'Grady consist of 2,112,341 shares held by
Adobe Ventures, L.P., 579,896 shares held by Adobe Ventures II, L.P., 897,413
shares held by H&Q Salon Investors, L.P., 141,160 shares issuable upon exercise
of warrants held by Adobe Ventures, L.P. and 47,053 shares issuable upon
exercise of warrants held by H&Q Salon Investors, L.P. Mr. O'Grady is the
manager of Adobe Ventures Management, LLC, which is a general partner of Adobe
Ventures II, L.P. and he is also the manager of Salon Investors Management,
LLC, which is a general partner of H&Q Salon Investors, L.P. Mr. O'Grady has
voting and investment power with respect to the shares held by Adobe Ventures
II, L.P. and H&Q Salon Investors, L.P. and may be deemed to beneficially own
these shares. Mr. O'Grady disclaims beneficial ownership of these shares,
except to the extent of his proportionate interest in them.
57
<PAGE>
Shares held by Mr. Chidambaram consist of 445,321 shares held DOTCOM
Ventures, L.P. and 31,369 shares subject to warrants held by DOTCOM Ventures,
L.P. Mr. Chidambaram is president and director of ASCII Investment Management,
Inc., the venture investment manager for DOTCOM Ventures, L.P. Mr. Chidambaram
has voting and investment power with respect to the shares held by DOTCOM
Ventures, L.P. and may be deemed to beneficially own these shares. Mr.
Chidambaram disclaims beneficial ownership of these shares, except to the
extent of his proportionate interest in them.
Shares listed as held by Mr. Rosenfield are shares subject to options
exercisable within 60 days of April 15, 1999.
Shares listed as held by Mr. Lear consist of 257,732 shares and 25,773 shares
subject to warrants held by ACT III Communications. Mr. Lear is the chairman of
ACT III Communications, has voting and investment power with respect to the
shares held by it, and may be deemed to beneficially own these shares. Mr. Lear
disclaims beneficial ownership of these shares, except to the extent of his
proportionate interest in them.
Shares listed as held by Mr. Celmer consist of 530,192 shares held by
Constellation Venture Capital, L.P. and 114,138 shares held by Constellation
Venture Offshore, L.P. Mr. Celmer is the general partner of Constellation
Ventures. Mr. Celmer has voting and investment power with respect to the shares
held by Constellation Venture Capital and Constellation Venture Offshore and
may be deemed to beneficially own these shares. Mr. Celmer disclaims beneficial
ownership of these shares, except to the extent of his proportionate interest
in them.
Shares listed as held by Adobe Ventures consist of 2,112,341 shares and
141,160 shares issuable upon exercise of warrants held by Adobe Ventures, L.P.
and 579,896 shares held by Adobe Ventures II, L.P.
Shares listed as held by Bruce R. Katz include 46,392 shares held by Bruce R.
Katz, as trustee of Bruce R. Katz and Whole Earth Lectronic Link, Inc. escrow
account and 408,382 shares held by Whole Earth Lectronic Link, Inc.
Shares listed as held by H&Q Salon Investors, L.P. include 47,053 shares
issuable upon exercise of warrants.
Shares listed as held by Constellation Venture Capital consist of 530,192
shares held by Constellation Venture Capital, L.P. and 114,138 shares held by
Constellation Venture Capital Offshore, L.P.
Townsend Ziebold is the president of Wasserstein Adelson Ventures, L.P. Mr.
Ziebold is also the president of Wasserstein Perella Ventures, Inc., the
general partner of Wasserstein Adelson Ventures, L.P.
Shares listed as held by DOTCOM Ventures, L.P. include 31,369 shares subject
to warrants.
Shares listed as held by all directors and executive officers as a group
include 383,696 shares subject to options exercisable within 60 days of April
15, 1999.
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DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, Salon's authorized capital stock will
consist of 50,000,000 shares of common stock and 5,000,000 shares of preferred
stock. The following summary of certain provisions of the common stock and the
preferred stock is subject to, and qualified in its entirety by Salon's
certificate of incorporation and bylaws and by the provisions of applicable
law.
Common Stock
As of April 15, 1999 there were 447,496 shares of common stock outstanding
held of record by 12 stockholders. Subject to preferences that may be
applicable to any preferred stock outstanding at the time, the holders of
outstanding shares of common stock are entitled to receive dividends out of
assets legally available therefor at such times and in such amounts as the
board from time to time may determine in its sole discretion. Holders of common
stock are entitled to one vote for each share held on all matters submitted to
a vote of stockholders. Cumulative voting for the election of directors is not
authorized by Salon's certificate of incorporation, which means that the
holders of a majority of the shares voted can elect all of the directors then
standing for election. The common stock is not entitled to preemptive rights
and is not subject to conversion or redemption. Upon liquidation, dissolution
or winding-up of Salon, the holders of common stock are entitled to share
ratably in all assets remaining after payment of liabilities and the
liquidation of any preferred stock. Each outstanding share of common stock is,
and all shares of common stock to be outstanding upon completion of this
offering will be, upon payment, duly and validly issued, fully paid and
nonassessable. The rights, preferences and privileges of the holders of common
stock are subject to, and may be adversely affected by, the rights of the
holders of any shares of preferred stock which Salon may issue in the future.
Preferred Stock
Upon completion of this offering, all outstanding shares of preferred stock
will be converted on a one-to-one one basis into 7,783,127 shares of common
stock. However, following this conversion, under Salon's certificate of
incorporation, the board of directors will have the authority, without further
action by the stockholders, to issue up to 5,000,000 shares of preferred stock
in one or more series. The board can fix the rights, preferences and privileges
of the shares of each series and any qualifications, limitations or
restrictions on these shares.
The board may authorize the issuance of preferred stock with voting or
conversion rights that could adversely affect the voting power or other rights
of the holders of common stock. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes could, under certain circumstances, have the effect of
delaying, deferring or preventing a change in control of Salon. Salon has no
current plans to issue any shares of preferred stock.
Warrants
In April 1997, Salon issued a warrant to Imperial Bancorp to purchase 8,750
shares of Series A preferred stock at an exercise price of $2.00 per share. The
April 1997 warrant may be exercised at any time within five years after
issuance of the warrant. In April 1998, Salon issued a warrant to Imperial
Bancorp to purchase 11,867 shares of Series B preferred stock at an exercise
price of $3.16 per share. In December 1998, Salon issued a warrant to Imperial
Bancorp to purchase 14,439 shares of Series C preferred stock at an exercise
price of $3.88 per share. Under the terms of the December 1998 warrant,
additional shares become subject to the terms of the December 1998 warrant
under certain circumstances. The April and December 1998 warrants may be
exercised at any time within seven years after issuance. Upon completion of
this offering, all warrants held by Imperial Bancorp will convert into the
right to purchase an equivalent number of shares of Salon's common stock at the
same exercise price per share.
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<PAGE>
In July 1998, Salon issued a warrant to America Online Inc. to purchase
79,114 shares of Series B preferred stock at an exercise price of $3.16 per
share. Upon completion of this offering, the warrant will convert into the
right to purchase an equivalent number of shares of Salon's common stock at the
same exercise price per share. The warrant may be exercised at any time within
five years after issuance.
In September 1998, Salon issued a warrant to Adobe Ventures II L.P. to
purchase 141,160 shares of common stock at an exercise price of $0.52 per
share. The warrant may be exercised at any time within ten years after
issuance.
In September 1998, Salon issued a warrant to DOTCOM Ventures, L.P. to
purchase 31,369 shares of common stock at an exercise price of $0.52 per share.
The warrant may be exercised at any time within ten years after issuance.
In September 1998, Salon issued a warrant to H&Q Salon Investors, L.P. to
purchase 47,053 shares of common stock at an exercise price of $0.52 per share.
The warrant may be exercised at any time within ten years after issuance.
In April 1999, Salon issued warrants to entities affiliated with Daiwa
Securities America Inc. to purchase an aggregate of 148,389 shares of Series C
preferred stock at an exercise price of $3.88 per share. The warrant may be
exercised at any time within five years after issuance. Upon completion of this
offering, the warrant will convert into the right to purchase an equivalent
number of shares of Salon's common stock at the same exercise price per share.
In April 1999, Salon issued a warrant to ACT III Communications to purchase
25,773 shares of Series C preferred stock at an exercise price of $3.88 per
share. The warrant may be exercised at any time within five years after
issuance. Upon completion of this offering, the warrant will convert into the
right to purchase an equivalent number of shares of Salon's common stock at the
same exercise price per share.
Registration Rights of Certain Holders
Following the sale of the common stock offered hereby, the holders of
approximately 8,158,127 shares of common stock and 288,332 shares of stock
issuable upon exercise of warrants will have certain rights to register those
shares under the Securities Act and an amended and restated rights agreement.
Subject to certain limitations in the rights agreement:
.the holders of at least 25% of such shares;
. the holders of at least 20% of the then-outstanding shares issued upon
conversion of the Series C preferred stock; or
.shares with an expected aggregate offering price to the public of at least
$5 million;
may require, on three occasions, that Salon use its best efforts to register
such shares for public resale. If Salon registers any of its common stock for
its own account or for the account of other security holders, the holders of
such shares are entitled to include their shares of common stock in the
registration, subject to the ability of the underwriters to limit the number of
shares included in the offering. Any holder or holders of such shares may also
require Salon to register all or a portion of their registrable securities in a
registration statement on form S-3 when Salon is eligible to use that form,
provided, among other limitations, that the proposed aggregate price to the
public is at least $500,000 and that Salon has not effected two of these
registrations in any 12-month period. Salon will bear all fees, costs and
expenses of these registrations, other than underwriting discounts and
commissions.
All of the registration rights described above are subject to conditions and
limitations, among them the right of the underwriters in any underwritten
offering to limit the number of shares of common stock to be included in a
registration. Registrations of any shares of common stock held by holders with
registration rights
60
<PAGE>
would result in these shares being freely tradable without restriction under
the Securities Act upon the effective date of the registration. Under the
rights agreement Salon also agreed to indemnify the holders of registration
rights.
Delaware Law and Provisions of Salon's Certificate of Incorporation and Bylaws
Provisions of Delaware law and Salon's certificate of incorporation and
bylaws could make more difficult the acquisition of Salon by means of a tender
offer, a proxy contest, or otherwise, and the removal of incumbent officers and
directors. These provisions are expected to discourage certain types of
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of Salon to first negotiate with its board
of directors. Salon believes that the benefits of increased protection of
Salon's potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure Salon outweighs the
disadvantages of discouraging these proposals, including proposals that are
priced above the then current market value of its common stock, because, among
other things, negotiation of these proposals could result in an improvement of
their terms.
Salon is subject to Section 203 of the Delaware General Corporation Law. This
provision generally prohibits any Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three
years following the date the stockholder became an interested stockholder,
unless:
. prior to that date the board of directors approved either the business
combination or the transaction that resulted in the stockholder becoming
an interested stockholder;
. upon completion of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock outstanding at the time the transaction
began; or
. on or following that date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested stockholder.
Section 203 defines a business combination to include:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
. subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
Salon's certificate of incorporation provides that, upon the closing of this
offering, the board of directors will be divided into three classes of
directors with each class serving a staggered three-year term. The
classification system of electing directors may tend to discourage a third
party from making a tender offer or otherwise attempting to obtain control of
Salon and may maintain the incumbency of the board of directors, as the
classification of the board of directors generally increases the difficulty of
replacing a majority of the directors. Salon's certificate of incorporation
eliminates the right of stockholders to call special meetings of
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<PAGE>
stockholders. The certificate of incorporation and bylaws do not provide for
cumulative voting in the election of directors. The authorization of
undesignated preferred stock makes it possible for the board of directors to
issue preferred stock with voting or other rights or preferences that could
impede the success of any attempt to change control of Salon. These and other
provisions may have the effect of deferring hostile takeovers or delaying
changes in control or management of Salon. The amendment of any of these
provisions would require approval by holders of at least 66 2/3% of the
outstanding common stock.
Transfer Agent and Registrar
The transfer agent and registrar for Salon's common stock is .
Listing
Salon has applied to list its common stock on the Nasdaq National Market
under the trading symbol "SALN."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of this offering, Salon will have outstanding an aggregate
of 10,730,623 shares of common stock. Of these shares, the 2,500,000 shares
sold in this offering will be freely tradable without restrictions or further
registration under the Securities Act unless such shares are purchased by
"affiliates" of Salon, as that term is defined under Rule 144 under the
Securities Act. The remaining 8,230,623 shares of common stock held by existing
stockholders will be "restricted securities" as that term is defined in Rule
144 under the Securities Act. Restricted shares may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rule 144, or Rule 701 under the Securities Act.
The restricted shares will be available for sale in the public market as
follows:
. 75,000 restricted shares will be available for sale in the public market
immediately following the closing of this offering pursuant to Rule
144(k);
. 3,804,361 restricted shares will become eligible for sale in the public
market 90 days after the closing of this offering under Rule 144 and Rule
701 of the Securities Act; and
. the remaining restricted shares will begin to be eligible for sale from
time to time thereafter upon expiration of one-year holding periods and
subject to the requirements of Rule 144.
Salon has agreed not to offer, sell, contract to sell, or otherwise dispose
of any shares of common stock, or any options or warrants to purchase common
stock other than the shares of common stock or options to acquire common stock
issued under Salon's 1995 stock option plan, employee stock purchase plan or
upon the conversion of outstanding warrants, for a period of 90 days after the
date of this prospectus, except with the prior written consent of W.R.
Hambrecht & Company, LLC.
In general, under Rule 144, a person, or persons whose shares are aggregated,
including an affiliate who has beneficially owned shares for at least one year,
is entitled to sell within any three-month period a number of shares that does
not exceed the greater of:
. 1% of the number of then-outstanding shares of common stock; or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the date on which notice of such sale is filed,
subject to certain restrictions.
In addition, a person who is not deemed to have been an affiliate of Salon at
any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years would be entitled
to sell such shares under Rule 144(k) without regard to the requirements
described above. If shares were acquired from an affiliate of Salon, that
affiliate's holder period to effect a sale under Rule 144 commences on the date
of transfer from the affiliate. The foregoing is only a summary of Rule 144 and
is not intended to be a complete description of it.
429,996 of the restricted shares were issued in reliance upon Rule 701.
Securities issued in reliance upon Rule 701 may be sold by persons that are not
affiliates subject to the manner of sale provisions of Rule 144 and by
affiliates subject to Rule 144 without compliance with its one-year minimum
holding period requirement.
As of March 31, 1999, 1,683,593 shares of common stock subject to outstanding
options were issuable pursuant to the 1995 stock option plan. After the
completion of this offering, Salon intends to file a registration statement
under the Securities Act to register 2,875,000 shares of common stock reserved
for issuance under the 1995 stock option plan and 500,000 shares of common
stock reserved for issuance under the employee stock purchase plan. This
registration statement will become effective immediately upon filing.
Prior to this offering, there has been no public market for the common stock
of Salon, and the effect, if any, that the sale or availability for sale of
shares of additional common stock will have on the trading price of the common
stock cannot be predicted. Nevertheless, sales of substantial amounts of such
shares in the public market, or the perception that such sales could occur,
could adversely affect the trading price of the common stock and could impair
Salon's future ability to raise capital through an offering of its equity
securities.
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PLAN OF DISTRIBUTION
Subject to the terms and conditions of an underwriting agreement, W.R.
Hambrecht & Company, LLC and Daiwa Securities America Inc., as underwriters,
will purchase from Salon the following respective number of shares of common
stock at the public offering price less the underwriting discounts and
commissions set forth on the cover page of this prospectus.
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
W.R. Hambrecht & Company, LLC......................................
Daiwa Securities America Inc.......................................
---------
Total.......................................................... 2,500,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to conditions, including the absence of any material adverse change
in Salon's business, and the receipt of certificates, opinions and letters from
Salon and its counsel and independent accountants. Subject to those conditions,
the underwriters are committed to purchase all shares of common stock offered
if any of the shares are purchased.
The underwriters propose to offer the shares of common stock directly to the
public at the offering price set forth on the cover page of this prospectus, as
this price is determined by the process described below, and to certain dealers
at this price less a concession not in excess of $ per share. Any dealers
or agents that participate in the distribution of the common stock may be
deemed to be underwriters within the meaning of the Securities Act, and any
discounts, commissions or concessions received by them and any provided by the
sale of the shares by them might be deemed to be underwriting discounts and
commissions under the Securities Act. After the completion of the initial
public offering of the shares, the public offering price and other selling
terms may be changed by the underwriters.
The public offering price set forth on the cover page of this prospectus will
be based on the results of an auction process, rather than solely through
negotiations between Salon and the underwriters. The plan of distribution of
the offered shares differs somewhat from traditional underwritten public
offerings of equity securities.
The auction process will proceed as follows:
. Prior to effectiveness of the registration statement relating to this
offering, the underwriters and participating dealers will solicit
indications of interest from prospective investors through the Internet
as well as by traditional means. The indications of interest will specify
the number of shares the potential investor proposes to purchase and the
price the investor is willing to pay for the shares. The public offering
price will ultimately be determined by negotiation between the
underwriters and Salon. The principal factor in establishing the public
offering price will be the price per share, or clearing price, that
equals the highest price set forth in valid indications of interest at
which all of the shares may be sold to potential investors. The public
offering price may be lower than the clearing price based on negotiations
between the underwriters and Salon.
. A simplified example of the auction process is as follows: Company X
offers to sell 100 shares in its public offering through this auction
process. W.R. Hambrecht & Company, LLC, on behalf of Company X, receives
five indications of interest, all of which are kept confidential until
the auction process ends. The first indication of interest is to pay $10
per share for 10 shares, the second is for $9 per share for 30 shares,
the third for $8 per share for 60 shares, the fourth for $8 per share for
40 shares and the last for $7 a share for 80 shares. In this scenario,
the clearing price used to determine the public offering price would be
$8 because $8 equals the highest price at which all 100 shares may be
sold to the potential investors who have submitted indications of
interest. After the registration statement becomes effective, all
potential investors who have submitted indications of interest will be
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advised of that fact and asked to confirm that their indications of
interest are now offers to purchase shares. The two potential investors
with the highest offers to purchase would receive all the shares they
requested, totaling 40 shares. The next two potential investors would
receive the remaining 60 shares in proportion to the amounts they asked
for or 36 and 24 shares each. The potential investor with the lowest offer
to purchase would receive no shares in this example.
. Valid indications of interest and offers to purchase are those that meet
the requirements, including eligibility, account status and size,
established by the underwriters or participating dealers. In determining
the validity of indications of interest and offers to purchase, in
addition to minimum account balances, a prospective investor submitting
an indication of interest or offer to purchase through a W.R. Hambrecht &
Company, LLC brokerage account may be required to have an account balance
equal to or in excess of the aggregate dollar amount of the prospective
investor's indications of interest or offer to purchase. Although funds
may be required to be in an account as a condition to the indication of
interest or offer to purchase being considered valid, the funds will not
be transferred to the underwriters until the closing of the offering.
Conditions for valid indications of interest and offers to purchase,
including eligibility standards and account funding requirements, of
other underwriters or participating dealers may vary.
. The offered shares will be purchased from Salon by the underwriters and
sold through the underwriters and participating dealers to investors who
have submitted offers to purchase at or in excess of the clearing price.
The number of shares sold to an investor submitting an offer to purchase
precisely at the clearing price may be subject to a pro rata reduction.
Each participating dealer has agreed with the underwriters to sell shares
they purchase from the underwriters in this manner, unless otherwise
consented to by the underwriters. Shares issued upon exercise of the
underwriters' over-allotment option will be allocated in the same manner.
The underwriters reserve the right, in exceptional circumstances, to
alter this method of allocation as they deem necessary to effect a fair
and orderly distribution of the shares. For example, large orders may be
reduced to insure a public distribution and indications of interest or
offers to purchase may be rejected by the underwriters or participating
dealers based on eligibility or creditworthiness criteria.
Price and volume volatility in the market for Salon's common stock may result
from the somewhat unique nature of the proposed plan of distribution. Price and
volume volatility in the market for Salon's common stock after the completion
of this offering may adversely affect the market price of Salon's common stock.
Salon has granted to the underwriters an option, exercisable no later than 30
days after the date of this prospectus, to purchase up to an aggregate of
375,000 additional shares of common stock at the offering price, less the
underwriting discount, set forth on the cover page of this prospectus. To the
extent that the underwriters exercise this option, the underwriters will have a
firm commitment to purchase the additional shares, and Salon will be obligated
to sell the additional shares to the underwriters. The underwriters may
exercise the option only to cover over-allotments made in connection with the
sale of shares offered.
The underwriting agreement provides that Salon will indemnify the
underwriters against specified liabilities, including liabilities under the
Securities Act, or contribute to payments that the underwriters may be required
to make.
Salon has agreed not to offer, sell, contract to sell, or otherwise dispose
of any shares of common stock, or any options or warrants to purchase common
stock other than the shares of common stock or options to acquire common stock
issued under Salon's 1995 stock option plan, employee stock purchase plan or
upon the conversion of outstanding warrants, for a period of 90 days after the
date of this prospectus, except with the prior written consent of W.R.
Hambrecht & Company, LLC.
Prior to the offering, there has been no public market for Salon's common
stock. The initial public offering price for the common stock will be
determined by the process described above and does not
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necessarily bear any direct relationship to Salon's assets, current earnings or
book value or to any other established criteria of value, although these
factors were considered in establishing the initial public offering price
range. Other factors considered in determining the initial public offering
price range include:
. market conditions;
. the industry in which Salon operates;
. an assessment of Salon's management;
. Salon's operating results;
. Salon's capital structure;
. the business potential of Salon;
. the demand for similar securities of comparable companies; and
. other factors deemed relevant.
In connection with the offering, persons participating in the offering may
purchase and sell shares of common stock on the open market. These transactions
may include short sales, stabilizing transactions and purchases to cover
positions created by short sales. Short sales involve the sale by the
underwriters of a greater number of shares than they are required to purchase
in the offering. Stabilizing transactions consist of certain bids or purchases
made for the purpose of preventing or retarding a decline in the market price
of the common stock. The underwriters also may impose a penalty bid. This
occurs when a particular underwriter repays to the underwriters a portion of
the underwriting discount received by it because the representative has
repurchased shares sold by or for the account of such underwriter in
stabilizing or short covering transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
Persons participating in this offering may also engage in passive market
making transactions in the common stock on the Nasdaq National Market. Passive
market making consists of displaying bids on the Nasdaq National Market limited
by the prices of independent market makers and affecting purchases limited by
such prices and in response to order flow. Rule 103 of Regulation M promulgated
by the SEC limits the amount of net purchases that each passive market maker
may make and the displayed size of each bid.
Passive market making may stabilize the market price of the common stock at a
level above that which might otherwise prevail in the open market and, if
commenced, may be discontinued at any time.
W.R. Hambrecht & Company, LLC currently intends to act as a market maker for
the common stock following this offering. However, W.R. Hambrecht & Company,
LLC is not obligated to do so and may discontinue any market making at any
time.
W.R. Hambrecht & Company, LLC is an investment banking firm formed as a
limited liability company in February 1998. In addition to this offering, W.R.
Hambrecht & Company, LLC has engaged in the business of public and private
equity investing and financial advisory services since its inception. The
manager of W.R. Hambrecht & Company, LLC, William R. Hambrecht, has 40 years of
experience in the securities industry. Persons affiliated and associated with
W.R. Hambrecht & Company, LLC have an interest in gains realized on shares of
Salon common stock held by Adobe Ventures, L.P. and H&Q Salon Investors, L.P.
In connection with services as placement agent for the sale of Series C
preferred stock in April 1999, entities affiliated with Daiwa Securities
America Inc. acquired warrants to purchase an aggregate of 148,389 shares of
Series C preferred stock at an exercise price of $3.88 per share.
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LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed upon
for Salon by Gray Cary Ware & Freidenrich LLP, Palo Alto, California. Certain
legal matters in connection with the offering will be passed upon for the
underwriters by Morrison & Foerster LLP, San Francisco, California.
Members of Gray Cary Ware & Freidenrich LLP beneficially own an aggregate of
10,309 shares of Salon common stock.
EXPERTS
The financial statements as of March 31, 1998 and 1999 and for each of the
three years in the period ended March 31, 1999, included in this prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The balance sheets as of December 31, 1997 and 1998 and the statements of
operations, of member's interest and of cash flows for the period July 1, 1997
(inception) to December 31, 1997 and the year ended December 31, 1998 for The
Well LLC, are included in this prospectus in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
The balance sheets as of June 30, 1997 and the statements of operations and
changes in owner's net equity and cash flows for the period January 1, 1997
(inception) to June 30, 1997 for Online Conferencing Business, predecessor
business of The Well LLC, are included in this prospectus in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of that firm as experts in accounting and auditing.
WHERE TO FIND ADDITIONAL INFORMATION ABOUT SALON
Salon has filed with the SEC a registration statement on form S-1 under the
Securities Act with respect to the shares of common stock offered by this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the
registration statement and the exhibits and schedules filed therewith. For
further information with respect to Salon and the common stock, reference is
made to the registration statement and the exhibits and schedules filed with
it. With respect to statements contained in this prospectus regarding the
contents of any agreement or any other document, in each instance, reference is
made to the copy of such agreement or other document filed as an exhibit to the
registration statement. Each statement is qualified in all respects by the
exhibits and schedules.
For further information with respect to Salon and the common stock, reference
is made to the registration statement and its exhibits and schedules. You may
read and copy any document Salon files at the SEC's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC
at 1-800-SEC-0330 for further information about the public reference rooms.
Salon's SEC filings are also available to the public from the SEC's Web site at
http://www.sec.gov.
Upon completion of this offering, Salon will become subject to the
information and periodic reporting requirements of the Exchange Act, and will
file periodic reports, proxy statements and other information with the SEC.
These periodic reports, proxy statements and other information will be
available for inspection and copying at the SEC's public reference rooms and
the SEC's Web site, which is described above.
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SALON.COM
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Salon.com
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Stockholders' Equity.......................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
The Well LLC
Report of Independent Accountants........................................ F-23
Balance Sheets........................................................... F-24
Statements of Operations................................................. F-25
Statements of Members' Interest.......................................... F-26
Statements of Cash Flows................................................. F-27
Notes to Financial Statements............................................ F-28
Online Conferencing Business (Predecessor Business)
Report of Independent Accountants........................................ F-33
Balance Sheet............................................................ F-34
Statement of Operations and Changes in Owner's Net Equity................ F-35
Statement of Cash Flows.................................................. F-36
Notes to Financial Statements............................................ F-37
Pro Forma Consolidated Financial Statements
Pro Forma Consolidated Financial Statements (unaudited).................. F-40
Pro Forma Consolidated Statement of Operations (unaudited)............... F-41
Notes to Pro Forma Consolidated Financial Statements (unaudited)......... F-42
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Salon.com
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Salon.com and its wholly-owned subsidiary ("Salon") at March 31, 1998 and 1999
and the results of their operations and their cash flows for each of the three
years in the period ended March 31, 1999, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
May 3, 1999
- --------------------------------------------------------------------------------
To the Board of Directors and
Stockholders of Salon.com
The consolidated financial statements included herein have been adjusted to
give effect to the reincorporation of the Company in Delaware as described more
fully in Note 11 to the financial statements. The above report is in the form
that will be signed by PricewaterhouseCoopers LLP upon effectiveness of such
reincorporation assuming that, from May 3, 1999 to the effective date of such
reincorporation, no other events shall have occurred that would affect the
accompanying financial statements or notes thereto.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
May 3, 1999
F-2
<PAGE>
SALON.COM
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
March 31, Equity at
------------------------- March 31,
1998 1999 1999
----------- ------------ -------------
Assets (unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents .......... $ 1,925,664 $ 754,334
Accounts receivable, net ........... 248,113 497,209
Inventories......................... -- 25,449
Prepaid expenses and other current
assets ............................ 138,232 577,985
----------- ------------
Total current assets .............. 2,312,009 1,854,977
Property and equipment, net ........ 371,632 706,559
Other assets ....................... 23,567 136,123
Intangible assets, net.............. -- 1,900,254
----------- ------------
Total assets ...................... $ 2,707,208 $ 4,597,913
=========== ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ................... $ 197,610 $ 1,035,960
Accrued liabilities ................ 79,393 439,498
Deferred revenue ................... 45,832 540,951
Bank borrowings .................... 94,991 363,959
----------- ------------
Total current liabilities ......... 417,826 2,380,368
Bank borrowings, net of current
portion............................ 94,991 75,152
----------- ------------
Total liabilities ................. 512,817 2,455,520
----------- ------------
Commitments and contingencies (Note 9)
Stockholders' Equity:
Convertible preferred stock, no par
value; 6,917,500 and 8,108,750
shares authorized at March 31, 1998
and 1999; 3,449,365 and 4,815,345
shares were issued and outstanding
at March 31, 1998 and 1999,
respectively; none were issued and
outstanding for pro forma
(liquidation preference $13,299,995
at March 31, 1999)................. 7,954,706 12,579,345 $ --
Common stock, $0.001 par value;
12,500,000 shares authorized at
March 31, 1998 and 1999; 50,000,000
shares authorized for pro forma;
375,000, 447,496 and 5,262,841
shares were issued and outstanding
at March 31, 1998 and 1999 and pro
forma, respectively................ 375 448 5,263
Additional paid-in capital ........... 1,109,184 3,146,811 15,721,341
Unearned compensation ................ (623,734) (833,799) (833,799)
Accumulated deficit .................. (6,246,140) (12,750,412) (12,750,412)
----------- ------------ ------------
Total stockholders' equity........ 2,194,391 2,142,393 $ 2,142,393
----------- ------------ ============
Total liabilities and
stockholders' equity ............ $ 2,707,208 $ 4,597,913
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
SALON.COM
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended March 31,
-------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net revenues ........................... $ 279,524 $ 1,155,931 $ 2,921,517
----------- ----------- -----------
Operating expenses:
Production, content, and product....... 1,555,134 2,832,006 4,502,964
Sales and marketing ................... 418,708 1,654,990 3,654,733
Research and development .............. 175,614 276,112 469,117
General and administrative ............ 129,189 291,446 518,291
----------- ----------- -----------
Total operating expenses ............. 2,278,645 5,054,554 9,145,105
----------- ----------- -----------
Loss from operations ................... (1,999,121) (3,898,623) (6,223,588)
Interest expense ....................... (185) (16,340) (53,672)
Other income ........................... 55,071 89,108 44,610
----------- ----------- -----------
Net loss ............................. (1,944,235) (3,825,855) (6,232,650)
Preferred dividend...................... -- -- 271,622
----------- ----------- -----------
Net loss attributable to common
stockholders........................... $(1,944,235) $(3,825,855) $(6,504,272)
=========== =========== ===========
Basic and diluted net loss per share
attributable to common stockholders.... $ (3.84) $ (10.20) $ (16.62)
=========== =========== ===========
Weighted average shares used in
computing basic and diluted net loss
per share attributable to common
stockholders .......................... 506,918 375,000 391,354
=========== =========== ===========
Pro forma basic and diluted net loss per
share attributable to common
stockholders (unaudited)............... $ (1.51)
===========
Weighted average shares used in
computing pro forma basic and diluted
net loss per share attributable to
common stockholders (unaudited) ....... 4,307,886
===========
</TABLE>
The accompanying notes are an integrated part of these financial statements.
F-4
<PAGE>
SALON.COM
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Total
--------------------- ---------------- Paid-In Unearned Accumulated Stockholders'
Shares Amount Shares Amount Capital Compensation Deficit Equity
--------- ----------- -------- ------ ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31,
1996................... 850,000 $ 1,693,025 600,000 $ 600 $ 183,400 $(154,278) $ (476,050) $ 1,246,697
Repurchase of common
stock ................. -- -- (225,000) (225) (150) -- -- (375)
Issuance of Series A
convertible preferred
stock for cash ........ 1,650,000 3,296,002 -- -- -- -- -- 3,296,002
Unearned compensation .. -- -- -- -- 108,000 (108,000) -- --
Amortization of unearned
compensation .......... -- -- -- -- -- 99,183 -- 99,183
Net loss ............... -- -- -- -- -- -- (1,944,235) (1,944,235)
--------- ----------- -------- ----- ---------- --------- ------------ -----------
Balance, March 31,
1997................... 2,500,000 4,989,027 375,000 375 291,250 (163,095) (2,420,285) 2,697,272
Issuance of Series B
convertible preferred
stock for cash ........ 949,365 2,965,679 -- -- -- -- -- 2,965,679
Issuance of preferred
stock warrants in
connection with bank
borrowings............. -- -- -- -- 11,871 -- -- 11,871
Unearned compensation .. -- -- -- -- 806,063 (806,063) -- --
Amortization of unearned
compensation .......... -- -- -- -- -- 345,424 -- 345,424
Net loss ............... -- -- -- -- -- -- (3,825,855) (3,825,855)
--------- ----------- -------- ----- ---------- --------- ------------ -----------
Balance, March 31,
1998................... 3,449,365 7,954,706 375,000 375 1,109,184 (623,734) (6,246,140) 2,194,391
Issuance of Series C
convertible preferred
stock and common stock
warrants for cash...... 902,062 2,824,637 -- -- 614,406 -- -- 3,439,043
Issuance of common stock
upon stock option
exercise .............. -- -- 54,996 55 11,094 -- -- 11,149
Issuance of preferred
stock warrants in
connection with bank
borrowings............. -- -- -- -- 98,539 -- -- 98,539
Issuance of preferred
stock warrants in
connection with online
distribution
agreement.............. -- -- -- -- 217,179 -- -- 217,179
Unearned compensation .. -- -- -- -- 763,729 (763,729) -- --
Amortization of unearned
compensation .......... -- -- -- -- -- 553,664 -- 553,664
Shares issued for
acquisition............ 463,918 1,800,002 -- -- -- -- -- 1,800,002
Shares issued for domain
name................... -- -- 17,500 18 61,058 -- -- 61,076
Preferred dividend...... -- -- -- -- 271,622 -- (271,622) --
Net loss ............... -- -- -- -- -- -- (6,232,650) (6,232,650)
--------- ----------- -------- ----- ---------- --------- ------------ -----------
Balance, March 31, 1999
....................... 4,815,345 $12,579,345 447,496 $ 448 $3,146,811 $(833,799) $(12,750,412) $ 2,142,393
========= =========== ======== ===== ========== ========= ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
SALON.COM
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss ........................... $(1,944,235) $(3,825,855) $(6,232,650)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Expense recognized in connection
with issuance of warrants and
stock options.................... 99,183 345,424 553,664
Depreciation and amortization..... 38,923 114,894 299,184
Loss on disposal of property and
equipment........................ -- 14,888 --
Amortization of discount on bank
borrowings....................... -- 3,627 5,606
Changes in operating assets and
liabilities:
Accounts receivable .............. (19,979) (228,134) (247,281)
Inventories....................... -- -- (25,449)
Prepaid expenses and other assets
................................. (20,860) (105,291) (316,713)
Accounts payable ................. 42,391 113,014 654,585
Accrued liabilities .............. (274) 41,898 316,269
Deferred revenue ................. (2,917) 31,249 495,119
----------- ----------- -----------
Net cash used in operating
activities...................... (1,807,768) (3,494,286) (4,497,666)
----------- ----------- -----------
Cash flows from investing activi-
ties:
Purchase of property and equipment
................................... (81,022) (381,665) (495,405)
Cash received in connection with
acquisition........................ -- -- 29,487
----------- ----------- -----------
Net cash used in investing
activities (81,022) (381,665) (465,918)
----------- ----------- -----------
Cash flows from financing activi-
ties:
Proceeds from issuance of pre-
ferred stock and common stock
warrants, net.................... 3,296,002 2,965,679 3,439,043
Proceeds from issuance of common
stock, net ...................... -- -- 11,149
Repurchase of common stock ....... (375) -- --
Proceeds from bank borrowings .... -- 247,783 461,797
Repayments of bank borrowings .... -- (49,557) (119,735)
----------- ----------- -----------
Net cash provided by financing
activities ..................... 3,295,627 3,163,905 3,792,254
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents............. 1,406,837 (712,046) (1,171,330)
Cash and cash equivalents--begin-
ning of period................... 1,230,873 2,637,710 1,925,664
----------- ----------- -----------
Cash and cash equivalents--end of
period........................... $ 2,637,710 $ 1,925,664 $ 754,334
=========== =========== ===========
Cash paid for interest ........... $ -- $ 12,713 $ 38,571
=========== =========== ===========
Cash paid for income taxes ....... $ 800 $ 800 $ 800
=========== =========== ===========
Non-cash investing and financing
transactions:
Unearned compensation in connection
with the issuance of stock options
.................................. $ 108,000 $ 806,063 $ 763,729
=========== =========== ===========
Issuance of warrants issued in
connection with bank borrowings .. $ -- $ 11,871 $ 98,539
=========== =========== ===========
Issuance of warrants issued in
connection with distribution
agreement ........................ $ -- $ -- $ 217,179
=========== =========== ===========
Value assigned to reciprocal
advertising agreements............ $ -- $ 75,424 $ 472,105
=========== =========== ===========
Issuance of stock in connection
with acquisition.................. $ -- $ -- $ 1,800,002
=========== =========== ===========
Issuance of stock in connection
with acquisition of domain name... $ -- $ -- $ 61,076
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--ORGANIZATION:
Salon.com is an Internet media company that produces a network of ten
subject-specific, demographically targeted Web sites and a variety of online
communities designed to attract Internet advertisers and electronic commerce
partners. Salon was originally incorporated in July 1995 in the State of
California.
On March 29, 1999, Salon.com completed the acquisition of The Well LLC, an
online community business.
Note 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
The consolidated financial statements include the accounts of Salon.com and
its wholly-owned subsidiary ("Salon"). All material intercompany accounts and
transactions have been eliminated in the consolidated financial statements.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash equivalents
Salon considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. The majority of
Salon's cash and cash equivalents are held in checking, money market accounts
or certificates of deposits with one bank. As of March 31, 1999, the balance
exceeded existing federally insured limits.
Inventories
Inventories, which consist solely of finished goods, are stated at the lower
of cost or market. Cost is determined using the first-in, first-out method.
Property and equipment
Property and equipment are recorded at cost. Depreciation and amortization
are computed on the straight-line basis over the estimated useful lives of the
assets, as follows:
<TABLE>
<S> <C>
Computer and network equipment and software.......................... 3 years
Furniture and office equipment....................................... 5 years
</TABLE>
Leasehold improvements are amortized on a straight-line basis over the life
of the lease, or the useful life of the assets; which ever is shorter.
Maintenance and repairs are charged to expense as incurred. When assets are
sold or retired, the cost and related accumulated depreciation are removed from
the accounts and any resulting gain or loss is included in operations.
Intangibles
Intangibles including proprietary technology, tradename and goodwill are
amortized on a straight line basis over two years.
F-7
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Management evaluates the future realization of intangible assets and writes
down any amounts that management deems unlikely to be recovered through future
revenues. Any amounts deemed unrecoverable are written down to the estimated
recoverable amount at the time of evaluation.
Revenue recognition
To date, Salon's revenues have been derived primarily from the sale of
advertising sponsorships and advertising contracts. Sponsorship and advertising
revenues were approximately 99%, 99% and 94% of total revenues for the years
ended March 31, 1997, 1998 and 1999, respectively. Sponsorship revenues are
derived generally from contracts ranging from six to thirty-six months in which
Salon commits to provide sponsors enhanced promotional opportunities beyond
traditional banner advertising. Sponsorship agreements typically include the
delivery of impressions, exclusive relationships and the design and development
of customized co-branded pages designed to enhance the promotional objective of
the sponsor. Revenues are recognized ratably in the period in which the
advertisement is displayed provided that no significant obligations remain. To
the extent that minimum guaranteed page deliveries are not met, Salon defers
recognition of the corresponding revenues on undelivered pages until the pages
are delivered. The cost to design and develop customized co-branded pages,
which are not significant, are recorded in production, content and product
expenses when incurred.
Advertising revenues are derived generally from short-term advertising
contracts in which Salon typically guarantees a minimum number of impressions
to be delivered to users over a specified period of time for a fixed fee.
Advertising revenues are recognized ratably in the period in which the
advertising is displayed, provided that no significant obligations remain. To
the extent that minimum guaranteed page deliveries are not met, Salon defers
recognition of the corresponding revenues until the guaranteed page deliveries
are achieved.
Advertising revenues include barter revenues, which are the exchange by Salon
of advertising space on Salon's Web sites for reciprocal advertising space on
other Web sites. Revenues from these barter transactions are recorded as
advertising revenues at the estimated fair value of the advertisements received
or delivered, whichever is more reliably measurable, and are recognized when
the advertisements are run on Salon's Web sites. Barter expenses are recorded
in sales and marketing in the consolidated statements of operations when
Salon's advertisements are run on the reciprocal Web sites, which is typically
in the same period as when advertisements are run on Salon's Web sites. There
was no barter revenue in 1997. Barter revenues represented 7% and 16% of net
revenues for the years ended March 31, 1998 and 1999, respectively.
Certain agreements may provide that Salon receives commissions on revenues
generated from electronic commerce transactions and shares in advertising
revenue generated on co-branded pages. These revenues are recognized by Salon
upon notification from the advertiser or distribution partner which
notification is generally received quarterly.
Revenues related to sales from Salon's online store are recognized when goods
are shipped. Revenues related to the syndication and licensing of Salon content
to other media outlets are recognized on notification that the content has been
published. Subscription revenues are recognized ratably over the period that
services are to be provided.
Research and development
Research and development expenditures are charged to expense as incurred.
F-8
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Advertising Costs
Salon expenses advertising costs as they are incurred. Advertising expense
was $9,000, $75,512 and $628,682 for the years ended March 31, 1997, 1998 and
1999, respectively. Of these total expenses, barter advertising costs
represented zero, $75,424 and $472,105 for the years ended March 31, 1997, 1998
and 1999, respectively.
Income taxes
Salon recognizes deferred taxes by the asset and liability method of
accounting for income taxes. Under the asset and liability method, deferred
income taxes are recognized for differences between the financial statement and
tax basis of assets and liabilities at enacted statutory tax rates in effect
for the years in which the differences are expected to reverse. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. In addition, valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
Stock-based compensation
Salon accounts for its stock-based compensation in accordance with the
provisions of Accounting Principles Board Opinion No. 25 ("APB No. 25"),
"Accounting for Stock Issued to Employees" and presents disclosure required by
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"),
"Accounting for Stock-Based Compensation."
Financial instruments
The carrying amounts of Salon's financial instruments, including cash and
cash equivalents, accounts receivable, accounts payable and accrued
liabilities, approximate fair value because of their short maturities. Fair
value of bank borrowings approximates carrying value because borrowings bear
interest at current market rates.
Concentrations
Financial instruments which potentially subject Salon to concentrations of
credit risk consist principally of trade accounts receivable. Salon performs
ongoing credit evaluations, but does not require collateral. Salon provides an
allowance for credit losses. The credit losses have not been significant to
date.
Salon relies on a number of third party suppliers for various services,
including Web hosting, banner advertising, delivery software, Internet traffic
measurement software and electronic commerce fulfillment services. While Salon
believes it could obtain these services from other qualified suppliers on
similar terms and conditions, a disruption in the supply of these services by
the current suppliers could materially harm the business.
Salon currently has the following concentrations of net revenues and trade
accounts receivable:
Net revenues
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------------------
Customer 1997 1998 1999
-------- ------ ------ ------
<S> <C> <C> <C>
A 71% 37% 13%
B -- 16% --
</TABLE>
F-9
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Trade accounts receivable
<TABLE>
<CAPTION>
March 31,
------------------------------------------------------------------
Customer 1997 1998 1999
-------- ---- ---- ----
<S> <C> <C> <C>
A 42% -- --
B 21% -- --
C 21% -- --
D 16% 58% --
E -- 11% 11%
F -- -- 11%
G -- -- 19%
H -- -- 11%
</TABLE>
Net loss per share and pro forma earnings per share
Basic earnings per share is computed using the weighted-average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted-average number of common and common stock
equivalent shares outstanding during the period. Common equivalent shares are
excluded from the computation if their effect is antidilutive. The pro forma
earnings per share is computed by dividing the net loss by the sum of the
weighted-average number of shares of common stock outstanding and the weighted-
average number of shares resulting from the automatic conversion of all
outstanding shares of convertible preferred stock upon the closing of a sale of
Salon's securities in an underwritten registered public offering with proceeds
of at least $15 million and an offering price per share to the public equal to
or greater than $11.64 appropriately adjusted for stock dividends, stock splits
and the like.
Diluted net loss per share attributable to common stockholders for the years
ended March 31, 1997, 1998 and 1999 does not include the effect of 485,000,
1,561,510 and 1,683,593 stock options, respectively, and zero, 8,750 and
333,752 common stock warrants, respectively, or 2,500,000, 3,449,366 and
4,815,345 shares of convertible preferred stock on an "as if converted" basis,
respectively, as the effect of their inclusion is antidilutive during each
period.
Pro forma stockholders' equity (unaudited)
The pro forma stockholders' equity as of March 31, 1999 reflects the
conversion of all outstanding convertible preferred stock into an aggregate of
5,262,841 shares of common stock.
Comprehensive income
Salon adopted the provisions of SFAS No. 130, Reporting Comprehensive Income,
("SFAS No. 130"). This statement requires companies to classify items of other
comprehensive income by their nature in the financial statements and display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. To date Salon has not had any transactions that are
required to be reported in comprehensive income.
Recent accounting pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, Disclosure About Segments of an Enterprise and Required Information,
("SFAS No. 131"), which established standards for reporting information about
operating segments in annual financial statements. It also establishes
standards for related disclosures about products and services, geographic area
and major customers. The adoption of SFAS No. 131 in fiscal 1999 did not have
an impact on Salon's financial statement disclosures since Salon operates in
only one business segment.
F-10
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1
is effective for financial statements for years beginning after December 15,
1998. SOP 98-1 provides guidance over accounting for computer software
developed or obtained for internal use including the requirement to capitalize
specified costs and amortization of such costs. Salon does not expect the
adoption of this standard to have a material impact on Salon's results of
operations, financial position or cash flows.
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-up
Activities ("SOP 98-5"). SOP 98-5, which is effective for fiscal years
beginning after December 15, 1998, provides guidance on the financial reporting
of start-up costs and organization costs. It requires costs of start-up
activities and organization costs to be expensed as incurred. As Salon has
historically expensed these costs, the adoption of SOP 98-5 is not expected to
have a significant impact on Salon's results of operations, financial position
or cash flows.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"), which establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives), and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters for fiscal years beginning after June 15,
1999. Salon is assessing the potential impact of this pronouncement on its
financial statements; however, they do not expect any significant impact since
Salon currently does not have any derivative instruments and does not
anticipate acquiring any.
F-11
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
March 31,
---------------------
1998 1999
--------- ----------
<S> <C> <C>
Accounts receivable, net:
Accounts receivable.................................... $ 248,113 $ 526,807
Less: Allowance for doubtful accounts.................. -- (29,598)
--------- ----------
$ 248,113 $ 497,209
========= ==========
Prepaid expenses and other current assets:
Prepaid advertising.................................... $ -- $ 404,669
Other.................................................. 138,232 173,316
--------- ----------
$ 138,232 $ 577,985
========= ==========
Property and equipment, net:
Computer and network equipment and software............ $ 391,133 $ 900,882
Furniture and office equipment......................... 115,923 167,110
Leasehold improvements................................. 21,122 33,221
--------- ----------
528,178 1,101,213
Less accumulated depreciation and amortization......... (156,546) (394,654)
--------- ----------
$ 371,632 $ 706,559
========= ==========
Intangible assets, net:
Tradename.............................................. $ -- $1,200,000
Goodwill............................................... -- 345,254
Proprietary technology................................. -- 305,000
Subscriber list........................................ -- 50,000
--------- ----------
-- 1,900,254
Less accumulated amortization.......................... -- --
--------- ----------
$ -- $1,900,254
========= ==========
Accrued liabilities:
Accrued compensation and related benefits.............. $ 43,707 $ 151,695
Other accruals......................................... 35,686 287,803
--------- ----------
$ 79,393 $ 439,498
========= ==========
</TABLE>
Note 4--ACQUISITION OF THE WELL:
Salon completed the acquisition of The Well LLC, an online community
business, March 29, 1999 for 463,918 shares of Series C preferred stock valued
at $3.88 per share. Salon also incurred acquisition costs of $113,938 related
to the transaction. Salon's acquisition of The Well LLC was accounted for using
the purchase method of accounting.
F-12
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The allocation of Salon's aggregate purchase price to the tangible and
identifiable intangible assets acquired and liabilities assumed in connection
with this acquisition were based on fair values as determined by independent
appraisers. The allocation is summarized below:
<TABLE>
<S> <C>
Trade name..................................................... $1,200,000
Subscriber list................................................ 50,000
Proprietary technology including billing, conferencing and
text-based system software.................................... 305,000
Goodwill....................................................... 345,254
Property and equipment......................................... 77,630
Net current liabilities assumed................................ (63,944)
----------
Total purchase price........................................... $1,913,940
==========
</TABLE>
The identifiable intangible assets and goodwill are being amortized on a
straight line basis over the estimated period of benefit of two years.
The following unaudited pro forma financial information presents the
consolidated results of Salon.com as if the Well acquisition had occurred at
the beginning of each period, and includes adjustments for amortization of
goodwill and other intangible assets. This pro forma financial information is
not intended to be indicative of future results. Unaudited pro forma
consolidated results of operations are as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------
1998 1999
----------- -----------
(unaudited)
<S> <C> <C>
Net revenues..................................... $ 1,673,533 $ 3,406,177
Net loss attributable to common stockholders..... (4,884,355) (7,523,387)
Basic and diluted net loss per share attributable
to common stockholders.......................... (13.02) (19.22)
</TABLE>
Note 5--BANK BORROWINGS:
In April 1997, Salon entered into a borrowing agreement with a bank which
provides for borrowings up to $500,000 for working capital and equipment
advances. Borrowings bear interest at the bank's prime rate plus 0.5% and are
collateralized by all assets of Salon, including intellectual property. As of
March 31, 1998 and 1999, the principal balances for equipment advances
outstanding under this agreement were $198,226 and $99,113 bearing interest at
8.25%. Borrowings are repayable in monthly installments of principal plus
accrued interest through March 31, 2000. According to the terms of the
agreement, Salon is required to meet certain financial covenants including
minimum net worth and working capital levels.
In connection with the borrowing agreement, Salon issued a warrant to
purchase 8,750 shares of its Series A preferred stock at an exercise price of
$2.00 per share. The warrant expires on April 14, 2002. Salon valued the
warrant, using the Black-Scholes option pricing model, applying an expected
life of 5 years, a weighted average risk-free interest rate of 6.51%, an
expected dividend yield of zero percent and a volatility of 79%. The fair value
was recorded as a discount to the amount borrowed and is being amortized to
interest expense over the term of the borrowing agreement using the effective
interest method.
In April 1998, Salon entered into an additional borrowing agreement with the
same bank which provides for revolving loans of the lesser of $250,000 plus 80%
of eligible accounts receivable as defined by the bank or $500,000. The
revolving borrowing amount was increased to a maximum of $1,000,000 upon the
closing of Salon's Series C financing on April 14, 1999. These borrowings bear
interest at the bank's prime rate. The agreement also provides for an equipment
term loan up to $300,000. Borrowings under this equipment term
F-13
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
loan bear interest at the bank's prime rate plus 0.5%. As of March 31, 1999,
Salon has drawn $210,841 against the equipment loan and $220,839 against the
revolving borrowing amount. According to the terms of the agreement, Salon is
required to meet certain covenants including minimum net worth and working
capital levels.
In connection with this borrowing agreement, Salon issued a warrant to
purchase 11,867 shares of Salon's Series B preferred stock at an exercise price
of $3.16 per share. The warrant expires on June 8, 2005. Salon valued the
warrant, using the Black-Scholes option pricing model, applying an expected
life of 7 years, a weighted average risk-free interest rate of 5.64%, an
expected dividend yield of zero percent and a volatility of 107%. The fair
value was recorded as a discount to the amount borrowed and is being amortized
to interest expense over the term of the borrowing agreement using the
effective interest method.
In connection with the borrowing agreements, Salon issued a warrant to
purchase 5,250 shares of Salon's Series C preferred stock at an exercise price
of $3.88 per share. As of March 31, 1999, an additional 9,189 shares became
issuable under the warrant determined in accordance with certain financing
thresholds. The warrant expires December 17, 2005. Salon valued the warrant,
using the Black-Scholes option pricing model, applying an expected life of 7
years, a weighted average risk-free interest rate of 5.06%, an expected
dividend yield of zero percent and a volatility of 107%. The fair value was
recorded as a discount to the amount borrowed and is being amortized to
interest expense over the term of the borrowing agreement using the effective
interest method.
Scheduled annual repayments of principal subsequent to March 31, 1999,
respectively, are as follows:
<TABLE>
<CAPTION>
1999
---------
<S> <C>
2000.............................................................. $ 440,434
2001.............................................................. 90,359
---------
530,793
Less unamortized discount......................................... (91,682)
---------
439,111
Less current portion.............................................. (363,959)
---------
$ 75,152
=========
</TABLE>
Note 6--STOCKHOLDERS' EQUITY:
Convertible preferred stock is composed of the following:
<TABLE>
<CAPTION>
Shares Issued and
Outstanding
-------------------
March 31,
Shares -------------------
Series Authorized 1998 1999
------ ---------- --------- ---------
<S> <C> <C> <C>
A............................................. 2,508,750 2,500,000 2,500,000
B............................................. 1,100,000 949,365 949,365
C............................................. 4,500,000 -- 1,365,980
--------- --------- ---------
8,108,750 3,449,365 4,815,345
========= ========= =========
</TABLE>
The liquidation amounts for the Series A, B, and C preferred stocks as of
March 31, 1999 were $5,000,000, $2,999,993 and $5,300,002, respectively.
F-14
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The holders of preferred stock have various rights and preferences as
follows:
Dividends and participation rights
The holders of Series A preferred stock are entitled to receive dividends in
preference to any dividend on common stock, at an annual rate equal to $0.16
per share, the holders of Series B preferred stock are entitled to receive
dividends in preference to any dividend on common stock, at an annual rate
equal to $0.252 per share, and the holders of Series C preferred stock are
entitled to receive dividends in preference to any dividend on common stock, at
an annual rate of $0.31 per share. In addition, preferred stockholders are
entitled to participate in distributions to common stockholders in an amount
per share as would be payable on the number of shares of common stock into
which each share of preferred stock could be converted. Such dividends are
noncumulative and no dividends have been declared or paid to date.
Liquidation preference
In the event of any liquidation, dissolution, or winding up of Salon, either
voluntarily or involuntarily, the holders of Series C preferred stock are
entitled to receive, in preference to the holders of Series A and Series B
preferred stock and common stock, an amount equal to $3.88 per share of Series
C preferred stock, plus all declared but unpaid dividends, if any. The holders
of Series A preferred stock are entitled to receive, in preference to the
holders of common stock, an amount equal to $2.00 per share of Series A
preferred stock plus all declared but unpaid dividends, if any. The holders of
Series B preferred stock are entitled to receive in preference to the holders
of common stock, an amount equal to $3.16 per share of Series B preferred stock
plus all declared but unpaid dividends. Once such liquidation preference has
been paid, holders of Series A, Series B and Series C preferred stock are
entitled to receive assets and funds of Salon in proportion to the number of
shares of common stock as if converted pursuant to the following paragraph.
Conversion rights
Each share of Series A, Series B and Series C preferred stock shall be
convertible at the option of the holder into shares of common stock at any
time. The number of shares of common stock into which each share of Series A,
Series B or Series C preferred stock may be converted shall be determined
dividing $2.00, $3.16 and $3.88, respectively, by the conversion price in
effect on the date the stock certificate is surrendered for conversion. The
conversion price per share of Series A preferred stock initially shall be
$2.00, the conversion price per share of Series B preferred stock initially
shall be $3.16, and the conversion price per share of Series C preferred stock
initially shall be $3.88. Each share of preferred stock shall automatically be
converted into fully paid and nonassessable shares of common stock of Salon at
the conversion price then in effect for such series of preferred stock at any
time during the conversion period immediately upon the earlier of: (i) the
closing of a sale of Salon's securities in an underwritten registered public
offering with proceeds to Salon of at least $15 million and an offering price
per share to the public equal to or greater than $11.64 appropriately adjusted
for stock dividends, stock splits, stock combinations and the like; (ii) the
date on which the holders of at least two-thirds of the then outstanding shares
of Series C preferred stock (determined on an as-converted basis) consent in
writing to such conversion; or (iii) at such time as less than an aggregate of
250,000, 90,000 or 375,000 shares of Series A, Series B or Series C preferred
stock, respectively, are outstanding.
The preferred stock also carries provisions which protect the holders of such
securities from dilution caused by capital reorganization, stock splits, or
other such capital changes.
Voting rights
The holders of preferred stock are entitled to vote on all matters and are
entitled to the number of votes equal to the number of shares of common stock
into which the preferred stock could be converted pursuant to the conversion
rights.
F-15
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As long as more than 250,000 shares of Series A preferred stock are
outstanding, the holders of Series A preferred stock, voting as a separate
class, have the right to elect one member of the Board of Directors. As long as
more than 250,000 shares of Series B preferred stock are outstanding, the
holders of Series B preferred stock, voting as a separate class, have the right
to elect one member of the Board of Directors. As long as more than 250,000
shares of Series C preferred stock are outstanding, the holders of Series C
preferred stock, voting as a separate class, have the right to elect one member
of the Board of Directors.
Holders of common stock, voting as a separate class, have the right to elect
two members of the Board of Directors. The holders of common stock and
preferred stock, voting together as a separate class, have the right to elect
the remaining members of the Board of Directors.
Common stock reserved
Salon had reserved shares of common stock for the following:
<TABLE>
<CAPTION>
March 31,
-------------------
1998 1999
<S> <C> <C>
Stock option plan........................................ 1,875,000 1,875,000
Warrants................................................. 8,750 333,752
Convertible preferred stock.............................. 3,449,365 4,815,345
--------- ---------
5,333,115 7,024,097
========= =========
</TABLE>
Warrants
In July 1998, Salon issued a warrant to purchase 79,114 shares of Series B
preferred stock at an exercise price of $3.16 per share in connection with an
online distribution agreement. The warrant may be exercised at any time within
5 years after issuance. Salon valued the warrant using the Black-Scholes option
pricing model, applying an expected life of 7 years, a weighted average risk-
free interest rate of 5.28%, an expected dividend yield of zero percent and a
volatility of 107%. The fair value of $217,179 was recorded in prepaid expenses
and other current assets and is being amortized to sales and marketing expense
over the term of the agreement.
In September and November 1998, Salon issued warrants to purchase up to
219,582 shares of common stock at an exercise price of $0.52 per share in
connection with the sale of Series C convertible preferred stock. The
exercisability of 146,389 of the warrants was contingent on Salon not
consummating an equity financing within a specified period, as defined in the
agreement. As of March 31, 1999 the warrants to acquire 146,389 shares of
common stock were exercisable. The warrants expire in September 2008. Salon
valued the warrants using the Black-Scholes option pricing model, applying an
expected life of 10 years, a weighted average risk free interest rate of 5.04%,
an expected dividend yield of zero percent and a volatility of 107%. The fair
value of the total warrants to purchase 219,582 shares of common stock of
$614,406 was recorded as additional paid-in capital. The allocation of proceeds
between convertible preferred stock and warrants results in a beneficial
conversion feature in the amount of $271,622. The beneficial conversion feature
was reflected as a preferred dividend in the statement of operations.
F-16
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about common stock warrants
outstanding at March 31, 1999:
<TABLE>
<CAPTION>
Warrants Outstanding Warrants Exercisable
at March 31, 1999 at March 31, 1999
--------------------------------- ---------------------
Weighted-
Average Weighted- Weighted-
Range of Number of Remaining Average Number Average
Exercise Shares Contractual Exercise of Shares Exercise
Prices Outstanding Life Price Exercisable Price
-------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.52 219,582 9.71 years $0.52 219,582 $0.52
======= =======
The following table summarizes information about preferred stock warrants
outstanding at March 31, 1999:
<CAPTION>
Warrants Outstanding Warrants Exercisable
at March 31, 1999 at March 31, 1999
--------------------------------- ---------------------
Weighted-
Average Weighted- Weighted-
Range of Number of Remaining Average Number Average
Exercise Shares Contractual Exercise of Shares Exercise
Prices Outstanding Life Price Exercisable Price
-------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$2.00 8,750 5.00 years $2.00 8,750 $2.00
$3.16 90,981 5.26 years $3.16 90,981 $3.16
$5.26 14,439 6.82 years $5.26 14,439 $5.26
------- -------
114,170 5.44 years $3.34 114,170 $3.34
======= =======
</TABLE>
Note 7--EMPLOYEE STOCK OPTION PLAN:
In 1995, Salon's Board of Directors adopted the 1995 Stock Option Plan (the
"Plan"). The Plan provides for the granting of stock options to employees and
consultants of Salon. Options granted under the Plan may be either incentive
stock options ("ISO") or non-qualified stock options ("NSO"). ISOs may be
granted only to Salon employees (including officers and directors who are also
employees). NSOs may be granted to Salon employees as well as non-employee
consultants. The exercise price of each option is determined by the Board of
Directors and the maximum term for each option is 10 years. Options generally
vest over a four year period.
F-17
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes activity under Salon's Plan from inception
through March 31, 1999:
<TABLE>
<CAPTION>
Outstanding Options
----------------------------------------------------
Weighted- Weighted-
Shares Average Average
Available Number of Price Per Aggregate Exercise Deemed
for Grant Shares Share Price Price Fair Value
---------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Shares reserved for
grant.................. 1,875,000
Options granted......... (355,000) 355,000 $ .20 $ 71,000 $.20 $ .80
Options terminated...... 50,000 (50,000) $ .20 (10,000) $.20 $ .80
---------- --------- --------- -------- ---- -----
Balance March 31, 1996.. 1,570,000 305,000 $ .20 61,000 $.20 $ .80
Options granted......... (190,000) 190,000 $ .20 38,000 $.20 $ .80
Options terminated...... 10,000 (10,000) $ .20 (2,000) $.20 $ .80
---------- --------- --------- -------- ---- -----
Balance March 31, 1997.. 1,390,000 485,000 $ .20 97,000 $.20 $ .80
Options granted......... (1,135,000) 1,135,000 $.20-$.32 239,600 $.22 $ .90
Options terminated...... 58,490 (58,490) $ .20 (11,698) $.20 $ .80
---------- --------- --------- -------- ---- -----
Balance March 31, 1998.. 313,490 1,561,510 $.20-$.32 324,902 $.20 $ .86
Options granted......... (376,250) 376,250 $.32-$.52 146,650 $.38 $2.72
Options terminated...... 199,171 (199,171) $.20-$.52 (56,184) $.28 $1.10
Options exercised....... -- (54,996) $.20-$.32 (11,149) $.20 $ .92
---------- --------- --------- -------- ---- -----
Balance March 31, 1999.. 136,411 1,683,593 $.20-$.52 $404,219 $.24 $1.20
========== ========= ========= ======== ==== =====
</TABLE>
In connection with the grant of options for the purchase of common stock to
employees during the period from July 27, 1995 (inception) through March 31,
1999, Salon recorded aggregate unearned compensation of $1,494,190 representing
the difference between the deemed fair value of the common stock and the option
exercise price at date of grant. Such unearned compensation will be amortized
over the vesting period relating to these options. Salon amortized $99,183,
$321,428 and $428,995 in the years ended March 31, 1997, 1998 and 1999,
respectively.
F-18
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In connection with the grant of options for the purchase of common stock to
non-employees during the period from April 1, 1997 through March 31, 1999,
Salon recorded compensation in accordance with Emerging Issues Task Force 96-18
and SFAS No. 123. As of March 31, 1999, Salon has recorded aggregate deferred
compensation of $366,602 related to these options. Such deferred compensation
will be amortized over the vesting period relating to these options. Salon
amortized $23,996 and $124,669 in the years ended March 31, 1998 and 1999,
respectively.
The following table summarizes information about stock options outstanding at
March 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding at Options Exercisable at
March 31, 1999 March 31, 1999
-------------------------------------- ------------------------
Weighted-
Average Weighted- Weighted-
Range of Number of Remaining Average Number of Average
Exercise Shares Contractual Exercise Shares Exercise
Prices Outstanding Life Price Exercisable Price
-------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$.20 1,314,843 8.04 years $.20 691,487 $.20
$.32 252,500 9.38 years $.32 13,460 $.32
$.52 116,250 9.84 years $.52 -- $.52
--------- -------
1,683,593 8.36 years $.24 704,948 $.20
========= =======
</TABLE>
At March 31, 1996, 1997 and 1998, options to purchase zero, 90,651 and
424,732 shares of common stock, respectively, were exercisable. The weighted-
average exercise price of the 1997 and 1998 options was $0.20.
Salon accounts for the options in accordance with APB No. 25. The following
information concerning the Plan is provided in accordance with SFAS No. 123.
The weighted-average grant date fair value of stock options granted was $.04,
$.04 and $.08 for the years ended March 31, 1997, 1998 and 1999, respectively.
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following weighted-average assumptions used
for grants in years ended March 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
Year Ended
March 31,
----------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rates................................... 5.88% 6.10% 5.66%
Expected lives (in years).................................. 4 4 4
Dividend yield............................................. 0 0 0
</TABLE>
Using the above method and assumptions, had Salon accounted for compensation
expense according to SFAS No. 123, the pro forma net loss would be as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net loss attributable to common
stockholders:
As reported....................... $(1,944,235) $(3,825,855) $(6,504,272)
Pro forma......................... $(1,953,294) $(3,846,385) $(6,524,315)
Basic and diluted net loss
attributable to common stockholders
per share:
As reported....................... $ (3.84) $ (10.20) $ (16.62)
Pro forma......................... $ (3.85) $ (10.26) $ (16.67)
</TABLE>
F-19
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 8--401(k) SAVINGS PLAN:
Salon's 401(k) Savings Plan (the "401(k) Plan") is a defined contribution
retirement plan intended to qualify under Sections 401(a) and 401(k) of the
Internal Revenue Code. All full-time employees of Salon are eligible to
participate in the 401(k) Plan pursuant to the terms of the Plan. Participants
may contribute from 1% to 15% of compensation, subject to statutory
limitations. Employer matching contributions are discretionary based on a
certain percentage of a participant's contributions as determined by management
of Salon. Salon has not made any discretionary contributions to the 401(k) Plan
for the years ended March 31, 1997, 1998 and 1999.
Note 9--COMMITMENTS AND CONTINGENCIES:
Lease obligations
Salon has entered into two separate non-cancelable operating lease agreements
for office space. The contracts provide for adjustments or escalations based
upon changes in consumer price indices or operating expenses.
Rent expenses under operating lease agreements was $64,750, $147,710 and
$284,395 for the years ended March 31, 1997, 1998 and 1999, respectively.
Future minimum rental payments under operating leases are as follows:
<TABLE>
<CAPTION>
Year Ending March 31,
---------------------
<S> <C>
2000.............................................................. $ 332,695
2001.............................................................. 346,305
2002.............................................................. 367,876
2003.............................................................. 177,899
2004.............................................................. 182,856
Thereafter........................................................ --
----------
$1,407,631
==========
</TABLE>
Contingencies
From time to time, Salon may have certain contingent liabilities that arise
in the ordinary course of its business activities. Salon accrues contingent
liabilities when it is probable that future expenditures will be made and such
expenditures can be reasonably estimated. In the opinion of management, there
are no pending claims of which the outcome is expected to have a material
adverse effect on the financial position or results of operations of Salon.
F-20
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 10--INCOME TAXES:
Salon has no income tax provision for the years ended March 31, 1997, 1998
and 1999 due to reported net operating losses.
Salon's deferred tax assets are as follows:
<TABLE>
<CAPTION>
March 31,
------------------------
1998 1999
----------- -----------
<S> <C> <C>
Net operating loss carryforward.................. $ 2,460,000 $ 4,319,000
Temporary differences principally deferred
revenue and reserves............................ 12,000 258,577
----------- -----------
2,472,000 4,577,577
Valuation allowance.............................. (2,472,000) (4,577,577)
----------- -----------
Net deferred tax asset......................... $ -- $ --
=========== ===========
</TABLE>
Due to uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, a valuation allowance has been provided
against deferred tax assets as March 31, 1998 and 1999.
At March 31, 1999, Salon has net operating loss carryforwards of
approximately $11,224,000 for federal and $8,712,000 for state income tax
purposes. These carryforwards expire by 2019 and 2006, respectively.
For federal and state tax purposes, a portion of Salon's net operating loss
carryforward may be subject to certain limitations on annual utilization due to
changes in ownership, as defined by federal and state tax laws.
Note 11--SUBSEQUENT EVENTS:
Offering of Series C preferred stock
On April 14, 1999, Salon completed an additional offering of Series C
preferred stock. Pursuant to this offering, a total of 2,967,782 additional
shares of Series C preferred stock were sold at a price of $3.88 per share, for
total proceeds to Salon of $11,515,000. The holders of these Series C preferred
stock have the same rights as those holders of the Series C shares issued prior
to March 31, 1999 as discussed in Note 6. In connection with investment broker
services provided during this offering Salon issued warrants to entities
affiliated with Daiwa Securities America, Inc. to purchase an aggregate of
148,389 shares of Series C preferred stock at an exercise price of $3.88 per
share. The warrants may be exercised at any time within five years after
issuance. Upon completion of this offering, the warrants will convert into the
right to purchase an equivalent number of shares of Salon's common stock at the
same exercise price. Salon valued the warrant using the Black-Scholes option
pricing model, applying an expected life of 5 years, a weighted average risk-
free interest rate of 5.14%, an expected dividend yield of zero percent and a
volatility of 107%. The fair market value of $440,555 will be netted against
the proceeds from the offering.
On April 14, 1999, in connection with marketing consulting services to be
provided to Salon, a warrant was issued to ACT III Communications to purchase
25,773 shares of Series C preferred stock at an exercise price of $3.88 per
share. The warrant may be exercised at any time within five years after
issuance. Upon completion of this offering, the warrant will convert into the
right to purchase an equivalent number of shares of Salon's common stock at the
same exercise price per share. Salon will value the warrant using the
Black-Scholes model and record compensation over the service period.
F-21
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Employee Stock Purchase Plan and Option Plan
In April 1999, Salon adopted an Employee Stock Purchase Plan (the "ESPP") to
provide substantially all employees whose customary employment is more than 20
hours per week for more than five months in any calendar year eligibility to
purchase shares of its common stock through payroll deductions, up to 10% of
eligible compensation. Participant account balances are used to purchase shares
of Salon common stock at the lesser of 85 percent of the fair market value of
shares on either the first day or the last day of the designated payroll
deduction period (the Offering Period), as chosen by the Board of Directors at
is discretion, whichever is lower. The aggregate number of shares purchased by
an employee may not exceed 1,000 shares in any one Offering Period, generally
12 months or less (subject to limitations imposed by the Internal Revenue
Code). A total of 500,000 shares are available for purchase under the ESPP.
1995 Stock Option Plan
On April 8, 1999, Salon's board of directors and stockholders approved a
1,000,000 share increase in the number of shares issuable under the 1995 Stock
Option Plan.
Reincorporation and stock splits
On April 8, 1999, Salon's Articles of Incorporation were amended to (i)
increase the amount of authorized shares of preferred stock to 8,108,750 and
common stock to 12,500,000, (ii) increase the number shares of preferred stock
designated as Series C to 4,500,000, (iii) effect a 1.35567 for 1 stock split
of each outstanding share of Series C preferred stock and (iv) modify the
rights, preferences, privileges and restrictions granted to or imposed on the
Series A, Series B and Series C preferred stock. In conjunction with the
increase in Series C, 4,500,000 shares of Salon's common stock were reserved
for issuance upon conversion of the Series C preferred stock.
In April 1999, Salon approved reincorporating in Delaware, changing the name
to Salon.com, and effected a one for two split of its common and preferred
stock. In connection with the reincorporation, Salon authorized (i) an increase
in the amount of authorized shares of common stock to 50,000,000 and (ii)
5,000,000 shares of a new class of preferred stock. All share data and stock
option plan information has been restated to reflect the splits and the
reincorporation.
F-22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of The Well LLC
In our opinion, the accompanying balance sheets and the related statements of
operations, of members' interest and of cash flows present fairly, in all
material respects, the financial position of The Well LLC at December 31, 1997
and 1998 and the results of its operations and its cash flows for the period
from July 1, 1997 to December 31, 1997 and for the year ended December 31, 1998
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
March 3, 1999
F-23
<PAGE>
THE WELL LLC
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------
March 29,
1997 1998 1999
-------- --------- -----------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash ....................................... $ 10,661 $ 11,455 $ 29,487
Accounts receivable, net of allowance for
doubtful accounts of $1,600, $1,800 and
$1,825, respectively....................... 8,733 4,427 1,790
Related party receivables .................. 29,824 24,650 15,192
Prepaid expenses and other current assets .. 2,100 1,213 3,249
-------- --------- ---------
Total current assets ..................... 51,318 41,745 49,718
Property and equipment, net .................. 121,636 87,295 77,630
-------- --------- ---------
Total assets ............................. $172,954 $ 129,040 $ 127,348
======== ========= =========
Liabilities
Current liabilities:
Accounts payable ........................... $ 4,998 $ 2,647 $ 69,827
Related party payables ..................... 2,100 9,703 4,725
Accrued liabilities ........................ 69,337 87,550 33,131
Deferred revenue ........................... 9,037 10,646 5,640
-------- --------- ---------
Total current liabilities ................ 85,472 110,546 113,323
-------- --------- ---------
Members' Interest
Members' interest .......................... 154,909 154,909 164,909
Accumulated deficit ........................ (67,427) (136,415) (150,884)
-------- --------- ---------
Total members' interest .................. 87,482 18,494 14,025
-------- --------- ---------
Total liabilities and members' interest .. $172,954 $ 129,040 $ 127,348
======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
THE WELL LLC
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the For the
Period from period period
July 1, 1997 Year ended January 1 to January 1 to
to December 31, December 31, March 31, March 29,
1997 1998 1998 1999
--------------- ------------ ------------ -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Subscription revenues... $ 267,022 $ 484,660 $ 137,183 $ 118,036
Operating expenses:
Cost of subscription
revenues............. 124,685 217,537 40,963 52,063
Selling and marketing
..................... 45,475 78,044 14,940 18,678
General and
administrative....... 164,289 258,067 53,975 61,764
--------- --------- --------- ---------
Total operating
expenses........... 334,449 553,648 109,878 132,505
--------- --------- --------- ---------
Net income (loss)....... $ (67,427) $ (68,988) $ 27,305 $ (14,469)
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
THE WELL LLC
STATEMENTS OF MEMBERS' INTEREST
<TABLE>
<CAPTION>
Members' Interest
-------------------
Whole Earth
Lectronic Bruce Accumulated
Link, Inc. Katz Deficit Total
----------- ------- ----------- --------
<S> <C> <C> <C> <C>
Capital contributions .............. $144,909 $10,000 $ -- $154,909
Net loss for the period July 1, 1997
to December 31, 1997 .............. -- -- (67,427) (67,427)
-------- ------- --------- --------
Balance at December 31, 1997 ....... 144,909 10,000 (67,427) 87,482
Net loss ........................... -- -- (68,988) (68,988)
-------- ------- --------- --------
Balance at December 31, 1998 ....... 144,909 10,000 (136,415) 18,494
Capital contribution ............... 10,000 -- -- 10,000
Net loss for the period from January
1, 1999 to March 29, 1999.......... -- -- (14,469) (14,469)
-------- ------- --------- --------
Balance at March 29, 1999........... $154,909 $10,000 $(150,884) $ 14,025
======== ======= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
THE WELL LLC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the
Period from period For the period
July 1, 1997 to Year ended January 1 January 1
December 31, December 31, to March 31, to March 29,
1997 1998 1998 1999
--------------- ------------ ------------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities
Net income (loss)..... $(67,427) $(68,988) $ 27,305 $(14,469)
Adjustments to
reconcile net loss to
net cash provided by
(used in) operating
activities:
Bad debt expense.... 1,600 200 2,000 25
Depreciation........ 26,902 44,001 13,856 11,000
Write-off of
property and
equipment.......... 4,237 2,378 -- --
Changes in operating
assets and
liabilities:
Accounts
receivable........ (10,333) 4,106 (29,326) 2,612
Related party
receivables....... (29,824) 11,469 (4,632) 9,458
Prepaid expenses
and other current
assets............ (1,378) (5,408) (4,742) (2,036)
Accounts payable... 4,998 (2,351) 391 67,180
Related party
payables.......... 2,100 7,603 (371) (4,978)
Accrued
liabilities....... 55,405 18,213 (22,136) (54,419)
Deferred revenue... 9,037 1,609 (7,508) (5,006)
-------- -------- -------- --------
Net cash provided
by (used in)
operating
activities...... (4,683) 12,832 (25,163) 9,367
-------- -------- -------- --------
Cash flows from
investing activities:
Acquisition of
property and
equipment ........... (9,764) (12,038) -- (1,335)
-------- -------- -------- --------
Net cash used in
investing
activities...... (9,764) (12,038) -- (1,335)
-------- -------- -------- --------
Cash flows from
financing activities:
Contributions from
members ............. 25,108 -- -- 10,000
Borrowings under bank
overdraft facility... -- -- 14,502 --
-------- -------- -------- --------
Net cash provided
by financing
activities ..... 25,108 -- 14,502 10,000
-------- -------- -------- --------
Net increase
(decrease) in
cash ........... 10,661 794 (10,661) 18,032
Cash at beginning of
period ............... -- 10,661 10,661 11,455
-------- -------- -------- --------
Cash at end of period
...................... $ 10,661 $ 11,455 $ -- $ 29,487
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
THE WELL LLC
NOTES TO FINANCIAL STATEMENTS
Note 1--FORMATION AND BUSINESS OF THE COMPANY:
The Well LLC (the "Company") is a California Limited Liability Company that
is in the business of providing international online conferencing services to
subscribers for a monthly fee. Its members are comprised of Whole Earth
'Lectronic Link, Inc. ("Link"), a California S corporation owning 1,500,000
membership units, and Bruce Katz, an individual owning 10,000 membership units.
Link is wholly owned by Bruce Katz.
The Company was initially formed in September 1996 and was dormant until July
1, 1997, when it acquired its business from Link as a capital contribution. As
consideration for 1,500,000 membership units in the Company, Link contributed
its online conferencing services division which had the following net assets at
July 1, 1997:
<TABLE>
<S> <C>
Cash............................................................... $ 15,108
Prepaid expenses .................................................. 722
Property and equipment, net........................................ 143,011
Accrued liabilities................................................ (13,932)
--------
$144,909
========
</TABLE>
Link also contributed intellectual property, primarily in the form of
existing technology, technical know-how, and the customer base. This
contribution has been recorded at its historical carrying amount, which is
zero. The Company recorded the tangible and intangible assets contributed by
Link at their historical carrying amounts as there was effectively no change in
ownership.
As consideration for 10,000 membership units in the Company, Bruce Katz
contributed $10,000 in cash.
Note 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim financial statements (unaudited)
The financial statements as of March 29, 1999 and for the periods from
January 1, 1998 to March 31, 1998 and January 1, 1999 to March 29, 1999 are
unaudited but have been prepared in accordance with generally accepted
accounting principles for interim financial statements and the rules of the
Securities and Exchange Commission and do not include all disclosures required
by generally accepted accounting principles for annual financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation have been included. The results
of operations of any interim period are not necessarily indicative of the
results of operations for the full year.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and cash equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
F-28
<PAGE>
Fair value of financial instruments
The reported amounts of certain of the Company's financial instruments
including cash and cash equivalents, accounts receivable, accounts payable and
other accrued liabilities approximate fair value due to their short maturities.
Concentration of credit risk
Cash and cash equivalents are deposited in one domestic bank. With respect to
accounts receivable, the Company's customer base is dispersed across many
geographic areas. The Company monitors customer's payment history and
establishes reserves for bad debt as warranted.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of five to seven years. Major additions and betterments are
capitalized, while replacements, maintenance, and repairs that do not improve
or extend the life of the assets are charged to expense. In the period assets
are retired or otherwise disposed of, the costs and related accumulated
depreciation and amortization are removed from the accounts, and any gain or
loss on disposal is included in results of operations.
Revenue recognition
Subscription revenues for online conferencing services are recognized over
the period that services are provided. Deferred revenue consists primarily of
monthly prepaid subscription fees billed in advance.
Cost of subscription revenues
Cost of subscription revenues includes connectivity charges, systems co-
location and administrative costs paid to Whole Earth Networks (see Note 5),
depreciation expense relating to network equipment, credit card charges, and
costs of personnel responsible for the operation of network equipment and
systems.
Income taxes
The Company was not subject to income taxes during the period from July 1,
1997 to March 29, 1999 since it operated as a partnership and any taxes are
payable by its members.
Comprehensive income
The Company has adopted the accounting treatment prescribed by SFAS No. 130
"Reporting Comprehensive Income." The adoption of this statement has no impact
on the Company's financial statements for the periods presented.
Note 3--PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------- March 29,
1997 1998 1999
--------- --------- -----------
(unaudited)
<S> <C> <C> <C>
Computer equipment......................... $ 252,253 $ 252,951 $ 254,286
Furniture.................................. 21,392 20,006 20,006
--------- --------- ---------
273,645 272,957 274,292
Accumulated depreciation................... (152,009) (185,662) (196,662)
--------- --------- ---------
$ 121,636 $ 87,295 $ 77,630
========= ========= =========
</TABLE>
F-29
<PAGE>
THE WELL LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 4--ACCRUED LIABILITIES:
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------
March 29,
1997 1998 1999
------- ------- -----------
(unaudited)
<S> <C> <C> <C>
Accrued payroll.................................. $12,981 $ 4,731 $ 8,000
Accrued vacation................................. 17,333 13,319 13,319
Other............................................ 39,023 69,500 11,812
------- ------- -------
$69,337 $87,550 $33,131
======= ======= =======
</TABLE>
Note 5--RELATED PARTY TRANSACTIONS:
Insurance
During the period from July 1, 1997 to March 29, 1999, the Company was
covered by an insurance policy held by Rosewood Stone Group, Inc. ("RSG"), an S
corporation wholly owned by one of its members, Bruce Katz. The insurance
policy covers property, general liability, and workers compensation.
Rent and other operating expenses
During 1998, the Company entered into an arrangement to rent office space
from Well Engaged LLC, a limited liability company whose members are also Bruce
Katz and Link. The Company pays $1,350 per month plus its prorata share of
related operating costs.
Billing and collection services
The Company entered into a billing and services agreement with Whole Earth
Networks ("WeNet"), a limited liability company. The Company's members are
majority owners of WeNet. WeNet was an Internet service provider and also
formerly a division of Link. Prior to the Company and WeNet's separation from
Link, the customer base had received one bill for both the conferencing and
Internet access services. The billing and services agreement appoints Link to
act as an agent in disbursing the revenue generated from The Well members who
were subscribers prior to the Company commencing operations on July 1, 1997.
The Company receives a fixed amount of revenue for each customer based on the
subscriber's plan. The Company also pays to WeNet for billing services
rendered. WeNet sold substantially all of its assets in March 1998 to Whole
Earth Network, Inc. ("GST WeNet"), an unrelated third party. GST WeNet assumed
the rights and obligations of the existing billing and services agreement and
continues to act as the billing agent for the Company.
Co-location services agreement
During the period from July 1, 1997 to March 29, 1999, the Company also had
an agreement with WeNet to provide certain types of services to the Company.
The services provided included storage space for some of the Company's computer
hardware, a high bandwidth Internet connection, and system administration. The
costs for these services vary depending on the services provided in any given
month. The rights and obligations of the co-location services agreement were
also specifically assumed by GST WeNet as part of the purchase of WeNet in
March 1998.
F-30
<PAGE>
THE WELL LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
Transactions with related parties are as follows:
<TABLE>
<CAPTION>
For the
Period from period For the period
July 1, 1997 to Year ended January 1 January 1
December 31, December 31, to March 31, to March 29,
Related Entity Transaction 1997 1998 1998 1999
-------------- ----------- --------------- ------------ ------------ -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Amounts received from:
Well Engaged LLC Sale of equipment...... $ -- $ 721 $ -- $ --
WeNet Sale of equipment...... 6,295 -- -- --
Amounts paid to:
WeNet/GST WeNet Billing fees........... 8,357 11,702 3,432 2,267
WeNet/GST WeNet Co-location services... 62,580 22,290 6,750 14,250
Rosewood Stone Group Insurance.............. 1,050 5,194 300 1,250
Well Engaged LLC Purchase of equipment.. -- 3,610 -- --
Well Engaged LLC Rent................... -- 12,150 -- 4,050
</TABLE>
In addition, the Company received certain management and accounting services
from RSG at no cost to the Company. The value of these services is estimated at
approximately $4,200 for the period from July 1, 1997 to December 31, 1997,
$8,400 and for the year ended December 31, 1998, and $2,100 and $2,100 for the
periods from January 1, 1998 to March 31, 1998 and January 1, 1999 to March 29,
1999, respectively.
Balances outstanding with related parties are as follows:
<TABLE>
<CAPTION>
December 31,
--------------- March 29,
1997 1998 1999
------- ------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Amounts due from:
Whole Earth 'Lectronic Link................. $22,492 $18,355 $15,192
Well Engaged LLC ........................... 1,037 -- --
Whole Earth Networks Link .................. 6,295 6,295 --
------- ------- -------
$29,824 $24,650 $15,192
======= ======= =======
Amounts payable to:
Rosewood Stone Group ....................... $ 2,100 $ 5,915 $ 675
Well Engaged LLC ........................... -- 3,788 4,050
------- ------- -------
$ 2,100 $ 9,703 $ 4,725
======= ======= =======
</TABLE>
Note 6--PROFIT SHARING PLAN:
The Company's qualifying employees are covered by a multi-employer profit
sharing plan ("the Plan") under Internal Revenue Code Section 401(k).
Participating employees may defer a portion of their pretax earnings, up to the
maximum percentage allowable under the Internal Revenue Code. The Company may
make matching contributions equal to a discretionary percentage of the
participating employees' salary reductions. The Company made no contributions
to the Plan during the period from July 1, 1997 to March 29, 1999.
Note 7--STOCK OPTION PLAN:
In 1997, the Company adopted the 1997 Option Plan (the "Plan") under which
300,000 shares were reserved for issuance to employees, consultants and
directors. As defined under the Plan, a share is equivalent to one membership
unit of the Company.
F-31
<PAGE>
THE WELL LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
In 1997, the Company granted options to purchase 225,000 shares to two
employees. All options granted to these employees have been cancelled and all
vested options, none of which were exercised, have expired since these
employees are no longer with the Company. As of March 29, 1999, there were no
options outstanding or exercisable.
Note 8--SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
For the For the
Period from period period
July 1, 1997 to Year ended January 1 January 1
December 31, December 31, to March 31, to March 29,
1997 1998 1998 1999
--------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Supplemental disclosures
of cash flow
information:
Cash paid during the
year for state income
taxes................. $ -- $800 $ -- $ --
======== ==== ====== ======
Supplemental disclosures
of noncash investing
and financing
transactions:
Assets and liabilities
contributed by Whole
Earth 'Lectronic Link:
Prepaid expenses ..... $ 722
Property and
equipment, net ...... 143,011
Accrued liabilities .. (13,932)
--------
Total .............. $129,801
========
</TABLE>
Note 9--SUBSEQUENT EVENT:
In March 1999, the Board of Directors approved the sale of the Company to
Salon.com for approximately $1.8 million.
F-32
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Whole Earth 'Lectronic Link, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations and changes in owner's net equity and of cash flows present fairly,
in all material respects, the financial position of the Online Conferencing
Business, a division of Whole Earth 'Lectronic Link, Inc., (the "Business") at
June 30, 1997 and the results of its operations and its cash flows for the
period from January 1, 1997 to June 30, 1997 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Business' management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
March 3, 1999
F-33
<PAGE>
ONLINE CONFERENCING BUSINESS
(PREDECESSOR BUSINESS)
BALANCE SHEET
JUNE 30, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash................................................................ $ 15,108
Prepaid expenses and other current assets........................... 722
--------
Total current assets.............................................. 15,830
Property and equipment, net........................................... 143,011
--------
Total assets...................................................... $158,841
========
LIABILITIES AND OWNER'S NET EQUITY
Current liabilities:
Accrued liabilities................................................. $ 13,932
Owner's net equity.................................................. 144,909
--------
Total liabilities and owner's net equity.......................... $158,841
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
ONLINE CONFERENCING BUSINESS
(PREDECESSOR BUSINESS)
STATEMENT OF OPERATIONS AND CHANGES IN OWNER'S NET EQUITY
FOR THE PERIOD FROM JANUARY 1, 1997 TO JUNE 30, 1997
<TABLE>
<S> <C>
Subscription revenues................................................. $250,580
Operating expenses:
Cost of subscription revenues....................................... 111,844
Selling and marketing............................................... 47,071
General and administrative.......................................... 132,611
--------
Total operating expenses.......................................... 291,526
--------
Net loss.............................................................. (40,946)
Owner's net equity, beginning of period............................... 185,855
--------
Owner's net equity, end of period..................................... $144,909
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
ONLINE CONFERENCING BUSINESS
(PREDECESSOR BUSINESS)
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1997 TO JUNE 30, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss........................................................... $(40,946)
Adjustment to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation..................................................... 26,703
Changes in operating assets and liabilities:
Prepaid expenses and other current assets........................ 3,810
Accrued liabilities.............................................. 2,904
--------
Net cash used in operating activities.......................... (7,529)
--------
Net decrease in cash........................................... (7,529)
Cash at beginning of period.......................................... 22,637
--------
Cash at end of period................................................ $ 15,108
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
ONLINE CONFERENCING BUSINESS
(PREDECESSOR BUSINESS)
NOTES TO FINANCIAL STATEMENTS
Note 1--FORMATION AND BUSINESS OF THE COMPANY:
The accompanying financial statements and related notes reflect the carve-out
historical results of operations and financial position of the online
conferencing business ("the Business") of Whole Earth 'Lectronic Link, Inc.
("Link"). The Statement of Operations includes all revenues and costs directly
attributable to the online conferencing business, including costs for
facilities, functions, and services used by the Business at shared sites and
allocations of costs for certain administrative functions and services
performed by Link. Costs have been allocated to the Business based on Link
management's estimates of costs attributable to the operation of the online
conferencing business. Such costs are not necessarily indicative of the costs
that would have been incurred if the online conferencing business had been a
separate entity.
The Business provides international online conferencing services to
subscribers for a monthly fee. Link is wholly owned by Bruce Katz.
Note 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and cash equivalents
The Business considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
Fair value of financial instruments
The reported amounts of certain of the Business' financial instruments
including cash and accrued liabilities approximate fair value due to their
short maturities.
Concentration of credit risk
Cash is deposited in one domestic bank. The Business' customer base is
dispersed across many geographic areas. The Business monitors customers'
payment history and establishes reserves for bad debt as warranted.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of five to seven years. Major additions and betterments are
capitalized, while replacements, maintenance, and repairs that do not improve
or extend the life of the assets are charged to expense. In the period assets
are retired or otherwise disposed of, the costs and related accumulated
depreciation and amortization are removed from the accounts, and any gain or
loss on disposal is included in results of operations.
F-37
<PAGE>
ONLINE CONFERENCING BUSINESS
(PREDECESSOR BUSINESS)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Revenue recognition
Subscription revenues for online conferencing services are recognized over
the period that services are provided. Deferred revenue consists primarily of
monthly prepaid subscription fees billed in advance.
Cost of subscription revenues
Cost of subscription revenues includes connectivity charges, systems co-
location and administrative costs, depreciation expense relating to network
equipment, credit card charges, and costs of personnel responsible for the
operation of network equipment and systems.
Income taxes
The Business is a division of Link, which operated as an S corporation and
any taxes are payable by Link's shareholder.
Note 3--PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at June 30, 1997:
<TABLE>
<CAPTION>
<S> <C>
Computer equipment............................................... $ 255,056
Furniture........................................................ 21,392
----------
276,448
Accumulated depreciation......................................... (133,437)
----------
$ 143,011
==========
</TABLE>
Note 4--RELATED PARTY TRANSACTIONS:
Insurance
During the period from January 1, 1997 to June 30, 1997, the Business was
covered by an insurance policy held by Rosewood Stone Group, Inc. ("RSG"), an S
corporation wholly owned by Bruce Katz. The insurance policy covers property,
general liability, and workers compensation. The Business paid RSG $1,200 in
connection with this insurance coverage.
Billing and collection services
The Business entered into a billing and services agreement with Whole Earth
Networks ("WeNet"), a limited liability company in which Bruce Katz was a
majority beneficial owner. WeNet is an Internet service provider and an
affiliate of Link. The customer base received one bill for both the
conferencing and Internet access services. The Business paid WeNet $12,432 for
billing services rendered during the period from January 1, 1997 to June 30,
1997.
F-38
<PAGE>
ONLINE CONFERENCING BUSINESS
(PREDECESSOR BUSINESS)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Co-location services agreement
During the period from January 1, 1997 to June 30, 1997, the Business had an
agreement with WeNet to provide certain types of services to the Business. The
services provided included storage space for some of the Business' computer
hardware, a high bandwidth Internet connection, and system administration. The
costs for these services vary depending on the services provided in any given
month. For the period from January 1, 1997 to June 30, 1997, the Business paid
WeNet $37,400 for these co-location services.
In addition, the Company received certain management and accounting services
from RSG at no cost to the Company. The value of these services is estimated at
approximately $4,200 for the period from January 1, 1997 to June 30, 1997.
Note 5--PROFIT SHARING PLAN:
The Business' qualifying employees are covered by a multi-employer profit
sharing plan ("the Plan") under Internal Revenue Code Section 401(k).
Participating employees may defer a portion of their pretax earnings, up to the
maximum percentage allowable under the Internal Revenue Code. The Company may
make matching contributions equal to a discretionary percentage of the
participating employees' salary reductions. The Business made no contributions
to the Plan during the period from January 1, 1997 to June 30, 1997.
Note 6--SUBSEQUENT EVENT:
On July 1, 1997, Link transferred the Business into The Well LLC ("The Well")
in return for 1,500,000 membership units in The Well.
F-39
<PAGE>
SALON.COM
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following financial pro forma consolidated statement presents the Salon
Internet, Inc. pro forma consolidated statement of operations for the year
ended March 31, 1999.
Salon's acquisition of The Well LLC has been accounted for under the
"purchase" method of accounting, which requires the purchase price to be
allocated to the acquired assets and liabilities of The Well LLC on the basis
of their estimated fair values as of the date of acquisition. The following pro
forma consolidated statement of operations for the year ended March 31, 1999
gives effect to the acquisition of The Well LLC as if it occurred on April 1,
1998 and includes adjustments directly attributable to the acquisition of The
Well LLC and expected to have a continuing impact on the combined company.
The pro forma information is based on historical financial statements. The
assumptions give effect to the business combination with The Well LLC under the
purchase method of accounting. The information has been prepared in accordance
with the rules and regulations of the Securities and Exchange Commission and is
provided for comparative purposes only. The pro forma information does not
purport to be indicative of the results that actually would have occurred had
the combination been effected at the beginning of the period presented.
F-40
<PAGE>
SALON.COM
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the For the For the
Year Ended Year Ended Year Ended
March 31, December 31, March 31,
1999 1998 1999
----------- ------------ -----------
Salon.com The Well LLC Adjustments Pro Forma
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Sponsorship and
advertising.......... $ 2,921,517 $ -- $ -- $ 2,921,517
Subscription.......... -- 484,660 -- 484,660
----------- -------- --------- -----------
2,921,517 484,660 -- 3,406,177
----------- -------- --------- -----------
Operating expenses:
Production, content,
and product.......... 4,502,964 -- -- 4,502,964
Cost of subscription
revenues............. -- 217,537 -- 217,537
Sales and marketing... 3,654,733 78,044 -- 3,732,777
Research and
development.......... 469,117 -- -- 469,117
General and
administrative....... 518,291 258,067 -- 776,358
Amortization of
acquired
intangibles.......... -- -- 950,127 (A) 950,127
----------- -------- --------- -----------
Total operating
expenses .......... 9,145,105 553,648 950,127 10,648,880
----------- -------- --------- -----------
Loss from operations.... (6,223,588) (68,988) (950,127) (7,242,703)
Interest expense........ (53,672) -- -- (53,672)
Other income............ 44,610 -- -- 44,610
----------- -------- --------- -----------
Net loss............ (6,232,650) (68,988) (950,127) (7,251,765)
Preferred dividend...... 271,622 -- -- 271,622
----------- -------- --------- -----------
Net loss attributable to
common stockholders.... $(6,504,272) $(68,988) $(950,127) $(7,523,387)
=========== ======== ========= ===========
Basic and diluted net
loss per share
attributable to common
stockholders........... $ (16.62) $ (19.22)
=========== ===========
Weighted average shares
used in computing basic
and diluted net loss
per share attributable
to common
stockholders........... 391,354 391,354
=========== ===========
Pro forma basic and
diluted net loss per
share attributable to
common stockholders ... $ (1.51) $ (1.58)
=========== ===========
Weighted average shares
used in computing pro
forma basic and diluted
net loss per share
attributable to common
stockholders........... 4,307,886 4,769,261
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE>
SALON.COM
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1--BASIS OF PRESENTATION:
In March 1999, Salon acquired The Well LLC, a privately held company that has
experience in providing international online conferencing services to
subscribers.
The unaudited pro forma information presented is not necessarily indicative
of the future consolidated results of operations of Salon or the consolidated
results of operations that would have resulted had the acquisition taken place
on April 1, 1998. The unaudited pro forma consolidated statement of operations
for the year ended March 31, 1999 reflects the effects of the acquisition,
assuming the related events occurred as of April 1, 1998 for the purposes of
the unaudited pro forma consolidated statement of operations.
Note 2--UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL ADJUSTMENTS:
The unaudited pro forma consolidated financial statements reflect a total
purchase price of $1.9 million consisting of 463,918 shares of Series C
preferred stock valued at $3.88 per share and acquisition costs of $113,938.
The acquisition was recorded under the purchase method of accounting. The
tradename, proprietary technology, goodwill and the subscriber list are being
amortized on a straight-line basis over the estimated period of benefit of two
years.
The allocation of Salon's aggregate purchase price to the tangible and
identifiable intangible assets acquired and liabilities assumed in connection
with this acquisition were based on fair values as determined by independent
appraisers. The allocation is summarized below:
<TABLE>
<S> <C>
Trade name..................................................... $1,200,000
Subscriber list................................................ 50,000
Proprietary technology including billing, conferencing and
text-based system software.................................... 305,000
Goodwill....................................................... 345,254
Property and equipment......................................... 77,630
Net current liabilities assumed................................ (63,944)
----------
Total purchase price........................................... $1,913,940
==========
</TABLE>
Note 3--UNAUDITED PRO FORMA CONSOLIDATED NET LOSS PER SHARE:
The net loss per share and shares used in computing the net loss per share
for the year ended March 31, 1999 is based upon the historical weighted average
common shares outstanding. The Salon common stock issuable upon the exercise of
the stock options and warrants have been excluded as the effect would be
antidilutive. In addition to the shares used in computing the net loss per
share above, pro forma net loss per share is calculated using the convertible
preferred stock outstanding as if such shares were converted to common stock at
the time of issuance.
The 463,918 shares of convertible preferred stock issued in connection with
the purchase price of The Well LLC have been included in the calculation of pro
forma basic and diluted net loss per share for the year ended March 31, 1999 as
follows:
<TABLE>
<S> <C>
Shares used in computing basic and diluted net loss per share
attributable to common stockholders ............................. 391,354
Adjustment to reflect the assumed conversion of preferred stock... 3,913,989
Adjustment to reflect the assumed conversion of preferred stock
issued in connection with the purchase of The Well............... 463,918
---------
Shares used in computing pro forma basic and diluted net loss per
share attributable to common stockholders........................ 4,769,261
=========
</TABLE>
F-42
<PAGE>
SALON.COM
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Note 4--PURCHASE ADJUSTMENTS:
The following adjustment was applied to Salon's historical financial
statements and those of The Well to arrive at the pro forma consolidated
statement of operations.
(A) To record the annual amortization of tradename, proprietary technology,
goodwill and subscriber list which is being amortized over the
estimated period of benefit of two years.
F-43
<PAGE>
[INSIDE BACK COVER ART DESCRIPTION]
[LOGO OF SALON.COM]
Awards and critical acclaim
[Images of logos of various companies and institutions which have bestowed
awards and/or critical acclaim on Salon.]
<PAGE>
[LOGO OF SALON.COM]
Until , 1999, which is 25 days after the date of this prospectus, all
dealers that buy, sell or trade Salon's common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This
requirement is in addition to the dealers' obligation to deliver a prospectus
when acting as underwriters and with respect to their unsold allotments or
subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions to be paid by Salon, in connection with
this offering. All amounts shown are estimates except for the SEC registration
fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee............................................. $ 10,790
NASD filing fee.................................................. 4,382
Nasdaq National Market listing fee............................... 43,750
Blue sky fees and expenses....................................... 10,000
Printing and engraving expenses.................................. 250,000
Legal fees and expenses.......................................... 400,000
Accounting fees and expenses..................................... 300,000
Transfer agent and registrar fees................................ 10,000
Miscellaneous expenses........................................... 171,078
----------
Total.......................................................... $1,200,000
==========
</TABLE>
Item 14. Indemnification of Officers and Directors
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to officers,
directors and other corporate agents under certain circumstances and subject
to certain limitations. Salon's certificate of incorporation and bylaws
provide that Salon shall indemnify its directors, officers, employees and
agents to the full extent permitted by Delaware General Corporation Law,
including in circumstances in which indemnification is otherwise discretionary
under Delaware law. In addition, Salon intends to enter into separate
indemnification agreements with its directors, officers and certain employees
which would require Salon, among other things, to indemnify them against
certain liabilities which may arise by reason of their status as directors,
officers or certain other employees. Salon also intends to maintain director
and officer liability insurance, if available on reasonable terms.
These indemnification provisions and the indemnification agreement to be
entered into between Salon and its officers and directors may be sufficiently
broad to permit indemnification of Salon's officers and directors for
liabilities (including reimbursement of expenses incurred) arising under the
Securities Act.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the underwriters of Salon and its
officers and directors for certain liabilities arising under the Securities
Act, or otherwise.
Item 15. Recent Sales of Unregistered Securities
(a) Since April 1, 1996, Salon has issued and sold the following
unregistered securities:
(1) From inception to April 1, 1999, Salon issued options to purchase an
aggregate of 2,056,250 shares of common stock under the 1995 stock option
plan, of which 54,996 have been exercised.
(2) On December 22, 1995, August 2, 1996 and February 6, 1997, Salon sold
an aggregate of 2,500,000 shares of its Series A preferred stock to two
investors, Adobe Ventures, L.P. and H&Q Salon Investors, L.P., for an
aggregate of $5,000,000.
II-1
<PAGE>
(3) In April 1997, Salon issued a warrant to purchase 8,750 shares of
Series A preferred stock at an exercise price of $2.00 per share to
Imperial Bancorp. This warrant may be exercised at any time within five
years after its issuance.
(4) On November 28, 1997, Salon sold an aggregate of 949,365 shares of
its Series B preferred stock to four investors, including Adobe Ventures
II, L.P., DOTCOM Ventures, L.P. and H&Q Salon Investors, L.P. for an
aggregate of approximately $3.0 million.
(5) In April 1998, Salon issued a warrant to purchase 11,867 shares of
Series B preferred stock at an exercise price of $3.16 per share to
Imperial Bancorp. This warrant may be exercised at any time within seven
years after its issuance.
(6) In July 1998, Salon issued a warrant to purchase 79,114 shares of its
Series B preferred stock at an exercise price of $3.16 per share to America
Online Inc. This warrant may be exercised at any time within five years
after its issuance.
(7) On September 18, 1998, November 3, 1998 and April 14, 1999, Salon
sold an aggregate of 3,869,843 shares of Series C preferred stock to
thirty-five investors including Adobe Ventures II, L.P., DOTCOM Ventures,
L.P., entities affiliated with Constellation Ventures, H&Q Salon Investors,
L.P., Wasserstein Adelson Ventures, L.P. and entities affiliated with Bruce
Katz for an aggregate of $15,014,991. In addition, on September 18, 1998,
Salon issued warrants to purchase an aggregate of 219,582 shares of common
stock with an exercise price per share of $0.52 to Adobe Ventures II, L.P.,
DOTCOM Ventures, L.P. and H&Q Salon Investors, L.P.
(8) In December 1998, Salon issued a warrant to purchase 14,439 shares of
Series C preferred stock at an exercise price of $3.88 per share to
Imperial Bancorp. This warrant may be exercised at any time within seven
years after its issuance.
(9) On March 29, 1999, Salon issued 463,918 shares of Series C preferred
stock to Whole Earth Lectronic Link and Bruce Katz in exchange for all of
the membership interests of The Well LLC.
(10) On April 14, 1999, Salon issued a warrant to purchase an aggregate
of 148,389 shares of Series C preferred stock at an exercise price of $3.88
per share to entities affiliated with Daiwa Securities America Inc. and a
warrant to purchase 25,773 shares of Series C preferred stock at an
exercise price of $3.88 per share to ACT III Communications.
There were no underwriters employed in connection with any of the
transactions set forth in Item 15.
For additional information concerning these equity investment transactions,
see the section entitled "Certain Transactions" in the prospectus.
The issuances described in Items 15(a)(1) through 15(a)(10) were deemed
exempt from registration under the Securities Act in reliance on Section 4(2)
of the Securities Act as transactions by an issuer not involving a public
offering. Certain issuances described in Item 15(a)(1) were deemed exempt from
registration under the Securities Act in reliance on Section 4(2) or Rule 701
promulgated thereunder as transactions pursuant to compensatory benefit plans
and contracts relating to compensation. The recipients of securities in each
such transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions. All recipients
either received adequate information about Salon or had access, through
employment or other relationships, to such information.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
* 2.1 Membership Interest Purchase Agreement dated March 29, 1999.
* 3.1 Amended and Restated Articles of Incorporation of Salon, as amended to
date.
3.2+ Form of Certificate of Incorporation of Salon, as proposed to be
filed.
* 3.3 Bylaws of Salon.
3.4+ Form of Bylaws, as proposed to be filed.
* 4.1 Third Amended and Restated Rights Agreement dated April 14, 1999.
* 4.2 Second Amended and Restated Voting Agreement dated April 14, 1999.
5.1 Opinion of Gray Cary Ware & Freidenrich LLP.
*10.1 1995 Stock Option Plan.
10.2 1999 Employee Stock Purchase Plan.
*10.3 Form of Indemnity Agreement.
*10.4 Commercial Office Lease between T/W Associates and Salon dated June
25, 1997.
*10.5 Agreement of Lease between ZAPCO 1500 Investment L.P. and Salon dated
March 1998.
*10.6 Employment Agreement between Michael O'Donnell and Salon dated
November 7, 1996.
*10.7 Employment Agreement between Bruce Roberts and Salon dated April 2,
1999.
*10.8 Letter Agreement between Todd Hagen and Salon dated March 25, 1999, as
amended.
*10.9 Warrant to Purchase Stock issued to Imperial Bancorp dated December
17, 1998.
*10.10 Warrant to Purchase Stock issued to Imperial Bancorp dated April 13,
1998.
*10.11 Warrant to Purchase Stock issued to Imperial Bancorp dated April 14,
1997.
*10.12 Warrant to Purchase Stock issued to America Online Inc. dated July 31,
1998.
*10.13 Warrant to Purchase Stock issued to Adobe Ventures II L.P. dated
September 18, 1998.
*10.14 Warrant to Purchase Stock issued to ASCII Ventures, L.P. dated
September 18, 1998.
*10.15 Warrant to Purchase Stock issued to H&Q Salon Investors, L.P. dated
November 3, 1998.
10.16 Warrant to Purchase Stock issued to entities affiliated with Daiwa
America Corporation dated April 14, 1999.
10.17 Warrant to Purchase Stock issued to ACT III Communications dated April
14, 1999.
*10.18 Loan Agreement between Imperial Bank and Salon dated April 13, 1998,
as amended.
*10.19 Series A Preferred Stock Purchase Agreement dated December 22, 1995.
*10.20 First Amendment to the Series A Preferred Stock Purchase Agreement
dated August 2, 1996.
*10.21 Second Amendment to the Series A Preferred Stock Purchase Agreement
dated February 6, 1997.
*10.22 Series B Preferred Stock Purchase Agreement dated November 28, 1997.
*10.23 Series C Preferred Stock Purchase Agreement dated September 18, 1998.
*10.24 Series C Preferred Stock Purchase Agreement dated April 14, 1999.
10.25 Warrant to Purchase Stock issued to Chatsworth Securities LLC dated
April 14, 1999.
10.26 Consent to Use of Name in Registration Statement dated May 20, 1999
executed by CyberDialogue, Inc.
10.27 Consent to Use of Name in Registration Statement dated May 25, 1999
executed by International Data Corporation.
10.28 Consent to Use of Name in Registration Statement dated May 24, 1999
executed by Jupiter Communications.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
*21.1 Subsidiaries of Salon.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.3 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.4 Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 5.1).
*24.1 Power of Attorney (included on page II-5).
27.1 Financial Data Schedule (EDGAR filed version only).
</TABLE>
- --------
+ To be filed by amendment
* Previously filed.
(b) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
Item 17. Undertakings
Salon hereby undertakes to provide to the Underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification by Salon for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of Salon pursuant to the provisions described in Item 14 above or otherwise,
Salon has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by Salon
of expenses incurred or paid by a director, officer, or controlling person of
Salon in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, Salon will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
Salon hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by Salon pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, Salon
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned, in the City of San
Francisco, State of California, on the 27th day of May, 1999.
SALON INTERNET, INC.
/s/ Michael O'Donnell
By: _________________________________
Michael O'Donnell
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on
the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Michael O'Donnell Chief Executive Officer, May 27, 1999
____________________________________ President and Director
Michael O'Donnell (Principal Executive
Officer)
/s/ David Talbot* Chairman of the Board, May 27, 1999
____________________________________ Editor-in Chief and
David Talbot Director
/s/ Todd Hagen* Chief Financial Officer, May 27, 1999
____________________________________ Vice President of Finance
Todd Hagen and Administration and
Secretary (Principal
Financial and Accounting
Officer)
/s/ Sada Chidambaram* Director May 27, 1999
____________________________________
Sada Chidambaram
/s/ Standish O'Grady* Director May 27, 1999
____________________________________
Standish O'Grady
/s/ Jim Rosenfield* Director May 27, 1999
____________________________________
Jim Rosenfield
/s/ Norman Lear* Director May 27, 1999
____________________________________
Norman Lear
Director May , 1999
____________________________________
Ron Celmer
</TABLE>
/s/ Michael O'Donnell*
- --------------------------------
*By: Michael O'Donnell, Attorney-in-Fact
II-5
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and
Stockholders of Salon.com
In connection with our audits of the financial statements of Salon.com as of
March 31, 1998 and 1999, and for each of the three years in the period ended
March 31, 1999, which financial statements are included in the Prospectus, we
have also audited the financial statement schedule listed in Item 16(b) herein.
In our opinion, this financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included herein.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
May 3, 1999
- --------------------------------------------------------------------------------
To the Board of Directors and
Stockholders of Salon.com
The consolidated financial statements included herein have been adjusted to
give effect to the reincorporation of the Company in Delaware as described more
fully in Note 11 to the financial statements. The above report is in the form
that will be signed by PricewaterhouseCoopers LLP upon effectiveness of such
reincorporation assuming that, from May 3, 1999 to the effective date of such
reincorporation, no other events shall have occurred that would affect the
accompanying financial statement schedule.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
May 3, 1999
S-1
<PAGE>
SCHEDULE II
SALON.COM
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Costs and End of
Description of Period Expenses Deductions Period
- ----------- ---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ended March 31, 1997........ $ -- $ -- $ -- $ --
Year ended March 31, 1998........ -- -- -- --
Year ended March 31, 1999........ -- 29,598 -- 29,598
Valuation allowance for deferred
tax assets
Year ended March 31, 1997........ $ 174 $ 763 $ -- $ 937
Year ended March 31, 1998........ 937 1,535 -- 2,472
Year ended March 31, 1999........ 2,472 2,106 -- 4,578
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
* 2.1 Membership Interest Purchase Agreement dated March 29, 1999.
* 3.1 Amended and Restated Articles of Incorporation of Salon, as amended to
date.
3.2+ Form of Certificate of Incorporation of Salon, as proposed to be
filed.
* 3.3 Bylaws of Salon.
3.4+ Form of Bylaws, as proposed to be filed.
* 4.1 Third Amended and Restated Rights Agreement dated April 14, 1999.
* 4.2 Second Amended and Restated Voting Agreement dated April 14, 1999.
5.1 Opinion of Gray Cary Ware & Freidenrich LLP.
*10.1 1995 Stock Option Plan.
10.2 1999 Employee Stock Purchase Plan.
*10.3 Form of Indemnity Agreement.
*10.4 Commercial Office Lease between T/W Associates and Salon dated June
25, 1997.
*10.5 Agreement of Lease between ZAPCO 1500 Investment L.P. and Salon dated
March 1998.
*10.6 Employment Agreement between Michael O'Donnell and Salon dated
November 7, 1996.
*10.7 Employment Agreement between Bruce Roberts and Salon dated April 2,
1999.
*10.8 Letter Agreement between Todd Hagen and Salon dated March 25, 1999, as
amended.
*10.9 Warrant to Purchase Stock issued to Imperial Bancorp dated December
17, 1998.
*10.10 Warrant to Purchase Stock issued to Imperial Bancorp dated April 13,
1998.
*10.11 Warrant to Purchase Stock issued to Imperial Bancorp dated April 14,
1997.
*10.12 Warrant to Purchase Stock issued to America Online Inc. dated July 31,
1998.
*10.13 Warrant to Purchase Stock issued to Adobe Ventures II L.P. dated
September 18, 1998.
*10.14 Warrant to Purchase Stock issued to ASCII Ventures, L.P. dated
September 18, 1998.
*10.15 Warrant to Purchase Stock issued to H&Q Salon Investors, L.P. dated
November 3, 1998.
10.16 Warrant to Purchase Stock issued to entities affiliated with Daiwa
America Corporation dated April 14, 1999.
10.17 Warrant to Purchase Stock issued to ACT III Communications dated April
14, 1999.
*10.18 Loan Agreement between Imperial Bank and Salon dated April 13, 1998,
as amended.
*10.19 Series A Preferred Stock Purchase Agreement dated December 22, 1995.
*10.20 First Amendment to the Series A Preferred Stock Purchase Agreement
dated August 2, 1996.
*10.21 Second Amendment to the Series A Preferred Stock Purchase Agreement
dated February 6, 1997.
*10.22 Series B Preferred Stock Purchase Agreement dated November 28, 1997.
*10.23 Series C Preferred Stock Purchase Agreement dated September 18, 1998.
*10.24 Series C Preferred Stock Purchase Agreement dated April 14, 1999.
10.25 Warrant to Purchase Stock issued to Chatsworth Securities LLC dated
April 14, 1999.
10.26 Consent to Use of Name in Registration Statement dated May 20, 1999
executed by CyberDialogue, Inc.
10.27 Consent to Use of Name in Registration Statement dated May 25, 1999
executed by International Data Corporation.
10.28 Consent to Use of Name in Registration Statement dated May 24, 1999
executed by Jupiter Communications.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.3 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.4 Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 5.1).
*24.1 Power of Attorney (included on page II-5).
27.1 Financial Data Schedule (EDGAR filed version only).
</TABLE>
- --------
+ To be filed by amendment
* Previously filed.
<PAGE>
EXHIBIT 1.1
2,500,000 Shares/1/
Common Stock
UNDERWRITING AGREEMENT
____________, 1999
W.R. HAMBRECHT & COMPANY, LLC
DAIWA SECURITIES AMERICA, INC.
c/o W.R. Hambrecht & Company, LLC
550 Fifteenth Street
San Francisco, CA 94103
Ladies and Gentlemen:
Salon.com, Inc., a Delaware corporation (the "Company"), proposes to issue
and sell up to an aggregate of 2,500,000 shares of its authorized but unissued
common stock, par value $0.001 per share (the "Common Stock") (said 2,500,000
shares of Common Stock being herein called the "Underwritten Stock") to the
Underwriters (as hereinafter defined) and to grant the Underwriters an option to
purchase up to an aggregate of 375,000 additional shares of Common Stock (the
"Option Stock" and collectively with the Underwritten Stock, the "Shares"). The
Common Stock is more fully described in the Registration Statement and the
Prospectus hereinafter mentioned.
The Company hereby confirms the agreements made with respect to the
purchase of the Shares by the underwriters, for whom you are acting as
representatives, named in Schedule I hereto (herein collectively called the
"Underwriters," which term shall also include any underwriter purchasing Shares
pursuant to Section 3(b) hereof). You represent and warrant that you have been
authorized by each of the other Underwriters to enter into this Agreement on its
behalf and to act for it in the manner herein provided.
1. Registration Statement. The Company has filed with the Securities and
Exchange Commission (the "Commission") a registration statement on Form S-1 (No.
333-76511, including the related preliminary prospectus, for the registration
under the Securities Act of 1933, as amended (the "Act") of the Shares. Copies
of such registration statement and of each amendment thereto, if any, including
the related preliminary prospectus (meeting the requirements of Rule 430A of the
rules and regulations of the
- ----------------
/1/ Plus an option to purchase from the Company up to an aggregate of 375,000
additional shares to cover over-allotments.
<PAGE>
Commission) heretofore filed by the Company with the Commission have been
delivered to you.
The term "Registration Statement" as used in this Agreement shall mean such
registration statement, including all exhibits and financial statements, all
information omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, in the form in which it became effective, and any
registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Shares (herein called a Rule
462(b) registration statement), and, in the event of any amendment thereto after
the effective date of such registration statement (herein called the "Effective
Date"), shall also mean (from and after the effectiveness of such amendment)
such registration statement as so amended (including any rule 462(b)
registration statement). The term "Prospectus" as used in this Agreement shall
mean the prospectus relating to the Shares first filed with the Commission
pursuant to Rule 424(b) and Rule 430A (or if no such filing is required, as
included in the Registration Statement) and, in the event of any supplement or
amendment so such prospectus after the Effective Date, shall also mean (from and
after the filing with the Commission of such supplement or the effectiveness of
such amendment) such prospectus as so supplemented or amended. The term
"Preliminary Prospectus" as used in this Agreement shall mean each preliminary
prospectus included in such registration statement prior to the time it becomes
effective.
The Registration Statement has been declared effective under the Securities
Act, and no post-effective amendment to the Registration Statement has been
filed as of the date of this Agreement. The Company has caused to be delivered
to you copies of each Preliminary Prospectus and has consented to the use of
such copies for the purposes permitted by the Act.
2. Representations and Warranties of the Company. The Company hereby
represents and warrants to the Underwriters as follows:
(a) Neither the Commission nor any state securities commission has
issued any order preventing or suspending the use of any Preliminary Prospectus
or has instituted or, to the Company's knowledge, threatened to institute any
proceedings with respect to such an order. The Registration Statement and the
Prospectus comply, and on the Closing Date (as hereinafter defined) and any
later date on which the Option Stock is to be purchased, the Prospectus will
comply, in all material respects, with the provisions of the Act and the rules
and regulations of the Commission thereunder. On the Effective Date, the
Registration Statement did not contain any untrue statement of a material fact
and did not omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading, and on the
Effective Date the Prospectus did not and, on the Closing Date and any later
date on which the Option Stock
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is to be purchased, will not contain any untrue statement of a material fact and
did not omit to state any material fact required to be stated therein, or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that none of the representations and warranties in this subparagraph (a) shall
apply to statements in, or omissions from, the Registration Statement or the
Prospectus made in reliance upon and in conformity with information herein or
otherwise furnished in writing to the Company by or on behalf of the
Underwriters expressly for use in the Registration Statement or Prospectus.
(b) Each of the Company and its subsidiaries (i) has been duly organized
and is validly existing and in good standing under the laws of its jurisdiction
of incorporation or formation, as the case may be, having full power and
corporate authority, to own or lease its properties and to conduct its business
as described in the Registration Statement and the Prospectus; and (ii) is duly
qualified to do business as a foreign corporation or limited liability company,
as the case may be, and is in good standing in all jurisdictions in which the
character of the property owned or leased or the nature of the business
transacted by it makes qualification necessary (except where the failure to be
so qualified would not have a material adverse effect on the business,
properties, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole). The Company and its subsidiaries do not own any
capital stock or other equity securities in any entity.
(c) The Company has the duly authorized and validly issued outstanding
capitalization set forth under the caption "Capitalization" in the Prospectus
and will have the adjusted capitalization set forth therein on the Closing Date
and any later date on which the Option Stock is to be purchased, based on the
assumptions set forth therein. The securities of the Company conform to the
descriptions thereof contained in the Prospectus. The form of certificates for
the Shares conforms to the corporate law of the jurisdiction of the Company's
incorporation. The outstanding shares of Common Stock (other than the Shares)
have been duly authorized and validly issued by the Company and are fully paid
and nonassessable. Except as created hereby or referred to in the Prospectus,
there are no outstanding options, warrants, rights or other arrangements
requiring the Company at any time to issue any capital stock. No holders of
outstanding shares of capital stock of the Company are entitled as such to any
preemptive or other rights to subscribe for any of the Shares, and neither the
filing of the Registration Statement nor the offering or sale of the Shares as
contemplated by this Agreement gives rise to any rights, other than those which
have been waived or satisfied, for or relating to, the registration of any
securities of the Company. The Shares are duly authorized, and will be, when
sold to the Underwriters as provided herein, validly issued, fully paid and
nonassesable and conform to the description thereof contained in the Prospectus.
No further approval or authority of the stockholders or the Board of Directors
of the
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Company will be required for the issuance and sale of the Shares as contemplated
herein. The outstanding shares of capital stock or ownership interests of each
of its subsidiaries have been duly authorized and validly issued, are fully paid
and non-assessable, and are solely owned by the Company free and clear of all
liens, encumbrances and equities and claims; and no options, warrants or other
rights to purchase, agreements or other obligations to issue or other rights to
convert any obligations into shares of capital stock or ownership interests in
such subsidiary are outstanding.
(d) The Company has full legal right, power and authority to enter into
this Agreement and to consummate the transactions provided for herein. This
Agreement has been duly authorized, executed and delivered by the Company and,
assuming it is a binding agreement of the Underwriters, constitutes a legal,
valid and binding agreement of the Company enforceable against the Company in
accordance with its terms (except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application relating to or affecting the enforcement of creditors'
rights and the application of equitable principles relating to the availability
of remedies and except as rights to indemnity or contribution may be limited by
federal or state securities laws and the public policy underlying such laws),
and none of the Company's execution or delivery of this Agreement, its
performance hereunder, its consummation of the transactions contemplated herein,
its application of the net proceeds of the offering in the manner set forth
under the caption "Use of Proceeds" or the conduct of its business as described
in the Prospectus, conflicts or will conflict with or results or will result in
any breach or violation of any of the terms or provisions of, or constitutes or
will constitute a default under, causes or will cause (or permits or will
permit) the maturation or acceleration of any liability or obligation or the
termination of any right under, or result in the creation or imposition of any
lien, charge, or encumbrance upon, any property or assets of the Company or any
of its subsidiaries pursuant to the terms of (i) the certificate of
incorporation or bylaws of the Company or any of its subsidiaries, (ii) any
indenture, mortgage, deed of trust, voting trust agreement, stockholders'
agreement, note agreement or other agreement or instrument to which the Company
or any of its subsidiaries is a party or by which it is or may be bound or to
which its respective property is or may be subject or (iii) any statute,
judgment, decree, order, rule or regulation applicable to the Company or any of
its subsidiaries of any government, arbitrator, court, regulatory body or
administrative agency or other governmental agency or body, domestic or foreign,
having jurisdiction over the Company or any of its subsidiaries, or their
activities or properties, which would materially and adversely affect the
business or properties of the Company and its subsidiaries taken as a whole.
(e) The Common Stock is approved for quotation on The Nasdaq National
Market and, prior to the Closing Date, (i) the Common Stock shall be listed and
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duly admitted to trading on The Nasdaq National Market and (ii) the Shares will
be authorized for inclusion in The Nasdaq National Market.
(f) The financial statements of the Company and its subsidiaries and the
related notes and schedules thereto included in the Registration Statement and
the Prospectus fairly present the financial position, results of operations,
stockholders' equity and cash flows of the Company and its subsidiaries at the
dates and for the periods specified therein. Such financial statements and the
related notes and schedules thereto have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved (except as otherwise noted therein) and all adjustments
necessary for a fair presentation of results for such periods have been made;
provided, however, that the unaudited financial statements are subject to normal
year-end audit adjustments (which are not expected to be material) and do not
contain all footnotes required under generally accepted accounting principles.
The summary and selected financial and statistical data included in the
Registration Statement and the Prospectus present fairly the information shown
therein and such data have been prepared on a basis consistent with the
financial statements contained therein and in the books and records of the
Company.
(g) PricewaterhouseCoopers LLP, who have certified the financial statements
filed with the Commission as part of the Registration Statement, are independent
public accountants as required by the Act and the rules and regulations
promulgated thereunder.
(h) Each of the Company and its subsidiaries maintains a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to assets is
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(i) The Company and its subsidiaries have filed all necessary federal,
state and local income, franchise and other material tax returns and has paid
all taxes shown as due thereunder, and the Company and its subsidiaries have no
tax deficiency that has been or, to their knowledge, which might be assessed
against the Company and its subsidiaries which, if so assessed, would materially
and adversely affect the business or properties of the Company and its
subsidiaries, taken as a whole. All tax liabilities accrued through the date
hereof have been adequately provided for on the books of the Company and its
subsidiaries.
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(j) The Company and its subsidiaries maintain insurance underwritten by
insurers of recognized financial responsibility of the types and in amounts and
with such deductibles as customary for companies in the same or similar
business, all of which insurance is in full force and effect.
(k) Except as disclosed in the Prospectus, there is no action, suit, claim,
proceeding or investigation pending or, to the Company's knowledge, threatened
against the Company or any of its subsidiaries before or by any court,
regulatory body or administrative agency or any other governmental agency or
body, domestic or foreign, which (i) questions the validity of the capital stock
of the Company or this Agreement or of any action taken or to be taken by the
Company pursuant to or in connection with this Agreement, (ii) is required to be
disclosed in the Registration Statement which is not so disclosed (and such
proceedings, if any, as are summarized in the Registration Statement are
accurately summarized in all material respects), or (iii) may have a material
adverse affect upon the business operations, financial conditions or income of
the Company and its subsidiaries, taken as a whole.
(l) All executed agreements or copies of executed agreements filed or
incorporated by reference as exhibits to the Registration Statement to which the
Company or any of its subsidiaries is a party or by which it is or may be bound
or to which its assets, properties or businesses are or may be subject have been
duly and validly authorized, executed and delivered by the Company or such
subsidiary and constitute the legal, valid and binding agreements of the Company
or such subsidiary enforceable by and against it in accordance with their
respective terms (except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization or other similar laws relating to
enforcement of creditors' rights generally, and general equitable principles
relating to the availability of remedies, and except as rights to indemnity or
contribution may be limited by federal or state securities laws and the public
policy underlying such laws). The descriptions in the Registration Statement of
contracts and other documents are accurate and fairly present the information
required to be shown with respect thereto by the Act and the rules and
regulations promulgated thereunder, and there are no contracts or other
documents which are required by the Act or the rules and regulations promulgated
thereunder to be described in the Registration Statement or filed as exhibits to
the Registration Statement which are not described or filed as required and the
exhibits which have been filed are complete and correct copies of the documents
of which they purport to be copies.
(m) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, and except as expressly contemplated
therein, neither the Company nor any of its subsidiaries has incurred, other
than in the ordinary course of its business, any material liabilities or
obligations, direct or contingent, purchased any of its outstanding capital
stock, paid or declared any dividends or other
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distributions on its capital stock or entered into any material transactions,
and there has been no material change in capital stock or debt or any material
adverse change in the business, properties, assets, net worth, condition
(financial or other), or results of operations or prospects of the Company and
its subsidiaries, taken as a whole, whether or not arising from transactions in
the ordinary course of business.
(n) Neither the Company nor any of its subsidiaries is, or with the giving
of notice or lapse of time or both, will be, in violation of or in default
under, any term or provision of (i) its certificate of incorporation, bylaws or
operating agreement, (ii) any indenture, mortgage, deed of trust, voting trust
agreement, stockholders' agreement, note agreement or other agreement or
instrument to which it is a party or by which it is or may be bound or to which
any of its property is or may be subject, or any indebtedness, the effect of
which breach or default singly or in the aggregate may have a material adverse
effect on the business, management, properties, assets, rights, operations, or
condition (financial or otherwise) of the Company and its subsidiaries, taken as
a whole, or (iii) any statute, judgment, decree, order, rule or regulation
applicable to the Company or such subsidiary or of any arbitrator, court,
regulatory body, administrative agency or any other governmental agency or body,
domestic or foreign, having jurisdiction over the Company or such subsidiary or
its activities or properties and the effect of which breach or default singly or
in the aggregate may have a material adverse effect on the business, management,
properties, assets, rights, operations, or condition (financial or otherwise) of
the Company and its subsidiaries, taken as a whole.
(o) The Company has not incurred any liability for a fee, commission, or
other compensation on account of the employment of a broker or finder in
connection with the transactions contemplated by this Agreement other than as
contemplated hereby.
(p) No labor disturbance by the employees of the Company or any of its
subsidiaries exists or, to the Company's knowledge, is imminent.
(q) Each of the Company and its subsidiaries owns, is licensed or otherwise
possesses all rights to use, all patents, patent rights, inventions, know-how
(including trade secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures), trademarks, service marks,
trade names, copyrights and other intellectual property rights (collectively,
the "Rights") necessary for the conduct of its business as described in the
Prospectus. To the Company's knowledge, no claims have been asserted against the
Company or any of its subsidiaries by any person with respect to the use of any
such Rights or challenging or questioning the validity or effectiveness of any
such Rights. The continued use of the Rights in connection with the business and
operations of the Company and its subsidiaries does not, to the knowledge of the
Company and its subsidiaries, infringe on the rights of any person, which, if
the subject of an unfavorable decision, ruling or filing, would have a
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<PAGE>
material adverse effect on the condition, business or properties of the
Company and its subsidiaries taken as a whole.
(r) The Company and its subsidiaries are conducting their businesses in
compliance with all applicable laws, ordinances or governmental rules or
regulations of the jurisdictions in which they are conducting business, except
where failure to be so in compliance would not materially and adversely affect
the business or properties of the Company and its subsidiaries, taken as a
whole. Each approval, consent, order, authorization, designation, declaration or
filing by or with any regulatory, administrative or other governmental body
necessary in connection with the execution and delivery by the Company of this
Agreement and the consummation of the transactions herein contemplated (except
such additional steps as may be required by the National Association of
Securities Dealers, Inc. (the "NASD"), the Act, the Securities Exchange Act of
1934, as amended or to qualify or exempt the Shares for public offering by the
Underwriters under state securities or Blue Sky laws) has been obtained or made
and is in full force and effect.
(s) Neither the Company nor to the Company's knowledge, any of its
officers, directors or affiliates (within the meaning of the rules and
regulations promulgated under the Act) has taken or may take, directly or
indirectly, any action designed to cause or result in, or which has constituted
or which might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Common Stock of the Company, to
facilitate the sale or resale of the Shares or otherwise.
(t) Neither the Company nor any of its subsidiaries is, or after giving
effect to the issuance and sale of the Shares by the Company will be, an
"investment company" within the meaning of such term under the Investment
Company Act of 1940, as amended, and the rules and regulations of the Commission
promulgated thereunder.
(u) The Company and its subsidiaries have good and marketable title to all
properties and assets described in the Prospectus as owned by them, free and
clear of all liens, encumbrances, security interests, equities, claims and
defects, except such as are described in the Registration Statement and
Prospectus, or such as are not materially important in relation to the business
of the Company and its subsidiaries when taken in the aggregate. The Company has
valid and enforceable leases for the properties described in the Prospectus as
leased by it, free and clear of all liens, encumbrances, security interests,
equities, claims and defects, except such as are not material and do not
interfere with the use made by the Company and its subsidiaries thereof. The
Company and its subsidiaries own or lease all such properties as are necessary
to their operations as now conducted, as set forth in the Registration Statement
and the Prospectus and the properties and business of the Company and its
subsidiaries conform in all material respects to the descriptions thereof
contained in the Registration Statement and the Prospectus.
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(v) Each of the Company and its subsidiaries holds all franchises,
licenses, permits, approvals, certificates and other authorizations from
federal, state and other governmental or regulatory authorities necessary to the
ownership, leasing and operation of its properties or required for the present
conduct of its business, and such franchises, licenses, permits, approvals,
certificates and other governmental authorizations are in full force and effect
and the Company and its subsidiaries are in compliance therewith in all material
respects, except where the failure so to obtain, maintain or comply with would
not have a materially adverse effect on the business, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole.
(w) The Company and its subsidiaries are in compliance in all material
respects with all presently applicable provisions of the Employee Retirement
Income Security Act of 1974, as amended, including the regulations and published
interpretations thereunder (herein called "ERISA"); no "reportable event" (as
defined in ERISA) has occurred with respect to any "pension plan" (as defined in
ERISA) for which the Company or any of its subsidiaries would have any
liability; the Company and its subsidiaries have not incurred and do not expect
to incur liability under (i) Title IV of ERISA with respect to termination of,
or withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the
Internal Revenue Code of 1986, as amended, including the regulations and
published interpretations thereunder (the "Code"); and each "Pension Plan" for
which the Company and its subsidiaries would have liability that is intended to
be qualified under Section 401(a) of the Code is so qualified in all material
respects and nothing has occurred, whether by action or by failure to act, which
would cause the loss of such qualification.
(x) No relationship, direct or indirect, exists between or among the
Company or its subsidiaries, on the one hand, and the directors, officers,
stockholders, customers or suppliers of the Company or its subsidiaries, on the
other hand, which is required to be described in the Prospectus that is not so
described.
(y) Neither the Company nor any of its subsidiaries, nor to the Company's
knowledge, any director, officer, agent, employee or other person associated
with or acting on behalf of the Company or any of its subsidiaries, has used any
corporate funds for any unlawful contribution, gift, entertainment or other
unlawful expense relating to political activity; made any direct or indirect
unlawful payment to any foreign or domestic government official or employee from
corporate funds; violated or is in violation of any provisions of the Foreign
Corrupt Practices Act of 1972; or made any bribe, rebate, payoff, influence,
payment, kickback or other unlawful payment.
(z) The business, operations and facilities of the Company and each of its
subsidiaries have been and are being conducted or operated in compliance with
all
9
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applicable laws, ordinances, rules, regulations, licenses, permits, approvals,
plans, authorizations or requirements relating to occupational safety and
health, pollution, protection of health or the environment (including, without
limitation, those relating to emissions, discharges, release or threatened
releases of pollutants, contaminants or hazardous or toxic substances, materials
or wastes into ambient air, surface water, groundwater or land, or relating to
the manufacture, processing, distribution, use treatment, storage, disposal,
transport or handling of chemical substances, pollutants, contaminants or
hazardous or toxic substances, materials or wastes, whether solid, gaseous or
liquid in nature) or otherwise relating to remediating real property in which
the Company or any of its subsidiaries has or has had any interest, whether
owned or leased, of any governmental department, commission, board, bureau,
agency or instrumentality of the United States, any state or political
subdivision thereof and all applicable judicial or administrative agency or
regulatory decrees, awards, judgments and orders relating thereto, except for
such failures to so comply as would not, individually or in the aggregate, have
a material adverse effect on the business of the Company and its subsidiaries
taken as a whole, and neither the Company nor any of its subsidiaries has
received any notice from a governmental instrumentality or any third party
alleging any violation thereof or liability thereunder (including, without
limitation, liability for costs of investigating or remediating sites containing
hazardous substances or damage to natural resources).
(aa) Neither the Company nor any of its subsidiaries, nor to the
Company's knowledge any officer or employee of the Company or any of its
subsidiaries is a party to any contract or commitment that restricts in any
material respect the ability of the Company, any of its subsidiaries or such
individual to engage in the business of the Company or such subsidiary as
described in the Registration Statement and the Prospectus.
3. Purchase of the Shares by the Underwriters.
(a) On the basis of the representations and warranties and subject to
the terms and conditions herein set forth, the Company shall issue and sell the
Underwritten Stock to the Underwriters, and the Underwriters agree to purchase
from the Company the Underwritten Stock. The price at which such shares of
Underwritten Stock shall be sold by the Company and purchased by the
Underwriters shall be [XXXXX] per share (the "Purchase Price"). In making this
Agreement, each Underwriter is contracting severally and not jointly; except as
provided in paragraphs (b) and (c) of this Section 3, the agreement of each
Underwriter is to purchase only the respective number of shares of the
Underwritten Stock specified in Schedule I.
(b) If for any reason one of the Underwriters shall fail or refuse
(other than for a reason sufficient to justify the termination of this Agreement
under the
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provisions of Section 7 or 12 hereof) to purchase and pay for the number of
shares of the Common Stock agreed to be purchased by such Underwriter, the
Company shall immediately give notice thereof to you, and the non-defaulting
Underwriter shall have the right within 24 hours after the receipt by you of
such notice to purchase, or procure one or more other Underwriters to purchase,
in such proportions as may be agreed upon between you and such purchasing
Underwriter and upon the terms herein set forth, all or any part of the shares
of the Common Stock which such defaulting Underwriter agreed to purchase. If the
non-defaulting Underwriter fails so to make such arrangements with respect to
all such shares and portion, the number of shares of the Common Stock which the
non-defaulting Underwriter is otherwise obligated to purchase under this
Agreement shall be automatically increased on a pro rata basis to absorb the
remaining shares and portion which the defaulting Underwriter agreed to
purchase; provided, however, that the non-defaulting Underwriter shall not be
obligated to purchase the shares and portion which the defaulting Underwriter
agreed to purchase if the aggregate number of such shares of Common Stock
exceeds 10% of the total number of Shares which the Underwriters agreed to
purchase under this Agreement. If the total number of shares of the Common Stock
which the defaulting Underwriter agreed to purchase shall not be purchased or
absorbed in accordance with the two preceding sentences, the Company shall have
the right, within 24 hours next succeeding the 24-hour period above referred to,
to make arrangements with other underwriters or purchasers satisfactory to you
for purchase of such shares and portion on the terms herein set forth. In any
such case, either you or the Company shall have the right to postpone the
Closing Date determined as provided in Section 5 hereof for not more than seven
business days after the date originally fixed as the Closing Date pursuant to
said Section 5 in order that any necessary changes in the Registration
Statement, the Prospectus or any other documents or arrangements may be made. If
the non-defaulting Underwriter does not make arrangements within the 24-hour
periods stated above for the purchase of all the shares of the Common Stock
which the defaulting Underwriter agreed to purchase hereunder, this Agreement
shall be terminated without further act or deed and without any liability on the
part of the Company to the non-defaulting Underwriter and without any liability
on the part of the non-defaulting Underwriter to the Company. Nothing in this
paragraph (b), and no action taken hereunder, shall relieve the defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
(c) On the basis of the representations, warranties and covenants herein
contained, and subject to the terms and conditions herein set forth, the Company
grants an option to the Underwriters to purchase, severally and not jointly, the
Option Stock at the Purchase Price. Said option may be exercised only to cover
over-allotments in the sale of the Underwritten Stock by the Underwriters and
may be exercised in whole or in part at any time (but not more than once) on or
before the thirtieth day after the date of this agreement upon written or
telegraphic notice by the Underwriters to the Company setting
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forth the aggregate number of shares of Option Stock as to which the
Underwriters are exercising the option. Delivery of the certificates for the
shares of Option Stock, and payment therefor shall be made as provided in
Section 5 hereof. The number of shares of the Option Stock to be purchased by
each Underwriter shall be in such amounts as the Underwriters shall agree upon
prior to the exercise of the option set forth hereunder.
4. Offering by the Underwriters.
(a) The terms of the initial public offering by the Underwriters of the
Shares to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may determine.
(b) The information set forth in the last paragraph on the front cover
page and under the caption "Plan of Distribution" in the Registration Statement,
any Preliminary Prospectus and the Prospectus relating to the Shares filed by
the Company (insofar as such information relates to the Underwriters or related
persons) constitutes the only information furnished by the Underwriters to the
Company for inclusion in the Registration Statement, any Preliminary Prospectus,
and the Prospectus, and you on behalf of the Underwriters represent and warrant
to the Company that the statements made therein (insofar as they relate to the
Underwriters or related persons) are correct and do not omit any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
5. Delivery of and Payment for the Shares.
(a) Delivery of certificates for the shares of the Underwritten Stock
and the Option Stock (if the option granted by Section 3(c) hereof shall have
been exercised not later than 7:00 A.M., San Francisco time, on the date two
business days preceding the Closing Date), and payment therefor, shall be made
at the office of Gray Cary Ware & Freidenrich LLP, on the third business day
after the date of this agreement, or at such time on such other day, not later
than seven full business days after such third business day, as shall be agreed
upon in writing by the Company and you. The date and hour of such delivery and
payment are herein called the Closing Date.
(b) If the option granted by Section 3(c) hereof shall be exercised
after 7:00 A.M., San Francisco time, on the date two business days preceding the
Closing Date, delivery of certificates for the shares of Option Stock, and
payment therefor shall be made at the office of Gray Cary Ware & Freidenrich LLP
at 7:00 A.M., San Francisco time, on the third business day after the exercise
of such Option.
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(c) Payment for the Shares purchased from the Company shall be made to
the Company or its order by wire transfer or one or more certified or official
bank check or checks in same day funds. Such payment shall be made upon delivery
of certificates for the Shares to you against receipt therefor signed by you.
Certificates for the Shares to be delivered to you shall be registered in the
name or names and shall be in such denominations as you may request at least one
business day before the Closing Date, in the case of Underwritten Stock, and at
least one business day prior to the purchase thereof, in the case of Option
Stock. Such certificates will be made available to the Underwriters for
inspection, checking and packaging of BHC Securities, Inc. on the business days
prior to the Closing Date or, in the case of Option Stock, by 12:00 P.M., San
Francisco time on the business day preceding the date of purchase.
6. Covenants of the Company. The Company covenants and agrees as follows:
(a) The Company will (i) prepare and timely file with the Commission
under 424(b) a Prospectus containing information previously omitted at the time
of effectiveness of the Registration Statement in reliance on Rule 430A and (ii)
not file with the Commission any amendment to the Registration Statement or
supplement to the Prospectus (A) of which the Underwriters shall not previously
have been advised and furnished with a copy a reasonable period of time prior to
the proposed filing and as to which filing the Underwriters shall not have given
their consent or (B) which is not in compliance with the Act or the rules and
regulations of the Commission thereunder.
(b) As soon as the Company is advised or obtains knowledge thereof, the
Company will advise the Underwriters (i) of any request made by the Commission
for amendment of the Registration Statement, for supplement to the Prospectus or
for additional information, (ii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement, or the
institution or threat of any action, investigation or proceeding for that
purpose, or (iii) the receipt by the Company of any notification with respect to
the suspension of the qualification of the Shares for sale in any jurisdiction,
or the receipt by it of notice of the initiation or threatening of any
proceeding for that purpose. The Company will use its best efforts to prevent
the issuance of any such order and, if issued, to obtain the lifting or
withdrawal thereof as soon as possible.
(c) The Company will (i) on or before the Closing Date, deliver to the
Underwriters a signed copy of the Registration Statement as originally filed and
of each amendment thereto filed prior to the time the Registration Statement
becomes effective and, promptly upon the filing thereof, a signed copy of each
post-effective amendment, if any to the Registration Statement (together with,
in each case, all exhibits thereto unless previously delivered to the
Underwriter), (ii) as promptly as possible deliver to the
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Underwriters, at such office as the Underwriters may designate, as many copies
of the Prospectus as the Underwriters may reasonably request, and (iii)
thereafter from time to time during the period in which a prospectus is required
by law to be delivered by an Underwriter or dealer, likewise send to the
Underwriters as many additional copies of the Prospectus and as many copies of
any supplement to the Prospectus and of any amended prospectus, filed by the
Company with the Commission, as the Underwriters may reasonably request for the
purposes contemplated by the Act.
(d) If at any time during the period in which a prospectus is required by
law to be delivered by an Underwriter or dealer any event relating to or
affecting the Company, or of which the Company shall be advised by in writing by
the Underwriters, shall occur as a result of which it is necessary, in the
opinion of counsel for the Company or of counsel for the Underwriters, to
supplement or amend the Prospectus in order to make the Prospectus not
misleading in the light of the circumstances existing at the time it is
delivered to a purchaser of the Shares, the Company will forthwith prepare and
file with the Commission a supplement to the Prospectus or an amended prospectus
so that the Prospectus as so supplemented or amended will not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances existing
at the time such Prospectus is delivered to such purchaser, not misleading. If,
after the initial public offering of the Shares by the Underwriters and during
such period, the Underwriters shall propose to vary the terms of the offering
thereof by reason of changes in general market conditions or otherwise, you will
advise the Company in writing of the proposed variation, and, if in the opinion
either of counsel for the Company or of counsel for the Underwriters such
proposed variation requires that the Prospectus be supplemented or amended, the
Company will forthwith prepare and file with the Commission a supplement to the
Prospectus or an amended prospectus setting forth such variation. The Company
authorizes the Underwriters and all dealers to whom any of the Shares may be
sold by the Underwriters to use the Prospectus, as from time to time amended or
supplemented, in connection with the sale of the Shares in accordance with the
applicable provisions of the Act and the applicable rules and regulations
thereunder for such period.
(e) Prior to the filing thereof with the Commission, the Company will submit
to you, for your information, a copy of any post-effective amendment to the
Registration Statement and any supplement to the Prospectus or any amended
prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in the
qualification of the Shares for offer and sale under the securities or blue sky
laws of such jurisdictions as you may designate and, during the period in which
a prospectus is required by law to be delivered by an Underwriter or a dealer,
in keeping such qualifications in good standing under said securities or blue
sky laws; provided, however,
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that the Company shall not be required to qualify as a foreign corporation or
file any general consent to service of process in any jurisdiction in which it
is not so qualified. The Company will from time to time, prepare and file such
statements, reports, and other documents as are or may be required to continue
such qualifications in effect for so long a period as you may reasonably request
for distribution of the Shares.
(g) The Company agrees to pay all costs and expenses incident to the
performance of the obligations of the Company under this Agreement, including,
without limitation, all costs and expenses incident to (i) the preparation,
printing and filing with the Commission and the NASD of the Registration
Statement, any Preliminary Prospectus and the Prospectus, (ii) the furnishing to
the Underwriters of copies of any Preliminary Prospectus and of the several
documents required by paragraph (c) of this Section 6 to be so furnished, (iii)
the printing of this Agreement and related documents delivered to the
Underwriters, (iv) the preparation, printing and filing of all supplements and
amendments to the Prospectus referred to in paragraph (d) of this Section 6, (v)
the furnishing to you of the reports and information referred to in paragraph
(j) of this Section 6, and (vi) the printing and issuance of stock certificates,
including the transfer agent's fees.
(h) The Company agrees to reimburse you, for the account of the several
Underwriters, for blue sky fees and related disbursements (including counsel
fees and disbursements and cost of printing memoranda for the Underwriters) paid
by or for the account of the Underwriters or their counsel in qualifying the
Shares under state securities or blue sky laws and in the review of the offering
by the NASD.
(i) As soon as practicable, but in any event not later than 45 days after
the end of the first fiscal quarter first occurring after the first anniversary
of the Effective Date, the Company will make generally available to its security
holders, in the manner specified in Rule 158(b) of the rules and regulations
promulgated under the Act an earnings statement which will be in the detail
required by, and will otherwise comply with, the provisions of Section 11(a) of
the Act and Rule 158(a) of the rules and regulations promulgated thereunder.
(j) During a period of three years after the date hereof, the Company will
furnish to you, and to each Underwriter who may so request in writing, copies of
all periodic and special reports furnished to stockholders of the Company and of
all information, documents and reports filed with the Commission.
(k) The Company will maintain a transfer agent and, if necessary under the
jurisdiction of incorporation of the Company, a registrar (which may be the
same entity as the transfer agent) for its Common Stock.
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(l) The Company will not, directly or indirectly, without the prior
written consent of W.R. Hambrecht & Company, LLC on behalf of the Underwriters,
issue, offer, sell, grant any option to purchase or otherwise dispose (or
announce any issuance, offer, sale, grant of any option to purchase or other
disposition) of any shares of Common Stock or any securities convertible into,
or exchangeable or exercisable for, shares of Common Stock for a period of 90
days following the commencement of the public offering of the Shares by the
Underwriters, except pursuant to this Agreement and except for issuances
pursuant to the exercise of stock options outstanding on or granted subsequent
to the date hereof, pursuant to a stock option or other employee benefit plan in
existence on the date hereof and except as contemplated by the Prospectus.
(m) The Company will cause the Shares to be duly included for quotation
on the Nasdaq National Market prior to the Closing Date.
(n) The Company will not take, directly or indirectly, and will use its
best efforts to cause its officers, directors or affiliates not to take,
directly or indirectly, any action designed to, or which might in the future
reasonably be expected to cause or result in, stabilization or manipulation of
the price of any securities of the Company.
(o) The Company will apply the net proceeds of the offering received by
it in the manner set forth under the caption "Use of Proceeds" in the
Prospectus.
(p) The Company will timely file all such reports, forms or other
documents as may be required from time to time, under the Act, the rules and
regulations promulgated thereunder, the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the rules and regulations promulgated
thereunder, and all such reports, forms and documents filed will comply as to
form and substance with the applicable requirements under the Act, the rules and
regulations promulgated thereunder, the Exchange Act and the rules and
regulations promulgated thereunder.
(q) The Company is familiar with the Investment Company Act of 1940, as
amended, and has in the past conducted its affairs, and will in the future
conduct its affairs, in such a manner to ensure that the Company was not and
will not be an "investment company" or a "company" controlled by an "investment
company" within the meaning of the Investment Company Act of 1940, as amended,
and the rules and regulations thereunder.
7. Conditions of the Underwriter's Obligations. The obligations of the
several Underwriters under this Agreement are subject to the performance by the
Company on and as of the Closing Date or any later date on which Option Stock is
to be purchased, as the case may be, of its covenants and agreements hereunder,
and the following additional conditions:
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(a) The Registration Statement shall have become effective, and no stop
order suspending the effectiveness of the Registration Statement shall have been
issued, and no proceedings for that purpose shall have been instituted or
threatened or, to the knowledge of the Company or the Underwriter, shall be
contemplated by the Commission.
(b) The Underwriters shall be satisfied that (i) as of the Effective Date,
the statements made in the Registration Statement and the Prospectus were true
and correct and neither the Registration Statement nor the Prospectus omitted to
state a fact required to be stated therein or is necessary to make the
statements therein not misleading, (ii) since the Effective Date, no event has
occurred which should have been set forth in a supplement or amendment to the
Prospectus which has not been set forth in an effective supplement or amendment,
(iii) since the respective dates as of which information is given in the
Registration Statement in the form in which it originally became effective and
the Prospectus contained therein, there has not been any material adverse change
or any development involving a prospective material adverse change in the
business, properties, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business, and since such dates, except in
the ordinary course of business, neither the Company nor any of its subsidiaries
has entered into any material transaction not referred to in the Registration
Statement in the form in which it originally became effective and the Prospectus
contained therein, (iv) neither the Company nor any of its subsidiaries has any
material contingent obligations which are not disclosed in the Registration
Statement and the Prospectus, (v) there are not pending or known threatened
legal proceedings to which the Company or any of its subsidiaries is a party or
of which property of the Company or any of its subsidiaries is subject which are
material and which are not disclosed in the Registration Statement and the
Prospectus, (vi) there are not any franchises, contracts, leases or other
documents which are required to be filed as exhibits to the Registration
Statement which have not been filed as required, and (vii) the representations
and warranties of the Company herein are true and correct in all material
respects as of the Closing Date or any later date on which Option Stock is to be
purchased, as the case may be.
(c) On or prior to the Closing Date, the legality and sufficiency of the
sale of the Shares hereunder and the validity and form of the certificates
representing the Shares, all corporate proceedings and other legal matters
incident to the foregoing, and the form of the Registration Statement and of the
Prospectus (except as to the financial statements contained therein), shall have
been approved at or prior to the Closing Date by Morrison & Foerster LLP,
counsel for the Underwriters. The Underwriters shall have received from counsel
to the Underwriters, such opinion or opinions with respect to the issuance and
sale of the Shares, the Registration Statement and the Prospectus and such
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other related matters as the Underwriters reasonably may request and such
counsel shall have received such documents and other information as they request
to enable them to pass upon such matters.
(d) On the Closing Date, and if Option Stock is purchased at any date after
the Closing Date, on such later date, the Underwriters shall have received an
opinion addressed to the Underwriters, dated the Closing Date or, if related to
the later sale of Option Stock, such later date, of Gray Cary Ware & Freidenrich
LLP, counsel to the Company ("Company Counsel"), to the effect set forth below:
(i) Each of the Company and its subsidiaries has been duly organized and
is validly existing and in good standing under the laws of its jurisdiction
of incorporation or formation, as the case may be, with full power and
corporate authority to own or, lease its properties and to conduct its
business as described in the Registration Statement and the Prospectus and
is duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction in which the ownership or leasing of property
or the conduct of its business requires such qualification (except for
those jurisdictions in which the failure so to qualify would not have a
material adverse effect on the Company and its subsidiaries, taken as a
whole);
(ii) Upon the closing of the sale of the Underwritten Stock, the
authorized capital stock of the Company consists of ___________ shares of
Preferred Stock, $_______ par value, of which there are no outstanding
shares, and ___________ shares of Common Stock, $0.001 par value, of which
there are outstanding ________ shares (including the Underwritten Stock and
any shares of Option Stock issued on the date hereof). The securities of
the Company conform in all material respects to the description thereof
contained in the Prospectus. Proper corporate proceedings have been validly
taken to authorize the Company's authorized capital stock and all
outstanding shares of such capital stock (including the Underwritten Stock
have been duly authorized and validly issued by the Company, are fully paid
and nonassessable. Any Option Stock purchased after the Closing Date has
been duly authorized and when issued and delivered to and paid for by the
Underwriters as provided in the Underwriting Agreement, will have been duly
and validly issued and be fully paid and nonassesable. No preemptive
rights, rights of first refusal or other rights exist with respect to the
Shares, or the issue and sale thereof, pursuant to the Company's
certificate of incorporation or bylaws and, there are to the knowledge of
such counsel no contractual preemptive rights that have not been waived,
right of first refusal or rights of co-sale which exist with respect to the
Shares.
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(iii) The outstanding shares of capital stock or ownership interests of
each of the Company's subsidiaries have been duly authorized and validly
issued, are fully paid and non-assessable, and are solely owned by the
Company free and clear of all liens, encumbrances and equities and claims;
and no options, warrants or other rights to purchase, agreements or other
obligations to issue or other rights to convert any obligations into shares
of capital stock or ownership interests in such subsidiary are outstanding.
(iv) To such counsel's knowledge, there are no rights of any holders of
the Company's securities, not effectively satisfied or waived, to require
registration under the Act of any of the Company's securities or other
securities of the Company in connection with the filing of the Registration
Statement or with the offer or sale of the Shares;
(v) The Company has full legal right, power, and authority to enter into
the Underwriting Agreement and to consummate the transactions provided for
therein. The Underwriting Agreement has been duly authorized, executed and
delivered by the Company and constitutes the legal, valid and binding
agreement of the Company, enforceable in accordance with its terms, except
as limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other laws now or hereafter in effect relating to or affecting
creditors' rights generally or by general principles of equity relating to
the availability of remedies and except as rights to indemnity and
contribution may be limited by federal or state securities laws or the
public policy underlying such laws.
(vi) None of the Company's execution or delivery of the Underwriting
Agreement, its performance thereof, its consummation of the transactions
contemplated therein or its application of the net proceeds of the offering
in the manner set forth under the caption "Use of Proceeds," conflicts or
will conflict with or results or will result in any breach or violation of
any of the terms or provisions of, or constitute a default under, or result
in the creation or imposition of any lien, charge or encumbrance upon, any
property or assets of the Company pursuant to the terms of the certificate
of incorporation, bylaws or operating agreement of the Company or any of
its subsidiaries; the terms of any indenture, mortgage, deed of trust,
voting trust agreement, stockholder's agreement, note agreement or other
agreement or instrument known to such counsel to which the Company or any
of its subsidiaries is a party or by which it is or may be bound or to
which its properties may be subject; any statute, rule or regulation of any
regulatory body or administrative agency or other governmental agency or
body, domestic or foreign, having jurisdiction over
19
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the Company or any of its subsidiaries or any of their activities or properties,
which would materially and adversely affect the business or properties of the
Company and its subsidiaries taken as a whole; or any judgment, decree or order,
known to such counsel of any government, arbitrator, court, regulatory body or
administrative agency or other governmental agency or body, domestic or foreign,
having such jurisdiction, which would materially and adversely affect the
business or properties of the Company and its subsidiaries taken as a whole;
(vii) No consent, approval, authorization or order of any court, regulatory
body or administrative agency or other governmental agency or body, domestic or
foreign, has been or is required for the consummation of the transactions
contemplated in the Underwriting Agreement, except such as have been obtained
under the Act or may be required under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by the Underwriters;
(viii) To the best of such counsel's knowledge, the conduct of the business of
the Company and its subsidiaries is not in violation of any federal, state or
local statute, administrative regulation or other law, which violation is likely
to have a material adverse effect on the Company and its subsidiaries, taken as
a whole; and each of the Company and its subsidiaries has obtained all licenses,
permits, franchises, certificates and other authorizations from state, federal
and other regulatory authorities as are necessary or required for the ownership,
leasing and operation of its properties and the conduct of its business as
presently conducted and as contemplated in the Prospectus;
(ix) The Registration Statement is effective under the Act; any required
filing of the Prospectus pursuant to Rule 424(b) has been made in the manner and
within the time period required by Rule 424(b); and no stop order suspending the
effectiveness of the Registration Statement or any amendment thereto has been
issued, and no proceedings for that purpose have been instituted or are pending
or, to the knowledge of such counsel, are threatened or contemplated by the
Commission;
(x) The Registration Statement and the Prospectus (except for the financial
statements, schedules and other financial data included therein, as to which
such counsel need not express any opinion), complied as to form in all material
respects with the requirements of the Act and the rules and regulations of the
Commission thereunder;
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(xi) The descriptions contained and summarized in the Registration
Statement and the Prospectus of franchises, contracts, leases,
documents, or any threatened legal or governmental actions, suits or
proceedings, are accurate and fairly represent in all material respects
the information required to be shown by the Act and the rules and
regulations of the Commission thereunder. To the knowledge of such
counsel, there are no franchises, contracts, leases, documents, or any
threatened legal or governmental actions, suits or proceedings, which
are required by the Act and the rules and regulations of the Commission
thereunder to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement
which are not described or filed as required;
(xii) The statements (1) in the Prospectus under the captions "Risk
Factors -___________, ___________, __________ and ___________,"
"Business ___________, __________ and ___________," Management,"
"Certain Transactions," "Description of Capital Stock" and "Shares
Eligible for Future Sale" and (2) in the Registration Statement in Items
24 and 26 in each case insofar as such statements constitute summaries
of the legal matters, documents or proceedings referred to therein,
fairly present the information required under the Act and the rules and
regulations promulgated thereunder (the "Act and Rules") with respect to
such legal matters, documents and proceedings and fairly summarize the
matters referred to therein to the extent required by the Act and Rules;
(xiii) Good and marketable title to the Shares sold under the
Underwriting Agreement, free and clear of all liens, encumbrances,
equities, security interests and claims of which counsel has knowledge,
has been transferred to the Underwriters, assuming for the purpose of
this opinion that the Underwriters purchased the same in good faith
without notice of any liens, encumbrances, equities, security interests
or adverse claims; and
(xiv) The Shares have been duly authorized for inclusion in The Nasdaq
National Market upon official notice of issuance.
In addition, such counsel shall state that in the course of the preparation
of the Registration Statement and the Prospectus, such counsel has participated
in conferences with officers and representatives of the Company and with the
Company's independent public accountants, at which conferences such counsel made
inquiries of such officers, representatives and accountants and discussed the
contents of the Registration Statement and the Prospectus and (without taking
any further action to verify independently the statements made in the
Registration Statement and the Prospectus and, except as stated in
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the foregoing opinion, without assuming responsibility for the accuracy,
completeness or fairness of such statements) nothing has come to such counsel's
attention that causes such counsel to believe that either the Registration
Statement as of the date it is declared effective and as of the Closing Date (or
if related to the later sale of the Option Stock, such later date) or the
Prospectus as of the date thereof and as of the Closing Date (or if related to
the later sale of the Option Stock, such later date) contained or contains any
untrue statement of a material fact or omitted or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading (it being understood that such counsel need not express any opinion
with respect to the financial statements, schedules and other financial data
included in the Registration Statement or the Prospectus).
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials. References to the Registration
Statement and the Prospectus in this paragraph (d) shall include any amendment
or supplement thereto at the date of such opinion.
(e) You shall have received from PricewaterhouseCoopers LLP a letter or
letters, addressed to the Underwriters and dated the Closing Date and any later
date on which Option Stock is purchased, confirming that they are independent
public accountants with respect to the Company within the meaning of the Act and
the applicable published rules and regulations thereunder and based upon the
procedures described in their letter delivered to the Underwriters concurrently
with the execution of this Agreement (the "Original Letter"), but carried out to
a date not more than three business days prior to the Closing Date or such later
date on which Option Stock is purchased (i) confirming, to the extent true, that
the statements and conclusions set forth in the Original Letter are accurate as
of the Closing Date or such later date, as the case may be, and (ii) setting
forth any revisions and additions to the statements and conclusions set forth in
the Original Letter which are necessary to reflect any changes in the facts
described in the Original Letter since the date of the Original Letter or to
reflect the availability of more recent financial statements, data or
information. The letters shall not disclose any change, or any development
involving a prospective change, in or affecting the business or properties of
the Company or any of its subsidiaries, which in your sole judgment, makes it
impractical or inadvisable to proceed with the public offering of the Shares or
the purchase of the Option Stock as contemplated by the Prospectus.
(f) You shall have from PricewaterhouseCoopers LLP, a letter stating
that their review of the Company's internal accounting controls, to the extent
they deemed necessary in establishing the scope of their examination of the
Company's
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financial statements as at March 31, 1999, did not disclose any weakness in
internal controls that they considered to be material weaknesses.
(g) On the Closing Date, and on any later date on which Option Stock is
purchased, you shall have received a certificate, dated the Closing Date or such
later date, as the case may be, signed by the Chief Executive Officer and Chief
Financial Officer of the Company stating that the respective signers of said
certificate have carefully examined the Registration Statement in the form in
which it originally became effective and the Prospectus contained therein and
any amendments or supplements thereto and this Agreement, and that the
statements included in clauses (i) through (xiii) of paragraph (d) of this
Section 7 are true and correct.
(h) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several jurisdictions,
or other evidence satisfactory to you, of the qualification referred to in
paragraph (f) of Section 6 hereof.
(i) Prior to the Closing Date, the Shares shall have been duly
authorized for inclusion on the Nasdaq National Market upon official notice of
issuance.
In case any of the conditions specified in this Section 7 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company; provided,
however, that (i) in the event of such termination, the Company agrees to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company under this Agreement,
including all costs and expenses referred to in paragraphs (g) and (h) of
Section 6 hereof, and (ii) if this Agreement is terminated by you because of any
refusal, inability or failure on the part of the Company to perform any
agreement herein, to fulfill any of the conditions herein, or to comply with any
provision hereof other than by reason of a default by any of the Underwriters,
the Company will reimburse the Underwriters severally upon demand for all out-
of-pocket expenses (including reasonable fees and disbursements of counsel) that
shall have been incurred by them in connection with the transactions
contemplated hereby.
8. Conditions of the Obligations of the Company.
(a) The obligations of the Company to deliver the Shares shall be
subject to the conditions that (i) the Registration Statement shall have become
effective and (ii) no stop order suspending the effectiveness thereof shall be
in effect and no proceedings therefor shall be pending or threatened by the
Commission.
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(b) In case either of the conditions specified in paragraph (a) of this
Section 8 shall not be fulfilled, this Agreement may be terminated by the
Company by giving notice to you. Any such termination shall be without liability
of the Company to the Underwriters and without liability of the Underwriters to
the Company; provided, however, that in the event of any such termination the
Company agrees to indemnify and hold harmless the Underwriters from all costs or
expenses incident to the performance of the obligations of the Company under
this Agreement, including all costs and expenses referred to in paragraphs (g)
and (h) of Section 6 hereof.
9. Indemnification and Contribution.
(a) Subject to the provisions of paragraph (d) of this Section 9, the
Company agrees to indemnify and hold harmless each Underwriter (and any person
participating in the distribution who is deemed to be an underwriter (as defined
in Section 2(11) of the Act) and each person (including each member or officer
thereof), if any, who controls any Underwriter within the meaning of Section 15
of the Act or Section 20 of the Exchange Act, from and against any and all
losses, claims, damages or liabilities, joint or several (and actions in respect
thereof), to which such indemnified parties or any of them may become subject,
under the Act, the Exchange Act or other federal or state statutory law or
regulation, at common law or otherwise, and the Company agrees to reimburse each
such Underwriter and controlling person for any legal or other expenses
(including, except as otherwise hereinafter provided, reasonable fees and
disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages, or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or are based upon (i) any untrue statement or alleged
untrue statement of any material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement) or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (ii) any untrue statement or alleged untrue statement
of any material fact contained in any Preliminary Prospectus or the Prospectus
(as amended or as supplemented if the Company shall have filed with the
Commission any amendment thereof or supplement thereto) or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstance under
which they were made, not misleading; provided, however, that (i) the indemnity
agreement of the Company contained in this paragraph (a) shall not apply to any
such loss, claim, damage, liability or action if such statement or omission was
made in reliance upon and in conformity with information furnished as herein
stated or otherwise furnished in writing to the Company by or on behalf of any
Underwriter expressly for use in any Preliminary Prospectus or the
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Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto, and (ii) that the indemnity agreement contained in
this paragraph (a) with respect to any Preliminary Prospectus shall not
inure to the benefit of any Underwriter (or such persons) if the person
asserting any such loss, claim, damage, liability or action purchased
Shares which are the subject thereof to the extent that any such loss,
claim, damage, liability or action (A) results from the fact that such
Underwriter failed to send or give a copy of the Prospectus (as amended or
supplemented) to such person at or prior to the confirmation of the sale of
such Shares to such person in any case where such delivery is required by
the Act and (B) arises out of or is based upon an untrue statement or
omission of a material fact contained in such Preliminary Prospectus that
was corrected in the Prospectus (as amended and supplemented), unless such
failure resulted from non-compliance by the Company with paragraph (c) of
Section 6 hereof. The indemnity agreements of the Company contained in
this paragraph (a) and the representations and warranties of the Company
contained in Section 2 hereof shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the delivery and payment for the
Shares.
(b) Each Underwriter severally agrees to indemnify and hold harmless
the Company, each of its directors, each of its officers who has signed the
Registration Statement, each person, if any, who controls the Company
within the meaning of Section 15 of the Act or Section 20 of the Exchange
Act, and the other Underwriters against any and all losses, claims, damages
or liabilities, joint or several, to which such indemnified parties or any
of them may become subject, under the Act, the Exchange Act or other
federal or state statutory law or regulation, at common law or otherwise
and to reimburse each of them for any legal or other expenses (including,
except as otherwise hereinafter provided, reasonable fees and disbursements
of counsel) incurred by the respective indemnified parties in connection
with defending against any such losses, claims, damages or liabilities or
in connection with any investigation or inquiry of, or other proceeding
which may be brought against, the respective indemnified parties, in each
case arising out of or are based upon (i) any untrue statement or alleged
untrue statement of any material fact contained in the Registration
Statement (including the Prospectus as part thereof and any Rule 462(b)
registration statement) or any post-effective amendment thereto (including
any Rule 462(b) registration statement) or the omission or alleged omission
to state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, or (ii) any untrue statement
or alleged untrue statement of any material fact contained in any
Preliminary Prospectus or the Prospectus (as amended or as supplemented if
the Company shall have filed with the Commission any amendment thereof or
supplement thereto) or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstance under which they were
made, not misleading, in each case to the extent, but only to the extent,
that such statement or
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omission was made in reliance upon and in conformity with information furnished
as herein stated or otherwise furnished in writing by or on behalf of such
indemnifying Underwriter to the Company expressly for use in the Registration
Statement or the Prospectus or any such amendment thereof or supplement thereto,
and will reimburse, as incurred, all legal or other expenses reasonably incurred
by the Company or any such director, officer or controlling person in connection
with investigating or defending any such loss, claim, damage, liability or
action. The indemnity agreement of each Underwriter contained in this paragraph
(b) shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any indemnified party and shall survive
the delivery and payment for the Shares.
(c) Each party indemnified under the provisions of paragraph (a) or (b) of
this Section 9 agrees that, upon the service of a summons or other initial legal
process upon it in any action or suit instituted against it or upon its receipt
of written notification of the commencement of any investigation or inquiry of,
or proceeding against it, in respect of which indemnity may be sought on account
of any indemnity agreement contained in such paragraphs, such indemnified party
will promptly notify any party or parties from whom indemnification may be
sought hereunder of the commencement thereof in writing. No indemnification
provided for in such paragraphs shall be available to any party who shall fail
so to give such notice if the party to whom such notice was not given was
unaware of the action, suit, investigation, inquiry or proceeding to which such
notice would have related and was prejudiced by the failure to give the notice,
but the omission so to notify such indemnifying party or parties of any such
service or notification shall not relieve such indemnifying party or parties
from any liability which it or they may have to the indemnified party for
contribution or otherwise than on account of such indemnity agreement. Any
indemnifying party or parties against which a claim is to be made will be
entitled, at its own expense, to participate in the defense of such action,
suit, investigation or inquiry of, an indemnified party. Any indemnifying party
shall be entitled, if it so elects within a reasonable time after receipt of
notice from the indemnified party or parties of an action, suit, investigation
or inquiry to which indemnity may be sought, to assume the entire defense
thereof (alone or in conjunction with any other indemnifying party or parties),
at its own expense, in which case such defense shall be conducted by counsel
reasonably satisfactory to the indemnified party or parties; provided, however,
that (i) if the indemnified party or parties has reasonably concluded that there
may be a conflict between the positions of the indemnifying party or parties and
of the indemnified party or parties in conducting the defense of such action,
suit, investigation, inquiry or proceeding or that there may be legal defenses
available to such indemnified party or parties different from or in addition to
those available to the indemnifying party or parties, then counsel for the
indemnified party or parties shall be entitled to conduct such defense to the
extent reasonably determined by such counsel to be necessary to protect the
interests of the indemnified party or parties and (ii) in any
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<PAGE>
event, the indemnified party or parties shall be entitled to have counsel chosen
by such indemnified party or parties participate in, but not conduct, the
defense. Upon receipt of notice from the indemnifying party to such indemnified
party of its election so to assume the defense of such action and approval by
the indemnified party of counsel, the indemnifying party will not be liable to
such indemnified party under this Section 9 for any legal or other expenses
(other than the reasonable costs of investigation) subsequently incurred by such
indemnified party in connection with the defense thereof unless (i) the
indemnified party has employed such counsel in connection with the assumption of
different or additional legal defenses in accordance with the proviso to the
immediately preceding sentence, or (ii) the indemnifying party has authorized in
writing the employment of counsel for the indemnified party at the expense of
the indemnifying party. If no such notice to assume the defense of such action
has been given within a reasonable time of the indemnified party's or parties'
notice to such indemnifying party or parties, the indemnifying party or parties
shall be responsible for any legal or other expenses incurred by the indemnified
party or parties in connection with the defense of the action, suit,
investigation, inquiry or proceeding.
(d) If the indemnification provided for in this Section 9 is unavailable or
insufficient to hold harmless an indemnified party under paragraph (a) or (b)
above in respect of any losses, claims, damages, expenses or liabilities (or
actions in respect thereof) referred to therein, then each indemnifying party,
in lieu of indemnifying such indemnified party, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (or actions in respect thereof) referred to in paragraphs
(a) and (b) above (i) in such proportion as is appropriate to reflect the
relative benefits received by each of the contributing parties from the offering
of the Shares or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of each of the contributing parties, on the one hand, and the party to be
indemnified, on the other hand in connection with the statements or omissions
that resulted in such losses, claims, damages or liabilities, as well as any
other relevant equitable considerations. The relative benefits received by the
Company, on the one hand, and the Underwriters, on the other, shall be deemed to
be in the same proportion as the total net proceeds from the offering of the
Shares (before deducting expenses) and the total underwriting discount received
by the Underwriters, in each case as set forth in the table on the cover page of
the Prospectus, bear to the aggregate public offering price of the Shares.
Relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
each indemnifying party, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission.
27
<PAGE>
The parties agree that it would not be just and equitable if contributions
pursuant to this paragraph (d) were to be determined by pro rata allocation or
by any other method of allocation which does not take into account the equitable
consideration referred to above. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages or liabilities (or actions in
respect thereof) referred to above in this paragraph (d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this paragraph (d), no Underwriter shall be
required to contribute any amount in excess of the underwriting discount
applicable to the Shares purchased by the Underwriter hereunder. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The Underwriters' obligations in this
paragraph (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect to which a claim for contribution may be made against another
party or parties under this paragraph (d), it will promptly notify such party or
parties from whom contribution may be sought, but the omission so to notify such
party or parties shall not relieve the party or parties from whom contribution
may be sought from any other obligation it may have hereunder or otherwise
(except as specifically provided in paragraph (c) of this Section 9). The
contribution agreement set forth above shall be in addition to any liabilities
which any indemnifying party may have at common law or otherwise.
(e) No indemnifying party will without the prior written consent of the
indemnified party, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action, suit or proceeding in respect of
which indemnification may be sought hereunder (whether or not such indemnified
party or any person who controls such Underwriter within the meaning of Section
15 of the Act or Section 20 of the Exchange Act is a party to such claim,
action, suit or proceeding) unless such settlement, compromise or consent
includes an unconditional release of such indemnified party and each such
controlling person from all liability arising out of such claim, action, suit or
proceeding.
10. Reimbursement of Certain Expenses. In addition to their other
obligations under Section 9 of this Agreement, the Company hereby agrees to
reimburse on quarterly basis the Underwriters for all reasonable legal and other
expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 9 of this agreement, notwithstanding the absence of a
judicial determination as to the propriety and
28
<PAGE>
enforceability of the obligations under this Section 10 and the possibility that
such payments might later be held to be improper; provided, however, that (i) to
the extent that any such payment is ultimately held to be improper, the
Underwriters shall promptly refund it and (ii) the Underwriters shall provide to
the Company, upon request, reasonable assurances of their ability to effect any
refund, when and if due.
11. Representations, etc. to Survive Delivery. The respective
representations, warranties, agreements, covenants, indemnities and statements
of, and on behalf of, the Company and its officers, and the Underwriters,
respectively, set forth in or made pursuant to this Agreement will remain in
full force and effect, regardless of any investigation made by or on behalf of
the Underwriters, and will survive delivery of and payment for the Shares. Any
successors to the Underwriters shall be entitled to the indemnity, contribution
and reimbursement agreements contained in this Agreement.
12. Termination.
(a) This Agreement (except for the provisions of Section 9 hereof) may
be terminated by you by notice to the Company at any time prior to the Closing
Date if: (i) the Company shall have sustained a loss by strike, fire, flood,
accident or other calamity of such a character as to interfere materially with
the conduct of the business and operations of the Company regardless of whether
or not such loss was insured; (ii) trading in the Common Stock shall have been
suspended or trading in securities generally on the New York Stock Exchange, the
American Stock Exchange or the Nasdaq National Market shall have been suspended
or limitations on such trading shall have been imposed or limitations on prices
shall have been established on any such exchange or market system; (iii) the
engagement in hostilities or an escalation of major hostilities by the United
States or the declaration of war or a national emergency by the United States on
or after the date hereof shall have occurred; (iv) any outbreak of hostilities
or other national or international calamity or crisis or material adverse change
in economic or political conditions shall have occurred if the effect of such
outbreak, calamity, crisis or change in economic or political conditions in the
financial markets of the United States would, in your reasonable judgment, make
the offering or delivery of the Shares impracticable; (v) the enactment,
publication, decree or other promulgation of any federal or state statute,
regulation, rule or order of, or commencement of any proceeding or investigation
by, any court, legislative body, agency or other governmental authority shall
have occurred which in the Underwriter's reasonable opinion materially and
adversely affects or will materially or adversely affect the business or
operations of the Company; (vi) a banking moratorium shall have been declared by
New York or United States authorities; (vii) the taking of any action by any
federal, state or local government or agency in respect of its monetary or
fiscal affairs shall have occurred which in your reasonable judgment has a
material adverse effect on the securities markets in the United States.
29
<PAGE>
(b) If this agreement is terminated pursuant to this Section 12, there
shall be no liability of the Company to the Underwriters and no liability of the
Underwriters to the Company; provided, however, that in the event of any such
termination, the Company agrees to indemnify and hold harmless the Underwriters
from all costs or expenses incident to the performance of the obligations of the
Company under this Agreement, including all costs and expenses referred to in
paragraphs (g) and (h) of Section 6. Notwithstanding any termination of this
agreement, the provisions of Section 9 hereof shall survive and remain in full
force and effect.
13. Notices. All communications hereunder shall be in writing and if sent
to the Underwriters shall be mailed or delivered or telegraphed and confirmed by
letter or telecopied and confirmed by letter to W.R. Hambrecht & Company, LLC at
550 Fifteenth Street, San Francisco, California 94103 or, if sent to the
Company, shall be mailed or delivered or telegraphed and confirmed to the
Company at 706 Mission Street, San Francisco, California 94103.
14. Successors. This agreement shall incur to the benefit of and be
binding upon the Company and the Underwriters and, with respect to the
provisions of Section 9 hereof, the several parties (in addition to the Company
and the Underwriters) indemnified under the provisions of said Section 9, and
their respective personal representatives successors and assigns. Nothing in
this agreement is intended or shall be construed to give any other person any
legal or equitable right, remedy or claim under or in respect of this agreement,
or any provisions herein contained. The term "successors and assigns" as herein
used shall not include any purchaser, as such purchaser, of any of the Shares
from the Underwriters.
15. Counterparts. This agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
together shall be deemed to be one and the same instrument.
30
<PAGE>
If the foregoing correctly sets forth our understanding, please indicate
the Underwriters' acceptance thereof in the space provided below for that
purpose, whereupon this letter shall constitute a binding agreement between us.
Very truly yours,
Salon.com, Inc.
By:
--------------------------------
Michael O'Donnell
Chief Executive Officer and
President
Accepted as of the date first above
written:
W.R. Hambrecht & Company, LLC
Daiwa Securities America, Inc.
By: W.R. Hambrecht & Company, LLC
By:
-------------------------------
Title:
----------------------------
31
<PAGE>
Schedule I
Underwriters
Number of Shares
Underwriters to be Purchased
------------------------------------- ----------------
W.R. Hambrecht & Company, LLC........................
Daiwa Securities America, Inc........................
<PAGE>
EXHIBIT 5.1
[GRAY CARY WARE & FREIDENRICH LLP LETTERHEAD]
May 27, 1999
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: SALON INTERNET, INC. REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
As counsel to Salon Internet, Inc. (the "Company"), we are rendering this
opinion in connection with a proposed sale of those certain shares of the
Company's newly-issued Common Stock as set forth in the Registration Statement
on Form S-1 to which this opinion is being filed as Exhibit 5.1 (the "Shares").
We have examined all instruments, documents and records which we deemed relevant
and necessary for the basis of our opinion hereinafter expressed. In such
examination, we have assumed the genuineness of all signatures and the
authenticity of all documents submitted to us as originals and the conformity to
the originals of all documents submitted to us as copies.
We express no opinion with respect to (i) the availability of equitable
remedies, including specific performance, or (ii) the effect of bankruptcy,
insolvency, reorganization, moratorium or equitable principles relating to or
limiting creditors' rights generally.
Based on such examination, we are of the opinion that the Shares identified
in the above-referenced Registration Statement will be, upon effectiveness of
the Registration Statement and receipt by the Company of payment therefor,
validly authorized, legally issued, fully paid, and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
above-referenced Registration Statement and to the use of our name wherever it
appears in said Registration Statement, including the Prospectus constituting a
part thereof, as originally filed or as subsequently amended.
Respectfully submitted,
/s/ Gray Cary Ware & Freidenrich LLP
GRAY CARY WARE & FREIDENRICH LLP
<PAGE>
EXHIBIT 10.2
SALON INTERNET, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
Adopted by the Board on , 1999
-----------
1. Establishment, Purpose and Term of Plan.
-- ---------------------------------------
1.1 Establishment. This 1999 Employee Stock Purchase Plan (the
"Plan") is hereby established effective as of the effective date of the initial
registration by the Company of its Stock under Section 12 of the Securities
Exchange Act of 1934, as amended (the "Effective Date").
1.2 Purpose. The purpose of the Plan is to advance the interests
of Company and its shareholders by providing an incentive to attract, retain and
reward Eligible Employees of the Participating Company Group and by motivating
such persons to contribute to the growth and profitability of the Participating
Company Group. The Plan provides such Eligible Employees with an opportunity to
acquire a proprietary interest in the Company through the purchase of Stock. The
Company intends that the Plan qualify as an "employee stock purchase plan" under
Section 423 of the Code.
1.3 Term of Plan. The Plan shall continue in effect until the
earlier of its termination by the Board or the date on which all of the shares
of Stock available for issuance under the Plan have been issued.
2. Definitions and Construction.
-- ----------------------------
2.1 Definitions. Any term not expressly defined in the Plan but
defined for purposes of Section 423 of the Code shall have the same definition
herein. Whenever used herein, the following terms shall have their respective
meanings set forth below:
(a) "Board" means the Board of Directors of the Company.
If one or more Committees have been appointed by the Board to administer the
Plan, "Board" also means such Committee(s).
(b) "Code" means the Internal Revenue Code of 1986, as
amended, and any applicable regulations promulgated thereunder.
(c) "Committee" means a committee of the Board duly
appointed to administer the Plan and having such powers as shall be specified by
the Board. Unless the powers of the Committee have been specifically limited,
the Committee shall have all of the powers of the Board granted herein,
including, without limitation, the power to amend or terminate the Plan at any
time, subject to the terms of the Plan and any applicable limitations imposed by
law.
(d) "Company" means Salon Internet, Inc., a California
corporation, or any successor corporation thereto.
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<PAGE>
(e) "Compensation" means, with respect to any Offering
Period, base wages or salary, commissions, overtime, bonuses, annual awards,
other incentive payments, shift premiums, and all other compensation paid in
cash during such Offering Period before deduction for any contributions to any
plan maintained by a Participating Company and described in Section 401(k) or
Section 125 of the Code. Compensation shall not include reimbursements of
expenses, allowances, long-term disability, workers' compensation or any amount
deemed received without the actual transfer of cash or any amounts directly or
indirectly paid pursuant to the Plan or any other stock purchase or stock option
plan, or any other compensation not included above.
(f) "Eligible Employee" means an Employee who meets the
requirements set forth in Section 5 for eligibility to participate in the Plan.
(g) "Employee" means a person treated as an employee of
a Participating Company for purposes of Section 423 of the Code. A Participant
shall be deemed to have ceased to be an Employee either upon an actual
termination of employment or upon the corporation employing the Participant
ceasing to be a Participating Company. For purposes of the Plan, an individual
shall not be deemed to have ceased to be an Employee while such individual is on
any military leave, sick leave, or other bona fide leave of absence approved by
the Company of ninety (90) days or less. In the event an individual's leave of
absence exceeds ninety (90) days, the individual shall be deemed to have ceased
to be an Employee on the ninety-first (91st) day of such leave unless the
individual's right to reemployment with the Participating Company Group is
guaranteed either by statute or by contract. The Company shall determine in good
faith and in the exercise of its discretion whether an individual has become or
has ceased to be an Employee and the effective date of such individual's
employment or termination of employment, as the case may be. For purposes of an
individual's participation in or other rights, if any, under the Plan as of the
time of the Company's determination, all such determinations by the Company
shall be final, binding and conclusive, notwithstanding that the Company or any
governmental agency subsequently makes a contrary determination.
(h) "Fair Market Value" means, as of any date, if there
is then a public market for the Stock, the closing price of a share of Stock (or
the mean of the closing bid and asked prices if the Stock is so quoted instead)
as quoted on the Nasdaq National Market, The Nasdaq SmallCap Market or such
other national or regional securities exchange or market system constituting the
primary market for the Stock, as reported in The Wall Street Journal or such
-----------------------
other source as the Company deems reliable. If the relevant date does not fall
on a day on which the Stock has traded on such securities exchange or market
system, the date on which the Fair Market Value shall be established shall be
the last day on which the Stock was so traded prior to the relevant date, or
such other appropriate day as shall be determined by the Board, in its
discretion. If, as of any date, there is then no public market for the Stock,
the Fair Market Value on any relevant date shall be as determined by the Board.
Notwithstanding the foregoing, the Fair Market Value per share of Stock on the
Effective Date shall be deemed to be the public offering price set forth in the
final prospectus filed with the Securities and Exchange Commission in connection
with the initial public offering of the Stock.
(i) "Offering" means an offering of Stock as provided in
Section 6.
2
<PAGE>
(j) "Offering Date" mea ns, for any Offering, the first
day of the Offering Period with respect to such Offering.
(k) "Offering Period" means a period established in
accordance with Section 6.1.
(l) "Parent Corporation" means any present or future
"parent corporation" of the Company, as defined in Section 424(e) of the
Code.
(m) "Participant" means an Eligible Employee who has
become a participant in an Offering Period in accordance with Section 7 and
remains a participant in accordance with the Plan.
(n) "Participating Company" means the Company or any
Parent Corporation or Subsidiary Corporation designated by the Board as a
corporation the Employees of which may, if Eligible Employees, participate in
the Plan. The Board shall have the sole and absolute discretion to determine
from time to time which Parent Corporations or Subsidiary Corporations shall be
Participating Companies.
(o) "Participating Company Group" means, at any point in
time, the Company and all other corporations collectively which are then
Participating Companies.
(p) "Purchase Date" means the last day of an Offering
Period (or Purchase Period, if so determined by the Board).
(q) "Purchase Period" means a period, if any,
established in accordance with Section 6.2.
(r) "Purchase Price" means the price at which a share of
Stock may be purchased under the Plan, as determined in accordance with
Section 9.
(s) "Purchase Right" means an option granted to a
Participant pursuant to the Plan to purchase such shares of Stock as provided in
Section 8, which the Participant may or may not exercise during the Offering
Period in which such option is outstanding. Such option arises from the right of
a Participant to withdraw any accumulated payroll deductions of the Participant
not previously applied to the purchase of Stock under the Plan and to terminate
participation in the Plan at any time during an Offering Period.
(t) "Stock" means the common stock of the Company, as
adjusted from time to time in accordance with Section 4.2.
(u) "Subscription Agreement" means a written agreement
in such form as specified by the Company, stating an Employee's election to
participate in the Plan and authorizing payroll deductions under the Plan
from the Employee's Compensation.
(v) "Subscription Date" means the last business day
prior to an Offering Date or such other date as the Company shall establish.
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<PAGE>
(w) "Subsidiary Corporation" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of
the Code.
2.2 Construction. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular. Use
of the term "or" is not intended to be exclusive, unless the context clearly
requires otherwise.
3. Administration.
-- --------------
3.1 Administration by the Board. The Plan shall be administered
by the Board. All questions of interpretation of the Plan, of any form of
agreement or other document employed by the Company in the administration of the
Plan, or of any Purchase Right shall be determined by the Board and shall be
final and binding upon all persons having an interest in the Plan or the
Purchase Right. Subject to the provisions of the Plan, the Board shall determine
all of the relevant terms and conditions of Purchase Rights granted pursuant to
the Plan; provided, however, that all Participants granted Purchase Rights
pursuant to the Plan shall have the same rights and privileges within the
meaning of Section 423(b)(5) of the Code. All expenses incurred in connection
with the administration of the Plan shall be paid by the Company.
3.2 Authority of Officers. Any officer of the Company shall have
the authority to act on behalf of the Company with respect to any matter, right,
obligation, determination or election that is the responsibility of or that is
allocated to the Company herein, provided that the officer has apparent
authority with respect to such matter, right, obligation, determination or
election.
3.3 Policies and Procedures Established by the Company. The
Company may, from time to time, consistent with the Plan and the requirements of
Section 423 of the Code, establish, change or terminate such rules, guidelines,
policies, procedures, limitations, or adjustments as deemed advisable by the
Company, in its sole discretion, for the proper administration of the Plan,
including, without limitation, (a) a minimum payroll deduction amount required
for participation in an Offering, (b) a limitation on the frequency or number of
changes permitted in the rate of payroll deduction during an Offering, (c) an
exchange ratio applicable to amounts withheld in a currency other than United
States dollars, (d) a payroll deduction greater than or less than the amount
designated by a Participant in order to adjust for the Company's delay or
mistake in processing a Subscription Agreement or in otherwise effecting a
Participant's election under the Plan or as advisable to comply with the
requirements of Section 423 of the Code, and (e) determination of the date and
manner by which the Fair Market Value of a share of Stock is determined for
purposes of administration of the Plan.
4. Shares Subject to Plan.
-- ----------------------
4.1 Maximum Number of Shares Issuable. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be one million (1,000,000), cumulatively
increased on June 1, 2000 and each June 1 thereafter until and including June 1,
2009 by an amount equal to the lesser of (a) Five
4
<PAGE>
Hundred Thousand (500,000) shares or (b) a lesser amount of shares determined by
the Board, and shall consist of authorized but unissued or reacquired shares of
Stock, or any combination thereof. If an outstanding Purchase Right for any
reason expires or is terminated or canceled, the shares of Stock allocable to
the unexercised portion of such Purchase Right shall again be available for
issuance under the Plan.
4.2 Adjustments for Changes in Capital Structure. In the event
of any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure of the
Company, or in the event of any merger (including a merger effected for the
purpose of changing the Company's domicile), sale of assets or other
reorganization in which the Company is a party, appropriate adjustments shall be
made in the number and class of shares subject to the Plan and each Purchase
Right and in the Purchase Price. If a majority of the shares which are of the
same class as the shares that are subject to outstanding Purchase Rights are
exchanged for, converted into, or otherwise become (whether or not pursuant to
an Ownership Change Event) shares of another corporation (the "New Shares"), the
Board may unilaterally amend the outstanding Purchase Rights to provide that
such Purchase Rights are exercisable for New Shares. In the event of any such
amendment, the number of shares subject to, and the Purchase Price of, the
outstanding Purchase Rights shall be adjusted in a fair and equitable manner, as
determined by the Board, in its sole discretion. Notwithstanding the foregoing,
any fractional share resulting from an adjustment pursuant to this Section 4.2
shall be rounded down to the nearest whole number, and in no event may the
Purchase Price be decreased to an amount less than the par value, if any, of the
stock subject to the Purchase Right. The adjustments determined by the Board
pursuant to this Section 4.2 shall be final, binding and conclusive.
5. Eligibility.
-- -----------
5.1 Employees Eligible to Participate. Each Employee of a
Participating Company is eligible to participate in the Plan and shall be deemed
an Eligible Employee, except the following:
(a) Any Employee who is customarily employed by the
Participating Company Group for less than twenty (20) hours per week; or
(b) Any Employee who is customarily employed by the
Participating Company Group for not more than five (5) months in any calendar
year.
5.2 Exclusion of Certain Shareholders. Notwithstanding any
provision of the Plan to the contrary, no Employee shall be granted a Purchase
Right under the Plan if, immediately after such grant, such Employee would own
or hold options to purchase stock of the Company or of any Parent Corporation or
Subsidiary Corporation possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of such corporation, as
determined in accordance with Section 423(b)(3) of the Code. For purposes of
this Section 5.2, the attribution rules of Section 424(d) of the Code shall
apply in determining the stock ownership of such Employee.
5
<PAGE>
6. Offerings.
-- ---------
6.1 Offering Periods. The Plan shall be implemented by
sequential Offerings (an "Offering Period"). The first Offering Period shall
commence on the Effective Date and end on January 31, 2000 (the "Initial
Offering Period"). Subsequent Offerings shall commence on the first day of
February and August of each year and end on the last day of July and January,
respectively, occurring thereafter, and will have a duration of approximately
six (6) months.
6.2 Purchase Periods. If the Board so determines, in its
discretion, each Offering Period may consist of two (2) or more consecutive
Purchase Periods having such duration as the Board shall specify, and the last
day of each such Purchase Period shall be a Purchase Date.
6.3 Discretion to Vary Duration. Notwithstanding the foregoing,
the Board may establish a different duration for one or more Offering Periods or
Purchase Periods or different commencing or ending dates for such periods;
provided, however, that no Offering Period may have a duration exceeding twenty-
seven (27) months. If the first or last day of an Offering Period or a Purchase
Period is not a day on which the national securities exchanges or Nasdaq Stock
Market are open for trading, the Company shall specify the trading day that will
be deemed the first or last day, as the case may be, of the period.
7. Participation in the Plan.
-- -------------------------
7.1 Initial Participation. An Eligible Employee may become a
Participant in an Offering Period by delivering a properly completed
Subscription Agreement to the Company not later than the close of business for
such office on the Subscription Date established by the Company for the
applicable Offering Date. An Eligible Employee who does not deliver a properly
completed Subscription Agreement to the Company's designated office on or before
the Subscription Date shall not participate in that Offering Period or any
subsequent Offering Period unless such Eligible Employee subsequently delivers a
properly completed Subscription Agreement to the appropriate office of the
Company on or before the Subscription Date for such subsequent Offering Period.
An Employee who becomes an Eligible Employee after the Offering Date of an
Offering Period (other than the Initial Offering Period) shall not be eligible
to participate in such Offering Period but may participate in any subsequent
Offering Period provided such Employee is still an Eligible Employee as of the
Offering Date of such subsequent Offering Period.
7.2 Continued Participation. A Participant shall automatically
participate in the next Offering Period commencing immediately after the final
Purchase Date of each Offering Period in which the Participant participates
provided that such Participant remains an Eligible Employee on the Offering Date
of the new Offering Period and has not either (a) withdrawn from the Plan, or
(b) terminated employment as provided in Section 13. A Participant who may
automatically participate in a subsequent Offering Period, as provided in this
Section, is not required to deliver any additional Subscription Agreement for
the subsequent Offering Period in order to continue participation in the Plan.
However, a Participant may deliver a new Subscription Agreement for a subsequent
Offering Period in accordance with the procedures set
6
<PAGE>
forth in Section 7.1 if the Participant desires to change any of the elections
contained in the Participant's then effective Subscription Agreement.
8. Right to Purchase Shares.
-- ------------------------
8.1 Grant of Purchase Right. Except as set forth below, on the
Offering Date of each Offering Period, each Participant in such Offering Period
shall be granted automatically, on the Offering Date, a Purchase Right
consisting of an option to purchase, on each Purchase Date within such Offering
Period, that number of whole shares of Stock determined by dividing the
aggregate payroll deductions collected from the Participant by the applicable
Purchase Price on such Purchase Date; provided, that no Participant may purchase
more than two thousand (2,000) shares of Stock on any Purchase Date.
8.2 Calendar Year Purchase Limitation. Notwithstanding any
provision of the Plan to the contrary, no Participant shall be granted a
Purchase Right which permits his or her right to purchase shares of Stock under
the Plan to accrue at a rate which, when aggregated with such Participant's
rights to purchase shares under all other employee stock purchase plans of a
Participating Company intended to meet the requirements of Section 423 of the
Code, exceeds Twenty-Five Thousand Dollars ($25,000) in Fair Market Value (or
such other limit, if any, as may be imposed by the Code) for each calendar year
in which such Purchase Right is outstanding at any time. For purposes of the
preceding sentence, the Fair Market Value of shares purchased during a given
Offering Period shall be determined as of the Offering Date for such Offering
Period. The limitation described in this Section shall be applied in conformance
with applicable regulations under Section 423(b)(8) of the Code.
9. Purchase Price.
-- --------------
The Purchase Price at which each share of Stock may be acquired in an
Offering Period upon the exercise of all or any portion of a Purchase Right
shall be established by the Board; provided, however, that the Purchase Price
shall not be less than eighty-five percent (85%) of the lesser of (a) the Fair
Market Value of a share of Stock on the Offering Date of the Offering Period or
(b) the Fair Market Value of a share of Stock on the Purchase Date. Unless
otherwise provided by the Board prior to the commencement of an Offering Period,
the Purchase Price for that Offering Period shall be eighty-five percent (85%)
of the lesser of (a) the Fair Market Value of a share of Stock on the Offering
Date of the Offering Period, or (b) the Fair Market Value of a share of Stock on
the Purchase Date.
10. Accumulation of Purchase Price through Payroll Deduction.
--- --------------------------------------------------------
Shares of Stock acquired pursuant to the exercise of all or any
portion of a Purchase Right may be paid for only by means of payroll deductions
from the Participant's Compensation accumulated during the Offering Period for
which such Purchase Right was granted, subject to the following:
10.1 Amount of Payroll Deductions. Except as otherwise provided herein,
the amount to be deducted under the Plan from a Participant's Compensation on
each payday during an Offering Period (after the Offering Date) shall be
determined by the Participant's Subscription
7
<PAGE>
Agreement. The Subscription Agreement shall set forth the percentage of the
Participant's Compensation to be deducted on each payday during an Offering
Period (after the Offering Date) in whole percentages of not less than one
percent (1%) (except as a result of an election pursuant to Section 10.3 to stop
payroll deductions made effective following the first payday during an Offering
after the Offering Date) or more than ten percent (10%). Notwithstanding the
foregoing, the Board may change the limits on payroll deductions effective as of
any future Offering Date.
10.2 Commencement of Payroll Deductions. Payroll deductions shall
commence on the first payday following the Offering Date and shall continue to
the end of the Offering Period unless sooner altered or terminated as provided
herein.
10.3 Election to Change or Stop Payroll Deductions. During an Offering
Period, a Participant may elect to increase or decrease the rate of or to stop
deductions from his or her Compensation by delivering to the Company an amended
Subscription Agreement authorizing such change on or before the "Change Notice
Date." The "Change Notice Date" shall be a date prior to the beginning of the
first pay period for which such election is to be effective as established by
the Company from time to time and announced to the Participants. A Participant
who elects to decrease the rate of his or her payroll deductions to zero percent
(0%) shall nevertheless remain a Participant in the current Offering Period
unless such Participant withdraws from the Plan as provided in Section 12.1.
10.4 Administrative Suspension of Payroll Deductions. The Company may,
in its sole discretion, suspend a Participant's payroll deductions under the
Plan as the Company deems advisable to avoid accumulating payroll deductions in
excess of the amount that could reasonably be anticipated to purchase the
maximum number of shares of Stock permitted during a calendar year under the
limit set forth in Section 8.2. Payroll deductions shall be resumed at the rate
specified in the Participant's then effective Subscription Agreement at the
beginning of the next Offering Period the Purchase Date of which falls in the
following calendar year.
10.5 Participant Accounts. Individual bookkeeping accounts shall be
maintained for each Participant. All payroll deductions from a Participant's
Compensation shall be credited to such Participant's Plan account and shall be
deposited with the general funds of the Company. All payroll deductions received
or held by the Company may be used by the Company for any corporate purpose.
10.6 No Interest Paid. Interest shall not be paid on sums deducted from
a Participant's Compensation pursuant to the Plan.
10.7 Voluntary Withdrawal from Plan Account. A Participant may withdraw
all or any portion of the payroll deductions credited to his or her Plan account
and not previously applied toward the purchase of Stock by delivering to the
Company a written notice on a form provided by the Company for such purpose. A
Participant who withdraws the entire remaining balance credited to his or her
Plan account shall be deemed to have withdrawn from the Plan in accordance with
Section 12.1. Amounts withdrawn shall be returned to the Participant as soon as
practicable after the withdrawal and may not be applied to the purchase of
8
<PAGE>
shares in any Offering under the Plan. The Company may from time to time
establish or change limitations on the frequency of withdrawals permitted under
this Section, establish a minimum dollar amount that must be retained in the
Participant's Plan account, or terminate the withdrawal right provided by this
Section.
11. Purchase of Shares.
--- ------------------
11.1 Exercise of Purchase Right. On each Purchase Date, each
Participant who has not withdrawn from the Plan and whose participation in the
Offering has not terminated before such Purchase Date shall automatically
acquire pursuant to the exercise of the Participant's Purchase Right the number
of whole shares of Stock determined by dividing (a) the total amount of the
Participant's payroll deductions accumulated in the Participant's Plan account
during the Offering Period and not previously applied toward the purchase of
Stock by (b) the Purchase Price. No shares of Stock shall be purchased on a
Purchase Date on behalf of a Participant whose participation in the Offering or
the Plan has terminated before such Purchase Date.
11.2 Pro Rata Allocation of Shares. In the event that the number
of shares of Stock which might be purchased by all Participants in the Plan on a
Purchase Date exceeds the number of shares of Stock available in the Plan as
provided in Section 4.1, the Company shall make a pro rata allocation of the
remaining shares in as uniform a manner as shall be practicable and as the
Company shall determine to be equitable. Any fractional share resulting from
such pro rata allocation to any Participant shall be disregarded.
11.3 Delivery of Certificates. As soon as practicable after each
Purchase Date, the Company shall arrange the delivery to each Participant, as
appropriate, of a certificate representing the shares acquired by the
Participant on such Purchase Date; provided that the Company may deliver such
shares to a broker that holds such shares in street name for the benefit of the
Participant. Shares to be delivered to a Participant under the Plan shall be
registered in the name of the Participant, or, if requested by the Participant,
in the name of the Participant and his or her spouse, or, if applicable, in the
names of the heirs of the Participant.
11.4 Return of Cash Balance. Any cash balance remaining in a
Participant's Plan account following any Purchase Date shall be refunded to the
Participant as soon as practicable after such Purchase Date. However, if the
cash to be returned to a Participant pursuant to the preceding sentence is an
amount less than the amount that would have been necessary to purchase an
additional whole share of Stock on such Purchase Date, the Company may retain
such amount in the Participant's Plan account to be applied toward the purchase
of shares of Stock in the subsequent Offering Period (or Purchase Period, if
applicable).
11.5 Tax Withholding. At the time a Participant's Purchase Right
is exercised, in whole or in part, or at the time a Participant disposes of some
or all of the shares of Stock he or she acquires under the Plan, the Participant
shall make adequate provision for the foreign, federal, state and local tax
withholding obligations of the Participating Company Group, if any, which arise
upon exercise of the Purchase Right or upon such disposition of shares,
9
<PAGE>
respectively. The Participating Company Group may, but shall not be obligated
to, withhold from the Participant's compensation the amount necessary to meet
such withholding obligations.
11.6 Expiration of Purchase Right. Any portion of a
Participant's Purchase Right remaining unexercised after the end of the Offering
Period to which the Purchase Right relates shall expire immediately upon the end
of the Offering Period.
11.7 Reports to Participants. Each Participant who has exercised
all or part of his or her Purchase Right shall receive, as soon as practicable
after the Purchase Date, a report of such Participant's Plan account setting
forth the total payroll deductions accumulated prior to such exercise, the
number of shares of Stock purchased, the Purchase Price for such shares, the
date of purchase and the cash balance, if any, remaining immediately after such
purchase that is to be refunded or retained in the Participant's Plan account
pursuant to Section 11.4. The report required by this Section may be delivered
in such form and by such means, including by electronic transmission, as the
Company may determine.
12. Withdrawal from Offering or Plan.
--- --------------------------------
12.1 Voluntary Withdrawal from the Plan. A Participant may
withdraw from the Plan by signing and delivering to the Company a written notice
of withdrawal on a form provided by the Company for such purpose. Such
withdrawal may be elected at any time prior to the end of an Offering Period. A
Participant who voluntarily withdraws from the Plan is prohibited from resuming
participation in the Plan in the same Offering from which he or she withdrew,
but may participate in any subsequent Offering by again satisfying the
requirements of Sections 5 and 7.1. The Company may impose a requirement that
the notice of withdrawal from the Plan be on file with the Company for a
reasonable period prior to the effectiveness of the Participant's withdrawal.
12.2 Return of Payroll Deductions. Upon a Participant's
voluntary withdrawal from the Plan pursuant to Section 12.1, the Participant's
accumulated payroll deductions which have not been applied toward the purchase
of shares of Stock shall be refunded to the Participant as soon as practicable
after the withdrawal, without the payment of any interest, and the Participant's
interest in the Plan shall terminate. Such accumulated payroll deductions to be
refunded in accordance with this Section may not be applied to any other
Offering under the Plan.
13. Termination of Employment or Eligibility.
--- ----------------------------------------
Upon a Participant's ceasing, prior to a Purchase Date, to be an
Employee of the Participating Company Group for any reason, including
retirement, disability or death, or the failure of a Participant to remain an
Eligible Employee, the Participant's participation in the Plan shall terminate
immediately. In such event, the payroll deductions credited to the Participant's
Plan account since the last Purchase Date shall, as soon as practicable, be
returned to the Participant or, in the case of the Participant's death, to the
Participant's legal representative, and all of the Participant's rights under
the Plan shall terminate. Interest shall not be paid on sums returned pursuant
to this Section 13. A Participant whose participation has been so terminated
10
<PAGE>
may again become eligible to participate in the Plan by again satisfying the
requirements of Sections 5 and 7.1.
14. Change in Control.
--- -----------------
14.1 Definitions.
(a) An "Ownership Change Event" shall be deemed to have
occurred if any of the following occurs with respect to the Company: (i) the
direct or indirect sale or exchange in a single or series of related
transactions by the shareholders of the Company of more than fifty percent (50%)
of the voting stock of the Company; (ii) a merger or consolidation in which the
Company is a party; (iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or (iv) a liquidation or
dissolution of the Company.
(b) A "Change in Control" shall mean an Ownership Change
Event or a series of related Ownership Change Events (collectively, the
"Transaction") wherein the shareholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "Transferee
Corporation(s)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
14.2 Effect of Change in Control on Purchase Rights. In the
event of a Change in Control, the surviving, continuing, successor, or
purchasing corporation or parent corporation thereof, as the case may be (the
"Acquiring Corporation"), may assume the Company's rights and obligations under
the Plan. If the Acquiring Corporation elects not to assume the Company's rights
and obligations under outstanding Purchase Rights, the Purchase Date of the then
current Offering Period shall be accelerated to a date before the date of the
Change in Control specified by the Board, but the number of shares of Stock
subject to outstanding Purchase Rights shall not be adjusted. All Purchase
Rights which are neither assumed by the Acquiring Corporation in connection with
the Change in Control nor exercised as of the date of the Change in Control
shall terminate and cease to be outstanding effective as of the date of the
Change in Control.
15. Nontransferability of Purchase Rights.
--- -------------------------------------
A Purchase Right may not be transferred in any manner otherwise than
by will or the laws of descent and distribution and shall be exercisable during
the lifetime of the Participant only by the Participant.
11
<PAGE>
16. Compliance with Securities Law.
--- ------------------------------
The issuance of shares under the Plan shall be subject to compliance
with all applicable requirements of federal, state and foreign law with respect
to such securities. A Purchase Right may not be exercised if the issuance of
shares upon such exercise would constitute a violation of any applicable
federal, state or foreign securities laws or other law or regulations or the
requirements of any securities exchange or market system upon which the Stock
may then be listed. In addition, no Purchase Right may be exercised unless (a)
a registration statement under the Securities Act of 1933, as amended, shall at
the time of exercise of the Purchase Right be in effect with respect to the
shares issuable upon exercise of the Purchase Right, or (b) in the opinion of
legal counsel to the Company, the shares issuable upon exercise of the Purchase
Right may be issued in accordance with the terms of an applicable exemption from
the registration requirements of said Act. The inability of the Company to
obtain from any regulatory body having jurisdiction the authority, if any,
deemed by the Company's legal counsel to be necessary to the lawful issuance and
sale of any shares under the Plan shall relieve the Company of any liability in
respect of the failure to issue or sell such shares as to which such requisite
authority shall not have been obtained. As a condition to the exercise of a
Purchase Right, the Company may require the Participant to satisfy any
qualifications that may be necessary or appropriate, to evidence compliance with
any applicable law or regulation, and to make any representation or warranty
with respect thereto as may be requested by the Company.
17. Rights as a Shareholder and Employee.
--- ------------------------------------
A Participant shall have no rights as a shareholder by virtue of the
Participant's participation in the Plan until the date of the issuance of a
certificate for the shares purchased pursuant to the exercise of the
Participant's Purchase Right (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company). No
adjustment shall be made for dividends, distributions or other rights for which
the record date is prior to the date such certificate is issued, except as
provided in Section 4.2. Nothing herein shall confer upon a Participant any
right to continue in the employ of the Participating Company Group or interfere
in any way with any right of the Participating Company Group to terminate the
Participant's employment at any time.
18. Legends.
--- -------
The Company may at any time place legends or other identifying symbols
referencing any applicable federal, state or foreign securities law restrictions
or any provision convenient in the administration of the Plan on some or all of
the certificates representing shares of Stock issued under the Plan. The
Participant shall, at the request of the Company, promptly present to the
Company any and all certificates representing shares acquired pursuant to a
Purchase Right in the possession of the Participant in order to carry out the
provisions of this Section. Unless otherwise specified by the Company, legends
placed on such certificates may include but shall not be limited to the
following:
12
<PAGE>
"THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE
CORPORATION TO THE REGISTERED HOLDER UPON THE PURCHASE OF SHARES UNDER AN
EMPLOYEE STOCK PURCHASE PLAN AS DEFINED IN SECTION 423 OF THE INTERNAL REVENUE
CODE OF 1986, AS AMENDED. THE TRANSFER AGENT FOR THE SHARES EVIDENCED HEREBY
SHALL NOTIFY THE CORPORATION IMMEDIATELY OF ANY TRANSFER OF THE SHARES BY THE
REGISTERED HOLDER HEREOF. THE REGISTERED HOLDER SHALL HOLD ALL SHARES PURCHASED
UNDER THE PLAN IN THE REGISTERED HOLDER'S NAME (AND NOT IN THE NAME OF ANY
NOMINEE)."
19. Notification of Sale of Shares.
--- ------------------------------
The Company may require the Participant to give the Company prompt
notice of any disposition of shares acquired by exercise of a Purchase Right
within two (2) years from the date of granting such Purchase Right or one (1)
year from the date of exercise of such Purchase Right. The Company may require
that until such time as a Participant disposes of shares acquired upon exercise
of a Purchase Right, the Participant shall hold all such shares in the
Participant's name (or, if elected by the Participant, in the name of the
Participant and his or her spouse but not in the name of any nominee) until the
lapse of the time periods with respect to such Purchase Right referred to in the
preceding sentence. The Company may direct that the certificates evidencing
shares acquired by exercise of a Purchase Right refer to such requirement to
give prompt notice of disposition.
20. Notices.
--- -------
All notices or other communications by a Participant to the Company
under or in connection with the Plan shall be deemed to have been duly given
when received in the form specified by the Company at the location, or by the
person, designated by the Company for the receipt thereof.
21. Indemnification.
--- ---------------
In addition to such other rights of indemnification as they may have
as members of the Board or officers or employees of the Participating Company
Group, members of the Board and any officers or employees of the Participating
Company Group to whom authority to act for the Board or the Company is delegated
shall be indemnified by the Company against all reasonable expenses, including
attorneys' fees, actually and necessarily incurred in connection with the
defense of any action, suit or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action
taken or failure to act under or in connection with the Plan, or any right
granted hereunder, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by independent legal counsel selected by
the Company) or paid by them in satisfaction of a judgment in any such action,
suit or proceeding, except in relation to matters as to which it shall be
adjudged in such action, suit or proceeding that such person is liable for gross
negligence, bad faith or intentional misconduct in duties; provided, however,
that within sixty (60) days after the institution of such action, suit or
13
<PAGE>
proceeding, such person shall offer to the Company, in writing, the opportunity
at its own expense to handle and defend the same.
22. Amendment or Termination of the Plan.
--- ------------------------------------
The Board may at any time amend or terminate the Plan, except that (a)
such termination shall not affect Purchase Rights previously granted under the
Plan, provided that the Board may terminate the Plan (and any Offering
thereunder) on any Purchase Date if the Board determines that such termination
is in the best interests of the Company and its shareholders except as permitted
under the Plan, and (b) no amendment may adversely affect a Purchase Right
previously granted under the Plan (except to the extent permitted by the Plan or
as may be necessary to qualify the Plan as an employee stock purchase plan
pursuant to Section 423 of the Code or to obtain qualification or registration
of the shares of Stock under applicable federal, state or foreign securities
laws). In addition, an amendment to the Plan must be approved by the
shareholders of the Company within twelve (12) months of the adoption of such
amendment if such amendment would authorize the sale of more shares than are
authorized for issuance under the Plan or would change the definition of the
corporations that may be designated by the Board as Participating Companies.
14
<PAGE>
SALON INTERNET, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
NAME (Please print):
____________________________________________________________________
(Last) (First) (Middle)
ADDRESS:
_______________________________________________________________________
MY SOCIAL SECURITY NUMBER:
______________________________________________________
[ ] Original Application for the Offering Period beginning
___________________, 199__.
[ ] Change in Payroll Deduction rate effective with the pay period ending
___________________, 199__.
I hereby elect to participate in the 1999 Employee Stock Purchase Plan (the
"Plan") of Salon Internet, Inc. (the "Company") and subscribe to purchase shares
of the Company's Stock in accordance with this Subscription Agreement and the
Plan.
I hereby authorize payroll deductions in the amount of ________ percent (in
whole percentages not less than 1% or more than 10%) of my "Compensation" on
each payday throughout the "Offering Period" in accordance with the Plan. I
understand that these payroll deductions will be accumulated for the purchase of
shares of Stock at the applicable purchase price determined in accordance with
the Plan. I understand that, except as otherwise provided by the Plan, I will
automatically purchase shares on each Purchase Date under the Plan unless I
withdraw from the Plan by giving written notice on a form provided by the
Company or unless my employment terminates.
I understand that I will automatically participate in each subsequent
Offering that commences immediately after the last day of an Offering in which I
am participating until I withdraw from the Plan by giving written notice on a
form provided by the Company or my employment terminates.
Shares I purchase under the Plan should be issued in the name(s) set forth
below. (Shares may be issued in the participant's name alone or together with
the participant's spouse as community property or in joint tenancy.)
NAME(S):
_______________________________________________________________________
[ ] In my name alone [ ] Community Property [ ] Joint Tenancy
I agree to make adequate provision for the federal, state, local and
foreign tax withholding obligations, if any, which may arise upon my purchase of
shares under the Plan and/or my disposition of such shares. The Company may,
but will not be obligated to, withhold from my compensation the amount necessary
to meet such withholding obligations.
I agree that while I hold shares acquired under the Plan, unless otherwise
permitted by the Company, I will hold such shares in the name(s) entered above
(and not in the name of any nominee). This restriction only applies to the
name(s) in which shares are held and does not affect my ability to dispose of
---
Plan shares.
The tax treatment of a disposition of Plan shares (including a gift)
depends on when the disposition occurs. I agree that I will notify the Chief
Financial Officer of the Company in writing within 30 days after any disposition
of Plan shares that occurs within 2 years after the Offering Date or 1 year
--
after the Purchase Date (a "Disqualifying Disposition"). I further agree that
if I do not respond within 30 days to a Company survey delivered to me
requesting information about a possible Disqualifying Disposition, the Company
may (1) treat my nonresponse as my notice to the Company that a Disqualifying
Disposition occurred, and (2) report the ordinary income I must recognize as a
result of the Disqualifying Disposition to the Internal Revenue Service.
I am familiar with the provisions of the Plan and agree to participate in
the Plan subject to all of its provisions. I understand that the Board of
Directors of the Company reserves the right to terminate the Plan or to amend
the Plan and my right to purchase stock under the Plan to the extent provided by
the Plan. I understand that the effectiveness of this Subscription Agreement is
dependent upon my eligibility to participate in the Plan.
Date: _______________________ Signature:_____________________________________
15
<PAGE>
SALON INTERNET, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
NAME (Please print):
____________________________________________________________________
(Last) (First) (Middle)
I hereby elect to withdraw from the Offering under Salon Internet, Inc.
1999 Employee Stock Purchase Plan (the "Plan") which began on
_________________________, 19____ and in which I am currently participating (the
"Current Offering").
Elect either A or B below:
[ ] A. I elect to terminate immediately my participation in the Current
Offering and in the Plan.
I request that the Company cease all further payroll deductions from
my Compensation under the Plan (provided that I have given
sufficient notice prior to the next payday). I request that all
payroll deductions credited to my account under the Plan (if any)
not previously used to purchase shares under the Plan shall not be
---
used to purchase shares on the Purchase Date of the Current Offering.
Instead, I request that all such amounts be paid to me as soon as
practicable. I understand that this election immediately terminates my
interest in the Current Offering and in the Plan.
[ ] B. I elect to terminate my participation in the Current Offering and in
the Plan following my purchase of shares on Purchase Date of the
Current Offering.
I request that the Company cease all further payroll deductions from
my Compensation under the Plan (provided that I have given sufficient
notice prior to the next payday). I request that all payroll
deductions credited to my account under the Plan (if any) not
previously used to purchase shares under the Plan shall be used to
purchase shares on the Purchase Date of the Current Offering to the
extent permitted by the Plan. I understand that this election will
terminate my interest in the Current Offering and in the Plan
immediately following such purchase. I request that any cash balance
remaining in my account under the Plan after my purchase of shares be
paid to me as soon as practicable.
I understand that by making this election I am terminating my interest in
the Plan and that no further payroll deductions will be made (provided that I
have given sufficient notice prior to the next payday) unless I elect in
accordance with the Plan to become a participant in another Offering under the
Plan by filing a new Subscription Agreement with the Company.
Date: Signature:
------------------------------ ------------------------------
16
<PAGE>
EXHIBIT 10.16
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE.
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND
MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE
APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN
FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED
TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE
SECURITIES LAWS.
SALON INTERNET, INC.
Warrant for the Purchase of Shares of Series C Preferred Stock
229,768 Shares
FOR VALUE RECEIVED, SALON INTERNET, INC., a California corporation
(the "Company"), with its principal office at 706 Mission Street, Second Floor,
San Francisco, California 94103, hereby certifies that Daiwa America
Corporation or its registered assigns (the "Holder") is entitled, subject to the
provisions of this Warrant, to purchase from the Company, at any time or from
time to time after the date hereof and on or before 5:00 p.m., California time,
April 14, 2004 (the "Expiration Date"), the number of fully paid and
nonassessable shares of Series C Preferred Stock ("Series C Preferred Stock")
of the Company set forth above.
The Holder may purchase the above number of shares of Series C
Preferred Stock at a purchase price per share (as appropriately adjusted
pursuant to Section 6 hereof) of One Dollar and Ninety-Four Cents ($1.94) (the
"Exercise Price"). The term "Series C Preferred Stock" shall mean (i) the
aforementioned Series C Preferred Stock of the Company and (ii) the Common Stock
of the Company issuable upon conversion of the Series C Preferred Stock at such
time as all of the Company's Series C Preferred are converted into Common Stock
of the Company, together, in each case, with any other equity securities that
may be issued by the Company in addition thereto or in substitution therefor as
provided herein.
1
<PAGE>
The number of shares of Series C Preferred Stock to be received upon
the exercise of this Warrant and the price to be paid for a share of Series C
Preferred Stock are subject to adjustment from time to time as hereinafter set
forth. The shares of Series C Preferred Stock deliverable upon such exercise,
as adjusted from time to time, are hereinafter sometimes referred to as "Warrant
Shares".
Section 1. Exercise of Warrant.
-------------------
(a) This Warrant may be exercised in whole or in part on any business
day prior to the termination of the Warrant by presentation and surrender hereof
to the Company at its principal office at the address set forth in the initial
paragraph hereof (or at such other address as the Company may hereafter notify
the Holder in writing) with the Purchase Form annexed hereto duly executed and
accompanied by proper payment of the Exercise Price in lawful money of the
United States of America in the form of a certified or cashier's check for the
number of Warrant Shares specified in the Purchase Form. If this Warrant should
be exercised in part only, the Company shall, upon surrender of this Warrant,
execute and deliver a new Warrant evidencing the rights of the Holder thereof to
purchase the balance of the Warrant Shares purchasable hereunder. Upon receipt
by the Company of this Warrant and such Purchase Form, together with proper
payment of the Exercise Price, at such office, the Holder shall be deemed to be
the holder of record of the Warrant Shares, notwithstanding that the stock
transfer books of the Company shall then be closed or that certificates
representing such Warrant Shares shall not then be actually delivered to the
Holder. The Company shall pay any and all documentary stamp or similar issue or
transfer taxes payable in respect of the issue or delivery of the Warrant
Shares.
(b) Notwithstanding the foregoing, upon such exercise pursuant to
Section 1(a), in lieu of payment of the Exercise Price, the Holder may instead
elect to receive that number of shares of Series C Preferred Stock of the
Company equal to the quotient obtained by dividing [(A-B)(C)] by A, where:
(A) = the Fair Market Value (as defined below) of one share
of Series C Preferred Stock on the date of exercise of
this Warrant;
(B) = the Exercise Price for one share of Series C Preferred
Stock under this Warrant (as adjusted to the date of such
calculation); and
(C) = the number of shares of Series C Preferred Stock
issuable upon exercise of this Warrant or, if only a
2
<PAGE>
portion of the Warrant is being exercised, the portion of
the Warrant being canceled (at the date of such
calculation).
If the above calculation results in a negative number, then no shares of Series
C Preferred Stock shall be issued or issuable upon exercise of this Warrant.
For purposes hereof, "Fair Market Value" of a share of Preferred Stock shall
mean:
(1) where there exists a public market for the Company's
Common Stock at the time of such exercise, the fair market value per share
of Preferred Stock shall be the product of (i) the average of the closing
bid and asked prices of the Common Stock quoted in the Over-The-Counter
Market Summary or the last reported sale price of the Common Stock or the
closing sale price quoted on the NASDAQ National Market System or on any
exchange on which the Common Stock is listed, whichever is applicable, and
(ii) the number of shares Common Stock into which each share of Series C
Preferred Stock is convertible at the time of such exercise.
Notwithstanding the forgoing, in the event the Warrant is exercised in
connection with the Company's initial public offering of Common Stock
("IPO"), the fair market value per share shall be the product of (i) the
per share offering price to the public of the Company's IPO and and (ii)
the number of shares Common Stock into which each share of Series C
Preferred Stock is convertible at the time of such exercise, or
(2) in all other cases, the fair value as determined in good
faith by the Company's Board of Directors.
Upon exercise of this Warrant pursuant to this Section 1(b), the registered
holder hereof shall be entitled to receive a certificate for the number of
shares of Series C Preferred Stock determined as aforesaid within a reasonable
time not to exceed 20 days after exercise of the stock purchase rights
represented by this Warrant.
Section 2. Reservation of Shares. The Company hereby agrees that at
---------- ---------------------
all times there shall be reserved for issuance and delivery upon exercise of
this Warrant all shares of its Series C Preferred Stock or other shares of
capital stock of the Company from time to time issuable upon exercise of this
Warrant. All such shares shall be duly authorized and, when issued upon such
exercise in accordance with the terms of this Warrant, shall be validly issued,
fully paid and nonassessable, free and clear of all liens, security interests,
charges and other encumbrances or restrictions on sale (other than as provided
in the Company's articles of incorporation
3
<PAGE>
and any restrictions on sale set forth herein or pursuant to applicable federal
and state securities laws) and free and clear of all preemptive rights.
Section 3. Fractional Interest. The Company will not issue a
---------- -------------------
fractional share of Series C Preferred Stock upon exercise of a Warrant.
Instead, the Company will deliver its check for the Fair Market Value of such
fraction of a share, rounded to the nearest cent.
Section 4. Assignment or Loss of Warrant.
---------- -----------------------------
(1) Except as provided in Section 8, the Holder of this Warrant shall
not be entitled, without obtaining the consent of the Company, to assign its
interest in this Warrant in whole or in part to any person or persons; provided,
however, that this warrant may be assigned to affiliates, (including
distributions or transfers made to general or limited partners of a Holder) in
compliance with the provisions of Section 8. Subject to the provisions of
Section 8, and the obtaining of such consent of the Company, where required,
upon surrender of this Warrant to the Company or at the office of its stock
transfer agent or warrant agent, with the Assignment Form annexed hereto duly
executed and funds sufficient to pay any transfer tax, the Company shall,
without charge, execute and deliver a new Warrant or Warrants in the name of the
assignee or assignees named in such instrument of assignment and, if the Holders
entire interest is not being assigned, in the name of the Holder, and this
Warrant shall promptly be canceled.
(2) Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction or mutilation of this Warrant, and (in the case of loss,
theft or destruction) of indemnification satisfactory to the Company, and upon
surrender and cancellation of this Warrant, if mutilated, the Company shall
execute and deliver a new Warrant of like tenor and date.
Section 5. Rights of the Holder. The Holder shall not, by virtue
---------- --------------------
hereof, be entitled to any rights of a shareholder in the Company, either at law
or equity, and the rights of the Holder are limited to those expressed in this
Warrant. Nothing contained in this Warrant shall be construed as conferring
upon the Holder hereof the right to vote or to consent or to receive notice as a
shareholder of the Company on any matters or any rights whatsoever as a
shareholder of the Company. No dividends or interest shall be payable or
accrued in respect of this Warrant or the interest represented hereby or the
Warrant Shares purchasable hereunder until, and only to the extent that, this
Warrant shall have been exercised in accordance with its terms.
4
<PAGE>
Section 6. Adjustment of Exercise Price and Number of Shares. The
number and kind of securities purchasable upon the exercise of each Warrant and
the Exercise Price shall be subject to adjustment from time to time upon the
happening of certain events, as follows:
(1) Adjustment for Change in Capital Stock. If the Company:
--- --------------------------------------
(A) pays a dividend or makes a distribution on its Series C
Preferred Stock in shares of its Series C Preferred Stock;
(B) subdivides its outstanding shares of Series C Preferred
Stock into greater number of shares;
(C) combines its outstanding shares of Series C Preferred
Stock into a smaller number of shares;
(D) makes a distribution on its Series C Preferred Stock in
shares of its capital stock other than Series C Preferred Stock; or
(E) issues by reclassification of its Series C Preferred Stock
any shares of its capital stock;
then the exercise right and the Exercise Price in effect immediately prior to
such action shall be adjusted so that the Holder may receive upon exercise of
the Warrants the number of shares of capital stock of the Company which the
Holder would have owned immediately following such action if the Holder had
exercised the Warrants immediately prior to such action.
The adjustment shall become effective immediately after the record
date in the case of a dividend or distribution and immediately after the
effective date in the case of a subdivision, combination or reclassification.
(2) Adjustment for Dilutive Issuances. Notwithstanding the foregoing
--- ---------------------------------
adjustments in paragraph (a) above, the conversion rate of the Series C
Preferred Stock into Common Stock is subject to adjustments as set forth in the
Company's Articles of Incorporation (without giving duplicative effect to
adjustments set forth in paragraph (a) above. The Company represents that as of
the date this Warrant was first issued, each share of Series C Preferred Stock
was convertible into one share of Common Stock.
5
<PAGE>
(3) Minimum Adjustment; Notice of Adjustments. No adjustment in the
--- -----------------------------------------
Exercise Price of this Section 6 shall be required unless such adjustment would
require an increase or decrease of at least one cent ($0.01) in such Exercise
Price; provided, however, that any adjustments which by reason of this
subsection are not required to be made, shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this Section 6
shall be made to the nearest cent or to the nearest share, as the case may be.
Whenever the Exercise Price or number of Warrant Shares issuable upon
exercise hereof shall be adjusted pursuant to this section, the Company shall
issue a certificate signed by the secretary of the Company setting forth, in
reasonable detail, the event requiring the adjustment, the amount of the
adjustment, the method by which such adjustment was calculated and the Exercise
Price and number of Warrant Shares purchasable hereunder after giving effect to
such adjustment, and shall cause a copy of such certificate to be mailed to the
holder of this Warrant.
(4) Deferral of Issuance or Payment. In any case in which an event
--- -------------------------------
covered by this Section 6 shall require that an adjustment in the Exercise Price
be made effective as of a record date, the Company may elect to defer until the
occurrence of such event (i) issuing to the Holder, if this Warrant is exercised
after such record date, the shares of Series C Preferred Stock and other capital
stock of the Company, if any, issuable upon such exercise over and above the
shares of Series C Preferred Stock or other capital stock of the Company, if
any, issuable upon such exercise on the basis of the Exercise Price in effect
prior to such adjustment, and (ii) paying to the Holder by check any amount in
lieu of the issuance of fractional shares pursuant to Section 3.
(5) When No Adjustment Required. No adjustment need be made for a
--- ---------------------------
change in the par value or no par value of the Series C Preferred Stock.
(6) Notice of Certain Actions. In the event that:
--- -------------------------
(A) the Company shall authorize the issuance to all holders of
its Series C Preferred Stock of rights, warrants, options or convertible
securities to subscribe for or purchase shares of its Series C Preferred
Stock or of any other subscription rights, warrants, options or convertible
securities; or
(B) the Company shall authorize the distribution to all holders
of its Series C Preferred Stock of evidences of its indebtedness or assets
(other than dividends paid in or distributions of the Company's capital
stock for which the Exercise Price shall have been adjusted pursuant to
6
<PAGE>
subsection (a) of this Section 6 or regular cash dividends or distributions
payable out of earnings or earned surplus and made in the ordinary course
of business); or
(C) the Company shall authorize any capital reorganization or
reclassification of the Series C Preferred Stock (other than a subdivision
or combination of the outstanding Series C Preferred Stock and other than a
change in par value of the Series C Preferred Stock) or of any
consolidation or merger to which the Company is a party and for which
approval of any stockholders of the Company is required (other than a
consolidation or merger in which the Company is the continuing corporation
and that does not result in any reclassification or change of the Series C
Preferred Stock outstanding), or of the conveyance or transfer of the
properties and assets of the Company as an entirety or substantially as an
entirety; or
(D) the Company is the subject of a voluntary or involuntary
dissolution, liquidation or winding-up procedure;
(E) the Company proposes to take any action (other than actions
of the character described in subsection (a) or (b) of this Section 6) that
would require an adjustment of the Exercise Price pursuant to this Section
6; or
(F) the Company has filed a registration statement relating
to an initial public offering of its securities;
then the Company shall cause to be mailed by first-class mail to the Holder, at
least ten (10) days prior to the applicable record or effective date hereinafter
specified, a notice stating (x) the date as of which the holders of Series C
Preferred Stock of record to be entitled to receive any such rights, warrants or
distributions are to be determined, or (y) the date on which any such
consolidation, merger, conveyance, transfer, dissolution, liquidation or
winding-up is expected to become effective, and the date as of which it is
expected that holders of Series C Preferred Stock of record shall be entitled to
exchange their shares of Series C Preferred Stock for securities or other
property, if any, deliverable upon such reorganization, reclassification,
consolidation, merger, conveyance, transfer, dissolution, liquidation or
winding-up.
(7) No Adjustment Upon Exercise of Warrants. No adjustments shall be
--- ---------------------------------------
made under any Section herein in connection with the issuance of Warrant Shares
upon exercise of the Warrants.
7
<PAGE>
Section 7. Reclassification, Reorganization, Consolidation or Merger.
---------- --------------------------------------------------------
In the event of any reclassification, capital reorganization or other change of
outstanding shares of Series C Preferred Stock of the Company (other than a
subdivision or combination of the outstanding Series C Preferred Stock and other
than a change in the par value of the Series C Preferred Stock) or in the event
of any consolidation or merger of the Company with or into another corporation
(other than a merger in which merger the Company is the continuing corporation
and that does not result in any reclassification, capital reorganization or
other change of outstanding shares of Series C Preferred Stock of the class
issuable upon exercise of this Warrant) or in the event of any sale, lease,
transfer or conveyance to another corporation of the property and assets of the
Company as an entirety or substantially as an entirety, the Company shall, as a
condition precedent to such transaction, cause effective provisions to be made
so that the Holder shall have the right thereafter, by exercising this Warrant,
to purchase the kind and amount of shares of stock and other securities and
property (including cash) receivable upon such reclassification, capital
reorganization and other change, consolidation, merger, sale or conveyance by a
holder of the number of shares of Series C Preferred Stock that might have been
received upon exercise of this Warrant immediately prior to such
reclassification, capital reorganization, change, consolidation, merger, sale or
conveyance. Any such provision shall include provisions for adjustments in
respect of such shares of stock and other securities and property that shall be
as nearly equivalent as may be practicable to the adjustments provided for in
this Warrant. The foregoing provisions of this Section 7 shall similarly apply
to successive reclassifications, capital reorganizations and changes of shares
of Series C Preferred Stock and to successive consolidations, mergers, sales or
conveyances. In the event that in connection with any such capital
reorganization, or reclassification, consolidation, merger, sale or conveyance,
additional shares of Series C Preferred Stock shall be issued in exchange,
conversion, substitution or payment, in whole or in part, for, or of, a security
of the Company other than Series C Preferred Stock, any such issue shall be
treated as an issue of Series C Preferred Stock covered by the provisions of
subsection (a) of Section 6.
Section 8. Transfer to Comply with the Securities Act of 1933. This
---------- --------------------------------------------------
Warrant may not be exercised and neither this Warrant nor any of the Warrant
Shares, nor any interest in either, may be sold, assigned, pledged,
hypothecated, encumbered or in any other manner transferred or disposed of, in
whole or in part, except in compliance with applicable United States federal and
state securities or blue sky laws and the terms and conditions hereof. Each
Warrant shall bear a legend in substantially the same form as the legend set
forth on the first page of this Warrant. Each certificate for Warrant Shares
issued upon exercise of this Warrant, unless at the time of exercise such
Warrant Shares are acquired pursuant to a
8
<PAGE>
registration statement that has been declared effective under the Act, shall
bear a legend substantially in the following form:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES
LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON
TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS
PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT
TO REGISTRATION OR EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY
REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE
ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE
WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
Any certificate for any Warrant Shares issued at any time in exchange or
substitution for any certificate for any Warrant Shares bearing such legend
(except a new certificate for any Warrant Shares issued after the acquisition of
such Warrant Shares pursuant to a registration statement that has been declared
effective under the Act) shall also bear such legend unless, in the opinion of
counsel for the Company, the Warrant Shares represented thereby need no longer
be subject to the restriction contained herein. The provision of this Section 8
shall be binding upon all subsequent holders of certificates for Warrant Shares
bearing the above legend and all subsequent holders of this Warrant, if any.
Section 9. Modification and Waiver. This Warrant and any term hereof
---------- -----------------------
may be changed, waived, discharged or terminated by an instrument in writing
signed by the Company and the Holder.
Section 10. Registration Rights Agreement. The registration rights
----------- ------------------------------
of the Holder (including Holders' successors) with respect to this Warrant and
the underlying stock will be the same as granted to the holders of the Company's
Series C Preferred Stock. Such rights may not be amended in a manner adverse to
the Holder without the Holder's prior written consent.
Section 11. Rights and Obligations Survive Exercise of Warrant. The
----------- ---------------------------------------------------
rights and obligations of the Company, the Holder and the holder of shares of
Series C Preferred Stock issued upon exercise of this Warrant referred to in
Sections 10 shall survive the exercise of this Warrant.
9
<PAGE>
Section 12. Notices. All notices and other communications required or
----------- -------
permitted hereunder shall be in writing and shall be deemed effectively given
upon personal delivery, on the first business day following mailing by overnight
courier, or on the fifth day following mailing by registered or certified mail,
return receipt requested, postage prepaid, addressed to the Company and the
Holder at its address as shown on the books of the Company or to the Company at
the address indicated therefor in the first paragraph of this Warrant.
Section 13. Descriptive Headings and Governing Law. The description
----------- --------------------------------------
headings of the several sections and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this Warrant. This Warrant
shall be construed and enforced in accordance with, and the rights of the
parties shall be governed by, the laws of the State of New York.
10
<PAGE>
IN WITNESS WHEREOF, the Company has duly caused this Warrant to be
executed by its duly authorized officer and to be dated as of April 14, 1999.
SALON INTERNET, INC.
By: /S/ MICHAEL O'DONNELL
-----------------------------
President
11
<PAGE>
PURCHASE FORM
-------------
Dated ________________, ____
The undersigned hereby irrevocably elects to exercise the within
Warrant to purchase _____ shares of Series C Preferred Stock and hereby makes
payment of ________________ in payment of the exercise price therefor.
------------------------------------
(Signature)
12
<PAGE>
ASSIGNMENT FORM
---------------
Dated ________________, ____
FOR VALUE RECEIVED, ___________________________ hereby
sells, assigns, and transfers unto ______________________________ (the
"Assignee"), (please type or print in block letters)
_______________________________________________________________________
(insert address)
its right to purchase up to ____ shares of Series C Preferred Stock represented
by this Warrant and does hereby irrevocably constitute and appoint
____________________ as its attorney-in-fact, to transfer the same on the books
of the Company, with full power of substitution in the premises.
----------------------------------------
(Signature)
13
<PAGE>
EXHIBIT 10.17
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR PURSUANT TO RULE 144 OInformation SystemsFinancial Printing GroupTHIS WARRANT
AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED
WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144
OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS
COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE SERIES C PREFERRED STOCK
Corporation: SALON INTERNET, INC.
Number of Shares: 51,546
Class of Stock: Series C Preferred Stock
Initial Exercise Price: $1.94
Issue Date/Initial Vesting Date: April 14, 1999
Expiration Date: April 14, 2004
THIS WARRANT CERTIFIES THAT, for good and valuable consideration, ACT III
COMMUNICATIONS ("Holder") is entitled to purchase the number of fully paid and
nonassessable shares of the class of securities (the "Shares") of Salon
Internet, Inc. (the "Company") at the initial exercise price per Share (the
"Warrant Price") all as set forth above, as adjusted pursuant to Article 2 of
this Warrant, subject to the provisions and upon the terms and conditions,
including without limitation the vesting provisions, set forth in this Warrant.
ARTICLE 1. EXERCISE.
1.1 Exercise of Warrant. This Warrant shall be exercisable on and
after the Issue Date and prior to the Expiration Date in an amount not to exceed
the Number of Shares set forth above less the number of Shares previously
acquired by Holder upon exercise of this Warrant.
1.2 Method of Exercise. Holder may exercise this Warrant by
delivering a duly executed Notice of Exercise in substantially the form attached
as Appendix 1 to the principal office of the Company. Unless Holder is
exercising the conversion right set forth in Section 1.3, Holder also shall
deliver to the Company a check for the aggregate Warrant Price for the Shares
being purchased.
1.3 Conversion Right. In lieu of exercising this Warrant as
specified in Section 1.2, Holder may from time to time convert this Warrant, in
whole or in part, into a number of Shares determined by dividing (a) the
aggregate fair market value of the Shares or other securities otherwise issuable
upon exercise of this Warrant minus the aggregate Warrant Price of such Shares
by (b) the fair market value of one Share. The fair market value of the Shares
shall be determined pursuant Section 1.5.
1.4 No Rights as Shareholder. This Warrant does not entitle Holder
to any voting rights as a shareholder of the Company prior to the exercise
hereof.
1.5 Fair Market Value. If the Shares are traded in a public
market, the fair market value of the Shares shall be the closing price of the
Shares on the Business Day prior to the date of measurement (or the closing
price of the Company's stock into which the Shares are convertible) before
Holder delivers its Notice of Exercise to the Company. If the Shares are not
traded in a public market, the Board of Directors of the Company shall determine
fair market value in its reasonable good faith judgment.
1.6 Delivery of Certificate and New Warrant. Promptly after Holder
exercises or converts this Warrant, the Company shall deliver to Holder
certificates for the Shares acquired and, if this Warrant has not been fully
exercised or converted and has not expired, a new Warrant representing the
Shares not so acquired.
1
<PAGE>
1.7 Replacement of Warrants. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of mutilation, or surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver, in lieu of this Warrant, a
new warrant of like tenor.
1.8 Repurchase on Sale, Merger, or Consolidation of the Company.
1.8.1 "Acquisition". For the purpose of this Warrant,
"Acquisition" means any sale, or other disposition of all or substantially all
of the assets of the Company, or any reorganization, consolidation, or merger of
the Company where the holders of the Company's securities before the transaction
beneficially own less than 50% of the outstanding voting securities of the
surviving entity after the transaction.
1.8.2 Assumption of Warrant. Upon the closing of any
Acquisition the successor entity shall assume the obligations of this Warrant,
and this Warrant shall be exercisable for the same securities, cash, and
property as would be payable for the Shares issuable upon exercise of the
unexercised portion of this Warrant as if such Shares were outstanding on the
record date for the Acquisition and subsequent closing. The Warrant Price shall
be adjusted accordingly.
ARTICLE 2. ADJUSTMENTS TO THE SHARES.
2.1 Stock Dividends, Splits, Etc. If the Company declares or pays
a dividend on its common stock (or the Shares if the Shares are securities other
than common stock) payable in common stock, or other securities, subdivides the
outstanding common stock into a greater amount of common stock, or, if the
Shares are securities other than common stock, subdivides the Shares in a
transaction that increases the amount of common stock into which the Shares are
convertible, then upon exercise of this Warrant, for each Share acquired, Holder
shall receive, without cost to Holder, the total number and kind of securities
to which Holder would have been entitled had Holder owned the Shares of record
as of the date the dividend or subdivision occurred.
2.2 Reclassification, Exchange or Substitution. Upon any
reclassification, exchange, substitution, or other event that results in a
change of the number and/or class of the securities issuable upon exercise or
conversion of this Warrant, Holder shall be entitled to receive, upon exercise
or conversion of this Warrant, the number and kind of securities and property
that Holder would have received for the Shares if this Warrant had been
exercised immediately before such reclassification, exchange, substitution, or
other event. Such an event shall include any automatic conversion of the
outstanding or issuable securities of the Company of the same class or series as
the Shares to common stock pursuant to the terms of the Company's charter
documents upon the closing of a registered public offering of the Company's
common stock. The Company or its successor shall promptly issue to Holder a new
Warrant for such new securities or other property. The new Warrant shall
provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Article 2 including, without
limitation, adjustments to the Warrant Price and to the number of securities or
property issuable upon exercise of the new Warrant. The provisions of this
Section 2.2 shall similarly apply to successive reclassifications, exchanges,
substitutions, or other events.
2.3 Adjustments for Combinations, Etc. If the outstanding Shares
are combined or consolidated, by reclassification or otherwise, into a lesser
number of shares, the Warrant Price shall be proportionately increased.
2.4 Adjustments for Diluting Issuances. The number of shares of
common stock issuable upon conversion of the Shares shall be subject to
adjustment, from time to time, in the manner set forth in the Company's Articles
of Incorporation, as amended.
2.5 No Impairment. The Company shall not, by amendment of its
Articles of Incorporation or through a reorganization, transfer of assets,
consolidation, merger, dissolution, issue, or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or
2
<PAGE>
performed under this Warrant by the Company, but shall at all times in good
faith assist in carrying out of all the provisions of this Article 2 and in
taking all such action as may be necessary or appropriate to protect Holder's
rights under this Article 2 against impairment.
2.6 Fractional Shares. No fractional Shares shall be issuable upon
exercise or conversion of the Warrant and the number of Shares to be issued
shall be rounded down to the nearest whole Share. If a fractional share
interest arises upon any exercise or conversion of the Warrant, the Company
shall eliminate such fractional share interest by paying Holder an amount
computed by multiplying the fractional interest by the fair market value of a
full Share.
2.7 Certificate as to Adjustments. Upon each adjustment of the
Warrant Price, the Company at its expense shall promptly compute such
adjustment, and furnish Holder with a certificate of its Chief Financial Officer
setting forth such adjustment and the facts upon which such adjustment is based.
The Company shall, upon written request, furnish Holder a certificate setting
forth the Warrant Price in effect upon the date thereof and the series of
adjustments leading to such Warrant Price.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.
3.1 Representations and Warranties. The Company hereby represents
and warrants to the Holder that all Shares which may be issued upon the exercise
of the purchase right represented by this Warrant, and all securities, if any,
issuable upon conversion of the Shares, shall, upon issuance, be duly
authorized, validly issued, fully paid and nonassessable, and free of any liens
and encumbrances except for restrictions on transfer provided for herein or
under applicable federal and state securities laws.
3.2 Registration Rights. The common stock issued or issuable upon
conversion of the Shares shall be deemed "Registrable Securities" under, and
Holder shall become a party to that certain Second Amended and Restated Rights
Agreement dated September 18, 1998 among the Company and certain shareholders of
the Company (the "Rights Agreement").
ARTICLE 4. MISCELLANEOUS.
4.1 Term. This Warrant is exercisable, in whole or in part, at any
time and from time to time on or before the Expiration Date set forth above.
4.2 Legends. This Warrant and the Shares (and the securities
issuable, directly or indirectly, upon conversion of the Shares, if any) shall
be imprinted with a legend in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN
EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS
COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
4.3 Compliance with Securities Laws on Transfer; Right of First
Refusal. This Warrant and the Shares issuable upon exercise this Warrant (and
the securities issuable, directly or indirectly, upon conversion of the Shares,
if any) may not be transferred or assigned in whole or in part without
compliance with Section 4.4 below and with applicable federal and state
securities laws by the transferor and the transferee (including, without
limitation, the delivery of investment representation letters and legal opinions
reasonably satisfactory to the Company, as reasonably requested by the Company).
The Company shall not require Holder to provide an opinion of counsel if the
transfer is to an affiliate of Holder or if there is no material question as to
the availability of current information as referenced in Rule 144(c), Holder
represents that it has complied with Rule 144(d) and (e) in reasonable detail,
the selling broker represents that it has complied with Rule 144(f), and the
Company is provided with a copy of Holder's notice of proposed sale.
3
<PAGE>
4.4 Transfer Procedure. This Warrant and the Shares issuable upon
exercise of this Warrant (or the securities issuable, directly or indirectly,
upon conversion of the Shares, if any) may not be transferred or assigned in
whole or in part without compliance with the requirements of the Rights
Agreement.
4.5 Notices. All notices and other communications from the Company
to the Holder, or vice versa, shall be deemed delivered and effective when given
personally or mailed by first class registered or certified mail, postage
prepaid, at such address as may have been furnished to the Company or the
Holder, as the case may be, in writing by the Company or such holder from time
to time.
4.6 Waiver. This Warrant and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought.
4.7 Attorneys Fees. In the event of any dispute between the
parties concerning the terms and provisions of this Warrant, the party
prevailing in such dispute shall be entitled to collect from the other party all
costs incurred in such dispute, including reasonable attorneys' fees.
4.8 Governing Law. This Warrant shall be governed by and construed
in accordance with the laws of the State of California, without giving effect to
its principles regarding conflicts of law.
"COMPANY"
SALON INTERNET, INC.
By: /S/ TODD HAGEN
------------------------------
Todd Hagen
4
<PAGE>
APPENDIX 1
NOTICE OF EXERCISE
------------------
1. The undersigned hereby elects to purchase _____________ shares of the
Series C Preferred Stock of Salon Internet, Inc. pursuant to the terms of the
attached Warrant, and tenders herewith payment of the purchase price of such
shares in full.
1. The undersigned hereby elects to convert the attached Warrant into
Shares in the manner specified in the Warrant. This conversion is exercised with
respect to _____________________ of the Shares covered by the Warrant.
[Strike paragraph above that does not apply.]
2. Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name as is specified below:
_____________________________
(Name)
_____________________________
_____________________________
(Address)
3. The undersigned represents it is acquiring the shares solely for its
own account and not as a nominee for any other party and not with a view toward
the resale or distribution thereof except in compliance with applicable
securities laws.
___________________________________________
(Signature)
____________________
(Date)
5
<PAGE>
EXHIBIT 10.25
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE.
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND
MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE
APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN
FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED
TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE
SECURITIES LAWS.
SALON INTERNET, INC.
Warrant for the Purchase of Shares of Series C Preferred Stock
67,010 Shares
FOR VALUE RECEIVED, SALON INTERNET, INC., a California corporation
(the "Company"), with its principal office at 706 Mission Street, Second Floor,
San Francisco, California 94103, hereby certifies that Chatsworth Securities LLC
or its registered assigns (the "Holder") is entitled, subject to the provisions
of this Warrant, to purchase from the Company, at any time or from time to time
after the date hereof and on or before 5:00 p.m., California time, April 14,
2004 (the "Expiration Date"), the number of fully paid and nonassessable shares
of Series C Preferred Stock ("Series C Preferred Stock") of the Company set
forth above.
The Holder may purchase the above number of shares of Series C
Preferred Stock at a purchase price per share (as appropriately adjusted
pursuant to Section 6 hereof) of One Dollar and Ninety-Four Cents ($1.94) (the
"Exercise Price"). The term "Series C Preferred Stock" shall mean (i) the
aforementioned Series C Preferred Stock of the Company and (ii) the Common Stock
of the Company issuable upon conversion of the Series C Preferred Stock at such
time as all of the Company's Series C Preferred are converted into Common Stock
of the Company, together, in each case, with any other equity securities that
may be issued by the Company in addition thereto or in substitution therefor as
provided herein.
1
<PAGE>
The number of shares of Series C Preferred Stock to be received upon
the exercise of this Warrant and the price to be paid for a share of Series C
Preferred Stock are subject to adjustment from time to time as hereinafter set
forth. The shares of Series C Preferred Stock deliverable upon such exercise,
as adjusted from time to time, are hereinafter sometimes referred to as "Warrant
Shares".
Section 1. Exercise of Warrant.
-------------------
(a) This Warrant may be exercised in whole or in part on any business
day prior to the termination of the Warrant by presentation and surrender hereof
to the Company at its principal office at the address set forth in the initial
paragraph hereof (or at such other address as the Company may hereafter notify
the Holder in writing) with the Purchase Form annexed hereto duly executed and
accompanied by proper payment of the Exercise Price in lawful money of the
United States of America in the form of a certified or cashier's check for the
number of Warrant Shares specified in the Purchase Form. If this Warrant should
be exercised in part only, the Company shall, upon surrender of this Warrant,
execute and deliver a new Warrant evidencing the rights of the Holder thereof to
purchase the balance of the Warrant Shares purchasable hereunder. Upon receipt
by the Company of this Warrant and such Purchase Form, together with proper
payment of the Exercise Price, at such office, the Holder shall be deemed to be
the holder of record of the Warrant Shares, notwithstanding that the stock
transfer books of the Company shall then be closed or that certificates
representing such Warrant Shares shall not then be actually delivered to the
Holder. The Company shall pay any and all documentary stamp or similar issue or
transfer taxes payable in respect of the issue or delivery of the Warrant
Shares.
(b) Notwithstanding the foregoing, upon such exercise pursuant to
Section 1(a), in lieu of payment of the Exercise Price, the Holder may instead
elect to receive that number of shares of Series C Preferred Stock of the
Company equal to the quotient obtained by dividing [(A-B)(C)] by A, where:
(A) = the Fair Market Value (as defined below) of one share
of Series C Preferred Stock on the date of exercise of
this Warrant;
2
<PAGE>
(B) = the Exercise Price for one share of Series C Preferred
Stock under this Warrant (as adjusted to the date of such
calculation); and
(C) = the number of shares of Series C Preferred Stock
issuable upon exercise of this Warrant or, if only a
portion of the Warrant is being exercised, the portion of
the Warrant being canceled (at the date of such
calculation).
If the above calculation results in a negative number, then no shares of Series
C Preferred Stock shall be issued or issuable upon exercise of this Warrant.
For purposes hereof, "Fair Market Value" of a share of Preferred Stock shall
mean:
(1) where there exists a public market for the Company's
Common Stock at the time of such exercise, the fair market value per share
of Preferred Stock shall be the product of (i) the average of the closing
bid and asked prices of the Common Stock quoted in the Over-The-Counter
Market Summary or the last reported sale price of the Common Stock or the
closing sale price quoted on the NASDAQ National Market System or on any
exchange on which the Common Stock is listed, whichever is applicable, and
(ii) the number of shares Common Stock into which each share of Series C
Preferred Stock is convertible at the time of such exercise.
Notwithstanding the forgoing, in the event the Warrant is exercised in
connection with the Company's initial public offering of Common Stock
("IPO"), the fair market value per share shall be the product of (i) the
per share offering price to the public of the Company's IPO and and (ii)
the number of shares Common Stock into which each share of Series C
Preferred Stock is convertible at the time of such exercise, or
(2) in all other cases, the fair value as determined in good
faith by the Company's Board of Directors.
Upon exercise of this Warrant pursuant to this Section 1(b), the registered
holder hereof shall be entitled to receive a certificate for the number of
shares of Series C Preferred Stock determined as aforesaid within a reasonable
time not to exceed 20 days after exercise of the stock purchase rights
represented by this Warrant.
3
<PAGE>
Section 2. Reservation of Shares. The Company hereby agrees that at
---------- ---------------------
all times there shall be reserved for issuance and delivery upon exercise of
this Warrant all shares of its Series C Preferred Stock or other shares of
capital stock of the Company from time to time issuable upon exercise of this
Warrant. All such shares shall be duly authorized and, when issued upon such
exercise in accordance with the terms of this Warrant, shall be validly issued,
fully paid and nonassessable, free and clear of all liens, security interests,
charges and other encumbrances or restrictions on sale (other than as provided
in the Company's articles of incorporation and any restrictions on sale set
forth herein or pursuant to applicable federal and state securities laws) and
free and clear of all preemptive rights.
Section 3. Fractional Interest. The Company will not issue a
---------- -------------------
fractional share of Series C Preferred Stock upon exercise of a Warrant.
Instead, the Company will deliver its check for the Fair Market Value of such
fraction of a share, rounded to the nearest cent.
Section 4. Assignment or Loss of Warrant.
---------- -----------------------------
(1) Except as provided in Section 8, the Holder of this Warrant shall
not be entitled, without obtaining the consent of the Company, to assign its
interest in this Warrant in whole or in part to any person or persons; provided,
however, that this warrant may be assigned to affiliates, (including
distributions or transfers made to general or limited partners of a Holder) in
compliance with the provisions of Section 8. Subject to the provisions of
Section 8, and the obtaining of such consent of the Company, where required,
upon surrender of this Warrant to the Company or at the office of its stock
transfer agent or warrant agent, with the Assignment Form annexed hereto duly
executed and funds sufficient to pay any transfer tax, the Company shall,
without charge, execute and deliver a new Warrant or Warrants in the name of the
assignee or assignees named in such instrument of assignment and, if the Holders
entire interest is not being assigned, in the name of the Holder, and this
Warrant shall promptly be canceled.
(2) Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction or mutilation of this Warrant, and (in the case of loss,
theft or destruction) of indemnification satisfactory to the Company, and upon
surrender and cancellation of this Warrant, if mutilated, the Company shall
execute and deliver a new Warrant of like tenor and date.
4
<PAGE>
Section 5. Rights of the Holder. The Holder shall not, by virtue
---------- --------------------
hereof, be entitled to any rights of a shareholder in the Company, either at law
or equity, and the rights of the Holder are limited to those expressed in this
Warrant. Nothing contained in this Warrant shall be construed as conferring
upon the Holder hereof the right to vote or to consent or to receive notice as a
shareholder of the Company on any matters or any rights whatsoever as a
shareholder of the Company. No dividends or interest shall be payable or
accrued in respect of this Warrant or the interest represented hereby or the
Warrant Shares purchasable hereunder until, and only to the extent that, this
Warrant shall have been exercised in accordance with its terms.
Section 6. Adjustment of Exercise Price and Number of Shares. The
number and kind of securities purchasable upon the exercise of each Warrant and
the Exercise Price shall be subject to adjustment from time to time upon the
happening of certain events, as follows:
(1) Adjustment for Change in Capital Stock. If the Company:
--- --------------------------------------
(A) pays a dividend or makes a distribution on its Series C
Preferred Stock in shares of its Series C Preferred Stock;
(B) subdivides its outstanding shares of Series C Preferred
Stock into greater number of shares;
(C) combines its outstanding shares of Series C Preferred
Stock into a smaller number of shares;
(D) makes a distribution on its Series C Preferred Stock in
shares of its capital stock other than Series C Preferred Stock; or
(E) issues by reclassification of its Series C Preferred Stock
any shares of its capital stock;
then the exercise right and the Exercise Price in effect immediately prior to
such action shall be adjusted so that the Holder may receive upon exercise of
the Warrants the number of shares of capital stock of the Company which the
Holder would have owned immediately following such action if the Holder had
exercised the Warrants immediately prior to such action.
5
<PAGE>
The adjustment shall become effective immediately after the record
date in the case of a dividend or distribution and immediately after the
effective date in the case of a subdivision, combination or reclassification.
(2) Adjustment for Dilutive Issuances. Notwithstanding the foregoing
--- ---------------------------------
adjustments in paragraph (a) above, the conversion rate of the Series C
Preferred Stock into Common Stock is subject to adjustments as set forth in the
Company's Articles of Incorporation (without giving duplicative effect to
adjustments set forth in paragraph (a) above. The Company represents that as of
the date this Warrant was first issued, each share of Series C Preferred Stock
was convertible into one share of Common Stock.
(3) Minimum Adjustment; Notice of Adjustments. No adjustment in the
--- -----------------------------------------
Exercise Price of this Section 6 shall be required unless such adjustment would
require an increase or decrease of at least one cent ($0.01) in such Exercise
Price; provided, however, that any adjustments which by reason of this
subsection are not required to be made, shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this Section 6
shall be made to the nearest cent or to the nearest share, as the case may be.
Whenever the Exercise Price or number of Warrant Shares issuable upon
exercise hereof shall be adjusted pursuant to this section, the Company shall
issue a certificate signed by the secretary of the Company setting forth, in
reasonable detail, the event requiring the adjustment, the amount of the
adjustment, the method by which such adjustment was calculated and the Exercise
Price and number of Warrant Shares purchasable hereunder after giving effect to
such adjustment, and shall cause a copy of such certificate to be mailed to the
holder of this Warrant.
(4) Deferral of Issuance or Payment. In any case in which an event
--- -------------------------------
covered by this Section 6 shall require that an adjustment in the Exercise Price
be made effective as of a record date, the Company may elect to defer until the
occurrence of such event (i) issuing to the Holder, if this Warrant is exercised
after such record date, the shares of Series C Preferred Stock and other capital
stock of the Company, if any, issuable upon such exercise over and above the
shares of Series C Preferred Stock or other capital stock of the Company, if
any, issuable upon such exercise on the basis of the Exercise Price in effect
prior to such adjustment, and (ii) paying to the Holder by check any amount in
lieu of the issuance of fractional shares pursuant to Section 3.
6
<PAGE>
(5) When No Adjustment Required. No adjustment need be made for a
--- ---------------------------
change in the par value or no par value of the Series C Preferred Stock.
(6) Notice of Certain Actions. In the event that:
--- -------------------------
(A) the Company shall authorize the issuance to all holders of
its Series C Preferred Stock of rights, warrants, options or convertible
securities to subscribe for or purchase shares of its Series C Preferred
Stock or of any other subscription rights, warrants, options or convertible
securities; or
(B) the Company shall authorize the distribution to all holders
of its Series C Preferred Stock of evidences of its indebtedness or assets
(other than dividends paid in or distributions of the Company's capital
stock for which the Exercise Price shall have been adjusted pursuant to
subsection (a) of this Section 6 or regular cash dividends or distributions
payable out of earnings or earned surplus and made in the ordinary course
of business); or
(C) the Company shall authorize any capital reorganization or
reclassification of the Series C Preferred Stock (other than a subdivision
or combination of the outstanding Series C Preferred Stock and other than a
change in par value of the Series C Preferred Stock) or of any
consolidation or merger to which the Company is a party and for which
approval of any stockholders of the Company is required (other than a
consolidation or merger in which the Company is the continuing corporation
and that does not result in any reclassification or change of the Series C
Preferred Stock outstanding), or of the conveyance or transfer of the
properties and assets of the Company as an entirety or substantially as an
entirety; or
(D) the Company is the subject of a voluntary or involuntary
dissolution, liquidation or winding-up procedure;
(E) the Company proposes to take any action (other than actions
of the character described in subsection (a) or (b) of this Section 6) that
would require an adjustment of the Exercise Price pursuant to this Section
6; or
7
<PAGE>
(F) the Company has filed a registration statement relating
to an initial public offering of its securities;
then the Company shall cause to be mailed by first-class mail to the Holder, at
least ten (10) days prior to the applicable record or effective date hereinafter
specified, a notice stating (x) the date as of which the holders of Series C
Preferred Stock of record to be entitled to receive any such rights, warrants or
distributions are to be determined, or (y) the date on which any such
consolidation, merger, conveyance, transfer, dissolution, liquidation or
winding-up is expected to become effective, and the date as of which it is
expected that holders of Series C Preferred Stock of record shall be entitled to
exchange their shares of Series C Preferred Stock for securities or other
property, if any, deliverable upon such reorganization, reclassification,
consolidation, merger, conveyance, transfer, dissolution, liquidation or
winding-up.
(7) No Adjustment Upon Exercise of Warrants. No adjustments shall be
--- ---------------------------------------
made under any Section herein in connection with the issuance of Warrant Shares
upon exercise of the Warrants.
Section 7. Reclassification, Reorganization, Consolidation or Merger.
---------- ----------------------------------------------------------
In the event of any reclassification, capital reorganization or other change of
outstanding shares of Series C Preferred Stock of the Company (other than a
subdivision or combination of the outstanding Series C Preferred Stock and other
than a change in the par value of the Series C Preferred Stock) or in the event
of any consolidation or merger of the Company with or into another corporation
(other than a merger in which merger the Company is the continuing corporation
and that does not result in any reclassification, capital reorganization or
other change of outstanding shares of Series C Preferred Stock of the class
issuable upon exercise of this Warrant) or in the event of any sale, lease,
transfer or conveyance to another corporation of the property and assets of the
Company as an entirety or substantially as an entirety, the Company shall, as a
condition precedent to such transaction, cause effective provisions to be made
so that the Holder shall have the right thereafter, by exercising this Warrant,
to purchase the kind and amount of shares of stock and other securities and
property (including cash) receivable upon such reclassification, capital
reorganization and other change, consolidation, merger, sale or conveyance by a
holder of the number of shares of Series C Preferred Stock that might have been
received upon exercise of this Warrant immediately prior to such
reclassification, capital reorganization, change, consolidation, merger, sale or
conveyance. Any such provision shall include provisions for adjustments in
respect of such shares of stock
8
<PAGE>
and other securities and property that shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Warrant. The foregoing
provisions of this Section 7 shall similarly apply to successive
reclassifications, capital reorganizations and changes of shares of Series C
Preferred Stock and to successive consolidations, mergers, sales or conveyances.
In the event that in connection with any such capital reorganization, or
reclassification, consolidation, merger, sale or conveyance, additional shares
of Series C Preferred Stock shall be issued in exchange, conversion,
substitution or payment, in whole or in part, for, or of, a security of the
Company other than Series C Preferred Stock, any such issue shall be treated as
an issue of Series C Preferred Stock covered by the provisions of subsection (a)
of Section 6.
Section 8. Transfer to Comply with the Securities Act of 1933. This
---------- --------------------------------------------------
Warrant may not be exercised and neither this Warrant nor any of the Warrant
Shares, nor any interest in either, may be sold, assigned, pledged,
hypothecated, encumbered or in any other manner transferred or disposed of, in
whole or in part, except in compliance with applicable United States federal and
state securities or blue sky laws and the terms and conditions hereof. Each
Warrant shall bear a legend in substantially the same form as the legend set
forth on the first page of this Warrant. Each certificate for Warrant Shares
issued upon exercise of this Warrant, unless at the time of exercise such
Warrant Shares are acquired pursuant to a registration statement that has been
declared effective under the Act, shall bear a legend substantially in the
following form:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES
LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON
TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS
PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT
TO REGISTRATION OR EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY
REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE
ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE
WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
9
<PAGE>
Any certificate for any Warrant Shares issued at any time in exchange or
substitution for any certificate for any Warrant Shares bearing such legend
(except a new certificate for any Warrant Shares issued after the acquisition of
such Warrant Shares pursuant to a registration statement that has been declared
effective under the Act) shall also bear such legend unless, in the opinion of
counsel for the Company, the Warrant Shares represented thereby need no longer
be subject to the restriction contained herein. The provision of this Section 8
shall be binding upon all subsequent holders of certificates for Warrant Shares
bearing the above legend and all subsequent holders of this Warrant, if any.
Section 9. Modification and Waiver. This Warrant and any term hereof
---------- -----------------------
may be changed, waived, discharged or terminated by an instrument in writing
signed by the Company and the Holder.
Section 10. Registration Rights Agreement. The registration rights
----------- ------------------------------
of the Holder (including Holders' successors) with respect to this Warrant and
the underlying stock will be the same as granted to the holders of the Company's
Series C Preferred Stock. Such rights may not be amended in a manner adverse to
the Holder without the Holder's prior written consent.
Section 11. Rights and Obligations Survive Exercise of Warrant. The
----------- ---------------------------------------------------
rights and obligations of the Company, the Holder and the holder of shares of
Series C Preferred Stock issued upon exercise of this Warrant referred to in
Sections 10 shall survive the exercise of this Warrant.
Section 12. Notices. All notices and other communications required or
----------- -------
permitted hereunder shall be in writing and shall be deemed effectively given
upon personal delivery, on the first business day following mailing by overnight
courier, or on the fifth day following mailing by registered or certified mail,
return receipt requested, postage prepaid, addressed to the Company and the
Holder at its address as shown on the books of the Company or to the Company at
the address indicated therefor in the first paragraph of this Warrant.
Section 13. Descriptive Headings and Governing Law. The description
----------- --------------------------------------
headings of the several sections and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this Warrant. This Warrant
shall be construed and enforced in accordance with, and the rights of the
parties shall be governed by, the laws of the State of New York.
10
<PAGE>
IN WITNESS WHEREOF, the Company has duly caused this Warrant to be
executed by its duly authorized officer and to be dated as of April 14, 1999.
SALON INTERNET, INC.
By: /S/ TODD HAGEN
-------------------
Todd Hagen
11
<PAGE>
PURCHASE FORM
-------------
Dated ________________, ____
The undersigned hereby irrevocably elects to exercise the within
Warrant to purchase _____ shares of Series C Preferred Stock and hereby makes
payment of ________________ in payment of the exercise price therefor.
----------------------------------
(Signature)
12
<PAGE>
ASSIGNMENT FORM
---------------
Dated ________________, ____
FOR VALUE RECEIVED, ___________________________ hereby
sells, assigns, and transfers unto ______________________________ (the
"Assignee"), (please type or print in block letters)
_______________________________________________________________________
(insert address)
its right to purchase up to ____ shares of Series C Preferred Stock represented
by this Warrant and does hereby irrevocably constitute and appoint
____________________ as its attorney-in-fact, to transfer the same on the books
of the Company, with full power of substitution in the premises.
-----------------------------------
(Signature)
13
<PAGE>
EXHIBIT 10.26
CONSENT TO USE OF NAME
IN
REGISTRATION STATEMENT
This Consent to Use of Name in Registration Statement is executed as of May
20, 1999, by a duly authorized representative of CyberDialogue, Inc. (the
"Company").
The Company hereby consents to the use of its name in the Registration
Statement on Form S-1 (the "Registration Statement") proposed to be filed with
the Securities and Exchange Commission (the "SEC") by Salon Internet, Inc.
("Salon") in connection with its anticipated initial public offering. The
Company understands that Salon intends to use the Company name and reference
certain market surveys and projection reports produced by the Company in the
Registration Statement. The Company understands that the Registration Statement
will be a public document when filed with the SEC.
CYBERDIALOGUE, INC.
By: /s/ Andrew Watt
--------------------------------
Name: ANDREW WATT
------------------------------
Title: CFO
-----------------------------
<PAGE>
EXHIBIT 10.27
CONSENT TO USE OF NAME
IN
REGISTRATION STATEMENT
This Consent to Use of Name in Registration Statement is executed as of
May 25, 1999, by a duly authorized representative of International Data
Corporation (the "Company").
The Company hereby consents to the use of its name in the Registration
Statement on Form S-1 (the "Registration Statement") proposed to be filed with
the Securities and Exchange Commission (the "SEC") by Salon Internet, Inc.
("Salon") in connection with its anticipated initial public offering. The
Company understands that Salon intends to use the Company name and reference
certain market surveys and projection reports produced by the Company in the
Registration Statement. The Company understands that the Registration Statement
will be a public document when filed with the SEC.
INTERNATIONAL DATA CORPORATION
By: /s/ Barry L. Parr
----------------------------------
Name: Barry L. Parr
--------------------------------
Title: Director
-------------------------------
<PAGE>
EXHIBIT 10.28
[JUPITER LETTERHEAD APPEARS HERE]
CONSENT TO USE OF NAME
IN
REGISTRATION STATEMENT
This Consent to Use of Name in Registration Statement is executed as of May
24, 1999, by a duly authorized representative of Jupiter Communications (the
"Company").
The Company hereby consents to the use of its name in the Registration
Statement on Form S-1 (the "Registration Statement") proposed to be filed with
the Securities and Exchange Commission (the "SEC") by Salon Internet, Inc.
("Salon") in connection with its anticipated initial public offering. The
Company understands that Salon intends to use the Company name and reference
certain market surveys and projection reports produced by the Company in the
Registration Statement. The Company understands that the Registration Statement
will be a public document when filed with the SEC.
JUPITER COMMUNICATIONS
By: /s/ Marla Kammer
-------------------------------------
Name: Marla Kammer
-----------------------------------
Title: Director of Production
----------------------------------
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Amendment No. 1 to Registration
Statement on Form S-1 (File No. 333-76511) of our reports dated May 3, 1999
relating to the financial statements and financial statement schedule of
Salon.com which appear in such Registration Statement. We also consent to the
references to us under the headings "Experts" and "Selected Financial Data" in
such Registration Statement.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
May 26, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Amendment No. 1 to Registration
Statement on Form S-1 (File No. 333-76511) of our report dated March 3, 1999,
relating to the financial statements of The Well LLC which appear in such
Registration Statement. We also consent to the reference to us under the
heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
May 26, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Amendment No. 1 to Registration
Statement on Form S-1 (File No. 333-76511) of our report dated March 3, 1999,
relating to the financial statements of Online Conferencing Business
(predecessor business) which appear in such Registration Statement. We also
consent to the reference to us under the heading "Experts" in such Registration
Statement.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
May 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS AND RELATED NOTES FOR THE YEAR ENDED MARCH 31, 1999 AND THE
YEAR ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-1998
<PERIOD-START> APR-01-1998 APR-01-1997
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 754,334 1,925,664
<SECURITIES> 0 0
<RECEIVABLES> 497,209 248,113
<ALLOWANCES> (29,598) 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,854,977 2,312,009
<PP&E> 1,101,213 528,178
<DEPRECIATION> 238,108 114,894
<TOTAL-ASSETS> 4,597,913 2,707,208
<CURRENT-LIABILITIES> 2,380,368 417,826
<BONDS> 0 0
0 0
12,579,345 7,954,706
<COMMON> 448 375
<OTHER-SE> (10,437,400) (5,760,690)
<TOTAL-LIABILITY-AND-EQUITY> 4,597,913 2,707,208
<SALES> 2,921,517 1,155,931
<TOTAL-REVENUES> 2,921,517 1,155,931
<CGS> 4,502,964 2,832,006
<TOTAL-COSTS> 4,502,964 2,832,006
<OTHER-EXPENSES> 4,642,141 2,222,548
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 53,672 16,340
<INCOME-PRETAX> (6,504,272) (3,825,855)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,504,272) (3,825,855)
<EPS-BASIC> (16.62) (10.20)
<EPS-DILUTED> (16.62) (10.20)
</TABLE>
