<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-27886
SALON.COM
(Exact name of Registrant as specified in its charter)
Delaware 94-3228750
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
706 Mission Street, 2nd Floor
San Francisco, CA 94103
(Address of principal executive offices)
----------------
(415) 882-8720
(Registrant's telephone number, including area code)
----------------
Securities registered pursuant to Section 12(b) of the Act:
None
----------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value
(Title of Class)
----------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
The number of outstanding shares of the Registrant's Common Stock, par value
$0.001 per share, on September 30, 1999 was 11,364,674 shares.
================================================================================
<PAGE>
- --------------------------------------------------------------------------------
FORM 10-Q
SALON.COM
INDEX
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
PART I FINANCIAL INFORMATION Number
<S> <C>
ITEM 1: Financial Statements
Consolidated Balance Sheets as of September 30, 1999 (unaudited) and
March 31, 1999................................................................................ 3
Consolidated Statements of Operations for the three months and six months
ended September 30, 1999 and 1998 (unaudited)................................................... 4
Consolidated Statements of Cash Flows for the six months ended
September 30, 1999 and 1998 (unaudited)....................................................... 5
Notes to Consolidated Financial Statements....................................................... 6
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations............ 10
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk....................................... 26
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings................................................................................ 26
ITEM 2. Changes in Securities and Use of Proceeds........................................................ 26
ITEM 3. Defaults upon Senior Securities.................................................................. 26
ITEM 4. Submission of Matters to a Vote of Security Holders.............................................. 26
ITEM 5. Other Information................................................................................ 27
ITEM 6: Exhibits and Reports on Form 8-K................................................................. 27
Signature........................................................................................ 27
Exhibits......................................................................................... 28
</TABLE>
2
<PAGE>
- --------------------------------------------------------------------------------
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
SALON.COM
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, September,
1999 1999
Assets (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 754,000 $ 20,210,000
Short term investments - 10,255,000
Accounts receivable, net 497,000 719,000
Inventories 26,000 17,000
Prepaid expenses and other current assets 578,000 660,000
----------- ------------
Total current assets 1,855,000 31,861,000
Property and equipment, net 707,000 769,000
Other assets 136,000 231,000
Intangible assets, net 5,110,000 4,600,000
----------- ------------
Total assets $ 7,808,000 $ 37,461,000
----------- ------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,036,000 $ 1,570,000
Accrued liabilities 439,000 2,097,000
Deferred revenue 541,000 154,000
Bank borrowings 364,000 122,000
----------- ------------
Total current liabilities 2,380,000 3,943,000
Bank borrowings, net of current portion 75,000 -
----------- ------------
Total liabilities 2,455,000 3,943,000
----------- ------------
Stockholders' Equity:
Convertible preferred stock, no par value;
8,108,750 and 5,000,000 shares authorized at March 31, 1999 and September
30, 1999, respectively; 4,815,345 and 0 shares
were issued and outstanding at March 31, 1999 and September 30, 1999,
respectively; 15,789,000 -
Common stock, $0.001 par value;
12,500,000 and 50,000,000 shares authorized at March 31, 1999 and September
30, 1999, respectively; 447,496 and 11,364,674 shares were issued and
outstanding at March 31, 1999 and September 30, 1999, respectively. 1,000 11,000
Additional paid-in capital 3,147,000 70,122,000
Unearned compensation (834,000) (3,088,000)
Accumulated deficit (12,750,000) (33,527,000)
----------- ------------
Total stockholders' equity 5,353,000 33,518,000
----------- ------------
Total liabilities and stockholders' equity $ 7,808,000 $ 37,461,000
----------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
SALON.COM
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in 000, except per share data)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
September 30, September 30,
-------------------- --------------------
(unaudited)
1998 1999 1998 1999
------- ------- ------- --------
<S> <C> <C> <C> <C>
Revenue $619 $1,378 $1,028 $2,383
Operating expenses:
Production, content, and product 965 2,118 1,809 4,220
Sales and marketing 797 2,637 1,487 4,467
Research and development 94 304 175 534
General and administrative 118 551 213 1,127
Amortization - 256 - 511
Stock-based compensation 135 602 276 1,233
------- ------- ------- --------
Total operating expenses 2,109 6,468 3,960 12,092
Loss from operations (1,490) (5,090) (2,932) (9,709)
Other income 5 393 23 447
------- ------- ------- --------
Net loss (1,485) (4,697) (2,909) (9,262)
Preferred Dividend 213 - 213 11,515
------- ------- ------- --------
Net loss attributable to common stockholders ($1,698) ($4,697) ($3,122) ($20,777)
------- ------- ------- --------
Basic and diluted net loss per share attributable to ($4.37) ($.41) ($8.12) ($3.16)
common stockholders
Weighted average shares used in computing basic 389 11,319 385 6,575
and diluted net loss per share attributable to common
stockholders
Pro forma net loss per share, basic and diluted (see note 3) ($.35) ($.34) ($.68) ($.75)
Note:
Net loss attributable to common stockholders ($1,698) ($4,697) ($3,122) ($20,777)
Less: Amortization of intangible assets - 256 - 511
Stock-based compensation 135 602 276 1,233
Preferred deemed dividend 213 - 213 11,515
------- ------- ------- --------
Pro forma net loss attributable to common stockholders ($1,350) ($3,839) ($2,633) ($7,518)
Shares used in computing pro forma net loss, basic and 3,908 11,319 3,869 10,034
diluted
Pro forma net loss per share, basic and diluted ($.35) ($.34) ($.68) ($.75)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
SALON.COM
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended Sept. 30,
1998 1999
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,909,000) $ (9,262,000)
Adjustments to reconcile net loss
to net cash used in operating activities:
Stock-based compensation 276,000 1,233,000
Depreciation and amortization 103,000 607,000
Amortization of discount on bank borrowings 8,000 13,000
Changes in operating assets and liabilities:
Accounts receivable (233,000) (222,000)
Inventories (29,000) 8,000
Prepaid expenses and other assets 22,000 67,000
Accounts payable 269,000 534,000
Accrued liabilities 110,000 1,658,000
Deferred revenue 151,000 (387,000)
------------ -------------
Net cash used in operating activities (2,232,000) (5,751,000)
------------ -------------
Cash flows from investing activities:
Purchase of property and equipment (273,000) (158,000)
Net purchase of investments - (10,255,000)
------------ -------------
Net cash used in investing activities (273,000) (10,413,000)
------------ -------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock and common stock warrants, net 2,685,000 10,936,000
Proceeds from issuance of common stock, net - 24,929,000
Proceeds from exercise of options 3,000 86,000
Proceeds from bank debt 458,000 -
Repayments of bank borrowings (46,000) (331,000)
------------ -------------
Net cash provided by financing activities 3,100,000 35,620,000
------------ -------------
Net increase in cash and cash equivalents 595,000 19,456,000
Cash and cash equivalents - beginning of period 1,926,000 754,000
------------ -------------
Cash and cash equivalents - end of period $ 2,521,000 $ 20,210,000
------------ -------------
Non-cash investing and financing transactions:
Unearned compensation in connection with the issuance
of stock options $ 627,000 $ 3,487,000
------------ -------------
Issuance of warrants in connection with bank borrowings $ 36,000 $ -
------------ -------------
Issuance of warrants in connection with agreements $ 217,000 $ 244,000
------------ -------------
Conversion of preferred stock to common stock $ - $ 25,301,000
------------ -------------
Preferred deemed dividend $ 213,000 $ 11,515,000
------------ -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company
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 and reincorporated in Delaware in June 1999.
2. Basis of Presentation
The accompanying consolidated financial statements as of September 30, 1999
and for the three months and six months ended September 30, 1998 and 1999 are
unaudited. The unaudited interim consolidated financial statements have been
prepared on the same basis as the annual financial statements and, in the
opinion of management, reflect all adjustments, which include only normal
recurring adjustments, necessary to present fairly Salon's financial position,
results of operations and cash flows as of and for the six months ended
September 30, 1998 and 1999. These consolidated financial statements and notes
thereto are unaudited and should be read in conjunction with Salon's audited
financial statements included in Salon's Form S-1 registration statement, as
amended, filed with the Securities and Exchange Commission. The balance sheet as
of March 31, 1999 was derived from audited financial statements, but does not
include all required disclosures required by generally accepted accounting
principles. The results for the three months and six months ended September 30,
1999 are not necessarily indicative of the expected results for any other
interim period or the year ending March 31, 2000. Certain prior period balances
have been reclassified to conform to the current period presentation.
3. Summary of Significant Accounting Policies
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivatives and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. In July
1999, the FASB issued SFAS No. 137, "Accounting for Derviative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133."
SFAS No. 137 deferred the effective date of SFAS No. 133 until fiscal years
beginning after June 15, 2000. Salon will adopt SFAS No. 133 during its year
ending March 31, 2002. To date, Salon has not engaged in derivative or hedging
activities. Salon is unable to predict the impact of adopting SFAS No. 133 if it
were to engage in derivative and hedging activities in the future.
Net loss per share
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No.
128"). SFAS No. 128 replaced primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Basic earnings per share is computed using the weighted-
average number of common shares outstanding during the period. Diluted earnings
6.
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
per share is computed using the weighted-average number of common and common
stock equivalents outstanding during the period. The calculation of diluted net
loss per share excludes potential shares of common stock as their effect will be
anti-dilutive.
Pro forma net loss per share has been computed as described above except
that it assumes the conversion of preferred stock outstanding into common stock
during the relevant period. It also eliminates non-cash charges for amortization
of intangible assets, stock-based compensation, and the preferred deemed
dividend from the net loss.
<TABLE>
<CAPTION>
($ in 000's, except per share data)
Three months ended Six months ended
September 30 September 30
1998 1999 1998 1999
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss attributable to common stockholders $ (1,698) $ (4,697) $ (3,122) $ (20,777)
Less: Amortization of intangible assets - 256 - 511
Stock based compensation 135 602 276 1,233
Preferred deemed dividends 213 - 213 11,515
Adjusted net loss attributable to common stockholders (1,350) (3,839) (2,633) (7,518)
Shares used in computing net loss attributable to common
stockholders, basic and diluted 389 11,319 385 6,575
Adjustment to reflect the assumed conversion of
preferred stock 3,519 - 3,484 3,459
Shares used in computing pro forma net loss, basic 3,908 11,319 3,869 10,034
and diluted
Pro forma net loss per share, basic and diluted $ (0.35) $ (0.34) $ (0.68) $ (0.75)
</TABLE>
Investments
Investments consist of high quality debt securities with original maturity
dates greater than ninety days. In accordance with SFAS No. 115, "Accounting for
Certain investments in Debt and Equity Securities," Salon's investments are
classified as available-for-sale and, at the balance sheet date, are reported at
fair value, with the unrealized gains and losses, net of related taxes, reported
as a component of other comprehensive income (loss). Unrealized gains and losses
were immaterial as of September 30, 1999. The cost of these investments at
September 30, 1999 was $10,255,000.
Inventories
Inventories consist solely of finished goods.
7.
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Concentrations
No customer accounted for over 10% of revenues for the three months
ended September 30, 1999. For the three months ended September 30, 1998, one
customer accounted for 39% of total revenues. No customer accounted for over 10%
of net revenues for the six months ended September 30, 1999 and one customer
accounted for 37% of net revenues for the six months ended September 30, 1998.
Included in sponsorship and advertising revenues are barter
transactions that accounted for $363,000 or approximately 26% of total revenues
and $92,000 or 15% of total revenues for the three months ended September 30,
1999 and 1998, respectively; and $478,000 or 20% and $183,000 or 18% of total
revenues for the six months ended September 30, 1999, and 1998, respectively.
4. Stockholders' Equity
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 then 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, an aggregate of 4,500,000 shares
of Salon's common stock were reserved for issuance upon conversion of the 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 net proceeds of approximately $10.9 million. The difference between the
offering price and the deemed fair value of the common stock on the date of the
transaction resulted in a beneficial conversion feature in the amount of
$11,515,000. The beneficial conversion feature has been reflected as a preferred
dividend in the statement of operations. 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. Upon completion of the Salon's IPO, the warrants converted into the right
to purchase an equivalent number of shares of Salon's common stock at the same
exercise price. The warrants may be exercised at any time within five years
after issuance. Salon valued the warrants using the Black-Scholes option pricing
model, applying an expected life of 5 years, a weighted average risk-free rate
of 5.14%, an expected dividend yield of zero percent, a volatility of 107% and a
deemed fair value of common stock of $10.80. The fair market value of the
warrants of $1.4 million has been netted against the proceeds from the
offerings.
In April 1999, Salon reincorporated in Delaware, changing its 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 stock splits and the
reincorporation.
8.
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Upon completion of the Salon's IPO, the warrant converted into the right
to purchase an equivalent number of shares of Salon's common stock at the same
exercise price. The warrant may be exercised at any time within five years after
issuance. Salon valued the warrant using the Black-Scholes option pricing model,
applying an expected life of 5 years, a weighted average risk-free rate of
5.14%, an expected dividend yield of zero percent, a volatility of 107% and a
deemed fair value of common stock of $10.80. The fair market value of the
warrant of $244,000 was recorded in other assets, and is being amortized over
the term of the agreement.
Stockholders' equity activity for the six months ended September 30, 1999
was as follows:
<TABLE>
<CAPTION>
Additional
Preferred Common Paid-In Unearned Accumulated
Stock Stock Capital Compensation Deficit
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance - March 31,1999 15,789,658 448 3,146,811 (833,799) (12,750,412)
Issuance of Series C
preferred stock and
warrant, net 9,511,179 - 1,424,492 - -
Unearned compensation - - 3,487,847 (3,487,847) -
Exercise of stock options for cash - 636 85,384 - -
Issuance of common stock for cash - - 997,400 - -
Issuance of preferred stock warrants - - 243,979 - -
Initial public offering - 2,500 23,928,471 - -
Conversion of preferred stock to
common (25,300,837) 7,781 25,293,054 - -
Amortization of unearned compensation - - - 1,233,000 -
Net loss - - - - (9,261,451)
Preferred deemed dividend - - 11,515,000 - (11,515,000)
Balance - September 30,1999 - 11,365 70,122,438 (3,088,646) (33,526,863)
</TABLE>
9.
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If the stock-based compensation for the three and six months ended
September 30, 1998 and 1999 had been allocated across the relevant functional
expense categories within operating expenses, it would be allocated as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30 September 30
1998 1999 1998 1999
------------------------------------------------------
<S> <C> <C> <C> <C>
Production, content and product $ 60,000 $ 222,000 $ 123,000 $ 454,000
Sales and marketing 59,000 174,000 121,000 356,000
Research and development 12,000 28,000 24,000 59,000
General and administrative 4,000 178,000 8,000 364,000
------------------------------------------------------
$ 135,000 $ 602,000 $ 276,000 $ 1,233,000
------------------------------------------------------
</TABLE>
5. Subsequent Events
On September 23,1999, Salon amended its security and loan agreement with
Imperial Bank dated April 13, 1998. The amendment was an additional revolving
loan for a maximum amount of $2,000,000. The agreement is collateralized by the
assets of Salon and contains certain financial covenants. As of September 30,
1999, there was no outstanding balance under the security and loan agreement.
- --------------------------------------------------------------------------------
PART I: FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
Salon has included in this filing certain "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995
concerning Salon's business, operations and financial condition. The words or
phrases "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates" and similar expressions are generally intended to identify forward-
looking statements. Such forward-looking statements are subject to various known
and unknown risks and uncertainties and Salon cautions you that any forward-
looking information provided by or on behalf of Salon is not a guarantee of
future performance. Actual results could differ materially from those
anticipated in such forward-looking statements due to a number of factors, some
of which are beyond Salon's control, including but not limited to Salon's
limited operating history, anticipated losses, the unpredictability of its
future revenues, competition, risks associated with system development and
operation risks, management of potential growth, and risks of new business
areas, business combinations, and strategic alliances. All forward-looking
statements are based on information available to the company on the date hereof
and the company assumes no obligation to update such statements.
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.
-------------
10.
<PAGE>
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
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 September 1999, approximately 1.9 million unique users visited Salon's
network of Web sites, compared to approximately 1.3 million unique users in June
1999 and approximately 1.0 million unique users in September 1998. Salon
generated approximately 59 million page views for the three months ended
September 30, 1999, compared to approximately 47 million page views for the
three months ended June 30, 1999 and approximately 35 million page views for the
three months ended September 30, 1998. Salon generated 260,000,000 ad
impressions for the three months ended September 30, 1999 compared to
159,000,000 for the three months ended June 30, 1999 and 35,000,000 for the
three months ended September 30, 1998.
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:
. America Online . TheStreet.com . EchoStar
. AltaVista . CNN.com . PointCast
. Lycos . @Home . WebTV
. Go.com . C/Net . Snap!
. Netscape . Rocket eBook . Reuters
Salon has derived a significant amount of its revenues to date from
Internet advertising, advertising sponsorships and e-commerce sponsorships.
Advertising and sponsorship revenue represented 89.0% of net revenues for the
three months ended September 30, 1999.
Internet 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 over the period in which the
advertising is displayed. If the percentage of time elapsed exceeds the
percentage of guaranteed impressions delivered, revenue is recognized at the
lower percentage.
Advertising sponsorship revenues are derived generally from contracts
ranging from six to thirty-six months in which Salon commits to provide sponsors
with enhanced promotional opportunities beyond traditional banner advertising.
Sponsorship agreements typically include the delivery of impressions, exclusive
relationships, and design and development of customized co-branded pages
designed to achieve broad marketing objectives including brand awareness and
product
11.
<PAGE>
introduction. Salon also offers exclusive category opportunities to sponsors,
such as Lexus' sponsorship of Salon's Brilliant Careers editorial series.
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 over
the sponsorship term. Electronic commerce sponsorships may provide that Salon
receive commissions from electronic commerce transactions. These commissions are
recognized by Salon upon notification from the sponsor. The notification from
advertisers and distribution partners is generally received quarterly. Under
some of Salon's distribution agreements, Salon is entitled to receive a portion
of the advertising revenue generated on co-branded pages. These advertising
revenues are recognized upon notification from the distribution partner.
Salon's strategy for capturing electronic commerce advertising 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. Salon's e-commerce sponsors include:
. Barnesandnoble.com
. DrKoop.com
. 911 Gifts
Sponsorship and advertising revenues also include barter revenues, which
are the exchange 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 Salon's Web sites.
E-commerce revenues are derived principally from sales through Salon's own
online store, Salon Shopping. Salon Shopping offers a range of upscale Salon-
branded and third party products, as well as goods offered by Salon's retailing
partners. Salon recognizes revenue on items from Salon Shopping when the goods
are shipped.
Salon obtains content licensing revenue by syndicating and licensing 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.
Revenues related to the syndication and licensing of Salon content to other
media outlets are recognized on notification that the content has been
published.
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. Salon Members is an annual membership program designed to
provide specific products and services to Salon's user base. Subscription
revenues are recognized ratably over the period that services are to be
provided.
Results of Operations
Net Revenues
Net revenues increased 123% to $1.4 million for the three months ended
September 30, 1999 from $619,000 for the three months ended September 30, 1998
and 132% to $2.4 million for the six months ended September 30, 1999 from $1.0
million for the six months ended September 30, 1998. The increase in revenues
was primarily due to Salon's ability to generate significantly higher
sponsorship and advertising revenues and development of its subscription
strategy through the acquisition of The Well and launch of Salon Members. The
net increase in Internet advertising, advertising sponsorship and e-commerce
sponsorship revenues was primarily due to an increase in the number of
impressions sold and an increase in the
12.
<PAGE>
number of sponsors advertising on Salon's Web sites. Sponsorship and advertising
revenues accounted for approximately 89% and 98% of net revenues for the three
months ended September 30, 1999 and 1998, respectively, and 85% and 98% of net
revenues for the six months ended September 30, 1999 and 1998, respectively.
No customer accounted for over 10% of revenues for the three months ended
September 30, 1999. For the three months ended September 30, 1998, one customer
accounted for 39%. No customer accounted for over 10% of net revenues for the
six months ending September 30,1999 and one customer accounted for 37% of net
revenues for the six months ending September 30,1998.
Included in sponsorship and advertising revenues are barter transactions
that accounted for $363,000 or approximately 26% of revenues and $92,000 or 15%
of revenues for the three months ended September 30, 1999 and 1998,
respectively. Barter transactions accounted for $478,000 or 20% of revenues and
$183,000 or 18% of revenues for the six months ended September 30, 1999 and
1998, respectively.
Operating Expenses
Production, Content and Product
Production, content and product expenses consist primarily of payroll and
related expenses for Salon's editorial, artistic, production and The Well staff,
payments to freelance writers and artists, and telecommunications and computer
related expenses for the support and delivery of Salon's Web sites and online
communities. Also included in production, content and product expenses are costs
associated with electronic commerce transactions, including the costs of product
inventory and distribution. Production, content and product expenses were
approximately $2.1 million, or 154% of net revenues, and $965,000 or 156% of net
revenues for the three months ended September 30, 1999 and 1998, respectively,
and $4.2 million or 177% of net revenues and $1.9 million or 176% of net
revenues for the six months ended September 30, 1999 and 1998, respectively. The
increase in production, content and product expenses is primarily attributable
to increased costs relating to growth in Salon's editorial, art, and production
staff, costs associated with Salon's new online community The Well, and payments
to freelance writers and artists.
Sales and Marketing
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 advertising, promotional and
distribution costs. Sales and marketing expenses were $2.6 million, or 191% of
revenues and $797,000, or 129% of revenues for the three months ended September
30, 1999 and 1998, respectively; and $4.5 million or 187% of revenues and $1.5
million or 145% of revenues for the six months ended September 30, 1999 and
1998, respectively. The increase in sales and marketing expenses was primarily
attributable to Salon's advertising campaign in print and on the radio and
television, as well as the hiring of additional sales personnel. Included in
sales and marketing expenses are barter expenses, which accounted for $397,000
and $92,000 for the three months ended September 30, 1999 and 1998,
respectively; and $512,000 and $183,000 for the six months ended September 1999
and 1998, respectively.
Research and Development
Research and development expenses consist of costs associated with the
development and maintenance of technology, including Salon's publishing platform
software and archival database, as well as in technical support staff for
Salon's Web sites and online communities. Research and development expenses
increased 223% to $304,000 in the three months ended September 30, 1999 from
$94,000 in the three months ended September 30, 1998. Research and develoment
expenses as a percentage of revenue, increased to 22% for the three months ended
September 30,1999 from 15% for the same period in 1998, and 22% for the six
months ended September 30, 1999 from 17% in the same period in 1998. Research
and development expenses also increased 204% to $534,000 from $176,000 for the
six months ended September 30, 1999 compared to the same period a year ago. The
increase in research and development expenses is primarily attributable to
13.
<PAGE>
salary and payroll related expenses for the technical support of Salon's new
websites, online communities, and increased staff, as well as the maintenance
and development of new technology, including the design and development of a new
publishing platform and advertising delivery system.
General and Administrative
General and administrative expenses consist primarily of salaries,
payroll taxes and benefits and related costs for general corporate functions
including executive management, finance, and legal and other professional fees.
General and administrative expenses were $552,000 or 40% of total revenues, and
$118,000 or 19% of total revenues for the three months ended September 30, 1999
and 1998, respectively; and $1.1 million or 47% and $213,000 or 21% of total
revenues for the six months ended September 30, 1999 and 1998, respectively. The
increase in general and administrative expenses is primarily attributable to
salary and related expenses for additional personnel hired to support the growth
of Salon's business and activities as a public company and higher professional
fees. General and administrative expenses increased as a percentage of total
revenues as a result of the increased growth of general and administrative
expenses in relation to revenue growth.
Amortization of Intangibles
Amortization of intangibles consists of the costs associated with the
amortization of the intangibles and goodwill associated with the acquisition of
The Well. The acquisition of The Well is being accounted for using the purchase
method of accounting and is being amortized on a straight-line basis over 60
months. Amortization expenses were $256,000 or 19% of revenue, for the three
months ended September 30, 1999 and $511,000 or 21% of net revenue for the six
months ended September 30, 1999. There was no amortization expense in 1998.
Stock-based Compensation
Stock-based compensation consists of expenses associated with the
issuance of stock options and warrants. Stock-based compensation charges were
$602,000 or 44% of net revenue for the three months ended September 30, 1999,
compared to $135,000 or 22% of revenue for the three months ended September 30,
1998. Stock based compensation charges were $1.2 million or 52% of net revenue
and $276,000 or 27% of net revenue for the six months ended September 30, 1999
and 1998, respectively. The increase in stock based compensation expenses is
primarily attributable to an increased number of employee options to new and
existing employees.
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 income increased to $393,000 in the three months ended
September 30, 1999 from $5,000 for the three months ended September 30, 1998 and
increased to $448,000 in the six months ended September 30, 1999 from $23,000
for the six months ended September 30,1998. 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 balance as a result of its financing
activities including Salon's initial public offering and Series C Financing
activities during the quarter ended June 30, 1999 and the sale of additional
stock in July 1999.
Preferred Deemed Dividend
The preferred deemed dividend of $11.5 million for the three months ended
June 30, 1999 is the difference between the offering price of Salon's Series C
preferred stock sold in April 1999, and the deemed fair value of Salon's common
stock on the date of the transaction. This is a one-time non cash expense that
was incurred in the prior quarter. There is no preferred dividend expense for
the three months ended September 30, 1999.
Net Loss
Salon recorded a pro forma net loss of $3.8 million, or $.34 per share,
for the three months ended September 30, 1999, compared to a pro forma net loss
of $1.3 million, or $.35 per share, for the three months ended September 30,
1998.
14.
<PAGE>
For the six months ended September 30, 1999 and 1998, Salon recorded a pro forma
net loss of $7.5 million or $.75 per share and $2.6 million or $.68 per share,
respectively. Salon recorded a net loss of $4.7 million, or $.41 per share, for
the three months ended September 30, 1999 compared to a net loss of $1.7 or
$4.37 per share for three months ended September 30, 1998. Salon recorded a net
loss of $20.8 million for the six months ended September 30, 1998, or $3.16 per
share compared to a net loss of $3.1 million or $8.12 per share for the same
period in 1998.
Liquidity and Capital Resources
Since its inception, Salon has primarily financed its operations through
the private placement of its convertible preferred stock and its initial public
offering of common stock. As of September 30, 1999, Salon had approximately
$30.5 million in cash and cash equivalents and short term investments, of which
$24.0 million was obtained through Salon's initial public offering in June 1999
and $1.0 million for the sale of the additional stock in July 1999.
Net cash used for operations was $5.8 million for the six months ended
September 30, 1999, compared to $2.2 million for the six months ended September
30, 1998. The principal use of cash from operations was the net loss generated
from operations.
Net cash used for investing activities totaled $10.4 million for the six
months ended September 30, 1999, compared to $273,000 for the six months ended
September 30, 1998. Net cash used for investing activities in each of these
respective periods consisted primarily of purchases of short-term investments
and purchases of certain equipment, including computer equipment.
Net cash provided by financing activities increased to $35.6 million for
the six months ended September 30, 1999 from net cash used in financing
activities of $3.1 million for the six months ended September 30, 1998. The
increase was primarily due to the receipt of $24.0 million of net proceeds from
Salon's initial public offering in June 1999, and $10.9 million of net proceeds
from the private placement of preferred stock in April 1999 and $1.0 million for
the sale of additional stock in July 1999.
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 will be
sufficient to meet its anticipated needs for working capital and capital
expenditures for at least the next 12 months. 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 Compliance
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.
15.
<PAGE>
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 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 November 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 $200,000 to $300,000 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 harm Salon's business.
Risks
Salon is not currently aware of any year 2000 readiness problems relating
to its internally-developed proprietary systems that would harm 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 harm Salon's business.
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 harm 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.
16.
<PAGE>
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.
Risk Factors That May Affect Our Results of Operations and Financial Condition
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.
We lack significant revenues, we have a history of losses and we anticipate
continued losses
We have not achieved profitability and expect to incur operating losses
for the foreseeable future. We incurred net losses attributable to common
stockholders of $20.8 million in the six months ended September 30, 1999 and
$6.2 million in the fiscal year ended March 31, 1999. As of September 30, 1999,
our accumulated deficit was $33.5 million. We expect these operating losses to
continue 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.
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.
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
17.
<PAGE>
be unable to reduce spending in that quarter. As a result, any shortfall in
revenues would likely harm our quarterly operating results.
Due to the factors noted above and the other risks discussed in this
section, 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.
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 three months ended September 30, 1999,
advertising and sponsorship sales accounted for 89% 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 harm 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 three
months ended September 30, 1999, Barnesandnoble.com accounted for approximately
8% 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 harm our business. We anticipate that
our financial results in any given period will continue to significantly depend
on revenues from a small number of 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.
The length of our sales cycles is uncertain and variable and may lead to
shortfalls in or 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:
18.
<PAGE>
. 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:
. 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.
19.
<PAGE>
The new design of our network of Web sites may not appeal to users which could
result in reduced traffic on our network
In April 1999 we 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/or retain qualified 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.
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 severely harm our business. We also license content from various
freelance providers and other third-party content providers. While we attempt to
insure that this content may be freely licensed to us, other parties may assert
claims of infringement against us relating to this content.
20.
<PAGE>
We may need to obtain licenses from others to refine, develop, market and
deliver new services. We may not be able to obtain any such licenses on
commercially reasonable terms or at all or rights granted pursuant to any
licenses may not be valid and enforceable.
In April 1999 we acquired the Internet address www.salon.com. Because
www.salon.com is the address of the main home page to our network of Web sites
and incorporates our company name, it is a vital part of our intellectual
property assets. We do not have a registered trademark on the address, and
therefore it may be difficult for us to prevent a third party from infringing
our intellectual property rights in the address. If we fail 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 severely harm our business.
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. In the year ended September 30, 1999 the number of employees we have
increased 216%. In the three months ended September 30, 1999 our total revenues
increased approximately 123% and our net expenses increased approximately 207%
compared to the three months ended September 30, 1998. 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.
21.
<PAGE>
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 XX 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.
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.
Acceptance and effectiveness of Internet advertising and electronic commerce is
unproven and, to the extent it does 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.
22.
<PAGE>
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.
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 harmed.
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.
23.
<PAGE>
Increased competition could result in advertising or sponsorship price
reductions, reduced margins or loss of market share, any of which could harm our
business. Competition is likely to increase significantly as new companies enter
the market and current competitors expand their services. Many of our present
and potential competitors are likely to enjoy substantial competitive advantages
over us. If we do not compete effectively or if we experience any pricing
pressures, reduced margins or loss of market share resulting from increased
competition, our business could be harmed.
If the Internet infrastructure continues to be unreliable, access to our network
may be impaired and our business may be harmed
Our success depends in part on the development and maintenance of the
Internet infrastructure. If this infrastructure fails to develop or be
adequately maintained, our business would be harmed because users may not be
able to access our network of Web sites. Among other things, development and
maintenance of a reliable infrastructure will require a reliable network
backbone with the necessary speed, data capacity, security and timely
development of complementary products for providing reliable Internet access and
services.
The Internet has experienced, and is expected to continue to experience,
significant growth in number of users and amount of traffic. If the Internet
continues to experience increased numbers of users, frequency of use or
increased bandwidth requirements, the Internet infrastructure may not be able to
support these increased demands or perform reliably. The Internet has
experienced a variety of outages and other delays as a result of damage to
portions of its infrastructure, and could face additional outages and delays in
the future. These outages and delays could reduce the level of Internet usage
and traffic on our network of Web sites. In addition, the Internet could lose
its viability due to delays in the development or adoption of new standards and
protocols to handle increased levels of activity. If the Internet infrastructure
is not adequately developed or maintained, use of our network of Web sites may
be reduced.
Even if the Internet infrastructure is adequately developed and maintained,
we may incur substantial expenditures in order to adapt our services and
products to changing Internet technologies. Such additional expenses could
severely harm our financial results.
We may be held liable for content on our Web sites
As a publisher and distributor of content over the Internet, including
user-generated content on our online communities, we face potential liability
for defamation, negligence, copyright, patent or trademark infringement and
other claims based on the nature and content of the material that is published
or distributed on our network of Web sites. These types of claims have been
brought, sometimes successfully, against online services, Web sites and print
publications in the past. Although we carry general liability insurance, our
insurance may not be adequate to indemnify us for all liability that may be
imposed. Any liability that is not covered by our insurance or is in excess of
our insurance coverage could severely harm our financial condition and business.
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.
24.
<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 four 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 harm our business. In addition, our
users depend on Internet service providers, online service providers and other
Web site operators for access to our Web sites. Many of these providers and
operators have experienced significant outages in the past, and could experience
outages, delays and other difficulties due to system failures unrelated to our
systems. Any of these system failures could harm our business.
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.
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
25.
<PAGE>
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
harm our financial results.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio. The Company places its
investments with high credit issuers in short-term securities with maturities of
three to twenty four months. The average maturity of the portfolio will not
exceed twelve months. The portfolio includes only marketable securities with
active secondary or resale markets to ensure portfolio liquidity. The Company
has no investments denominated in foreign country currencies and therefore is
not subject to foreign exchange risk.
26.
<PAGE>
PART II: OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1. Legal Proceedings.
None at this time.
Item 2. Changes in Securities and Use of Proceeds.
The effective date of Salon's first registration statement, filed on Form
S-1 under the Securities Act of 1933 (File No. 333-68749) relating to Salon's
initial public offering of its common stock, was June 21, 1999. A total of
2,500,000 shares of Salon's common stock were sold to an underwriting syndicate.
The managing underwriters were W.R. Hambrecht & Co. and Daiwa Securities
America, Inc. The offering commenced and completed on June 22, 1999, at an
initial public offering price of $10.50 per share. The initial public offering
resulted in gross proceeds of $26.3 million, $1.3 million of which was applied
to the underwriting discount and approximately $1.0 million of which was applied
to related expenses. As a result, net proceeds of the offering to Salon were
approximately $24.0 million. On July 26, 1999, Salon issued an additional
100,000 shares of common stock at a price of $9.975 per share for total proceeds
of $997,500. The shares were issued upon exercise of a 30-day option granted to
Salon's underwriters to cover over-allotments. Net proceeds of Salon's initial
public offering were used to promote Salon's brand, expand Salon's sales and
marketing, for working capital or invested in short-term, interest-bearing,
investment-grade securities. None of the net proceeds of the offering were paid
by Salon, directly or indirectly, to any director, officer or general partner of
Salon or any of their associates, or to any persons owning ten percent or more
of any class of Salon's equity securities, or any affiliates of Salon.
Item 3. Default upon Senior Securities.
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
--------
10.0 Imperial bank restated loan agreement
27.1 Financial Data Schedule
(b) Reports on Form 8-k. No reports on form 8-K were filed during the
quarter ended September 30, 1999.
27.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed of its behalf by the
undersigned thereunto duly authorized.
SALON.COM
(Registrant)
Dated: By: /s/ Michael O'Donnell
--------------------------------
Michael O'Donnell, Chief Executive Officer
Dated: By: /s/ Todd Hagen
--------------------------------
Todd Hagen, Chief Financial Officer
28.
<PAGE>
EXHIBIT INDEX
Exhibits
- --------
10.0 Imperial bank restated loan agreement
27.1 Financial Data Schedule
29.
<PAGE>
Exhibit 10.0
AMENDED AND RESTATED LOAN AGREEMENT
THIS AMENDED AND RESTATED LOAN AGREEMENT is entered into as of September
23, 1999 (this "Restated Loan Agreement") between SALON.COM, a Delaware
corporation (herein called "Borrower"), and IMPERIAL BANK (herein called
"Bank"). This Restated Loan Agreement amends, restates and supercedes in its
entirety the Security and Loan Agreement and the Other Loan Agreement (as
hereinafter defined).
RECITALS
A. Borrower and Bank entered into a certain Security and Loan Agreement
dated as of April 14, 1997, as the same was amended by that certain First
Amendment to Loan Agreement dated as of April 13, 1998 (collectively, the
"Security and Loan Agreement"), pursuant to which Bank agreed to extend and make
"Working Capital Advances" and "Equipment Advances" (as said terms are defined
in the Security and Loan Agreement) to Borrower in the maximum principal amount
of $500,000.00 upon the terms and conditions contained therein. The commitment
of Bank to make Working Capital Advances expired and was terminated on April 13,
1998. The commitment of Bank to make Equipment Advances expired on September 30,
1997 and Borrower is currently making the scheduled principal and interest
payments set forth in the Security and Loan Agreement.
B. Borrower and Bank entered into a certain Loan Agreement dated as of
April 13, 1998 (the "Other Loan Agreement"), pursuant to which Bank agreed to
make (1) revolving loans to Borrower in the maximum principal amount of
$1,000,000.00 (the "Prior Revolving Loan Commitment") and (2) an equipment term
loan to Borrower in the maximum principal amount of $300,000.00 (the "Additional
Equipment Loan Commitment"). The Prior Revolving Loan Commitment expired and was
terminated on April 12, 1999. The commitment of Bank to make advances under the
Additional Equipment Loan Commitment expired on December 31, 1998 and Borrower
is currently making the scheduled principal and interest payments set forth in
the Other Loan Agreement.
C. Borrower has requested and Bank has agreed to make additional revolving
loans to Borrower in the maximum principal amount of $2,000,000.00, subject to
the terms and conditions hereinafter set forth and in reliance on the
representations and warranties set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
covenants hereinafter set forth, and intending to be legally bound, the parties
hereby agree as follows:
1. Definitions. As used in this Restated Loan Agreement and unless
otherwise defined herein, all initially capitalized terms shall have the
meanings set forth on Exhibit A attached hereto and incorporated herein by this
reference.
2. Commitments.
(A) Revolving Commitment. Subject to all the terms and conditions of
this Restated Loan Agreement and prior to the termination of its commitment as
hereinafter provided, Bank hereby agrees to make loans (each a "Revolving Loan")
to Borrower, from time to time and in such amounts as Borrower shall request
pursuant to this Section 2.A., up to an aggregate principal amount outstanding
under the Revolving Loan Account
29.
<PAGE>
not to exceed the lesser of: (a) eighty percent (80.0%) of Eligible Accounts (as
the same may be adjusted from time to time as provided for under Section 9.B.
hereof, the "Borrowing Base") or (b) $2,000,000.00 (the "Revolving Loan
Commitment"). If at any time or for any reason, the outstanding principal amount
of the Revolving Loan Account is greater than the lesser of: (x) the Borrowing
Base or (y) the Revolving Loan Commitment, Borrower shall immediately pay to
Bank, in cash, the amount of such excess. Any commitment of Bank, pursuant to
the terms of this Restated Loan Agreement, to make Revolving Loans shall expire
on the Revolving Loan Maturity Date, subject to Bank's right to renew said
commitment in its sole and absolute discretion at Borrower's request. Any such
renewal of the Revolving Loan Commitment shall not be binding upon Bank unless
it is in writing and signed by an officer of Bank. The outstanding principal
balance of the Revolving Loan Account may be prepaid in whole or in part at any
time without penalty. Any partial prepayment of principal will be applied to the
Revolving Loans in inverse order of maturity. Provided that no Event of Default
has occurred and is continuing, all or any portion of the Revolving Loans
advanced by Bank which are repaid by Borrower shall be available for reborrowing
in accordance with the terms hereof. Borrower promises to pay to Bank the entire
outstanding unpaid principal balance (and all accrued unpaid interest thereon)
of the Revolving Loan Account on or before September 23, 2000 ("Revolving Loan
Maturity Date").
(1) Non-Formula Availability. Notwithstanding the provisions set
forth in Section 2.A. hereof, and provided that no Event of Default has occurred
and is continuing, and subject to the availability of the Revolving Loan
Commitment and in reliance on the representations and warranties of Borrower set
forth herein, at any time from the date hereof through July 31, 2000 ("Non-
Formula Expiration Date"), Bank hereby agrees to make Revolving Loans to
Borrower in such amounts that exceed the Borrowing Base as Borrower shall
request pursuant to this Section 2.A.(1), up to an aggregate principal amount
not to exceed $1,000,000.00 (the "Non-Formula Sublimit"); provided, however,
that the outstanding amounts under the Non-Formula Sublimit shall be deemed to
constitute Revolving Loans for the purpose of calculating availability under the
Revolving Loan Commitment. On the Banking Day immediately following the Non-
Formula Expiration Date, Borrower shall immediately pay to Bank, in cash, the
entire outstanding unpaid principal amount advanced to Borrower under the Non-
Formula Sublimit.
(2) Revolving Loans. The amount of each Revolving Loan made by Bank
to Borrower hereunder shall be debited to the loan ledger account of Borrower
maintained by Bank for the Revolving Loan Commitment (herein called the
"Revolving Loan Account") and Bank shall credit the Revolving Loan Account with
all Loan repayments in respect thereof made by Borrower. When Borrower desires
to obtain a Revolving Loan, Borrower shall notify Bank (which notice shall be
signed by an officer of Borrower and shall be irrevocable) in accordance with
Section 3 hereof, to be received no later than 3:00 p.m. Pacific time one (1)
Banking Day before the day on which the Revolving Loan is to be made. Revolving
Loans may only be used to support the short-term working capital requirements of
Borrower, the issuance of letters of credit and for the purchase of foreign
exchange futures con tracts.
(a) Letter of Credit Usage and Sublimit. Subject to the
availability of the Revolving Loan Commitment and in reliance on the
representations and warranties of Borrower set forth herein, at any time and
from time to time from the date hereof through the Banking Day immediately prior
to the Revolving Loan Maturity Date, Bank shall issue for the account of
Borrower such standby and commercial letters of credit ("Letters of Credit") as
Borrower may request, which request shall be made by delivering to Bank a duly
executed letter of credit application on Bank's standard form; provided,
however, that the outstanding and undrawn amounts under all such Letters of
Credit (i) shall not at any time exceed $1,500,000.00 and (ii) any Letters of
Credit currently issued or hereafter issued by Bank for the account of Borrower
shall be deemed to constitute Revolving Loans for the purpose of calculating
availability under the Revolving Loan Commitment. Unless Borrower shall have
deposited with Bank cash collateral in an amount sufficient to cover all undrawn
amounts under each such Letter of Credit, no Letter of Credit shall have an
expiration date that is later than the Revolving Loan Maturity Date. All Letters
of Credit shall be in form and substance acceptable to Bank in its sole
discretion and shall be subject to the terms and conditions of Bank's form
application and letter of credit
30.
<PAGE>
agreement. Borrower will pay any standard issuance and other fees that Bank
notifies Borrower will be charged for issuing and processing Letters of Credit
for Borrower.
(b) Foreign Exchange Usage and Sublimit. Subject to the
availability of the Revolving Loan Commitment and in reliance on the
representations and warranties of Borrower set forth herein, at any time and
from time to time from the date hereof through the Banking Day immediately prior
to the Revolving Loan Maturity Date, Bank shall arrange the purchase by Borrower
of foreign exchange futures contracts ("Exchange Contracts") as Borrower may
request, which request shall be made by delivering to Bank a duly executed
exchange contract application on Bank's standard form; provided, however, that
the maximum aggregate notional contract amount under all such Exchange Contracts
shall not at any time exceed $1,000,000.00 and provided, further, that ten
percent (10.0%) of the maximum aggregate notional contract amount under all such
Exchange Contracts shall be deemed to constitute outstanding Revolving Loans for
the purpose of calculating availability under the Revolving Loan Commitment.
Unless Borrower shall have deposited with Bank cash collateral in an amount
sufficient to cover all undrawn amounts under each such Exchange Contract and
Bank shall have agreed in writing, no Exchange Contract shall have a due date
that is later than the Revolving Loan Maturity Date. All Exchange Contracts
shall be in form and substance acceptable to Bank in its sole discretion and
shall be subject to the terms and conditions of Bank's form exchange contract
application. Borrower will pay any standard issuance and other fees that Bank
notifies Borrower will be charged for issuing and processing Exchange Contracts
for Borrower. After and during the continuance of an Event of Default, Bank may,
in its sole and absolute discretion, terminate any or all of the Exchange
Contracts. Borrower agrees to indemnify and hold harmless Bank from and against
all loss, costs and expense associated with any such termination of any Exchange
Contract.
(3) Interest Payments on Revolving Loans. Borrower further
promises to pay to Bank from the date of the advance of the initial Revolving
Loan through the Revolving Loan Maturity Date, on or before the tenth (10th) day
of each month, interest on the average daily unpaid balance of the Revolving
Loan Account during the immediately preceding month at a rate of interest per
annum equal to the rate of interest which Bank has announced as its prime
lending rate (the "Prime Rate"), which shall vary concurrently with any change
in the Prime Rate. Interest shall be computed at the above rate on the basis of
the actual number of days during which the principal balance of the Revolving
Loan Account is outstanding divided by 360, which shall for interest computation
purposes be considered one (1) year.
(B) Equipment Commitment. Pursuant to the terms of the Security and
Loan Agreement, as of the date hereof Bank has made loans ("Equipment Loans") to
Borrower in the principal amount of $66,075.00 (the "Equipment Loan Commitment")
to enable Borrower to purchase equipment. The commitment of Bank to make further
Equipment Loans to Borrower expired on September 30, 1997. Any renewal of the
Equipment Loan Commitment shall be in Bank's sole and absolute discretion and
shall not be binding upon Bank unless it is in writing and signed by an officer
of Bank. Equipment Loans that are repaid by Borrower may not be reborrowed.
Borrower promises to pay to Bank the outstanding unpaid principal balance (and
all accrued unpaid interest thereon) of the Equipment Loan Account on or before
March 31, 2000 (the "Equipment Loan Maturity Date").
(1) Equipment Loans. The amount of the Equipment Loans made by
Bank to Borrower has been debited to the loan ledger account of Borrower
maintained by Bank for the Equipment Loan Commitment (herein called the
"Equipment Loan Account") and Bank shall credit the Equipment Loan Account with
all Loan repayments in respect thereof made by Borrower.
(2) Principal and Interest Payments. Borrower further promises
to pay to Bank from the date hereof through the Equipment Loan Maturity Date, on
or before the tenth (10th) day of each month, (a) the outstanding principal
balance of the Equipment Loan Account on September 30, 1997 in twenty-nine (29)
equal monthly installments plus (b) interest on the average daily unpaid balance
of the Equipment Loan Account
31.
<PAGE>
during the immediately preceding month at a rate of interest equal to one-half
of one percent (0.50%) per annum in excess of the Prime Rate, which shall vary
concurrently with any change in the Prime Rate. Interest shall be computed at
the above rate on the basis of the actual number of days during which the
principal balance of the Equipment Loan Account is outstanding divided by 360,
which shall for interest computation purposes be considered one (1) year.
(C) Additional Equipment Commitment. Pursuant to the terms of the
Other Loan Agreement, as of the date hereof Bank has made loans ("Additional
Equipment Loans") to Borrower in the principal amount of $170,680.00 (the
"Additional Equipment Loan Commitment") to enable Borrower to purchase
equipment, furniture and software. The commitment of Bank to make further
Additional Equipment Loans to Borrower expired on December 31, 1998. Any renewal
of the Additional Equipment Loan Commitment shall be in Bank's sole and absolute
discretion and shall not be binding upon Bank unless it is in writing and signed
by an officer of Bank. Additional Equipment Loans that are repaid by Borrower
may not be reborrowed. Borrower promises to pay to Bank the outstanding unpaid
principal balance (and all accrued unpaid interest thereon) of the Additional
Equipment Loan Account on or before December 31, 2000 (the "Additional Equipment
Loan Maturity Date").
(1) Additional Equipment Loans. The amount of the Additional
Equipment Loans made by Bank to Borrower has been debited to the loan ledger
account of Borrower maintained by Bank for the Additional Equipment Loan
Commitment (herein called the "Additional Equipment Loan Account") and Bank
shall credit the Additional Equipment Loan Account with all Loan repayments in
respect thereof made by Borrower.
(2) Principal and Interest Payments. Borrower further promises
to pay to Bank from the date hereof through the Additional Equipment Loan
Maturity Date, on or before the tenth (10th) day of each month, (a) the
outstanding principal balance of the Equipment Loan Account on December 31, 1998
in twenty-four (24) equal monthly installments plus (b) interest on the average
daily unpaid balance of the Additional Equipment Loan Account during the
immediately preceding month at a rate of interest equal to one-half of one
percent (0.50%) per annum in excess of the Prime Rate, which shall vary
concurrently with any change in the Prime Rate. Interest shall be computed at
the above rate on the basis of the actual number of days during which the
principal balance of the Additional Equipment Loan Account is outstanding
divided by 360, which shall for interest computation purposes be considered one
(1) year.
3. Loan Requests. Requests for Loans hereunder shall be in writing duly
executed by Borrower in a form satisfactory to Bank and shall contain a
certification setting forth the matters referred to in Section 2, which shall
disclose that Borrower is entitled to the amount and type of Loan being
requested. Bank is hereby authorized to charge Borrower's deposit account with
Bank for all sums due Bank under this Restated Loan Agreement.
4. Delivery of Payments. Payment to Bank of all amounts due hereunder shall
be made at its Santa Clara Valley Regional office, or at such other place as may
be designated in writing by Bank from time to time. If any payment date fall on
a day that is not a day that Bank is open for the transaction of business
("Banking Day"), the payment due date shall be extended to the next Banking Day.
5. Late Charge. If any interest payment, principal payment or principal
balance payment required hereunder is not received by Bank on or before ten (10)
days from the date in which such payment becomes due, Borrower shall pay to
Bank, a late charge equal to the lesser of (a) five percent (5.0%) of the amount
of such unpaid payment, in addition to said unpaid payment or (b) the maximum
amount permitted to be charged by applicable law, until remitted to Bank;
provided; however, nothing contained in this Section 5, shall be construed as
any obligation on the part of Bank to accept payment of any past due payment or
less than the total unpaid principal balance of the applicable Loan Account
following the Revolving Loan Maturity Date, the Equipment
32.
<PAGE>
Loan Maturity Date or the Additional Equipment Loan Maturity Date. All payments
shall be applied first to any late charges due hereunder, next to accrued
interest then payable and the remainder, if any, to reduce any unpaid principal
due under the applicable Loan Account.
6. Default Interest. From and after the Revolving Loan Maturity Date, the
Equipment Loan Maturity Date or the Additional Equipment Loan Maturity Date, as
applicable, or such earlier date as all sums owing under any Loan Account
becomes due and payable by acceleration or otherwise, or upon the occurrence and
during the continuance of an Event of Default, at the option of Bank all sums
owing under the applicable Loan Account shall bear interest until paid in full
at a rate equal to the lesser of (a) five percent (5.0%) per annum in excess of
the then applicable interest rate provided for in Sections 2A.(2), 2.B.(2) and
2.C.(2) hereof or (b) the maximum amount permitted to be charged by applicable
law, until all obligations hereunder are repaid in full or the Event of Default
is waived or cured to the satisfaction of Bank, as applicable.
7. Representations and Warranties. Borrower represents and warrants to
Bank: (a) That Borrower is a corporation, duly organized and existing in the
State of its incorporation and the execution, delivery and performance of each
of the Loan Documents are within Borrower's corporate powers, have been duly
authorized and are not in conflict with law or the terms of any charter, by-law
or other incorporation papers, or of any indenture, agreement or undertaking to
which Borrower is a party or by which Borrower is bound or affected; (b)
Borrower is, and at the time the Collateral becomes subject to Bank's security
interest will be, the true and lawful owner of and has, and at the time the
Collateral becomes subject to Bank's security interest will have, good and clear
title to the Collateral, subject only to Bank's rights therein and to Permitted
Liens; (c) Each Account is, and at the time the Account comes into existence
will be, a true and correct statement of a bona fide indebtedness incurred by
the debtor named therein in the amount of the Account for either merchandise
sold or delivered (or being held subject to Borrower's delivery instructions)
to, or services rendered, performed and accepted by, the account debtor; (d)
That there are and will be no defenses, counterclaims, or setoffs which may be
asserted against the Accounts from time to time represented by Borrower to be
Eligible Accounts, except as permitted in the definition thereof; (e) Any and
all financial information, including information relating to the Collateral,
submitted by Borrower to Bank, whether previously or in the future, is and will
be true and correct in all material respect; (f) There is no litigation or other
proceeding pending or to Borrower's knowledge threatened against or affecting
Borrower, and Borrower is not in default with respect to any order, writ,
injunction, decree or demand of any court or other governmental or regulatory
authority except for proceeding of defaults which will not have a materially
adverse effect upon its financial conditions or business as now conducted; (g)
(i) The consolidated balance sheets of Borrower for the month ending July 31,
1999, and the related consolidated profit and loss statements for the fiscal
year then ended, copies of which have heretofore been delivered to Bank by
Borrower, and all other statements and data submitted in writing by Borrower to
Bank in connection with Borrower's request for credit are true and correct, and
said balance sheet and profit and loss statement accurately present the
financial condition of Borrower as of the date thereof and the results of the
operations of Borrower for the period covered thereby, and have been prepared in
accordance with GAAP, (ii) since such date, there have been no material adverse
changes in the financial condition of Borrower, and (iii) Borrower has no
knowledge of any liabilities, contingent or otherwise, which are not reflected
in said balance sheet, and Borrower has not entered into any special commitments
or substantial contracts which are not reflected in said balance sheet, other
than in the ordinary and normal course of its business, which may have a
Material Adverse Effect upon its financial condition, operations or business as
now conducted; (h) Borrower has no liability for any delinquent local, state or
federal taxes, and, if Borrower has contracted with any government agency, it
has no liability for renegotiation of profits; and (i) Borrower, as of the date
hereof, possesses all necessary Trademarks, trade names, Copyrights, Patents,
patent rights, and licenses to conduct its business as now operated, without any
known conflict with valid Trademarks, trade names, Copyrights, Patents, patent
rights and license rights of others; and (j) Borrower and its Subsidiaries have
reviewed the areas within their operations and business which could be adversely
affected by, and have developed or are developing a program to address on a
timely basis, the Year 2000 Problem and have made related appropriate inquiry of
material suppliers and vendors, and based on such review and program, the
33.
<PAGE>
Year 2000 Problem will not have a Material Adverse Effect upon its financial
condition, operations or business as now conducted.
8. Negative Covenants. Borrower agrees that so long as any Loans,
obligations or liabilities remain outstanding or unpaid to Bank or the
commitment of Bank hereunder is in effect, neither Borrower, nor any of its
subsidiaries ("Subsidiaries") will, without the prior written consent of Bank
which consent shall not be unreasonably withheld, declined or conditioned in the
case of 8.F below:
(A) Make any substantial change in the character of its business as
now conducted;
(B) (1) Create, incur, assume or permit to exist any Indebtedness
other than Loans from Bank, obligations now existing as shown in the financial
statements referenced in Section 7.(g)(i) (excluding those being refinanced by
Bank, Subordinated Debt and Permitted Indebtedness); or (2) sell or transfer,
either with or without recourse, any accounts or notes receivable or any monies
due or to become due;
(C) Create, incur, assume or permit to exist any mortgage, pledge,
encumbrance, lien or charge of any kind (including the charge upon property at
any time purchased or acquired under conditional sale or other title retention
agreement) upon any asset now owned or hereafter acquired by it, other than
Permitted Liens and liens in favor of Bank;
(D) Sell, dispose of or grant a security interest in any of the
Collateral other than to Bank (other than the disposing of such Collateral in
the ordinary and normal course of its business as now conducted or other assets
which are obsolete or otherwise considered surplus), or execute any financing
statements covering the Collateral in favor of any secured party or Person other
than Bank, except for Permitted Liens;
(E) (1) Make any loans or advances in excess of $500,000.00 in the
aggregate to any Person or other entity other than in the ordinary and normal
course of its business as now conducted (provided that such loans or advances
are not made to any Person or entity which is controlled by or under common
control with Borrower); or (2) make any investment in the securities of any
Person or other entity other than the United States Government; or (3) guarantee
or otherwise become liable upon the obligation of any Person or other entity,
except by endorsement of negotiable instruments for deposit or collection in the
ordinary and normal course of its business as now conducted;
(F) (1) Purchase or otherwise acquire all or substantially all of the
assets or business of any Person or other entity; or (2) liquidate, dissolve,
merge (other than a merger to change Borrower's State of Incorporation) or
consolidate, or commence any proceedings therefore; or (3) except in the
ordinary and normal course of its business as now conducted, sell (including,
without limitation, the selling of any property or other asset accompanied by
the leasing back of the same) any assets including any fixed assets, any
property, or other assets necessary for the continuance of its business as now
conducted. Notwithstanding the foregoing, upon the consent of Bank, which
consent shall not be unreasonably withheld, Borrower may proceed with any
acquisition, merger or consolidation (as described above) (a) so long as no
Event of Default has occurred and is continuing or would exist after giving
effect to such transaction, (b) Borrower is the surviving corporation, if
applicable and (c) prior to consummating such transaction, Borrower executes and
delivers to Bank all such additional agreements, documents and instruments as
Bank may require in order to affirm, effectuate or further assure its
continuing, first priority lien in the Collateral after giving effect to such
transaction;
(G) (1) Declare or pay any dividend or make any other distribution on
any of its capital stock now outstanding or hereafter issued; or (2) purchase,
redeem or retire any of such stock, other than in dividends or distributions
payable in Borrower's or any such Subsidiary's capital stock, except for the
repurchase of Borrower's capital stock from officers, directors, employees or
consultants of Borrower upon termination of their employment with or rendering
of service to Borrower; and
34.
<PAGE>
(H) Sell, transfer, assign, mortgage, pledge, license, lease, grant a
security interest in, or otherwise encumber any of the Intellectual Property,
other than licenses or leases of the Intellectual Property granted in the
ordinary and normal course of its business.
9. Affirmative Covenants. Borrower affirmatively covenants that so long as
any Loans, obligations or liabilities remain outstanding or unpaid to Bank or
the commitment of Bank hereunder is in effect, it will:
(A) Furnish Bank from time to time such financial statements and
information as Bank may reasonably request and inform Bank immediately upon the
occurrence of a material adverse change therein;
(B) Permit representatives of Bank to conduct an audit of Borrower's
books and records relating to the Collateral and make extracts therefrom, with
results satisfactory to Bank, provided that Bank shall use its best efforts to
not interfere with the conduct of Borrower's business, and to the extent
possible to arrange for verification of the Accounts directly with the account
debtors obligated thereon or otherwise, all under reasonable procedures
acceptable to Bank and at Borrower's sole expense; provided further that prior
to an Event of Default, Borrower shall only be responsible for the expense of
one (1) such audit in any fiscal year if the amount outstanding and unpaid under
the Revolving Loan Account is greater than One Million Dollars ($1,000,000.00),
the cost of such audit of which shall not exceed $2,000.00;
(C) Promptly notify Bank of any attachment or other legal process
levied against any of the Collateral and any information received by Borrower
relative to the Collateral, including the Accounts, the account debtors or other
Persons obligated in connection therewith, which may in any way affect the value
of the Collateral or the rights and remedies of Bank in respect thereto;
(D) Reimburse Bank upon demand for any and all legal costs, including
reasonable attorneys' fees, and other expenses incurred in collecting any sums
payable by Borrower under any Loan Account or any other obligation secured
hereby, enforcing any term or provision of this Restated Loan Agreement or
otherwise or in the checking, handling and collection of the Collateral and the
preparation and enforcement of any agreement relating thereto;
(E) Notify Bank of each location and of each office of Borrower at
which records of Borrower relating to the Accounts are kept;
(F) Provide, maintain and deliver to Bank policies insuring the
Collateral against loss or damage by such risks and in such amounts, forms and
companies as Bank may require (to the extent customarily maintained by
businesses similar to Borrower) and with loss payable to Bank, and, in the event
Bank takes possession of the Collateral, the insurance policy or policies and
any unearned or returned premium thereon shall at the option of Bank become the
sole property of Bank, such policies and the proceeds of any other insurance
covering or in any way relating to the Collateral, whether now in existence or
hereafter obtained, being hereby assigned to Bank;
(G) In the event the unpaid balance of any Loan Account shall exceed
the maximum amount of outstanding Loans to which Borrower is entitled under
Section 2 hereof, as applicable, Borrower shall immediately pay to Bank for
credit to such Loan Account the amount of such excess;
(H) Maintain and preserve all rights, franchises and other authority
adequate and necessary for the conduct of its business and maintain and preserve
its existence in the state of its incorporation and any other states in which
Borrower conducts its business, except with respect to such other states, where
the failure to do so would not have a Material Adverse Effect;
35.
<PAGE>
(I) Maintain public liability, property damage and workers
compensation insurance and insurance on all its insurable property against fire
and other hazards with responsible insurance carriers to the extent usually
maintained by similar businesses. Borrower shall provide evidence of property
insurance in amounts and types acceptable to Bank, and certificates naming Bank
as a loss payee;
(J) Pay and discharge, before the same becomes delinquent and
penalties accrue thereon, all taxes, assessments and governmental charges upon
or against it or any of its properties, and any of its other liabilities at any
time existing, except to the extent and so long as: (1) the same are being
contested in good faith and by appropriate proceedings in such manner as not to
cause any Material Adverse Effect or the loss of any right of redemption from
any sale thereunder; and (2) it shall have set aside on its books reserves
(segregated to the extent required by GAAP);
(K) Maintain a standard and modern system of accounting in accordance
with GAAP on a basis consistently maintained; permit Bank's representatives to
have access to, and to examine its properties, books and records during normal
business hours; provided that Bank shall use its best efforts to not interfere
with the conduct of Borrower's business;
(L) Maintain its properties, equipment and facilities in good order
and repair, ordinary wear and tear excepted;
(M) Maintain its primary operating and depository accounts with Bank;
(N) Prior to allowing any of Borrower's raw materials, work in
process, finished goods inventory and property, plant and equipment to be
transported to or be held at any contract manufacturer, warehouse or other
location (other than with bona fide distributors and retail accounts), Borrower
shall provide notice to Bank and Borrower shall have complied with such filing
and notice requirements as shall, in Bank's opinion, assure Borrower's and
Bank's priority in such property over creditors of such contract manufacturer,
warehouseman or operator of such other location, including, without limitation,
making filings under California Commercial Code ss.2326, providing notice under
California Commercial Code ss.9114 and making filings and publications as
required under California Civil Code ss.3440.1 and ss.3440.5 All such filings,
notices and publications shall be in form and substance satisfactory to Bank;
and
(O) Borrower shall perform all acts reasonably necessary to ensure
that (1) Borrower, its Subsidiaries and any business in which Borrower holds a
substantial interest and (2) all customers, suppliers and vendors that are
material to Borrower's business, become Year 2000 Compliant in a timely manner.
Such acts shall include, without limitation, performing a comprehensive review
and assessment of all of Borrower's systems and adopting a detailed plan, with
an itemized budget, for the remediation, monitoring and testing of such systems.
If requested by Bank, Borrower shall within ten (10) business days deliver a
statement to Bank summarizing the Year 2000 exposure, program or progress of
Borrower and its Subsidiaries or other evidence of Borrower's compliance with
the terms of this Section 9.O. certified by an officer of Borrower.
10. Financial Covenants and Information. All financial covenants and
financial information referenced herein shall be interpreted and prepared in
accordance with GAAP as used in the United States of America applied on a basis
consistent with previous years. Compliance with the financial covenants shall be
calculated and monitored on a monthly basis, except as shall be expressly stated
to the contrary. Borrower affirmatively covenants that so long as any Loans,
obligations or liabilities remain outstanding or unpaid to Bank or any
commitment is outstanding hereunder, it will, on a consolidated basis:
(A) As of the last day of each month, maintain a minimum Tangible Net
Worth of not less than $10,000,000.00. As used herein, "Tangible Net Worth"
shall mean the sum of all assets, excluding any value
36.
<PAGE>
for goodwill, Trademarks, Patents, Copyrights, organization expense and other
similar intangible items, less all liabilities, plus Subordinated Debt;
(B) At all times maintain a minimum Quick Ratio of not less than
2.00:1.00 and beginning with the month ending September 30, 2000 of not less
than 1.50:1.00. As used herein "Quick Ratio" means the sum of all unrestricted
cash plus Accounts divided by the sum of all current liabilities less deferred
revenues;
(C) Within five (5)days of filing with the Securities Exchange
Commission (the "SEC"), but in no event later than fifty (50) days after the end
of each of the first three fiscal quarters of each fiscal year, a copy of its
quarterly 10-Q report for each such quarter, as filed with the SEC and a
Compliance Certificate in the form of Exhibit B attached hereto and incorporated
herein by this reference, certified by an officer of Borrower;
(D) Within five (5)days of filing with the SEC, but in no event later
than ninety-five (95) days after the end of each fiscal year, beginning with the
fiscal year ending March 31, 2000, deliver to Bank (1) unqualified copies of its
consolidated financial statements together with changes in financial position
audited by an independent certified public accountant selected by Borrower but
acceptable to Bank, (2) a copy of its annual 10-K report, as filed with the SEC
and (3) and a Compliance Certificate, certified by an officer of Borrower;
(E) So long as any amounts remain outstanding and unpaid under the
Revolving Loan Account, as soon as it is available, but not later than twenty
(20) days after and as of the end of each month, deliver to Bank, in such form
and detail as Bank may require, statements showing aging of the Accounts and
Borrower's accounts payable from invoice date, together with a Borrowing Base
Certificate in the form of Exhibit C attached hereto and incorporated herein by
this reference, certified by an officer of Borrower. Notwithstanding the
foregoing, if Borrower has not provided to Bank the statements described
immediately above for the most recent month then ended, as a condition to any
request for a Revolving Loan, Borrower shall have delivered to Bank said
statements as well as a Borrowing Base Certificate covering the most recent
month then ended at least twenty (20) days prior to the date of Borrower's
request for an advance for said Revolving Loan;
(F) Upon the reasonable request of Bank, deliver to Bank current
budgets, sales projections, operating plans and other financial exhibits and
information in form and substance satisfactory to Bank; and
(G) Upon any officer becoming aware, deliver immediately to Bank
written notice of any pending or threatened litigation claiming, or reasonably
likely to result in, damages against Borrower in an amount in excess of
$50,000.00.
11. Loan Fee. Borrower has paid, and Bank hereby acknowledges receipt of in
respect of the Revolving Loan Commitment, a loan fee in the amount of Five
Thousand Dollars ($5,000.00).
12. Event of Default. The occurrence of any one or more of the following
shall constitute an "Event of Default" under this Restated Loan Agreement: (a)
Default be made in the payment of any obligation by Borrower under any Loan
Document; (b) Except for any failure to pay as described in clause (a) above,
breach be made in any warranty, statement, promise, term or condition, contained
herein or in any other Loan Document and the same shall not have been cured to
the satisfaction of Bank within fifteen (15) days after Borrower shall have
become aware thereof, whether by written notice from Bank, or otherwise (except
that no cure period shall exist for breaches in respect of Borrower's
obligations under Section 8, Subsections 9.A., 9.B., 9.C., 9.F., 9.G., 9.H.,
9.I. and 9.O., Subsections 10.A., 10.B., 10.C., 10.D. and 10.E. of this Restated
Loan Agreement, and Sections 1 and 2 of the General Security Agreement); (c) Any
statement, warranty or representation made by Borrower at any time proves false
in any material respect; (d) Borrower defaults in the repayment of any principal
of or the payment of any interest on any indebtedness exceeding in the aggregate
principal amount $50,000 or breaches or violates any term or provision of any
promissory note, loan agreement, mortgage, indenture or other evidence of
37.
<PAGE>
such indebtedness pursuant to which amounts outstanding in the aggregate exceed
$50,000 if the effect of such breach is to permit the acceleration of such
indebtedness, whether or not waived by the note holder or obligee, and such
failure shall not have been cured to Bank's satisfaction within fifteen (15)
calendar days after Borrower shall become aware thereof, whether by written
notice from Bank or otherwise, or there has in fact been an acceleration of such
indebtedness; (e) Borrower becomes insolvent or makes an assignment for the
benefit of creditors; (f) Any proceeding be commenced by Borrower under any
bankruptcy, reorganization, arrangement, readjustment of debt or moratorium law
or statute or, any such a proceeding is commenced against Borrower and is not
dismissed or stayed within sixty (60) days (provided that no Loans will be made
prior to the dismissal of such proceeding); (g) Any money judgment, writ of
attachment, garnishment, execution or other legal process be entered against
Borrower or issued against any material property of Borrower which is not fully
covered by insurance (subject to reasonable deductibles) and remains unvacated,
unbonded, unstayed or unpaid or undischarged for more than fifteen (15) days
(whether or not consecutive) or in any event later than five (5) days prior to
the date of any proposed sale thereunder, or if any assessment for taxes against
Borrower other than against any of its real property, is made by the Federal or
State government or any department thereof;
13. Remedies. Upon the occurrence and during the continuance of an Event of
Default, Bank may, at its option and without demand first made and without
notice to Borrower, do any one or more of the following: (i) Terminate its
obligation to make Loans to Borrower as provided in Section 2 hereof; (ii)
Declare all sums secured hereby immediately due and payable; (iii) Immediately
take possession of the Collateral wherever it may be found, using all legally
permissible means to do so, or require Borrower to assemble the Collateral and
make it available to Bank at a place designated by Bank which is reasonably
convenient to Borrower and Bank, and Borrower waives all claims for damages due
to or arising from or connected with any such taking; (iv) Proceed in the
foreclosure of Bank's security interest and sale of the Collateral in any manner
permitted by law, or provided for herein; (v) Sell, lease or otherwise dispose
of the Collateral at public or private sale, with or without having the
Collateral at the place of sale, and upon terms and in such manner as Bank may
determine, and Bank may purchase same at any such sale; (vi) Retain the
Collateral in full satisfaction of the obligations secured thereby to the extent
permitted under the UCC; or (vii) Exercise any remedies of a secured party under
the UCC. Prior to any such disposition, Bank may, at its option, cause any of
the Collateral to be repaired or reconditioned in such manner and to such extent
as Bank may deem advisable, and any sums expended therefor by Bank shall be
repaid by Borrower and secured hereby. Bank shall have the right to enforce one
or more remedies hereunder successively or concurrently, and any such action
shall not estop or prevent Bank from pursuing any further remedy that it may
have hereunder or by law. If a sufficient sum is not realized from any such
disposition of the Collateral to pay all obligations secured by this Restated
Loan Agreement, Borrower hereby promises and agrees to pay Bank any deficiency.
14. Records Retention. Borrower authorizes Bank to destroy all invoices,
delivery receipts, reports and other types of documents and records submitted to
Bank in connection with the transactions contemplated herein at any time
subsequent to four (4) months from the time such items are delivered to Bank.
15. Attorneys' Fees. Borrower agrees to reimburse Bank for its reasonable
attorneys' fees and expenses incurred in connection with the negotiation,
preparation, execution and delivery of the Loan Documents.
16. Governing Law; Judicial Reference.
(A) overning Law. This Agreement shall be deemed to have been made in
the State of California and the validity, construction, interpretation, and
enforcement hereof, and the rights of the parties hereto, shall be determined
under, governed by, and construed in accordance with the internal laws of the
State of California, without regard to principles of conflicts of law.
(B) Judicial Reference.
38.
<PAGE>
(1) Other than (a) nonjudicial foreclosure and all matters in
connection therewith regarding security interests in real or personal property;
or (b) the appointment of a receiver, or the exercise of other provisional
remedies (any and all of which may be initiated pursuant to applicable law),
each controversy, dispute or claim between the parties arising out of or
relating to this Restated Loan Agreement or the other Loan Documents, which
controversy, dispute or claim is not settled in writing within thirty (30) days
after the "Claim Date" (defined as the date on which a party subject to this
Restated Loan Agreement gives written notice to all other parties that a
controversy, dispute or claim exists), will be settled by a reference proceeding
in California in accordance with the provisions of Section 638 et seq. of the
California Code of Civil Procedure, or their successor sections ("CCP"), which
shall constitute the exclusive remedy for the settlement of any controversy,
dispute or claim concerning this Restated Loan Agreement, including whether such
controversy, dispute or claim is subject to the reference proceeding and except
as set forth above, the parties waive their rights to initiate any legal
proceedings against each other in any court or jurisdiction other than the
Superior Court in the County where the real property, if any, is located or
Santa Clara County, if none (the "Court"). The referee shall be a retired Judge
of the Court selected by mutual agreement of the parties, and if they cannot so
agree within forty-five (45) days after the Claim Date, the referee shall be
promptly selected by the Presiding Judge of the Court (or his/her
representative). The referee shall be appointed to sit as a temporary judge,
with all of the powers for a temporary judge, as authorized by law, and upon
selection should take and subscribe to the oath of office as provided for in
Rule 244 of the California Rules of Court (or any subsequently enacted Rule).
Each party shall have one peremptory challenge pursuant to CCP ss. 170.6. The
referee shall (x) be requested to set the matter for hearing within sixty (60)
days after the date of selection of the referee and (y) try any and all issues
of law or fact and report a statement of decision upon them, if possible, within
ninety (90) days of the Claim Date. Any decision rendered by the referee will be
final, binding and conclusive and judgement shall be entered pursuant to CCP ss.
644 in any court in the State of California having jurisdiction. Any party may
apply for a reference proceeding at any time after thirty (30) days following
notice to any other party of the nature of the controversy, dispute or claim, by
filing a petition for a hearing and/or trial. All discovery permitted by this
Restated Loan Agreement shall be completed no later than fifteen (15) days
before the first hearing date established by the referee. The referee may extend
such period in the event of a party's refusal to provide requested discovery for
any reason whatsoever, including, without limitation, legal objections raised to
such discovery or unavailability of a witness due to absence or illness. No
party shall be entitled to "priority" in conducting discovery. Depositions may
be taken by either party upon seven (7) days written notice, and request for
production or inspection of documents shall be responded to within ten (10) days
after service. All disputes relating to discovery which cannot be resolved by
the parties shall be submitted to the referee whose decision shall be final and
binding upon the parties. Pending appointment of the referee as provided herein,
the Superior Court is empowered to issue temporary and/or provisional remedies,
as appropriate.
(2) Except as expressly set forth in this Restated Loan Agreement, the
referee shall determine the manner in which the reference proceeding is
conducted including the time and place of all hearings, the order of
presentation of evidence, and all other questions that arise with respect to the
course of the reference proceeding. All proceedings and hearings conducted
before the referee, except for trial, shall be conducted without a court
reporter except that when any party so requests, a court reporter will be used
at any hearing conducted before the referee. The party making such a request
shall have the obligation to arrange for and pay for the court reporter. The
costs of the court reporter at the trial shall be borne equally by the parties.
(3) The referee shall be required to determine all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the State
of California will be applicable to the reference proceeding. The referee shall
be empowered to enter equitable as well as legal relief, to provide all
temporary and/or provisional remedies and to enter equitable orders that will be
binding upon the parties. The referee shall issue a single judgment at the close
of the reference proceeding that shall dispose of all of the claims of the
parties that are the subject of the reference. The parties hereto expressly
reserve the right to contest or appeal from the final judgment or any appealable
order or appealable judgment entered by the referee. The parties hereto
expressly reserve the right to findings of fact,
39.
<PAGE>
conclusions of laws, a written statement of decision, and the right to move for
a new trial or a different judgment, which new trial, if granted, is also to be
a reference proceeding under this provision.
(4) In the event that the enabling legislation which provides for
appointment of a referee is repealed (and no successor statute is enacted), any
dispute between the parties that would otherwise be determined by the reference
procedure herein described will be resolved and determined by arbitration. The
arbitration will be conducted by a retired judge of the Court, in accordance
with the California Arbitration Act, ss. 1280 through ss. 1294.2 of the CCP as
amended from time to time. The limitations with respect to discovery as set
forth hereinabove shall apply to any such arbitration proceeding.
17. Miscellaneous Provisions.
(A) Nothing herein shall in any way limit the effect of the
conditions set forth in any other security or other agreement executed by
Borrower, but each and every condition hereof shall be in addition thereto.
(B) No failure or delay on the part of Bank, in the exercise of any
power, right or privilege hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise thereof.
(C) All rights and remedies existing under this Restated Loan
Agreement or any other Loan Document are cumulative to, and not exclusive of,
any rights or remedies otherwise available.
(D) All headings and captions in this Restated Loan Agreement and any
related documents are for convenience only and shall not have any substantive
effect.
(E) This Restated Loan Agreement may be executed in any number of
counterparts, each of which when so delivered shall be deemed an original, but
all such counterparts shall constitute but one and the same instrument. Each
such agreement shall become effective upon the execution of a counterpart hereof
or thereof by each of the parties hereto and telephonic notification that such
executed counterparts has been received by Borrower and Bank.
(F) This Restated Loan Agreement is not intended to be, and shall not
be construed to create, a novation or accord and satisfaction, and, except as
otherwise provided herein, the Security and Loan Agreement and the Other Loan
Agreement are amended and restated in full by the terms of this Restated Loan
Agreement and all obligations outstanding under the Security and Loan Agreement
and the Other Loan Agreement are governed by the terms of this Restated Loan
Agreement.
<TABLE>
<CAPTION>
BANK: BORROWER:
<S> <C>
IMPERIAL BANK SALON.COM,
a Delaware corporation
By: September 23, 1999 By: /s/ Benjermin Colombo By: September 23, 1999 By: /s/ Todd Hagen
- -------------------------------------------------------- ---------------------------------------
Benjermin Colombo Todd Hagen
Assistant Vice President Chief Financial Officer
</TABLE>
LIST OF EXHIBITS AND SCHEDULES
- ------------------------------
EXHIBIT A: Definitions
40.
<PAGE>
SCHEDULE 1 TO EXHIBIT A: List of Specific Permitted Indebtedness
SCHEDULE 2 TO EXHIBIT A: List of Specific Permitted Liens
EXHIBIT B: Compliance Certificate
EXHIBIT C: Borrowing Base Certificate
41.
<PAGE>
Exhibit A
Definitions
"Accounts" means any right to payment for goods sold or leased, or to
be sold or to be leased, or for services rendered or to be rendered no matter
how evidenced, including accounts receivable, contract rights, chattel paper,
instruments, purchase orders, notes, drafts, acceptances, general intangibles
and other forms of obligations and receivables.
"Capital Lease" means, as to any Person, any lease of any Property by
such Person as lessee that is, or should be in accordance with Financing
Accounting Standards Board Statement No. 13, classified and accounted for as a
"capital lease" on the balance sheet of such Person prepared in accordance with
GAAP.
"Capital Lease Obligation" means, with respect to any Capital Lease,
the amount of the obligation of the lessee thereunder that, in accordance with
GAAP, would appear on a balance sheet of such lessee in respect of such Capital
Lease or otherwise be disclosed in a note to such balance sheet.
"Collateral" means any and all personal property of Borrower which is
assigned or hereafter is assigned to Bank as security or in which Bank now has
or hereafter acquires a security interest hereunder (including, without
limitation, the Accounts), or pursuant to the terms of the General Security
Agreement, the IP Security Agreement or otherwise.
"Contingent Obligation" means, as applied to any Person, any direct or
indirect liability, contingent or otherwise, of that Person with respect to any
indebtedness, lease, dividend, letter of credit or other obligation of another,
including, without limitation, any such obligation directly or indirectly
guaranteed, endorsed (otherwise than for collection or deposit in the ordinary
course of business), co-made or discounted or sold with recourse by that Person,
or in respect of which that Person is otherwise directly or indirectly liable,
including, without limitation, any such obligation for which that Person is in
effect liable through any agreement (contingent or otherwise) to purchase,
repurchase or otherwise acquire such obligation or any security therefor, or to
provide funds for the payment or discharge of such obligation (whether in the
form of loans, advances, capital stock purchases, capital contributions or
otherwise), or to maintain the solvency of the obligor of such obligation, or to
make payment for any products, materials or supplies or for any transportation,
services or lease regardless of the non-delivery or non-furnishing thereof, in
any such case if the purpose or intent of such agreement is to provide assurance
that such obligation will be paid or discharged, or that any agreements relating
thereto will be complied with, or that the holders of such obligation will be
protected (in whole or in part) against loss in respect thereof. The amount of
any Contingent Obligation of any Person shall be deemed to be an amount equal to
the maximum amount of such Person's liability with respect to the stated or
determinable amount of the primary obligation for which such Contingent
Obligation is incurred or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof (assuming such Person is required to
perform thereunder).
"Eligible Accounts" means such of Borrower's Accounts as Bank in its
sole reasonable discretion shall determine are eligible from time to time;
provided, however, that in no event shall Eligible Accounts include the
following:
(a) all Accounts under which payment is not received within
ninety (90) days from the applicable invoice date;
(b) all Accounts against which the account debtor or any other
Person obligated to make payment thereon asserts any defense,
offset, counterclaim or other right to avoid or reduce the
liability represented by the Accounts;
Exhibit A
Page 1 of 6
<PAGE>
(c) any Accounts if the account debtor or any other Person
liable in connection therewith is insolvent, subject to
bankruptcy or receivership proceedings or has made an
assignment for the benefit of creditors or whose credit
standing is unacceptable to Bank and Bank has so notified
Borrower;
(d) Accounts with respect to which the account debtor is an
officer, director, shareholder, employee or Subsidiary of
Borrower;
(e) Accounts due from an account debtor if more than twenty-
five percent (25%) of the aggregate amount of Accounts of
such account debtor have at that time remained unpaid for
more than ninety (90) days from the applicable invoice date;
(f) Accounts with respect to account debtors whose principal
place of business is located outside of the United States of
America unless either (a) such Accounts are insured or
covered by a letter of credit in a manner and form acceptable
to the Bank or (b) Bank shall have otherwise permitted in
writing in its sole and absolute direction;
(g) salesperson's accounts for promotional purposes;
(h) the amount by which the aggregate of all Accounts of an
account debtor exceeds twenty-five percent (25.0%) of the
total accounts receivable balance;
(i) Accounts where the account debtor is a seller to borrower,
to the extent that a potential offset exists;
(j) any Account which has been offset by Borrower against
another Account, the balance of which is subtracted and
reflected on its balance sheet; and
(k) Accounts where the account debtor is a federal governmental
entity, federal agency or instrumentality thereof.
"Event of Default" has the meaning set forth in Section 12.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other Person as may be approved by the significant segment of the accounting
profession, which are applicable to the circumstances as of the date of
determination.
"General Security Agreement" means that certain General Security
Agreement dated as of April 14, 1997, made by Borrower in favor of Bank.
"IP Security Agreement" means that certain Collateral Assignment,
Patent Mortgage and Security Agreement dated as of April 13, 1998, made by
Borrower in favor of Bank.
"Indebtedness" means, as to any Person, without duplication, (a) all
indebtedness of such Person for borrowed money, including, without limitation,
all of such indebtedness outstanding under this Restated Loan Agreement and any
of the other Loan Documents, (b) all Capital Lease Obligations of such Person,
(c) to the extent of the outstanding indebtedness thereunder, any obligation of
such Person representing an extension of credit to such Person, whether or not
for borrowed money, (d) any obligation of such Person for the deferred purchase
price of Property or services (other than (i) trade or other accounts payable in
the ordinary course of
Exhibit A
Page 2 of 6
<PAGE>
business in accordance with customary industry terms and (ii) deferred franchise
fees), (e) all Contingent Obligations, (f) any obligation of such Person of the
nature described in clauses (a), (b), (c), (d) or (e) above, that is secured by
a Lien on assets of such Person and which is non-recourse to the credit of such
Person, but only to the extent of the fair market value of the assets so subject
to the Lien, (g) obligations of such Person arising under acceptance facilities
or under facilities for the discount of accounts receivable of such Person, (h)
any obligation of such Person to reimburse the issuer of any letter of credit
issued for the account of such Person upon which a draw has been made, and (i)
any lease having the effect of indebtedness, whether or not the same shall be
treated as such on the balance sheet of Borrower under GAAP.
"Intellectual Property" means
(1) Any and all copyright rights, copyright applications,
copyright registrations and like protection in each work or
authorship and derivative work thereof, whether published or
unpublished and whether or not the same also constitutes a
trade secret, now or hereafter existing, created, acquired or
held (collectively, the "Copyrights");
(l) Any and all trade secrets, and any and all intellectual
property rights in computer software and computer software
products now or hereafter existing, created, acquired or
held;
(m) Any and all design rights which may be available to
Borrower now or hereafter existing, created, acquired or
held;
(n) Any patents, patent applications and like protections,
including, without limitation, improvements, divisions,
continuations, renewals, reissues, extensions and
continuations-in-part of the same, including, without
limitation, the patents and patent applications
(collectively, the "Patents");
(o) Any trademark and servicemark rights, whether registered
or not, applications to register and registrations of the
same and like protections, and the entire goodwill of the
business of Borrower connected with and symbolized by such
trademarks (collectively, the "Trademarks");
(p) Any and all claims for damages by way of past, present and
future infringements of any of the rights included above,
with the right, but not the obligation, to sue for and
collect such damages for said use or infringement of the
intellectual property rights identified above;
(q) Any licenses or other rights to use any of the Copyrights,
Patents or Trademarks and all license fees and royalties
arising from such use to the extent permitted by such license
or rights;
(r) Any amendments, extensions, renewals and extensions of any
of the Copyrights, Patents or Trademarks; and
(s) Any proceeds and products of the foregoing, including,
without limitation, all payments under insurance or any
indemnity or warranty payable in respect of any of the
foregoing.
"Lien" means any mortgage, pledge, security interest, lien or other
charge or encumbrance, including the lien or retained security title of a
conditional vendor, upon or with respect to any property or assets.
"Loan Account or Loan Accounts" means individually and collectively,
the Revolving Loan Account, the Equipment Loan Account and the Additional
Equipment Loan Account.
Exhibit A
Page 3 of 6
<PAGE>
"Loan Documents" means this Restated Loan Agreement, the General
Security Agreement, the IP Security Agreement, the Warrants to Purchase Stock
and that certain Agreement to Provide Insurance (Real or Personal Property)
dated of even date herewith, each as executed by Borrower in favor of Bank,
together with all other documents entered into or delivered pursuant to any of
the foregoing, in each case as originally executed or as the same may from time
to time be modified, amended, supplemented or restated.
"Loan or Loans" means individually and collectively, the Revolving
Loans, the Equipment Loans and the Additional Equipment Loans advanced pursuant
to Section 2.
"Material Adverse Effect" means any set of circumstances or events
which (a) has or could reasonably be expected to have any material adverse
effect upon the validity or enforceability of any material provision of any Loan
Document, (b) is or could reasonably be expected to be material and adverse to
the condition (financial or otherwise) or business operations of Borrower, (c)
materially impairs or could reasonably be expected to materially impair the
ability of Borrower, to perform its material Obligations, (d) materially impairs
or could reasonably be expected to materially impair the value or priority of
Bank's security interest in any Collateral or (e) materially impairs or could
reasonably be expected to materially impair the ability of Bank to enforce any
of its legal remedies pursuant to the Loan Documents.
"Permitted Indebtedness" means the following:
(2) Indebtedness of Borrower or Indebtedness and Contingent
Obligations of its Subsidiaries in favor of Bank arising under this
Restated Loan Agreement and the other Loan Documents;
(t) the existing Indebtedness and Contingent Obligations
disclosed on Schedule 1 attached hereto and incorporated
herein by this reference; provided that the principal amount
thereof is not increased and the terms thereof are not
modified to impose more burdensome terms upon Borrower or
any of its Subsidiaries;
(u) the Subordinated Debt;
(v) extensions, renewals or refinancings of Indebtedness
permitted under this Restated Loan Agreement, other than
clause (3) immediately above;
(w) accrued dividends on the preferred stock of Borrower;
(x) interest rate and currency hedging agreements;
(y) guaranties of any Subsidiary's suppliers in connection
with the purchase of supplies in the ordinary course of
business;
(z) guaranties of lease obligations incurred in the ordinary
course of business and to the extent otherwise permitted
hereunder;
(aa) Contingent Obligations constituting Permitted Liens; and
(bb) the indebtedness referred to in clause (3) of the
definition of Permitted Liens.
Exhibit A
Page 4 of 6
<PAGE>
"Permitted Liens" means the following:
(3) liens and security interests existing as of this date and
disclosed in Schedule 2 attached hereto and incorporated herein by this
reference;
(4) liens for taxes, fees, assessments or other governmental charges
or levies, either not delinquent or being contested in good faith by appropriate
proceedings;
(5) liens and security interests (a) upon or in any equipment
acquired or held by Borrower to secure the purchase price of such equipment or
indebtedness incurred solely for the purpose of financing the acquisition of
such equipment and in an amount not greater than the purchase price thereof or
(b) existing on such equipment at the time of its acquisition, provided that the
lien and security interest is confined solely to the property so acquired and
improvements thereon, and the proceeds of such equipment;
(6) liens consisting of leases or subleases and licenses and
sublicenses granted to others in the ordinary course of Borrower's business not
interfering in any material respect with the business of Borrower and any
interest or title of a lessor or licensor under any lease or license, as
applicable;
(7) liens securing claims or demands of materialmen, mechanics,
carriers, warehousemen, landlords and other like persons or entities imposed
without action of such parties, provided that the payment thereof is not yet
required;
(8) liens incurred or deposits made in the ordinary course of
Borrower's business in connection with worker's compensation, unemployment
insurance, social security and other like laws;
(9) liens arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default;
(10) easements, reservations, rights-of-way, restrictions, minor
defects or irregularities in title and other similar charges or encumbrances
affecting real property not interfering in any material respect with the
ordinary conduct of Borrower's business;
(11) liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods;
(12) liens that are not prior to Bank's security interest which
constitute rights of set-off of a customary nature;
(13) any interest or title of a lessor in equipment subject to any
Capitalized Lease otherwise permitted hereunder; and
(14) any liens arising from the filing of any financing statements
relating to true leases otherwise permitted hereunder.
"Person" means any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, corporation, limited
liability company, institution, public benefit corporation, firm, joint stock
company, estate, entity or governmental agency.
Exhibit A
Page 5 of 6
<PAGE>
"Property" means any interest in any kind of property or asset, whether
real, personal or mixed, whether tangible or intangible.
"Subordinated Debt" means indebtedness of Borrower, the repayment of
principal of which is fully subordinated in time and right of payment to the
Loans, and has been approved in Bank's sole and absolute discretion and in
writing.
"UCC" means the Uniform Commercial Code as the same may, from time to
time, be in effect in the State of California; provided, however, in the event
that, by reason of mandatory provisions of law, any or all of the attachment,
perfection or priority of Bank's security interest in any Collateral is governed
by the Uniform Commercial Code as in effect in a jurisdiction other than the
State of California, the term "UCC" shall mean the Uniform Commercial Code as in
effect in such other jurisdiction for purposes of the provisions hereof relating
to such attachment, perfection or priority and for purposes of definitions
related to such provisions.
"Warrants to Purchase Stock" means collectively, that certain Warrant
to Purchase Stock issued on April 14, 1997 by Borrower to Bank in connection
with the Security and Loan Agreement and that certain Warrant to Purchase Stock
issued on April 13, 1998 by Borrower to Bank in connection with the Other Loan
Agreement.
"Year 2000 Compliant" means, in regard to Borrower or any Person, that
all software, hardware, firmware, equipment, goods or systems utilized by or
material to the business operations or financial condition of Borrower or such
Person, will properly perform date sensitive functions before, during and after
the year 2000.
"Year 2000 Problem" means the risk that any computer applications used
by Borrower and its Subsidiaries may be unable to recognize and properly perform
date-sensitive functions involving certain dates prior to and any date on or
after December 31, 1999.
Exhibit A
Page 6 of 6
<PAGE>
Schedule 1 To Exhibit A
SPECIFIC PERMITTED INDEBTEDNESS
(List, attach schedule or indicate "None")
Schedule 1 To Exhibit A
<PAGE>
Schedule 2 To Exhibit A
SPECIFIC PERMITTED LIENS
(List, attach schedule or indicate "None")
Schedule 2 To Exhibit A
<PAGE>
Exhibit B
COMPLIANCE CERTIFICATE
The consolidated financial statements dated as of __________________________ of
SALON.COM, a Delaware corporation ("Borrower") attached hereto and submitted to
IMPERIAL BANK ("Bank") pursuant to that certain Amended and Restated Loan
Agreement dated as of September ___, 1999, entered into between Borrower and
Bank (the "Restated Loan Agreement"), are in compliance with all financial
covenants (unless otherwise noted below) as specified in Section 10 therein, as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Covenant: Actual:
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
A. Tangible Net Worth of not less than:
-----------------------------------
$10,000,000.00
- -----------------------------------------------------------------------------------------------------------------------
B. Quick Ratio of not less than:
----------------------------
2.00: 1.00
1.50: 1.00 for the month ending September 30, 2000
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Exceptions: (if none, so state):
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
The undersigned authorized officer of Borrower hereby certifies that Borrower is
in complete compliance with the terms and conditions of the Restated Loan
Agreement for the period ending _____________________, ____, and as of the date
of this Compliance Certificate the representations and warranties stated therein
are true, accurate and complete as of the date hereof (except as to those
representations and warranties which specifically reference a particular date
and except as noted above).
The undersigned further certifies that s/he knows of no pending conditions which
may cause an Event of Default (as defined in the Restated Loan Agreement) to
exist in the next thirty (30) days. The required support documents for this
certification are attached and prepared in accordance with GAAP consistently
applied.
Date: SALON.COM,
a Delaware corporation
By: _____________________________________
Name: ___________________________________
Title: __________________________________
Exhibit B
Page 1 of 1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-Q
and is qualified in its entirety to such financial statements (in thousands,
except per share data).
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-2000 MAR-31-1999
<PERIOD-START> JUL-01-1999 JUL-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 20,210 2,521
<SECURITIES> 10,255 0
<RECEIVABLES> 759 489
<ALLOWANCES> 40 8
<INVENTORY> 17 29
<CURRENT-ASSETS> 31,861 3,173
<PP&E> 1,545 800
<DEPRECIATION> 776 259
<TOTAL-ASSETS> 37,461 3,929
<CURRENT-LIABILITIES> 3,943 1,428
<BONDS> 0 0
0 0
0 7,955
<COMMON> 11 3
<OTHER-SE> 33,507 (5,456)
<TOTAL-LIABILITY-AND-EQUITY> 33,518 3,929
<SALES> 1,378 619
<TOTAL-REVENUES> 1,378 619
<CGS> 2,118 965
<TOTAL-COSTS> 6,468 2,108
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 393 0
<INCOME-PRETAX> (4,697) (1,485)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (4,697) (1,485)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,697) (1,698)
<EPS-BASIC> (.41) (4.37)
<EPS-DILUTED> (.41) (4.37)
</TABLE>
