<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-76511
2,500,000 shares of common stock
$10.50 per share
[LOGO OF SALON.COM]
Salon.com Salon.com is a leading Internet
706 Mission Street, 2nd Floor media company that produces a
San Francisco, California 94103 network of ten subject-specific,
demographically-targeted Web
sites and a variety of online
communities designed to attract
premium Internet advertisers and
electronic commerce partners.
The Offering
<TABLE> This is our initial public
<CAPTION> offering and no public market
Per currently exists for our shares.
Share Total We expect that the price will be
------- ----------- between $10.50 and $13.50 per
<S> <C> <C> share. This price may not
Public Price......... $10.50 $26,250,000 reflect the market price of our
Underwriting shares after this offering.
discounts and
commissions......... $ 0.525 $ 1,312,500
Proceeds to Salon.... $ 9.975 $24,937,500
</TABLE>
Proposed Trading Symbol:
The Nasdaq National Market - SALN
--------------------------------
This offering involves a high degree of risk. You should purchase shares only
if you can afford to lose your entire investment. See "Risk Factors" beginning
on page 5.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
We have entered into a firm commitment underwriting agreement with the
underwriters for the sale of the shares in this offering. We have granted the
underwriters a 30-day option to purchase up to an additional 375,000 shares of
our common stock to cover over-allotments. The underwriters expect to deliver
shares of our common stock to purchasers on June 25, 1999.
[WR HAMBRECHT & CO LOGO]
DAIWA SECURITIES AMERICA INC.
June 22, 1999
<PAGE>
[INSIDE FRONT COVER ART DESCRIPTION]
Images depicting views of Salon Web sites and online communities. The images
include views of Salon's main home page, www.salon.com, each of Salon's ten Web
sites, Table Talk and The Well. The images incorporate logos of various Salon
advertisers.
<PAGE>
[GATEFOLD ART DESCRIPTION]
[LOGO OF SALON.COM]
Distributing Salon.com content to high traffic portals
[Images depicting web pages of various Salon.com distributors and images of
such distributors' logos.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUMMARY......................................................... 1
THE OFFERING............................................................... 3
SUMMARY FINANCIAL DATA..................................................... 4
RISK FACTORS............................................................... 5
FORWARD-LOOKING STATEMENTS................................................. 17
USE OF PROCEEDS............................................................ 18
DIVIDEND POLICY............................................................ 18
CAPITALIZATION............................................................. 19
DILUTION................................................................... 20
SELECTED FINANCIAL DATA.................................................... 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..................................................... 22
BUSINESS................................................................... 34
MANAGEMENT................................................................. 49
CERTAIN TRANSACTIONS....................................................... 56
PRINCIPAL STOCKHOLDERS..................................................... 57
DESCRIPTION OF CAPITAL STOCK............................................... 60
SHARES ELIGIBLE FOR FUTURE SALE............................................ 64
PLAN OF DISTRIBUTION....................................................... 65
LEGAL MATTERS.............................................................. 68
EXPERTS.................................................................... 68
WHERE TO FIND ADDITIONAL INFORMATION ABOUT SALON........................... 69
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
</TABLE>
----------------
"Salon" and the Salon logo are trademarks of Salon.com. All other trademarks
or tradenames referred to in this prospectus are the property of their
respective owners.
i
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information described more fully elsewhere in this
prospectus. This summary is not complete and may not contain all of the
information that you should consider before investing in our common stock. You
should read the entire prospectus carefully.
SALON.COM
Our Business: We are a leading Internet media company that produces a network
of ten subject-specific, demographically-targeted Web sites and
a variety of online communities designed to attract premium
Internet advertisers and electronic commerce partners. We
believe that our network of Web sites combines the
thoughtfulness of print, the timeliness of television and the
interactivity of talk radio.
Our Strategy: Our strategy is to build a premier network of Internet
destination sites through compelling content that appeals to
users with high-value demographics. To establish our network of
premier Internet destinations, we intend to:
. broaden our revenue base in advertising and electronic
commerce;
. expand our content and communities;
. expand our network of distribution partners;
. grow our brand recognition through advertising and
syndication; and
. enhance our technology to improve production, user
experience, advertising delivery and circulation analysis.
Our Market: The Internet is becoming one of the most important mediums for
global communication and business. Industry analysts estimate
that the number of Internet users worldwide will increase to
319.8 million in 2002 from 68.7 million in 1997. The dramatic
increase in Internet use provides a tremendous opportunity for
both online advertising and electronic commerce, which industry
experts believe will realize significant revenue growth in the
near future.
Our Network: Our network of subject-specific Web sites includes:
. Salon News . Salon Books
. Salon Technology . Salon Media
. Salon Arts & Entertainment . Salon Travel
. Salon Mothers Who Think . Salon People
. Salon Health & Body . Salon Comics
Our other media offerings consist of Table Talk and The Well,
our interactive Web communities; and Salon Shopping, an
electronic commerce destination aimed at marketing upscale
Salon branded and third party products to our high-value
demographic base. The main entry and navigation point for our
network is www.salon.com.
We believe the scope of our product offerings and the high-
value demographics of our user base offer the opportunity to
build a premier Internet destination capable of highly targeted
advertising and electronic commerce marketing.
1
<PAGE>
We were incorporated in California in July 1995 and reincorporated in
Delaware and changed our name to "Salon.com" in June 1999. We currently employ
99 people in San Francisco, Sausalito, New York, Washington, D.C., Chicago, Los
Angeles, Boston and Tacoma, Washington. Our headquarters are located at
706 Mission Street, 2nd Floor, San Francisco, California 94103 and our
telephone number is (415) 882-8720. Our principal Web site is located at
www.salon.com. Information contained on our Web sites does not constitute a
part of this prospectus.
Unless otherwise indicated, all information contained in this prospectus
assumes that:
. the underwriters will not exercise their over-allotment option;
. all outstanding convertible preferred stock will be converted to common
stock before this offering is completed; and
. we will complete a 1 for 2 split of our common stock before this offering
is completed.
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of our common stock only in jurisdictions where offers and sales
are permitted. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
2
<PAGE>
THE OFFERING
Type of security............ Common stock
Common stock offered........ 2,500,000 shares
Common stock to be
outstanding after this
offering...................
10,730,623 shares
Use of proceeds............. For expansion of our sales force, marketing and
distribution activities, expansion of our
business operations and general corporate
purposes. See "Use of Proceeds" for more
information.
Proposed Nasdaq National
Market Symbol..............
SALN
The method of distribution being used by the underwriters in this offering
differs somewhat from that traditionally employed in firm commitment
underwritten public offerings. In particular, the public offering price and
allocation of shares will be determined primarily by an auction process
conducted by the underwriters and other securities dealers participating in
this offering. A more detailed description of this process is included in "Plan
of Distribution."
3
<PAGE>
SUMMARY FINANCIAL DATA
Summary Financial Information
(In thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year Ended
March 31,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Statement of Operations Data:
Net revenues....................................... $ 280 $ 1,156 $ 2,921
------- ------- -------
Operating expenses:
Production, content, and product................. 1,555 2,832 4,503
Sales and marketing.............................. 419 1,655 3,655
Research and development......................... 176 276 469
General and administrative....................... 129 291 518
------- ------- -------
Total operating expenses....................... 2,279 5,054 9,145
------- ------- -------
Loss from operations............................... (1,999) (3,898) (6,224)
Other income, net.................................. 55 73 (9)
------- ------- -------
Net loss........................................... (1,944) (3,825) (6,233)
Preferred dividend................................. -- -- 271
------- ------- -------
Net loss attributable to common stockholders....... $(1,944) $(3,825) $(6,504)
======= ======= =======
Basic and diluted net loss per share attributable
to common stockholders............................ $ (3.84) $(10.20) $(16.62)
======= ======= =======
Weighted average shares used in computing basic and
diluted net loss per share attributable to common
stockholders...................................... 507 375 391
======= ======= =======
Pro forma basic and diluted net loss per share
attributable to common stockholders (unaudited)... $ (1.50)
=======
Weighted average shares used in computing pro forma
basic and diluted net loss per share attributable
to common stockholders (unaudited)................ 4,328
=======
</TABLE>
<TABLE>
<CAPTION>
As of March 31, 1999
------------------------
Pro As
Actual forma adjusted
------ ------- --------
(unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.............................. $ 754 $11,678 $38,978
Working capital (deficit).............................. (525) 10,399 37,699
Total assets........................................... 7,808 18,732 46,032
Long-term liabilities, net of current portion.......... 75 75 75
Total stockholders' equity............................. 5,353 16,277 43,577
</TABLE>
The pro forma information above reflects the net cash proceeds of
approximately $10.9 million from the sale of 2,967,782 shares of Series C
preferred stock on April 14, 1999.
The as adjusted information above is adjusted to give effect to our receipt
of the estimated net proceeds of $27.3 million from the sale of 2,500,000
shares of common stock in this offering at an assumed public offering price of
$12 per share.
4
<PAGE>
RISK FACTORS
You should carefully consider the following risks before you decide to buy
our common stock.
Risks Related to Our Operations
Because we have a limited operating history, it is difficult to evaluate our
business and prospects
We originally incorporated in July 1995 and launched our initial Web sites in
November 1995. Because we have a limited operating history, you must consider
the risks and difficulties frequently encountered by early-stage companies like
us in new and rapidly evolving markets, including the market for advertising
and commerce on the Internet. Any future growth and success in our business
will depend substantially upon our ability to attract a larger number of users
to our Web sites and online communities, to increase advertising and
sponsorship sales based on that audience and to meet the challenges described
in the risk factors set forth below. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" for detailed information on
our limited operating history.
We lack significant revenues, we have a history of losses and we anticipate
increased losses
We have not achieved profitability and expect to incur operating losses for
the foreseeable future. We incurred net losses of $3.8 million in the fiscal
year ended March 31, 1998 and $6.2 million in the fiscal year ended March 31,
1999. As of March 31, 1999, our accumulated deficit was $12.8 million. We
expect these operating losses to increase for at least the foreseeable future.
We will need to generate significant revenues to achieve and maintain
profitability, and we may not be able to do so. Even if we do achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis in the future. If our revenues grow more slowly than
we anticipate or if our operating expenses exceed our expectations, our
financial results would be severely harmed. See "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for more detailed information.
Our quarterly operating results are volatile and may adversely affect our stock
price
Our future revenues and operating results are likely to vary significantly
from quarter to quarter due to a number of factors, many of which are outside
our control, and any of which could severely harm our business. These factors
include:
. our ability to attract and retain banner advertisers, advertising
sponsors and electronic commerce sponsors;
. our ability to attract and retain a large number of users;
. the introduction of new Web sites, services or products by us or by our
competitors;
. the timing and uncertainty of our advertising and sponsorship sales
cycles;
. the mix of banner advertisements and sponsorships sold by us or our
competitors;
. seasonal declines in advertising sales, which typically occur in the
first and third calendar quarters;
. the level of Internet usage;
. our ability to attract, integrate and retain qualified personnel;
. our ability to successfully integrate operations and technologies from
acquisitions or other business combinations;
. technical difficulties or system downtime affecting the Internet
generally or the operation of our Web sites; and
. the amount and timing of operating costs and capital expenditures
relating to the expansion of our business operations and infrastructure.
5
<PAGE>
In order to attract and retain a larger user base, we plan to significantly
increase our expenditures on sales and marketing, content development,
technology and infrastructure. Many of these expenditures are planned or
committed in advance and in anticipation of future revenues. If our revenues in
a particular quarter are lower than we anticipate, we may be unable to reduce
spending in that quarter. As a result, any shortfall in revenues would likely
adversely affect our quarterly operating results.
Due to the factors noted above and the other risks discussed in this section,
you should not rely on quarter-to-quarter comparisons of our results of
operations as an indication of future performance. It is possible that in some
future periods our results of operations may be below the expectations of
public market analysts and investors. If this occurs, the price of our common
stock may decline. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for detailed information on our quarterly
operating results.
We depend on banner advertising and sponsorship sales for substantially all of
our revenues, and our inability to increase banner advertising and sponsorship
revenues would harm our business
Our revenues for the foreseeable future will depend substantially on sales of
advertising and sponsorships. In the fiscal year ended March 31, 1998,
advertising and sponsorship sales accounted for 99% of our net revenues, and in
the fiscal year ended March 31, 1999, they accounted for 94% of our net
revenues. In order to increase our revenues, we will need to attract additional
significant banner advertisers, advertising sponsors and electronic commerce
sponsors on an ongoing basis. We may not be able to attract or retain a
sufficient number of banner advertisers or advertising sponsors in the future,
and if we cannot, our business would likely be severely harmed. Increasing our
advertising and sponsorship revenues depends upon many factors, including
whether we will be able to:
. successfully sell and market our network to advertisers and sponsors;
. increase our user base;
. increase the amount of revenues we receive per sponsorship;
. increase awareness of the Salon brand;
. target advertisements and electronic commerce opportunities to users with
appropriate interests;
. accurately measure the number and demographic characteristics of our
users; and
. attract and retain sales personnel.
If we do not sell a sufficient number of advertisements or sponsorships or do
not engage a sufficient number of advertisers or sponsors during a particular
period, our business could be severely harmed.
Our revenues depend on a limited number of advertisers and sponsors who are not
subject to long-term agreements, and the loss of a number of these advertisers
and sponsors could adversely affect our operating results
Historically, we have relied on a small number of banner advertisers and
advertising sponsors for a significant percentage of our revenues. In the
fiscal year ended March 31, 1998, Borders accounted for approximately 37% and
IBM accounted for approximately 16% of our revenues. In the fiscal year ended
March 31, 1999, Borders accounted for approximately 13% of our revenues. The
loss of any of our significant banner advertisers or advertising sponsors could
adversely affect our business. We anticipate that our financial results in any
given period will continue to significantly depend on revenues from a small
number of banner advertisers and advertising sponsors. In addition,
particularly because few banner advertisers and advertising sponsors are
contractually obligated to purchase any advertising in the future, we are
unable to anticipate our mix of banner advertisers and advertising sponsors in
future fiscal periods.
6
<PAGE>
The length of our sales cycles is uncertain and variable and may lead to
shortfalls in our revenue and fluctuations in our operating results
Our dependence on banner advertising and sponsorships subjects us to the risk
of revenue shortfalls because the sales cycles for advertising and sponsorships
vary significantly, and during these cycles we may expend substantial funds and
management resources while not obtaining advertising or sponsorship revenues.
If sales are delayed or do not occur, our financial results for a particular
period may be harmed. The time between the date of initial contact with a
potential banner advertiser or sponsor and receipt of a purchase order from the
advertiser may range from as little as one week to up to nine months. Sales of
banner advertising and sponsorships are subject to factors over which we have
little or no control, including:
. advertisers' and sponsors' budgets;
. internal acceptance reviews by advertisers and their agencies;
. the timing of completion of advertisements and sponsorships; and
. the possibility of cancellation or delay of projects by advertisers or
sponsors.
We must increase our user base to attract advertisers and sponsors and to
generate additional revenue
Increasing the size of our user base is critical to selling advertising and
sponsorships and to increasing our revenues. If we cannot increase the size of
our user base we may not be able to generate additional revenues, which could
leave us unable to maintain or grow our business. To increase our user base, we
must:
. expand our content and communities;
. expand our network of distribution partners;
. grow Salon brand recognition through advertising and syndication;
. enhance our technology to improve the functionality of our network of Web
sites; and
. offer attractive electronic commerce opportunities to electronic commerce
sponsors and users.
If we do not achieve these objectives to increase our user base, our business
could be severely harmed. Additionally, a significant element of our business
strategy is to build loyal online communities because we believe communities
help retain actively engaged users. However, the concept of developing these
communities on the Web is unproven, and if it is not successful, then it may be
more difficult to increase the size of our user base.
We must establish and maintain distribution relationships to attract more users
to our network
We depend on establishing and maintaining distribution relationships with
high-traffic Web sites to increase our user base. There is intense competition
for relationships with these sites, and we may not be able to enter into such
relationships on favorable terms or at all. Even if we enter into distribution
relationships with these Web sites, their sites may not attract significant
numbers of users, and our Web sites may not attract additional users from these
relationships. Moreover, we have paid and may in the future pay significant
fees to establish these relationships.
We must continually develop compelling content to attract Internet users
Our success depends upon our ability to attract and retain a large number of
users by delivering original and compelling Internet content and services. If
we are unable to develop content and services that allow us to attract, retain
and expand a loyal user base possessing high-value demographic characteristics,
we will be unable to generate advertising revenues or enter into sponsorships,
and our revenues and operating results will be severely harmed. The content and
services we provide on our Web sites may not appeal to a sufficient number of
Internet users to generate banner advertising revenues or attract sponsorships.
Our ability to develop compelling content depends on several factors,
including:
. the quality and number of writers and artists who create content for
Salon;
7
<PAGE>
. the quality of our editorial staff; and
. the technical expertise of our production staff.
Consumer tastes and preferences change rapidly and we may not be able to
anticipate, monitor, and successfully respond to these changes to attract and
retain a sufficient number of users for our network of Web sites. Internet
users can freely navigate and instantly switch among a large number of Web
sites, many of which offer content and services that compete with Salon. In
addition, many Web sites offer very specific, highly targeted content that
could have greater appeal than our network to particular subsets of our target
user base.
The new design of our network of Web sites may not appeal to users which could
result in reduced traffic on our network
We recently made significant changes to the design of our network of Web
sites. If the new design of our network does not appeal to our existing users
or new users, the amount of traffic on our network could be reduced, which
would make it more difficult for us to enter into agreements with banner
advertisers, advertising sponsors and electronic commerce sponsors, because
these agreements are based on the quantity and quality of users that visit our
network. A loss of advertisers or sponsors could harm our business.
The controversial content of our Web sites may limit our revenues from banner
advertising, advertising sponsorships or electronic commerce sponsorships
Many of our Web sites contain, and will continue to contain, content that is
politically and culturally controversial. As a result of this content, current
and potential advertisers and sponsors may refuse to do business with us. Our
outspoken stance on political issues, including the investigation and
impeachment of President Clinton, as well as much of our other published
content, has and may continue to result in negative reactions from some users,
commentators and other media outlets.
Our promotion of the Salon brand must be successful in order to attract and
retain users as well as advertisers, sponsors and strategic partners
The success of the Salon brand depends largely on our ability to provide high
quality content and services. If Internet users do not perceive our existing
content and services to be of high quality, or if we introduce new content and
services or enter into new business ventures that are not favorably perceived
by users, we may not be successful in promoting and maintaining our brand. Any
expansion of the focus of our operations creates a risk of diluting our brand,
confusing consumers and decreasing the value of our user base to advertisers.
In order to attract and retain users, and to promote the Salon brand, we may
need to increase our budgets for content and services or otherwise
substantially increase our financial commitment to establishing and maintaining
loyalty for the Salon brand name. If we are unable to establish the Salon brand
or are forced to substantially increase our expenditures to promote the Salon
brand, our business could be severely harmed.
We need to hire, integrate and retain qualified editorial and design personnel
because these individuals are important to our growth
Our success significantly depends on the continued services of our key
editorial and design personnel. In addition, because the content of our Web
sites must be perceived by our users as having been created by credible and
notable sources, our success also depends on the name recognition and
reputation of our editorial staff, in particular David Talbot, Salon's editor-
in-chief. The loss of these individuals or other key editorial or design
personnel would likely harm our business.
We have recently hired a chief financial officer and a senior vice president
of sales. If we cannot integrate each of these persons into our management
team, we may not be able to retain their services, and may have to search for
other persons to fill these positions.
8
<PAGE>
We expect that we will need to hire additional personnel in all areas in
1999. Competition for personnel in the Internet industry is intense. We may be
unable to retain our current key employees or attract, integrate or retain
other qualified employees in the future. If we do not succeed in attracting new
personnel or integrating, retaining and motivating our current personnel, our
business could be harmed.
We may expend significant resources to protect our intellectual property rights
or to defend claims of infringement by third parties, and if we are not
successful we may lose rights to use significant material or be required to pay
significant fees
Our success and ability to compete are significantly dependent on our
proprietary content. We rely exclusively on copyright law to protect our
content. While we actively take steps to protect our proprietary rights, these
steps may not be adequate to prevent the infringement or misappropriation of
our content. Infringement or misappropriation of our content or intellectual
property could materially harm our business. We also license content from
various freelance providers and other third-party content providers. While we
attempt to insure that this content may be freely licensed to us, other parties
may assert claims of infringement against us relating to this content.
We may need to obtain licenses from others to refine, develop, market and
deliver new services. We cannot assure you that we will be able to obtain any
such licenses on commercially reasonable terms or at all or that rights granted
pursuant to any licenses will be valid and enforceable.
We recently acquired the Internet address www.salon.com. Because
www.salon.com is the address of the main home page to our network of Web sites
and incorporates our company name, it is a vital part of our intellectual
property assets. We do not have a registered trademark on the address, and
therefore it may be difficult for us to prevent a third party from infringing
our intellectual property rights in the address. If we fail to adequately
protect our rights in the address, or if a third party infringes our rights in
the address or otherwise dilutes the value of www.salon.com, our business could
be harmed.
Our technology development efforts may not be successful in improving the
functionality of our network which could result in reduced traffic on our
network
We have recently developed a proprietary online publishing system. If this
system does not work as intended, or if we are unable to continue to develop
this system to keep up with the rapid evolution of technology for content
delivery on the Internet, our network of Web sites may not operate properly
which could harm our business. Additionally, software product development
schedules are difficult to predict because they involve creativity and the use
of new development tools and learning processes. Delays in our software
development process could harm our business. Moreover, complex software
products like our online publishing system frequently contain undetected errors
or shortcomings, and may fail to perform or scale as expected. Although we have
tested and will continue to test our publishing system, errors or deficiencies
may be found in the system.
We rely on third parties for several critical functions relating to delivery of
advertising and our Web site performance, and the failure of these third
parties to supply these services in an efficient manner could limit our growth
and impair our business
We rely on a number of third party suppliers for various services, including
Web hosting, banner advertising delivery software, Internet traffic measurement
software and electronic commerce fulfillment services. While we believe that we
could obtain these services from other qualified suppliers on similar terms and
conditions, a disruption in the supply of these services by our current
suppliers could materially harm our business.
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.
9
<PAGE>
We have also recently begun to use new third-party software to measure
traffic on our network of Web sites. If this software malfunctions or does not
accurately measure our user traffic, we may not be able to justify our
advertising rates, and our advertising revenues could be reduced.
Growth in our operations is placing a strain on our resources, and failure to
manage growth effectively could harm our business
We have experienced and are currently experiencing a period of significant
growth. For example, in the last 12 months the number of employees we have has
increased 83% from approximately 54 to 99, and in the fiscal year ended March
31, 1999 our total revenues increased approximately 153% and our total expenses
increased approximately 81%. If we cannot manage our growth effectively, we may
not be able to coordinate the activities of our technical, accounting, finance,
marketing, sales and production staffs, and our business could be harmed. We
intend to add new subject-specific Web sites to our network, hire additional
staff in all departments, expand existing offices and open new offices. As part
of this growth, we will have to implement new operational procedures and
controls to train and manage our employees and to expand and coordinate the
operations of our various departments. If we acquire new businesses, we will
also need to integrate new operations, technologies and personnel. If we cannot
manage the growth of our network of Web sites, staff, offices and business
generally, our business could be harmed.
We may not be able to successfully integrate our acquisitions, and any failure
to integrate could diminish the value of an acquired business or cause
disruptions in our ongoing operations
Acquisitions and business combinations entail numerous operational risks,
including:
. difficulty in the assimilation of acquired operations, technologies or
products;
. diversion of management's attention from other business operations;
. risks of entering markets in which we have limited or no experience; and
. potential loss of key employees of acquired businesses.
We acquired The Well LLC, an online community provider, in March 1999. We may
not be able to successfully integrate The Well LLC or any businesses, products,
technologies or personnel that we might acquire in the future, and if we
cannot, our business could be harmed.
We will need more working capital to expand our network and achieve our
business objectives, and securing financing may be difficult because of the
condition of our business or the uncertain nature of the financial markets
We believe that our current cash resources, combined with the net proceeds
from this offering, will meet our anticipated working capital and capital
expenditure requirements for at least the 12 months following the date of this
prospectus. We may need to raise additional capital to do the following:
. expand our network of Web sites and interactive communities;
. increase our electronic commerce opportunities;
. aggressively promote awareness of the Salon brand;
. make payments under distribution relationships;
. respond to competitive pressures; or
. acquire complementary businesses or technologies.
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
10
<PAGE>
senior to those of our current stockholders. Additionally, we may not be able
to obtain additional financing on favorable terms, or at all. If adequate
capital is not available on acceptable terms, our ability to expand, take
advantage of unanticipated opportunities, develop or enhance services or
otherwise respond to competitive pressures would be significantly limited. This
limitation could harm our business. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources" for a discussion of our working capital and
capital expenditures.
Provisions contained in our charter documents may delay or prevent a takeover
of Salon that could involve a premium stock price or other benefits to our
stockholders
We intend to reincorporate in Delaware prior to the completion of this
offering. Provisions of our Delaware certificate of incorporation and bylaws
and of the Delaware general corporation law could make it more difficult for a
third-party to acquire us, even if a change-in-control would be beneficial to
our stockholders. These provisions also may prevent changes in the management
of Salon. See "Description of Capital Stock" for more detailed information.
Risks Related to Our Internet Business and Prospects
Acceptance and effectiveness of Internet advertising and electronic commerce is
unproven and, to the extent they do not continue to grow, our market may not
develop adequately and our business could be harmed
Our success is highly dependent on an increase in the use of the Internet for
advertising and electronic commerce. If the markets for Internet advertising or
electronic commerce do not develop, our business may be severely harmed.
Currently, demand and market acceptance for Internet advertising is uncertain
and may not increase as necessary for our business to grow or succeed. Many
advertisers have little or no experience using the Internet for advertising
purposes. The adoption of Internet advertising, particularly by companies that
have historically relied on traditional media, requires the acceptance of a new
way of conducting business, exchanging information and advertising products and
services. Potential advertisers may believe Internet advertising to be
undesirable or less effective for promoting their products and services
relative to traditional advertising media. If the Internet advertising market
fails to develop or develops more slowly than we expect, our business could be
harmed.
Different pricing models are used to sell Internet advertising. It is
difficult to predict which pricing models, if any, will emerge as the industry
standard. This uncertainty makes it difficult to project our future advertising
rates and revenues. Any failure to adapt to pricing models that develop or
respond to competitive pressures could reduce our advertising revenues.
Moreover, "filter" software programs that limit or prevent advertising from
being delivered to an Internet user's computer are commonly available.
Widespread use of this software could adversely affect the commercial viability
of Internet advertising and our business.
Many retailers have little or no experience using the Internet for electronic
commerce. The adoption of electronic commerce, particularly by companies that
have historically relied on traditional channels to sell their products and
services, requires the acceptance of a new way of conducting business,
exchanging information and completing commercial transactions. Potential
electronic commerce partners may believe electronic commerce to be undesirable
or less effective for selling their products and services relative to
traditional channels. If the electronic commerce market fails to develop or
develops more slowly than we expect, our business could be harmed.
11
<PAGE>
Tracking and measurement standards for advertising may not evolve to the extent
necessary to support Internet advertising, thereby creating uncertainty about
the viability of our business model
There are currently no standards for the measurement of the effectiveness of
advertising on the Internet, and the industry may need to develop standard
measurements in order to sustain advertising volume or attract new advertisers.
Standardized measurements may not develop and if they do not, our business
could be harmed. In addition, currently available software programs that track
Internet usage and other tracking methodologies are rapidly evolving. The
development of such software or other methodologies may not keep pace with our
information needs, particularly to support our internal business requirements
and those of our advertisers and sponsors. The absence or insufficiency of this
information could limit our ability to attract and retain advertisers and
sponsors.
It is important to our advertisers and sponsors that we accurately measure
the demographics of our user base and the delivery of advertisements on our Web
sites. We depend on third parties to provide certain of these measurement
services. If they are unable to provide these services in the future, we would
need to perform them ourselves or obtain them from another provider, if
available. This could cause us to incur additional costs or cause interruptions
in our business while we are replacing these services. Companies may choose to
not advertise on Salon or may pay less for advertising or sponsorships if they
do not perceive our measurements or measurements made by third parties to be
reliable.
If use of the Internet does not grow, our business could be harmed
Our success is highly dependent upon continued growth in the use of the
Internet generally and in particular as a medium for content, advertising and
electronic commerce. If Internet usage does not grow, we may not be able to
increase revenues from advertising and sponsorships and this may harm our
business. Internet use by consumers is in an early stage of development, and
market acceptance of the Internet as a medium for content, advertising and
electronic commerce is highly uncertain. A number of factors may inhibit the
growth of Internet usage, including:
. inadequate network infrastructure;
. security concerns;
. inconsistent quality of service; and
. limited availability of cost-effective, high-speed access.
If these or any other factors cause use of the Internet to slow or decline, our
results of operations could be adversely affected.
Increasing competition among Internet content providers could reduce our
advertising sales or market share, thereby harming our business
The market for Internet content is relatively new, rapidly changing and
intensely competitive. We expect competition for Internet content to continue
to increase and if we cannot compete effectively our business could be harmed.
Additionally, we expect the number of Web sites competing for the attention and
spending of users, advertisers and sponsors to continue to increase, because
there are so few barriers to entry on the Internet.
Increased competition could result in advertising or sponsorship price
reductions, reduced margins or loss of market share, any of which could harm
our business. Competition is likely to increase significantly as new companies
enter the market and current competitors expand their services. Many of our
present and potential competitors are likely to enjoy substantial competitive
advantages over us. If we do not compete effectively or if we experience any
pricing pressures, reduced margins or loss of market share resulting from
increased competition, our business could be adversely affected. See
"Business--Competition."
12
<PAGE>
If the Internet infrastructure continues to be unreliable, access to our
network may be impaired and our business may be harmed
Our success depends in part on the development and maintenance of the
Internet infrastructure. If this infrastructure fails to develop or be
adequately maintained, our business would be harmed because users may not be
able to access our network of Web sites. Among other things, development and
maintenance of a reliable infrastructure will require a reliable network
backbone with the necessary speed, data capacity, security and timely
development of complementary products for providing reliable Internet access
and services.
The Internet has experienced, and is expected to continue to experience,
significant growth in number of users and amount of traffic. If the Internet
continues to experience increased numbers of users, frequency of use or
increased bandwidth requirements, the Internet infrastructure may not be able
to support these increased demands or perform reliably. The Internet has
experienced a variety of outages and other delays as a result of damage to
portions of its infrastructure, and could face additional outages and delays in
the future. These outages and delays could reduce the level of Internet usage
and traffic on our network of Web sites. In addition, the Internet could lose
its viability due to delays in the development or adoption of new standards and
protocols to handle increased levels of activity. If the Internet
infrastructure is not adequately developed or maintained, use of our network of
Web sites may be reduced.
Even if the Internet infrastructure is adequately developed and maintained,
we may incur substantial expenditures in order to adapt our services and
products to changing Internet technologies. Such additional expenses could
severely harm our financial results.
We may be held liable for content on our Web sites
As a publisher and distributor of content over the Internet, including user-
generated content on our online communities, we face potential liability for
defamation, negligence, copyright, patent or trademark infringement and other
claims based on the nature and content of the material that is published or
distributed on our network of Web sites. These types of claims have been
brought, sometimes successfully, against online services, Web sites and print
publications in the past. Although we carry general liability insurance, our
insurance may not be adequate to indemnify us for all liability that may be
imposed. Any liability that is not covered by our insurance or is in excess of
our insurance coverage could severely harm our business.
Concerns about transactional security may hinder our electronic commerce
strategy by subjecting us to liability or by discouraging commercial
transactions over the Internet
A significant barrier to electronic commerce is the secure transmission of
confidential information over public networks. Any breach in our security could
expose us to a risk of loss or litigation and possible liability. We rely on
encryption and authentication technology licensed from third parties to provide
secure transmission of confidential information. As a result of advances in
computer capabilities, new discoveries in the field of cryptography or other
developments, a compromise or breach of the algorithms we use to protect
customer transaction data may occur. A compromise of our security could
severely harm our business. A party who is able to circumvent our security
measures could misappropriate proprietary information, including customer
credit card information, or cause interruptions in the operation of our network
of Web sites.
We may be required to expend significant capital and other resources to
protect against the threat of security breaches or to alleviate problems caused
by these breaches. However, protection may not be available at a reasonable
price or at all. Concerns over the security of electronic commerce and the
privacy of users may also inhibit the growth of the Internet as a means of
conducting commercial transactions.
13
<PAGE>
Our efforts to engage in electronic commerce may expose us to product liability
claims
We have and continue to foster relationships with manufacturers or other
companies to offer certain products to users through our network of Web sites.
We have very limited experience in the sale of products online and the
development of relationships with manufacturers or suppliers of these products.
Users who purchase products may sue us if any of the products sold on our
network are defective, fail to perform properly or injure the user. Liability
claims could require us to spend significant time and money in litigation or to
pay significant damages. As a result, any such claims, whether or not
successful, could severely harm our business.
Our systems may fail due to natural disasters, telecommunications failures and
other events, any of which would limit user traffic
Substantially all of our communications hardware and computer hardware
operations for our Web sites are located at Frontier GlobalCenter's facilities
in Sunnyvale, California. Fire, floods, earthquakes, power loss,
telecommunications failures, break-ins and similar events could damage these
systems and cause interruptions in our services. Computer viruses, electronic
break-ins or other similar disruptive problems could cause users to stop
visiting our network of Web sites and could cause advertisers and sponsors to
terminate any agreements with us. If any of these circumstances occurred, our
business could be harmed. Our insurance policies may not adequately compensate
us for any losses that may occur due to any failures of or interruptions in our
systems. We do not presently have a formal disaster recovery plan.
Our Web sites must accommodate a high volume of traffic and deliver
frequently updated information. In the past year, our Web sites have
experienced slower response times or decreased traffic on approximately three
different occasions due to a variety of reasons including hardware and software
failures and intermittent Internet traffic routing problems beyond our control.
For example, in March 1999, users were unable to access Table Talk for
approximately two weeks as we upgraded our technology to compensate for
unexpected growth in user activity. It is possible that we will experience
similar systems failures in the future and that such failures could adversely
affect our business. In addition, our users depend on Internet service
providers, online service providers and other Web site operators for access to
our Web sites. Many of these providers and operators have experienced
significant outages in the past, and could experience outages, delays and other
difficulties due to system failures unrelated to our systems. Any of these
system failures could harm our business.
Governmental regulation of the Internet may restrict our business
There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. Laws and regulations may be adopted
in the future, however, that address issues including user privacy, pricing,
and the characteristics and quality of products and services. An increase in
regulation or the application of existing laws to the Internet could
significantly increase our costs of operations and harm our business. For
example, the Communications Decency Act of 1996 sought to prohibit the
transmission of certain types of information and content over the Web.
Additionally, several telecommunications companies have petitioned the Federal
Communications Commission to regulate Internet service providers and online
service providers in a manner similar to long distance telephone carriers and
to impose access fees on these companies. Imposition of access fees could
increase the cost of transmitting data over the Internet.
Possible state sales and other taxes could adversely affect our results of
operations
We generally do not collect sales or other taxes in respect of goods sold to
users on our network of Web sites. However, one or more states may seek to
impose sales tax collection obligations on out-of-state companies, including
Salon, which engage in or facilitate electronic commerce. A number of proposals
have been made at the state and local level that would impose additional taxes
on the sale of goods and services through the Internet. Such proposals, if
adopted, could substantially impair the growth of electronic commerce and could
reduce our ability to derive revenue from electronic commerce. Moreover, if any
state or foreign country were to successfully assert that we should collect
sales or other taxes on the exchange of merchandise on our network, our
financial results could be harmed.
14
<PAGE>
If we, or third parties on which we rely, fail to achieve year 2000 compliance,
our business could be impaired
We may discover year 2000 readiness problems in our internally developed
systems that will require substantial revision. In addition, third-party
software, hardware or services incorporated into our systems may need to be
revised or replaced, all of which could be time-consuming and expensive. If we
cannot fix or replace our internally developed proprietary software or third-
party software, hardware or services before January 1, 2000 our operating costs
could be increased and we could experience business interruptions which could
harm our business. Additionally, if we cannot adequately address year 2000
readiness issues in our internally developed proprietary software, we could be
subject to claims of mismanagement, misrepresentation or breach of contract and
related litigation, which could be costly and time consuming to defend.
In addition, the software and systems of governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside of our control may not be year 2000 ready. If these entities are not
year 2000 ready, a systemic failure beyond our control could result, including
a prolonged Internet, telecommunications or general electrical failure. This
type of failure would make it difficult or impossible to use the Internet or
access our network of Web sites and would prevent us from publishing our
content. If a prolonged failure of this type occurred, our business would be
severely harmed. If our advertisers and sponsors are not year 2000 ready, they
may defer or cancel advertising scheduled to appear on our network of Web
sites, which could adversely affect our financial results. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000 Readiness" for more detailed information.
Risks Related to This Offering
Our executive officers, directors and major stockholders will retain
significant control over Salon after this offering, which may lead to conflicts
with other stockholders over corporate governance matters
After this offering, executive officers, directors and holders of 5% or more
of our outstanding common stock will, in the aggregate, own approximately 67.7%
of our outstanding common stock. These stockholders would be able to
significantly influence all matters requiring approval by our stockholders,
including the election of directors and the approval of significant corporate
transactions. This concentration of ownership may also delay, deter or prevent
a change in control of Salon and may make some transactions more difficult or
impossible without the support of these stockholders.
Our stock price may be volatile which may lead to losses by investors and
securities litigation
The stock market has experienced significant price and volume fluctuations
and the market prices of securities of technology companies, particularly
Internet-related companies, have been highly volatile. Investors may not be
able to resell their shares at or above the initial public offering price. See
"Plan of Distribution" for more detailed information.
In the past, securities class action litigation has often been instituted
against a company following periods of volatility in the company's stock price.
This type of litigation could result in substantial costs and could divert our
management's attention and resources.
Our management will retain broad discretion in the use of proceeds from this
offering, and may fail to use such funds effectively to grow our business or to
achieve our other business goals
We intend to use the net proceeds from the sale of our common stock for
expansion of sales and marketing, brand promotion, working capital and general
corporate purposes, including content development or expansion of our offices
and possible acquisitions. Accordingly, our management will have significant
flexibility in applying the net proceeds of this offering. Until the proceeds
are needed, we plan to invest them in investment-grade, interest-bearing
securities. The failure of our management to apply such funds effectively could
harm our business. See "Use of Proceeds" for more detailed information.
15
<PAGE>
Sales of additional shares of our common stock could cause our stock price to
decline and could harm our ability to raise funds from stock offerings in the
future
Sales of a large number of shares of our common stock in the market after the
offering, or the belief that such sales could occur, could cause a drop in the
market price of our common stock and could impair our ability to raise capital
through offerings of our equity securities. Upon completion of this offering,
there will be 10,730,623 shares of our common stock outstanding. All of the
2,500,000 shares sold in this offering will be freely tradable without
restrictions or further registration under the Securities Act, unless such
shares are purchased by our "affiliates," as that term is defined under the
Securities Act. The remaining 8,230,623 shares of common stock held by existing
stockholders will be "restricted securities" as that term is defined in
Rule 144 of the Securities Act. These restricted shares will be available for
sale in the public market as follows:
. 75,000 restricted shares will be eligible for sale on the date of this
prospectus pursuant to Rule 144(k) of the Securities Act;
. 3,804,361 restricted shares will be eligible for sale 90 days after the
date of this prospectus pursuant to Rule 144 and Rule 701 of the
Securities Act; and
. the remainder of the restricted shares will be eligible for sale from
time to time thereafter upon expiration of one-year holding periods and
subject to the requirements of Rule 144.
After the completion of this offering, we intend to file a registration
statement on Form S-8 under the Securities Act to register 2,875,000 shares
reserved for issuance under our 1995 stock option plan and 500,000 shares
reserved for our issuance under our 1999 employee stock purchase plan. Upon
registration, all of these shares will be freely tradable when issued.
Because there has been no public market for our common stock prior to this
offering, trading our stock could be difficult or unsuccessful following this
offering
While we have applied to list our common stock on the Nasdaq National Market,
a trading market for our common stock may not develop or, if a market does
develop, the common stock may still be difficult to trade. You may not be able
to resell your shares at or above the initial public offering price. See "Plan
of Distribution" for more detailed information.
Investors in this offering will suffer immediate dilution, and existing
stockholders are likely to have achieved significant unrealized appreciation in
their stock
The initial public offering price is expected to be substantially higher than
the pro forma net tangible book value per share of the outstanding common stock
immediately after the offering. Accordingly, purchasers of common stock in this
offering will experience immediate and substantial dilution of approximately
$8.42 in net tangible book value per share, or approximately 70% of the assumed
offering price of $12 per share. In contrast, existing stockholders paid an
average price of $3.34 per share and, assuming an offering price of $12 per
share, will have, in the aggregate, achieved unrealized appreciation in their
stock in the amount of approximately $71.3 million. Investors will incur
additional dilution upon the exercise of outstanding stock options and
warrants.
16
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements" which may include
statements about our:
. business strategy;
. timing of and plans for the introduction or phase-out of services;
. enhancements;
. plans for hiring additional personnel;
. entering into sponsorships or distribution partnerships;
. anticipated sources of funds, including the proceeds from this offering,
to fund our operations for at least the 12 months following the date of
this prospectus; and
. plans, objectives, expectations and intentions contained in this
prospectus that are not historical facts.
When used in this prospectus, the words "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates" and similar expressions are generally
intended to identify forward-looking statements. Because these forward-looking
statements involve risks and uncertainties, actual results could differ
materially from those expressed or implied by these forward-looking statements
for a number of reasons, including those discussed under "Risk Factors" and
elsewhere in this prospectus. We assume no obligation to update any forward-
looking statements.
17
<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds of $27.3 million from the sale
of the 2,500,000 shares of common stock in this offering, assuming an initial
public offering price of $12 per share and after deducting estimated
underwriting discounts and offering expenses. While we cannot predict with
certainty how the proceeds of this offering will be used, we currently intend
to use them approximately as follows:
. $6.0 million for expansion of our sales force, marketing and distribution
activities;
. $9.0 million for expansion of our business operations, including
increased staffing, content production and technology infrastructure; and
. $12.3 million for general corporate purposes including working capital.
Pending these uses, the net proceeds of the offering will be invested in
short-term, interest-bearing investments or accounts.
The cost, timing and amount of funds we need cannot be precisely determined
at this time and will be based on numerous factors. Our board of directors has
broad discretion in determining how the proceeds of this offering will be
applied.
DIVIDEND POLICY
We have never paid cash dividends on our common stock and do not anticipate
paying such dividends in the foreseeable future. We currently intend to retain
any future earnings to develop and expand our business.
18
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999:
. on an actual basis;
. on a pro forma basis to reflect:
-- our proposed reincorporation in Delaware;
-- the net cash proceeds of approximately $10.9 million from the sale of
2,967,782 shares of Series C preferred stock at $3.88 per share on
April 14, 1999; and
-- the conversion of all outstanding shares of convertible preferred
stock to common stock; and
. on an as-adjusted basis after giving effect to our receipt of the
estimated net proceeds from the sale of the 2,500,000 shares of common
stock in this offering at an assumed public offering price of $12 per
share.
This table only presents summary information. In reading it, you should refer
to our financial statements and related notes, which are included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
March 31, 1999
----------------------------
Pro As
Actual Forma Adjusted
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Long-term debt--including current portion........ $ 439 $ 439 $ 439
-------- -------- --------
Stockholders' equity
Preferred stock, $0.001 par value; 5,000,000
shares authorized and none outstanding (pro
forma and as adjusted)........................ -- -- --
Convertible preferred stock, no par value;
8,108,750 shares authorized and 4,815,345
shares outstanding (actual); none authorized
and outstanding (pro forma and as adjusted)... 15,790 -- --
Common stock, $0.001 par value; 12,500,000
shares authorized and 447,496 issued and
outstanding (actual); 50,000,000 authorized
(pro forma and as adjusted); 8,230,623 issued
and outstanding (pro forma); 10,730,623 issued
and outstanding (as adjusted)................. -- 8 10
Additional paid in capital..................... 3,147 29,853 57,151
Unearned compensation.......................... (834) (834) (834)
Accumulated deficit............................ (12,750) (12,750) (12,750)
-------- -------- --------
Total stockholders' equity..................... 5,353 16,277 43,577
-------- -------- --------
Total capitalization............................. $ 5,792 $ 16,716 $ 44,016
======== ======== ========
</TABLE>
The common stock outstanding as shown above is based on shares outstanding as
of March 31, 1999 and excludes:
. 1,683,593 shares of common stock reserved for issuance pursuant to
outstanding options granted under our 1995 stock option plan;
. 1,136,411 shares of common stock reserved for issuance pursuant to future
grants under our 1995 stock option plan;
. 500,000 shares of common stock reserved for issuance under our employee
stock purchase plan; and
. 333,752 shares of common stock issuable upon exercise of outstanding
warrants or upon conversion of preferred stock issuable upon exercise of
outstanding warrants.
19
<PAGE>
DILUTION
Pro forma net tangible book value per share represents total assets less
intangible assets, net and total liabilities, after giving effect to our
receipt of the net cash proceeds of approximately $10,924,000 from our sale of
2,967,782 shares of Series C preferred stock at a price of $3.88 per share on
April 14, 1999, divided by the number of shares outstanding as of March 31,
1999, including the Series C preferred stock issued on April 14, 1999, and
assuming the conversion into common stock of all of our outstanding shares of
preferred stock. Our pro forma net tangible book value at March 31, 1999 was
approximately $11,167,000 or approximately $1.36 per share.
After giving effect to our sale of the 2,500,000 shares of common stock in
this offering at an assumed initial public offering price of $12 per share, and
after deducting the estimated fee payable to the underwriters and offering
expenses payable by us, our as adjusted net tangible book value as of March 31,
1999 would have been approximately $38,467,000 million, or $3.58 per share.
This represents an immediate dilution of $8.42 per share to new investors
purchasing shares in this offering. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $12.00
------
Pro forma tangible book value per share as of March 31,
1999....................................................... $1.36
Increase per share attributable to new investors............ $2.22
-----
As adjusted net tangible book value per share after this
offering................................................... $ 3.58
------
Dilution per share to new investors in this offering.......... $ 8.42
======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1999,
assuming conversion into common stock of all of our outstanding shares of
preferred stock including 2,967,782 shares of preferred stock issued on April
14, 1999, and after giving effect to this offering, the number of shares
purchased from us, the total consideration paid and the average price per share
paid by existing stockholders and by the new investors purchasing the shares
offered hereby assuming an initial public offering price of $12 per share:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 8,230,623 77% $27,479,000 48% $ 3.34
New public investors... 2,500,000 23% 30,000,000 52% 12.00
---------- --- ----------- ---
Total................ 10,730,623 100% $57,479,000 100%
========== === =========== ===
</TABLE>
This information is based on pro forma shares outstanding as of March 31,
1999 and excludes:
. 1,683,593 shares of common stock reserved for issuance pursuant to
outstanding options granted under our 1995 stock option plan;
. 1,136,411 shares of common stock reserved for issuance pursuant to future
grants under our 1995 stock option plan;
. 500,000 shares of common stock reserved for issuance under our employee
stock purchase plan; and
. 333,752 shares of common stock issuable upon exercise of outstanding
warrants or upon conversion of preferred stock issuable upon exercise of
outstanding warrants.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
Our selected consolidated financial data set forth below as of March 31, 1998
and 1999 and for the fiscal years ended March 31, 1997, 1998 and 1999 are
derived from our consolidated financial statements that have been audited by
PricewaterhouseCoopers LLP, independent accountants, and are included elsewhere
in this prospectus. Our selected consolidated financial data set forth below as
of March 31, 1996 and 1997 and for the period July 27, 1995 (inception) to
March 31, 1996 are derived from our consolidated financial statements that have
been audited by PricewaterhouseCoopers LLP, independent accountants, and are
not included in this prospectus. The following information is qualified by
reference to, and should be read in connection with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
financial statements and related notes, included in this prospectus.
<TABLE>
<CAPTION>
Fiscal Year
July 27, 1995 Ended March 31,
(inception) to -------------------------
March 31, 1996 1997 1998 1999
-------------- ------- ------- -------
<S> <C> <C> <C> <C>
Statement of Operations Data (in
thousands, except per share
amounts):
Net revenues......................... $ 196 $ 280 $ 1,156 $ 2,921
------ ------- ------- -------
Operating expenses:
Production, content, and product... 463 1,555 2,832 4,503
Sales and marketing................ 124 419 1,655 3,655
Research and development........... 52 176 276 469
General and administrative......... 43 129 291 518
------ ------- ------- -------
Total operating expenses.......... 682 2,279 5,054 9,145
------ ------- ------- -------
Loss from operations................. (486) (1,999) (3,898) (6,224)
Other income, net.................... 10 55 73 (9)
------ ------- ------- -------
Net loss............................. (476) (1,944) (3,825) (6,233)
Preferred dividend................... -- -- -- 271
------ ------- ------- -------
Net loss attributable to common
stockholders........................ $ (476) $(1,944) $(3,825) $(6,504)
====== ======= ======= =======
Basic and diluted net loss per share
attributable to common
stockholders........................ $(1.26) $ (3.84) $(10.20) $(16.62)
====== ======= ======= =======
Weighted average shares used in
computing basic and diluted net loss
per share attributable to common
stockholders........................ 376 507 375 391
====== ======= ======= =======
Pro forma basic and diluted net loss
per share attributable to common
stockholders (unaudited)............ $ (1.50)
=======
Weighted average shares used in
computing pro forma basic and
diluted net loss per share
attributable to common stockholders
(unaudited)......................... 4,328
=======
</TABLE>
<TABLE>
<CAPTION>
As of March 31, As of March 31, 1999
-------------------- ------------------------
Pro As
1996 1997 1998 Actual forma Adjusted
------ ------ ------ ------ ------- --------
Balance Sheet Data (in thousands): (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents....... $1,231 $2,638 $1,926 $ 754 $11,678 $38,978
Working capital (deficit)....... 1,150 2,560 1,894 (525) 10,399 37,699
Total assets.................... 1,340 2,834 2,707 7,808 18,372 46,032
Long-term liabilities, net of
current portion................ -- -- 95 75 75 75
Total stockholders' equity...... 1,247 2,697 2,194 5,353 16,277 43,577
</TABLE>
The pro forma information above reflects the net cash proceeds of
approximately $10.9 million from the sale of 2,967,782 shares of Series C
preferred stock on April 14, 1999.
The as adjusted information above is adjusted to give effect to our receipt
of the estimated net proceeds of $27.3 million from the sale of 2,500,000
shares of common stock in this offering at an assumed public offering price of
$12 per share.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and related notes included elsewhere in this prospectus.
In addition to historical information, the discussion in this prospectus
contains certain forward-looking statements that involve risks and
uncertainties. Salon's actual results could differ materially from those
anticipated by these forward-looking statements due to factors discussed under
"Risk Factors," "Business" and elsewhere in this prospectus.
Overview
Salon.com is a leading Internet media company that produces a network of ten
subject-specific, demographically-targeted Web sites and a variety of online
communities. Salon was incorporated in July 1995 and launched its initial Web
sites in November 1995. Circulation of Salon's original content has grown
consistently since inception to a total of approximately 1.2 million unique
users and 16.1 million page views in April 1999. Page views are the total
number of complete pages retrieved and viewed by visitors to Salon's network. A
unique user is an individual visitor to Salon's network. Salon calculates its
unique user and page view figures internally by analyzing the log files that
record traffic to Salon's network of Web sites. Unique users are calculated by
identifying the individual Internet protocol address of each domestic and
international user who visits the Salon network. Page views are calculated by
counting actual page views as recorded in Salon's log files. Since December
1998, these calculations have been performed automatically through the use of
Accrue software. Prior to that time, the log files were manually downloaded and
analyzed.
Through April 30, 1999, approximately 166,000 users had registered for
Salon's online communities, including approximately 104,000 for Table Talk and
62,000 for The Well.
Salon has incurred significant net losses and negative cash flows from
operations since its inception. As of March 31, 1999, Salon had an accumulated
deficit of approximately $12.8 million. Salon intends to continue to make
significant financial investments in content, marketing and promotion and the
development of technology and infrastructure. As a result, Salon believes that
it will incur additional operating losses and negative cash flows from
operations for the foreseeable future.
During the period from its inception in July 1995 to date, Salon's activities
have primarily involved the following:
. recruiting editorial and business personnel;
. creating and expanding content;
. licensing content to distribution partners;
. establishing relationships with advertisers and sponsors;
. developing and enhancing Salon's technical infrastructure;
. developing Salon's online retail capabilities; and
. raising capital.
To date, Salon's revenues have been derived primarily from the sale of banner
advertising, advertising sponsorships and electronic commerce sponsorships. To
a lesser extent, Salon has derived revenues from the sale of goods and services
through its online store, Salon Shopping, and from the syndication of its
original content to other media outlets.
Salon's advertising rates vary depending primarily on the particular content
site on which advertisements are placed, the total number of impressions
purchased and the length of the advertiser's commitment. Advertising revenue is
recognized in the period in which the advertisement is displayed, provided that
no significant obligations remain and collection of the resulting receivable is
probable. Revenues related to upfront fees in connection with advertising
sponsorships and electronic commerce sponsorships are recognized ratably
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over the sponsorship term. Certain agreements may provide that Salon receives
commissions on revenues generated from electronic commerce transactions and
shares in advertising revenue generated on co-branded pages. These revenues are
recognized by Salon upon notification from the advertiser or distribution
partner which notification is generally received quarterly.
Advertising revenues include barter revenues, which are the exchange by Salon
of advertising space on Salon's Web sites for reciprocal advertising space on
other Web sites or the exchange of goods and services. In the fiscal year ended
March 31, 1999, barter revenues represented 16% of Salon's advertising
revenues. Revenues from these barter transactions are recorded as advertising
revenues at the estimated fair value of the advertisements received or
delivered, whichever is more reliably measurable, and are recognized when the
advertisements are run on Salon's Web sites. Barter expenses are recorded in
sales and marketing in the consolidated statement of operations when Salon's
advertisements are run on the reciprocal Web sites, which is typically in the
same period as when advertisements are run on Salon's Web sites. The percentage
of revenues received from barter transactions has increased from 0% of
advertising revenues in the fiscal year ended March 31, 1997 to 7% in the
fiscal year ended March 31, 1998 and 16% in the fiscal year ended March 31,
1999. Salon believes that these barter transactions have been important to the
establishment of the Salon brand and expects to continue to engage in these
transactions in the future.
Revenues related to the sale of goods from Salon Shopping are recognized when
goods are shipped. Revenues related to the syndication and licensing of Salon
content to other media outlets are recognized on notification that the content
has been published. Subscription revenues are recognized ratably over the
period that services are to be provided.
Substantially all of Salon's content, as well as participation in Table Talk
and Salon's third-party sponsored Internet communities are free of charge to
users. In October 1998, Salon launched Salon Members, a paid membership program
that provides subscribers with discounts on purchases through Salon, access to
a members-only live chat session, free e-mail and other benefits. In March
1999, Salon acquired The Well, a paid online community that charges its
participants a monthly subscription fee. Salon expects to continue to derive a
portion of its revenues from fees charged to Salon Members and subscribers to
The Well.
Recent Events
Sale of Series C Convertible Preferred Stock
In April 1999, Salon completed the sale of 2,967,782 shares of Series C
preferred stock at a price of $3.88 per share, with total proceeds of
approximately $11.5 million. Each share of Series C preferred stock is
convertible into one share of common stock upon closing of this offering. The
Series C preferred stock has identical anti-dilution and dividend preferences
to Salon's Series A and Series B preferred stock, and priority as to
liquidation over common stock and all other series of preferred stock. 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 $11.5 million, which will be recorded as a preferred
dividend in April 1999. Upon the closing of the sale of the Series C preferred
stock on April 14, 1999, Salon's cash and cash equivalents totaled
approximately $12.3 million.
Acquisition of The Well LLC
Salon acquired The Well LLC in March 1999. The Well LLC has been operating
The Well since July 1997. The Well is an online community that has been in
existence since 1985, and which was previously operated by Whole Earth
'Lectronic Link, Inc. Through this acquisition, Salon obtained a long-standing
online community business, increased its presence as a provider of established
online communities and created a stronger platform for future growth in the
development of online communities.
Salon's acquisition of The Well LLC was accounted for using the purchase
method of accounting. In connection with the acquisition, Salon recorded
intangibles and goodwill of approximately $5.1 million which are being
amortized on a straight line basis over five years. The future operating and
financial performance of Salon will depend in part on its ability to integrate
and operate The Well LLC successfully and to enhance the operating results of
The Well LLC's business.
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Salon expects to continue to enter into similar business acquisitions that
may result in similar or greater non-cash charges. Because Internet business
acquisitions typically involve significant amounts of intangible assets, future
operating results may be adversely affected by amortization of the intangible
assets acquired.
Salon Results of Operations
The following table sets forth Salon's results of operations expressed as a
percentage of net revenues:
<TABLE>
<CAPTION>
Fiscal Year
Ended
March 31,
------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net revenues................ 100 % 100 % 100 %
---- ---- ----
Operating expenses:
Production, content and
product.................. 557 245 154
Sales and marketing....... 150 143 125
Research and development.. 63 24 16
General and
administrative........... 46 25 18
---- ---- ----
Total operating
expenses............... 816 437 313
---- ---- ----
Loss from operations........ (716) (337) (213)
Other income, net........... 20 6 0
---- ---- ----
Net loss.................... (696)% (331)% (213)%
==== ==== ====
</TABLE>
Fiscal Years Ended March 31, 1999 and 1998
Net Revenues
Salon's net revenues consist of the following:
. Banner advertising revenues and revenues related to sponsorship
advertising;
. Electronic commerce sponsorship revenues, including slotting fees and
commissions related to sales of products and services offered by online
retailing partners through Salon;
. Revenues from the sale of products through Salon Shopping;
. Revenues derived from the syndication of Salon's original content and the
development of content for media sources other than Salon's Web sites;
and
. Fees derived from paid subscription and membership programs.
Salon's net revenues increased 153% to approximately $2.9 million in the
fiscal year ended March 31, 1999 from approximately $1.2 million in the fiscal
year ended March 31, 1998. The increase in net revenues is primarily
attributable to an increase in revenues derived from banner advertisements of
approximately $1.0 million, advertising sponsorships of approximately $435,000
and electronic commerce sponsorships of approximately $166,000. Salon expects
that sponsorship and advertising revenues will continue to represent the most
significant portion of its net revenues for the foreseeable future. Net
revenues derived from subscription fees are expected to increase in future
periods as subscription fees related to membership in The Well are recognized
by Salon.
Net revenues include revenues recognized from advertising barter transactions
of approximately $472,000 in the fiscal year ended March 31, 1999 and
approximately $75,000 in the fiscal year ended March 31, 1998.
Operating Expenses
Salon's operating expenses consist of the following:
. Production, content and product expenses;
. Sales and marketing expenses;
. Research and development expenses; and
. General and administrative expenses.
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Salon's operating expenses increased 81% to approximately $9.1 million in the
fiscal year ended March 31, 1999 from approximately $5.1 million in the fiscal
year ended March 31, 1998, but decreased as a percentage of net revenues to
313% from 437% over these respective periods. The increase in operating
expenses for the fiscal year ended March 31, 1999 is primarily attributable to
increased production, content and product expenses of approximately $1.7
million, as well as increased sales and marketing expenses of approximately
$2.0 million. The decrease in operating expenses as a percentage of net
revenues is primarily attributable to an increase in sales of sponsorships and
advertising without a corresponding increase in operational expenses and the
fact that some operating expenses are relatively fixed. Salon expects that
operating expenses will continue to increase substantially as it increases the
scope of its content and communities, expands its marketing efforts and further
develops its technology and infrastructure.
Production, Content and Product Expenses. Production, content and product
expenses consist primarily of payroll and related expenses for Salon's
editorial, artistic and production staff, payments to freelance writers and
artists, and telecommunications and computer related expenses for the support
and delivery of Salon's Web sites. Also included in production, content and
product expenses are costs associated with electronic commerce transactions,
including the costs of product inventory and distribution.
Production, content and product expenses increased 59% to approximately $4.5
million in the fiscal year ended March 31, 1999 from approximately $2.8 million
in the fiscal year ended March 31, 1998, but decreased as a percentage of net
revenues to 154% from 245% over these respective periods. The increase in
production, content and product expenses for the fiscal year ended March 31,
1999 is primarily attributable to increased costs relating to growth in Salon's
editorial and production staff of approximately $838,000 and payments to
freelance writers and artists of approximately $168,000. The decrease in
production, content and product expenses as a percentage of net revenues is
primarily attributable to an increase in sales of sponsorships and advertising,
and due to the fact that some production and content expenses are relatively
fixed and may be utilized to deliver an expanding number of advertisements.
Salon anticipates that its production, content and product expenses will
continue to grow substantially as it increases staffing to expand the scope and
distribution of its Web sites and online communities and increases its online
retailing efforts.
Sales and Marketing Expenses. Sales and marketing expenses consist of payroll
and related expenses, including commissions, travel expenses and other costs
associated with Salon's advertising and sponsorship sales force, as well as
Salon related advertising, promotional and distribution costs. Sales and
marketing expenses increased 121% to approximately $3.7 million in the fiscal
year ended March 31, 1999 from approximately $1.7 million in the fiscal year
ended March 31, 1998, but decreased as a percentage of net revenues to 125%
from 143% over these respective periods. Sales and marketing expenses include
expenses incurred from barter transactions of approximately $472,000 for the
fiscal year ended March 31, 1999 and approximately $75,000 for the fiscal year
ended March 31, 1998. The increase in sales and marketing expenses is primarily
attributable to additional hiring of sales and marketing personnel of
approximately $812,000 and additional marketing costs associated with barter
transactions and the distribution of Salon content of approximately $748,000.
The decrease in sales and marketing expenses as a percentage of net revenues is
primarily attributable to increased sales of advertisements and sponsorships.
Salon anticipates that sales and marketing expenses will increase substantially
in the future as it increases its sales force and undertakes advertising and
other marketing campaigns to further promote the Salon brand and attempt to
increase revenue.
Research and Development Expenses. Research and development expenses consist
of costs associated with the development of technology, including Salon's
publishing platform software and archival database. Research and development
expenses increased 70% to approximately $469,000 in the fiscal year ended
March 31, 1999 from approximately $276,000 in the fiscal year ended March 31,
1998, but decreased as a percentage of net revenues to 16% from 24% over these
respective periods. The increase in research and development expenses is
primarily attributable to salary and payroll related expenses for the design
and development of a new publishing platform and advertising delivery system
and an increase in technical support staff. The decrease in research and
development expenses as a percentage of net revenues is primarily
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attributable to an increase in sales of advertising and sponsorships. Salon
expects that research and development expenses will continue to increase
substantially in the future as it further develops and refines its publishing
platform, advertising delivery technology and online retailing capabilities.
General and Administrative Expenses. General and administrative expenses
consist primarily of payroll and related expenses and related costs for general
corporate functions. General and administrative expenses increased 78% to
approximately $518,000 in the fiscal year ended March 31, 1999 from
approximately $291,000 in the fiscal year ended March 31, 1998, but decreased
as a percentage of net revenues to 18% from 25% over these respective periods.
The increase in general and administrative expenses is primarily attributable
to salary and related expenses for additional personnel of approximately
$112,000 and higher professional fees of approximately $174,000. The decrease
in general and administrative expenses as a percentage of net revenues is
primarily attributable to an increase in advertising and sponsorship sales and
due to the fact that certain general and administrative expenses are relatively
fixed. Salon expects that general and administrative expenses will continue to
increase as it expands its operations and incurs additional costs related to
becoming a public company.
Other Income, Net
Other income consists primarily of interest earned on Salon's cash, cash
equivalents and short term investments, offset by interest expense on
borrowings. Other expense, net was approximately $9,000 in the fiscal year
ended March 31, 1999. Other income, net was approximately $73,000 in the fiscal
year ended March 31, 1998. The decrease in other income in the aggregate is
primarily attributable to a decrease in the amount of interest earned by Salon
due to a decrease in Salon's cash and cash equivalents and an increase in
interest expense associated with additional borrowing under Salon's line of
credit.
Income Taxes
No provision for federal and state income taxes has been recorded as Salon
has incurred net operating losses through the fiscal year ended March 31, 1999.
As of March 31, 1999, Salon had approximately $11.2 million of federal and
approximately $8.7 million of state net operating loss carryforwards available
to offset future taxable income each of which will expire in 2019 and 2006. Due
to the change in Salon's ownership interests in connection with this offering
and prior private placements, Salon's use of these federal and state net
operating loss carryforwards may be subject to certain annual limitations.
Fiscal Years Ended March 31, 1998 and 1997
Net Revenues
Net revenues increased 314% to approximately $1.2 million in the fiscal year
ended March 31, 1998 from approximately $280,000 in the fiscal year ended March
31, 1997. The increase in net revenues is primarily attributable to an increase
in revenues derived from banner advertisements of approximately $490,000 and
advertising sponsorships of approximately $176,000. Net revenues include
revenues recognized from barter transactions of approximately $75,000 for the
fiscal year ended March 31, 1998 and zero for the fiscal year ended March 31,
1997.
Operating Expenses
Operating expenses increased 122% to approximately $5.1 million in the fiscal
year ended March 31, 1998 from approximately $2.3 million in the fiscal year
ended March 31, 1997, but decreased as a percentage of net revenues to 437%
from 815% over these respective periods. The increase in operating expenses for
the fiscal year ended March 31, 1998 is primarily attributable to increased
production, content and product expenses of approximately $1.3 million as well
as increased sales and marketing expenses of approximately $1.2 million. The
decrease in operating expenses as a percentage of net revenues is primarily
attributable to an increase
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in sales of sponsorships and advertising without a corresponding increase in
operational expenses and the fact that certain production expenses are
relatively fixed.
Production, Content and Product Expenses. Production, content and product
expenses increased 82% to approximately $2.8 million for the fiscal year ended
March 31, 1998 from approximately $1.6 million in the fiscal year ended March
31, 1997, but decreased as a percentage of net revenues to 245% from 557% in
these respective periods. The increase in production, content and product
expenses for the year ended March 31, 1998 is primarily attributable to
increased costs relating to growth in Salon's editorial and production staff of
approximately $573,000 and payments to freelance writers and artists of
approximately $418,000. The decrease in production, content and product
expenses as a percentage of net revenues is primarily attributable to an
increase in sales of advertising and sponsorships and the fact that some
production and content expenses are relatively fixed and may be utilized to
deliver an expanding number of advertisements.
Sales and Marketing Expenses. Sales and marketing expenses increased 295% to
approximately $1.7 million in the fiscal year ended March 31, 1998 from
approximately $419,000 in the fiscal year ended March 31, 1997, but decreased
as a percentage of net revenues to 143% from 150% over these respective
periods. Sales and marketing expenses include expenses incurred from barter
transactions of approximately $75,000 for the fiscal year ended March 31, 1998
and zero for the fiscal year ended March 31, 1997. The increase in sales and
marketing expenses is primarily attributable to additional hiring of sales and
marketing personnel of approximately $639,000 and barter advertising of
approximately $75,000.
Research and Development Expenses. Research and development expenses
increased 57% to approximately $276,000 in the fiscal year ended March 31, 1998
from approximately $176,000 in the fiscal year ended March 31, 1997, but
decreased as a percentage of net revenues to 24% from 63% over these respective
periods. The increase in research and development expenses is primarily
attributable to payroll and related expenses for upgrading and maintaining
Salon's Web site infrastructure. The decrease in research and development
expenses as a percentage of net revenues is primarily attributable to an
increase in sales of advertising and sponsorships.
General and Administrative Expenses. General and administrative expenses
increased 126% to approximately $291,000 in the fiscal year ended March 31,
1998 from approximately $129,000 in the fiscal year ended March 31, 1997, but
decreased as a percentage of net revenues to 25% from 46% over these respective
periods. The increase in general and administrative expenses is primarily
attributable to payroll and related expenses for additional personnel of
approximately $67,000 and higher professional fees of approximately $31,000.
The decrease in general and administrative expenses as a percentage of net
revenues is primarily attributable to an increase in sales of advertising and
sponsorships and the fact that some general and administrative expenses are
relatively fixed.
Other Income, Net
Other income increased 33% to approximately $73,000 in the fiscal year ended
March 31, 1998 from approximately $55,000 in the fiscal year ended March 31,
1997. The increase in other income is primarily attributable to an increase in
the amount of interest earned by Salon due to an increase in Salon's cash and
cash equivalents.
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The Well LLC Results of Operations
The following table sets forth The Well LLC's and its predecessor business'
results of operations expressed as a percentage of net revenues. For purposes
of the following discussion, results of operations for the predecessor business
for the period January 1, 1997 through June 30, 1997 and for The Well LLC for
the period July 1, 1997 through December 31, 1997 are combined.
<TABLE>
<CAPTION>
The Well LLC,
Predecessor period from The Well LLC,
Business, period July 1 to Combined, year year ended
from January 1 December 31, ended December December 31,
to June 30, 1997 1997 31, 1997 1998
---------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Subscription revenues... 100% 100% 100% 100%
--- --- --- ---
Operating expenses
Cost of subscription
revenues............. 44 46 46 45
Selling and
marketing............ 19 17 18 16
General and
administrative....... 53 62 57 53
--- --- --- ---
Total operating
expenses........... 116 125 121 114
--- --- --- ---
Net loss................ (16)% (25)% (21)% (14)%
=== === === ===
</TABLE>
Fiscal Years Ended December 31, 1998 and 1997
Subscription Revenues
Subscription revenues consists of conferencing service revenues derived from
monthly subscription fees charged to members of The Well LLC's online
community. Net revenues decreased 6% to approximately $485,000 in the year
ended December 31, 1998 from approximately $518,000 in the year ended December
31, 1997. The decrease in subscription revenues is primarily attributable to a
decrease in subscription fees resulting from a decrease in registered members
of The Well LLC's online community.
Cost of Subscription Revenues
Cost of subscription revenues consists primarily of telecommunications and
computer expenses. Cost of revenues decreased to approximately $218,000 or 45%
of subscription revenues in the year ended December 31, 1998 from approximately
$237,000 or 46% of subscription revenues in the year ended December 31, 1997.
The decrease in cost of subscription revenues is primarily attributable to
reduced fees from The Well LLC's server maintenance provider.
Selling and Marketing Expenses
Selling and marketing expenses consist of payroll and related expenses,
including commissions and other costs associated with The Well LLC's
advertising and promotional costs. Sales and marketing expenses decreased to
approximately $78,000 or 16% of subscription revenues in the year ended
December 31, 1998 from approximately $93,000 or 18% of subscription revenues in
the year ended December 31, 1997. The decrease in selling and marketing
expenses in the aggregate and as a percentage of subscription revenues is
primarily attributable to reduced expenses for community development and
promotional materials.
General and Administrative Expenses
General and administrative expenses consist primarily of payroll and related
expenses for general corporate functions. General and administrative expenses
decreased to approximately $258,000 or 53% of subscription revenues in the year
ended December 31, 1998 from approximately $297,000 or 57% of subscription
revenues in the year ended December 31, 1997. The decrease in general and
administrative expenses in the aggregate and as a percentage of subscription
revenues is primarily attributable to operating efficiencies in general
corporate functions.
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Selected Quarterly Results of Operations
The following table presents Salon's results of operations for each of the
last seven quarters. The quarterly information is unaudited, but management
believes that the information regarding these quarters has been prepared on the
same basis as the audited financial statements appearing elsewhere in this
prospectus. In the opinion of management, all necessary adjustments have been
included to present fairly the unaudited quarterly results when read in
conjunction with the financial statements and related notes appearing elsewhere
in this prospectus.
Salon Quarterly Results of Operations
<TABLE>
<CAPTION>
September 30, December 31, March 31, June 30, September 30, December 31, March 31,
1997 1997 1998 1998 1998 1998 1999
------------- ------------ --------- -------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ $ 212 $ 381 $ 467 $ 408 $ 619 $ 1,031 $ 863
------- ------ ------- ------- ------- ------- -------
Production, content and
product................ 715 684 764 913 1,032 1,190 1,368
Sales and marketing..... 416 396 446 747 850 983 1,075
Research and
development............ 70 66 75 88 101 116 164
General and
administrative......... 75 72 79 98 111 129 180
------- ------ ------- ------- ------- ------- -------
Total operating
expenses............. 1,276 1,218 1,364 1,846 2,094 2,418 2,787
------- ------ ------- ------- ------- ------- -------
Loss from operations.... (1,064) (837) (897) (1,438) (1,475) (1,387) (1,924)
Other income (expense),
net.................... 27 10 19 13 (9) (2) (11)
------- ------ ------- ------- ------- ------- -------
Net loss................ (1,037) (827) (878) (1,425) (1,484) (1,389) (1,935)
Preferred dividend...... -- -- -- -- 213 58 --
------- ------ ------- ------- ------- ------- -------
Net loss attributable to
common stockholders.... $(1,037) $ (827) $ (878) $(1,425) $(1,697) $(1,447) $(1,935)
======= ====== ======= ======= ======= ======= =======
</TABLE>
The increase in net revenues during the quarter ended December 31, 1998, as
compared to the immediately preceding quarter ended September 30, 1998, was due
to the growth of the Internet as an advertising medium and seasonal promotions
related to holiday shopping and planning. In addition, the fourth calendar
quarter is seasonally strong for most kinds of advertising. Net revenues for
the quarter ended March 31, 1999 increased over the year-ago quarter ended
March 31, 1998 and decreased as compared to the quarter ended December 31,
1998. The decrease from the immediately preceding quarter was primarily because
the first calendar quarter follows the seasonally strong fourth calendar
quarter holiday shopping season. In addition, Salon's sales force and sales
management team were reorganized during the quarter ended March 31, 1999, as
part of an effort to upgrade and expand the selling team.
Because Salon manages its business to achieve long-term strategic objectives,
it may make decisions that it believes will enhance its long-term growth and
profitability, even if such decisions adversely affect quarterly earnings.
Salon believes that advertising sales in traditional media, such as television,
generally are lower in the first and third calendar quarters of each year, and
that advertising expenditures fluctuate significantly with economic cycles.
Depending on the extent to which the Internet is accepted as an advertising
medium, seasonality and cyclicality in the level of Internet advertising
expenditures could become more pronounced. These factors could have a material
adverse affect on Salon's business, results of operations and financial
condition. Historical results are not necessarily indicative of the results to
be expected in the future, and results of interim periods are not necessarily
indicative of results for the entire year. The market price of Salon's common
stock may fluctuate significantly in response to these quarter-to-quarter
variations.
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Liquidity and Capital Resources
Salon has funded its capital requirements primarily through the sale of
preferred stock and a mix of short-term and long-term borrowing. Cash and cash
equivalents totaled approximately $754,000 at March 31, 1999, as compared to
$1.9 million at March 31, 1998.
Net cash used for operations was approximately $4.5 million in the fiscal
year ended March 31, 1999, as compared to approximately $3.5 million in the
fiscal year ended March 31, 1998 and approximately $1.8 million in the fiscal
year ended March 31, 1997. The principal use of cash from operations was the
net loss generated from operations due to the expansion of Salon's editorial,
marketing, sales and production staff.
Net cash used for investing activities totaled approximately $466,000 in the
fiscal year ended March 31, 1999, as compared to approximately $382,000 for the
fiscal year ended March 31, 1998 and approximately $81,000 for the fiscal year
ended March 31, 1997. Net cash used for investing activities in each of these
respective periods consisted primarily of purchases of certain property and
equipment, including computer equipment.
Net cash provided by financing activities was approximately $3.8 million in
the fiscal year ended March 31, 1999, as compared to approximately $3.2 million
in the fiscal year ended March 31, 1998 and approximately $3.3 million in the
fiscal year ended March 31, 1997. The principal sources of cash provided by
financing activities in each of these respective periods was the sale of shares
of Salon's preferred stock, as described below. To a lesser extent, cash
provided by financing activities also resulted from borrowings under Salon's
line of credit in the fiscal years ended March 31, 1999 and 1998.
In September and November 1998 and April 1999, Salon raised approximately
$2.75 million, $750,000 and $11.5 million through the issuance of 3,869,844
shares of its Series C preferred stock at a price of $3.88 per share. Each
share of Series C preferred stock is convertible into one share of common
stock. The Series C preferred stock has anti-dilution and dividend preferences
similar to Salon's Series A and Series B preferred stock, and priority as to
liquidation over common stock and all other series of preferred stock. The
Series C preferred stock will convert into common stock upon closing of this
offering.
In November 1997, Salon raised approximately $3.0 million through the
issuance of 949,365 shares of its Series B preferred stock at a price of $3.16
per share. Each share of Series B preferred stock is convertible into one share
of common stock. The Series B preferred stock has anti-dilution and dividend
preferences similar to Salon's Series A and Series C preferred stock, and
shares liquidation preferences with shares of Salon's Series A preferred stock.
The Series B preferred stock will convert into common stock upon closing of
this offering.
In December 1995, August 1996, and February 1997 Salon raised an aggregate of
approximately $5.0 million through the issuance of 2,500,000 shares of its
Series A preferred stock at a price of $2.00 per share. Each share of Series A
Preferred stock is convertible into one share of common stock. The Series A
preferred stock has anti-dilution and dividend preferences similar to Salon's
Series B and Series C preferred stock, and shares liquidation preferences with
shares of Salon's Series B preferred stock. The Series A preferred stock will
convert into common stock upon closing of this offering.
In April 1998, Salon entered into a borrowing agreement with a bank which
provides for revolving loans of the lesser of $250,000 plus 80% of eligible
accounts receivable as defined by the bank, or $500,000. The revolving
borrowing amount was increased to a maximum of $1,000,000 upon the closing of
Salon's Series C financing on April 14, 1999. These borrowings bear interest at
the bank's prime rate. The agreement also provides for an equipment term loan
up to $300,000. Borrowings under this equipment term loan bear interest at the
bank's prime rate plus 0.5%. As of March 31, 1999, Salon had drawn
approximately $211,000 against the equipment loan and approximately $221,000
against the revolving borrowing amount.
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In April 1997, Salon entered into a borrowing agreement with the same bank
referenced in the previous paragraph which provides for borrowing up to
$500,000 for working capital and equipment advances. Borrowings bear interest
at the bank's prime rate plus 0.5% and are collaterized by all assets of Salon,
including intellectual property. As of March 31, 1998 and 1999, the principal
balances for equipment advances outstanding under this agreement were
approximately $198,000 and $99,000, bearing interest at 8.25%. Borrowings are
repayable in monthly installments of principal plus accrued interest through
March 31, 2000. According to the terms of the agreement, Salon is required to
comply with financial covenants including net worth and working capital levels.
Salon's capital requirements depend on numerous factors, including the
success of Salon's strategies for generating revenues and the amount of
resources it devotes to investments in its network, sales, marketing and brand
promotion. Salon's expenditures have substantially increased since inception as
its operations and staff have grown and Salon anticipates that its expenditures
will continue to increase substantially for the foreseeable future. In
addition, Salon will continue to evaluate possible investments in businesses,
products and technologies complementary to its existing business.
Salon currently anticipates that its available cash resources, combined with
the net proceeds of this offering, will be sufficient to meet its anticipated
needs for working capital and capital expenditures for at least the 12 months
following the date of this prospectus. Salon may need to raise additional
funds, however, in order to fund more rapid expansion, to develop new or
enhance existing services, to respond to competitive pressures or to acquire
complementary businesses, products or technologies. If Salon raises additional
funds by selling equity securities, the percentage ownership of Salon's
stockholders will be reduced and its stockholders may experience additional
dilution. Salon cannot be sure that additional financing will be available on
terms favorable to Salon, or at all. If adequate funds are not available on
acceptable terms, Salon's ability to fund expansion, react to competitive
pressures, or take advantage of unanticipated opportunities would be
substantially limited. If this occurred, Salon's business would be
significantly harmed.
Year 2000 Readiness
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and software used by many companies and governmental agencies may need
to be upgraded to comply with these year 2000 requirements or risk system
failure or miscalculations that could cause disruptions of normal business
activities.
State of Readiness
Salon has made a preliminary assessment of the year 2000 readiness of its
operating financial and administrative systems, including the hardware and
software that support Salon's systems. Salon's assessment plan consists of:
. quality assurance testing of its internally developed proprietary
software;
. contacting third-party vendors and licensors of material hardware,
software and services that are both directly and indirectly related to
the delivery of Salon's services to its users;
. contacting vendors of third-party systems;
. assessing repair or replacement requirements;
. implementing repair or replacement; and
. creating contingency plans in the event of year 2000 failures.
Salon's year 2000 task force is currently conducting an inventory of and
developing testing procedures for all software and other systems that it
believes might be affected by year 2000 issues. Since third parties
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developed and currently support many of the systems that Salon uses, a
significant part of this effort will be to ensure that these third-party
systems are year 2000 ready. Salon plans to confirm this compliance through a
combination of the representation by these third parties of their products'
year 2000 readiness, as well as specific testing of these systems. Salon plans
to complete this process prior to the end of the third calendar quarter of
1999. Until such testing is completed and such vendors and providers are
contacted, Salon will not be able to completely evaluate whether its systems
will need to be revised or replaced.
Costs
To date, Salon has spent an immaterial amount on year 2000 readiness issues,
but expects to incur an additional $350,000 to $500,000 in the future in
connection with identifying, evaluating and addressing year 2000 readiness
issues. Most of Salon's expenses have related to, and are expected to continue
to relate to, the operating costs associated with time spent by employees and
consultants in the evaluation process and year 2000 readiness matters
generally. Such expenses, if higher than anticipated, could have a material
adverse effect on Salon's business, results of operations and financial
condition.
Risks
Salon is not currently aware of any year 2000 readiness problems relating to
its internally-developed proprietary systems that would have a material adverse
effect on Salon's business. Salon may discover year 2000 readiness problems in
these systems that will require substantial revision. In addition, third-party
software, hardware or services incorporated into Salon's material systems may
need to be revised or replaced, all of which could be time-consuming and
expensive. The failure of Salon to fix or replace its internally developed
proprietary software or third-party software, hardware or services on a timely
basis could result in lost revenues, increased operating costs, the loss of
users, advertisers or sponsors and other business interruptions, any of which
could have a material adverse effect on Salon's business, results of operations
and financial condition. Moreover, the failure to adequately address year 2000
readiness issues in its internally developed proprietary software could result
in claims of mismanagement, misrepresentation or breach of contract and related
litigation, which could be costly and time-consuming to defend.
Salon is heavily dependent on a significant number of third-party vendors to
provide both network services and equipment. A significant year 2000-related
disruption of the services or equipment that third-party vendors provide to
Salon could cause Salon's users, advertisers or sponsors to consider seeking
alternate content providers or cause an unmanageable burden on its technical
support, which in turn could materially and adversely affect Salon's business.
In addition, governmental agencies, utility companies, Internet access
companies, third-party service providers and others outside of Salon's control
may not be year 2000 ready. The failure by such entities to be year 2000 ready
could result in a systemic failure beyond the control of Salon, such as a
prolonged Internet, telecommunications or electrical failure, which could also
prevent Salon from delivering its services to its customers, decrease the use
of the Internet or prevent users from accessing its Web sites which could have
a material adverse effect on Salon's business.
Contingency Plan
As discussed above, Salon is engaged in an ongoing year 2000 assessment and
has not yet developed any contingency plans. The results of Salon's year 2000
simulation testing and the responses received from third-party vendors and
service providers will be taken into account in determining the nature and
extent of any contingency plans Salon adopts.
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Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosure About Segments of an Enterprise and Required Information, which
established standards for reporting information about operating segments in
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic area and major customers.
The adoption of SFAS No. 131 in fiscal 1999 did not have an impact on Salon's
financial statement disclosures since Salon operates in only one business
segment.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use. SOP 98-1 is effective for financial
statements for years beginning after December 15, 1998. SOP 98-1 provides
guidance over accounting for computer software developed or obtained for
internal use including the requirement to capitalize specified costs and
amortization of such costs. Salon does not expect the adoption of this standard
to have a material impact on Salon's results of operations, financial position
or cash flows.
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-up
Activities. SOP 98-5, which is effective for fiscal years beginning after
December 15, 1998, provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. As Salon has historically
expensed these costs, the adoption of SOP 98-5 is not expected to have a
significant impact on Salon's results of operations, financial position or cash
flows.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which established accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, which are collectively referred to as derivatives,
and for hedging activities. SFAS No. 133 is effective for all fiscal quarters
for fiscal years beginning after June 15, 1999. Salon is assessing the
potential impact of this pronouncement on its financial statements; however,
Salon does not expect any significant impact since Salon currently does not
have any derivative instruments and does not anticipate acquiring any.
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BUSINESS
Overview
Salon.com is a leading Internet media company that produces a network of ten
subject-specific, demographically-targeted Web sites and a variety of online
communities. Salon believes that its network of Web sites combines the
thoughtfulness of print, the timeliness of television and the interactivity of
talk radio. Salon's ten content sites provide news, features, interviews and
regular columnists on specific topics, from arts and entertainment to parenting
and health. The main entry and navigation point to Salon's various content
sites is Salon's home page at www.salon.com. Salon's online communities allow
users to interact and discuss Salon content and other topics via electronic
messaging. Salon's online communities include Table Talk, a free interactive
forum, and The Well, a paid subscription community. Because of Salon's
reputation for community building, Salon also has agreed with third parties to
host communities within its network. Salon's users can access Table Talk or The
Well through www.salon.com or through Salon's ten content Web sites.
Salon believes that its original, award-winning content and highly regarded
interactive communities allow Salon to attract and retain users who are
younger, more affluent, better educated and more likely to make online
purchases than typical Internet users. Salon believes its user profile makes
its network of Web sites and online communities a valuable media property for
advertisers and retailers who are increasingly allocating marketing resources
to target consumers online.
In April 1999, approximately 1.2 million unique users visited Salon's network
of Web sites, generating about 16.1 million page views, compared to
approximately 542,000 unique users and 7.6 million page views in April 1998. A
unique user is an individual visitor to Salon's network. Page views are the
total number of complete pages retrieved and viewed by visitors to Salon's
network. Salon calculates its unique user and page view figures internally by
analyzing the log files that record traffic to Salon's network of Web sites.
Unique users are calculated by identifying the individual Internet protocol
address of each domestic and international user who visits the Salon network.
Page views are calculated by counting actual page views as recorded in Salon's
log files. Since December 1998, these calculations have been performed
automatically through the use of Accrue software. Prior to that time, the log
files were manually downloaded and analyzed.
Through April 30, 1999, approximately 166,000 users had registered for
Salon's interactive communities, compared to approximately 146,000 registered
users as of April 30, 1998. Through April 30, 1999, approximately 104,000 users
had registered for Salon's Table Talk forum, compared to approximately
86,000 registered users as of April 30, 1998. Through April 30, 1999,
approximately 62,000 users had registered for The Well, compared to
approximately 60,000 registered users as of April 30, 1998.
Through April 30, 1999, Salon had approximately 190 advertisers and
advertising sponsors. Salon has also recently begun to extend its electronic
commerce efforts throughout its network and to develop electronic commerce
sponsorships and its own online retailing capabilities through Salon Shopping.
Salon believes that the online spending habits of its users present
opportunities for Salon to capture additional revenues, both within Salon
Shopping and on the Web pages of its commercial partners.
Industry Background
The following discussion of Salon's industry contains market projections
prepared by various research firms. These market projections may not be
achieved.
Growth in Internet Usage
The Internet is fast becoming one of the most important mediums for global
communication and business, allowing millions of people to gather and transfer
information instantly. International Data Corporation, a market research firm,
predicts that worldwide Internet use will grow to 319.8 million users in 2002
from
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68.7 million users in 1997, representing 366% growth over this period. The
growth in Internet users is driven by numerous factors, including:
. increased public awareness of the Internet;
. the growing base of personal computers and improved Internet access;
. increased quantity and quality of Web content; and
. growing selection and acceptance of electronic commerce.
The Internet provides a unique opportunity for content providers to reach a
broad base of readers on a real-time basis with a diverse body of information.
Unlike traditional media, the Internet permits dissemination of content without
geographic limits, print production costs or broadcast capacity constraints.
Growth in Online Advertising
The Internet is an attractive medium for advertisers because it allows more
flexibility, interactivity and measurement capabilities than traditional media,
including print, television and radio, and provides users with immediate access
to information about advertisers and their products. For example, the Internet
allows advertisers to change messages frequently in response to market
developments or current events. The Internet also allows advertisers to gather
demographic information about users and to deliver targeted messages to
specific consumer groups. According to Jupiter Communications, an independent
industry research firm, total Internet advertising revenues grew from $300
million in 1996 to $1.9 billion in 1998. Jupiter Communications projects total
Internet advertising revenues will grow to $7.7 billion in 2002, representing
an average annual growth rate of 45% from 1998 to 2002.
[GRAPH OF TOTAL INTERNET ADVERTISING REVENUES]
Source: Jupiter Communications
According to International Data Corporation, of the $187 billion spent on
advertising in 1997, 0.3% was spent on Internet media. In 1998, 0.8% of all
dollars spent on advertising were spent on Internet media. Salon believes that
the potential to shift advertising spending away from traditional media to the
Internet presents a significant growth opportunity for Internet advertising.
Growth in Electronic Commerce
The growing popularity of the Internet represents a substantial opportunity
for companies to take advantage of the potential for conducting commercial
transactions online, or "electronic commerce." IDC
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estimates that commerce over the Internet will increase from over $12 billion
worldwide at the end of 1997 to approximately $425 billion worldwide by the end
of 2002. Jupiter Communications predicts that by 2002, 44% of Internet users
will make purchases online, as compared to the 22% who did so in 1998. While
electronic commerce is expected to have broad application, industry experts
believe that the most significant growth in electronic commerce activity will
be in the markets for computer products, travel, entertainment, apparel,
financial services and information services.
The Need for Compelling Internet Destinations
As Internet companies compete to attract and retain users, unique content has
become increasingly valuable. Salon believes compelling, original content
produced by talented editorial staff is a principal feature that distinguishes
Web sites from each other.
Web sites built around focused, proprietary content provide advertisers with
targeted channels for reaching their desired market. To date, online
advertisers and retailers have spent most of their marketing budgets on Web
sites with the highest traffic volume, including "portals," which bring
together and organize a wide variety of content, and "search engines," which
allow users to search for specific information. As Internet advertising and
electronic commerce mature, however, Salon believes online advertisers and
retailers will increasingly spend their marketing dollars on more focused Web
sites to reach specific demographic groups, as has occurred in traditional
advertising media.
According to a 1998 study by Forrester Research, a market research firm, a
major shift in online advertising spending will occur as advertisers move media
campaigns from generalized portals toward more narrowly targeted Web sites.
Targeted sites provide content on designated topics, and therefore attract
users looking for subject-specific information. Because targeted sites are
usually the direct source of information the user wants, rather than simply a
gateway to other collections of information like a portal or search engine,
these sites are frequently referred to as "destination sites." Forrester
estimates that portals currently receive 59% of all Internet advertising
dollars while only accounting for 15% of Web traffic. However, Forrester
predicts that by 2002, destination sites will attract 70% of online advertising
dollars. Destination sites are attractive to advertisers and retailers because
these sites allow more seamless integration of marketing campaigns and product
sales with related content, and more effectively target the advertisers' and
retailers' most likely customers. In addition, destination sites tend to have
longer use periods, or "stickiness," further enhancing marketing and retailing
opportunities.
To address the perceived lack of compelling content available through
portals, a number of skillfully produced destination sites have been developed
to target specific demographic groups. Examples of such sites include
technology-oriented sites such as C/Net and ZDNet, financial news sites
including MarketWatch.com and TheStreet.com, sports-related sites such as
Sportsline.com and ESPN.com and women-oriented sites including iVillage and
Women.com.
While Internet destinations like these provide advertisers and retailers with
targeted marketing opportunities, they also lack the varied appeal necessary to
facilitate broad-based marketing campaigns. Salon believes that the best
opportunity for matching users' needs with those of advertisers and retailers
on the Internet is to develop a network of destination sites that combines the
quality and depth of subject-specific destination sites with the broad reach of
portals and search engines. Salon believes its network of ten subject-specific
Web sites and communities offers advertisers and retailers these benefits.
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Salon's Strategy: To Build a Network of Premier Destination Sites
Salon's strategy is to build a network of leading destination sites with
compelling content and engaging interactive communities that will attract
demographically valuable users, premier Internet advertisers and electronic
commerce partners. To establish itself as a leading Internet network, Salon is
pursuing the following goals:
Broaden Revenue Base in Advertising and Electronic Commerce
Through April 30, 1999, Salon had derived revenues from a customer base of
approximately 190 online advertisers. Salon believes it can substantially
increase its advertiser base by targeting the more than 4,000 companies that
currently advertise online. Salon intends to increase its revenue from
advertising and electronic commerce through new editorial, marketing and
technological initiatives.
Salon has and intends to continue to develop content-driven, long-term
advertising sponsorships with leading corporate clients. These sponsorships go
beyond simple banner advertising to focus on the advertiser's broader marketing
objectives including branding or product introduction. Salon's sponsorships
also occasionally involve offline marketing events in addition to advertising
on the Salon network. Salon believes that forming these types of arrangements
forges more valuable relationships between Salon and its advertisers.
To increase its electronic commerce revenues, Salon has developed strategic
arrangements with sponsors including Visa International, barnesandnoble.com,
Microsoft Expedia, drkoop.com and 911gifts.com. Salon will continue to pursue
electronic commerce sponsorships with premier online retailers to expand the
breadth of its electronic commerce offerings. Salon has created a marketplace
designed to sell Salon-branded products as well as high-quality third-party
products through Salon Shopping.
Expand Content and Communities
With the recent launch of its Web sites Salon Health & Body and Salon People,
Salon has expanded its network to ten subject-specific Web sites. Salon
believes that by regularly introducing new editorial categories it will
continue to draw and retain new users and advertisers. In addition, Salon
recently changed its publishing cycle. Instead of publishing new items only
once each day, Salon now posts headline stories, features, columns, reviews and
news updates throughout the day on all ten of its Web sites. This dynamic
publishing strategy is designed to attract a more consistent flow of users
during the daily news cycle, and to significantly increase traffic to Salon's
network of sites.
Salon has recently expanded its online community offerings through its
acquisition of The Well, a paid membership community. Salon intends to further
its focus on developing online communities by aggregating its community
offerings under a primary gateway URL. This new structure will consist of The
Well along with Table Talk, Salon's existing free interactive forum. Salon also
intends to use its expertise in developing interactive communities to custom-
build forums for corporate, professional and educational clients.
Expand Salon's Distribution Partnerships
Building on its strength as a premier Internet content producer, Salon has
established distribution relationships with major portals including America
Online, Lycos, Go.com, AltaVista, @Home and Snap! These arrangements typically
place Salon's logo and content on the distribution partner's site, and provide
links back to Salon's network. Salon also has distribution arrangements with
other major content sites and distributors, including CNN.com and Reuters.
Online and print versions of leading technology publications including Wired
Digital and the Industry Standard also link or refer to Salon content. In order
to further broaden awareness of the Salon brand and drive more users to Salon's
network, Salon continues to pursue distribution arrangements with additional
portals and other leading Internet destination sites.
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Grow Salon's Brand Recognition Through Advertising and Syndication
Salon believes that the further establishment of the Salon brand is critical
to drawing more users to its network. Salon believes it has derived
considerable publicity through its award-winning content and can significantly
grow its brand awareness through increased advertising and syndication.
To date, Salon has made limited investments in advertising to promote the
Salon brand. In April 1999, Salon launched its first national marketing
campaign to increase its brand awareness within key consumer groups and urban
markets. Salon's efforts will include online, radio and print advertising
introducing the slogan "Salon. . . Makes You Think." Salon believes this
campaign will capitalize on its appeal to high-value users.
Salon currently licenses its content to magazines around the world through
Salon's own syndication efforts and to daily newspapers through United Features
Syndicate. In addition, Salon has arranged for the publication of two books
derived from Salon's original content: Mothers Who Think: Tales of Real-Life
Parenthood, published in April 1999, and The Salon Readers Guide to
Contemporary Literature, expected to be published in 2000. Salon believes that
continued exposure through these and other traditional media outlets will be
crucial to increasing awareness of the Salon brand.
Enhance Salon Technology to Improve Production, User Experience, Advertising
Delivery and Circulation Analysis
Salon has begun to substantially invest in personnel and software development
tools to create a state-of-the-art online publishing system. This system is
designed to optimize the Salon network's user experience and advertising
performance. Salon believes its new custom-built, Linux-based platform will
give Salon the ability to store Salon's content in a database and automatically
assemble pages. This system facilitates easier navigation of Salon's Web sites
as well as printing, bookmarking and e-mailing of Salon content for users.
Salon's technological upgrade also includes new circulation management software
to improve user traffic analysis and reporting as well as an enhanced
advertising delivery system.
The Salon Network
Salon's network consists of ten subject-specific destination sites as well as
free and subscription-based interactive communities. The main gateway to these
Web sites and communities is the Salon home page at www.salon.com.
Destination Sites
Salon's subject-specific Web sites provide a continuously updated array of
news, features, interviews and regular columnists.
News Salon News provides headline stories, investigative
features and commentary on daily events. Salon's news
operation distinguished itself in 1998 by breaking
national news stories on the independent counsel's
investigation of President Clinton and the resulting
impeachment proceedings. Salon is investing further in
its news-gathering operations by opening a Washington
news bureau and adding experienced political reporters to
its staff.
Technology Salon Technology posts news stories, exclusive features
and commentary on the business and culture of the digital
world. Salon believes its technology site offers users an
understandable perspective on major trends, including the
Linux "open source" movement, the MP3 format for digital
music and Microsoft's antitrust case. Salon believes that
its technology coverage goes beyond the headlines and
"trade talk" content of other technology Web sites, and
is an important reason that popular sites like C/Net link
to Salon content on a regular basis.
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Arts & Salon Arts & Entertainment publishes up-to-the-minute
Entertainment coverage of movies, television and music. Salon's staff
of entertainment critics and reporters is based in
Salon's New York office, and was assembled from
established publications including The New Yorker, Vanity
Fair and the Boston Phoenix. Salon believes its coverage
of popular culture is more insightful and edgy than that
of other online and traditional media.
Mothers Who Salon Mothers Who Think is a critically acclaimed
Think parenting site that features the work of well-known
writers including Anne Lamott, Jayne Anne Phillips,
Bobbie Ann Mason, Julia Alvarez, Katie Roiphe and Sallie
Tisdale. Salon Mothers Who Think publishes essays and
reporting with an honest, unsentimental view of family
life and related social issues. An anthology of Salon
Mothers Who Think stories was published in April 1999 by
Random House/Villard.
Health & Body Salon Health & Body features reporting, commentary and
headline news on the healthcare industry, biomedical
research, alternative medicine, sexual health, nutrition
and fitness. In addition, Salon Health & Body users can
access a database of health information, as well as buy
pharmaceutical products online through Salon's
partnership with drkoop.com, the health services Web site
developed by the former U.S. Surgeon General.
Books Salon Books publishes daily reviews of fiction and non-
fiction titles as well as author interviews and exclusive
news coverage of the publishing industry. Salon believes
its presence in the book industry is highlighted and
reinforced each year by the Salon Book Awards, an online
and offline event recognizing Salon editors' choices for
the ten best books of the year. Salon Books is sponsored
by barnesandnoble.com, Salon's electronic commerce
partner for book retailing.
Media Salon Media covers the broadcast, print and electronic
press in a critical and irreverent manner. The site
features the work of three columnists who offer scoops as
well as timely analysis on the media industry.
Travel Salon Travel is an award-winning site known for its
literary quality, featuring well-known writers including
Paul Theroux, Peter Mayle, Isabel Allende and Jan Morris.
Salon Travel also offers service features including a
traveler's advice column, a readers' tips department and
a flight attendant's diary. In addition, the site
provides users the opportunity to buy airline tickets and
hotel accommodations through Salon's electronic commerce
partnership with Microsoft Expedia.
People Salon People focuses on the world of celebrities,
covering notable figures in entertainment, politics,
business, technology and other fields that compel public
interest. Salon People includes a weekly profile series,
Brilliant Careers, sponsored by Lexus, as well as a daily
column of celebrity "dish," obituaries and interviews.
Comics Salon Comics serves as a showcase for regular Salon
cartoonists including Tom Tomorrow and Ruben Bolling, as
well as Bob Callahan and Spain Rodriguez's original comic
serial, "Dark Hotel."
Online Communities
Salon's online communities allow users to discuss Salon content, as well as
to interact with other users and Salon's editorial staff. Salon's network of
communities is accessible through www.salon.com and Salon's ten subject-
specific sites. Salon believes that well-developed online communities help
foster user loyalty and
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stickiness, qualities valued by Internet advertisers and online retailers,
because users can contribute to and be actively involved in the discussion that
makes up the communities' content, and can interact with people with similar
interests. In April 1999, the average Salon user visited Salon's network 23
times per month, for an average of 23 minutes per visit, or a total of
approximately 8.8 hours. In July 1998, the average Salon user visited Salon's
network 23 times per month for an average of 22 minutes per visit, or a total
of approximately 8.4 hours. From May 1998 to May 1999, Salon's online
communities, including Table Talk and The Well, received approximately 2.9
million posted messages from users.
Table Talk
Salon's Table Talk is a free interactive community where Salon users can
share their opinions on a wide variety of topics with Salon editors and with
each other. Salon also frequently arranges for featured guests, including well-
known commentators and writers, to join Table Talk discussions. Salon's Table
Talk is one of the most popular communities on the Web, according to a survey
conducted in May 1998 by Forum One, an Internet community measurement service,
which ranked online discussion groups by their number of postings. Through
April 30, 1999, approximately 104,000 users had registered for Table Talk and
there were more than 4,400 different ongoing Table Talk discussions on a wide
range of subjects.
The Well
The Well, a community which Salon acquired in March 1999, has been operating
since 1985 and is one of the most established Internet community brands, with
approximately 62,000 users having registered through April 30, 1999. In
contrast to Table Talk, The Well is a paid subscription community that provides
Salon with direct revenues from its users. Active members of The Well pay a fee
of $10 to $15 per month to participate in private discussion groups. Since May
1997, The Well has experienced less than 5% turnover in its membership. Salon
intends to build on The Well's established reputation as a premier interactive
community and promote The Well on Salon's network to its established user base
as a forum for highly focused and engaged discussion.
Community Partnerships
Salon's reputation for building online communities creates opportunities to
establish communities for other content providers. Recently, Salon entered into
agreements to establish communities for National Public Radio and Go.com. No
revenues have been derived to date from establishing community partnerships.
However, Salon believes that building third-party communities provides it with
attractive cross-marketing opportunities. It also gives Salon the opportunity
to derive additional advertising, sponsorship and electronic commerce
transaction revenues by providing user-driven forums outside of Salon's natural
user base. Salon intends to develop additional community partnerships to
establish Salon as the preferred destination for compelling online discussions.
Distribution Agreements
Salon has entered into a number of distribution agreements to generate
traffic and to promote the Salon brand name. Many of these agreements are
"content-for-carriage," in which Salon provides its proprietary content to a
distribution partner and receives prominent placement of its logo and content
on the distribution partner's site, as well as links back to Salon's network.
Salon has entered into distribution and content relationships with many of
the major portal and content aggregation sites on the Web, including:
<TABLE>
<S> <C> <C>
. America Online . TheStreet.com . EchoStar
. AltaVista . CNN.com . PointCast
. Lycos . @Home . WebTV
. Go.com . C/Net . Snap!
. Netscape . Rocket eBook . Reuters
</TABLE>
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In August 1998, Salon entered into a two-year interactive services agreement
with America Online. Under the agreement, Salon has an anchor tenancy position
on the AOL service, including a dedicated Salon home page. Salon pays AOL a
carriage fee and AOL guarantees Salon a minimum number of impressions per year.
In September 1998, Salon entered into a three-year content distribution
arrangement with One Zero Media Inc. Under the agreement, Salon receives top-
level positioning within AltaVista's entertainment channel, and is guaranteed a
minimum number of click-throughs from the AltaVista service. Salon pays One
Zero Media a carriage fee, consisting of a combination of cash and barter
advertising.
In March 1999, Salon entered into a one-year content distribution agreement
with Lycos. Under the agreement, Salon content is co-branded and marketed
throughout the Lycos site. The resulting traffic is directed to Salon's
servers. Salon receives a percentage of advertising revenue generated on these
co-branded pages and numerous links from top level pages on Lycos' site to
Salon's network.
In November 1998, Salon entered into a one-year content distribution
arrangement with Go.com. Under the agreement, Salon became the anchor tenant of
Go.com's books area, providing book-oriented content that appears on co-branded
pages on the Go.com site. In addition, Salon arranges for and moderates guest
"chats" in the co-branded area. Salon receives a percentage of advertising
revenue generated on these co-branded pages and numerous links from top level
pages on Go.com to Salon's network.
In April 1998, Salon entered into a one-year agreement with Netscape. Under
the agreement, Salon receives prominent placement in Netscape's In-Box Direct
program. Netscape users can subscribe to an e-mail version of Salon featuring
links to Salon's network. In March 1999, Salon extended its relationship with
Netscape to provide headlines to Netscape's My Netscape area. In exchange,
Salon receives links back to Salon's network.
In March 1999, Salon entered into a one-year agreement with TheStreet.com.
Under the agreement, Salon receives TheStreet.com content and presents it in
Salon News. Salon receives a percentage of advertising revenue generated on
these co-branded pages.
In October 1998, Salon entered into a month-to-month agreement with CNN
Interactive. Under the agreement, Salon Books content is co-branded on
CNN.com's books area. Salon also receives links back to Salon's network.
In December 1996, Salon entered into an agreement with @Home under which
Salon content and headlines appear on the @Home service, and Salon receives
links back to Salon's network.
In February 1999, Salon entered into a three-month, renewable agreement with
C/Net. Under this agreement, links to two Salon Technology stories per week are
presented on C/Net's News.com site, and Salon links to one News.com story per
day.
In December 1998, Salon entered into a two-year agreement with NuvoMedia's
Rocket eBook. Under the agreement, Salon content is distributed to users of the
Rocket eBook service via a Web site operated by Rocket eBook. Salon receives
prominent branding on the NuvoMedia Web site and has the right to sell Rocket
eBooks from Salon's network. Salon will receive a percentage of sales of Rocket
eBooks sold on Salon's network.
In January 1999, Salon entered into a three-year data broadcasting agreement
with EchoStar. Under the agreement, Salon content, including multimedia
components, will be distributed via satellite as a paid "interactive channel"
available to EchoStar's 1.7 million subscribers through PCs and televisions.
Salon receives a share of the subscription revenue generated by the paid
interactive channel.
In July 1997, Salon entered into a agreement with PointCast under which Salon
content is "pushed" to PointCast users via headlines provided by Salon to
PointCast on a daily basis.
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In June 1997, Salon entered into a month-to-month agreement with WebTV, under
which Salon content is distributed on WebTV's entertainment channel.
In July 1997, Salon entered into a month-to-month agreement with Snap!, under
which Salon provides headlines which are featured on Snap!'s Web site, in
exchange for links back to Salon's network.
In April 1999, Salon entered into an two-year agreement with Reuters, under
which Salon provides technology-related content to Reuters' new digital news
service in exchange for links back to Salon's network.
Revenue Sources
Salon has derived a significant amount of its revenues to date from Internet
advertising and sponsorships from electronic commerce partners and advertisers.
For the fiscal year ended March 31, 1998, advertising and sponsorship revenues
accounted for 99% of Salon's net revenues, and barter revenues accounted for 7%
of Salon's net revenues. For the fiscal year ended March 31, 1999, advertising
and sponsorship revenues accounted for 94% of Salon's net revenues, and barter
revenues accounted for 16% of Salon's net revenues.
Advertising Sponsorships and Banner Advertising
Salon has adopted a strategy of selling long-term advertising sponsorships in
addition to short-term banner advertising. Salon's sponsorship arrangements
differ from traditional banner advertising in that they are designed to achieve
broad marketing objectives including brand awareness, product introduction and
occasional editorial content integration. Salon's sponsors often place their
advertising adjacent to related editorial content to enhance their marketing
campaigns. Salon's sponsorship arrangements generally have longer terms than
typical banner advertising placements and provide for value-added components.
Salon also offers exclusive category opportunities to sponsors, including
Lexus' sponsorship of Salon's Brilliant Careers editorial series.
Salon has a large and growing base of advertisers and consistently sells a
high percentage of its advertising space. Due to the high-value demographics of
its users, Salon believes that it is able to attract premier Internet
advertisers willing to pay higher CPM's, or cost per thousand impressions, than
are paid to other Internet destinations. Salon's average CPM of $23 per
contract is approximately 53% higher than most portals, for which Jupiter
Communications estimates a CPM average of $15.
According to a user survey conducted by Cyber Dialogue, an independent
research firm, the Salon user base includes the following valuable
demographics:
. 90% are between the ages of 18 and 49;
. 44% earn $60,000 or more per year;
. 32% earn $75,000 or more per year;
. 19% earn $100,000 or more per year;
. 98% have earned a college degree, or are pursuing one;
. 43% have earned a post-graduate degree, or are pursuing one;
. 69% have professional, managerial or technical positions; and
. At least 77% have conducted electronic commerce transactions.
Additionally, the Cyber Dialogue survey also found that Salon users spend an
average of 23 minutes on Salon's network each time they visit.
For the fiscal year ended March 31, 1998, IBM accounted for approximately 16%
of Salon's revenues and Borders accounted for approximately 37% of Salon's
revenues. For the fiscal year ended March 31, 1999,
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Borders accounted for approximately 13% of Salon's revenues. Some of Salon's
premier advertisers and sponsors include:
<TABLE>
<S> <C> <C> <C>
. Mercedes-Benz . Visa International . Starbucks . Apple
. Lexus . Discover Brokerage . Macy's . IBM
. Ford . Ameritrade . PolyGram . Intel
. Budget Rent-a-Car . AT&T . JCPenney's . Microsoft
</TABLE>
In April 1999, Salon significantly revised the design of its network of Web
sites to increase advertising space per page, including new space for network-
wide and content-specific sponsorships. Salon believes the increased
advertising inventory provided by the redesign of its network will enable it to
deliver significantly more advertising impressions and revenue opportunities in
the future.
Electronic Commerce Sponsorships and Transactions
Salon believes that the buying patterns of its user base make its network of
Web sites uniquely suited to online retailing. According to Cyber Dialogue, at
least 77% of Salon's users have made purchases over the Internet, compared to
an industry average of 22% in 1998, as estimated by Jupiter Communications.
Salon's strategy for capturing electronic commerce revenues is to enter into
sponsorships with premium online retailers. Sponsorship fees are paid to Salon
by a particular retailer for a measure of exclusivity in the retailer's
industry segment.
In April 1999, Salon entered into a one-year agreement with 911gifts.com,
under which 911gifts.com was granted the right to become the exclusive third-
party gift product retailer for Salon. The agreement requires Salon to provide
a guaranteed number of impressions and links to 911gifts.com. In addition to
sponsorship fees, Salon receives a percentage of net profits from the sale of
gift products through a co-branded storefront on Salon's site, and a percentage
of advertising revenue on co-branded pages.
In March 1999, Salon entered into a three-year agreement with drkoop.com.
Under the agreement, Salon Health & Body content is presented in a co-branded
fashion on both Salon's and drkoop.com's sites. Salon receives a percentage of
net sales of pharmaceutical products through a co-branded storefront on Salon's
site, and a percentage of advertising revenues from the co-branded pages on
Salon's site. Salon guarantees a minimum number of impressions over the term of
the agreement.
In November 1998, Salon entered into a two-year agreement with
barnesandnoble.com under which barnesandnoble.com was granted the right to
become the exclusive book retailer for Salon. The agreement requires Salon to
provide a guaranteed number of impressions and links to the barnesandnoble.com
site. In addition to sponsorship fees, barnesandnoble.com has agreed to provide
Salon with a percentage of all purchases made through Salon beyond a minimum
amount of purchases.
In October 1998, Salon entered into a six-month agreement with online travel
service Microsoft Expedia, under which Expedia was granted the right to become
the exclusive Internet travel agency for Salon. The agreement requires Salon to
provide a guaranteed number of transfers to Expedia and the establishment of
accounts. In addition to sponsorship fees, Expedia has agreed to pay Salon a
royalty for each Expedia account opened through Salon and a fee for airline
tickets purchased by Salon users.
Salon intends to continue to develop similar electronic commerce partnerships
with retailers that provide goods and services tied closely to specific areas
of its content. Salon's architectural design provides each of its destination
sites with opportunities for electronic commerce tie-ins.
In addition to electronic commerce sponsorships, Salon has established its
own online store, Salon Shopping. Salon Shopping offers an expanding range of
upscale Salon-branded and third party products, as well
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as goods offered by its retailing partners. As Salon expands its relationships
with online retailing sponsors, it expects Salon Shopping to provide a
destination where Salon users can benefit from the range of commerce
opportunities available throughout the Salon network.
Syndication and Licensing
Since its inception, Salon has syndicated and licensed its content to media
companies worldwide for publication on Web sites, and in newspapers and
magazines. In addition to revenues, syndication and licensing provide Salon
with valuable exposure for the Salon brand and additional traffic to Salon's
network. These arrangements also require prominent placement of Salon's logo
and primary Internet address in reproductions of its content.
Since 1997, Salon has maintained a worldwide agreement with United Features
Syndicate to distribute Salon content to newspapers, both in print and on the
Internet. As of April 30, 1999, Salon content had been syndicated in 72
newspapers. Salon also directly licenses and syndicates to publications not
associated with United Features Syndicate. Salon has generated syndication
revenues from more than 56 domestic and international magazines and other
reprint vehicles.
In addition to its syndication efforts, Salon has entered into agreements
with publishers to produce two books created by Salon's editors. Mothers Who
Think: Tales of Real-Life Parenting was published by Random House/Villard in
April 1999 and The Salon Readers Guide to Contemporary Literature is to be
published by Viking/Penguin in 2000. In addition to creating additional
revenues from previously produced content, Salon believes that such
arrangements are tremendously valuable in promoting the Salon brand beyond its
traditional user base.
Subscription Services
Salon derives revenue from two paid subscription services: The Well and Salon
Members. The Well, a paid subscription online community, was acquired by Salon
in March 1999. Through April 30, 1999, approximately 62,000 users had
registered for The Well. The Well generated approximately $485,000 in revenues
in its fiscal year ended December 31, 1998. Salon intends to generate
additional subscription revenues from The Well by promoting the community on
Salon's network as a forum for highly focused and engaging discussions.
Salon has also established Salon Members, an annual membership program, to
provide specific products and services to its user base. Salon Members receive
discounts on purchases from Salon Shopping, Salon's online store, access to the
Members Lounge, a live chat session, free e-mail and Salon merchandise. Through
April 30, 1999, 1,100 users had enrolled in the Salon Members program.
Sales and Marketing
Sales
In order to reach a broad range of potential sponsors, advertisers and
electronic commerce partners, Salon has built its own direct sales organization
of 13 employees located in San Francisco, New York City, Chicago and Los
Angeles. Salon believes its direct sales approach allows it to form stronger
relationships with its advertisers and sponsors. The sales force consists of
regional sales managers, account executives, sales planners and sales
operations staff, under a senior vice president of sales. Salon's sales
organization consults regularly with advertisers, sponsors and their agencies
on design and placement of advertisements and the production and management of
sponsorship campaigns. Salon hires and continues to seek out sales force
representatives with experience in selling advertising in a variety of media.
Salon intends to continue to expand its sales force to establish additional
advertising and sponsorship arrangements.
The majority of Salon's banner advertising and advertising sponsorship sales
are conducted through media buying divisions of advertising agencies. These
agencies determine whether to recommend advertising on
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Salon's network. In some instances, Salon may conduct its sales activities
directly with banner advertisers and advertising sponsors. The time between the
date of initial contact with a potential banner advertiser or advertising
sponsor and receipt of a purchase order from the advertiser may range from as
little as one week to up to nine months.
Salon's electronic commerce sponsorships are sold as joint projects by
Salon's sales, business development and electronic commerce staff. These
agreements are typically negotiated directly with the electronic commerce
sponsor, and have a similar sales cycle to advertising sponsorships. Salon's
sales staff works closely with electronic commerce sponsors to integrate
advertising, branding and buying opportunities throughout the Salon network.
Marketing
Over the last three years, Salon's visibility has increased through extensive
publicity. Salon and its staff have been featured on some of the nation's
leading media outlets and programs, including:
<TABLE>
<S> <C> <C>
. ABC . The Wall Street Journal . Meet the Press
. MSNBC . The Washington Post . Good Morning America
. CNBC . The New York Times . Politically Incorrect
. NPR . Time . Morning Edition
. CNNfn . Newsweek . Crossfire
</TABLE>
Salon also uses event marketing to build awareness among influential opinion
leaders in the publishing, advertising and entertainment industry. In January
1999, Salon sponsored the Third Annual Salon Book Awards, celebrating top books
selected by Salon editors. For its new Brilliant Careers editorial series,
Salon will host, with advertising sponsor Lexus, an event honoring successful
individuals from different fields including science, technology, arts and
culture.
Salon has increased its investment in building brand awareness on and off the
Internet and currently has five employees dedicated to marketing. Salon intends
to utilize online advertising, traditional print, radio and television
advertising as well as local and national events to communicate its marketing
message and has engaged an advertising firm to assist in this effort. As part
of its efforts to increase awareness for the Salon brand and drive additional
users to its network, Salon has developed a significant media plan for the
promotion of the Salon brand. This media effort will include online, radio and
print advertising introducing the slogan "Salon . . . Makes You Think."
Competition
The market for Internet content is relatively new, rapidly changing and
intensely competitive. Traditional media companies, such as television
broadcasters, magazine publishers and radio stations, are constantly refining
their content and strategies to increase their audiences and advertising and
sponsorship revenues. Additionally, the number of Web sites competing for the
attention and spending of users, advertisers and sponsors has increased, and
Salon expects it to continue to increase, particularly because there are so few
barriers to entry on the Internet. Salon competes for users, advertisers and
sponsors with the following types of companies:
. portals, including Excite, Infoseek, Lycos, Yahoo! and Netscape, which
are increasingly trying to deepen their sites with content as a way of
encouraging user stickiness;
. mass consumer online services including America Online and the Microsoft
Network and online services focused on news, politics, technology,
parenting, health and pop culture including CNN.com, MSNBC.com, Slate,
iVillage, Women.com, Feed, Nerve, Thrive, Entertainment Weekly Online,
TimeDigital, C/Net and ZDNet;
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. community sites including Cafe Utne, Tripod, Talk City and GeoCities;
. electronic commerce services including Amazon.com, Epicurious Travel and
Sharper Image; and
. traditional print and broadcast media outlets and programs targeted at
high-value audiences, including the New York Times, The Washington Post,
Vanity Fair, Time, Newsweek, Entertainment Weekly, the New Yorker,
Dateline, Politically Incorrect, Entertainment Tonight and Biography.
Increased competition could result in advertising or sponsorship price
reductions, reduced margins or loss of market share, any of which could harm
Salon's business. Competition is likely to increase significantly as new
companies enter the market and current competitors expand their services. Many
of Salon's present and potential competitors are likely to enjoy substantial
competitive advantages, including the following:
. larger numbers of users;
. larger numbers of advertisers;
. greater brand recognition;
. more fully-developed electronic commerce opportunities;
. larger technical, production and editorial staffs; and
. substantially greater financial, marketing, technical and other
resources.
If Salon does not compete effectively or if it experiences any pricing
pressures, reduced margins or loss of market share resulting from increased
competition, its business could be adversely affected.
Infrastructure and Operations
Salon has developed a flexible publishing structure that enables it to
develop compelling and original content while responding quickly to news events
and taking advantage of the ease of distribution provided by the Internet.
Editors work with staff writers as well as with a variety of experienced
contributing writers, freelance contributors and columnists. Ideas for Salon
content flow from editor to writer and writer to editor, as well as from
readers to editors. Weekly editorial meetings serve as a filter for content
proposals and determine what content will occupy the featured position on
Salon's home page at www.salon.com. All content that appears on Salon's network
of Web sites goes through a rigorous editorial process. Site editors work with
writers from assignment through final editing of material.
Salon has deployed a versatile technical infrastructure and backend systems
to support its mission of providing first-rate content, community and commerce
on the Internet. Salon content is developed on a proprietary software platform
and captured in an Oracle database for reuse in Web and other formats. This
system allows Salon content to be easily redistributed to other Web sites,
newspapers and magazines, electronic devices including electronic books, pagers
and handheld devices, and other print or electronic media.
Salon's Web sites are supported by a variety of servers using the Windows NT,
Solaris and Linux operating systems. Salon's top technical priority is the fast
delivery of pages to its users. Salon's systems are designed to handle
significant traffic growth by balancing the amount of traffic among multiple
servers. Salon also relies on server redundancy to help achieve its goal of 24
hour, seven-day-a-week site availability. Regular automated backups protect the
integrity of Salon data.
Salon servers are maintained at Frontier GlobalCenter's media distribution
center in Sunnyvale, California. Salon's contract with Frontier GlobalCenter
provides bandwidth on demand to meet the fluctuating needs of Salon's network.
Frontier GlobalCenter offers high-speed connections to the Internet, helping
ensure fast serving and delivery of Salon's Web sites, and monitors all servers
via human or technical means on a continuous basis. Salon follows strict
password management procedures to protect access to its servers. Salon
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technical staff monitors alerts from Frontier GlobalCenter and, where relevant,
undertakes recommended actions to address security issues and vulnerabilities.
All of Salon's servers are supported by uninterruptable power supplies for
protection against power outages.
Frontier GlobalCenter provides the following features to protect against
natural disaster, human error, and malicious acts:
. Multi-level card key system to control all areas of its facility;
. Visitor and vendor escorts;
. Redundant air conditioning systems;
. Intruder alarms and fire system alarms, monitored 24 hours a day;
. Dual zone, dual sensor, gas-based suppression system;
. Floors, racks, and other support systems with seismic reinforcements to
protect against earthquakes; and
. Redundant power systems consisting of uninterruptable power supplies and
a high-capacity diesel generator.
Although Salon does not yet have a formal disaster recovery plan, one is
currently in development. At Salon's San Francisco and New York offices and
Frontier GlobalCenter, nightly, weekly and monthly backups are performed and
sent to an off-site facility.
Proprietary Rights
Salon's success and ability to compete are significantly dependent on its
proprietary content. Salon relies exclusively on copyright law to protect its
content. While Salon actively takes steps to protect its proprietary rights,
such steps may not be adequate to prevent the infringement or misappropriation
of its content. Infringement or misappropriation of Salon's intellectual
property could materially harm Salon's business. Salon also licenses content
from various freelance providers and other third-party content providers. While
Salon attempts to insure that third-party content may be freely licensed to
Salon, other parties may assert claims of infringement against Salon relating
to this content.
Salon has licensed in the past, and expects to license in the future,
proprietary rights such as trademarks and copyrighted material to third
parties. While Salon attempts to insure that the quality of its brand is
maintained by these licensees, its licensees may take actions that adversely
affect the value of the Salon brand or Salon's other proprietary rights. Any
such adverse acts could materially harm Salon's reputation and its business.
Salon recently acquired the Internet address www.salon.com. Because
www.salon.com is the address of the main home page to Salon's network of sites
and incorporates Salon's company name, it is a vital part of Salon's
intellectual property assets. Salon does not have a registered trademark on the
address, and therefore it may be difficult for Salon to prevent a third party
from infringing its intellectual property rights in the address. If Salon fails
to adequately protect its rights in the address, or if a third party infringes
its rights in the address or otherwise dilutes the value of www.salon.com,
Salon's business could be harmed.
Legal Proceedings
There are no material legal proceedings pending to which Salon is a party.
Salon's management knows of no legal actions being contemplated against Salon.
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Employees
As of May 15, 1999, Salon had 99 full-time employees, including 50 in
production and content, 26 in sales and marketing, nine in research and
development, seven in administration and seven in the Well LLC. As of April 15,
1999, 75 employees were located in San Francisco, 11 employees were located in
New York City, six were located in Sausalito, three were located in Washington,
D.C. and one was located in each of Chicago, Los Angeles, Boston and Tacoma,
Washington.
None of Salon's employees are represented by a union. Salon believes that its
relationship with its employees is good.
Facilities
Salon leases approximately 9,277 square feet of space at 706 Mission Street,
2nd floor, San Francisco, California. The rent for this space is currently
$13,916 per month, and the lease expires on July 31, 2002. Salon has an option
to renew its lease for this space for one five-year term.
Salon leases approximately 3,903 square feet of space at 1500 Broadway, Suite
1402, New York, New York. The rent for this space is currently $13,036 per
month, and the lease expires in March 2004.
Salon also leases office space in Chicago, Los Angeles and Sausalito.
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MANAGEMENT
Executive Officers and Directors
Salon's executive officers and directors and their ages as of April 15, 1999
are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
David Talbot............... 47 Chairman of the board, editor-in-chief and
director
Michael O'Donnell.......... 35 Chief executive officer, president and
director
Andrew Ross................ 52 Vice president of business and strategic
development
Todd Hagen................. 39 Chief financial officer, vice president of
finance and administration and secretary
Bruce Roberts.............. 41 Senior vice president of sales
Patrick Hurley............. 37 Vice president of marketing
Chad Dickerson............. 26 Vice president of technology
Ron Celmer................. 37 Director
Sada Chidambaram........... 54 Director
Norman Lear................ 76 Director
Standish O'Grady........... 38 Director
Jim Rosenfield............. 69 Director
</TABLE>
David Talbot co-founded Salon in 1995. He has served as editor-in chief and
director since Salon's incorporation. He served as chief executive officer from
Salon's incorporation through April 1999. He became chairman of the board in
April 1999. From 1990 to 1995, Mr. Talbot was the arts & features editor for
the San Francisco Examiner newspaper. Mr. Talbot has co-authored three books
and written for numerous publications including The New Yorker, Rolling Stone
and Playboy. Mr. Talbot holds a bachelor of arts degree in sociology from the
University of California at Santa Cruz.
Michael O'Donnell has served as Salon's president and director since December
1996. He became chief executive officer in April 1999. In 1996, he served as
vice president of sales and merchandising at SegaSoft, Inc., a consumer
software publisher. From 1995 to 1996, Mr. O'Donnell was vice president of
worldwide sales at Rocket Science Games, Inc., a consumer software publisher.
From 1993 to 1995, he served as Vice President of Retail Sales at Mindscape,
Inc., a consumer software publisher. Mr. O'Donnell holds a bachelor of arts
degree in political science from the University of California at Berkeley.
Andrew Ross co-founded Salon in 1995. He has served as vice president of
business and strategic development since 1998. From 1995 to 1998, he served as
Salon's managing editor. From 1994 to 1995, Mr. Ross was the foreign/national
editor of the San Francisco Examiner newspaper. Mr. Ross holds a bachelor of
science degree in economics and politics from the University of London and also
attended Columbia University's Graduate School of Journalism.
Todd Hagen has served as Salon's chief financial officer, vice president of
finance and administration and secretary since April 1999. From 1998 to 1999,
he was chief financial officer, vice president, finance and administration at
Worldtalk Corp., an Internet security software company. From 1994 to 1998, he
was chief financial officer and vice president, finance and administration at
HyperMedia Communications, Inc., an Internet publishing company. Mr. Hagen
holds a bachelor of science degree in finance and marketing from The Wharton
School at the University of Pennsylvania and a master of business
administration in finance and accounting from the Anderson Graduate School of
Management at the University of California at Los Angeles.
Bruce Roberts has served as Salon's senior vice president of sales since
April 1999. From 1995 to 1999, he was the general sales manager of KGO-TV/ABC,
Inc., a broadcast affiliate of ABC owned by Disney. From 1989 to 1995 he was a
sales manager at KABC-TV/ABC, Inc., a broadcast affiliate of ABC. Mr. Roberts
holds a bachelor of science degree in physical education from Springfield
College.
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Patrick Hurley has served as Salon's vice president of marketing since March
1999. From 1998 to 1999, he served as Salon's marketing director. From 1996 to
1998, he was management supervisor at Hal Riney & Partners, an advertising
agency. From 1994 to 1996, he served as account supervisor for the J. Walter
Thompson advertising agency. Mr. Hurley holds a bachelor of arts degree in
journalism from Marquette University.
Chad Dickerson has served as Salon's vice president of technology since July
1998. From 1997 until joining Salon, Mr. Dickerson served as director of
applications development for CNN/SI Interactive, an Internet content provider.
From 1996 to 1997, he was the technical product manager for CNN Interactive.
From 1995 to 1996, Mr. Dickerson served as webmaster for the Atlanta Journal-
Constitution newspaper. Mr. Dickerson holds a bachelor of arts degree in
English literature from Duke University.
Ron Celmer has served as a director of Salon since April 1999. Mr. Celmer has
been a managing director of Bear, Stearns & Co. Inc., an investment bank, and a
general partner of Constellation Ventures, a venture capital firm, since 1998.
In 1998 he was president of Airmedia, a software company. From 1994 to 1998 he
was a general partner of Prospect Street Ventures, a venture capital firm. Mr.
Celmer holds bachelor of arts degrees in economics and psychology from the
University of Pennsylvania.
Sada Chidambaram has served as a director of Salon since November 1997. Mr.
Chidambaram has served as president and director of ASCII Investment
Management, Inc., the venture investment manager for DOTCOM Ventures, L.P.,
(formerly ASCII Ventures, L.P.), since 1998. From 1988 to 1998, he served as
president and director of ASCII of America, Inc., the U.S. representative of
ASCII Corporation, an information, entertainment and education publishing
company. Mr. Chidambaram holds a bachelor of science degree in chemistry from
Loyola College University in Madras, India and a master of science degree in
chemical engineering from the Tokyo Institute of Technology in Japan.
Norman Lear has served as a director of Salon since April 1999. Mr. Lear has
been the chairman of Act III Communications Holdings, LP, a multimedia
entertainment company, since it was founded in 1986. He founded Tandem
Productions, Inc. in 1959 and produced television programs including All in the
Family, Sanford & Son and The Jeffersons. Mr. Lear is a member of the
Television Academy Hall of Fame.
Standish O'Grady has served as a director of Salon since December 1995. Mr.
O'Grady has been a managing member of H&Q Venture Associates, LLC, a venture
capital firm, since its formation in 1998. From 1996 to 1998, he was a managing
director in the venture capital department of Hambrecht & Quist Group, an
investment banking firm. Mr. O'Grady holds a bachelor of science degree in
chemical engineering from Princeton University and a master of business
administration from the Amos Tuck School of Business Administration at
Dartmouth College.
Jim Rosenfield has served as a director of Salon since April 1998. Mr.
Rosenfield has been the president of JHR & Associates, a media consulting firm,
since 1998. From 1994 to 1998, Mr. Rosenfield was managing director at the
investment banking firm of Veronis Suhler & Associates. From 1987 to 1994, he
was chairman and chief executive officer of John Blair Communications, Inc., a
television sales and syndication company. From 1965 to 1985, Mr. Rosenfield
held various executive positions at CBS Corporation, a television broadcasting
and media company, including executive vice president of the Broadcast Group.
Mr. Rosenfield holds a bachelor of arts degree in English from Dartmouth
College.
The board of directors is divided into three classes, with each class holding
office for staggered three-year terms. The terms of Messrs. O'Grady and
Chidambaram will expire upon the election and qualification of directors at the
annual meeting of stockholders to be held in 2000, the terms of Messrs. Celmer
and Talbot will expire upon the election and qualification of directors at the
annual meeting of stockholders to be held in 2001 and the terms of Messrs.
O"Donnell, Lear and Rosenfield will expire upon the election and qualification
of directors at the annual meeting of stockholders to be held in 2002. Officers
are elected by the board of directors and serve at the direction of the board
of directors. There are no family relationships among any of Salon's directors
or officers.
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Audit Committee
The board of directors has established an audit committee consisting of Mr.
Chidambaram and Mr. Celmer. The audit committee reviews with Salon's
independent auditors the scope and timing of their audit services and any other
services that they are asked to perform, the auditor's report on Salon's
financial statements following completion of their audit, and Salon's policies
and procedures with respect to internal accounting and financial controls. In
addition, the audit committee makes annual recommendations to the board of
directors for the appointment of independent auditors for the ensuing year.
Compensation Committee
The board of directors has established a compensation committee consisting of
Mr. O'Grady, Mr. Chidambaram, Mr. Rosenfield and Mr. Celmer. The compensation
committee makes recommendations to the board concerning salaries and incentive
compensation for Salon's officers and employees and administers Salon's
employee benefit plans.
Director Compensation
Directors receive no compensation for serving as directors of Salon, except
that Mr. Rosenfield receives $2,500 for each board meeting he attends. Salon
also granted to Mr. Rosenfield options to purchase 37,500 shares of common
stock on April 28, 1998, at an exercise price of $0.32 per share, and options
to purchase 7,500 shares of common stock on April 8, 1999, at an exercise price
of $2.92 per share. The options are subject to vesting over four years.
Compensation Committee Interlocks and Insider Participation
None of Salon's executive officers has served as a member of a compensation
committee or board of directors of any other entity which has an executive
officer serving as a member of Salon's board of directors.
Employment Contracts, Termination of Employment and Change of Control
Arrangements
In November 1996, Salon entered into an employment agreement with Mr.
O'Donnell under which he currently receives an annual salary of $175,000, and
an annual bonus of up to $50,000. Mr. O'Donnell also received options to
purchase 8% of Salon's then-outstanding capital stock at a purchase price of
$0.20 per share, as well as the right to participate in future sales of stock
by Salon to maintain his percentage ownership at 8%. This participation right
will terminate upon the closing of this offering. If Mr. O'Donnell voluntarily
resigns from his employment with Salon or is terminated for cause by Salon, he
will be entitled to no compensation or benefits from Salon other than those
earned through the date of his resignation. If Mr. O'Donnell is terminated
without cause, he will be entitled to salary payments until the earlier of nine
months following his termination or until he begins other employment. If Mr.
O'Donnell resigns within one year of a change of control of Salon because of
(a) a decrease in his base salary or a material decrease in any of his then-
existing bonus plans or employee benefits; or (b) a material adverse change in
his title, authority, responsibilities or duties, then he will be entitled to
salary payments until the earlier of nine months following his resignation or
change in title or authority or until he begins other employment.
In March 1999, Salon entered into a letter agreement with Mr. Hagen under
which he receives an annual salary of $140,000, and an annual bonus of up to
$35,000. Mr. Hagen also received options to purchase 75,000 shares of Salon's
common stock at an exercise price of $2.92 per share. If Salon is acquired
within one year of the date Mr. Hagen began working for Salon and Mr. Hagen is
terminated by the acquiror, Salon agreed to accelerate the vesting of
Mr. Hagen's options by one year. If Salon is acquired more than one year
following the date Mr. Hagen began working for Salon and Mr. Hagen is
terminated by the acquiror, Salon will accelerate Mr. Hagen's options to the
next year anniversary of the date he began working for Salon.
51
<PAGE>
In April 1999, Salon entered into a letter agreement with Mr. Roberts under
which he received an annual salary of $175,000, and an annual bonus of up to
$50,000. Mr. Roberts also received options to purchase 87,500 shares of Salon's
common stock at an exercise price of $2.92 per share. If Mr. Roberts is
terminated by Salon without cause within one year of the date he began working
for Salon, he will be entitled to salary payments until the earlier of one year
following his termination or the date he begins other employment, and his
options will immediately become fully vested. If Mr. Roberts is terminated by
Salon without cause more than one year following the date he began working for
Salon, he will be entitled to salary payments until the earlier of six months
following his termination or the date he begins other employment, and the
vesting of his options will accelerate by one year.
Mr. Roberts' options will immediately become fully vested if, within two
years of a change of control of Salon, he is terminated without cause, or
resigns because of:
. a decrease in his base salary or a material decrease in any of his then-
existing bonus plans or employee benefits;
. a material adverse change in his title, authority, responsibilities or
duties; or
. the relocation of his work place for Salon to a location that is more
than 75 miles from San Francisco.
Executive Compensation
The following table contains summary information for the fiscal year ended
March 31, 1999 regarding the compensation earned by Salon's chief executive
officer and each of Salon's most highly compensated executive officers other
than the chief executive officer whose salary plus bonus exceeded $100,000 for
the fiscal year ended March 31, 1999. In accordance with the rules of the SEC,
the compensation described in this table does not include perquisites and other
personal benefits received by the executive officers named in the table below
which do not exceed the lesser of $50,000 or 10% of the total salary and bonus
reported for these officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation
Compensation Awards
---------------- ------------
Securities
Underlying
Name and Principal Position Salary Bonus Options/SARs
--------------------------- -------- ------- ------------
<S> <C> <C> <C>
David Talbot................................. $145,000 $30,304 --
Chairman of the board and editor-in-chief
Michael O'Donnell............................ 145,000 30,304 --
Chief executive officer and president
Andrew Ross ................................. 108,646 20,304 15,000
Vice president of business and strategic
development
Chad Dickerson............................... 82,500 20,325 37,500
Vice president of technology
Liza Parker ................................. 77,284 52,956 5,000
Vice president of advertising sales
</TABLE>
Liza Parker was Salon's vice president of advertising sales from May 12, 1997
to February 5, 1999.
52
<PAGE>
Option Grants
The following table sets forth information concerning grants of stock options
to each of the executive officers named in the table above during the fiscal
year ended March 31, 1999. All options granted to these executive officers in
the last fiscal year were granted under the 1995 stock option plan. Each option
vests and becomes exercisable over a period of four years. The percentage of
total options set forth below is based on an aggregate of 376,250 options
granted to employees in fiscal 1999. All options were granted at a fair market
value as determined by the board of directors on the date of grant. The board
of directors determined the fair market value based on Salon's financial
results and prospects and the share price in arms-length transactions. The
exercise price may in some cases be paid by delivery of other shares or by
offset of the shares subject to options. The deemed value for the date of grant
has been adjusted solely for financial accounting purposes. Potential
realizable values are net of exercise price, but before taxes associated with
exercise. Amounts represent hypothetical gains that could be achieved for the
options if exercised at the end of the option term. The assumed 0%, 5% and 10%
rates of stock price appreciation are provided in accordance with rules of the
SEC and do not represent Salon's estimate or projection of the future common
stock price. The assumed 0%, 5% and 10% rates of stock price appreciation are
based on the assumed offering price of $12 per share. The assumed rate of 0%
indicates the value at the effective date of the offering based on the deemed
value for financial accounting purposes less the exercise price.
Options Granted in Fiscal Year Ended March 31, 1999
<TABLE>
<CAPTION>
Individual Grants
------------------------------- Potential Realizable Value
Number of % of Total Deemed at Assumed Annual Rates
Securities Options Value Per of Stock Price Appreciation
Underlying Granted to Exercise Share For for Option Term
Options Employees Price Expiration Date ----------------------------
Granted in Year ($/Share) Date of Grant 0% 5% 10%
---------- ---------- --------- ---------- --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David Talbot............ -- -- -- -- -- -- -- --
Chairman of the board
and editor-in-chief
Michael O'Donnell....... -- -- -- -- -- -- -- --
Chief executive officer
and president
Andrew Ross ............ 15,000 4.0 $ 0.52 09/24/08 $3.50 $172,200 $285,401 $ 459,074
Vice president of
business and strategic
development
Chad Dickerson.......... 37,500 10.0 0.32 07/07/08 2.38 438,000 721,003 1,155,184
Vice president of
technology
Liza Parker............. 5,000 1.3 0.52 12/11/08 3.50 57,400 95,134 153,025
Vice president of
advertising sales
</TABLE>
Aggregate Option Exercises in Fiscal Year Ended March 31, 1999 and Option
Values at March 31, 1999
The following table sets forth information concerning exercisable and
unexercisable stock options held by the executive officers named in the summary
compensation table at March 31, 1999. The value of unexercised in-the-money
options is based on the offering price of $12 per share minus the actual
exercise prices. All options were granted under Salon's 1995 stock option plan.
These options vest over four years and otherwise generally conform to the terms
of Salon's 1995 stock option plan.
Fiscal Year Ended March 31, 1999 Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options
Shares Options at March 31, 1999 at March 31, 1999
Acquired on Value ------------------------- -------------------------
Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
----------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David Talbot ........... -- -- 94,791 80,209 $1,118,534 $ 946,467
Chairman of the board
and editor-in chief
Michael O'Donnell....... -- -- 144,166 115,834 1,701,159 1,366,842
Chief executive officer
and president
Andrew Ross ............ -- -- 104,895 55,105 1,237,761 645,439
Vice president of
business and strategic
development
Chad Dickerson.......... -- -- -- 37,500 -- 438,000
Vice president of
technology
Liza Parker............. 6,978 $2,233 -- -- -- --
Vice president of
advertising sales
</TABLE>
53
<PAGE>
Stock Plans
1995 Stock Option Plan. Salon's 1995 stock option plan was approved by
Salon's board of directors in December 1995 and was later approved by Salon's
stockholders. The plan provides for the grant of incentive stock options,
within the meaning of Section 422 of the Internal Revenue Code, to employees,
and for grants of nonstatutory stock options to employees, including officers,
non-employee directors and consultants.
The plan is administered by Salon's board of directors or a committee of the
board. Under the plan, the board or its committee has the authority to select
the persons to whom options are granted and determine the terms of each option,
including:
. the number of shares of common stock covered by the option;
. when the option becomes exercisable;
. the per share option exercise price, which in the case of incentive stock
options must be at least equal to the fair market value of a share of
common stock on the grant date or 110% of such fair market value for
incentive stock options granted to 10% stockholders, and, in the case of
nonstatutory stock options, must be at least 85% of the fair market value
of a share of common stock on the grant date; and
. the duration of the option, which may not exceed ten years, or, with
respect to incentive stock options granted to 10% stockholders, five
years.
Generally, options granted under the plan become exercisable as the
underlying shares vest. Options granted under the plan generally vest over four
years, although the board or its committee may specify a different vesting
schedule for a particular grant. Options granted under the plan are non-
transferable other than by will or the laws of descent and distribution.
In the event of a change in control of Salon, the acquiring or successor
corporation may assume or substitute for the outstanding options granted under
the plan. The outstanding options will terminate if these options are neither
exercised nor assumed or substituted for by the acquiring corporation.
Currently, the maximum number of shares issuable under the plan is 2,875,000.
The share reserve will automatically be increased on the first day of each
calendar year of Salon beginning on and after January 1, 2001 by 5% of the
number of shares of Salon's common stock that was issued and outstanding on the
last day of the preceding fiscal year. As of March 31, 1999, 54,996 shares have
been issued upon the exercise of options, options to purchase of a total of
1,683,593 shares at a weighted average exercise price of $0.24 per share were
outstanding and 1,136,411 shares were available for future option grants.
1999 Employee Stock Purchase Plan. Currently, a total of 500,000 shares of
common stock have been reserved for issuance under Salon's 1999 employee stock
purchase plan, none of which have been issued as of the effective date of this
offering. The plan's share reserve will automatically be increased on June 1 of
each year by 250,000 shares, or a lower number of shares determined by the
board. The first annual increase will occur on June 1, 2000 and the last annual
increase will occur on June 1, 2009. The plan, which is intended to qualify
under Section 423 of the Internal Revenue Code, is administered by Salon's
board or by a committee of the board. Employees, including officers and
employee directors, of Salon or any subsidiary designated by the board for
participation in the plan are eligible to participate in the plan if they are
customarily employed for more than 20 hours per week and more than five months
per year.
The plan will be implemented by sequential offerings of approximately six
months duration, the first of which will commence on the effective date of this
offering and will terminate on January 31, 2000. Shares will be purchased on
the last day of each offering period. After the effective date of this
offering, offering periods under the plan will generally begin on February 1
and August 1 of each year. The board may change the dates or duration of one or
more offerings, but no offering may exceed 27 months. The plan permits eligible
employees to purchase common stock through payroll deductions at a price no
less than 85% of the lower of
54
<PAGE>
the fair market value of the common stock on the first day of the offering, or
the purchase date. Participants generally may not purchase more than 1,000
shares in a six-month offering period or stock having a value greater than
$25,000 in any calendar year as measured at the beginning of the offering. In
the event of a change in control of Salon, the board may accelerate the
purchase date of the then current offering period to a date prior to the change
in control, unless the acquiring or successor corporation assumes or replaces
the purchase rights outstanding under the plan.
401(k) Savings Plan
Salon provides a tax-qualified employee savings and retirement plan, commonly
known as a 401(k) plan, which covers its eligible employees. Pursuant to the
401(k) plan, employees may elect to reduce their current annual compensation up
to the lesser of 15% or the statutorily prescribed limit, which is $10,000 in
calendar year 1999, and have the amount of the reduction contributed to the
401(k) plan. The 401(k) plan is intended to qualify under Sections 401(a) and
401(k) of the Internal Revenue Code, so that contributions by Salon or its
employees to the 401(k) plan, and income earned on plan contributions, are not
taxable to employees until withdrawn from the 401(k) plan, and so that
contributions will be deductible by Salon when made. The trustee of the 401(k)
plan invests the assets of the 401(k) plan in the various investment options as
directed by the participants.
Limitation of Liability and Indemnification
Salon's certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit. This limitation of liability does not apply to liabilities
arising under the federal securities laws and does not affect the
availability of equitable remedies such as injunctive relief or
rescission.
Salon's certificate of incorporation and bylaws provide that Salon will
indemnify its directors and executive officers and may indemnify its other
officers and employees and other agents to the fullest extent permitted by law.
Salon believes that indemnification under its bylaws covers at least negligence
and gross negligence on the part of indemnified parties. Salon's bylaws also
permit it to secure insurance on behalf of any officer, director, employee or
other agent for any liability arising out of his or her actions in such
capacity, regardless of whether Delaware law would permit indemnification.
In addition to indemnification provisions in Salon's bylaws, upon the closing
of this offering, Salon will have entered into agreements to indemnify its
directors and executive officers. These agreements will provide for
indemnification of Salon's directors and executive officers for some types of
expenses, including attorneys' fees, judgments, fines and settlement amounts
incurred by persons in any action or proceeding, including any action by or in
the right of Salon, arising out of their services as a director or executive
officer of Salon. Salon believes that these provisions and agreements are
necessary to attract and retain qualified persons as directors and executive
officers.
55
<PAGE>
CERTAIN TRANSACTIONS
Since April 1, 1997 there has been no transaction or series of transactions
to which Salon was a party involving $60,000 or more and in which any director,
executive officer or holder of more than five percent of Salon's capital stock
had a material interest other than agreements which are described where
required under the caption "Management" and the transactions described below.
On November 28, 1997, Salon sold an aggregate of 949,365 shares of Series B
preferred stock at a price of $3.16 per share for an aggregate of approximately
$3.0 million to four investors, including Adobe Ventures II, L.P., DOTCOM
Ventures, L.P., formerly ASCII Ventures, L.P., and H&Q Salon Investors, L.P.
On September 18, 1998, November 3, 1998 and April 14, 1999, Salon sold an
aggregate of 3,869,844 shares of Series C preferred stock at a price of $3.88
per share for an aggregate of approximately $15.0 million to thirty-five
investors, including Adobe Ventures II, L.P., DOTCOM Ventures, L.P., entities
affiliated with Constellation Ventures, H&Q Salon Investors, L.P., Wasserstein
Adelson Ventures, L.P. and entities affiliated with Bruce R. Katz. In addition,
on September 18, 1998, Salon issued warrants to purchase an aggregate of
219,582 shares of common stock to Adobe Ventures II, L.P., DOTCOM Ventures,
L.P. and H&Q Salon Investors, L.P. at an exercise price of $0.52 per share.
On March 29, 1999, Salon issued 463,918 shares of Series C preferred stock to
Whole Earth Lectronic Link, Inc. and Bruce R. Katz in exchange for all of the
membership interests of The Well LLC.
On April 14, 1999, Salon issued warrants to purchase an aggregate of 148,389
shares of Series C preferred stock at an exercise price of $3.88 to entities
affiliated with Daiwa Securities America Inc., as well as a warrant to purchase
25,773 shares of Series C preferred stock at an exercise price of $3.88 per
share to Act III Communications.
Upon the consummation of this offering, all outstanding shares of Series A
preferred stock, Series B preferred stock and Series C preferred stock will
automatically convert into shares of common stock on a one-for-one basis.
Salon intends to enter into indemnification agreements with each of its
directors and officers. These indemnification agreements will require Salon to
indemnify such individuals to the fullest extent permitted by Delaware law.
Salon believes that all transactions with affiliates described above were
made on terms no less favorable to Salon than could have been obtained from
unaffiliated third parties. Salon's charter documents require that any
transactions between Salon and its directors, officers or other affiliates must
be no less favorable to Salon than would be identical arm's length transactions
with an unrelated third party. Such transactions will continue to be on terms
no less favorable to Salon than could obtain from unaffiliated third parties.
56
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of Salon's common
stock as of April 15, 1999 and as adjusted to reflect the sale of the shares of
common stock offered hereby by:
. the chief executive officer, each of the executive officers named in the
summary compensation table and each of Salon's directors;
. all executive officers and directors as a group; and
. each person or entity who is known by Salon to beneficially own more than
5% of Salon's outstanding common stock.
Unless otherwise indicated, the address for each of the named individuals is
c/o Salon.com, 706 Mission Street, 2nd Floor, San Francisco, California 94103.
Except as otherwise indicated, and subject to applicable community property
laws, the persons named in the table have sole voting and investment power with
respect to all shares of common stock held by them.
Applicable percentage ownership in the table is based on 8,230,623 shares of
common stock outstanding as of April 15, 1999 and 10,730,623 shares outstanding
immediately following the completion of this offering. Beneficial ownership is
determined in accordance with the rules of the SEC. Shares of common stock
subject to options or warrants that are presently exercisable or exercisable
within 60 days of April 15, 1999 are deemed outstanding for the purpose of
computing the percentage ownership of the person or entity holding options or
warrants, but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person or entity. If any shares are issued
upon exercise of options, warrants or other rights to acquire Salon's capital
stock that are presently outstanding or granted in the future or reserved for
future issuance under Salon's stock plans, there will be further dilution to
new public investors.
<TABLE>
<CAPTION>
Percentage of
Shares
Outstanding
-----------------
Number of Shares Prior to After
Name and Address of Beneficial Owner Beneficially Owned Offering Offering
- ------------------------------------ ------------------ -------- --------
<S> <C> <C> <C>
Named Executive Officers and Directors
David Talbot............................. 402,083 4.8% 3.7%
Michael O'Donnell........................ 158,333 1.9 1.5
Andrew Ross.............................. 113,124 1.4 1.0
Chad Dickerson........................... 0 * *
Liza Parker.............................. 6,978 * *
Standish O'Grady......................... 3,777,863 44.9 34.6
Sada Chidambaram......................... 476,690 5.8 4.4
Jim Rosenfield........................... 10,156 * *
Norman Lear.............................. 283,505 3.4 2.6
Ronald Celmer............................ 644,330 7.8 6.0
All executive officers and directors as a
group (12 persons)...................... 5,866,084 66.2 51.6
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Shares
Outstanding
-----------------
Number of Shares Prior to After
Name and Address of Beneficial Owner Beneficially Owned Offering Offering
- ------------------------------------ ------------------ -------- --------
<S> <C> <C> <C>
5% Stockholders
Adobe Ventures........................... 2,833,397 33.8 26.1
c/o H&Q Venture Associates, LLC
One Bush Street,
San Francisco, CA 94104
Bruce R. Katz............................ 973,003 11.8 9.1
c/o Rosewood Stone Group
2320 Marinship Way, Ste. 240
Sausalito, CA 94965
H&Q Salon Investors, L.P................. 944,466 11.4 8.8
c/o H&Q Venture Associates, LLC
One Bush Street,
San Francisco, CA 94104
Constellation Venture Capital............ 644,330 7.8 6.0
575 Lexington Avenue,
New York, NY 10022
Wasserstein Adelson Ventures, L.P........ 515,464 6.3 4.8
31 W. 52nd Street, 26th Floor,
New York, NY 10019
DOTCOM Ventures, L.P..................... 476,690 5.8 4.4
3945 Freedom Circle, Suite 730,
Santa Clara, CA 95054
</TABLE>
- --------
* Less than 1%
Shares listed as held by Mr. Talbot include 102,083 shares subject to options
exercisable within 60 days of April 15, 1999.
Shares listed as held by Mr. O'Donnell are shares subject to options
exercisable within 60 days of April 15, 1999.
Shares listed as held by Mr. Ross are shares subject to options exercisable
within 60 days of April 15, 1999.
Shares listed as held by Mr. Dickerson are shares subject to options
exercisable within 60 days of April 15, 1999.
Shares listed as held by Mr. O'Grady consist of 2,112,341 shares held by
Adobe Ventures, L.P., 579,896 shares held by Adobe Ventures II, L.P., 897,413
shares held by H&Q Salon Investors, L.P., 141,160 shares issuable upon exercise
of warrants held by Adobe Ventures, L.P. and 47,053 shares issuable upon
exercise of warrants held by H&Q Salon Investors, L.P. Mr. O'Grady is the
manager of Adobe Ventures Management, LLC, which is a general partner of Adobe
Ventures II, L.P. and he is also the manager of Salon Investors Management,
LLC, which is a general partner of H&Q Salon Investors, L.P. Mr. O'Grady has
voting and investment power with respect to the shares held by Adobe Ventures
II, L.P. and H&Q Salon Investors, L.P. and may be deemed to beneficially own
these shares. Mr. O'Grady disclaims beneficial ownership of these shares,
except to the extent of his proportionate interest in them.
58
<PAGE>
Shares held by Mr. Chidambaram consist of 445,321 shares held DOTCOM
Ventures, L.P. and 31,369 shares subject to warrants held by DOTCOM Ventures,
L.P. Mr. Chidambaram is president and director of ASCII Investment Management,
Inc., the venture investment manager for DOTCOM Ventures, L.P. Mr. Chidambaram
has voting and investment power with respect to the shares held by DOTCOM
Ventures, L.P. and may be deemed to beneficially own these shares. Mr.
Chidambaram disclaims beneficial ownership of these shares, except to the
extent of his proportionate interest in them.
Shares listed as held by Mr. Rosenfield are shares subject to options
exercisable within 60 days of April 15, 1999.
Shares listed as held by Mr. Lear consist of 257,732 shares and 25,773 shares
subject to warrants held by ACT III Communications. Mr. Lear is the chairman of
ACT III Communications, has voting and investment power with respect to the
shares held by it, and may be deemed to beneficially own these shares. Mr. Lear
disclaims beneficial ownership of these shares, except to the extent of his
proportionate interest in them.
Shares listed as held by Mr. Celmer consist of 530,192 shares held by
Constellation Venture Capital, L.P. and 114,138 shares held by Constellation
Venture Offshore, L.P. Mr. Celmer is the general partner of Constellation
Ventures. Mr. Celmer has voting and investment power with respect to the shares
held by Constellation Venture Capital and Constellation Venture Offshore and
may be deemed to beneficially own these shares. Mr. Celmer disclaims beneficial
ownership of these shares, except to the extent of his proportionate interest
in them.
Shares listed as held by Adobe Ventures consist of 2,112,341 shares and
141,160 shares issuable upon exercise of warrants held by Adobe Ventures, L.P.
and 579,896 shares held by Adobe Ventures II, L.P.
Shares listed as held by Bruce R. Katz include 46,392 shares held by Bruce R.
Katz, as trustee of Bruce R. Katz and Whole Earth Lectronic Link, Inc. escrow
account and 408,382 shares held by Whole Earth Lectronic Link, Inc.
Shares listed as held by H&Q Salon Investors, L.P. include 47,053 shares
issuable upon exercise of warrants.
Shares listed as held by Constellation Venture Capital consist of 530,192
shares held by Constellation Venture Capital, L.P. and 114,138 shares held by
Constellation Venture Capital Offshore, L.P.
Townsend Ziebold is the president of Wasserstein Adelson Ventures, L.P. Mr.
Ziebold is also the president of Wasserstein Perella Ventures, Inc., the
general partner of Wasserstein Adelson Ventures, L.P.
Shares listed as held by DOTCOM Ventures, L.P. include 31,369 shares subject
to warrants.
Shares listed as held by all directors and executive officers as a group
include 383,696 shares subject to options exercisable within 60 days of April
15, 1999.
59
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, Salon's authorized capital stock will
consist of 50,000,000 shares of common stock and 5,000,000 shares of preferred
stock. The following summary of certain provisions of the common stock and the
preferred stock is subject to, and qualified in its entirety by Salon's
certificate of incorporation and bylaws and by the provisions of applicable
law.
Common Stock
As of April 15, 1999 there were 447,496 shares of common stock outstanding
held of record by 12 stockholders. Subject to preferences that may be
applicable to any preferred stock outstanding at the time, the holders of
outstanding shares of common stock are entitled to receive dividends out of
assets legally available therefor at such times and in such amounts as the
board from time to time may determine in its sole discretion. Holders of common
stock are entitled to one vote for each share held on all matters submitted to
a vote of stockholders. Cumulative voting for the election of directors is not
authorized by Salon's certificate of incorporation, which means that the
holders of a majority of the shares voted can elect all of the directors then
standing for election. The common stock is not entitled to preemptive rights
and is not subject to conversion or redemption. Upon liquidation, dissolution
or winding-up of Salon, the holders of common stock are entitled to share
ratably in all assets remaining after payment of liabilities and the
liquidation of any preferred stock. Each outstanding share of common stock is,
and all shares of common stock to be outstanding upon completion of this
offering will be, upon payment, duly and validly issued, fully paid and
nonassessable. The rights, preferences and privileges of the holders of common
stock are subject to, and may be adversely affected by, the rights of the
holders of any shares of preferred stock which Salon may issue in the future.
Preferred Stock
Upon completion of this offering, all outstanding shares of preferred stock
will be converted on a one-to-one one basis into 7,783,127 shares of common
stock. However, following this conversion, under Salon's certificate of
incorporation, the board of directors will have the authority, without further
action by the stockholders, to issue up to 5,000,000 shares of preferred stock
in one or more series. The board can fix the rights, preferences and privileges
of the shares of each series and any qualifications, limitations or
restrictions on these shares.
The board may authorize the issuance of preferred stock with voting or
conversion rights that could adversely affect the voting power or other rights
of the holders of common stock. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes could, under certain circumstances, have the effect of
delaying, deferring or preventing a change in control of Salon. Salon has no
current plans to issue any shares of preferred stock.
Warrants
In April 1997, Salon issued a warrant to Imperial Bancorp to purchase 8,750
shares of Series A preferred stock at an exercise price of $2.00 per share. The
April 1997 warrant may be exercised at any time within five years after
issuance of the warrant. In April 1998, Salon issued a warrant to Imperial
Bancorp to purchase 11,867 shares of Series B preferred stock at an exercise
price of $3.16 per share. In December 1998, Salon issued a warrant to Imperial
Bancorp to purchase 14,439 shares of Series C preferred stock at an exercise
price of $3.88 per share. Under the terms of the December 1998 warrant,
additional shares become subject to the terms of the December 1998 warrant
under certain circumstances. The April and December 1998 warrants may be
exercised at any time within seven years after issuance. Upon completion of
this offering, all warrants held by Imperial Bancorp will convert into the
right to purchase an equivalent number of shares of Salon's common stock at the
same exercise price per share.
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In July 1998, Salon issued a warrant to America Online Inc. to purchase
79,114 shares of Series B preferred stock at an exercise price of $3.16 per
share. Upon completion of this offering, the warrant will convert into the
right to purchase an equivalent number of shares of Salon's common stock at the
same exercise price per share. The warrant may be exercised at any time within
five years after issuance.
In September 1998, Salon issued a warrant to Adobe Ventures II L.P. to
purchase 141,160 shares of common stock at an exercise price of $0.52 per
share. The warrant may be exercised at any time within ten years after
issuance.
In September 1998, Salon issued a warrant to DOTCOM Ventures, L.P. to
purchase 31,369 shares of common stock at an exercise price of $0.52 per share.
The warrant may be exercised at any time within ten years after issuance.
In September 1998, Salon issued a warrant to H&Q Salon Investors, L.P. to
purchase 47,053 shares of common stock at an exercise price of $0.52 per share.
The warrant may be exercised at any time within ten years after issuance.
In April 1999, Salon issued warrants to entities affiliated with Daiwa
Securities America Inc. to purchase an aggregate of 148,389 shares of Series C
preferred stock at an exercise price of $3.88 per share. The warrant may be
exercised at any time within five years after issuance. Upon completion of this
offering, the warrant will convert into the right to purchase an equivalent
number of shares of Salon's common stock at the same exercise price per share.
In April 1999, Salon issued a warrant to ACT III Communications to purchase
25,773 shares of Series C preferred stock at an exercise price of $3.88 per
share. The warrant may be exercised at any time within five years after
issuance. Upon completion of this offering, the warrant will convert into the
right to purchase an equivalent number of shares of Salon's common stock at the
same exercise price per share.
Registration Rights of Certain Holders
Following the sale of the common stock offered hereby, the holders of
approximately 8,158,127 shares of common stock and 288,332 shares of stock
issuable upon exercise of warrants will have certain rights to register those
shares under the Securities Act and an amended and restated rights agreement.
Subject to certain limitations in the rights agreement:
. the holders of at least 25% of such shares;
. the holders of at least 20% of the then-outstanding shares issued upon
conversion of the Series C preferred stock; or
. shares with an expected aggregate offering price to the public of at
least $5 million;
may require, on three occasions, that Salon use its best efforts to register
such shares for public resale. If Salon registers any of its common stock for
its own account or for the account of other security holders, the holders of
such shares are entitled to include their shares of common stock in the
registration, subject to the ability of the underwriters to limit the number of
shares included in the offering. Any holder or holders of such shares may also
require Salon to register all or a portion of their registrable securities in a
registration statement on form S-3 when Salon is eligible to use that form,
provided, among other limitations, that the proposed aggregate price to the
public is at least $500,000 and that Salon has not effected two of these
registrations in any 12-month period. Salon will bear all fees, costs and
expenses of these registrations, other than underwriting discounts and
commissions.
All of the registration rights described above are subject to conditions and
limitations, among them the right of the underwriters in any underwritten
offering to limit the number of shares of common stock to be included in a
registration. Registrations of any shares of common stock held by holders with
registration rights
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<PAGE>
would result in these shares being freely tradable without restriction under
the Securities Act upon the effective date of the registration. Under the
rights agreement Salon also agreed to indemnify the holders of registration
rights.
Delaware Law and Provisions of Salon's Certificate of Incorporation and Bylaws
Provisions of Delaware law and Salon's certificate of incorporation and
bylaws could make more difficult the acquisition of Salon by means of a tender
offer, a proxy contest, or otherwise, and the removal of incumbent officers and
directors. These provisions are expected to discourage certain types of
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of Salon to first negotiate with its board
of directors. Salon believes that the benefits of increased protection of
Salon's potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure Salon outweighs the
disadvantages of discouraging these proposals, including proposals that are
priced above the then current market value of its common stock, because, among
other things, negotiation of these proposals could result in an improvement of
their terms.
Salon is subject to Section 203 of the Delaware General Corporation Law. This
provision generally prohibits any Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three
years following the date the stockholder became an interested stockholder,
unless:
. prior to that date the board of directors approved either the business
combination or the transaction that resulted in the stockholder becoming
an interested stockholder;
. upon completion of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock outstanding at the time the transaction
began; or
. on or following that date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested stockholder.
Section 203 defines a business combination to include:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
. subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
Salon's certificate of incorporation provides that, upon the closing of this
offering, the board of directors will be divided into three classes of
directors with each class serving a staggered three-year term. The
classification system of electing directors may tend to discourage a third
party from making a tender offer or otherwise attempting to obtain control of
Salon and may maintain the incumbency of the board of directors, as the
classification of the board of directors generally increases the difficulty of
replacing a majority of the directors. Salon's certificate of incorporation
eliminates the right of stockholders to call special meetings of
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<PAGE>
stockholders. The certificate of incorporation and bylaws do not provide for
cumulative voting in the election of directors. The authorization of
undesignated preferred stock makes it possible for the board of directors to
issue preferred stock with voting or other rights or preferences that could
impede the success of any attempt to change control of Salon. These and other
provisions may have the effect of deferring hostile takeovers or delaying
changes in control or management of Salon. The amendment of any of these
provisions would require approval by holders of at least 66 2/3% of the
outstanding common stock.
Transfer Agent and Registrar
The transfer agent and registrar for Salon's common stock is Harris Trust &
Savings Bank.
Listing
Salon has applied to list its common stock on the Nasdaq National Market
under the trading symbol "SALN."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of this offering, Salon will have outstanding an aggregate
of 10,730,623 shares of common stock. Of these shares, the 2,500,000 shares
sold in this offering will be freely tradable without restrictions or further
registration under the Securities Act unless such shares are purchased by
"affiliates" of Salon, as that term is defined under Rule 144 under the
Securities Act. The remaining 8,230,623 shares of common stock held by existing
stockholders will be "restricted securities" as that term is defined in Rule
144 under the Securities Act. Restricted shares may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rule 144, or Rule 701 under the Securities Act.
The restricted shares will be available for sale in the public market as
follows:
. 75,000 restricted shares will be available for sale in the public market
immediately following the closing of this offering pursuant to Rule
144(k);
. 3,804,361 restricted shares will become eligible for sale in the public
market 90 days after the closing of this offering under Rule 144 and Rule
701 of the Securities Act; and
. the remaining restricted shares will begin to be eligible for sale from
time to time thereafter upon expiration of one-year holding periods and
subject to the requirements of Rule 144.
Salon has agreed not to offer, sell, contract to sell, or otherwise dispose
of any shares of common stock, or any options or warrants to purchase common
stock other than the shares of common stock or options to acquire common stock
issued under Salon's 1995 stock option plan, employee stock purchase plan or
upon the conversion of outstanding warrants, for a period of 90 days after the
date of this prospectus, except with the prior written consent of W.R.
Hambrecht & Company, LLC.
In general, under Rule 144, a person, or persons whose shares are aggregated,
including an affiliate who has beneficially owned shares for at least one year,
is entitled to sell within any three-month period a number of shares that does
not exceed the greater of:
. 1% of the number of then-outstanding shares of common stock; or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the date on which notice of such sale is filed,
subject to certain restrictions.
In addition, a person who is not deemed to have been an affiliate of Salon at
any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years would be entitled
to sell such shares under Rule 144(k) without regard to the requirements
described above. If shares were acquired from an affiliate of Salon, that
affiliate's holder period to effect a sale under Rule 144 commences on the date
of transfer from the affiliate. The foregoing is only a summary of Rule 144 and
is not intended to be a complete description of it.
429,996 of the restricted shares were issued in reliance upon Rule 701.
Securities issued in reliance upon Rule 701 may be sold by persons that are not
affiliates subject to the manner of sale provisions of Rule 144 and by
affiliates subject to Rule 144 without compliance with its one-year minimum
holding period requirement.
As of March 31, 1999, 1,683,593 shares of common stock subject to outstanding
options were issuable pursuant to the 1995 stock option plan. After the
completion of this offering, Salon intends to file a registration statement
under the Securities Act to register 2,875,000 shares of common stock reserved
for issuance under the 1995 stock option plan and 500,000 shares of common
stock reserved for issuance under the employee stock purchase plan. This
registration statement will become effective immediately upon filing.
Prior to this offering, there has been no public market for the common stock
of Salon, and the effect, if any, that the sale or availability for sale of
shares of additional common stock will have on the trading price of the common
stock cannot be predicted. Nevertheless, sales of substantial amounts of such
shares in the public market, or the perception that such sales could occur,
could adversely affect the trading price of the common stock and could impair
Salon's future ability to raise capital through an offering of its equity
securities.
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PLAN OF DISTRIBUTION
Subject to the terms and conditions of an underwriting agreement, W.R.
Hambrecht & Company, LLC and Daiwa Securities America Inc., as underwriters,
will purchase from Salon the following respective number of shares of common
stock at the public offering price less the underwriting discounts and
commissions set forth on the cover page of this prospectus.
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
W.R. Hambrecht & Company, LLC...................................... 2,310,500
Daiwa Securities America Inc....................................... 189,500
---------
Total.......................................................... 2,500,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to conditions, including the absence of any material adverse change
in Salon's business, and the receipt of certificates, opinions and letters from
Salon and its counsel and independent accountants. Subject to those conditions,
the underwriters are committed to purchase all shares of common stock offered
if any of the shares are purchased.
The underwriters propose to offer the shares of common stock directly to the
public at the offering price set forth on the cover page of this prospectus, as
this price is determined by the process described below, and to certain dealers
at this price less a concession not in excess of $0.21 per share. Any dealers
or agents that participate in the distribution of the common stock may be
deemed to be underwriters within the meaning of the Securities Act, and any
discounts, commissions or concessions received by them and any provided by the
sale of the shares by them might be deemed to be underwriting discounts and
commissions under the Securities Act. After the completion of the initial
public offering of the shares, the public offering price and other selling
terms may be changed by the underwriters.
The public offering price set forth on the cover page of this prospectus will
be based on the results of an auction process, rather than solely through
negotiations between Salon and the underwriters. The plan of distribution of
the offered shares differs somewhat from traditional underwritten public
offerings of equity securities.
The auction process will proceed as follows:
. Prior to effectiveness of the registration statement relating to this
offering, the underwriters and participating dealers will solicit
indications of interest from prospective investors through the Internet
as well as by traditional means. The auction is open for purposes of
receiving indications of interest following the posting of the
preliminary prospectus on the Web site of W.R. Hambrecht & Company, LLC.
The indications of interest will specify the number of shares the
potential investor proposes to purchase and the price the investor is
willing to pay for the shares. After effectiveness, the underwriters will
contact in person, by e-mail, telephone, voice mail, facsimile, mail and
or posting a notice on W.R. Hambrecht's Web site, all pre-effective
bidders to confirm whether their indications are firm bids. Pre-effective
bidders who have not furnished e-mail addresses will be contacted in
person, by telephone, voice mail, facsimile or mail. All indications of
interest that are not confirmed prior to a time specified by the
underwriters or, if no time is specified, the close of the auction will
be deemed withdrawn. After an indication of interest has been confirmed,
it may be modified or withdrawn at any time until the auction is closed.
Similarly, new bids may be placed at any time prior to the close of the
auction. The public offering price will ultimately be determined by
negotiation between the underwriters and Salon following the close of the
auction. The principal factor in establishing the public offering price
will be the price per share, or clearing price, resulting from the
auction that equals the highest price set forth in valid firm bids at
which all of the shares (excluding any shares which may be sold pursuant
to exercise of the over-allotment option) may be sold to potential
investors. The public offering price may be lower (but will not be
higher) than the clearing price based on negotiations between the
underwriters and Salon. However, the clearing price will always determine
the allocation of shares. Thus, if the public offering price is below the
clearing price all bids which are below the clearing price will be
rejected
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even if they are higher than the public offering price. If sufficient bids
are not received or Salon does not consider the clearing price to be
adequate or the underwriters and Salon are not able to reach agreement on
the offering price, Salon and the underwriters will either postpone or
cancel the offering or file a post-effective amendment and conduct a new
auction.
. A simplified example of the auction process is as follows: Company X
offers to sell 100 shares in its public offering through this auction
process. W.R. Hambrecht & Company, LLC, on behalf of Company X, receives
five indications of interest, all of which are kept confidential until
the auction process ends. The first indication of interest is to pay $10
per share for 10 shares, the second is for $9 per share for 30 shares,
the third for $8 per share for 60 shares, the fourth for $8 per share for
40 shares and the last for $7 a share for 80 shares. After the
registration statement becomes effective, all potential investors who
have submitted pre-effective indications of interest will be advised of
that fact and asked to confirm that their indications of interest are now
offers to purchase shares. The auction is closed and a clearing price is
set. Assuming all of these indications of interest are confirmed as
offers to purchase shares and no additional offers to purchase are
received, the clearing price used to determine the public offering price
would be $8 a share because $8 equals the highest price at which all
100 shares may be sold to potential investors who have submitted valid
bids. The two potential investors with the highest offers to purchase
would receive all the shares they requested, totaling 40 shares. The next
two potential investors would receive the remaining 60 shares in
proportion to the amounts they asked for or 36 and 24 shares each. The
potential investor with the lowest offer to purchase would receive no
shares in this example.
. Valid indications of interest and offers to purchase are those that meet
the requirements, including eligibility, account status and size,
established by the underwriters or participating dealers. In determining
the validity of offers to purchase, in addition to minimum account
balances, a prospective investor submitting an offer to purchase after
the registration statement is effective through a W.R. Hambrecht &
Company, LLC brokerage account may be required to have an account balance
equal to or in excess of the aggregate dollar amount of the prospective
investor's offer to purchase. Although funds may be required to be in an
account as a condition to the offer to purchase being considered valid,
the funds will not be transferred to the underwriters until the closing
of the offering. Conditions for valid indications of interest and offers
to purchase, including eligibility standards and account funding
requirements, of other underwriters or participating dealers may vary.
. The auction will close not earlier than on a date publicly disclosed in
advance by the underwriters. The offered shares will be purchased from
Salon by the underwriters and sold through the underwriters and
participating dealers to investors who have submitted offers to purchase
at or in excess of the clearing price, and these investors will be
notified by e-mail, telephone, voice mail, facsimile or mail as soon as
practicable following the close of the auction that their offers to
purchase have been accepted. The number of shares sold to an investor
submitting an offer to purchase precisely at the clearing price may be
subject to a pro rata reduction. Each participating dealer has agreed
with the underwriters to sell shares they purchase from the underwriters
in this manner, unless otherwise consented to by the underwriters. Shares
issued upon exercise of the underwriters' over-allotment option will be
allocated in the same manner, with investors who have submitted bids in
excess of the clearing price receiving 100% of shares bid for, and
investors who have submitted bids at the clearing price receiving
available shares on a pro rata basis. The underwriters reserve the right
to reject bids that they deem manipulative, disruptive or necessary or
beneficial to facilitate the orderly completion of the offering, and
reserve the right, in exceptional circumstances, to alter this method of
allocation as they deem necessary to effect a fair and orderly
distribution of the shares. For example, large orders may be reduced to
insure a public distribution and indications of interest or offers to
purchase may be rejected by the underwriters or participating dealers
based on eligibility or creditworthiness criteria.
Price and volume volatility in the market for Salon's common stock may result
from the somewhat unique nature of the proposed plan of distribution. Price and
volume volatility in the market for Salon's common stock after the completion
of this offering may adversely affect the market price of Salon's common stock.
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Salon has granted to the underwriters an option, exercisable no later than 30
days after the date of this prospectus, to purchase up to an aggregate of
375,000 additional shares of common stock at the offering price, less the
underwriting discount, set forth on the cover page of this prospectus. To the
extent that the underwriters exercise this option, the underwriters will have a
firm commitment to purchase the additional shares, and Salon will be obligated
to sell the additional shares to the underwriters. The underwriters may
exercise the option only to cover over-allotments made in connection with the
sale of shares offered.
The underwriting agreement provides that Salon will indemnify the
underwriters against specified liabilities, including liabilities under the
Securities Act, or contribute to payments that the underwriters may be required
to make.
Salon has agreed not to offer, sell, contract to sell, or otherwise dispose
of any shares of common stock, or any options or warrants to purchase common
stock other than the shares of common stock or options to acquire common stock
issued under Salon's 1995 stock option plan, employee stock purchase plan or
upon the conversion of outstanding warrants, for a period of 90 days after the
date of this prospectus, except with the prior written consent of W.R.
Hambrecht & Company, LLC.
Prior to the offering, there has been no public market for Salon's common
stock. The initial public offering price for the common stock will be
determined by the process described above and does not necessarily bear any
direct relationship to Salon's assets, current earnings or book value or to any
other established criteria of value, although these factors were considered in
establishing the initial public offering price range. Other factors considered
in determining the initial public offering price range include:
. market conditions;
. the industry in which Salon operates;
. an assessment of Salon's management;
. Salon's operating results;
. Salon's capital structure;
. the business potential of Salon;
. the demand for similar securities of comparable companies; and
. other factors deemed relevant.
In connection with the offering, persons participating in the offering may
purchase and sell shares of common stock on the open market. These transactions
may include short sales, stabilizing transactions in accordance with Rule 104
of Regulation M under the Exchange Act and purchases to cover positions created
by short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering which
creates a syndicate short position. Stabilizing transactions consist of certain
bids or purchases made for the purpose of preventing or retarding a decline in
the market price of the common stock. The underwriters also may impose a
penalty bid. This occurs when a particular underwriter repays to the
underwriters a portion of the underwriting discount received by it because the
representative has repurchased shares sold by or for the account of such
underwriter in stabilizing or short covering transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
Persons participating in this offering may also engage in passive market
making transactions in the common stock on the Nasdaq National Market. Passive
market making consists of displaying bids on the
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<PAGE>
Nasdaq National Market limited by the prices of independent market makers and
affecting purchases limited by such prices and in response to order flow. Rule
103 of Regulation M promulgated by the SEC limits the amount of net purchases
that each passive market maker may make and the displayed size of each bid.
Passive market making may stabilize the market price of the common stock at a
level above that which might otherwise prevail in the open market and, if
commenced, may be discontinued at any time.
W.R. Hambrecht & Company, LLC currently intends to act as a market maker for
the common stock following this offering. However, W.R. Hambrecht & Company,
LLC is not obligated to do so and may discontinue any market making at any
time.
W.R. Hambrecht & Company, LLC is an investment banking firm formed as a
limited liability company in February 1998. In addition to this offering, W.R.
Hambrecht & Company, LLC has engaged in the business of public and private
equity investing and financial advisory services since its inception. The
manager of W.R. Hambrecht & Company, LLC, William R. Hambrecht, has 40 years of
experience in the securities industry. Persons affiliated and associated with
W.R. Hambrecht & Company, LLC have an interest in gains realized on shares of
Salon common stock held by Adobe Ventures, L.P. and H&Q Salon Investors, L.P.
In connection with services as placement agent for the sale of Series C
preferred stock in April 1999, entities affiliated with Daiwa Securities
America Inc. acquired warrants to purchase an aggregate of 148,389 shares of
Series C preferred stock at an exercise price of $3.88 per share.
Daiwa Securities America Inc. and Daiwa America Corporation have agreed that
the 148,389 warrants acquired by Daiwa America Corporation in April, 1999, will
not be sold, transferred, pledged, assigned or hypothecated for a period of one
year from the effective date of the offering except to officers or partners
(not directors) of the underwriters or to officers or partners of the selling
group.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed upon
for Salon by Gray Cary Ware & Freidenrich LLP, Palo Alto, California. Certain
legal matters in connection with the offering will be passed upon for the
underwriters by Morrison & Foerster LLP, San Francisco, California.
Members of Gray Cary Ware & Freidenrich LLP beneficially own an aggregate of
10,309 shares of Salon common stock.
EXPERTS
The financial statements as of March 31, 1998 and 1999 and for each of the
three years in the period ended March 31, 1999, included in this prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The balance sheets as of December 31, 1997 and 1998 and the statements of
operations, of member's interest and of cash flows for the period July 1, 1997
(inception) to December 31, 1997 and the year ended December 31, 1998 for The
Well LLC, are included in this prospectus in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
The balance sheets as of June 30, 1997 and the statements of operations and
changes in owner's net equity and cash flows for the period January 1, 1997
(inception) to June 30, 1997 for Online Conferencing Business, predecessor
business of The Well LLC, are included in this prospectus in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of that firm as experts in accounting and auditing.
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WHERE TO FIND ADDITIONAL INFORMATION ABOUT SALON
Salon has filed with the SEC a registration statement on form S-1 under the
Securities Act with respect to the shares of common stock offered by this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the
registration statement and the exhibits and schedules filed therewith. For
further information with respect to Salon and the common stock, reference is
made to the registration statement and the exhibits and schedules filed with
it. With respect to statements contained in this prospectus regarding the
contents of any agreement or any other document, in each instance, reference is
made to the copy of such agreement or other document filed as an exhibit to the
registration statement. Each statement is qualified in all respects by the
exhibits and schedules.
For further information with respect to Salon and the common stock, reference
is made to the registration statement and its exhibits and schedules. You may
read and copy any document Salon files at the SEC's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC
at 1-800-SEC-0330 for further information about the public reference rooms.
Salon's SEC filings are also available to the public from the SEC's Web site at
http://www.sec.gov.
Upon completion of this offering, Salon will become subject to the
information and periodic reporting requirements of the Exchange Act, and will
file periodic reports, proxy statements and other information with the SEC.
These periodic reports, proxy statements and other information will be
available for inspection and copying at the SEC's public reference rooms and
the SEC's Web site, which is described above.
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SALON.COM
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Salon.com
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Stockholders' Equity.......................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
The Well LLC
Report of Independent Accountants........................................ F-23
Balance Sheets........................................................... F-24
Statements of Operations................................................. F-25
Statements of Members' Interest.......................................... F-26
Statements of Cash Flows................................................. F-27
Notes to Financial Statements............................................ F-28
Online Conferencing Business (Predecessor Business)
Report of Independent Accountants........................................ F-33
Balance Sheet............................................................ F-34
Statement of Operations and Changes in Owner's Net Equity................ F-35
Statement of Cash Flows.................................................. F-36
Notes to Financial Statements............................................ F-37
Pro Forma Consolidated Financial Statements
Pro Forma Consolidated Financial Statements (unaudited).................. F-40
Pro Forma Consolidated Statement of Operations (unaudited)............... F-41
Notes to Pro Forma Consolidated Financial Statements (unaudited)......... F-42
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Salon.com
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Salon.com and its wholly-owned subsidiary ("Salon") at March 31, 1998 and 1999
and the results of their operations and their cash flows for each of the three
years in the period ended March 31, 1999, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
May 3, 1999
F-2
<PAGE>
SALON.COM
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
March 31, Equity at
------------------------- March 31,
1998 1999 1999
----------- ------------ -------------
Assets (unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents .......... $ 1,925,664 $ 754,334
Accounts receivable, net ........... 248,113 497,209
Inventories......................... -- 25,449
Prepaid expenses and other current
assets ............................ 138,232 577,985
----------- ------------
Total current assets .............. 2,312,009 1,854,977
Property and equipment, net ........ 371,632 706,559
Other assets ....................... 23,567 136,123
Intangible assets, net.............. -- 5,110,567
----------- ------------
Total assets ...................... $ 2,707,208 $ 7,808,226
=========== ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ................... $ 197,610 $ 1,035,960
Accrued liabilities ................ 79,393 439,498
Deferred revenue ................... 45,832 540,951
Bank borrowings .................... 94,991 363,959
----------- ------------
Total current liabilities ......... 417,826 2,380,368
Bank borrowings, net of current
portion............................ 94,991 75,152
----------- ------------
Total liabilities ................. 512,817 2,455,520
----------- ------------
Commitments and contingencies (Note 9)
Stockholders' Equity:
Convertible preferred stock, no par
value; 6,917,500 and 8,108,750
shares authorized at March 31, 1998
and 1999; 3,449,365 and 4,815,345
shares were issued and outstanding
at March 31, 1998 and 1999,
respectively; none were issued and
outstanding for pro forma
(liquidation preference $13,299,995
at March 31, 1999)................. 7,954,706 15,789,658 $ --
Common stock, $0.001 par value;
12,500,000 shares authorized at
March 31, 1998 and 1999; 50,000,000
shares authorized for pro forma;
375,000, 447,496 and 5,262,841
shares were issued and outstanding
at March 31, 1998 and 1999 and pro
forma, respectively................ 375 448 5,263
Additional paid-in capital ........... 1,109,184 3,146,811 18,931,654
Unearned compensation ................ (623,734) (833,799) (833,799)
Accumulated deficit .................. (6,246,140) (12,750,412) (12,750,412)
----------- ------------ ------------
Total stockholders' equity........ 2,194,391 5,352,706 $ 5,352,706
----------- ------------ ============
Total liabilities and
stockholders' equity ............ $ 2,707,208 $ 7,808,226
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
SALON.COM
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended March 31,
-------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net revenues ........................... $ 279,524 $ 1,155,931 $ 2,921,517
----------- ----------- -----------
Operating expenses:
Production, content, and product....... 1,555,134 2,832,006 4,502,964
Sales and marketing ................... 418,708 1,654,990 3,654,733
Research and development .............. 175,614 276,112 469,117
General and administrative ............ 129,189 291,446 518,291
----------- ----------- -----------
Total operating expenses ............. 2,278,645 5,054,554 9,145,105
----------- ----------- -----------
Loss from operations ................... (1,999,121) (3,898,623) (6,223,588)
Interest expense ....................... (185) (16,340) (53,672)
Other income ........................... 55,071 89,108 44,610
----------- ----------- -----------
Net loss ............................. (1,944,235) (3,825,855) (6,232,650)
Preferred dividend...................... -- -- 271,622
----------- ----------- -----------
Net loss attributable to common
stockholders........................... $(1,944,235) $(3,825,855) $(6,504,272)
=========== =========== ===========
Basic and diluted net loss per share
attributable to common stockholders.... $ (3.84) $ (10.20) $ (16.62)
=========== =========== ===========
Weighted average shares used in
computing basic and diluted net loss
per share attributable to common
stockholders .......................... 506,918 375,000 391,354
=========== =========== ===========
Pro forma basic and diluted net loss per
share attributable to common
stockholders (unaudited)............... $ (1.50)
===========
Weighted average shares used in
computing pro forma basic and diluted
net loss per share attributable to
common stockholders (unaudited) ....... 4,327,798
===========
</TABLE>
The accompanying notes are an integrated part of these financial statements.
F-4
<PAGE>
SALON.COM
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Total
--------------------- ---------------- Paid-In Unearned Accumulated Stockholders'
Shares Amount Shares Amount Capital Compensation Deficit Equity
--------- ----------- -------- ------ ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31,
1996................... 850,000 $ 1,693,025 600,000 $ 600 $ 183,400 $(154,278) $ (476,050) $ 1,246,697
Repurchase of common
stock ................. -- -- (225,000) (225) (150) -- -- (375)
Issuance of Series A
convertible preferred
stock for cash ........ 1,650,000 3,296,002 -- -- -- -- -- 3,296,002
Unearned compensation .. -- -- -- -- 108,000 (108,000) -- --
Amortization of unearned
compensation .......... -- -- -- -- -- 99,183 -- 99,183
Net loss ............... -- -- -- -- -- -- (1,944,235) (1,944,235)
--------- ----------- -------- ----- ---------- --------- ------------ -----------
Balance, March 31,
1997................... 2,500,000 4,989,027 375,000 375 291,250 (163,095) (2,420,285) 2,697,272
Issuance of Series B
convertible preferred
stock for cash ........ 949,365 2,965,679 -- -- -- -- -- 2,965,679
Issuance of preferred
stock warrants in
connection with bank
borrowings............. -- -- -- -- 11,871 -- -- 11,871
Unearned compensation .. -- -- -- -- 806,063 (806,063) -- --
Amortization of unearned
compensation .......... -- -- -- -- -- 345,424 -- 345,424
Net loss ............... -- -- -- -- -- -- (3,825,855) (3,825,855)
--------- ----------- -------- ----- ---------- --------- ------------ -----------
Balance, March 31,
1998................... 3,449,365 7,954,706 375,000 375 1,109,184 (623,734) (6,246,140) 2,194,391
Issuance of Series C
convertible preferred
stock and common stock
warrants for cash...... 902,062 2,824,637 -- -- 614,406 -- -- 3,439,043
Issuance of common stock
upon stock option
exercise .............. -- -- 54,996 55 11,094 -- -- 11,149
Issuance of preferred
stock warrants in
connection with bank
borrowings............. -- -- -- -- 98,539 -- -- 98,539
Issuance of preferred
stock warrants in
connection with online
distribution
agreement.............. -- -- -- -- 217,179 -- -- 217,179
Unearned compensation .. -- -- -- -- 763,729 (763,729) -- --
Amortization of unearned
compensation .......... -- -- -- -- -- 553,664 -- 553,664
Shares issued for
acquisition............ 463,918 5,010,315 -- -- -- -- -- 5,010,315
Shares issued for domain
name................... -- -- 17,500 18 61,058 -- -- 61,076
Preferred dividend...... -- -- -- -- 271,622 -- (271,622) --
Net loss ............... -- -- -- -- -- -- (6,232,650) (6,232,650)
--------- ----------- -------- ----- ---------- --------- ------------ -----------
Balance, March 31, 1999
....................... 4,815,345 $15,789,658 447,496 $ 448 $3,146,811 $(833,799) $(12,750,412) $ 5,352,706
========= =========== ======== ===== ========== ========= ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
SALON.COM
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ............................... $(1,944,235) $(3,825,855) $(6,232,650)
Adjustments to reconcile net loss to net
cash used in operating activities:
Expense recognized in connection with
issuance of warrants and stock
options.............................. 99,183 345,424 553,664
Depreciation and amortization......... 38,923 114,894 299,184
Loss on disposal of property and
equipment............................ -- 14,888 --
Amortization of discount on bank
borrowings........................... -- 3,627 5,606
Changes in operating assets and
liabilities:
Accounts receivable .................. (19,979) (228,134) (247,281)
Inventories........................... -- -- (25,449)
Prepaid expenses and other assets .... (20,860) (105,291) (316,713)
Accounts payable ..................... 42,391 113,014 654,585
Accrued liabilities .................. (274) 41,898 316,269
Deferred revenue ..................... (2,917) 31,249 495,119
----------- ----------- -----------
Net cash used in operating
activities.......................... (1,807,768) (3,494,286) (4,497,666)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment ..... (81,022) (381,665) (495,405)
Cash received in connection with
acquisition............................ -- -- 29,487
----------- ----------- -----------
Net cash used in investing activities (81,022) (381,665) (465,918)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of preferred
stock and common stock warrants,
net.................................. 3,296,002 2,965,679 3,439,043
Proceeds from issuance of common
stock, net .......................... -- -- 11,149
Repurchase of common stock ........... (375) -- --
Proceeds from bank borrowings ........ -- 247,783 461,797
Repayments of bank borrowings ........ -- (49,557) (119,735)
----------- ----------- -----------
Net cash provided by financing
activities ......................... 3,295,627 3,163,905 3,792,254
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents..................... 1,406,837 (712,046) (1,171,330)
Cash and cash equivalents--beginning
of period............................ 1,230,873 2,637,710 1,925,664
----------- ----------- -----------
Cash and cash equivalents--end of pe-
riod................................. $ 2,637,710 $ 1,925,664 $ 754,334
=========== =========== ===========
Cash paid for interest ............... $ -- $ 12,713 $ 38,571
=========== =========== ===========
Cash paid for income taxes ........... $ 800 $ 800 $ 800
=========== =========== ===========
Non-cash investing and financing trans-
actions:
Unearned compensation in connection
with the issuance of stock options ... $ 108,000 $ 806,063 $ 763,729
=========== =========== ===========
Issuance of warrants issued in
connection with bank borrowings ...... $ -- $ 11,871 $ 98,539
=========== =========== ===========
Issuance of warrants issued in
connection with distribution agreement
...................................... $ -- $ -- $ 217,179
=========== =========== ===========
Value assigned to reciprocal
advertising agreements................ $ -- $ 75,424 $ 472,105
=========== =========== ===========
Issuance of stock in connection with
acquisition........................... $ -- $ -- $ 5,010,315
=========== =========== ===========
Issuance of stock in connection with
acquisition of domain name............ $ -- $ -- $ 61,076
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--ORGANIZATION:
Salon.com is an Internet media company that produces a network of ten
subject-specific, demographically targeted Web sites and a variety of online
communities designed to attract Internet advertisers and electronic commerce
partners. Salon was originally incorporated in July 1995 in the State of
California.
On March 29, 1999, Salon.com completed the acquisition of The Well LLC, an
online community business.
Note 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
The consolidated financial statements include the accounts of Salon.com and
its wholly-owned subsidiary ("Salon"). All material intercompany accounts and
transactions have been eliminated in the consolidated financial statements.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash equivalents
Salon considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. The majority of
Salon's cash and cash equivalents are held in checking, money market accounts
or certificates of deposits with one bank. As of March 31, 1999, the balance
exceeded existing federally insured limits.
Inventories
Inventories, which consist solely of finished goods, are stated at the lower
of cost or market. Cost is determined using the first-in, first-out method.
Property and equipment
Property and equipment are recorded at cost. Depreciation and amortization
are computed on the straight-line basis over the estimated useful lives of the
assets, as follows:
<TABLE>
<S> <C>
Computer and network equipment and software.......................... 3 years
Furniture and office equipment....................................... 5 years
</TABLE>
Leasehold improvements are amortized on a straight-line basis over the life
of the lease, or the useful life of the assets; which ever is shorter.
Maintenance and repairs are charged to expense as incurred. When assets are
sold or retired, the cost and related accumulated depreciation are removed from
the accounts and any resulting gain or loss is included in operations.
Intangibles
Intangibles including proprietary technology, tradename and goodwill are
amortized on a straight line basis over five years.
F-7
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Management evaluates the future realization of intangible assets and writes
down any amounts that management deems unlikely to be recovered through future
revenues. Any amounts deemed unrecoverable are written down to the estimated
recoverable amount at the time of evaluation.
Revenue recognition
To date, Salon's revenues have been derived primarily from the sale of
advertising sponsorships and advertising contracts. Sponsorship and advertising
revenues were approximately 99%, 99% and 94% of total revenues for the years
ended March 31, 1997, 1998 and 1999, respectively. Sponsorship revenues are
derived generally from contracts ranging from six to thirty-six months in which
Salon commits to provide sponsors enhanced promotional opportunities beyond
traditional banner advertising. Sponsorship agreements typically include the
delivery of impressions, exclusive relationships and the design and development
of customized co-branded pages designed to enhance the promotional objective of
the sponsor. Revenues are recognized ratably over the period in which the
advertisement is displayed. If the percentage of time elapsed exceeds the
percentage of guaranteed impressions delivered, revenue is recognized at the
lower percentage. The cost to design and develop customized co-branded pages,
which are not significant, are recorded in production, content and product
expenses when incurred.
Advertising revenues are derived generally from short-term advertising
contracts in which Salon typically guarantees a minimum number of impressions
to be delivered to users over a specified period of time for a fixed fee.
Advertising revenues are recognized ratably 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 revenues include barter revenues, which are the exchange by Salon
of advertising space on Salon's Web sites for reciprocal advertising space on
other Web sites. Revenues from these barter transactions are recorded as
advertising revenues at the estimated fair value of the advertisements received
or delivered, whichever is more reliably measurable, and are recognized when
the advertisements are run on Salon's Web sites. Barter expenses are recorded
in sales and marketing in the consolidated statements of operations when
Salon's advertisements are run on the reciprocal Web sites, which is typically
in the same period as when advertisements are run on Salon's Web sites. There
was no barter revenue in 1997. Barter revenues represented 7% and 16% of net
revenues for the years ended March 31, 1998 and 1999, respectively.
Certain agreements may provide that Salon receives commissions on revenues
generated from electronic commerce transactions and shares in advertising
revenue generated on co-branded pages. Revenues from electronic commerce
transactions are generally not earned until the retailer has been paid by the
customer. These revenues are recognized by Salon upon notification from the
advertiser or distribution partner which notification is generally received
quarterly.
Revenues related to sales from Salon's online store are recognized when goods
are shipped. Revenues related to the syndication and licensing of Salon content
to other media outlets are recognized on notification that the content has been
published. Subscription revenues are recognized ratably over the period that
services are to be provided.
Research and development
Research and development expenditures are charged to expense as incurred.
F-8
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Advertising Costs
Salon expenses advertising costs as they are incurred. Advertising expense
was $9,000, $75,512 and $628,682 for the years ended March 31, 1997, 1998 and
1999, respectively. Of these total expenses, barter advertising costs
represented zero, $75,424 and $472,105 for the years ended March 31, 1997, 1998
and 1999, respectively.
Income taxes
Salon recognizes deferred taxes by the asset and liability method of
accounting for income taxes. Under the asset and liability method, deferred
income taxes are recognized for differences between the financial statement and
tax basis of assets and liabilities at enacted statutory tax rates in effect
for the years in which the differences are expected to reverse. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. In addition, valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
Stock-based compensation
Salon accounts for its stock-based compensation in accordance with the
provisions of Accounting Principles Board Opinion No. 25 ("APB No. 25"),
"Accounting for Stock Issued to Employees" and presents disclosure required by
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"),
"Accounting for Stock-Based Compensation."
Financial instruments
The carrying amounts of Salon's financial instruments, including cash and
cash equivalents, accounts receivable, accounts payable and accrued
liabilities, approximate fair value because of their short maturities. Fair
value of bank borrowings approximates carrying value because borrowings bear
interest at current market rates.
Concentrations
Financial instruments which potentially subject Salon to concentrations of
credit risk consist principally of trade accounts receivable. Salon performs
ongoing credit evaluations, but does not require collateral. Salon provides an
allowance for credit losses. The credit losses have not been significant to
date.
Salon relies on a number of third party suppliers for various services,
including Web hosting, banner advertising, delivery software, Internet traffic
measurement software and electronic commerce fulfillment services. While Salon
believes it could obtain these services from other qualified suppliers on
similar terms and conditions, a disruption in the supply of these services by
the current suppliers could materially harm the business.
Salon currently has the following concentrations of net revenues and trade
accounts receivable:
Net revenues
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------------------
Customer 1997 1998 1999
-------- ------ ------ ------
<S> <C> <C> <C>
A 71% 37% 13%
B -- 16% --
</TABLE>
F-9
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Trade accounts receivable
<TABLE>
<CAPTION>
March 31,
------------------------------------------------------------------
Customer 1997 1998 1999
-------- ---- ---- ----
<S> <C> <C> <C>
A 42% -- --
B 21% -- --
C 21% -- --
D 16% 58% --
E -- 11% 11%
F -- -- 11%
G -- -- 19%
H -- -- 11%
</TABLE>
Net loss per share and pro forma earnings per share
Basic earnings per share is computed using the weighted-average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted-average number of common and common stock
equivalent shares outstanding during the period. Common equivalent shares are
excluded from the computation if their effect is antidilutive. The pro forma
earnings per share is computed by dividing the net loss by the sum of the
weighted-average number of shares of common stock outstanding and the weighted-
average number of shares resulting from the automatic conversion of all
outstanding shares of convertible preferred stock upon the closing of a sale of
Salon's securities in an underwritten registered public offering with proceeds
of at least $15 million and an offering price per share to the public equal to
or greater than $11.64 appropriately adjusted for stock dividends, stock splits
and the like.
Diluted net loss per share attributable to common stockholders for the years
ended March 31, 1997, 1998 and 1999 does not include the effect of 485,000,
1,561,510 and 1,683,593 stock options, respectively, and zero, 8,750 and
333,752 common stock warrants, respectively, or 2,500,000, 3,449,366 and
4,815,345 shares of convertible preferred stock on an "as if converted" basis,
respectively, as the effect of their inclusion is antidilutive during each
period.
Pro forma stockholders' equity (unaudited)
Effective upon the closing of this offering, the outstanding shares of Series
A, Series B and Series C convertible preferred stock will automatically convert
into approximately 2,500,000, 949,365 and 1,365,980 shares, respectively, of
common stock. The pro forma effects of this conversion is unaudited and has
been reflected in the accompanying pro forma stockholders' equity at March 31,
1999.
Comprehensive income
Salon adopted the provisions of SFAS No. 130, Reporting Comprehensive Income,
("SFAS No. 130"). This statement requires companies to classify items of other
comprehensive income by their nature in the financial statements and display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. To date Salon has not had any transactions that are
required to be reported in comprehensive income.
F-10
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recent accounting pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, Disclosure About Segments of an Enterprise and Required Information,
("SFAS No. 131"), which established standards for reporting information about
operating segments in annual financial statements. It also establishes
standards for related disclosures about products and services, geographic area
and major customers. The adoption of SFAS No. 131 in fiscal 1999 did not have
an impact on Salon's financial statement disclosures since Salon operates in
only one business segment.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1
is effective for financial statements for years beginning after December 15,
1998. SOP 98-1 provides guidance over accounting for computer software
developed or obtained for internal use including the requirement to capitalize
specified costs and amortization of such costs. Salon does not expect the
adoption of this standard to have a material impact on Salon's results of
operations, financial position or cash flows.
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-up
Activities ("SOP 98-5"). SOP 98-5, which is effective for fiscal years
beginning after December 15, 1998, provides guidance on the financial reporting
of start-up costs and organization costs. It requires costs of start-up
activities and organization costs to be expensed as incurred. As Salon has
historically expensed these costs, the adoption of SOP 98-5 is not expected to
have a significant impact on Salon's results of operations, financial position
or cash flows.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"), which establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives), and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters for fiscal years beginning after June 15,
1999. Salon is assessing the potential impact of this pronouncement on its
financial statements; however, they do not expect any significant impact since
Salon currently does not have any derivative instruments and does not
anticipate acquiring any.
F-11
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
March 31,
---------------------
1998 1999
--------- ----------
<S> <C> <C>
Accounts receivable, net:
Accounts receivable.................................... $ 248,113 $ 526,807
Less: Allowance for doubtful accounts.................. -- (29,598)
--------- ----------
$ 248,113 $ 497,209
========= ==========
Prepaid expenses and other current assets:
Prepaid advertising.................................... $ -- $ 404,669
Other.................................................. 138,232 173,316
--------- ----------
$ 138,232 $ 577,985
========= ==========
Property and equipment, net:
Computer and network equipment and software............ $ 391,133 $ 900,882
Furniture and office equipment......................... 115,923 167,110
Leasehold improvements................................. 21,122 33,221
--------- ----------
528,178 1,101,213
Less accumulated depreciation and amortization......... (156,546) (394,654)
--------- ----------
$ 371,632 $ 706,559
========= ==========
Intangible assets, net:
Tradename.............................................. $ -- $1,200,000
Goodwill............................................... -- 3,555,567
Proprietary technology................................. -- 305,000
Subscriber list........................................ -- 50,000
--------- ----------
-- 5,110,567
Less accumulated amortization.......................... -- --
--------- ----------
$ -- $5,110,567
========= ==========
Accrued liabilities:
Accrued compensation and related benefits.............. $ 43,707 $ 151,695
Other accruals......................................... 35,686 287,803
--------- ----------
$ 79,393 $ 439,498
========= ==========
</TABLE>
Note 4--ACQUISITION OF THE WELL:
Salon completed the acquisition of The Well LLC, an online community
business, March 29, 1999 for 463,918 shares of Series C preferred stock valued
at $10.80 per share. Salon also incurred acquisition costs of $113,938 related
to the transaction. Salon's acquisition of The Well LLC was accounted for using
the purchase method of accounting.
F-12
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The allocation of Salon's aggregate purchase price to the tangible and
identifiable intangible assets acquired and liabilities assumed in connection
with this acquisition were based on fair values as determined by independent
appraisers. The allocation is summarized below:
<TABLE>
<S> <C>
Trade name..................................................... $1,200,000
Subscriber list................................................ 50,000
Proprietary technology including billing, conferencing and
text-based system software.................................... 305,000
Goodwill....................................................... 3,555,567
Property and equipment......................................... 77,630
Net current liabilities assumed................................ (63,944)
----------
Total purchase price........................................... $5,124,253
==========
</TABLE>
The identifiable intangible assets and goodwill are being amortized on a
straight line basis over the estimated period of benefit of five years.
The following unaudited pro forma financial information presents the
consolidated results of Salon.com as if the Well acquisition had occurred at
the beginning of each period, and includes adjustments for amortization of
goodwill and other intangible assets. This pro forma financial information is
not intended to be indicative of future results. Unaudited pro forma
consolidated results of operations are as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------
1998 1999
----------- -----------
(unaudited)
<S> <C> <C>
Net revenues..................................... $ 1,673,533 $ 3,406,177
Net loss attributable to common stockholders..... (4,956,341) (7,595,373)
Basic and diluted net loss per share attributable
to common stockholders.......................... (13.21) (19.41)
</TABLE>
Note 5--BANK BORROWINGS:
In April 1997, Salon entered into a borrowing agreement with a bank which
provides for borrowings up to $500,000 for working capital and equipment
advances. Borrowings bear interest at the bank's prime rate plus 0.5% and are
collateralized by all assets of Salon, including intellectual property. As of
March 31, 1998 and 1999, the principal balances for equipment advances
outstanding under this agreement were $198,226 and $99,113 bearing interest at
8.25%. Borrowings are repayable in monthly installments of principal plus
accrued interest through March 31, 2000. According to the terms of the
agreement, Salon is required to meet certain financial covenants including
minimum net worth and working capital levels.
In connection with the borrowing agreement, Salon issued a warrant to
purchase 8,750 shares of its Series A preferred stock at an exercise price of
$2.00 per share. The warrant expires on April 14, 2002. Salon valued the
warrant, using the Black-Scholes option pricing model, applying an expected
life of 5 years, a weighted average risk-free interest rate of 6.51%, an
expected dividend yield of zero percent and a volatility of 79%. The fair value
was recorded as a discount to the amount borrowed and is being amortized to
interest expense over the term of the borrowing agreement using the effective
interest method.
In April 1998, Salon entered into an additional borrowing agreement with the
same bank which provides for revolving loans of the lesser of $250,000 plus 80%
of eligible accounts receivable as defined by the bank or $500,000. The
revolving borrowing amount was increased to a maximum of $1,000,000 upon the
closing of Salon's Series C financing on April 14, 1999. These borrowings bear
interest at the bank's prime rate. The agreement also provides for an equipment
term loan up to $300,000. Borrowings under this equipment term
F-13
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
loan bear interest at the bank's prime rate plus 0.5%. As of March 31, 1999,
Salon has drawn $210,841 against the equipment loan and $220,839 against the
revolving borrowing amount. According to the terms of the agreement, Salon is
required to meet certain covenants including minimum net worth and working
capital levels.
In connection with this borrowing agreement, Salon issued a warrant to
purchase 11,867 shares of Salon's Series B preferred stock at an exercise price
of $3.16 per share. The warrant expires on June 8, 2005. Salon valued the
warrant, using the Black-Scholes option pricing model, applying an expected
life of 7 years, a weighted average risk-free interest rate of 5.64%, an
expected dividend yield of zero percent and a volatility of 107%. The fair
value was recorded as a discount to the amount borrowed and is being amortized
to interest expense over the term of the borrowing agreement using the
effective interest method.
In connection with the borrowing agreements, Salon issued a warrant to
purchase 5,250 shares of Salon's Series C preferred stock at an exercise price
of $3.88 per share. As of March 31, 1999, an additional 9,189 shares became
issuable under the warrant determined in accordance with certain financing
thresholds. The warrant expires December 17, 2005. Salon valued the warrant,
using the Black-Scholes option pricing model, applying an expected life of 7
years, a weighted average risk-free interest rate of 5.06%, an expected
dividend yield of zero percent and a volatility of 107%. The fair value was
recorded as a discount to the amount borrowed and is being amortized to
interest expense over the term of the borrowing agreement using the effective
interest method.
Scheduled annual repayments of principal subsequent to March 31, 1999,
respectively, are as follows:
<TABLE>
<CAPTION>
1999
---------
<S> <C>
2000.............................................................. $ 440,434
2001.............................................................. 90,359
---------
530,793
Less unamortized discount......................................... (91,682)
---------
439,111
Less current portion.............................................. (363,959)
---------
$ 75,152
=========
</TABLE>
Note 6--STOCKHOLDERS' EQUITY:
Convertible preferred stock is composed of the following:
<TABLE>
<CAPTION>
Shares Issued and
Outstanding
-------------------
March 31,
Shares -------------------
Series Authorized 1998 1999
------ ---------- --------- ---------
<S> <C> <C> <C>
A............................................. 2,508,750 2,500,000 2,500,000
B............................................. 1,100,000 949,365 949,365
C............................................. 4,500,000 -- 1,365,980
--------- --------- ---------
8,108,750 3,449,365 4,815,345
========= ========= =========
</TABLE>
The liquidation amounts for the Series A, B, and C preferred stocks as of
March 31, 1999 were $5,000,000, $2,999,993 and $5,300,002, respectively.
F-14
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The holders of preferred stock have various rights and preferences as
follows:
Dividends and participation rights
The holders of Series A preferred stock are entitled to receive dividends in
preference to any dividend on common stock, at an annual rate equal to $0.16
per share, the holders of Series B preferred stock are entitled to receive
dividends in preference to any dividend on common stock, at an annual rate
equal to $0.252 per share, and the holders of Series C preferred stock are
entitled to receive dividends in preference to any dividend on common stock, at
an annual rate of $0.31 per share. In addition, preferred stockholders are
entitled to participate in distributions to common stockholders in an amount
per share as would be payable on the number of shares of common stock into
which each share of preferred stock could be converted. Such dividends are
noncumulative and no dividends have been declared or paid to date.
Liquidation preference
In the event of any liquidation, dissolution, or winding up of Salon, either
voluntarily or involuntarily, the holders of Series C preferred stock are
entitled to receive, in preference to the holders of Series A and Series B
preferred stock and common stock, an amount equal to $3.88 per share of Series
C preferred stock, plus all declared but unpaid dividends, if any. The holders
of Series A preferred stock are entitled to receive, in preference to the
holders of common stock, an amount equal to $2.00 per share of Series A
preferred stock plus all declared but unpaid dividends, if any. The holders of
Series B preferred stock are entitled to receive in preference to the holders
of common stock, an amount equal to $3.16 per share of Series B preferred stock
plus all declared but unpaid dividends. Once such liquidation preference has
been paid, holders of Series A, Series B and Series C preferred stock are
entitled to receive assets and funds of Salon in proportion to the number of
shares of common stock as if converted pursuant to the following paragraph.
Conversion rights
Each share of Series A, Series B and Series C preferred stock shall be
convertible at the option of the holder into shares of common stock at any
time. The number of shares of common stock into which each share of Series A,
Series B or Series C preferred stock may be converted shall be determined
dividing $2.00, $3.16 and $3.88, respectively, by the conversion price in
effect on the date the stock certificate is surrendered for conversion. The
conversion price per share of Series A preferred stock initially shall be
$2.00, the conversion price per share of Series B preferred stock initially
shall be $3.16, and the conversion price per share of Series C preferred stock
initially shall be $3.88. The conversion prices for each series of preferred
stock shall be adjusted for stock splits, combinations and recapitalizations of
Salon's common stock and stock dividends on the common stock, and for issuances
by Salon of stock at a price per share less than the relevant conversion price.
Each share of preferred stock shall automatically be converted into fully paid
and nonassessable shares of common stock of Salon at the conversion price then
in effect for such series of preferred stock at any time during the conversion
period immediately upon the earlier of: (i) the closing of a sale of Salon's
securities in an underwritten registered public offering with proceeds to Salon
of at least $15 million and an offering price per share to the public equal to
or greater than $11.64 appropriately adjusted for stock dividends, stock
splits, stock combinations and the like; (ii) the date on which the holders of
at least two-thirds of the then outstanding shares of Series C preferred stock
(determined on an as-converted basis) consent in writing to such conversion; or
(iii) at such time as less than an aggregate of 250,000, 90,000 or 375,000
shares of Series A, Series B or Series C preferred stock, respectively, are
outstanding.
The preferred stock also carries provisions which protect the holders of such
securities from dilution caused by capital reorganization, stock splits, or
other such capital changes.
F-15
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Voting rights
The holders of preferred stock are entitled to vote on all matters and are
entitled to the number of votes equal to the number of shares of common stock
into which the preferred stock could be converted pursuant to the conversion
rights.
As long as more than 250,000 shares of Series A preferred stock are
outstanding, the holders of Series A preferred stock, voting as a separate
class, have the right to elect one member of the Board of Directors. As long as
more than 250,000 shares of Series B preferred stock are outstanding, the
holders of Series B preferred stock, voting as a separate class, have the right
to elect one member of the Board of Directors. As long as more than 250,000
shares of Series C preferred stock are outstanding, the holders of Series C
preferred stock, voting as a separate class, have the right to elect one member
of the Board of Directors.
Holders of common stock, voting as a separate class, have the right to elect
two members of the Board of Directors. The holders of common stock and
preferred stock, voting together as a separate class, have the right to elect
the remaining members of the Board of Directors.
Common stock reserved
Salon had reserved shares of common stock for the following:
<TABLE>
<CAPTION>
March 31,
-------------------
1998 1999
<S> <C> <C>
Stock option plan........................................ 1,875,000 1,875,000
Warrants................................................. 8,750 333,752
Convertible preferred stock.............................. 3,449,365 4,815,345
--------- ---------
5,333,115 7,024,097
========= =========
</TABLE>
Warrants
In July 1998, Salon issued a warrant to purchase 79,114 shares of Series B
preferred stock at an exercise price of $3.16 per share in connection with an
online distribution agreement. The warrant may be exercised at any time within
5 years after issuance. Salon valued the warrant using the Black-Scholes option
pricing model, applying an expected life of 7 years, a weighted average risk-
free interest rate of 5.28%, an expected dividend yield of zero percent and a
volatility of 107%. The fair value of $217,179 was recorded in prepaid expenses
and other current assets and is being amortized to sales and marketing expense
over the term of the agreement.
In September and November 1998, Salon issued warrants to purchase up to
219,582 shares of common stock at an exercise price of $0.52 per share in
connection with the sale of Series C convertible preferred stock. The
exercisability of 146,389 of the warrants was contingent on Salon not
consummating an equity financing within a specified period, as defined in the
agreement. As of March 31, 1999 the warrants to acquire 146,389 shares of
common stock were exercisable. The warrants expire in September 2008. Salon
valued the warrants using the Black-Scholes option pricing model, applying an
expected life of 10 years, a weighted average risk free interest rate of 5.04%,
an expected dividend yield of zero percent and a volatility of 107%. The fair
value of the total warrants to purchase 219,582 shares of common stock of
$614,406 was recorded as additional paid-in capital. The allocation of proceeds
between convertible preferred stock and warrants results in a beneficial
conversion feature in the amount of $271,622. The beneficial conversion feature
was reflected as a preferred dividend in the statement of operations.
F-16
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about common stock warrants
outstanding at March 31, 1999:
<TABLE>
<CAPTION>
Warrants Outstanding Warrants Exercisable
at March 31, 1999 at March 31, 1999
--------------------------------- ---------------------
Weighted-
Average Weighted- Weighted-
Range of Number of Remaining Average Number Average
Exercise Shares Contractual Exercise of Shares Exercise
Prices Outstanding Life Price Exercisable Price
-------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.52 219,582 9.71 years $0.52 219,582 $0.52
======= =======
The following table summarizes information about preferred stock warrants
outstanding at March 31, 1999:
<CAPTION>
Warrants Outstanding Warrants Exercisable
at March 31, 1999 at March 31, 1999
--------------------------------- ---------------------
Weighted-
Average Weighted- Weighted-
Range of Number of Remaining Average Number Average
Exercise Shares Contractual Exercise of Shares Exercise
Prices Outstanding Life Price Exercisable Price
-------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$2.00 8,750 5.00 years $2.00 8,750 $2.00
$3.16 90,981 5.26 years $3.16 90,981 $3.16
$5.26 14,439 6.82 years $5.26 14,439 $5.26
------- -------
114,170 5.44 years $3.34 114,170 $3.34
======= =======
</TABLE>
Note 7--EMPLOYEE STOCK OPTION PLAN:
In 1995, Salon's Board of Directors adopted the 1995 Stock Option Plan (the
"Plan"). The Plan provides for the granting of stock options to employees and
consultants of Salon. Options granted under the Plan may be either incentive
stock options ("ISO") or non-qualified stock options ("NSO"). ISOs may be
granted only to Salon employees (including officers and directors who are also
employees). NSOs may be granted to Salon employees as well as non-employee
consultants. The exercise price of each option is determined by the Board of
Directors and the maximum term for each option is 10 years. Options generally
vest over a four year period.
F-17
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes activity under Salon's Plan from inception
through March 31, 1999:
<TABLE>
<CAPTION>
Outstanding Options
----------------------------------------------------
Weighted- Weighted-
Shares Average Average
Available Number of Price Per Aggregate Exercise Deemed
for Grant Shares Share Price Price Fair Value
---------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Shares reserved for
grant.................. 1,875,000
Options granted......... (355,000) 355,000 $ .20 $ 71,000 $.20 $ .80
Options terminated...... 50,000 (50,000) $ .20 (10,000) $.20 $ .80
---------- --------- --------- -------- ---- -----
Balance March 31, 1996.. 1,570,000 305,000 $ .20 61,000 $.20 $ .80
Options granted......... (190,000) 190,000 $ .20 38,000 $.20 $ .80
Options terminated...... 10,000 (10,000) $ .20 (2,000) $.20 $ .80
---------- --------- --------- -------- ---- -----
Balance March 31, 1997.. 1,390,000 485,000 $ .20 97,000 $.20 $ .80
Options granted......... (1,135,000) 1,135,000 $.20-$.32 239,600 $.22 $ .90
Options terminated...... 58,490 (58,490) $ .20 (11,698) $.20 $ .80
---------- --------- --------- -------- ---- -----
Balance March 31, 1998.. 313,490 1,561,510 $.20-$.32 324,902 $.20 $ .86
Options granted......... (376,250) 376,250 $.32-$.52 146,650 $.38 $2.72
Options terminated...... 199,171 (199,171) $.20-$.52 (56,184) $.28 $1.10
Options exercised....... -- (54,996) $.20-$.32 (11,149) $.20 $ .92
---------- --------- --------- -------- ---- -----
Balance March 31, 1999.. 136,411 1,683,593 $.20-$.52 $404,219 $.24 $1.20
========== ========= ========= ======== ==== =====
</TABLE>
In connection with the grant of options for the purchase of common stock to
employees during the period from July 27, 1995 (inception) through March 31,
1999, Salon recorded aggregate unearned compensation of $1,494,190 representing
the difference between the deemed fair value of the common stock and the option
exercise price at date of grant. Such unearned compensation will be amortized
over the vesting period relating to these options. Salon amortized $99,183,
$321,428 and $428,995 in the years ended March 31, 1997, 1998 and 1999,
respectively.
F-18
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In connection with the grant of options for the purchase of common stock to
non-employees during the period from April 1, 1997 through March 31, 1999,
Salon recorded compensation in accordance with Emerging Issues Task Force 96-18
and SFAS No. 123. As of March 31, 1999, Salon has recorded aggregate deferred
compensation of $366,602 related to these options. Such deferred compensation
will be amortized over the vesting period relating to these options. Salon
amortized $23,996 and $124,669 in the years ended March 31, 1998 and 1999,
respectively.
The following table summarizes information about stock options outstanding at
March 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding at Options Exercisable at
March 31, 1999 March 31, 1999
-------------------------------------- ------------------------
Weighted-
Average Weighted- Weighted-
Range of Number of Remaining Average Number of Average
Exercise Shares Contractual Exercise Shares Exercise
Prices Outstanding Life Price Exercisable Price
-------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$.20 1,314,843 8.04 years $.20 691,487 $.20
$.32 252,500 9.38 years $.32 13,460 $.32
$.52 116,250 9.84 years $.52 -- $.52
--------- -------
1,683,593 8.36 years $.24 704,948 $.20
========= =======
</TABLE>
At March 31, 1996, 1997 and 1998, options to purchase zero, 90,651 and
424,732 shares of common stock, respectively, were exercisable. The weighted-
average exercise price of the 1997 and 1998 options was $0.20.
Salon accounts for the options in accordance with APB No. 25. The following
information concerning the Plan is provided in accordance with SFAS No. 123.
The weighted-average grant date fair value of stock options granted was $.04,
$.04 and $.08 for the years ended March 31, 1997, 1998 and 1999, respectively.
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following weighted-average assumptions used
for grants in years ended March 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
Year Ended
March 31,
----------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rates................................... 5.88% 6.10% 5.66%
Expected lives (in years).................................. 4 4 4
Dividend yield............................................. 0 0 0
</TABLE>
Using the above method and assumptions, had Salon accounted for compensation
expense according to SFAS No. 123, the pro forma net loss would be as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net loss attributable to common
stockholders:
As reported....................... $(1,944,235) $(3,825,855) $(6,504,272)
Pro forma......................... $(2,105,982) $(4,165,802) $(6,911,677)
Basic and diluted net loss
attributable to common stockholders
per share:
As reported....................... $ (3.84) $ (10.20) $ (16.62)
Pro forma......................... $ (4.15) $ (11.11) $ (17.66)
</TABLE>
F-19
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 8--401(k) SAVINGS PLAN:
Salon's 401(k) Savings Plan (the "401(k) Plan") is a defined contribution
retirement plan intended to qualify under Sections 401(a) and 401(k) of the
Internal Revenue Code. All full-time employees of Salon are eligible to
participate in the 401(k) Plan pursuant to the terms of the Plan. Participants
may contribute from 1% to 15% of compensation, subject to statutory
limitations. Employer matching contributions are discretionary based on a
certain percentage of a participant's contributions as determined by management
of Salon. Salon has not made any discretionary contributions to the 401(k) Plan
for the years ended March 31, 1997, 1998 and 1999.
Note 9--COMMITMENTS AND CONTINGENCIES:
Lease obligations
Salon has entered into two separate non-cancelable operating lease agreements
for office space. The contracts provide for adjustments or escalations based
upon changes in consumer price indices or operating expenses.
Rent expenses under operating lease agreements was $64,750, $147,710 and
$284,395 for the years ended March 31, 1997, 1998 and 1999, respectively.
Future minimum rental payments under operating leases are as follows:
<TABLE>
<CAPTION>
Year Ending March 31,
---------------------
<S> <C>
2000.............................................................. $ 332,695
2001.............................................................. 346,305
2002.............................................................. 367,876
2003.............................................................. 177,899
2004.............................................................. 182,856
Thereafter........................................................ --
----------
$1,407,631
==========
</TABLE>
Contingencies
From time to time, Salon may have certain contingent liabilities that arise
in the ordinary course of its business activities. Salon accrues contingent
liabilities when it is probable that future expenditures will be made and such
expenditures can be reasonably estimated. In the opinion of management, there
are no pending claims of which the outcome is expected to have a material
adverse effect on the financial position or results of operations of Salon.
F-20
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 10--INCOME TAXES:
Salon has no income tax provision for the years ended March 31, 1997, 1998
and 1999 due to reported net operating losses.
Salon's deferred tax assets are as follows:
<TABLE>
<CAPTION>
March 31,
------------------------
1998 1999
----------- -----------
<S> <C> <C>
Net operating loss carryforward.................. $ 2,460,000 $ 4,319,000
Temporary differences principally deferred
revenue and reserves............................ 12,000 258,577
----------- -----------
2,472,000 4,577,577
Valuation allowance.............................. (2,472,000) (4,577,577)
----------- -----------
Net deferred tax asset......................... $ -- $ --
=========== ===========
</TABLE>
Due to uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, a valuation allowance has been provided
against deferred tax assets as March 31, 1998 and 1999.
At March 31, 1999, Salon has net operating loss carryforwards of
approximately $11,224,000 for federal and $8,712,000 for state income tax
purposes. These carryforwards expire by 2019 and 2006, respectively.
For federal and state tax purposes, a portion of Salon's net operating loss
carryforward may be subject to certain limitations on annual utilization due to
changes in ownership, as defined by federal and state tax laws.
Note 11--SUBSEQUENT EVENTS:
Offering of Series C preferred stock
On April 14, 1999, Salon completed an additional offering of Series C
preferred stock. Pursuant to this offering, a total of 2,967,782 additional
shares of Series C preferred stock were sold at a price of $3.88 per share, for
total proceeds to Salon of $11,515,000. The holders of these Series C preferred
stock have the same rights as those holders of the Series C shares issued prior
to March 31, 1999 as discussed in Note 6. 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 will be reflected as a preferred
dividend in the statement of operations in the first quarter of fiscal year
2000. In connection with investment broker services provided during this
offering Salon issued warrants to entities affiliated with Daiwa Securities
America, Inc. to purchase an aggregate of 148,389 shares of Series C preferred
stock at an exercise price of $3.88 per share. The warrants may be exercised at
any time within five years after issuance. Upon completion of this offering,
the warrants will convert into the right to purchase an equivalent number of
shares of Salon's common stock at the same exercise price. Salon valued the
warrant using the Black-Scholes option pricing model, applying an expected life
of 5 years, a weighted average risk-free interest rate of 5.14%, an expected
dividend yield of zero percent, 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
will be netted against the proceeds from the offering.
On April 14, 1999, in connection with marketing consulting services to be
provided to Salon, a warrant was issued to ACT III Communications to purchase
25,773 shares of Series C preferred stock at an exercise price of $3.88 per
share. The warrant may be exercised at any time within five years after
issuance. Upon completion of this offering, the warrant will convert into the
right to purchase an equivalent number of shares
F-21
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of Salon's common stock at the same exercise price per share. Salon valued the
warrant using the Black-Scholes option pricing model, applying an expected life
of 5 years, a weighted average risk-free interest rate of 5.14%, an expected
dividend yield of zero percent, a volatility of 107% and a deemed fair value of
common stock of $10.80. The fair market value of the warrants of $244,000 will
be expensed as the services are rendered.
Employee Stock Purchase Plan and Option Plan
In April 1999, Salon adopted an Employee Stock Purchase Plan (the "ESPP") to
provide substantially all employees whose customary employment is more than 20
hours per week for more than five months in any calendar year eligibility to
purchase shares of its common stock through payroll deductions, up to 10% of
eligible compensation. Participant account balances are used to purchase shares
of Salon common stock at the lesser of 85 percent of the fair market value of
shares on either the first day or the last day of the designated payroll
deduction period (the Offering Period), as chosen by the Board of Directors at
is discretion, whichever is lower. The aggregate number of shares purchased by
an employee may not exceed 1,000 shares in any one Offering Period, generally
12 months or less (subject to limitations imposed by the Internal Revenue
Code). A total of 500,000 shares are available for purchase under the ESPP.
1995 Stock Option Plan
On April 8, 1999, Salon's board of directors and stockholders approved a
1,000,000 share increase in the number of shares issuable under the 1995 Stock
Option Plan.
In April 1999, Salon granted 359,500 options to employees to acquire common
stock at an exercise price of $2.92. Salon will record an aggregate of $2.8
million of unearned compensation representing the difference between the deemed
fair market value of the common stock and the option exercise price at date of
grant for these grants. Such unearned compensation will be amortized over the
vesting period relating to these options.
Reincorporation and stock splits
On April 8, 1999, Salon's Articles of Incorporation were amended to (i)
increase the amount of authorized shares of preferred stock to 8,108,750 and
common stock to 12,500,000, (ii) increase the number shares of preferred stock
designated as Series C to 4,500,000, (iii) effect a 1.35567 for 1 stock split
of each outstanding share of Series C preferred stock and (iv) modify the
rights, preferences, privileges and restrictions granted to or imposed on the
Series A, Series B and Series C preferred stock. In conjunction with the
increase in Series C, 4,500,000 shares of Salon's common stock were reserved
for issuance upon conversion of the Series C preferred stock.
In April 1999, Salon approved reincorporating in Delaware, changing the name
to Salon.com, and effected a one for two split of its common and preferred
stock. In connection with the reincorporation, Salon authorized (i) an increase
in the amount of authorized shares of common stock to 50,000,000 and (ii)
5,000,000 shares of a new class of preferred stock. All share data and stock
option plan information has been restated to reflect the splits and the
reincorporation.
F-22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of The Well LLC
In our opinion, the accompanying balance sheets and the related statements of
operations, of members' interest and of cash flows present fairly, in all
material respects, the financial position of The Well LLC at December 31, 1997
and 1998 and the results of its operations and its cash flows for the period
from July 1, 1997 to December 31, 1997 and for the year ended December 31, 1998
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
March 3, 1999
F-23
<PAGE>
THE WELL LLC
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------
March 29,
1997 1998 1999
-------- --------- -----------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash ....................................... $ 10,661 $ 11,455 $ 29,487
Accounts receivable, net of allowance for
doubtful accounts of $1,600, $1,800 and
$1,825, respectively....................... 8,733 4,427 1,790
Related party receivables .................. 29,824 24,650 15,192
Prepaid expenses and other current assets .. 2,100 1,213 3,249
-------- --------- ---------
Total current assets ..................... 51,318 41,745 49,718
Property and equipment, net .................. 121,636 87,295 77,630
-------- --------- ---------
Total assets ............................. $172,954 $ 129,040 $ 127,348
======== ========= =========
Liabilities
Current liabilities:
Accounts payable ........................... $ 4,998 $ 2,647 $ 69,827
Related party payables ..................... 2,100 9,703 4,725
Accrued liabilities ........................ 69,337 87,550 33,131
Deferred revenue ........................... 9,037 10,646 5,640
-------- --------- ---------
Total current liabilities ................ 85,472 110,546 113,323
-------- --------- ---------
Members' Interest
Members' interest .......................... 154,909 154,909 164,909
Accumulated deficit ........................ (67,427) (136,415) (150,884)
-------- --------- ---------
Total members' interest .................. 87,482 18,494 14,025
-------- --------- ---------
Total liabilities and members' interest .. $172,954 $ 129,040 $ 127,348
======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
THE WELL LLC
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the For the
Period from period period
July 1, 1997 Year ended January 1 to January 1 to
to December 31, December 31, March 31, March 29,
1997 1998 1998 1999
--------------- ------------ ------------ -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Subscription revenues... $ 267,022 $ 484,660 $ 137,183 $ 118,036
Operating expenses:
Cost of subscription
revenues............. 124,685 217,537 40,963 52,063
Selling and marketing
..................... 45,475 78,044 14,940 18,678
General and
administrative....... 164,289 258,067 53,975 61,764
--------- --------- --------- ---------
Total operating
expenses........... 334,449 553,648 109,878 132,505
--------- --------- --------- ---------
Net income (loss)....... $ (67,427) $ (68,988) $ 27,305 $ (14,469)
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
THE WELL LLC
STATEMENTS OF MEMBERS' INTEREST
<TABLE>
<CAPTION>
Members' Interest
-------------------
Whole Earth
Lectronic Bruce Accumulated
Link, Inc. Katz Deficit Total
----------- ------- ----------- --------
<S> <C> <C> <C> <C>
Capital contributions .............. $144,909 $10,000 $ -- $154,909
Net loss for the period July 1, 1997
to December 31, 1997 .............. -- -- (67,427) (67,427)
-------- ------- --------- --------
Balance at December 31, 1997 ....... 144,909 10,000 (67,427) 87,482
Net loss ........................... -- -- (68,988) (68,988)
-------- ------- --------- --------
Balance at December 31, 1998 ....... 144,909 10,000 (136,415) 18,494
Capital contribution ............... 10,000 -- -- 10,000
Net loss for the period from January
1, 1999 to March 29, 1999.......... -- -- (14,469) (14,469)
-------- ------- --------- --------
Balance at March 29, 1999........... $154,909 $10,000 $(150,884) $ 14,025
======== ======= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
THE WELL LLC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the For the
Period from period period
July 1, 1997 to Year ended January 1 January 1
December 31, December 31, to March 31, to March 29,
1997 1998 1998 1999
--------------- ------------ ------------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from
operating activities
Net income (loss)..... $(67,427) $(68,988) $ 27,305 $(14,469)
Adjustments to
reconcile net loss to
net cash provided by
(used in) operating
activities:
Bad debt expense.... 1,600 200 2,000 25
Depreciation........ 26,902 44,001 13,856 11,000
Write-off of
property and
equipment.......... 4,237 2,378 -- --
Changes in operating
assets and
liabilities:
Accounts
receivable........ (10,333) 4,106 (29,326) 2,612
Related party
receivables....... (29,824) 11,469 (4,632) 9,458
Prepaid expenses
and other current
assets............ (1,378) (5,408) (4,742) (2,036)
Accounts payable... 4,998 (2,351) 391 67,180
Related party
payables.......... 2,100 7,603 (371) (4,978)
Accrued
liabilities....... 55,405 18,213 (22,136) (54,419)
Deferred revenue... 9,037 1,609 (7,508) (5,006)
-------- -------- -------- --------
Net cash provided
by (used in)
operating
activities...... (4,683) 12,832 (25,163) 9,367
-------- -------- -------- --------
Cash flows from
investing activities:
Acquisition of
property and
equipment ........... (9,764) (12,038) -- (1,335)
-------- -------- -------- --------
Net cash used in
investing
activities...... (9,764) (12,038) -- (1,335)
-------- -------- -------- --------
Cash flows from
financing activities:
Contributions from
members ............. 25,108 -- -- 10,000
Borrowings under bank
overdraft facility... -- -- 14,502 --
-------- -------- -------- --------
Net cash provided
by financing
activities...... 25,108 -- 14,502 10,000
-------- -------- -------- --------
Net increase
(decrease) in
cash ........... 10,661 794 (10,661) 18,032
Cash at beginning of
period ............... -- 10,661 10,661 11,455
-------- -------- -------- --------
Cash at end of period
...................... $ 10,661 $ 11,455 $ -- $ 29,487
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
THE WELL LLC
NOTES TO FINANCIAL STATEMENTS
Note 1--FORMATION AND BUSINESS OF THE COMPANY:
The Well LLC (the "Company") is a California Limited Liability Company that
is in the business of providing international online conferencing services to
subscribers for a monthly fee. Its members are comprised of Whole Earth
'Lectronic Link, Inc. ("Link"), a California S corporation owning 1,500,000
membership units, and Bruce Katz, an individual owning 10,000 membership units.
Link is wholly owned by Bruce Katz.
The Company was initially formed in September 1996 and was dormant until July
1, 1997, when it acquired its business from Link as a capital contribution. As
consideration for 1,500,000 membership units in the Company, Link contributed
its online conferencing services division which had the following net assets at
July 1, 1997:
<TABLE>
<S> <C>
Cash............................................................... $ 15,108
Prepaid expenses .................................................. 722
Property and equipment, net........................................ 143,011
Accrued liabilities................................................ (13,932)
--------
$144,909
========
</TABLE>
Link also contributed intellectual property, primarily in the form of
existing technology, technical know-how, and the customer base. This
contribution has been recorded at its historical carrying amount, which is
zero. The Company recorded the tangible and intangible assets contributed by
Link at their historical carrying amounts as there was effectively no change in
ownership.
As consideration for 10,000 membership units in the Company, Bruce Katz
contributed $10,000 in cash.
Note 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim financial statements (unaudited)
The financial statements as of March 29, 1999 and for the periods from
January 1, 1998 to March 31, 1998 and January 1, 1999 to March 29, 1999 are
unaudited but have been prepared in accordance with generally accepted
accounting principles for interim financial statements and the rules of the
Securities and Exchange Commission and do not include all disclosures required
by generally accepted accounting principles for annual financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation have been included. The results
of operations of any interim period are not necessarily indicative of the
results of operations for the full year.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and cash equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
F-28
<PAGE>
THE WELL LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
Fair value of financial instruments
The reported amounts of certain of the Company's financial instruments
including cash and cash equivalents, accounts receivable, accounts payable and
other accrued liabilities approximate fair value due to their short maturities.
Concentration of credit risk
Cash and cash equivalents are deposited in one domestic bank. With respect to
accounts receivable, the Company's customer base is dispersed across many
geographic areas. The Company monitors customer's payment history and
establishes reserves for bad debt as warranted.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of five to seven years. Major additions and betterments are
capitalized, while replacements, maintenance, and repairs that do not improve
or extend the life of the assets are charged to expense. In the period assets
are retired or otherwise disposed of, the costs and related accumulated
depreciation and amortization are removed from the accounts, and any gain or
loss on disposal is included in results of operations.
Revenue recognition
Subscription revenues for online conferencing services are recognized over
the period that services are provided. Deferred revenue consists primarily of
monthly prepaid subscription fees billed in advance.
Cost of subscription revenues
Cost of subscription revenues includes connectivity charges, systems co-
location and administrative costs paid to Whole Earth Networks (see Note 5),
depreciation expense relating to network equipment, credit card charges, and
costs of personnel responsible for the operation of network equipment and
systems.
Income taxes
The Company was not subject to income taxes during the period from July 1,
1997 to March 29, 1999 since it operated as a partnership and any taxes are
payable by its members.
Comprehensive income
The Company has adopted the accounting treatment prescribed by SFAS No. 130
"Reporting Comprehensive Income." The adoption of this statement has no impact
on the Company's financial statements for the periods presented.
Note 3--PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------- March 29,
1997 1998 1999
--------- --------- -----------
(unaudited)
<S> <C> <C> <C>
Computer equipment......................... $ 252,253 $ 252,951 $ 254,286
Furniture.................................. 21,392 20,006 20,006
--------- --------- ---------
273,645 272,957 274,292
Accumulated depreciation................... (152,009) (185,662) (196,662)
--------- --------- ---------
$ 121,636 $ 87,295 $ 77,630
========= ========= =========
</TABLE>
F-29
<PAGE>
THE WELL LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 4--ACCRUED LIABILITIES:
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------
March 29,
1997 1998 1999
------- ------- -----------
(unaudited)
<S> <C> <C> <C>
Accrued payroll.................................. $12,981 $ 4,731 $ 8,000
Accrued vacation................................. 17,333 13,319 13,319
Other............................................ 39,023 69,500 11,812
------- ------- -------
$69,337 $87,550 $33,131
======= ======= =======
</TABLE>
Note 5--RELATED PARTY TRANSACTIONS:
Insurance
During the period from July 1, 1997 to March 29, 1999, the Company was
covered by an insurance policy held by Rosewood Stone Group, Inc. ("RSG"), an S
corporation wholly owned by one of its members, Bruce Katz. The insurance
policy covers property, general liability, and workers compensation.
Rent and other operating expenses
During 1998, the Company entered into an arrangement to rent office space
from Well Engaged LLC, a limited liability company whose members are also Bruce
Katz and Link. The Company pays $1,350 per month plus its prorata share of
related operating costs.
Billing and collection services
The Company entered into a billing and services agreement with Whole Earth
Networks ("WeNet"), a limited liability company. The Company's members are
majority owners of WeNet. WeNet was an Internet service provider and also
formerly a division of Link. Prior to the Company and WeNet's separation from
Link, the customer base had received one bill for both the conferencing and
Internet access services. The billing and services agreement appoints Link to
act as an agent in disbursing the revenue generated from The Well members who
were subscribers prior to the Company commencing operations on July 1, 1997.
The Company receives a fixed amount of revenue for each customer based on the
subscriber's plan. The Company also pays to WeNet for billing services
rendered. WeNet sold substantially all of its assets in March 1998 to Whole
Earth Network, Inc. ("GST WeNet"), an unrelated third party. GST WeNet assumed
the rights and obligations of the existing billing and services agreement and
continues to act as the billing agent for the Company.
Co-location services agreement
During the period from July 1, 1997 to March 29, 1999, the Company also had
an agreement with WeNet to provide certain types of services to the Company.
The services provided included storage space for some of the Company's computer
hardware, a high bandwidth Internet connection, and system administration. The
costs for these services vary depending on the services provided in any given
month. The rights and obligations of the co-location services agreement were
also specifically assumed by GST WeNet as part of the purchase of WeNet in
March 1998.
F-30
<PAGE>
THE WELL LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
Transactions with related parties are as follows:
<TABLE>
<CAPTION>
For the For the
Period from period period
July 1, 1997 to Year ended January 1 January 1
December 31, December 31, to March 31, to March 29,
Related Entity Transaction 1997 1998 1998 1999
-------------- ----------- --------------- ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Amounts received from:
Well Engaged LLC Sale of equipment...... $ -- $ 721 $ -- $ --
WeNet Sale of equipment...... 6,295 -- -- --
Amounts paid to:
WeNet/GST WeNet Billing fees........... 8,357 11,702 3,432 2,267
WeNet/GST WeNet Co-location services... 62,580 22,290 6,750 14,250
Rosewood Stone Group Insurance.............. 1,050 5,194 300 1,250
Well Engaged LLC Purchase of equipment.. -- 3,610 -- --
Well Engaged LLC Rent................... -- 12,150 -- 4,050
</TABLE>
In addition, the Company received certain management and accounting services
from RSG at no cost to the Company. The value of these services is estimated at
approximately $4,200 for the period from July 1, 1997 to December 31, 1997,
$8,400 and for the year ended December 31, 1998, and $2,100 and $2,100 for the
periods from January 1, 1998 to March 31, 1998 and January 1, 1999 to March 29,
1999, respectively.
Balances outstanding with related parties are as follows:
<TABLE>
<CAPTION>
December 31,
--------------- March 29,
1997 1998 1999
------- ------- -----------
(unaudited)
<S> <C> <C> <C>
Amounts due from:
Whole Earth 'Lectronic Link..................... $22,492 $18,355 $15,192
Well Engaged LLC ............................... 1,037 -- --
Whole Earth Networks Link ...................... 6,295 6,295 --
------- ------- -------
$29,824 $24,650 $15,192
======= ======= =======
Amounts payable to:
Rosewood Stone Group ........................... $ 2,100 $ 5,915 $ 675
Well Engaged LLC ............................... -- 3,788 4,050
------- ------- -------
$ 2,100 $ 9,703 $ 4,725
======= ======= =======
</TABLE>
Note 6--PROFIT SHARING PLAN:
The Company's qualifying employees are covered by a multi-employer profit
sharing plan ("the Plan") under Internal Revenue Code Section 401(k).
Participating employees may defer a portion of their pretax earnings, up to the
maximum percentage allowable under the Internal Revenue Code. The Company may
make matching contributions equal to a discretionary percentage of the
participating employees' salary reductions. The Company made no contributions
to the Plan during the period from July 1, 1997 to March 29, 1999.
Note 7--STOCK OPTION PLAN:
In 1997, the Company adopted the 1997 Option Plan (the "Plan") under which
300,000 shares were reserved for issuance to employees, consultants and
directors. As defined under the Plan, a share is equivalent to one membership
unit of the Company.
F-31
<PAGE>
THE WELL LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
In 1997, the Company granted options to purchase 225,000 shares to two
employees. All options granted to these employees have been cancelled and all
vested options, none of which were exercised, have expired since these
employees are no longer with the Company. As of March 29, 1999, there were no
options outstanding or exercisable.
Note 8--SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
For the For the
Period from period period
July 1, 1997 to Year ended January 1 January 1
December 31, December 31, to March 31, to March 29,
1997 1998 1998 1999
--------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Supplemental disclosures
of cash flow
information:
Cash paid during the
year for state income
taxes................. $ -- $800 $ -- $ --
======== ==== ====== ======
Supplemental disclosures
of noncash investing
and financing
transactions:
Assets and liabilities
contributed by Whole
Earth 'Lectronic Link:
Prepaid expenses ..... $ 722
Property and
equipment, net ...... 143,011
Accrued liabilities .. (13,932)
--------
Total .............. $129,801
========
</TABLE>
Note 9--SUBSEQUENT EVENT:
In March 1999, the Board of Directors approved the sale of the Company to
Salon.com for approximately $1.8 million.
F-32
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Whole Earth 'Lectronic Link, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations and changes in owner's net equity and of cash flows present fairly,
in all material respects, the financial position of the Online Conferencing
Business, a division of Whole Earth 'Lectronic Link, Inc., (the "Business") at
June 30, 1997 and the results of its operations and its cash flows for the
period from January 1, 1997 to June 30, 1997 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Business' management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
March 3, 1999
F-33
<PAGE>
ONLINE CONFERENCING BUSINESS
(PREDECESSOR BUSINESS)
BALANCE SHEET
JUNE 30, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash................................................................ $ 15,108
Prepaid expenses and other current assets........................... 722
--------
Total current assets.............................................. 15,830
Property and equipment, net........................................... 143,011
--------
Total assets...................................................... $158,841
========
LIABILITIES AND OWNER'S NET EQUITY
Current liabilities:
Accrued liabilities................................................. $ 13,932
Owner's net equity.................................................. 144,909
--------
Total liabilities and owner's net equity.......................... $158,841
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
ONLINE CONFERENCING BUSINESS
(PREDECESSOR BUSINESS)
STATEMENT OF OPERATIONS AND CHANGES IN OWNER'S NET EQUITY
FOR THE PERIOD FROM JANUARY 1, 1997 TO JUNE 30, 1997
<TABLE>
<S> <C>
Subscription revenues................................................. $250,580
Operating expenses:
Cost of subscription revenues....................................... 111,844
Selling and marketing............................................... 47,071
General and administrative.......................................... 132,611
--------
Total operating expenses.......................................... 291,526
--------
Net loss.............................................................. (40,946)
Owner's net equity, beginning of period............................... 185,855
--------
Owner's net equity, end of period..................................... $144,909
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
ONLINE CONFERENCING BUSINESS
(PREDECESSOR BUSINESS)
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1997 TO JUNE 30, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss........................................................... $(40,946)
Adjustment to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation..................................................... 26,703
Changes in operating assets and liabilities:
Prepaid expenses and other current assets........................ 3,810
Accrued liabilities.............................................. 2,904
--------
Net cash used in operating activities.......................... (7,529)
--------
Net decrease in cash........................................... (7,529)
Cash at beginning of period.......................................... 22,637
--------
Cash at end of period................................................ $ 15,108
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
ONLINE CONFERENCING BUSINESS
(PREDECESSOR BUSINESS)
NOTES TO FINANCIAL STATEMENTS
Note 1--FORMATION AND BUSINESS OF THE COMPANY:
The accompanying financial statements and related notes reflect the carve-out
historical results of operations and financial position of the online
conferencing business ("the Business") of Whole Earth 'Lectronic Link, Inc.
("Link"). The Statement of Operations includes all revenues and costs directly
attributable to the online conferencing business, including costs for
facilities, functions, and services used by the Business at shared sites and
allocations of costs for certain administrative functions and services
performed by Link. Costs have been allocated to the Business based on Link
management's estimates of costs attributable to the operation of the online
conferencing business. Such costs are not necessarily indicative of the costs
that would have been incurred if the online conferencing business had been a
separate entity.
The Business provides international online conferencing services to
subscribers for a monthly fee. Link is wholly owned by Bruce Katz.
Note 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and cash equivalents
The Business considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
Fair value of financial instruments
The reported amounts of certain of the Business' financial instruments
including cash and accrued liabilities approximate fair value due to their
short maturities.
Concentration of credit risk
Cash is deposited in one domestic bank. The Business' customer base is
dispersed across many geographic areas. The Business monitors customers'
payment history and establishes reserves for bad debt as warranted.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of five to seven years. Major additions and betterments are
capitalized, while replacements, maintenance, and repairs that do not improve
or extend the life of the assets are charged to expense. In the period assets
are retired or otherwise disposed of, the costs and related accumulated
depreciation and amortization are removed from the accounts, and any gain or
loss on disposal is included in results of operations.
F-37
<PAGE>
ONLINE CONFERENCING BUSINESS
(PREDECESSOR BUSINESS)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Revenue recognition
Subscription revenues for online conferencing services are recognized over
the period that services are provided. Deferred revenue consists primarily of
monthly prepaid subscription fees billed in advance.
Cost of subscription revenues
Cost of subscription revenues includes connectivity charges, systems co-
location and administrative costs, depreciation expense relating to network
equipment, credit card charges, and costs of personnel responsible for the
operation of network equipment and systems.
Income taxes
The Business is a division of Link, which operated as an S corporation and
any taxes are payable by Link's shareholder.
Note 3--PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at June 30, 1997:
<TABLE>
<CAPTION>
<S> <C>
Computer equipment............................................... $ 255,056
Furniture........................................................ 21,392
----------
276,448
Accumulated depreciation......................................... (133,437)
----------
$ 143,011
==========
</TABLE>
Note 4--RELATED PARTY TRANSACTIONS:
Insurance
During the period from January 1, 1997 to June 30, 1997, the Business was
covered by an insurance policy held by Rosewood Stone Group, Inc. ("RSG"), an S
corporation wholly owned by Bruce Katz. The insurance policy covers property,
general liability, and workers compensation. The Business paid RSG $1,200 in
connection with this insurance coverage.
Billing and collection services
The Business entered into a billing and services agreement with Whole Earth
Networks ("WeNet"), a limited liability company in which Bruce Katz was a
majority beneficial owner. WeNet is an Internet service provider and an
affiliate of Link. The customer base received one bill for both the
conferencing and Internet access services. The Business paid WeNet $12,432 for
billing services rendered during the period from January 1, 1997 to June 30,
1997.
F-38
<PAGE>
ONLINE CONFERENCING BUSINESS
(PREDECESSOR BUSINESS)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Co-location services agreement
During the period from January 1, 1997 to June 30, 1997, the Business had an
agreement with WeNet to provide certain types of services to the Business. The
services provided included storage space for some of the Business' computer
hardware, a high bandwidth Internet connection, and system administration. The
costs for these services vary depending on the services provided in any given
month. For the period from January 1, 1997 to June 30, 1997, the Business paid
WeNet $37,400 for these co-location services.
In addition, the Company received certain management and accounting services
from RSG at no cost to the Company. The value of these services is estimated at
approximately $4,200 for the period from January 1, 1997 to June 30, 1997.
Note 5--PROFIT SHARING PLAN:
The Business' qualifying employees are covered by a multi-employer profit
sharing plan ("the Plan") under Internal Revenue Code Section 401(k).
Participating employees may defer a portion of their pretax earnings, up to the
maximum percentage allowable under the Internal Revenue Code. The Company may
make matching contributions equal to a discretionary percentage of the
participating employees' salary reductions. The Business made no contributions
to the Plan during the period from January 1, 1997 to June 30, 1997.
Note 6--SUBSEQUENT EVENT:
On July 1, 1997, Link transferred the Business into The Well LLC ("The Well")
in return for 1,500,000 membership units in The Well.
F-39
<PAGE>
SALON.COM
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following financial pro forma consolidated statement presents the
Salon.com pro forma consolidated statement of operations for the year ended
March 31, 1999.
Salon's acquisition of The Well LLC has been accounted for under the
"purchase" method of accounting, which requires the purchase price to be
allocated to the acquired assets and liabilities of The Well LLC on the basis
of their estimated fair values as of the date of acquisition. The following pro
forma consolidated statement of operations for the year ended March 31, 1999
gives effect to the acquisition of The Well LLC as if it occurred on April 1,
1998 and includes adjustments directly attributable to the acquisition of The
Well LLC and expected to have a continuing impact on the combined company.
The pro forma information is based on historical financial statements. The
assumptions give effect to the business combination with The Well LLC under the
purchase method of accounting. The information has been prepared in accordance
with the rules and regulations of the Securities and Exchange Commission and is
provided for comparative purposes only. The pro forma information does not
purport to be indicative of the results that actually would have occurred had
the combination been effected at the beginning of the period presented.
F-40
<PAGE>
SALON.COM
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the For the For the
Year Ended Year Ended Year Ended
March 31, December 31, March 31,
1999 1998 1999
----------- ------------ -----------
Salon.com The Well LLC Adjustments Pro Forma
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Sponsorship and
advertising.......... $ 2,921,517 $ -- $ -- $ 2,921,517
Subscription.......... -- 484,660 -- 484,660
----------- -------- ----------- -----------
2,921,517 484,660 -- 3,406,177
----------- -------- ----------- -----------
Operating expenses:
Production, content,
and product.......... 4,502,964 -- -- 4,502,964
Cost of subscription
revenues............. -- 217,537 -- 217,537
Sales and marketing... 3,654,733 78,044 -- 3,732,777
Research and
development.......... 469,117 -- -- 469,117
General and
administrative....... 518,291 258,067 -- 776,358
Amortization of
acquired
intangibles.......... -- -- 1,022,113 (A) 1,022,113
----------- -------- ----------- -----------
Total operating
expenses .......... 9,145,105 553,648 1,022,113 10,720,866
----------- -------- ----------- -----------
Loss from operations.... (6,223,588) (68,988) (1,022,113) (7,314,689)
Interest expense........ (53,672) -- -- (53,672)
Other income............ 44,610 -- -- 44,610
----------- -------- ----------- -----------
Net loss............ (6,232,650) (68,988) (1,022,113) (7,323,751)
Preferred dividend...... 271,622 -- -- 271,622
----------- -------- ----------- -----------
Net loss attributable to
common stockholders.... $(6,504,272) $(68,988) $(1,022,113) $(7,595,373)
=========== ======== =========== ===========
Basic and diluted net
loss per share
attributable to common
stockholders........... $ (16.62) $ (19.41)
=========== ===========
Weighted average shares
used in computing basic
and diluted net loss
per share attributable
to common
stockholders........... 391,354 391,354
=========== ===========
Pro forma basic and
diluted net loss per
share attributable to
common stockholders ... $ (1.50) $ (1.58)
=========== ===========
Weighted average shares
used in computing pro
forma basic and diluted
net loss per share
attributable to common
stockholders........... 4,327,798 4,791,716
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE>
SALON.COM
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1--BASIS OF PRESENTATION:
In March 1999, Salon acquired The Well LLC, a privately held company that has
experience in providing international online conferencing services to
subscribers.
The unaudited pro forma information presented is not necessarily indicative
of the future consolidated results of operations of Salon or the consolidated
results of operations that would have resulted had the acquisition taken place
on April 1, 1998. The unaudited pro forma consolidated statement of operations
for the year ended March 31, 1999 reflects the effects of the acquisition,
assuming the related events occurred as of April 1, 1998 for the purposes of
the unaudited pro forma consolidated statement of operations.
Note 2--UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL ADJUSTMENTS:
The unaudited pro forma consolidated financial statements reflect a total
purchase price of $5.1 million consisting of 463,918 shares of Series C
preferred stock valued at $10.80 per share and acquisition costs of $113,938.
The acquisition was recorded under the purchase method of accounting. The
tradename, proprietary technology, goodwill and the subscriber list are being
amortized on a straight-line basis over the estimated period of benefit of five
years.
The allocation of Salon's aggregate purchase price to the tangible and
identifiable intangible assets acquired and liabilities assumed in connection
with this acquisition were based on fair values as determined by independent
appraisers. The allocation is summarized below:
<TABLE>
<S> <C>
Trade name..................................................... $1,200,000
Subscriber list................................................ 50,000
Proprietary technology including billing, conferencing and
text-based system software.................................... 305,000
Goodwill....................................................... 3,555,567
Property and equipment......................................... 77,630
Net current liabilities assumed................................ (63,944)
----------
Total purchase price........................................... $5,124,253
==========
</TABLE>
Note 3--UNAUDITED PRO FORMA CONSOLIDATED NET LOSS PER SHARE:
The net loss per share and shares used in computing the net loss per share
for the year ended March 31, 1999 is based upon the historical weighted average
common shares outstanding. The Salon common stock issuable upon the exercise of
the stock options and warrants have been excluded as the effect would be
antidilutive. In addition to the shares used in computing the net loss per
share above, pro forma net loss per share is calculated using the convertible
preferred stock outstanding as if such shares were converted to common stock at
the time of issuance.
The 463,918 shares of convertible preferred stock issued in connection with
the purchase price of The Well LLC have been included in the calculation of pro
forma basic and diluted net loss per share for the year ended March 31, 1999 as
follows:
<TABLE>
<S> <C>
Shares used in computing basic and diluted net loss per share
attributable to common stockholders ............................. 391,354
Adjustment to reflect the assumed conversion of preferred stock... 3,936,444
Adjustment to reflect the assumed conversion of preferred stock
issued in connection with the purchase of The Well............... 463,918
---------
Shares used in computing pro forma basic and diluted net loss per
share attributable to common stockholders........................ 4,791,716
=========
</TABLE>
F-42
<PAGE>
SALON.COM
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Note 4--PURCHASE ADJUSTMENTS:
The following adjustment was applied to Salon's historical financial
statements and those of The Well to arrive at the pro forma consolidated
statement of operations.
(A) To record the annual amortization of tradename, proprietary technology,
goodwill and subscriber list which is being amortized over the
estimated period of benefit of five years.
F-43
<PAGE>
[LOGO OF SALON.COM]
Until July 17, 1999, which is 25 days after the date of this prospectus, all
dealers that buy, sell or trade Salon's common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This
requirement is in addition to the dealers' obligation to deliver a prospectus
when acting as underwriters and with respect to their unsold allotments or
subscriptions.
