<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from__________to__________
Commission file number 0-27886
SALON.COM
(Exact name of Registrant as specified in its charter)
Delaware 94-3228750
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
22 Fourth Street, 16th Floor
San Francisco, CA 94103
(Address of principal executive offices)
----------------
(415) 645-9200
(Registrant's telephone number, including area code)
----------------
Securities registered pursuant to Section 12(b) of the Act:
None
----------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value
(Title of Class)
----------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
The number of outstanding shares of the Registrant's Common Stock, par value
$0.001 per share, on July 31, 2000 was 13,865,494 shares.
================================================================================
1
<PAGE>
--------------------------------------------------------------------------------
FORM 10-Q
SALON.COM
INDEX
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
PART I FINANCIAL INFORMATION Number
ITEM 1: Financial Statements
<S> <C>
Consolidated Balance Sheets as of June 30, 2000 (unaudited)
and March 31, 2000..................................................................... 3
Consolidated Statements of Operations for the three months ended
June 30, 2000 and 1999 (unaudited)..................................................... 4
Consolidated Statements of Cash Flows for the three months ended
June 30, 2000 and 1999 (unaudited)..................................................... 5
Notes to Consolidated Financial Statements....................................................... 6
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations............ 10
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk....................................... 25
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings................................................................................ 25
ITEM 2. Changes in Securities and Use of Proceeds........................................................ 25
ITEM 3. Defaults upon Senior Securities.................................................................. 25
ITEM 4. Submission of Matters to a Vote of Security Holders.............................................. 25
ITEM 5. Other Information................................................................................ 25
ITEM 6: Exhibits and Reports on Form 8-K................................................................. 25
Signature........................................................................................ 26
Exhibits......................................................................................... 27
</TABLE>
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
SALON.COM
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
----------------- -----------------
Assets (Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 13,865 $ 17,982
Accounts receivable, net 1,419 2,425
Inventories 16 16
Prepaid expenses and other current assets 323 391
----------------- -----------------
Total current assets 15,623 20,814
Property and equipment, net 2,530 2,312
Other assets 176 186
Intangible assets, net 5,796 4,088
----------------- -----------------
Total assets $ 24,125 $ 27,400
================= =================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 3,785 $ 4,303
Deferred revenue 331 210
Bank borrowings 60 90
----------------- -----------------
Total current liabilities 4,176 4,603
----------------- -----------------
Other long term liabilities 453 473
----------------- -----------------
Total liabilities $ 4,629 $ 5,076
----------------- -----------------
Stockholders' Equity:
Common stock, $.001 par value;
50,000,000 shares authorized at June 30, 2000 and March 31, 2000
respectively; 13,852,656 and 12,546,569 shares issued and outstanding at
June 30, 2000 (unaudited) and March 31, 2000, respectively. $ 13 $ 13
Additional paid-in capital 79,078 78,448
Advertising receivable from stockholder (7,682) (7,884)
Unearned compensation (1,238) (2,098)
Accumulated deficit (50,675) (46,155)
----------------- -----------------
Total stockholders' equity 19,496 22,324
----------------- -----------------
Total liabilities and stockholders' equity $ 24,125 $ 27,400
================= =================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
3
<PAGE>
SALON.COM
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share data)
<TABLE>
<CAPTION>
Three Months Ended June 30,
----------------------------------------
2000 1999
------------------- -------------------
(unaudited)
<S> <C> <C>
Net revenues $ 1,759 $ 1,005
------------------- -------------------
Operating expenses:
Production, content and product 2,701 2,103
Sales and marketing 2,434 1,830
Research and development 386 230
General and administrative 625 576
Amortization of intangible assets 323 255
Stock-based compensation 17 630
------------------- -------------------
Total operating expenses 6,486 5,624
------------------- -------------------
Loss from operations (4,727) (4,619)
Other income 207 54
------------------- -------------------
Net loss (4,520) (4,565)
------------------- -------------------
Preferred deemed dividend - 11,515
------------------- -------------------
Net loss attributable to common stockholders $ (4,520) $ (16,080)
=================== ===================
Basic and diluted net loss per share attributable to
common stockholders $ (.36) $ (10.10)
=================== ===================
Weighted average shares used in computing basic and diluted
net loss per share attributable to common stockholders 12,638 1,592
=================== ===================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
4
<PAGE>
SALON.COM
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------
2000 1999
------------- -----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,520) $ (4,565)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation 17 630
Depreciation and amortization 521 344
Amortization of discount on bank borrowings - 7
Amortization of deferred advertising 202 -
Changes in operating assets and liabilities:
Accounts receivable 1,005 (64)
Inventories - 5
Prepaid expenses and other assets 67 545
Accounts payable (68) 425
Accrued liabilities (691) 1,132
Deferred revenue 122 (168)
---------- ---------
Net cash used in operating activities (3,345) (1,709)
---------- ---------
Cash flows from investing activities:
Purchase of property and equipment (317) (95)
Acquisition of MP3Lit (400) -
---------- ---------
Net cash used in investing activities (717) (95)
---------- ---------
Cash flows from financing activities:
Proceeds from issuance of preferred stock and common stock warrants, net - 10,936
Proceeds from issuance of common stock, net - 23,971
Proceeds from exercise of options 20 84
Repayment of leases (45) -
Repayment of bank borrowings (30) (276)
---------- ---------
Net cash provided by (used in) financing activities (55) 34,715
---------- ---------
Net (decrease)/increase in cash and cash equivalents (4,117) 32,911
Cash and cash equivalents - beginning of period 17,982 754
---------- ---------
Cash and cash equivalents - end of period $ 13,865 $ 33,665
========== =========
Non-cash investing and financing transactions:
Conversion of preferred stock to common stock $ - $ 25,301
========== =========
Preferred deemed dividend $ - $ 11,515
========== =========
Unearned compensation in connection with the issuance
(cancellation) of stock options $ (859) $ 3,811
========== =========
Issuance of stock and warrants in connection with acquisition $ 1,469 $ -
========== =========
Issuance of warrants in connection with distribution agreement $ - $ 244
========== =========
Value assigned to reciprocal advertising agreements $ 45 $ 115
========== =========
Property and equipment purchased with capital lease $ 94 $ -
========== =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
5
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company
Salon.com is an Internet media company that produces a network of
eleven subject-specific, demographically targeted Web sites and a variety of
online communities designed to attract Internet advertisers and electronic
commerce partners. Salon.com was originally incorporated in July 1995 in the
State of California and reincorporated in Delaware in June 1999. The company
operates in one business segment.
2. Basis of Presentation
The accompanying consolidated financial statements as of June 30, 2000
and for the three months ended June 30, 2000 and 1999 are unaudited. The
unaudited interim consolidated financial statements have been prepared on the
same basis as the annual financial statements and, in the opinion of management,
reflect all adjustments, which include only normal recurring adjustments,
necessary to present fairly Salon's financial position, results of operations
and cash flows as of June 30, 2000 and for the three months ended June 30, 2000
and 1999. These consolidated financial statements and notes thereto are
unaudited and should be read in conjunction with Salon's audited financial
statements, filed with the Securities and Exchange Commission on Form 10-K, as
amended, as of March 31, 2000. The results for the three months ended June 30,
2000 are not necessarily indicative of the expected results for any other
interim period or the fiscal year ending March 31, 2001.
These consolidated financial statements contemplate the realization of
assets and the satisfaction of liabilities in the normal course of business.
Salon has incurred operating losses since inception and has an accumulated
deficit. Management's plans to decrease operating losses are to increase
revenues while controlling costs. If Salon is unable to generate adequate cash
flows from operations, Salon may need to seek additional sources of capital.
There can be no assurance that Salon will be able to obtain such funding, if
necessary, on acceptable terms or at all.
3. Acquisition of MP3Lit
On May 5, 2000, Salon acquired MP3Lit.com (MP3Lit), a web site
dedicated to offering spoken word and audio literature recordings in the MP3
format.
The acquisition of MP3Lit consisted of the following: (i) 380,400
shares of common stock valued at $3.375 per share; (ii) $400,000 of cash
consideration; (iii) warrants to purchase 100,000 shares of common stock over a
five-year period at a price of $10.50 per share. These shares were valued at
$185,000 using the Black-Sholes option-pricing model, applying an expected life
of five years, a weighted risk-free rate of 6.73%, an expected dividend yield of
zero percent, a volatility of 90% and a deemed fair value of common stock of
$1.85; and (iv) acquisition costs of $135,000. An additional 887,600 shares have
been issued and are held in escrow. These shares are contingent upon the meeting
of certain business benchmarks over a three-year period. If the business
benchmarks are met, the shares will be released to the former stockholders of
MP3Lit. When the contingencies are resolved, the shares will be recorded at
their fair value on the respective dates, as either an additional cost of the
acquisition or as compensation expense of the appropriate period.
Salon's acquisition of MP3Lit 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 MP3Lit on the basis of their
estimated fair values as of the date of acquisition. The assets acquired consist
of net tangible assets, identifiable intangible assets and goodwill. Net
tangible assets include primarily accounts receivable, property and equipment
and accounts payable. A preliminary review of the identifiable intangible assets
indicates the purchase of audio streaming technology which will serve
6
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
as the platform for Salon to launch an audio format, a website and associated
traffic, trade and domain names, an acquired workforce and non-compete
agreements. Salon is in the process of determining the fair values of the
identifiable intangible assets acquired and will allocate the purchase price
accordingly.
The excess of the purchase price over the fair value of the net
tangible and identifiable intangible assets acquired has been recorded as
goodwill. 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 as if the MP3Lit acquisition had occurred on April
1, 2000 and includes adjustments for amortization of goodwill and other
intangible assets. There was no activity for MP3Lit for the period April 1, 1999
to June 30, 1999 as the date of inception of MP3Lit was not until September 1,
1999. This pro forma financial information is not intended to be indicative of
future results. Unaudited pro forma consolidated results of operations are as
follows:
(in thousands, except share data)
<TABLE>
<CAPTION>
Three months ended
June 30, 2000
--------------------
(unaudited)
<S> <C>
Net revenues $ 1,759
==========
Net loss attributable to common stockholders $ (4,554)
==========
Basic and diluted net loss per share attributable to common stockholders $ (.35)
==========
</TABLE>
4. Summary of Significant Accounting Policies
Net Loss 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
equivalents outstanding during the period. The calculation of diluted net loss
per share excludes shares of common stock equivalents whose effect would be
anti-dilutive.
Diluted net loss per share attributable to common stockholders for the
three months ended June 30, 2000 and 1999 does not include the effect of common
stock equivalent shares, comprised of stock options, common stock warrants and
contingently issuable shares of 4,103,275 and 2,692,058, respectively, as the
effect of their inclusion is anti-dilutive during each period.
7
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories
Inventories, which consist solely of finished goods, are stated at the
lower of cost or market. Cost is determined by the first in, first out method.
Concentrations
No customer accounted for more than 10% of total revenues for the three
months ended June 30, 2000. One customer accounted for 11% of revenues for the
three months ended June 30, 1999. Barter revenues accounted for 3% of total
revenues for the three months ended June 30, 2000 and 11% of revenues for the
three months ended June 30, 1999. One customer accounted for 11% of the total
accounts receivable balance at June 30, 2000. One customer accounted for 13% of
the total accounts receivable balance at June 30, 1999.
Financial instruments which potentially subject Salon to concentration 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.
8
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Stockholders' Equity
Stockholders' equity activity for the three months ended June 30, 2000
was as follows:
<TABLE>
<CAPTION>
(in thousands)
Advertising
Additional Receivable
Common Paid-In From Unearned Accumulated
Stock Capital Stockholder Compensation Deficit
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 2000 $ 13 $ 78,448 $ (7,884) $ (2,098) $ (46,155)
Acquisition of MP3Lit - 1,469 - - -
Unearned compensation - (859) - 860 -
Amortization of advertising receivable - - 202 - -
Exercise of stocks options for cash - 20 - - -
Net loss - - - - (4,520)
------------------------------------------------------------------------------
Balance at June 30, 2000 $ 13 $ 79,078 $ (7,682) $ (1,238) $ (50,675)
==============================================================================
</TABLE>
If the stock-based compensation for the three months ended June 30,
2000 and 1999 had been allocated across the relevant functional expense
categories within operating expenses, it would be allocated as follows:
<TABLE>
<CAPTION>
(in thousands)
For the three months ended June 30,
---------------------------------------
2000 1999
-------------------- ------------------
<S> <C> <C>
Production, content and product $ 8 $ 232
Sales and marketing 6 182
Research and development 2 30
General and administrative 1 186
-------------------- ------------------
$ 17 $ 630
==================== ==================
</TABLE>
9
<PAGE>
--------------------------------------------------------------------------------
PART I: FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
This section and other parts of this 10-Q contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act, as amended, that
involve risks and uncertainties, including but not limited to statements
regarding our strategy, plans, objectives, expectations, intentions, financial
performance, and revenue sources. Our actual results may differ significantly
from those anticipated or implied in these forward-looking statements as a
result of the factors set forth below and in "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" and "Factors That
May Affect Our Operating Results and Market Price of Stock." In this report, the
words "anticipates," "believes," "expects," "intends," "future," and similar
expressions identify forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof.
Overview
Salon.com is a leading Internet media company that produces a
network of eleven subject-specific, demographically-targeted Web sites,
maintains Salon Shop, an e-commerce gateway, and hosts two online communities --
Table Talk, a free interactive forum and The Well, a paid subscription service.
In May 2000, Salon acquired MP3Lit.com, a pioneering Web site offering quality
spoken word and audio literature recordings in MP3 and Real Audio formats. Salon
believes that its network of Web sites combines the thoughtfulness of print, the
timeliness of television and the interactivity of talk radio.
The main entry and navigation point to Salon's eleven content sites
is Salon's home page at www.salon.com. The sites provide news, features,
interviews and regular columnists on specific topics, from politics and arts and
entertainment to parenting and health, while Salon's online communities allow
users to interact and discuss Salon content and other topics via electronic
messaging. 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
eleven 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 June 2000, approximately 2.5 million unique users visited Salon's
network of Web sites. During the quarter ended June 30, 2000, approximately 91
million page views were generated. These figures are compared to approximately
47 million page views in the quarter ended June 30, 1999 and 1.3 million unique
users in the month of June 1999. 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 by analyzing the log files that record traffic to Salon's network
of Web sites. Unique users are calculated by identifying the individual Internet
protocol address of each user who visits the Salon network. Page views are
calculated by counting actual page views as recorded in Salon's log files. Since
December 1998, these calculations have been performed
10
<PAGE>
automatically through the use of Accrue software. Prior to that time, the log
files were manually downloaded and analyzed.
As of June 30, 2000, Salon had more than 440 advertisers and
advertising sponsors. Salon has also recently begun to extend its electronic
commerce efforts throughout its network and to develop electronic commerce
sponsorships as well as its own online retailing capabilities through Salon
Shop. Salon believes that the online spending habits of its users present
opportunities for Salon to capture additional revenues, both within Salon Shop
and on the Web pages of its commercial partners.
Recent Events
In May 2000, Salon acquired MP3Lit, a web site dedicated to offering
spoken word and audio literature recordings in MP3 format. In addition to
obtaining a web site and associated traffic, through this acquisition Salon
obtained audio streaming technology that will serve as the platform for Salon to
launch an audio format. The future operating and financial performance of Salon
will depend in part on its ability to integrate and leverage MP3Lit successfully
and to enhance its operating results.
Salon's acquisition of MP3Lit was accounted for using the purchase
method of accounting. In connection with the acquisition, Salon recorded
intangibles and goodwill of approximately $2.0 million which are being amortized
on a straight-line basis over five years. An additional 887,600 shares of Salon
stock have been issued in connection with the acquisition and are held in
escrow. These shares are contingent upon the meeting of certain business
benchmarks over a three-year period. If the business benchmarks are met, the
shares will be released to the former stockholders of MP3Lit. When the
contingencies are resolved, the shares will be recorded at their fair value on
the respective dates, as either an additional cost of the acquisition or as
compensation expense of the appropriate period.
Salon expects to continue to enter into similar business
acquisitions that may result in similar or greater charges. Because Internet
businesses typically involve significant amounts of intangible assets, future
operating results may be adversely affected by amortization of the intangible
assets acquired.
Results of Operations
For the three months ended June 30, 2000 compared to the three months ended June
30, 1999
Net Revenues
Net revenues increased 75% to $1.8 million for the three months
ended June 30, 2000 from $1.0 million for the three months ended June 30, 1999.
The increase was primarily due to Salon's ability to generate significantly
higher sponsorship and advertising revenues based on an increase in the number
of impressions sold and an increase in the number of sponsors advertising on
Salon's Web sites. Sponsorship and advertising revenues accounted for
approximately 88% and 80% of net revenues for the three months ended June 30,
2000 and 1999, respectively. Barter transactions, included in sponsorship and
advertising revenues, significantly decreased during the three months ended June
30, 2000 versus June 30, 1999, to $45,000, or 3% of total revenues, from
$115,000, or 11% of total revenues, respectively.
No customer accounted for more than 10% of total revenues for the
three months ended June 30, 2000. One customer accounted for 11% of revenues for
the three months ended June 30, 1999.
Production, Content and Product
Production, content and product costs consist primarily of payroll and
related costs for Salon's editorial, artistic, and production staffs, The Well
and MP3Lit staffs, payments to freelance writers and artists, and
telecommunications and computer related expenses for the support and delivery of
Salon's Web sites and online communities. Production, content and product costs
during the three months ended June 30, 2000 were $2.7 million or 154% of net
revenues versus $2.1 million or 209% of net revenues for the three months ended
June 30, 1999, a decline of 55 percentage points. Of the 28% increase in
production, content and product costs for the three months ended June 30, 2000
versus June 30, 1999, 24% is primarily attributable to increased costs relating
to growth in Salon's editorial and art staff, and 4% to additional MP3Lit costs.
Sales and Marketing
Sales and marketing expenses consist of payroll and related
expenses, including commissions, travel expenses and other costs associated with
Salon's advertising and sponsorship sales force, as well as advertising,
promotional and distribution costs. Sales and marketing expenses were $2.4
million, or 138% of revenues and $1.8 million or 182% of total revenues for the
three months ended June 30, 2000 and 1999, respectively. The 33% increase in
sales and marketing expenses is primarily attributable to the payroll and
associated expenses of expanded sales and business development staffs.
Included in sales and marketing expenses are barter expenses of
$49,000 and $115,000 for the three months ended June 30, 2000 and 1999,
respectively.
11
<PAGE>
Research and Development
Research and development expenses consist of costs associated with the
development and maintenance of technology, including Salon's publishing platform
software and archival database, as well as technical support for Salon's Web
sites and online communities. Research and development expenses increased 68% to
$386,000 in the three months ended June 30, 2000 from $230,000 in the three
months ended June 30, 1999. Research and development expenses as a percentage of
total revenue decreased to 22% for the three months ended June 30, 2000 from 23%
for the three months ended June 30, 1999. The increase in research and
development expenses is primarily attributable to salary and payroll related
expenses for the technical support of Salon's Websites and online communities.
General and Administrative
General and administrative expenses consist primarily of salaries,
payroll taxes, benefits and related costs for the general corporate functions
including executive management, finance, human resources, and legal and other
professional fees. General and administrative expenses increased to $625,000 in
the three months ended June 30, 2000 from $576,000 in the three months ended
June 30, 1999. General and administrative expenses as a percentage of total
revenue decreased to 36% for the three months ended June 30, 2000 from 57% for
the three months ended June 30, 1999, a 21% decrease. The 9% increase in general
and administrative expenses is primarily attributable to salary and related
expenses for additional personnel hired to support the growth of Salon's
business and activities as a public company and higher professional fees.
Amortization of Intangibles
Amortization of intangibles consists of the costs associated with
the amortization of the intangibles and goodwill associated with the acquisition
of The Well and MP3Lit. The acquisition of The Well and MP3Lit are being
accounted for using the purchase method of accounting and are being amortized on
a straight-line basis over 60 months. Amortization expenses were $323,000, or
18% of net revenue, and $255,000, or 25% of net revenue, for the three months
ended June 30, 2000 and 1999, respectively.
Stock-based Compensation
Stock-based compensation consists of expenses associated with the
issuance of stock options and warrants. Stock-based compensation charges were
$17,000, or 1% of net revenue for the three months ended June 30, 2000, compared
to $630,000, or 63% of net revenue for the three months ended June 30, 1999. The
decrease in stock-based compensation was due to the departure of two senior
management executives whose options expired and the decline in the Company's
stock price during the period.
Other Income, Net
Other income consists primarily of interest earned on Salon's cash
and cash equivalents, offset by interest expense on borrowings. Other income
increased to $207,000 in the three months ended June 30, 2000 from $54,000 for
the three months ended June 30, 1999. The increase in other income is primarily
attributable to an increase in the amount of interest earned by Salon due to the
increase in Salon's cash balance as a result of its financing activities in late
June and July 1999.
12
<PAGE>
Net Loss
Salon recorded a net loss of $4.5 million, or $.36 per share for
the three months ended June 30, 2000 compared to a net loss of $16.1 million, or
$10.10 per share for three months ended June 30, 1999.
Liquidity and Capital Resources
Since its inception, Salon has primarily financed its operations
through the private placement of its convertible preferred stock and its initial
public offering of common stock. As of June 30, 2000, Salon had approximately
$13.9 million in cash and cash equivalents which was obtained through Salon's
initial public offering in June 1999 and the sale of additional stock in July
1999.
Net cash used for operations was $3.3 million for the three months
ended June 30, 2000, compared to $1.7 million for the three months ended June
30, 1999. The principal use of cash during the three months ended June 30, 2000
was to fund the $4.5 million net loss for the period, with a reduction in
accounts receivable generating $1.0 million in cash and a decrease in accrued
liabilities reducing cash by $0.7 million. The principal use of cash during the
three months ended June 30, 1999 was to fund the $4.6 million net loss for the
period offset by increases in accrued expenses and accounts payable that reduced
the use of cash by $1.1 million and $.4 million, respectively, and non-cash
stock-based compensation of $.6 million that reduced the use of cash.
Net cash used in investing activities totaled $717,000 for the
three months ended June 30, 2000, compared to $95,000 for the three months ended
June 30, 1999. During the three months ended June 30, 2000, the net cash used
for investing consisted primarily of the cash consideration of the MP3Lit
acquisition and property and equipment purchases. The principal use of cash for
investing during the three months ended June 30, 1999 was for property and
equipment purchases.
Net cash provided by financing activities decreased from $34.7
million for the three months ended June 30, 1999 to $55,000 used in operations
for the three months ended June 30, 2000. The cash used in financing activities
during the three months ended June 30, 2000 was primarily for the repayment of
leases and bank borrowings of $45,000 and $30,000, respectively. The cash
provided by financing activities during the three months ended June 30, 1999 was
primarily from the net proceeds from the issuance of preferred stock and common
stock warrants and the net proceeds from the issuance of common stock during the
Company's initial public offering.
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 for the foreseeable future but will decrease as a
percentage of sales. In addition, Salon will continue to evaluate possible
investments in businesses, products and technologies complementary to its
existing business.
Salon currently anticipates that its available cash resources will
be sufficient to meet its anticipated needs for working capital and capital
expenditures for at least the next 12 months. Salon may need to raise additional
funds, however, in order to fund more rapid expansion, to develop new or enhance
existing services, to respond to competitive pressures or to acquire
complementary businesses, products or technologies. If Salon raises additional
funds by selling equity securities, the percentage ownership of Salon's
stockholders will be reduced and its stockholders may experience additional
dilution. Salon cannot be sure that additional financing will be available on
terms favorable to Salon, or at all. If adequate funds are not available on
acceptable terms, Salon's ability to fund expansion, react to competitive
pressures, or take advantage of unanticipated opportunities would be
substantially limited. If this occurred, Salon's business would be significantly
harmed.
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Factors That May Affect Our Future Results and Market Price of Stock
Because we have a limited operating history, it is difficult to evaluate our
business and prospects
We originally incorporated in July 1995 and launched our initial Web
sites in November 1995. Because we have a limited operating history, you must
consider the risks and difficulties frequently encountered by early-stage
companies like us in new and rapidly evolving markets, including the market for
advertising and commerce on the Internet. Any future growth and success in our
business will depend substantially upon our ability to attract a larger number
of users to our Web sites and online communities, to increase advertising and
sponsorship sales based on that audience and to meet the challenges described in
the risk factors set forth below.
We lack significant revenues, we have a history of losses and we anticipate
continued losses
We have not achieved profitability and expect to incur operating losses
for the foreseeable future. We incurred net losses attributable to common
stockholders of $4.5 million in the three months ended June 30, 2000 and $33.4
million in the fiscal year ended March 31, 2000. As of June 30, 2000, our
accumulated deficit was $50.7 million. We expect these operating losses to
continue for at least the foreseeable future. We will need to generate
significant revenues to achieve and maintain profitability, and we may not be
able to do so. Even if we do achieve profitability, we may not be able to
sustain or increase profitability on a quarterly or annual basis in the future.
If our revenues grow more slowly than we anticipate or if our operating expenses
exceed our expectations, our financial results would be severely harmed.
Our quarterly operating results are volatile and may adversely affect our stock
price
Our future revenues and operating results are likely to vary
significantly from quarter to quarter due to a number of factors, many of which
are outside our control, and any of which could severely harm our business.
These factors include:
o our ability to attract and retain banner advertisers, advertising
sponsors and electronic commerce sponsors;
o our ability to attract and retain a large number of users;
o the introduction of new Web sites, services or products by us or by
our competitors;
o the timing and uncertainty of our advertising and sponsorship sales
cycles;
o the mix of banner advertisements and sponsorships sold by us or our
competitors;
o seasonal declines in advertising sales, which typically occur in the
first and third calendar quarters;
o the level of Internet usage;
o our ability to attract, integrate and retain qualified personnel;
o our ability to successfully integrate operations and technologies
from acquisitions or other business combinations;
o technical difficulties or system downtime affecting the Internet
generally or the operation of our Web sites; and
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o the amount and timing of operating costs and capital expenditures
relating to the expansion of our business operations and
infrastructure.
In order to attract and retain a larger user base, we plan to
significantly increase our expenditures on sales and marketing, content
development, technology and infrastructure. Many of these expenditures are
planned or committed in advance and in anticipation of future revenues. If our
revenues in a particular quarter are lower than we anticipate, we may be unable
to reduce spending in that quarter. As a result, any shortfall in revenues would
likely harm our quarterly operating results.
Due to the factors noted above and the other risks discussed in this
section, you should not rely on quarter-to-quarter comparisons of our results of
operations as an indication of future performance. It is possible that in some
future periods our results of operations may be below the expectations of public
market analysts and investors. If this occurs, the price of our common stock may
decline.
We depend on banner advertising and sponsorship sales for substantially all of
our revenues, and our inability to increase banner advertising and sponsorship
revenues would harm our business
Our revenues for the foreseeable future will depend substantially on
sales of advertising and sponsorships. In the three months ended June 30, 2000,
advertising and sponsorship sales accounted for 88% of our net revenues, and in
the fiscal year ended June 30, 1999 they accounted for 80% 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. 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.
Increasing our advertising and sponsorship revenues depends upon many
factors, including whether we will be able to:
o successfully sell and market our network to advertisers and
sponsors;
o increase our user base;
o increase the amount of revenues we receive per sponsorship;
o increase awareness of the Salon brand;
o target advertisements and electronic commerce opportunities to users
with appropriate interests;
o accurately measure the number and demographic characteristics of our
users; and
o attract and retain sales personnel.
Our revenues depend on a limited number of advertisers and sponsors who are not
subject to long-term agreements, and the loss of a number of these advertisers
and sponsors could harm our operating results
Historically, we have relied on a small number of banner advertisers
and advertising sponsors for a significant percentage of our revenues. In the
three months ended June 30, 2000 Evineyard.com accounted for approximately 7% of
our revenue. In the fiscal year ended March 31, 2000 Barnesandnoble.com
accounted for 6% of our revenues. The loss of any of our significant banner
advertisers or advertising sponsors could harm our business. We anticipate that
our financial results in
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any given period will continue to significantly depend on revenues from a small
number of banner advertisers and advertising sponsors. In addition, particularly
because few banner advertisers and advertising sponsors are contractually
obligated to purchase any advertising in the future, we are unable to anticipate
our mix of banner advertisers and advertising sponsors in future fiscal periods.
The length of our sales cycles is uncertain and variable and may lead to
shortfalls in or revenue and fluctuations in our operating results
Our dependence on banner advertising and sponsorships subjects us to
the risk of revenue shortfalls because the sales cycles for advertising and
sponsorships vary significantly, and during these cycles we may expend
substantial funds and management resources while not obtaining advertising or
sponsorship revenues. If sales are delayed or do not occur, our financial
results for a particular period may be harmed. The time between the date of
initial contact with a potential banner advertiser or sponsor and receipt of a
purchase order from the advertiser may range from as little as one week to up to
nine months. Sales of banner advertising and sponsorships are subject to factors
over which we have little or no control, including:
o advertisers' and sponsors' budgets;
o internal acceptance reviews by advertisers and their agencies;
o the timing of completion of advertisements and sponsorships; and
o 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:
o expand our content and communities;
o expand our network of distribution partners;
o grow Salon brand recognition through advertising and syndication;
o enhance our technology to improve the functionality of our network
of Web sites; and
o 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
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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:
o the quality and number of writers and artists who create content for
Salon;
o the quality of our editorial staff; and
o 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 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 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.
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We need to hire, integrate and/or retain qualified personnel because these
individuals are important to our growth
Our success significantly depends on the continued services of our key
editorial and design personnel. In addition, because our users must perceive the
content of our Web 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.
Competition for personnel in the Internet industry is intense. We may
be unable to retain our current key employees or attract, integrate or retain
other qualified employees in the future. If we do not succeed in attracting new
personnel or integrating, retaining and motivating our current personnel, our
business could be harmed.
We may expend significant resources to protect our intellectual property rights
or to defend claims of infringement by third parties, and if we are not
successful we may lose rights to use significant material or be required to pay
significant fees
Our success and ability to compete are significantly dependent on our
proprietary content. We rely exclusively on copyright law to protect our
content. While we actively take steps to protect our proprietary rights, these
steps may not be adequate to prevent the infringement or misappropriation of our
content. Infringement or misappropriation of our content or intellectual
property could severely harm our business. We also license content from various
freelance providers and other third-party content providers. While we attempt to
insure that this content may be freely licensed to us, other parties may assert
claims of infringement against us relating to this content.
We may need to obtain licenses from others to refine, develop, market
and deliver new services. We may not be able to obtain any such licenses on
commercially reasonable terms or at all or rights granted pursuant to any
licenses may not be valid and enforceable.
In April 1999 we acquired the Internet address www.salon.com. Because
www.salon.com is the address of the main home page to our network of Web sites
and incorporates our company name, it is a vital part of our intellectual
property assets. We do not have a registered trademark on the address, and
therefore it may be difficult for us to prevent a third party from infringing
our intellectual property rights in the address. If we fail to adequately
protect our rights in the address, or if a third party infringes our rights in
the address or otherwise dilutes the value of www.salon.com, our business could
be harmed.
Our technology development efforts may not be successful in improving the
functionality of our network which could result in reduced traffic on our
network
We have recently developed a proprietary online publishing system. If
this system does not work as intended, or if we are unable to continue to
develop this system to keep up with the rapid evolution of technology for
content delivery on the Internet, our network of Web sites may not operate
properly which could harm our business. Additionally, software product
development schedules are difficult to predict because they involve creativity
and the use of new development tools and learning processes. Delays in our
software development process could harm our business. Moreover, complex software
products like our online publishing system frequently contain undetected errors
or shortcomings, and may fail to perform or scale as expected. Although we have
tested and will continue to test our publishing system, errors or deficiencies
may be found in the system.
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We rely on third parties for several critical functions relating to delivery of
advertising and our Web site performance, and the failure of these third parties
to supply these services in an efficient manner could limit our growth and
impair our business
We rely on a number of third party suppliers for various services,
including Web hosting, banner advertising delivery software, Internet traffic
measurement software and electronic commerce fulfillment services. While we
believe that we could obtain these services from other qualified suppliers on
similar terms and conditions, a disruption in the supply of these services by
our current suppliers could severely harm our business.
We have recently begun to use new third-party software to manage the
delivery of banner advertising on our network of Web sites. If this software
malfunctions or does not deliver the correct banner advertisements to our
network, our advertising revenues could be reduced, and our business could be
harmed.
We have also recently begun to use new third-party software to measure
traffic on our network of Web sites. If this software malfunctions or does not
accurately measure our user traffic, we may not be able to justify our
advertising rates, and our advertising revenues could be reduced.
Growth in our operations is placing a strain on our resources, and failure to
manage growth effectively could harm our business
We have experienced a period of significant growth. In the fiscal year
ended March 31, 2000 our number of employees increased 143%. In the fiscal year
ended March 31, 2000 our total revenues increased approximately 174% and our
total operating expenses increased approximately 236% compared to the fiscal
year ended March 31, 1999. In the three months ended June 30, 2000 our number
of employees declined 7%. In the three months ended June 30, 2000 our total
revenues increased approximately 75% and our total operating expenses increased
approximately 15% compared to the three months ended June 30, 1999.
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:
o difficulty in the assimilation of acquired operations, technologies
or products;
o diversion of management's attention from other business operations;
o risks of entering markets in which we have limited or no experience;
and
o potential loss of key employees of acquired businesses.
We acquired The Well LLC, an online community provider, in March 1999
and MP3Lit, a web site dedicated to offering spoken word and audio literature
recordings in the MP3 format, in May 2000. We may not be able to successfully
integrate The Well LLC, MP3Lit or any businesses, products, technologies or
personnel that we might acquire in the future, and if we cannot, our business
could be harmed.
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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 will meet our anticipated
working capital and capital expenditure requirements for at least the 12 months.
We may need to raise additional capital to do the following:
o expand our network of Web sites and interactive communities;
o increase our electronic commerce opportunities;
o aggressively promote awareness of the Salon brand;
o make payments under distribution relationships;
o respond to competitive pressures; or
o acquire complementary businesses or technologies.
If we raise additional capital by issuing equity or convertible debt
securities, the percentage ownership of our then-current stockholders will be
reduced, and such securities may have rights, preferences or privileges senior
to those of our current stockholders. Additionally, we may not be able to obtain
additional financing on favorable terms, or at all. If adequate capital is not
available on acceptable terms, our ability to expand, take advantage of
unanticipated opportunities, develop or enhance services or otherwise respond to
competitive pressures would be significantly limited. This limitation could harm
our business.
Acceptance and effectiveness of Internet advertising and electronic commerce is
unproven and, to the extent it does not continue to grow, our market may not
develop adequately and our business could be harmed
Our success is highly dependent on an increase in the use of the
Internet for advertising and electronic commerce. If the markets for Internet
advertising or electronic commerce do not develop, our business may be severely
harmed.
Currently, demand and market acceptance for Internet advertising is
uncertain and may not increase as necessary for our business to grow or succeed.
Many advertisers have little or no experience using the Internet for advertising
purposes. The adoption of Internet advertising, particularly by companies that
have historically relied on traditional media, requires the acceptance of a new
way of conducting business, exchanging information and advertising products and
services. Potential advertisers may believe Internet advertising to be
undesirable or less effective for promoting their products and services relative
to traditional advertising media. If the Internet advertising market fails to
develop or develops more slowly than we expect, our business could be harmed.
Different pricing models are used to sell Internet advertising. It is
difficult to predict which pricing models, if any, will emerge as the industry
standard. This uncertainty makes it difficult to project our future advertising
rates and revenues. 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.
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Many retailers have little or no experience using the Internet for
electronic commerce. The adoption of electronic commerce, particularly by
companies that have historically relied on traditional channels to sell their
products and services, requires the acceptance of a new way of conducting
business, exchanging information and completing commercial transactions.
Potential electronic commerce partners may believe electronic commerce to be
undesirable or less effective for selling their products and services relative
to traditional channels. If the electronic commerce market fails to develop or
develops more slowly than we expect, our business could be harmed.
Tracking and measurement standards for advertising may not evolve to the extent
necessary to support Internet advertising, thereby creating uncertainty about
the viability of our business model
There are currently no standards for the measurement of the
effectiveness of advertising on the Internet, and the industry may need to
develop standard measurements in order to sustain advertising volume or attract
new advertisers. Standardized measurements may not develop and if they do not,
our business could be harmed. In addition, currently available software programs
that track Internet usage and other tracking methodologies are rapidly evolving.
The development of such software or other methodologies may not keep pace with
our information needs, particularly to support our internal business
requirements and those of our advertisers and sponsors. The absence or
insufficiency of this information could limit our ability to attract and retain
advertisers and sponsors.
It is important to our advertisers and sponsors that we accurately
measure the demographics of our user base and the delivery of advertisements on
our Web sites. We depend on third parties to provide certain of these
measurement services. If they are unable to provide these services in the
future, we would need to perform them ourselves or obtain them from another
provider, if available. This could cause us to incur additional costs or cause
interruptions in our business while we are replacing these services. Companies
may choose to not advertise on Salon or may pay less for advertising or
sponsorships if they do not perceive our measurements or measurements made by
third parties to be reliable.
If use of the Internet does not grow, our business could be harmed
Our success is highly dependent upon continued growth in the use of the
Internet generally and in particular as a medium for content, advertising and
electronic commerce. If Internet usage does not grow, we may not be able to
increase revenues from advertising and sponsorships and this may harm our
business. Internet use by consumers is in an early stage of development, and
market acceptance of the Internet as a medium for content, advertising and
electronic commerce is highly uncertain. A number of factors may inhibit the
growth of Internet usage, including the following. If these or any other factors
cause use of the Internet to slow or decline, our results of operations could be
harmed.
o inadequate network infrastructure;
o security concerns;
o inconsistent quality of service; and
o limited availability of cost-effective, high-speed access.
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
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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 harmed.
If the Internet infrastructure continues to be unreliable, access to our network
may be impaired and our business may be harmed
Our success depends in part on the development and maintenance of the
Internet infrastructure. If this infrastructure fails to develop or be
adequately maintained, our business would be harmed because users may not be
able to access our network of Web sites. Among other things, development and
maintenance of a reliable infrastructure will require a reliable network
backbone with the necessary speed, data capacity, security and timely
development of complementary products for providing reliable Internet access and
services.
The Internet has experienced, and is expected to continue to
experience, significant growth in number of users and amount of traffic. If the
Internet continues to experience increased numbers of users, frequency of use or
increased bandwidth requirements, the Internet infrastructure may not be able to
support these increased demands or perform reliably. The Internet has
experienced a variety of outages and other delays as a result of damage to
portions of its infrastructure, and could face additional outages and delays in
the future. These outages and delays could reduce the level of Internet usage
and traffic on our network of Web sites. In addition, the Internet could lose
its viability due to delays in the development or adoption of new standards and
protocols to handle increased levels of activity. If the Internet infrastructure
is not adequately developed or maintained, use of our network of Web sites may
be reduced.
Even if the Internet infrastructure is adequately developed and
maintained, we may incur substantial expenditures in order to adapt our services
and products to changing Internet technologies. Such additional expenses could
severely harm our financial results.
We may be held liable for content on our Web sites
As a publisher and distributor of content over the Internet, including
user-generated content on our online communities, we face potential liability
for defamation, negligence, copyright, patent or trademark infringement and
other claims based on the nature and content of the material that is published
or distributed on our network of Web sites. These types of claims have been
brought, sometimes successfully, against online services, Web sites and print
publications in the past. Although we carry general liability insurance, our
insurance may not be adequate to indemnify us for all liability that may be
imposed. Any liability that is not covered by our insurance or is in excess of
our insurance coverage could severely harm our financial condition and business.
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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.
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. It is possible that we will experience systems
failures in the future and that such failures could harm our business. In
addition, our users depend on Internet service providers, online service
providers and other Web site operators for access to our Web sites. Many of
these providers and operators have experienced significant outages in
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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.
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PART I: FINANCIAL INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------------------
The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's investment portfolio. The Company places its
investments with high credit issuers in short-term securities with maturities of
less than three months. The average maturity of the portfolio will not exceed
twelve months. The portfolio includes only marketable securities with active
secondary or resale markets to ensure portfolio liquidity. The Company has no
investments denominated in foreign country currencies and therefore is not
subject to foreign exchange risk.
--------------------------------------------------------------------------------
PART II: OTHER INFORMATION
--------------------------------------------------------------------------------
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Default upon senior securities.
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable
Item 5. Other Information.
Not applicable
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.18 Employment Agreement between Steven Reed and the Company dated
May 31, 2000
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
The Company filed one report on Form 8-K during the three months
ended June 30, 2000 and one report on Form 8-K/A subsequent to that
period. These filings related to the acquisition of MP3Lit. The report on
Form 8-K was filed on May 22, 2000 and reported under Item 2 -Acquisition
or Disposition of Assets. The report on Form 8-K/A was filed on July 19,
2000 and reported under Item 7 - Financial Statements, Pro Forma
Financial Information and Exhibits.
25
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed of its behalf by the
undersigned, thereunto duly authorized.
SALON.COM
Dated: 08/14/00 /s/ Michael O'Donnell
--------------------------------------------
Michael O'Donnell, Chief Executive Officer and President
Dated: 08/14/00 /s/ Robert O'Callahan
--------------------------------------------
Robert O'Callahan, Chief Financial Officer
26
<PAGE>
EXHIBIT INDEX
Exhibits
--------
10.18 Employment Agreement between Steven Reed and the Company dated
May 31, 2000
27.1 Financial Data Schedule
27
