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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
__________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2000
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 193 4
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [X]
The number of outstanding shares of the Registrant's Common Stock, par value
$0.001 per share, on June 20, 2000 was 13,832,517 shares.
Parts of the definitive proxy statement for Registrant's 2000 Annual Meeting of
Stockholders to be filed with the Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this Report are
incorporated by reference into Part III of this Report.
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FORM 10-K
SALON.COM
INDEX
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PART I
ITEM 1. Business............................................................................................... 3
ITEM 2. Properties............................................................................................. 15
ITEM 3. Legal Proceedings...................................................................................... 16
ITEM 4. Submission of Matters to a Vote of Security Holders.................................................... 16
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.................................. 17
ITEM 6. Selected Consolidated Financial Data................................................................... 18
ITEM 7. Management's Discussion and Analysis of Financial Condition and Result of Operations................... 19
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk............................................. 36
ITEM 8. Consolidated Financial Statements and Supplementary Data............................................... 37
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.................. 37
PART III
ITEM 10. Directors and Executive Officers of the Registrant..................................................... 37
ITEM 11. Executive Compensation................................................................................. 37
ITEM 12. Security Ownership of Certain Beneficial Owners and Management......................................... 37
ITEM 13. Certain Relationships and Related Transactions......................................................... 37
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................................ 38
SIGNATURES....................................................................................................... 40
Index of Financial Statements and Financial Statement Schedule................................................... 41
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PART I
ITEM 1. Business
This section and other parts of this Annual Report on Form 10-K 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.
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. Salon's eleven
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
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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 March 2000, approximately 3.7 million unique users visited Salon's
network of Web sites, generating approximately 72 million page views, compared
to approximately 1.2 million unique users and 13 million page views in March
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 automatically through the use of
Accrue software. Prior to that time, the log files were manually downloaded and
analyzed.
As of March 31, 2000, Salon's interactive communities consisted of
approximately 69,000 registered users. Salon's Table Talk forum had
approximately 63,000 registered users as of March 31, 2000 and generated over
5.9 million page views. As of March 31, 2000, The Well had approximately 6,000
paid subscribers.
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As of March 31, 2000, Salon had more than 360 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 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.
Awards
Salon.com has won most major Web awards including:
. 1999 "Best Technology Site" and "Best Parenting Site" -- Forbes
Magazine
. 1999 "David Talbot, one of the 20 Stars of the New News" - Newsweek
. 1999, 1998 & 1997 "Top of the Net" -- Yahoo Internet Life
. 1999, 1998 & 1997 Webby Award for "Best Online Magazine"
. 1998 "Best of Multimedia" -- Entertainment Weekly
. 1997 "Best of the Web" -- Business Week
. 1997 "Best Website" -- Entertainment Weekly
. 1997 "Best Online Magazine of the Year" -- Advertising Age
. 1996 "Web Site of the Year" -- Time Magazine
Industry Background
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. 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.
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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 will grow to $28 billion in
2005, representing a 551 percent increase over global online ad revenues in
1999, which were $4.8 billion.
The Need for Compelling Internet Destinations
As Internet companies compete to attract and retain users, we believe
unique content will 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 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 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 eleven
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
As of March 31, 2000, Salon derived revenues from a customer base of
approximately 360 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 IBM, Lexus, Microsoft, EDS, and
Kimberly-Clark. 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 Shop.
Expand Content and Communities
Salon believes that by regularly introducing new editorial categories it
will continue to draw and retain new users and advertisers. In May 2000, the
company announced the launch of Salon Business, a site dedicated to reporting on
business and finance, Salon Sex, featuring articles about sex, society and
culture and Salon Shop, a shopping and e-commerce gateway. Additionally,
Salon.com implemented a network-wide redesign that includes expanded broadband
integration, new site navigation and new placement opportunities for Salon.com's
advertisers and sponsors. Also 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. In April 2000, Salon launched the Free Software
Project, a totally unique approach to book publishing using the interactivity of
the Internet to present groundbreaking reporting on Linux and the Open Source
movement.
In April 1999 Salon expanded its online community offerings through its
acquisition of The Well, a paid membership community. The Well is often
described as the world' most influential online community. Salon has furthered
its focus on developing online communities by aggregating its community
offerings under a primary gateway Internet address. This structure now consists
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, and C/Net, as well as, wireless innovators
AvantGo and Rocket eBooks. 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. Salon.com content is also
syndicated to print publications through United Features Syndicate.
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In order to further broaden awareness of the Salon brand and drive more users to
Salon's network, Salon continues to pursue distribution arrangements with
additional portals and other leading Internet destination sites.
Grow Salon's Brand Recognition Through Advertising and Syndication
Salon believes that the further establishment of the Salon brand is
critical to drawing more users to its network. Salon believes it has derived
considerable publicity through its award-winning content and can significantly
grow its brand awareness through increased advertising and syndication.
In December 1999, Salon entered into a strategic alliance with Rainbow
Media Holdings, a subsidiary of Cablevision Systems (NYSE: CVC). Reflecting a
shared editorial vision, the agreement includes content exchange and
development, as well as extension of each company's brands onto new platforms
and to new audiences.
Under the terms of the 10-year agreement, Salon will receive
approximately $11 million in advertising and promotion across Rainbow Media
Holdings properties, which include the television networks, The Bravo Network,
Independent Film Channel, American Movie Classics, entertainment venues Madison
Square Garden, Radio City Music Hall, Clearview Cinemas (movie theatres) and the
electronics retailer, The Wiz.
In the first collaboration, Salon.com and Bravo Networks will exchange
content and cross-promote throughout their Web properties, in addition to
developing a new weekly television series, expected to launch in late 2000 or
early 2001.
Salon.com plans to provide its reporters and columnists to Rainbow's
MetroChannels, three channels dedicated to the New York Tri-State area. The two
companies will jointly sell advertising on the new Bravo television series, as
well as on each other's Internet properties, providing media buyers with
comprehensive online and television opportunities. Both Salon.com and Rainbow
stand to benefit from each other's proven expertise in brand development and
distribution via the Internet and on television, respectively.
In 1999, Salon continued to roll out its national marketing campaign to
increase its brand awareness within key consumer groups and urban markets.
Salon's efforts included online, radio, television and print advertising which
reinforced its positioning of the campaign "Salon...Makes You Think." Salon
believes this campaign will continue to 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 three
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 and Salon.com's Wanderlust: Real Life Tales of Adventure
and Romance 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 significant investments 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 custom-built, Linux-based platform gives 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.
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The Salon Network
Salon's network consists of eleven 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.
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Destination Sites
Salon's subject-specific Web sites provide a continuously updated array
of news, features, interviews and regular columnists.
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News Edited by Joan Walsh, News features breaking stories, investigative journalism and commentary, as well as
interviews with newsmakers, politicians and pundits. Salon News columnists include political commentators
Joe Conason and David Horowitz and sports writer Allen Barra. In addition, author and broadcaster Arianna
Huffington contributes regularly to the site.
Technology Smart, opinionated coverage of Internet news and digital culture from today's best technology writers.
Edited by Kaitlin Quistgaard, Technology offers daily feature stories and logs; reviews of books, hardware,
software and Web sites; Scott Rosenberg's column of Internet commentary; and the Free Software Project, a
totally unique approach to book publishing using the interactivity of the Internet to present Andrew
Leonard's groundbreaking reporting on Linux and the open source movement.
Arts & Entertainment Edited by Bill Wyman, Arts & Entertainment features movie, music and television reviews and interviews. The
site includes Joyce Millman's daily Blue Glow and frequent television features; extended film coverage
including actor and director interviews; Sharps & Flats, reviews of the hottest music releases from jazz and
country to rock and hip-hop; and Real Life Rock Top 10, Greil Marcus' weekly music column .
Mothers Who Think Mothers Who Think features articles by thought-provoking writers about motherhood, family life and women's
lives. In addition, renowned illustrator Lynda Barry contributes the exclusive biweekly feature, One Hundred
Demons. Mothers Who Think was founded by Camille Peri and Kate Moses who co-edited the national bestseller
"Mothers Who Think: Tales of Real-life Parenthood" in May 1999 (Villard)
Health Formerly Health & Body. The content covers a wide range of health issues, from biomedical ethics and genetic
engineering to alternative medicine and fitness. The site also includes a column of healthy wit by Mary
Roach.
Books Books includes ahead-of-the-curve daily book reviews; interviews with today's most interesting writers; Book
Bag, a weekly dose of must-reads recommended by celebrated authors; and the Salon.com Book Awards, an annual
literary event honoring the year's best books. Books also contains Ivory Tower, a look at campus life from
within and without.
People This site takes a discerning look at celebrity and the culture of celebrity. People includes Brilliant
Careers, Salon.com's weekly series of profiles of today's outstanding achievers; Camille Paglia's column on
culture and politics; Nothing Personal, a daily gossip and news column by Amy Reiter; and Cintra Wilson's
column about celebrity and pop culture. People is edited by Douglas Cruickshank
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Comics The site features the works of comic luminaries Tom Tomorrow, Ruben Bolling, Carol Lay and Keith Knight --
as well as "Dark Hotel," a serial penned and inked by comics legends Bob Callahan and Spain Rodriguez
featuring the strange and twisted lives of those who live in San Francisco's imaginary Dark Hotel.
Politics 2000 Politics 2000 features some of the most in-depth and hard-hitting political coverage found anywhere as well
as daily interactive polls, streaming video of C-Span's Campaign 2000 footage and "Trail Mix," a daily news
roundup. The site is home to the writing of Jake Tapper, Salon.com's Washington correspondent, and "one of
the best young reporters in D.C.," according to Business Week.
Business Salon Business features daily commentary and reporting on business and personal finance with an emphasis on
the information industries -entertainment, media, broadcasting, technology, publishing, fashion and
advertising.
Sex The site features articles about sex, society and culture. Highlights include a semimonthly column by
Salon.com columnist Virginia Vitzhum and "Naked World", a daily new item by Jack Boulware. It is edited by
Karen Croft, former editor of Salon Health & Body.
MP3Lit Recently acquired by Salon.com, MP3Lit was the first Web site focused solely on offering quality spoken-word
and audio literature recordings in MP3 and Real Audio formats. The company, which was founded in 1999,
offers hundreds of free recordings of short stories, novel excerpts, poems, essays, interviews and more.
Authors on MP3Lit.com include such American legends as Ernest Hemingway and Edgar Allen Poe, plus
contemporary favorites such as John Grisham, Michael Crichton, Anne Rice, Tom Wolfe, John Updike, Maya
Angelou, Henry Rollins and many more.
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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 eleven subject-
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specific sites. Salon believes that well-developed online communities help
foster user loyalty and stickiness, qualities valued by Internet advertisers and
online retailers, because users can contribute to and be actively involved in
the discussion that makes up the communities' content, and can interact with
people with similar interests
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. As of March 31,
2000, Table Talk had approximately 63,000 registered members and more than 5,000
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 7,000 registered users as of March, 31, 2000. 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. 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.
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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:
. America Online . TheStreet.com . Earthlink
. CBS MarketWatch . CNN.com . WebMD/Healtheon
. Netscape . @Home . Airmedia
. Go.com . C/Net . Snap!
. Mondadori . Rocket eBook . Reuters
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, 1999, advertising and
sponsorship revenues accounted for 94.3% of Salon's net revenues, and barter
revenues accounted for 16.2% of Salon's net revenues. For the fiscal year ended
March 31, 2000, advertising and sponsorship revenues accounted for 89.4% of
Salon's net revenues, and barter revenues accounted for 17.8% 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 and EDS' sponsorship of Salon's View From The Top editorial series.
Salon also sells advertising in opt-in email newsletters sent to readers, audio
advertisements on our audio channels, and sponsorships of offline cultural and
promotional events. 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.
According to a 2000 user survey conducted by Cyber Dialogue, an independent
research firm, the Salon user base includes the following valuable demographics:
. 88% are between the ages of 18 and 49;
. Average household income: $71,300;
. 90% have earned a college degree, or are pursuing one;
. 70% have professional, managerial or technical positions;
. At least 80% have shopped on the internet in the last 6 months;
. 91% are online everyday or more often.
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Additionally, the Cyber Dialogue survey also found that Salon users spend
an average of 26.3 minutes on Salon's network each time they visit.
Some of Salon's 360 premier advertisers and sponsors include:
. Mercedes-Benz . Ameritrade . Starbucks . Apple
. Lexus . IBM . Microsoft . Intel
. EDS . eVineyard . Kimberly-Clark . Nieman Marcus
In May 2000, Salon significantly revised the design of its network of Web
sites for improved navigation, enhanced sponsorship treatment, and integrated
advertising placement. Salon hosts a comprehensive media kit, which can be found
at http://www.salon.com/adsales/index.html
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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 80% of Salon's users have shopped on the internet in the last 6 months.
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 December 1999, Salon entered into a one-year agreement with
eVineyard.com, under which eVineyard serves as sponsor of Burt Wolf editorial
content, and which provides eVineyard the right to become the exclusive wine
retailer for Salon.com.
In October 1999 Salon renewed their exclusive content sponsorship agreement
with Lexus. Lexus agreed to renew their year-long sponsorship of Salon's popular
Brilliant Careers feature, as well as, expanding their sponsorship to become the
featured sponsor of the Salon People site.
Also in October 1999 Salon entered into a one-year contract with EDS, under
which EDS serves as exclusive sponsor of View From The Top editorial content.
Salon intends to continue to develop similar electronic commerce
partnerships with retailers and service providers 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 Shop. Salon Shop offers an expanding range of upscale
Salon-branded and third party products, as well as goods offered by its
retailing partners. As Salon expands its relationships with online retailing
sponsors, it expects Salon Shop 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.
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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 March 31, 2000, Salon content had been syndicated in 75
newspapers. Salon also directly licenses and syndicates to publications not
associated with United Features Syndicate. Salon has generated syndication
revenues from more than 60 domestic and international magazines and other
reprint vehicles.
In addition to its syndication efforts, Salon has entered into agreements
with publishers to produce three books created by Salon's editors. Mothers Who
Think: Tales of Real-Life Parenting was published by Random House/Villard in
April 1999, Salon.com's Wanderlust: Real Life Tales of Adventure and Romance to
be published by Random House/Villard in 2000, 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 the paid subscription service, The Well. The
Well, a paid subscription online community, was acquired by Salon in April 1999.
As of March 31, 2000, The Well had approximately 7,000 registered users. 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.
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 29 employees located in San Francisco, New York City, Chicago, Atlanta and
Los Angeles. Salon believes its direct sales approach allows it to form stronger
relationships with its advertisers and sponsors. The sales force consists of
regional sales managers, account executives, sales planners and sales operations
staff, under a senior vice president of sales. Salon's sales organization
consults regularly with advertisers, sponsors and their agencies on design and
placement of advertisements and the production and management of sponsorship
campaigns. Salon hires and continues to seek out sales force representatives
with experience in selling advertising in a variety of media. Salon intends to
continue to expand its sales force to establish additional advertising and
sponsorship arrangements.
The majority of Salon's banner advertising and advertising sponsorship
sales are conducted through media buying divisions of advertising agencies.
These agencies determine whether to recommend advertising on Salon's network. In
some instances, Salon may conduct its sales activities directly with banner
advertisers and advertising sponsors. The time between the date of initial
contact with a potential banner advertiser or advertising sponsor and receipt of
a purchase order from the advertiser may range from as little as one week to up
to nine months.
Salon's electronic commerce sponsorships are sold as joint projects by
Salon's sales, business development and electronic commerce staff. These
agreements are typically negotiated directly with the electronic commerce
sponsor, and have a similar sales cycle to advertising sponsorships. Salon's
sales staff works closely with electronic commerce sponsors to integrate
advertising, branding and buying opportunities throughout the Salon network.
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Marketing
Over the last four 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:
. ABC News . 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
Salon also uses event marketing to build awareness among influential
opinion leaders in the publishing, advertising and entertainment industry. In
January 2000, Salon sponsored the Fourth Annual Salon Book Awards, celebrating
top books selected by Salon editors. For its new Brilliant Careers editorial
series, Salon, with advertising sponsor Lexus, hosts an event honoring
successful individuals from different fields including science, technology, arts
and culture.
Salon has increased its efforts in building brand awareness on and off the
Internet and currently has seven employees dedicated to marketing. Salon has
utilized a targeted campaign consisting of online advertising, traditional
print, radio and television advertising as well as local and national events to
communicate its marketing message.
Competition
The market for Internet content is 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, Go.com, Lycos and Yahoo!, 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, Entertainment Weekly Online, TimeDigital, C/Net and ZDNet;
community sites including Cafe Utne, Tripod, Talk City and GeoCities;
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;
13
<PAGE>
. 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.
Editor's work with staff writers as well as with a variety of experienced
contributing writers, freelance contributors and columnists. Ideas for Salon
content flow from editor to writer and writer to editor, as well as from readers
to editors. Weekly editorial meetings serve as a filter for content proposals
and determine what content will occupy the featured position on Salon's home
page at www.salon.com. All content that appears on Salon's network of Web sites
goes through a rigorous editorial process. Site editors work with writers from
assignment through final editing of material.
Salon has deployed a versatile technical infrastructure and backend systems
to support its mission of providing first-rate content, community and commerce
on the Internet. Salon content is developed on a proprietary software platform
and captured in an Oracle database for reuse in Web and other formats. This
system allows Salon content to be easily redistributed to other Web sites,
newspapers and magazines, electronic devices including electronic books, pagers
and handheld devices, and other print or electronic media.
Salon's Web sites are supported by a variety of servers using the Windows
NT, Solaris and Linux operating systems. Salon's top technical priority is the
fast delivery of pages to its users. Salon's systems are designed to handle
significant traffic growth by balancing the amount of traffic among multiple
servers. Salon also relies on server redundancy to help achieve its goal of 24
hour, seven-day-a-week site availability. Regular automated backups protect the
integrity of Salon data.
Salon servers are maintained at Frontier GlobalCenter's media distribution
center in Sunnyvale, California. Salon's contract with Frontier GlobalCenter
provides bandwidth on demand to meet the fluctuating needs of Salon's network.
Frontier GlobalCenter offers high-speed connections to the Internet, helping
ensure fast serving and delivery of Salon's Web sites, and monitors all servers
via human or technical means on a continuous basis. Salon follows strict
password management procedures to protect access to its servers. Salon technical
staff monitors alerts from Frontier GlobalCenter and, where relevant, undertakes
recommended actions to address security issues and vulnerabilities. All of
Salon's servers are supported by uninterruptable power supplies for protection
against power outages.
Frontier GlobalCenter provides the following features to protect against
natural disaster, human error, and malicious acts:
. Multi-level card key system to control all areas of its facility;
. Visitor and vendor escorts;
. Redundant air conditioning systems;
. Intruder alarms and fire system alarms, monitored 24 hours a day;
. Dual zone, dual sensor, gas-based suppression system;
. Floors, racks, and other support systems with seismic
reinforcements to protect against earthquakes; and
. Redundant power systems consisting of uninterruptable power
supplies and a high-capacity diesel generator.
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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 owns 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.
Employees
As of March 31, 2000, Salon had 148 full-time employees, including 67 in
production and content, 46 in sales and marketing, 16 in research and
development, 11 in administration and 8 in the Well LLC. None of Salon's
employees are represented by a union. Salon believes that its relationship with
its employees is good.
ITEM 2. Properties
Salon's headquarter leases approximately 20,833 square feet of space at 22
Fourth Street 15th and 16/th/ Floor, San Francisco, California. The rent for
this space is approximately $70,000 per month, and the lease expires on December
2009.
Salon also leases approximately 7,000 square feet of space at 126 Fifth
Avenue, New York, New York. The rent for this space is approximately $16,000 per
month, and the lease expires in December 2004.
Salon leases another office with approximately 3,635 square feet of space
at 1133 21st Street NW, Washington, DC. The rent for this space is currently
$9,390 per month, and the lease expires in December 2005.
Salon has a Chicago office with approximately 171 square feet of space at
401 N. Michigan Avenue, Chicago, IL. The rent for this space is currently $2,250
per month, and the lease expires in April 2001.
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ITEM 3. Legal Proceedings
Salon is not a party to any pending legal proceedings which it
believes will materially affect it financial condition or results of operations.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
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PART II
ITEM 5. Market for Registrant's Common Equity and Related Matters
Salon's common stock has been quoted on The Nasdaq National Market since
our initial public offering on June 22, 1999 under the symbol "SALN." The
following table sets forth, for the periods indicated, the range of high and low
for the Company's Common Stock.
Fiscal Year Ended March 31, 2000 High Low
----- ----
First Quarter (From June 22, 1999) 10.81 9.00
2/nd/ Quarter 15.13 3.75
3/rd/ Quarter 9.00 4.25
4/th/ Quarter 10.06 4.06
There were 213 holders of record as of June 20, 2000.
Recent Sales of Unregistered Securities
On January 12, 2000, we issued 1,125,000 shares of our common stock to
Rainbow Media Holding, Inc., a subsidiary of Cablevision Systems, a publicly-
traded (NYSE: CVC) which operates among other properties, television networks
and entertainment venues. The consideration for the shares was a commitment from
Rainbow Media Holdings, Inc. for approximately $ 8.1 million in television
advertising on its television networks and other promotion efforts to build the
Salon.com brand.
The issuance of common stock to Rainbow Media Holdings, Inc. described
above was deemed exempt from registration under the Securities Act in reliance
on Section 4(2) of the Securities Act as a transaction by an issuer not
involving a public offering. Rainbow Media Holdings, Inc. represented its
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificate and other instruments issued in the
transaction.
We have never declared or paid any cash dividends on our capital
stock. We presently intend to retain future earnings, if any, to finance future
expansion of our business and do not expect to pay any cash dividends in the
foreseeable future.
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ITEM 6. Selected Consolidated Financial Data
<TABLE>
<CAPTION>
July 27,1995
(Inception)
to
Year Ended March 31, March 31,
--------------------------------------------------- ----------
2000 1999 1998 1997 1996
------- ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data
(in thousands except per share amounts)
Net revenues $ 8,002 $ 2,921 $ 1,156 $ 280 $ 196
-------- -------- ------- ------- ------
Operating expenses
Production, content and product 9,004 4,232 2,658 1,555 463
Sales and marketing 14,399 3,431 1,507 419 124
Research and development 1,402 443 259 176 52
General and administrative 2,453 539 285 129 43
Amortization of intangibles 1,023 - - - -
Non-cash advertising expense 202 - - - -
Non-cash compensation charges 2,412 554 345 - -
-------- -------- ------- ------- ------
Total expenses 30,895 9,199 5,054 2,279 682
-------- -------- ------- ------- ------
Loss from operations (22,893) (6,278) (3,898) (1,999) (486)
Interest income 1,129 45 89 55 10
Other income (expense), net (126) - (16) - -
-------- -------- ------- ------- ------
Net loss (21,890) (6,233) (3,825) (1,944) (476)
Preferred dividends 11,515 271 - - -
-------- -------- ------- ------- ------
Net loss attributable to common stockholders $(33,405) $ (6,504) $(3,825) $(1,944) $ (476)
======== ======== ======= ======= ======
Basic and diluted net loss per share attributable to
common stockholders $ (3.63) $(16.63) $(10.20) $(3.84) $(1.26)
======== ======== ======= ======= ======
Weighted average shares of common stock
outstanding used in computing basic and diluted
net loss per share 9,204 391 375 507 376
======== ======== ======= ======= ======
</TABLE>
As of March 31,
------------------------------------------------
2000 1999 1998 1997 1996
------- ------ ------ ------ ------
Balance Sheet Data
(in thousands)
Cash and cash equivalents $17,982 $ 754 $1,926 $2,638 $1,231
Working capital 16,211) (525) 1,894 2,560 1,150
Total assets 27,400 7,808 2,707 2,834 1,340
Long-term liabilities 473 75 95 - -
Total stockholders' equity 22,324 5,353 2,194 2,697 1,247
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ITEM 7. Management Discussion and Analysis of Financial Condition and Result of
Operations
The following discussion and analysis should be read in conjunction with
the financial statements and related notes included elsewhere in this report on
Form 10-K. In addition to historical information, the discussion in this report
contains certain forward-looking statements that involve risks and
uncertainties.
Overview
Salon.com is a leading Internet media company that produces a network of
eleven 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 3.7 million unique
users and 72 million page views in March 2000. 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 has incurred significant net losses and negative cash flows from
operations since its inception. As of March 31, 2000, Salon had an accumulated
deficit of approximately $46.2 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
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 over
the sponsorship term. Electronic commerce sponsorships may provide that Salon
receive commissions from electronic commerce transactions. These commissions are
recognized by Salon upon notification from the sponsor. The notification from
advertisers and distribution partners is generally received quarterly. Under
some of Salon's distribution agreements, Salon is entitled to receive a portion
of the advertising revenue generated on co-branded pages. These advertising
revenues are recognized upon notification from the distribution partner.
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, 2000, barter revenues represented 17.8% of Salon's
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advertising revenues. Revenues from these barter transactions are recorded as
advertising revenues at the estimated fair value of the advertisements
delivered. 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 16.2% of advertising revenues in the
fiscal year ended March 31, 1999 to 17.8% in the fiscal year ended March 31,
2000. 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 Shop are recognized when
goods are shipped. Revenues related to the syndication and licensing of Salon
content to other media outlets are recognized on notification. 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 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 subscribers to The
Well.
Recent Events
In May 2000, Salon acquired MP3Lit.com, a Web site dedicated to offering
spoken word and audio literature recordings in the MP3 format. The acquisition
represents Salon.com's continued expansion into the multibillion dollar digital
audio market by adding a new destination site that will be promoted to Salon's
audience of millions of users.
Under the terms of the agreement, consideration consisted of 1,268,000
shares of common stock, a warrant to purchase a total number of 100,000 shares
of common stock and cash in the amount of $400,000, amounting to a purchase
price of approximately $5.0 million for all outstanding shares of MP3Lit.com.
The acquisition was approved by the board of directors of each company, and
closed on May 5, 2000 and will be accounted for under the purchase method. With
the MP3Lit.com acquisition, Salon.com will offer downloadable audio versions of
books, short stories and interviews. In addition, the new MP3Lit.com division of
Salon.com will assist in developing audio versions of Salon's popular articles,
essays and commentary. The downloads will be available on the Web as well as on
portable and wireless devices such as personal digital assistants (PDAs), MP3
players, electronic books devices and Internet-enabled cellular phones.
The acquisition also includes LoudBooks.com (http://www.loudbooks.com), the
e-commerce division of MP3Lit.com, which will sell digital audio downloads of
full-length books by new authors when it launches later this year.
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Salon Results of Operations
The following table sets forth Salon's results of operations expressed as a
percentage of net revenues:
<TABLE>
<CAPTION>
Year ended March 31,
----------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C> <C>
Statement of Operations Data (in thousands)
Net revenues 100% 100% 100%
----- ----- -----
Operating expenses
Production, content and product 112% 145% 230%
Sales and marketing 180% 118% 130%
Research and development 18% 15% 22%
General and administrative 31% 18% 25%
Amortization of intangibles 13% 0% 0%
Non-cash advertising expense 2% 0% 0%
Non-cash compensation charges 30% 19% 30%
----- ----- -----
Total expenses 386% 315% 437%
----- ----- -----
Loss from operations (286%) (215%) (337%)
Interest income 14% 2% 7%
Other income (expense), net (2%) 0% (1%)
----- ----- -----
Net loss (274%) (213%) (331%)
Preferred dividends 143% 10% 0%
----- ----- -----
Net loss attributable to common stockholders (417%) (223%) (331%)
===== ====== =====
</TABLE>
Fiscal Years Ended March 31, 2000 and 1999
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 174% to $8.0 million in the fiscal year
ended March 31, 2000 from $2.9 million in the fiscal year ended March 31, 1999.
The increase in net revenues is primarily attributable to an increase in
revenues derived from banner advertisements of approximately $4.6 million,
advertising sponsorships of $1.1 million and subscription revenue of $534,000.
Salon expects that sponsorship and advertising revenues will continue to
represent the most significant portion of its net revenues for the foreseeable
future.
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Net revenues include revenues recognized from advertising barter
transactions of $1.4 million in the fiscal year ended March 31, 2000 and
$472,000 in the fiscal year ended March 31, 1999.
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.
Salon's operating expenses increased 236% to $30.9 million in the fiscal
year ended March 31, 2000 from $9.2 million in the fiscal year ended March 31,
1999. Operating expenses also increased as a percentage of net revenues to 386%
from 315% over these respective periods. The increase in operating expenses for
the fiscal year ended March 31, 2000 is primarily attributable to increased
production, content and product expenses of approximately $4.8 million, as well
as increased sales and marketing expenses of approximately $11.0 million. The
increase in operating expenses as a percentage of net revenues is primarily
attributable to an increase in the scope of Salon's content and communities,
expanding its marketing efforts and further developing its technology and
infrastructure.
Production, Content and Product Expense
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 113% to $9.0 million in
the fiscal year ended March 31, 2000 from $4.2 million in the fiscal year ended
March 31, 1999, but decreased as a percentage of net revenues to 112% from 145%
in these respective periods. The increase in production, content and product
expenses for the fiscal year ended March 31, 2000 is attributable to Salon's
increased staffing to expand the scope and distribution of its Web sites and
online communities. 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.
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 326%
to $14.6 million in the fiscal year ended March 31, 2000 from $3.4 million in
the fiscal year ended March 31, 1999, and increased as a percentage of net
revenues to 182% from 118% over these respective periods. Sales and marketing
expenses include expenses incurred from barter transactions of $1.4 million for
the fiscal year ended March 31, 2000 and $472,000 for the fiscal year ended
March 31, 1999. The increase in sales and marketing expenses is primarily
attributable to an increase in advertising of $6.5 million for the fiscal year
ended March 31, 2000 compared to $607,000 for the fiscal year ended March 31,
1999, and additional sales and marketing personnel expenses of $3.8 million for
the fiscal year ended March 31, 2000 compared to $1.1 million for the fiscal
year ended March 31, 1999.
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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 217% to $1.4
million in the fiscal year ended March 31, 2000 from $443,000 in the fiscal year
ended March 31, 1999, and research and development increased as a percentage of
net revenues to 18% from 15% over these respective periods. The increase in
research and development expenses is primarily attributable to salary and
payroll related expenses for new technological developments undertaken by Salon,
including the design and development of a new publishing platform and
advertising delivery system, and to a lesser extent, an increase in technical
support staff. 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 consist primarily of payroll and
related expenses and related costs for general corporate functions. General and
administrative expenses increased 355% to $2.5 million in the fiscal year ended
March 31, 2000 from $539,000 in the fiscal year ended March 31, 1999, it also
increased as a percentage of net revenues to 31% from 18% over these respective
periods. The increase in general and administrative expenses is primarily
attributable to salary and related expenses for additional personnel and higher
professional fees associated with the overall increase in headcount within all
departments. The increase in general and administrative expenses as a
percentage of net revenues is primarily attributable to an increase in overall
headcount due to the fact that certain general and administrative expenses are
relatively fixed.
Amortization of Intangibles
Amortization of intangibles consists of the costs associated with the
amortization of the intangibles and goodwill associated with the acquisition of
the Well. The acquisition of the Well is being accounted for using the purchase
method of accounting and is being amortized on a straight-line basis over 60
months. Amortization expenses were $1.0 million or 13% of net revenue, for the
fiscal year ended March 31, 2000. There was no similar amortization expense in
1999.
Stock-based Compensation
Stock-based compensation consists of expenses associated with the issuance
of stock options and warrants. Stock-based compensation charges were $2.4
million or 30% of net revenue for the fiscal year ended March 31,2000, compared
to $554,000 or 19% of revenue for the same period in 1999. The increase in stock
-based compensation expenses is primarily attributable to an increased number of
employee options to new and existing employees.
Interest and Other Income, Net
Other income consists primarily of interest earned on Salon's cash, cash
equivalents and short-term investments, offset by interest expense on
borrowings. Other income increased to $1.0 million or 12% of net revenues in
the fiscal year ended March 31, 2000 from $45,000 or 2% of net revenues in the
fiscal year ended March 31, 1999. The increase in other income in the aggregate
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 as a result of
Salon's initial public offering on June 22, 1999.
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Preferred Deemed Dividend
The preferred deemed dividend of $11.5 million for the fiscal year ended
March 31, 2000 is the difference between the offering price of Salon's Series C
preferred stock sold in April 1999 and the deemed fair value of Salon's common
stock on the date of the transaction. This is a one-time non-cash expense. The
preferred dividend expense for the fiscal year ended March 31, 2000 was $11.5
million or 143% of net revenues compared to $271,000 or 10% of net revenues for
the same period in 1999.
Net Loss
Salon recorded a net loss of $33.4 million or 417% of net revenues or $3.63
per share for the fiscal year ended March 31, 2000 compared to a net loss of
$6.2 million or 223% of net revenues or $16.62 per share for same period in
1999.
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, 2000.
As of March 31, 2000, Salon had approximately $28.8 million of federal and $16.1
million of state net operating loss carry forwards available to offset future
taxable income. Salon's use of these federal and state net operating loss carry
forwards may be subject to certain annual limitations.
Fiscal Years Ended March 31, 1999 and 1998
Net Revenues
Salon's net revenues increased 15% to $2.9 million in the fiscal year ended
March 31, 1999 from $1.2 million in the fiscal year ended March 31, 1998. The
increase in net revenues was primarily attributable to an increase in revenues
derived from banner advertisements of approximately $1.0 million, advertising
sponsorships of $435,000 and electronic commerce sponsorships of $166,000.
Net revenues include revenues recognized from advertising barter
transactions of $472,000 in the fiscal year ended March 31, 1999 and $75,000 in
the fiscal year ended March 31, 1998.
Operating Expenses
Salon's operating expenses increased 82% to $9.2 million in the fiscal year
ended March 31, 1999 from $5.1 million in the fiscal year ended March 31, 1998,
but decreased as a percentage of net revenues to 315% from 437% over these
respective periods. The increase in operating expenses for the fiscal year
ended March 31, 1999 was primarily attributable to increased production, content
and product expenses of approximately $1.5 million, as well as increased sales
and marketing expenses of approximately $1.9 million. The decrease in operating
expenses as a percentage of net revenues was 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.
Production, Content and Product Expenses
Production, content and product expenses increased 59% to $4.2 million in
the fiscal year ended March 31, 1999 from $2.7 million in the fiscal year ended
March 31, 1998, but decreased as a percentage of net revenues to 145% from 230%
in these respective periods. The increase in production, content and product
expenses for the fiscal year ended March 31, 1999 was primarily attributable to
increased costs relating to growth in Salon's editorial and production staff of
$838,000 and payments to freelance writers and artists of $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
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Sales and Marketing Expenses
Sales and marketing expenses increased 127% to $3.4 million in the fiscal
year ended March 31, 1999 from $1.5 million in the fiscal year ended March 31,
1998, but decreased as a percentage of net revenues to 118% from 130% over these
respective periods. Sales and marketing expenses include expenses incurred from
barter transactions of $472,000 for the fiscal year ended March 31, 1999 and
$75,000 for the fiscal year ended March 31, 1998. The increase in sales and
marketing expenses was primarily attributable to additional hiring of sales and
marketing personnel of $812,000 and additional marketing costs associated with
barter transactions and the distribution of Salon content of $748,000. The
decrease in sales and marketing expenses as a percentage of net revenues was
primarily attributable to increased sales of advertisements and sponsorships.
Research and Development Expenses
Research and development expenses increased 71% to $443,000 in the fiscal
year ended March 31, 1999 from $259,000 in the fiscal year ended March 31, 1998,
but decreased as a percentage of net revenues to 15% from 22% over these
respective periods. The increase in research and development expenses is
primarily attributable to salary and payroll related expenses for new
technological developments undertaken by Salon, including the design and
development of a new publishing platform and advertising delivery system, and to
a lesser extent, an increase in technical support staff. 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 Expense
General and administrative expenses consist primarily of payroll and
related expenses and related costs for general corporate functions. General and
administrative expenses increased 89% to $539,000 in the fiscal year ended March
31, 1999 from $285,000 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 was primarily attributable to
salary and related expenses for additional personnel of $112,000 and higher
professional fees of $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.
Interest and Other Income, Net
Other income decreased to $45,000 in the fiscal year ended March 31, 1999
from $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.
Liquidity and Capital Resources
Since its inception, Salon has primarily financed its operations through
the private placement of convertible preferred stock and its initial public
offering of common stock. As of March 31, 2000, Salon had approximately $18.0
million in cash and cash equivalents that was obtained through Salon's initial
public offering in June 1999 and the sale of the additional stock in July 1999.
Salon had $754,000 in cash at March 31, 1999 compared to $1.9 million at March
31, 1998.
Net cash used for operations was $16.7 million for the fiscal year ended
March 31, 2000 which was mainly attributable to a $21.9 million net loss and a
$1.9 million increase in accounts receivable offset by a $2.5 million non-cash
compensation expense, a $1.5 million depreciation and amortization charge and an
increase of $2.0 million and $795,000 in accrued liabilities and accounts
payable, respectively. Net cash used for operations was $4.5 million for the
fiscal year ended March 31, 1999
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which was mainly attributable to a net loss of $6.2 million, and a increase in
prepaid expenses and other assets of $317,000 offset by an increase in accounts
payable of $655,000, a non-cash compensation expense of $554,000 and an increase
in deferred revenue of $495,000. Net cash used for operations was $3.5 million
for the fiscal year ended March 31, 1998 which was mainly attributable to a net
loss of $3.8 million and an increase in accounts receivable of $229,000 offset
by a non-cash compensation charge of $345,000.
Net cash used in investing activities totaled $1.5 million, $495,000 and
$382,000 for the fiscal years ended March 31, 2000, 1999 and 1998, respectively.
Net cash used for investing activities in each of these respective periods
consisted mainly of purchases of property and equipment.
Net cash provided by financing activities was $35.6 million for the fiscal
year ended March 31, 2000 primarily due to proceeds from a private placement of
preferred stock of $10.9 million in April and June 1999 and $25.1 million from
the issuance of common stock due to the initial public offering in June of 1999.
This was offset by capital lease payments of $388,000. Net cash provided by
financing activities was $3.8 million for the fiscal year ended March 31, 1999
primarily due to proceeds from the issuance of preferred stock of $3.4 million
and borrowings of $462,000 offset by repayment of bank borrowings of $120,000.
Net cash provided by financing activities was $3.2 million for the fiscal year
ended March 31, 1998 primarily due to proceeds from the issuance of preferred
stock of $3.0 million and bank borrowings of $248,000 offset by repayment of
bank borrowings of $50,000.
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. 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 through June 2001. 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.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivatives and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. In July
1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133."
SFAS No. 137 deferred the effective date of SFAS No. 133 until fiscal years
beginning after June 15, 2000. Salon will adopt SFAS No. 133 as of April 1,
2001. To date, Salon has not engaged in derivative or hedging activities. Salon
is unable to predict the impact of adopting SFAS No. 133 if it were to engage in
derivative and hedging activities in the future.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements", which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosure related to revenue recognition policies. In March 2000,
the SEC issued SAB No. 101A to defer for one quarter and in June 2000, issued
SAB No. 101B to defer for an additional two quarters the
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effective date of implementation of SAB 101 with earlier application encouraged.
Management believes that the impact of SAB 101 will not have a material effect
on the financial position or result of operations of the Company.
In March 2000, the FASB issued interpretation No. 44 "Accounting for
Certain Transactions Involving Stock Compensation an interpretation of APB
Opinion No. 25". This interpretation has provisions that are effective on
staggered dates, some of which began after December 15, 1998 and others that
become effective after June 30, 2000. The adoption of this interpretation did
not, and is not expected to have a material impact on the financial statements.
In May 2000, the Emerging Issues Task Force issued ("EITF") 00-02,
"Accounting for Web Site Development Costs". EITF 00-02 requires costs
associated with web site application and infrastructure to be capitalized as
well as costs incurred for the initial web site graphics. EITF 00-02 is
effective for web site development costs incurred for fiscal quarters beginning
after June 30, 2000. Salon does not expect the adoption of this EITF to have a
material impact on the financial statements.
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 $33.4 million
in the fiscal year ended March 31, 2000 and $6.5 million in the fiscal year
ended March 31, 1999. As of March 31, 2000, our accumulated deficit was $46.2
million. We expect these operating losses to continue for at least the
foreseeable future. We will need to generate significant revenues to achieve
and maintain profitability, and we may not be able to do so. Even if we do
achieve profitability, we may not be able to sustain or increase profitability
on a quarterly or annual basis in the future. If our revenues grow more slowly
than we anticipate or if our operating expenses exceed our expectations, our
financial results would be severely harmed.
Our quarterly operating results are volatile and may adversely affect our stock
price
Our future revenues and operating results are likely to vary significantly
from quarter to quarter due to a number of factors, many of which are outside
our control, and any of which could severely harm our business. These factors
include:
. our ability to attract and retain banner advertisers, advertising
sponsors and electronic commerce sponsors ;
. our ability to attract and retain a large number of users;
. the introduction of new Web sites, services or products by us or by
our competitors ;
. the timing and uncertainty of our advertising and sponsorship sales
cycles;
. the mix of banner advertisements and sponsorships sold by us or our
competitors;
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. seasonal declines in advertising sales, which typically occur in the
first and third calendar quarters;
. the level of Internet usage;
. our ability to attract, integrate and retain qualified personnel;
. our ability to successfully integrate operations and technologies
from acquisitions or other business combinations;
. technical difficulties or system downtime affecting the Internet
generally or the operation of our Web sites; and
. the amount and timing of operating costs and capital expenditures
relating to the expansion of our business operations and
infrastructure.
In order to attract and retain a larger user base, we plan to significantly
increase our expenditures on sales and marketing, content development,
technology and infrastructure. Many of these expenditures are planned or
committed in advance and in anticipation of future revenues. If our revenues in
a particular quarter are lower than we anticipate, we may 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 fiscal year ended March 31, 2000,
advertising and sponsorship sales accounted for 89% of our net revenues, and in
the fiscal year ended March 31, 1999 they accounted for 94% of our net revenues.
In order to increase our revenues, we will need to attract additional
significant banner advertisers, advertising sponsors and electronic commerce
sponsors on an ongoing basis. We may not be able to attract or retain a
sufficient number of banner advertisers or advertising sponsors in the future,
and if we cannot, our business would likely be severely harmed. Increasing our
advertising and sponsorship revenues depends upon many factors, including
whether we will be able to:
. successfully sell and market our network to advertisers and
sponsors;
. increase our user base;
. increase the amount of revenues we receive per sponsorship;
. increase awareness of the Salon brand;
. target advertisements and electronic commerce opportunities to users
with appropriate interests;
. accurately measure the number and demographic characteristics of our
users; and
. attract and retain sales personnel.
. If we do not sell a sufficient number of advertisements or
sponsorships or do not engage a sufficient number of advertisers or
sponsors during a particular period, our business could be severely
harmed.
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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
fiscal year ended March 31, 2000, no customer accounted for revenues of 10% or
more of total revenues and Borders accounted for approximately 13% of total
revenues during the fiscal year ended March 31, 1999. The loss of any of our
significant banner advertisers or advertising sponsors could harm our business.
We anticipate that our financial results in any given period will continue to
significantly depend on revenues from a small number of banner advertisers and
advertising sponsors. In addition, particularly because few banner advertisers
and advertising sponsors are contractually obligated to purchase any advertising
in the future, we are unable to anticipate our mix of banner advertisers and
advertising sponsors in future fiscal periods.
The length of our sales cycles is uncertain and variable and may lead to
shortfalls in or revenue and fluctuations in our operating results
Our dependence on banner advertising and sponsorships subjects us to the
risk of revenue shortfalls because the sales cycles for advertising and
sponsorships vary significantly, and during these cycles we may expend
substantial funds and management resources while not obtaining advertising or
sponsorship revenues. If sales are delayed or do not occur, our financial
results for a particular period may be harmed. The time between the date of
initial contact with a potential banner advertiser or sponsor and receipt of a
purchase order from the advertiser may range from as little as one week to up to
nine months. Sales of banner advertising and sponsorships are subject to
factors over which we have little or no control, including:
. 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.
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We must establish and maintain distribution relationships to attract more users
to our network
We depend on establishing and maintaining distribution relationships with
high-traffic Web sites to increase our user base. There is intense competition
for relationships with these sites, and we may not be able to enter into such
relationships on favorable terms or at all. Even if we enter into distribution
relationships with these Web sites, their sites may not attract significant
numbers of users, and our Web sites may not attract additional users from these
relationships. Moreover, we have paid and may in the future pay significant
fees to establish these relationships.
We must continually develop compelling content to attract Internet users
Our success depends upon our ability to attract and retain a large number
of users by delivering original and compelling Internet content and services.
If we are unable to develop content and services that allow us to attract,
retain and expand a loyal user base possessing high-value demographic
characteristics, we will be unable to generate advertising revenues or enter
into sponsorships, and our revenues and operating results will be severely
harmed. The content and services we provide on our Web sites may not appeal to
a sufficient number of Internet users to generate banner advertising revenues or
attract sponsorships. Our ability to develop compelling content depends on
several factors, including:
. the quality and number of writers and artists who create content for
Salon;
. the quality of our editorial staff; and
. the technical expertise of our production staff.
Consumer tastes and preferences change rapidly and we may not be able to
anticipate, monitor, and successfully respond to these changes to attract and
retain a sufficient number of users for our network of Web sites. Internet
users can freely navigate and instantly switch among a large number of Web
sites, many of which offer content and services that compete with Salon. In
addition, many Web sites offer very specific, highly targeted content that could
have greater appeal than our network to particular subsets of our target user
base.
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 integrate and/or retain qualified personnel because these individuals are
important to our growth
Our success significantly depends on the continued services of our key
editorial and design personnel. In addition, because the content of our Web
sites must be perceived by our users as having been created by credible and
notable sources, our success also depends on the name recognition and reputation
of our editorial staff, in particular David Talbot, Salon's editor-in-chief.
The loss of these individuals or other key editorial or design personnel would
likely harm our business.
We 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
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 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
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terms and conditions, a disruption in the supply of these services by our
current suppliers could severely harm our business.
We have used 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 also use 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. 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. 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 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 through June 2001. We may need to raise
additional capital to do the following:
. expand our network of Web sites and interactive communities;
. increase our electronic commerce opportunities;
. aggressively promote awareness of the Salon brand;
. make payments under distribution relationships;
. respond to competitive pressures; or
. acquire complementary businesses or technologies.
If we raise additional capital by issuing equity or convertible debt
securities, the percentage ownership of our then-current stockholders will be
reduced, and such securities may have rights, preferences or privileges senior
to those of our current stockholders. Additionally, we may not be able to
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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.
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
33
<PAGE>
sponsorships if they do not perceive our measurements or measurements made by
third parties to be reliable.
If use of the Internet does not grow, our business could be harmed
Our success is highly dependent upon continued growth in the use of the
Internet generally and in particular as a medium for content, advertising and
electronic commerce. If Internet usage does not grow, we may not be able to
increase revenues from advertising and sponsorships and this may harm our
business. Internet use by consumers is in an early stage of development, and
market acceptance of the Internet as a medium for content, advertising and
electronic commerce is highly uncertain. A number of factors may inhibit the
growth of Internet usage, including:
. inadequate network infrastructure;
. security concerns;
. inconsistent quality of service; and
. limited availability of cost-effective, high-speed access.
If these or any other factors cause use of the Internet to slow or decline,
our results of operations could be harmed.
Increasing competition among Internet content providers could reduce our
advertising sales or market share, thereby harming our business
The market for Internet content is relatively new, rapidly changing and
intensely competitive. We expect competition for Internet content to continue to
increase and if we cannot compete effectively our business could be harmed.
Additionally, we expect the number of Web sites competing for the attention and
spending of users, advertisers and sponsors to continue to increase, because
there are so few barriers to entry on the Internet.
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
34
<PAGE>
Internet infrastructure is not adequately developed or maintained, use of our
network of Web sites may be reduced.
Even if the Internet infrastructure is adequately developed and maintained,
we may incur substantial expenditures in order to adapt our services and
products to changing Internet technologies. Such additional expenses could
severely harm our financial results.
We may be held liable for content on our Web sites
As a publisher and distributor of content over the Internet, including
user-generated content on our online communities, we face potential liability
for defamation, negligence, copyright, patent or trademark infringement and
other claims based on the nature and content of the material that is published
or distributed on our network of Web sites. These types of claims have been
brought, sometimes successfully, against online services, Web sites and print
publications in the past. Although we carry general liability insurance, our
insurance may not be adequate to indemnify us for all liability that may be
imposed. Any liability that is not covered by our insurance or is in excess of
our insurance coverage could severely harm our financial condition and business.
Concerns about transactional security may hinder our electronic commerce
strategy by subjecting us to liability or by discouraging commercial
transactions over the internet
A significant barrier to electronic commerce is the secure transmission of
confidential information over public networks. Any breach in our security could
expose us to a risk of loss or litigation and possible liability. We rely on
encryption and authentication technology licensed from third parties to provide
secure transmission of confidential information. As a result of advances in
computer capabilities, new discoveries in the field of cryptography or other
developments, a compromise or breach of the algorithms we use to protect
customer transaction data may occur. A compromise of our security could severely
harm our business. A party who is able to circumvent our security measures could
misappropriate proprietary information, including customer credit card
information, or cause interruptions in the operation of our network of Web
sites.
We may be required to expend significant capital and other resources to
protect against the threat of security breaches or to alleviate problems caused
by these breaches. However, protection may not be available at a reasonable
price or at all. Concerns over the security of electronic commerce and the
privacy of users may also inhibit the growth of the Internet as a means of
conducting commercial transactions.
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
35
<PAGE>
be harmed. Our insurance policies may not adequately compensate us for any
losses that may occur due to any failures of or interruptions in our systems. We
do not presently have a formal disaster recovery plan.
Our Web sites must accommodate a high volume of traffic and deliver
frequently updated information. In the past year, our Web sites have experienced
slower response times or decreased traffic on approximately four different
occasions due to a variety of reasons including hardware and software failures
and intermittent Internet traffic routing problems beyond our control. It is
possible that we will experience similar systems failures in the future and that
such failures could harm our business. In addition, our users depend on Internet
service providers, online service providers and other Web site operators for
access to our Web sites. Many of these providers and operators have experienced
significant outages in the past, and could experience outages, delays and other
difficulties due to system failures unrelated to our systems. Any of these
system failures could harm our business.
Governmental regulation of the Internet may restrict our business
There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. Laws and regulations may be adopted
in the future, however, that address issues including user privacy, pricing, and
the characteristics and quality of products and services. An increase in
regulation or the application of existing laws to the Internet could
significantly increase our costs of operations and harm our business. For
example, the Communications Decency Act of 1996 sought to prohibit the
transmission of certain types of information and content over the Web.
Additionally, several telecommunications companies have petitioned the Federal
Communications Commission to regulate Internet service providers and online
service providers in a manner similar to long distance telephone carriers and to
impose access fees on these companies. Imposition of access fees could increase
the cost of transmitting data over the Internet.
Possible state sales and other taxes could adversely affect our results of
operations
We generally do not collect sales or other taxes in respect of goods sold
to users on our network of Web sites. However, one or more states may seek to
impose sales tax collection obligations on out-of-state companies, including
Salon, which engage in or facilitate electronic commerce. A number of proposals
have been made at the state and local level that would impose additional taxes
on the sale of goods and services through the Internet. Such proposals, if
adopted, could substantially impair the growth of electronic commerce and could
reduce our ability to derive revenue from electronic commerce. Moreover, if any
state or foreign country were to successfully assert that we should collect
sales or other taxes on the exchange of merchandise on our network, our
financial results could be harmed.
Extreme Volatility of Stock Price
The market price of our Common Stock has declined significantly since our
initial public offering and may be subject to material fluctuations in the
future in response to announcements or press coverage regarding us, our
competitors, quarterly variations in our operating results, announcements of new
editorial initiatives, changes in analysts' earnings estimates, general
conditions in the Internet economy, developments in the financial markets and
most particularly, developments in the financial markets relating to
availability of financing for Internet companies.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio. The Company places its
investments with high credit issuers in short-term securities with maturities of
three to twenty-four months. The average maturity of the portfolio will not
exceed twelve months. The portfolio includes only marketable securities with
active secondary or
36
<PAGE>
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.
ITEM 8. Consolidated Financial Statements and Supplementary Data
The financial statements required by Item 8 are included in this Form
10-K beginning on Page 43.
ITEM 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
ITEM 10. Directors and Executive Officers
The information regarding directors and executive officers required by Item
10 is incorporated by reference to our definitive proxy statement for our 2000
annual stockholders' meeting.
ITEM 11. Executive Compensation
The information required by Item 11 is incorporated by reference to
our definitive proxy statement for our 2000 annual stockholders' meeting.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 is incorporated by reference to our
definitive proxy statement for our 2000 annual stockholders' meeting.
ITEM 13. Certain Relationships and Related Transactions
The information required by Item 13 is incorporated by reference to our
definitive proxy statement for our 2000 annual stockholders' meeting.
37
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
a) Documents filed as a part of this report.
(1) The following Consolidated Financial Statements are included in
Item 8 of this report.
Independent Auditor's Report
Consolidated Balance Sheet as of March 31, 2000 and 1999
Consolidated Statement of Operation for the years ended March 31,
2000, 1999 and 1998
Consolidated Statement of Stockholders' Equity for the years ended
March 31, 2000, 1999 and 1998
Consolidated Statement of Cash Flows for the years ended March 31,
2000, 1999 and 1998
Notes to Consolidated Financial Statements
(2) Schedule II - Valuation and Qualifying Accounts.
b) Reports on Form 8-K during the quarter ended March 31, 2000
None
38
<PAGE>
(3) Exhibits
Exhibit
Number Description of Document
------- -----------------------
3.2** Certificate of Incorporation of Salon
3.3** Bylaws of Salon.
4.1 Fourth Amended and Restated Rights Agreement dated January 12, 2000
10.1* 1995 Stock Option Plan.
10.2* 1999 Employee Stock Purchase Plan.
10.3* Form of Indemnity Agreement.
10.4* Commercial Office Lease between T/W Associates and Registrant dated
June 25, 1997.
10.5* Agreement of Lease between ZAPCO 1500 Investment L.P. and Registrant
dated March 1998.
10.6* Employment Agreement between Michael O'Donnell and Registrant dated
November 7, 1996.
10.7* Employment Agreement between Bruce Roberts and Registrant dated April
2, 1999.
10.8* Warrant to Purchase Stock issued to Imperial Bancorp dated December
17, 1998.
10.9* Warrant to Purchase Stock issued to Imperial Bank dated April 13,
1998.
10.10* Warrant to Purchase Stock issued to Imperial Bankcorp dated April __,
1997.
10.11* Warrant to Purchase Stock issued to America Online Inc. dated July
__, 1998.
10.12* Warrant to Purchase Stock issued to Adobe Ventures II L.P. dated
September 18, 1998.
10.13* Warrant to Purchase Stock issued to ASCII Ventures dated September
18, 1998.
10.14* Warrant to Purchase Stock issued to H&Q Salon Investors, L.P. dated
September 18, 1998.
10.15* Warrant to Purchase Stock issued to Daiwa Securities America Inc.
dated April 14, 1999.
10.16* Warrant to Purchase Stock issued to ACT III Communications dated
April 14, 1999.
10.17* Loan Agreement between Imperial Bank and Registrant dated April 14,
1998.
21.1 Subsidiaries of Salon
23.1 Consent of Independent Accountants, PricewaterhouseCoopers LLP
27.1 Financial Data Schedule
___________________________
* Previously filed as an exhibit to Registrants Registration Statements on Form
S-1 (Filed April 19, 1999) and incorporated herein by reference.
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SALON.COM
By: /s/ Michael O'Donnell
---------------------------
Michael O'Donnell
Chief Executive Officer,
President and acting Principal
Financial and Accounting Officer
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- -----
<S> <C> <C>
/s/ Michael O'Donnell Chief Executive Officer, President June 29, 2000
------------------------ and Director
Michael O'Donnell (Principal Executive Officer and
acting Principal Financial and
Accounting Officer)
/s/ David Talbot Chairman of the Board, Editor-in-Chief and June 29, 2000
------------------------ Director
David Talbot
/s/ Leonardo Mondadori Director June 29, 2000
------------------------
Leonardo Mondadori
------------------
Director
------------------------
Brian Dougherty
---------------
/s/ Jim Rosenfield Director June 29, 2000
------------------------
Jim Rosenfield
------------------------ Director
Norman Lear
/s/ Ron Celmer Director June 29, 2000
------------------------
Ron Celmer
</TABLE>
40
<PAGE>
INDEX OF FINANCIAL STATEMENTS AND FINANCIALS STATEMENT SCHEDULE
The following consolidated financial statements of Salon.com are included
in this report
. Report of Independent Accountants
. Consolidated Balance Sheet - March 31, 2000 and 1999
. Consolidated Statement of Operations - Year ended March 31, 2000,
1999 and 1998
. Consolidated Statement of Stockholders' Equity - Years ended March
31, 2000, 1999 and 1998
. Consolidated Statement of Cash Flows - Years ended March 31, 2000,
1999 and 1998
. Notes to Consolidated Financial Statements
. Schedule II Valuation and Qualifying Accounts.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.
41
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Salon.com:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Salon.com and its subsidiary at March 31, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended March 31, 2000 in conformity with accounting principles generally accepted
in the United States. In addition, in our opinion, the financial statement
schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States, 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 Jose, California
May 19, 2000
42
<PAGE>
SALON.COM
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
March 31,
-----------------------------
2000 1999
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 17,982 $ 754
Accounts receivable, net 2,425 497
Inventories 16 26
Prepaid expenses and other current assets 391 578
-------- --------
Total current assets 20,814 1,855
Property and equipment, net 2,312 707
Other assets 186 136
Intangible assets, net 4,088 5,110
-------- --------
Total assets $ 27,400 $ 7,808
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,831 $ 1,036
Accrued liabilities 2,318 439
Capital leases, current portion 154 -
Deferred revenue 210 541
Bank borrowings 90 364
-------- --------
Total current liabilities 4,603 2,380
Other long term liabilities 149 -
Bank borrowings, net of current portion - 75
Capital Leases, net of current portion 324 -
-------- --------
Total liabilities 5,076 2,455
-------- --------
Commitments and Contingencies ( Note 11)
Stockholders' Equity:
Convertible preferred stock, no par value;
Zero and 8,108,750 shares authorized at March 31, 2000 and 1999,
respectively; 0 and 4,815,345 shares were outstanding at March 31, 2000 and
1999, respectively; (aggregate liquidation preference $0 and $13,300 at
March 31, 2000 and 1999, respectively). - 15,789
Common stock, $0.001 par value;
50,000,000 and 12,500,000 shares authorized at March 31, 2000 and March 31,
1999, respectively; 12,546,769 shares and 447,496 shares were issued and
outstanding at March 31, 2000 and 1999, respectively. 13 1
Additional paid-in capital 78,448 3,147
Advertising receivable from stockholder (7,884) -
Unearned compensation (2,098) (834)
Accumulated deficit (46,155) (12,750)
-------- --------
Total stockholders' equity 22,324 5,353
-------- --------
Total liabilities and stockholders' equity $ 27,400 $ 7,808
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
43
<PAGE>
SALON.COM
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended March 31,
----------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net revenues $ 8,002 $ 2,921 $ 1,156
-------- -------- --------
Operating expenses:
Production, content and product 9,004 4,232 2,658
Sales and marketing 14,399 3,431 1,507
Research and development 1,402 443 259
General and administrative 2,453 539 285
Amortization of intangibles 1,023 - -
Non-cash advertising expense 202 - -
Non-cash compensation charges 2,412 554 345
-------- -------- --------
Total operating expenses 30,895 9,199 5,054
-------- -------- --------
Loss from operations (22,893) (6,278) (3,898)
Interest income 1,129 45 89
Other income (expense), net (126) - (16)
-------- -------- --------
Net loss (21,890) (6,233) (3,825)
Preferred dividend 11,515 271 -
-------- -------- --------
Net loss attributable to common stockholders $(33,405) $ (6,504) $ (3,825)
======== ======== ========
Basic and diluted net loss per share
attributable to common stockholders $ (3.63) $ (16.63) $ (10.20)
======== ======== ========
Weighted average share of common stock
outstanding used in computing basic
and diluted net loss per share 9,204 391 375
======== ======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
44
<PAGE>
SALON.COM
STATEMENTS OF STOCKHOLDER'S EQUITY
(in thousands)
<TABLE>
<CAPTION>
Preferred Common Additional Advertising
Stock Stock Paid-In Receivable from Unearned Accumulated
------------------------------------
Shares Amount Shares Amount Capital Stockholder Compensation Deficit
-------- -------- ------ ------ -------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1997 2,500 $ 4,989 375 $ 1 $ 291 $ - $ (163) $ (2,421)
Issuance of Series B convertible
preferred stock for cash 949 2,966 - - - - - -
Issuance of preferred stock
warrants
in connection with bank
borrowings - - - - 12 - - -
Unearned compensation - - - - 806 - (806) -
Amortization of unearned
compensation - - - - - - 345 -
Net loss - - - - - - - (3,825)
-------- -------- ------ ------ -------- ------------ ------------ --------
Balance, March 31,1998 3,449 7,955 375 1 1,109 - (624) (6,246)
Issuance of Series C convertible
preferred stock and common
stock warrants for cash 902 2,824 - - 615 - - -
Issuance of common stock upon
stock option exercise - - 55 - 11 - - -
Issuance of preferred stock
warrants
in connection with bank
borrowings - - - - 99 - - -
Issuance of preferred stock
warrants
in connection with online
distribution agreements - - - - 217 - - -
Unearned compensation - - - - 764 - (764) -
Amortization of unearned
compensation - - - - - - 554 -
Shares issued for acquisition 464 5,010 - - - - - -
Shares issued for domain name - - 17 - 61 - - -
Preferred dividend - - - - 271 - - (271)
Net loss - - - - - - - (6,233)
-------- -------- ------ ------ -------- ------------ ------------ --------
Balance, March 31, 1999 4,815 15,789 447 1 3,147 - (834) (12,750)
Issuance of Series C convertible
preferred stock and common
stock warrants for cash 2,968 9,511 - - 1,424 - - -
Issuance of common stock upon
stock option exercise - - 506 106 - - -
Issuance of common stock upon
employee stock plan purchase 16 - 104
Issuance of common stock upon
exercise of over-allotment - - 100 - 997 - - -
Issuance of common stock upon
net exercise of warrants - - 70 - - - - -
Issuance of common stock
in connection with the
advertising agreement - - 1,125 1 8,085 (8,086) - -
Issuance of warrants
in association with
advertising agreement - - - - 244 - - -
Amorization of advertising
receivable - - - - - 202 - -
Issuance of common stock in
connection
with the initial public
offering - - 2,500 3 23,858 - - -
Conversion of preferred stock to
common stock (7,783) (25,300) 7,783 8 25,292 - - -
Unearned compensation - - - - 3,676 - (3,676) -
Amortization of unearned
compensation - - - - - - 2,412 -
Preferred dividend - - - - 11,515 - - (11,515)
Net loss - - - - - - - (21,890)
-------- -------- ------ ------ -------- ------------ ------------ --------
Balance, March 31, 2000 - $ - 12,547 $13 $78,448 $(7,884) $(2,098) $(46,155)
======== ======== ====== ====== ======== ============ ============ ========
<CAPTION>
Total
Stockholders'
Equity
----------------
<S> <C>
Balance, March 31, 1997 $ 2,697
Issuance of Series B convertible
preferred stock for cash 2,966
Issuance of preferred stock
warrants in connection with
bank borrowings 12
Unearned compensation -
Amortization of unearned
compensation 345
Net loss (3,825)
-----------------
Balance, March 31, 1998 2,195
Issuance of Series C convertible
preferred stock and common
stock warrants for cash 3,439
Issuance of common stock upon
stock option exercise 11
Issuance of preferred stock
warrants in connection with bank
borrowings 99
Issuance of preferred stock
warrants in connection with online
distribution agreements 217
Unearned compensation -
Amortization of unearned
compensation 554
Shares issued for acquisition 5,010
Shares issued for domain name 61
Preferred dividend -
Net loss (6,233)
-----------------
Balance, March 31, 1999 5,353
Issuance of Series C convertible -
preferred stock and common
stock warrants for cash 10,935
Issuance of common stock upon
stock option exercise 106
Issuance of common stock upon
employee stock plan purchase 104
Issuance of common stock upon
exercise of over-allotment 997
Issuance of common stock upon
net exercise of warrants -
Issuance of common stock
in connection with the
advertising agreement -
Issuance of warrants
in association with
advertising agreement 244
Amorization of advertising
receivable 202
Issuance of common stock in
connection with the initial
public offering 23,861
Conversion of preferred stock to
common stock -
Unearned compensation -
Amortization of unearned
compensation 2,412
Preferred dividend -
Net loss (21,890)
-----------------
Balance, March 31, 2000 $ 22,324
=================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
45
<PAGE>
SALON.COM
STATEMENTS OF CASH FLOW
(in thousands)
<TABLE>
<CAPTION>
Year Ended March 31,
---------- ---------- ----------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Cash flow from operating activities:
Net loss $ (21,890) $ (6,233) $ (3,825)
Adjustments to reconcile net loss to net cash used in operating activities
Expense recognized in connection with the issuance of warrants and
stock options 2,467 554 345
Depreciation and amortization 1,505 299 115
Loss on disposal of property and equipment - - 15
Amortization of discount on bank borrowings 40 6 4
Amortization of deferred advertising 202 - -
Changes in operating assets and liabilities:
Accounts receivable (1,927) (247) (229)
Inventories 10 (25) -
Prepaid expenses and other assets 325 (318) (105)
Accounts payable 795 655 113
Accrued liabilities 2,033 316 42
Deferred revenue (331) 495 31
---------- ---------- ----------
Net cash used in operating activities (16,771) (4,498) (3,494)
---------- ---------- ----------
Cash flows from investing activities:
Purchase of property and equipment (1,552) (495) (382)
Cash received in connection with acquisition - 29 -
---------- ---------- ----------
Net cash used in investing activities (1,552) (466) (382)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of preferred stock, net 10,935 3,439 2,966
Proceeds from issuance of common stock, net 25,067 11 -
Proceeds from bank borrowings - 462 248
Repayment of bank borrowings (388) (120) (50)
Repayment of capital lease (63) - -
---------- ---------- ----------
Net cash provided by financing activities 35,551 3,792 3,164
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 17,228 (1,172) (712)
Cash and cash equivalents at the beginning of year 754 1,926 2,638
---------- ---------- ----------
Cash and cash equivalents at the end of year $ 17,982 $ 754 $ 1,926
========== ========== ==========
Cash paid for interest $ 126 $ 39 $ 13
========== ========== ==========
Supplemental disclosure of non-cash investing and financial activities:
Unearned compensation in connection with the issuance of stock options $ 3,676 $ 764 $ 806
========== ========== ==========
Issuance of warrants issued in connection with bank borrowings $ - $ 99 $ 12
========== ========== ==========
Issuance of warrants issued in connection with agreements $ 244 $ 217 $ -
========== ========== ==========
Issuance of stock in connection with advertising agreement $ 8,086 $ - $ -
========== ========== ==========
Value assigned to reciprocal advertising agreement $ 1,424 $ 472 $ 75
========== ========== ==========
Issuance of stock in connection with acquisition $ - $ 5,010 $ -
========== ========== ==========
Issuance of stock in connection with domain name $ - $ 61 $ -
========== ========== ==========
Property and equipment purchased with capital lease $ 536 $ - $ -
========== ========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
46
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 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.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
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.
Principles of consolidation
The consolidated financial statements include accounts of Salon.com and its
wholly owned subsidiary (collectively "Salon"). All material inter-company
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 revenue 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 with a single financial institution.
At times, the balance may exceed federally insured limits.
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.
Property and equipment
Property and equipment are recorded at cost. Depreciation and amortization
are computed on a straight-line basis over the useful lives of the asset, as
follows:
Computer and network equipment and software - 3 years
Furniture and office equipment - 5 years
47
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Leasehold improvements are amortized on a straight-line basis over the
useful life of the asset or the term of the lease; whichever is shorter.
Maintenance and repairs are charged to expense as incurred. When assets
are sold or retired, the cost and the related accumulated depreciation are
removed from the accounts and any resulting gain or loss is included in
operations.
In April 1999, Salon adopted Statement of Position ("SOP") 98-1, which
requires software development costs associated with internal use software to be
charged to operations until certain capitalization criteria are met. Salon
incurred no costs which were required to be capitalized for the year ended March
31, 2000.
Intangibles
Intangibles including proprietary technology, tradename and goodwill are
amortized on a straight-line basis over five years.
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 89%, 94% and 99% of total revenues for the fiscal
years ended 2000, 1999 and 1998, respectively. Sponsorship revenues are derived
principally from contracts ranging from six to thirty-six months in which Salon
commits to provide sponsors enhanced promotional opportunities beyond
traditional banner advertising. Sponsorship agreements typically include the
delivery of impressions, exclusive relationships and the design and development
of customized co-branded pages designed to enhance the promotional objective of
the sponsor. Revenues are recognized ratably in the period in which the
advertisement is displayed provided that no significant obligations remain. To
the extent that minimum guaranteed page deliveries are not met, Salon defers
recognition of the corresponding revenues until the guaranteed page deliveries
are achieved.
Advertising revenues are derived principally from short-term advertising
contracts in which Salon typically guarantees a minimum number of impressions to
be delivered to users over a specified period of time for a fixed fee.
Advertising revenues are recognized ratably in the period in which the
advertising is displayed, provided that no significant obligations remain. To
the extent that minimum guaranteed page deliveries are not met, Salon defers
recognition of the corresponding revenues until the guaranteed page deliveries
are achieved.
Advertising revenues include barter revenues, which are the exchange by
Salon of advertising space on Salon's Web sites for reciprocal advertising space
on other Web sites or the exchange of goods or services. Revenues from these
barter transactions are recorded as advertising revenues at the estimated fair
value of the advertisements delivered and are recognized when the advertisements
are run on Salon's Web sites. Barter expenses are recorded 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. Barter revenues
represented 17.8%, 16.2% and 6.5% of total revenues for the fiscal years ended
March 31, 2000, 1999 and 1998, respectively.
48
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Salon adopted Emerging Issues Task Force ("EITF") 99-17, "Accounting for
Advertising Barter Transaction" for all barter transactions entered into after
January 20, 2000. EITF 99-17 requires advertising barter transactions to be
valued based on similar cash transactions which have occurred within six months
prior to the date of the barter transaction and is effective for all
transactions after January 20, 2000. The Company adopted this standard on
January 20, 2000. The number of impressions delivered by Salon based on barter
transactions where fair value was not determinable, was approximately
15,000,000.
Slotting fees are paid to Salon by a particular retailer for a measure of
exclusivity in the retailers industry segment. Slotting fees obtained for
promoting the sale of goods and services through Salon are recognized ratably
over the course of the contract. The agreements may provide that Salon receive
commissions from electronic commerce transactions. These commissions are
recognized by Salon upon notification from the advertiser.
Revenues related to sales from Salon's online store are recognized when
goods are shipped. Revenues related to the syndication of Salon content to other
media outlets are recognized on receipt of payment. 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.
Advertising Costs
Salon expenses advertising costs as they are incurred. Advertising expense
was $7,804,000, $629,000 and $76,000 for the fiscal year ended March 31, 2000,
1999 and 1998. Of these total expenses, barter advertising cost represents
$1,427,000, $472,000 and $75,000 for the fiscal years ended March 31, 2000, 1999
and 1998.
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
The Company accounts for employee stock compensation arrangements in
accordance with provision of Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock issued to Employees", and complies with the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Under
APB No. 25, stock compensation is based on the difference, if any, on the date
of grant, between the estimated fair value of the Company's common stock and the
exercise price. Deferred stock compensation is amortized in accordance with
Financial Accounting Standards Board ("FASB") Interpretation No. ("FIN") 28.
The Company accounts for stock issued to non-employees in accordance with the
provisions of SFAS 123 and Emerging Issues Task Force Issue No. 96-18,
"Accounting for Equity Instruments that are Issued to Other than Employees for
Aquiring, or in Conjunction with Selling Goods or Services".
49
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 had the following concentrations of net revenues:
Year Ended March 31,
--------------------
Customer 2000 1999 1998
-------- ---- ---- ----
A - 13% 37%
B - - 16%
Salon had no customers at March 31, 2000 that accounted for more than 10%
of trade accounts receivable and had four customers at March 31, 1999 that
accounted for 19%, 11%, 11% and 11%, respectively.
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 shares excludes potential shares of common stock as their effect would be
anti-dilutive.
Diluted net loss per share attributable to common stockholders for the
years ended March 31, 2000, 1999 and 1998 does not include the effect of
2,694,291, 1,683,593 and 1,561,510 stock options, respectively, and 478,758,
333,752 and 8,750 common stock warrants, respectively or zero, 4,815,345 and
3,449,366 shares of convertible preferred stock on an "as if converted" basis,
respectively, as the effect of their inclusion is anti-dilutive during each
period.
50
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Comprehensive income
SFAS No. 130, "Reporting Comprehensive Income", ("SFAS No. 130") requires
companies to classify items of other comprehensive income by their nature in the
financial statements and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position. To date Salon has not had
any transactions that are required to be reported in comprehensive income.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivatives and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. In July
1999, the FASB issued SFAS No. 137, "Accounting for Derviative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133."
SFAS No. 137 deferred the effective date of SFAS No. 133 until fiscal years
beginning after June 15, 2000. Salon will adopt SFAS No. 133 as of April 1,
2001. To date, Salon has not engaged in derivative or hedging activities.
Salon is unable to predict the impact of adopting SFAS No. 133 if it were to
engage in derivative and hedging activities in the future.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements", which provides guidance on the recognition,
presentation, and disclosure of revenue in financial statements filed with the
SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue
and provides guidance for disclosure related to revenue recognition policies.
In March 2000, the SEC issued SAB No. 101A to defer for one quarter and in June
2000 issued SAB No. 101B to defer for an additional two quarters the effective
date of implementation of SAB 101 with earlier application encouraged.
Management believes that the impact of SAB 101 will not have a material effect
on the financial position or result of operations of the Company.
In March 2000, The FASB issued FASB interpretation No. 44 "Accounting for
Certain Transactions Involving Stock Compensation an interpretation of APB
Opinion No. 25". This interpretation has provisions that are effective on
staggered dates, some of which began after December 15, 1998 and others that
become effective after June 30, 2000. The adoption of this interpretation did
not, and is not expected to have a material impact on the financial statements.
In May 2000, the Emerging Issues Task Force issued ("EITF") 00-02,
"Accounting for Web Site Development Costs". EITF 00-02 requires costs
associated with web site application and infrastructure to be capitalized as
well as costs incurred for the initial web site graphics. EITF 00-02 is
effective for web site development costs incurred for fiscal quarters beginning
after June 30, 2000. Salon does not expect the adoption of this EITF to have a
material impact on the financial statements.
51
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Balance Sheet Components
<TABLE>
<CAPTION>
Year ended
March 31,
--------------------------------------
2000 1999
-------------------- -----------------
(in thousands)
<S> <C> <C>
Accounts receivable, net:
Accounts receivable $ 2,719 $ 527
Less: Allowance for doubtful accounts (294) (30)
---------- ----------
$ 2,425 $ 497
========== ==========
Prepaid expenses and other current assets:
Prepaid advertising $ - $ 405
Deposits 85 21
Prepaid expenses 284 99
Other 22 53
---------- ----------
$ 391 $ 578
========== ==========
Property and equipment, net:
Computer and network equipment and software $ 1,909 $ 901
Furniture and office equipment 510 167
Leasehold improvements 967 33
---------- ----------
3,386 1,101
Less: Accumulated depreciation and amortization (1,074) (394)
---------- ----------
$ 2,312 $ 707
========== ==========
</TABLE>
At March 31, 2000, Salon had $536,000 of furniture and computer equipment under
capitalized leases. The amortization at March 31, 2000 was $59,000.
<TABLE>
<CAPTION>
Year ended
March 31,
---------------------------------
2000 1999
--------------- ---------------
(in thousands)
<S> <C> <C>
Intangible assets, net:
Tradename $ 1,200 $ 1,200
Goodwill 3,555 3,555
Proprietary technology 305 305
Subscriber list 50 50
--------- --------
5,110 5,110
Less: Accumulated amortization (1,022) -
--------- --------
$ 4,088 $ 5,110
========= ========
Accrued liabilities:
Accrued compensation and related benefits $ 958 $ 151
Accrued marketing expenses 462 -
Other accrued expenses 898 288
--------- --------
$ 2,318 $ 439
========= ========
</TABLE>
52
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Acquisition of The WELL LLC
Salon completed the acquisition of The Well LLC, an online community
business, on March 29, 1999 for 463,918 shares of Series C preferred stock
valued at $10.80 per share. Salon also incurred acquisition costs of $114,000
related to the transaction. Salon's acquisition of The Well LLC was accounted
for using the purchase method of accounting. 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 (in thousands):
Intangibles including proprietary technology and tradename $1,555
Goodwill 3,555
Property and equipment 78
Net current liabilities assumed (64)
------
Total purchase price $5,124
======
The excess of the purchase price over the fair value of the net tangible
and identifiable intangible assets acquired has been recorded as goodwill.
Indentifiable 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 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 (in thousands except share data):
<TABLE>
<CAPTION>
Year ended March 31,
-------------------------
1999 1998
-------- --------
(unaudited)
<S> <C> <C>
Net revenues $ 3,406 $ 1,674
======== ========
Net loss attributable to common stockholders $ (7,595) $ (4,956)
======== ========
Basic and diluted net loss per share attributable to common
stockholders $ (19.41) $ (13.21)
======== ========
</TABLE>
53
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Bank Borrowings
In April 1997, Salon entered into a borrowing agreement with a bank which
provided 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. The
bank's commitment to provide additional funds under this agreement expired on
September 30, 1997. Borrowings are repayable in monthly installments of
principal plus accrued interest through December 10, 2000. According to the
terms of the agreement, Salon is required to meet certain financial covenants
including minimum net worth and working capital levels. There was no balance
outstanding at March 31, 2000 and $99,000 at March 31, 1999.
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. Upon completion of the initial public offering, the warrant
was converted into the right to purchase an equivalent number of Salon's common
stock at the same exercise price per share. This warrant was subsequently
exercised. Salon valued the warrant, using the Black-Scholes option pricing
model. The fair value was recorded as a discount to the amount borrowed and was
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,
subsequently increased to a maximum amount of $1,000,000. The agreement also
provides for an equipment term loan up to $300,000. Borrowings bear interest at
the bank's prime rate plus 0.5%. As of March 31, 2000 and 1999, Salon has drawn
$90,000 and $210,000 against the equipment loan and zero and $220,000 against
the revolving borrowing amount, respectively. The bank's commitment to provide
additional funds under this agreement expired on April 12, 1999.
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. Upon completion of the initial public offering, the warrant
was converted into the right to purchase an equivalent number of Salon's common
stock at the same exercise price per share. This warrant was subsequently
exercised. Salon valued the warrant, using the Black-Scholes option pricing
model. The fair value was recorded as a discount to the amount borrowed and was
amortized to interest expense over the term of the borrowing agreement using the
effective interest method.
Also, in connection with the borrowing agreements, Salon issued a warrant
to purchase 14,439 shares of Salon's Series C preferred stock at an exercise
price of $3.88 per share. Salon valued the warrant, using the Black-Scholes
option pricing model. The fair value was recorded as a discount to the amount
borrowed and was amortized to interest expense over the term of the borrowing
agreement using the effective interest method.
On September 23, 1999, Salon amended the above security and loan agreement
and obtained a new revolving loan for a maximum amount of $2,000,000 which
expires on September 23, 2000. Additionally, the agreement provides for a
credit line of $1,000,000 until July 31, 2000. The agreement is collateralized
by the assets of Salon and contains certain financial covenants. As of March
31, 2000, there was no outstanding balance under the security and loan
agreement.
54
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Re-incorporation and Stock Split
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 and (ii) increase the number shares of preferred
stock designated as Series C to 4,500,000. In conjunction with the increase in
Series C preferred stock, 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 re-incorporation, Salon authorized an increase
in the amount of authorized shares of common stock to 50,000,000. All share data
and stock option plan information has been restated to reflect the split and the
re-incorporation.
Note 7. Stockholders' Equity
In April 1999, Salon authorized 5,000,000 shares of a new class of
preferred stock whose preferences, rights and privileges are to be decided by
the Board of Directors. At March 31, 2000 there are no shares outstanding.
Convertible preferred stock
On June 23, 1999, in association with the Company's initial public
offering, all of Salon's preferred stock was converted to common stock based on
the conversion rate at that time.
Convertible preferred stock at March 31, 1999:
Shares Shares Issued
Series Authorized and Outstanding
------ ---------- ---------------
A 2,508,750 2,500,000
B 1,100,000 949,365
C 4,500,000 1,365,980
---------- ---------
8,108,750 4,815,345
========== =========
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 had the same rights as those holders of Series C shares prior issuances.
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 is
reflected as a preferred dividend in the consolidated statement of operations
for the year ended March 31, 2000.
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.
55
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Convertible preferred stock 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. Upon completion of the initial public offering,
the warrant was converted to the right to purchase an equivalent number of
Salon's common stock at the same exercise price per share. The warrant may be
exercised at any time within 5 years after issuance.
Salon valued the warrant using the Black-Scholes option pricing model. 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 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 actual number of shares subject to
the terms of the warrants shall be determined according to certain financing
thresholds. The warrants may be exercised at any time within 10 years after
issuance. As of March 31, 2000, warrants to purchase 172,529 shares of common
stock were exercisable. The warrants expire September 2008. Salon valued the
warrants using the Black-Scholes option price model, applying an expected life
of 10 years, a weighted average risk free interest rate of 5.04%, an expected
dividends 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 $271,000. The beneficial conversion feature was
reflected as a preferred dividend in the statement of operations.
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 warrants may be
exercised at any time within five years after issuance. Upon completion of the
initial public offering, the warrants were converted into the right to purchase
an equivalent number of shares of Salon's common stock at the same exercise
price per share. Salon valued the warrants 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 warrant of $1.4 million is netted against the proceeds from
the offering.
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 the initial public offering, the warrant was
converted into the right to purchase an equivalent number of shares 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
dividends yield of zero percent, a volatility of 107% and a deemed fair value of
common stock of $10.80. The fair market value of the warrant of $244,000 is
being expensed as the services are rendered.
56
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Common stock reserved
Salon had reserved shares of common stock for the following:
Year ended March 31,
-------------------------------
2000 1999 1998
--------- --------- ---------
Stock option plan 2,875,000 1,875,000 1,875,000
Warrants 478,758 333,752 8,750
Convertible preferred stock - 4,815,345 3,449,365
Preferred stock 5,000,000 - -
--------- --------- ---------
8,353,758 7,024,097 5,333,115
========= ========= =========
Common stock issuance
In December 1999, Salon issued 1,125,000 shares of common stock,
representing approximately 10% of Salon's outstanding common stock to an
advertising company in exchange for approximately $8.1 million in advertising
and promotional time to be delivered over ten years. The Company recorded the
value of the advertising services as offset to equity and amortizes it as
services are rendered.
Note 8. 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.
57
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes activity under Salon's Plan from March 31, 1997
through March 31, 2000:
<TABLE>
<CAPTION>
Outstanding Options
---------------------------------------------------
Weighted
Average
Number of Price per Exercise
Shares Share Price
----------------- ---------------- ------------
<S> <C> <C> <C>
Balance March 31, 1997 485,000 $ .20 $ .20
Options granted 1,135,000 $ .20-$.32 $ .22
Options terminated (58,490) $ .20 $ .20
----------------- ---------------- ------------
Balance March 31, 1998 1,561,510 $ .20-$.32 $ .20
Options granted 376,250 $ .32-$.52 $ .38
Options terminated (199,171) $ .20-$.52 $ .28
Options exercised (54,996) $ .20-$.32 $ .20
----------------- ---------------- ------------
Balance March 31, 1999 1,683,593 $ .20-$.52 $ .24
Options granted 1,799,569 $2.92-$10.94 $7.37
Options terminated (282,761) $ .20-$10.06 $3.74
Options exercised (506,110) $ .20-$.52 $ .21
----------------- ---------------- ------------
Balance March 31, 2000 2,694,291 $ .20-$10.94 $4.64
================= ================ ============
</TABLE>
In connection with the grant of options for the purchase of common stock to
employees and non- employees during the period from July 27, 1995 (inception)
through March 31, 2000, Salon recorded aggregate deferred compensation of $5.5
million as determined by APB 25, Emerging Issues Task Force 96-18 and SFAS
No.123. Such deferred compensation will be amortized over the vesting period
relating to these options. Accordingly, Salon amortized $2,412,000, $554,000 and
$345,000, for the years ended March 31, 2000, 1999 and 1998, respectively.
The following table summarizes information about stock options outstanding
at March 31, 2000:
<TABLE>
<CAPTION>
Options outstanding at Options Exercisable at
March 31, 2000 March 31, 2000
------------------------------------------------------- ------------------------------
Weighted
Average Weighted
Range of Number Remaining Average Number Weighted
Exercise Shares Contractual Exercise Shares Exercise
Prices Outstanding Life Price Exercisable Price
------------- ---------------- --------------- ------------ ---------------- -----------
<S> <C> <C> <C> <C> <C>
$0.20 802,453 6.9 $0.20 599,274 $0.20
$0.32 196,513 8.1 $0.32 78,538 $0.32
$0.52 97,005 8.5 $0.52 31,557 $0.52
$2.92 266,750 9 $2.92 24,499 $2.92
$5.06-$ 6.97 262,820 9.7 $5.48 1,750 $6.13
$8.50-$10.94 1,068,750 9.5 $9.36 - -
------------ --------------- -------------- ----------- ---------------- --------
$.20-$10.94 2,694,291 8.6 years $4.64 735,618 $0.33
=============== ============== =========== ================ ========
</TABLE>
58
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At March 31, 2000 and 1999 options to purchase 735,618 and 704,948
shares of common stock, respectively, were exercisable.
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 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, 2000, 1999 and 1998:
Year Ended March 31,
--------------------
2000 1999 1998
---- ---- ----
Risk-free interest rates 4.99-6.50% 5.66% 6.10%
Expected lives (in years) 4.00 4.00 4.00
Expected volatility 90% 0.0% 0.0%
Dividend yield 0.0 0.0 0.0
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:
Year Ended March 31,
--------------------------------
2000 1999 1998
---- ---- ----
(in thousands, except share data)
Net loss attributable to common
stockholders:
As reported $(33,405) $(6,504) $(3,825)
Pro forma $(34,467) $(6,912) $(4,166)
Basic and diluted net loss per share
attributable to common stockholders:
As reported $ (3.63) $(16.63) $(10.20)
Pro forma $ (3.74) $(17.66) $(11.11)
Note 9. 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
its 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.
59
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 2000, the Company sold 15,184 shares of common stock at $6.85
per share for total proceeds of $104,000. The weighted average fair value of
rights granted under the ESPP in accordance with FAS 123 was $1.61 per share for
the year ended March 31, 2000.
Note 10. 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.
Note 11. Commitments and Contingencies
Operating Leases
Salon has six 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 were $749,000, $284,000 and
$148,000 for the years ended March 31, 2000, 1999 and 1998, respectively.
Capital leases and equipment loan
Salon leases various furniture and computer equipment under two capital
leases which expire in May 2001 and December 2005, respectively.
Additionally, in January 2000, the Company entered into a three-year master
capital lease agreement with a credit limit of $500,000, to be drawn in full or
in installments of not less than $50,000 until December 2000. Equipment financed
under this master agreement amounted to $340,000 for the year ended March 31,
2000.
Future minimum rental payments under capital leases and non-cancellable
operating leases, net of rental receipts, are as follows (in thousands):
Capital Operating
Year Ending March 31, Leases Leases
--------------------- --------- ---------
2001 $ 227 $ 1,189
2002 182 1,302
2003 154 1,200
2004 9 1,113
2005 and thereafter 19 5,709
------- -------
Total minimum lease payments 590 $10,513
=======
Less: interest (113)
-------
Present value of minimum lease payments 478
Less: current portion (154)
-------
Long-term portion of capital lease $ 324
=======
60
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company leases out unused office space in two locations with lease
agreements that expire at various dates through March 2004. Annual rental income
totaled $52,000 in 2000 and none in 1999 and 1998. This income is recorded as an
offset against rent expense. Future minimum rental receipts under non-
cancellable lease agreements are as follows as of March 31, 2000 (in thousands):
Year Ending March 31, Amount
----------------------- ------
2001 $315
2002 217
2003 223
2004 230
----
Total $986
====
In March 2000, the Company entered into a content agreement with an
Internet service provider. The Company is to promote and include links to
Salon's content on its homepage over a one year period in exchange for $216,000,
which Salon will pay in 12 monthly installments of $18,000.
Note 12. Income Taxes
Salon has no income tax provision for the years ended March 31, 2000, 1999
and 1998, respectively.
At March 31, 2000, the Company had net operating loss carry-forwards of
approximately $28,800,000 and $16,100,000 for Federal and California purposes,
respectively, available to reduce future taxable income, if any. These carry-
forwards expire through 2019 and 2006 for Federal and California purposes,
respectively, if not utilized beforehand.
At March 31, 2000, the Company had research and development credit carry-
forwards of approximately $12,000 and $9,000 for Federal and California income
tax purposes, respectively. The research and development carry-forwards expire
beginning in the year 2011.
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carry-forwards in certain situations where changes occur in the stock
ownership of a company. In the event the Company has a change in ownership,
utilization of the carry-forwards could be restricted.
Temporary differences which give rise to significant portions of deferred
tax assets and liabilities are as follows (in thousands):
Year ended March 31,
----------------------------------
2000 1999
------------- -------------
Net operating losses $ 10,706 $ 4,319
Temporary differences 266 259
------------- ------------
Total 10,972 4,578
Valuation allowance (10,972) (4,578)
------------- -------------
Net deferred tax asset $ - $ -
============= =============
Due to uncertainty of realizing the benefits of the deferred tax assets,
the Company has provided a valuation allowance against the net deferred tax
assets.
61
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Subsequent Events
On May 5, 2000, Salon acquired MP3Lit.com, a Web site dedicated to offering
spoken word and audio literature recordings in the MP3 format. The acquisition
will be accounted for using the purchase method of accounting. Consideration
consisted of 1,268,000 shares of common stock, warrants to purchase a total of
100,000 shares of common stock and cash of $400,000, amounting to a purchase
price of approximately $5.0 million for all outstanding shares of MP3Lit.com
Section II: Valuation and Qualifying Accounts
Valuation allowance for doubtful accounts
<TABLE>
<CAPTION>
Additions
Balance at Charged to Charged to Balance
Beginning Cost and Other at End
Year Ending March 31 of Period Expenses Accounts Deductions of Period
----------------------- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(in thousands)
1998 - - - - -
1999 - $ 30 - - $ 30
2000 $30 $347 - $(83) $294
</TABLE>
Valuation allowance for deferred tax asset
<TABLE>
<CAPTION>
Additions
Balance at Charged to Charged to Balance
Beginning Cost and Other at End
Year Ending March 31 of Period Expenses Accounts Deductions of Period
----------------------- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(in thousands)
1998 $ 937 $1,535 - - $ 2,472
1999 $2,472 $2,106 - - $ 4,578
2000 $4,578 $6,394 - - $10,972
</TABLE>
62
