<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
__________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-27886
SALON.COM
(Exact name of Registrant as specified in its charter)
Delaware 94-3228750
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
22 Fourth Street, 16th Floor
San Francisco, CA 94103
(Address of principal executive offices)
________________
(415) 645-9200
(Registrant's telephone number, including area code)
________________
Securities registered pursuant to Section 12(b) of the Act:
None
________________
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value
(Title of Class)
________________
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
The number of outstanding shares of the Registrant's Common Stock, par value
$0.001 per share, on December 31, 1999 was 11,376,964 shares.
================================================================================
1
<PAGE>
- --------------------------------------------------------------------------------
FORM 10-Q
SALON.COM
INDEX
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
Number
<S> <C>
PART I FINANCIAL INFORMATION
ITEM 1: Financial Statements
Consolidated Balance Sheets as of December 31, 1999 (unaudited) and
March 31, 1999........................................................................ 3
Consolidated Statements of Operations for the three months and nine months
ended December 31, 1998 and 1999 (unaudited)............................................ 4
Consolidated Statements of Cash Flows for the nine months ended
December 31, 1998 and 1999 (unaudited)................................................. 5
Notes to Consolidated Financial Statements.............................................. 6
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations... 12
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk.............................. 27
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings....................................................................... 28
ITEM 2. Changes in Securities and Use of Proceeds............................................... 28
ITEM 3. Defaults upon Senior Securities......................................................... 28
ITEM 4. Submission of Matters to a Vote of Security Holders..................................... 28
ITEM 5. Other Information....................................................................... 28
ITEM 6: Exhibits and Reports on Form 8-K........................................................ 28
Signature............................................................................... 29
Exhibits................................................................................ 30
</TABLE>
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
SALON.COM
CONSOLIDATED BALANCE SHEETS
($ in 000, except share data)
<TABLE>
<CAPTION>
March 31, December,
1999 1999
<S> <C> <C>
Assets (unaudited)
Current assets:
Cash and cash equivalents $ 754 $ 13,639
Short term investments - 10,240
Accounts receivable, net 497 2,451
Inventories 26 16
Prepaid expenses and other current assets 578 1,022
----------------- -----------------
Total current assets 1,855 27,368
Property and equipment, net 707 1,681
Other assets 136 257
Intangible assets, net 5,110 4,344
----------------- -----------------
Total assets $ 7,808 $ 33,650
----------------- -----------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,036 $ 3,530
Accrued liabilities 439 2,377
Deferred revenue 541 35
Bank borrowings 364 74
----------------- -----------------
Total current liabilities 2,380 6,016
Bank borrowings, net of current portion 75 -
----------------- -----------------
Total liabilities 2,455 6,016
----------------- -----------------
Stockholders' Equity:
Convertible preferred stock, no par value;
8,108,750 and 5,000,000 shares authorized at March 31, 1999 and December
31, 1999, respectively; 4,815,345 and 0 shares
were issued and outstanding at March 31, 1999 and December 31, 1999,
respectively; 15,789 -
Common stock, $0.001 par value;
12,500,000 and 50,000,000 shares authorized at March 31, 1999 and December
31, 1999, respectively; 447,496 and 11,376,964 shares were issued and
outstanding at March 31, 1999 and December 31, 1999, respectively. 1 11
Additional paid-in capital 3,147 70,228
Unearned compensation (834) (2,633)
Accumulated deficit (12,750) (39,972)
----------------- -----------------
Total stockholders' equity 5,353 27,634
----------------- -----------------
Total liabilities and stockholders' equity $ 7,808 $ 33,650
----------------- -----------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
SALON.COM
CONSOLIDATED STATEMENTS OF OPERATIONS
( in 000's, except per share data)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
December 31, December 31,
--------------------------- -----------------------------
(unaudited) (unaudited)
--------------------------- -----------------------------
1998 1999 1998 1999
-------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
Revenue $ 1,031 $ 3,016 $ 2,058 $ 5,399
-------------- ------------ ------------- --------------
Operating expenses:
Production, content, and product 1,120 2,356 2,928 6,577
Sales and marketing 923 5,641 2,410 10,108
Research and development 109 427 284 961
General and administrative 122 531 331 1,658
Amortization of intangibles - 256 - 767
Stock-based compensation 144 606 420 1,838
-------------- ------------ ------------- --------------
Total operating expenses 2,418 9,817 6,373 21,909
-------------- ------------ ------------- --------------
Loss from operations (1,387) (6,801) (4,315) (16,510)
Other income(expense), net (2) 355 16 802
-------------- ------------ ------------- --------------
Net loss (1,389) (6,446) (4,299) (15,708)
Preferred deemed dividend 59 - 272 11,515
-------------- ------------ ------------- --------------
Net loss attributable to common stockholders $ (1,448) $ (6,446) $(4,571) $ (27,223)
============== ============ ============= ==============
Basic and diluted net loss per share attributable to
common stockholders $ (3.70) $ (.57) $ (11.81) $ (3.30)
============== ============ ============= ==============
Weighted average shares used in computing basic
and diluted net loss per share attributable to common
stockholders 391 11,371 387 8,254
============== ============ ============= ==============
Pro forma net loss per share, basic and diluted (see note 3) $ (0.28) $ (0.49) $ (0.96) $ (1.25)
============== ============ ============= ==============
Supplemental information:
Net loss attributable to common stockholders (1,448) (6,446) (4,571) (27,223)
Less: Amortization of intangible assets - 256 - 767
Stock-based compensation 144 606 420 1,838
Preferred deemed dividend 59 - 272 11,515
-------------- ------------ ------------- --------------
Pro forma net loss attributable to common stockholders (1,245) (5,584) (3,879) (13,103)
Shares used in computing pro forma net loss, basic and
diluted 4,432 11,371 4,060 10,502
Pro forma net loss per share, basic and diluted $ (0.28) $ (0.49) $ (.96) $ (1.25)
============== ============ ============= ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
SALON.COM
CONSOLIDATED STATEMENTS OF CASH FLOWS
($, in 000's)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
1998 1999
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,299) $(15,708)
Adjustments to reconcile net loss
to net cash used in operating activities:
Stock-based compensation 420 1,838
Depreciation and amortization 171 1,071
Amortization of discount on bank borrowings 10 20
Changes in operating assets and liabilities:
Accounts receivable (596) (1,953)
Inventories - 10
Prepaid expenses and other assets 42 (350)
Accounts payable 227 2,494
Accrued liabilities 103 1,938
Deferred revenue 168 (506)
---------------- ----------------
Net cash used in operating activities (3,754) (11,146)
---------------- ----------------
Cash flows from investing activities:
Purchase of property and equipment (394) (1,277)
Net purchase of investments - (10,240)
----------------- ----------------
Net cash used in investing activities (394) (11,517)
---------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock and common stock warrants, net 3,439 10,936
Proceeds from issuance of common stock, net 4 24,908
Proceeds from exercise of options - 90
Proceeds from bank debt 461 -
Repayments of bank borrowings (74) (386)
---------------- ----------------
Net cash provided by financing activities 3,830 35,548
---------------- ----------------
Net decrease in cash and cash equivalents (318) 12,885
Cash and cash equivalents - beginning of period $ 1,926 754
---------------- ----------------
Cash and cash equivalents - end of period $ 1,608 $ 13,639
---------------- ----------------
Non-cash investing and financing transactions:
Unearned compensation in connection with the issuance
of stock options $ 901 $ 3,795
---------------- ----------------
Issuance of warrants in connection with bank borrowings $ 33 $ -
---------------- ----------------
Issuance of warrants in connection with agreements $ 217 $ 244
---------------- ----------------
Value assigned to reciprocal advertising agreements $ 307 $ 462
---------------- ----------------
Conversion of preferred stock to common stock $ - $ 25,301
---------------- ----------------
Preferred deemed dividend $ - $ 11,515
---------------- ----------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company
Salon.com is an Internet media company that produces a network of
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.
2. Basis of Presentation
The accompanying consolidated financial statements as of December 31,
1999 and for the three months and nine months ended December 31, 1998 and 1999
are unaudited. The unaudited interim consolidated financial statements have been
prepared on the same basis as the annual financial statements and, in the
opinion of management, reflect all adjustments, which include only normal
recurring adjustments, necessary to present fairly Salon's financial position,
results of operations and cash flows as of and for the nine months ended
December 31, 1998 and 1999. These consolidated financial statements and notes
thereto are unaudited and should be read in conjunction with Salon's audited
financial statements included in Salon's Form S-1 registration statement, as
amended, filed with the Securities and Exchange Commission. The balance sheet as
of March 31, 1999 was derived from audited financial statements, but does not
include all required disclosures required by generally accepted accounting
principles. The results for the three months and nine months ended December 31,
1999 are not necessarily indicative of the expected results for any other
interim period or the fiscal year ending March 31, 2000. Certain prior period
balances have been reclassified to conform to the current period presentation.
3. Summary of Significant Accounting Policies
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivatives and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. In July
1999, the FASB issued SFAS No. 137, "Accounting for Derviative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133."
SFAS No. 137 deferred the effective date of SFAS No. 133 until fiscal years
beginning after June 15, 2000. Salon will adopt SFAS No. 133 during its year
ending March 31, 2002. To date, Salon has not engaged in derivative or hedging
activities. Salon is unable to predict the impact of adopting SFAS No. 133 if it
were to engage in derivative and hedging activities in the future.
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. 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.
6
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net loss per share
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
No. 128"). SFAS No. 128 replaced primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Basic earnings per share is computed using the weighted-
average number of common shares outstanding during the period. Diluted earnings
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.
Pro forma net loss per share has been computed as described above
except that it assumes the conversion of preferred stock outstanding into common
stock during the relevant period. It also eliminates non-cash charges for
amortization of intangible assets, stock-based compensation, and the preferred
deemed dividend from the net loss.
<TABLE>
<CAPTION>
(in 000's, except per share data)
Three months ended Nine months ended
December 31 December 31
1998 1999 1998 1999
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss attributable to common stockholders $ (1,448) $ (6,446) $ (4,571) $ (27,223)
Less: Amortization of intangible assets - 256 - 767
Stock based compensation 144 606 420 1,838
Preferred deemed dividends 59 - 272 11,515
------------------------------------------------------------------
Adjusted net loss attributable to common $ (1,245) $ (5,584) $ (3,879) $ (13,103)
stockholders ==================================================================
Shares used in computing net loss attributable to common
stockholders, basic and diluted 391 11,371 387 8,254
Adjustment to reflect the assumed conversion of
preferred stock 4,041 - 3,673 2,248
------------------------------------------------------------------
Shares used in computing pro forma net loss, basic 4,432 11,371 4,060 10,502
and diluted ==================================================================
Pro forma net loss per share, basic and diluted $ (0.28) $ (0.49) $ (0.96) $ (1.25)
==================================================================
</TABLE>
SALON.COM
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investments
Investments consist of high quality debt securities with original maturity
dates greater than ninety days. In accordance with SFAS No. 115, "Accounting for
Certain investments in Debt and Equity Securities," Salon's investments are
classified as available-for-sale and, at the balance sheet date, are reported at
fair value, with the unrealized gains and losses, net of related taxes, reported
as a component of other comprehensive income (loss). Unrealized gains and losses
were immaterial as of December 31, 1999. The cost of these investments at
December 31, 1999 was $10,240,000.
Inventories
Inventories consist solely of finished goods.
Concentrations
No customer accounted for more than 10% of total revenues for the
three months ended December 31, 1998 and 1999. No customer accounted for more
than 10% of total revenues for the nine months ended December 31, 1999. One
customer accounted for 18% of total revenues for the nine months ended December
31, 1998.
Included in sponsorship and advertising revenues are barter
transactions that accounted for $462,000, or approximately 15% of total revenues
and $124,000, or 12% of total revenues for the three months ended December 31,
1999 and 1998, respectively. Barter transactions accounted for $940,000, or 17%
and $307,000, or 15% of total revenues for the nine months ended December 31,
1999 and 1998, respectively.
4. Stockholders' Equity
On April 8, 1999, Salon's Articles of Incorporation were amended to
(i) increase the number of authorized shares of preferred stock to 8,108,750 and
common stock to 12,500,000, (ii) increase the number shares of preferred stock
designated as Series C preferred stock to 4,500,000, (iii) effect a 1.35567 for
1 stock split of each then outstanding share of Series C preferred stock and
(iv) modify the rights, preferences, privileges and restrictions granted to or
imposed on the Series A, Series B and Series C preferred stock.
In conjunction with the increase in Series C, an aggregate of
4,500,000 shares of Salon's common stock were reserved for issuance upon
conversion of the Series C preferred stock.
On April 14, 1999, Salon completed an additional offering of Series C preferred
stock. Pursuant to this offering, a total of 2,967,782 additional shares of
Series C preferred stock were sold at a price of $3.88 per share, for total net
proceeds of approximately $10.9 million. The difference between the offering
price and the deemed fair value of the common stock on the date of the
transaction resulted in a beneficial conversion feature in the amount of
$11,515,000. The beneficial conversion feature has been reflected as a preferred
dividend in the statement of operations. In connection with investment broker
services provided during this offering Salon issued warrants to entities
affiliated with Daiwa Securities America, Inc. to purchase an aggregate of
148,389 shares of Series C preferred stock at an exercise price
SALON.COM
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of $3.88 per share. Upon completion of the Salon's IPO, the warrants converted
into the right to purchase an equivalent number of shares of Salon's common
stock at the same exercise price. The warrants may be exercised at any time
within five years after issuance. Salon valued the warrants using the Black-
Scholes option pricing model, applying an expected life of 5 years, a weighted
average risk-free rate of 5.14%, an expected dividend yield of zero percent, a
volatility of 107% and a deemed fair value of common stock of $10.80. The fair
market value of the warrants of $1.4 million has been netted against the
proceeds from the offerings.
In April 1999, Salon reincorporated in Delaware, changing its name to
Salon.com, and effected a one for two split of its common and preferred stock.
In connection with the reincorporation, Salon authorized (i) an increase in the
number of authorized shares of common stock to 50,000,000 and (ii) 5,000,000
shares of a new class of undesignated preferred stock. All share data and stock
option plan information has been restated to reflect the stock splits and the
reincorporation.
On April 14, 1999, in connection with marketing consulting services to
be provided to Salon, a warrant was issued to ACT III Communications to purchase
25,773 shares of Series C preferred stock at an exercise price of $3.88 per
share. Upon completion of Salon's IPO, the warrant converted into the right to
purchase an equivalent number of shares of Salon's common stock at the same
exercise price.
The warrant may be exercised at any time within five years after issuance. Salon
valued the warrant using the Black-Scholes option pricing model, applying an
expected life of 5 years, a weighted average risk-free rate of 5.14%, an
expected dividend yield of zero percent, a volatility of 107% and a deemed fair
value of common stock of $10.80. The fair market value of the warrant of
$244,000 was recorded in other assets, and is being amortized over the term of
the agreement.
9
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stockholders' equity activity for the nine months ended December 31, 1999 was as
follows:
($, in 000's)
<TABLE>
<CAPTION>
Additional
Preferred Common Paid-In Unearned Accumulated
Stock Stock Capital Compensation Deficit
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance - March 31, 1999 $ 15,790 $ 1 $ 3,147 $ (834) $ (12,750)
Issuance of Series C
preferred stock and warrants,
net 9,511 - 1,421 - -
Unearned compensation - - 3,611 (3,611) -
Exercise of stocks options for cash - - 90 - -
Issuance of common stock for cash - - 997 - -
Issuance of preferred stock warrants - - 244 - -
Initial public offering - 2 23,910 - -
Conversion of preferred stock to
common (25,301) 8 25,293 - -
Amortization of unearned compensation - - - 1,812 -
Net loss - - - - (15,707)
Preferred deemed dividend - - 11,515 - (11,515)
----------------------------------------------------------------------------------------
Balance - December 31, 1999 $ - $ 11 $ 70,228 $ (2,633) $ (39,972)
========================================================================================
</TABLE>
10
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If the stock-based compensation for the three and nine months ended
December 31, 1998 and 1999 had been allocated across the relevant functional
expense categories within operating expenses, it would be allocated as follows:
(in 000's);
Three months ended Nine months ended
December 31 December 31
1998 1999 1998 1999
-----------------------------------------
Production, content and product $ 70 $ 295 $ 207 $ 906
Sales and marketing 60 253 170 744
Research and development 7 29 33 144
General and administrative 7 29 10 44
-----------------------------------------
$ 144 $ 606 $ 420 $ 1,838
-----------------------------------------
5. Subsequent Events
In December 1999, Salon.com entered into an agreement with Rainbow
Media Holdings, Inc. to issue 1,125,000 common shares to Rainbow, representing
approximately 10% of Salon.com's outstanding common stock. In exchange, Rainbow
Media Holdings, Inc. will provide Salon.com approximately $11.8 million in
advertising and promotional time, delivered over ten years. Salon and Bravo
Networks will exchange content and cross-promote throughout their Web
properties. Bravo Networks is Rainbow Media Holding's film and art network.
In January 2000, Salon.com received the appropriate approvals for the
agreement and have issued the 1,125,000 shares to Rainbow Media Holdings
accordingly.
11
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- --------------------------------------------------------------------------------
PART I: FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Salon has included in this filing certain "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995
concerning Salon's business, operations and financial condition. The words or
phrases "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates" and similar expressions are generally intended to identify forward-
looking statements. Such forward-looking statements are subject to various known
and unknown risks and uncertainties and Salon cautions you that any forward-
looking information provided by or on behalf of Salon is not a guarantee of
future performance. Actual results could differ materially from those
anticipated in such forward-looking statements due to a number of factors, some
of which are beyond Salon's control, including but not limited to Salon's
limited operating history, anticipated losses, the unpredictability of its
future revenues, competition, risks associated with system development and
operation risks, management of potential growth, and risks of new business
areas, business combinations, and strategic alliances. All forward-looking
statements are based on information available to the company on the date hereof
and the company assumes no obligation to update such statements.
Overview
Salon.com is a leading Internet media company that produces a network of
eleven subject-specific, demographically-targeted Web sites and a variety of
online communities. Salon believes that its network of Web sites combines the
thoughtfulness of print, the timeliness of television and the interactivity of
talk radio. Salon's 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.
Our network of subject-specific Web sites includes:
. Salon News . Salon Books
. Salon Technology . Salon Media
. Salon Arts & Entertainment . Salon Travel
. Salon Mothers Who Think . Salon People
. Salon Health & Body . Salon Comics
. Politics 2000
Salon's online communities allow users to interact and discuss Salon
content and other topics via electronic messaging. Salon's online communities
include Table Talk, a free interactive forum, and The Well, a paid subscription
community. Because of Salon's reputation for community building, Salon also has
agreed with third parties to host communities within its network. Salon's users
can access Table Talk or The Well through www.salon.com or through Salon's ten
content Web sites.
Salon believes that its original, award-winning content and highly regarded
interactive communities allow Salon to attract and retain users who are younger,
more affluent, better educated and more likely to make online purchases than
typical Internet users. Salon believes its user profile makes its network of Web
sites and online communities a valuable media property for advertisers and
retailers who are increasingly allocating marketing resources to target
consumers online.
In December 1999, approximately 3.4 million unique users visited Salon's
network of Web sites, compared to approximately 1.9 million unique users in
September 1999 and approximately 650,000 unique users in December 1998. Salon
generated approximately 69 million page views for the three months ended
December 31, 1999, compared to approximately 59 million page views for the three
months ended September 30, 1999 and approximately 34 million page views for the
three months ended December 31, 1998. Salon generated 380 million ad impressions
for the three months ended December 31, 1999
12
<PAGE>
compared to 260 million for the three months ended September 30, 1999 and 80
million for the three months ended December 31, 1998.
Salon has entered into a number of distribution agreements to generate
traffic and to promote the Salon brand name. Many of these agreements are
"content-for-carriage," in which Salon provides its proprietary content to a
distribution partner and receives prominent placement of its logo and content on
the distribution partner's site, as well as links back to Salon's network.
Salon has entered into distribution and content relationships with many of
the major portal and content aggregation sites on the Web, including:
. America Online . TheStreet.com . EchoStar
. AltaVista . CNN.com . PointCast
. Lycos . Excite@Home . WebTV
. Go.com . C/Net . Snap!
. Netscape . Rocket eBook . Reuters
Salon has derived a significant amount of its revenues to date from
Internet advertising, advertising sponsorships and e-commerce sponsorships.
Advertising and sponsorship revenues represented 95% of net revenues for the
three months ended December 31, 1999.
Internet advertising revenues are derived generally from short term
advertising contracts in which Salon typically guarantees a minimum number of
impressions to be delivered to users over a specified period of time for a fixed
fee. Advertising revenues are recognized ratably over the period in which the
advertising is displayed. If the percentage of time elapsed exceeds the
percentage of guaranteed impressions delivered, revenue is recognized at the
lower percentage.
Advertising sponsorship revenues are derived generally from contracts
ranging from six to thirty-six months in which Salon commits to provide sponsors
with enhanced promotional opportunities beyond traditional banner advertising.
Sponsorship agreements typically include the delivery of impressions, exclusive
relationships, and design and development of customized co-branded pages
designed to achieve broad marketing objectives including brand awareness and
product introduction. Salon also offers exclusive category opportunities to
sponsors, such as Lexus' sponsorship of Salon's Brilliant Careers editorial
series.
Advertising revenue is recognized in the period in which the advertisement
is displayed, provided that no significant obligations remain and collection of
the resulting receivable is probable. Revenues related to upfront fees in
connection with advertising sponsorships and electronic commerce sponsorships
are recognized ratably over the sponsorship term. Electronic commerce
sponsorships may provide that Salon receive commissions from electronic commerce
transactions. These commissions are recognized by Salon upon notification from
the sponsor. The notification from advertisers and distribution partners is
generally received quarterly. Under some of Salon's distribution agreements,
Salon is entitled to receive a portion of the advertising revenue generated on
co-branded pages. These advertising revenues are recognized upon notification
from the distribution partner.
Salon's strategy for capturing electronic commerce advertising revenues is
to enter into sponsorships with premium online retailers. Sponsorship fees are
paid to Salon by a particular retailer for a measure of exclusivity in the
retailer's industry segment. Salon's e-commerce sponsors include:
. Barnesandnoble.com . Flowerbud . Virgin Records
. DrKoop.com . Gavelnet . 911 Gifts
Sponsorship and advertising revenues also include barter revenues, which
are the exchange of advertising space on Salon's Web sites for reciprocal
advertising space on other Web sites. Revenues from
13
<PAGE>
these barter transactions are recorded as advertising revenues at the estimated
fair value of the advertisements received or delivered, whichever is more
reliably measurable, and are recognized when the advertisements are run on
Salon's Web sites. Barter expenses are recorded in sales and marketing in the
consolidated statements of operations when Salon's advertisements are run on
Salon's Web sites.
E-commerce revenues are derived principally from sales through Salon's own
online store, Salon Shopping. Salon Shopping offers a range of upscale Salon-
branded and third party products, as well as goods offered by Salon's retailing
partners. Salon recognizes revenue on items from Salon Shopping when the goods
are shipped.
Salon obtains content licensing revenue by syndicating and licensing its
content to media companies worldwide for publication on Web sites, and in
newspapers and magazines. In addition to revenues, syndication and licensing
provide Salon with valuable exposure for the Salon brand and additional traffic
to Salon's network. These arrangements also require prominent placement of
Salon's logo and primary Internet address in reproductions of its content.
Revenues related to the syndication and licensing of Salon content to other
media outlets are recognized on notification that the content has been
published.
Salon derives revenue from two paid subscription services: The Well and
Salon Members. The Well, a paid subscription online community, was acquired by
Salon in March 1999. Salon Members is an annual membership program designed to
provide specific products and services to Salon's user base. Subscription
revenues are recognized ratably over the period that services are to be
provided.
Results of Operations
Net Revenues
Net revenues increased 193% to $3.0 million for the three months ended
December 31, 1999 from $1.0 million for the three months ended December 31, 1998
and 162% to $5.4 million for the nine months ended December 31, 1999 from $2.1
million for the nine months ended December 31, 1998. The increase in revenues
was primarily due to Salon's ability to generate significantly higher
sponsorship and advertising revenues and development of its subscription
strategy through the acquisition of The Well and launch of Salon Members. The
net increase in Internet advertising, advertising sponsorship and e-commerce
sponsorship revenues was primarily due to an increase in the number of
impressions sold and an increase in the number of sponsors advertising on
Salon's Web sites. Sponsorship and advertising revenues accounted for
approximately 95% and 88% of net revenues for the three months ended December
31, 1999 and 1998, respectively, and 90% and 93% of net revenues for the nine
months ended December 31, 1999 and 1998, respectively.
No customer accounted for more than 10% of total revenues for the three
months ended December 31, 1998 and 1999. No customer accounted for more than 10%
of total revenues for the nine months ending December 31, 1999 and one customer
accounted for 18% of total revenues for the nine months ended December 31, 1998.
Included in sponsorship and advertising revenues are barter transactions
that accounted for $462,000, or approximately 15% of total revenues and
$124,000, or 12% of total revenues for the three months ended December 31, 1999
and 1998, respectively. Barter transactions accounted for $940,000, or 17% of
total revenues and $307,000, or 15% of total revenues for the nine months ended
December 31, 1999 and 1998, respectively.
Operating Expenses
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Production, Content and Product
Production, content and product expenses consist primarily of payroll and
related expenses for Salon's editorial, artistic, production and The Well staff,
payments to freelance writers and artists, and telecommunications and computer
related expenses for the support and delivery of Salon's Web sites and online
communities. Also included in production, content and product expenses are costs
associated with electronic commerce transactions, including the costs of product
inventory and distribution. Production, content and product expenses were
approximately $2.4 million or 78% of net revenues and $1.1 million or 109% of
net revenues for the three months ended December 31, 1999 and 1998,
respectively, and $6.6 million or 122% of net revenues and $2.9 million or 142%
of net revenues for the nine months ended December 31, 1999 and 1998,
respectively. The increase in production, content and product expenses is
primarily attributable to increased costs relating to growth in Salon's
editorial, art, and production staff, costs associated with Salon's new online
community The Well, and payments to freelance writers and artists.
Sales and Marketing
Sales and marketing expenses consist of payroll and related expenses,
including commissions, travel expenses and other costs associated with Salon's
advertising and sponsorship sales force, as well as advertising, promotional and
distribution costs. Sales and marketing expenses were $5.6 million, or 187% of
revenues and $923,000, or 90% of total revenues for the three months ended
December 31, 1999 and 1998, respectively; and $10.1 million or 187% of total
revenues and $2.4 million or 117% of total revenues for the nine months ended
December 31, 1999 and 1998, respectively. The increase in sales and marketing
expenses was primarily attributable to Salon's advertising campaign in print,
radio and a national television campaign launched at the end of September 1999,
as well as the hiring of additional sales personnel.
Included in sales and marketing expenses are barter expenses of $381,000
and $124,000 for the three months ended December 31, 1999 and 1998,
respectively; and $893,000 and $307,000 for the nine months ended December 31,
1999 and 1998, respectively.
Research and Development
Research and development expenses consist of costs associated with the
development and maintenance of technology, including Salon's publishing platform
software and archival database, as well as technical support for Salon's Web
sites and online communities. Research and development expenses increased 291%
to $427,000 in the three months ended December 31, 1999 from $109,000 in the
three months ended December 31, 1998. Research and development expenses as a
percentage of total revenue increased to 14% for the three months ended December
31, 1999 from 11% for the same period in 1998 and 18% for the nine months ended
December 31, 1999 from 14% in the same period in 1998. Research and development
expenses also increased 238% to $961,000 from $284,000 for the nine months ended
December 31, 1999 compared to the same period in 1998. The increase in research
and development expenses is primarily attributable to salary and payroll related
expenses for the technical support of Salon's new Websites, online communities,
and increased staff, as well as the maintenance and development of new
technology.
General and Administrative
General and administrative expenses consist primarily of salaries, payroll
taxes and benefits and related costs for general corporate functions including
executive management, finance, and legal and other professional fees. General
and administrative expenses were $531,000 or 18% of total revenues, and $122,000
or 12% of total revenues for the three months ended December 31, 1999 and 1998,
respectively; and $1.7 million or 31% and $331,000 or 16% of total revenues for
the nine months ended December 31, 1999 and 1998, respectively. The increase in
general and administrative expenses is primarily attributable
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to salary and related expenses for additional personnel hired to support the
growth of Salon's business and activities as a public company and higher
professional fees. General and administrative expenses increased as a percentage
of total revenues as a result of the increased growth of general and
administrative expenses in relation to revenue growth.
Amortization of Intangibles
Amortization of intangibles consists of the costs associated with the
amortization of the intangibles and goodwill associated with the acquisition of
The Well. The acquisition of The Well is being accounted for using the purchase
method of accounting and is being amortized on a straight-line basis over 60
months. Amortization expenses were $256,000 or 8% of total revenue, for the
three months ended December 31, 1999 and $767,000 or 14% of total revenue for
the nine months ended December 31, 1999. There was no amortization expense in
1998.
Stock-based Compensation
Stock-based compensation consists of expenses associated with the issuance
of stock options and warrants. Stock-based compensation charges were $606,000 or
20% of net revenue for the three months ended December 31, 1999, compared to
$144,000 or 14% of revenue for the three months ended December 31, 1998. Stock
based compensation charges were $1.8 million or 34% of net revenue and $420,000
or 20% of net revenue for the nine months ended December 31, 1999 and 1998,
respectively. The increase in stock based compensation expenses is primarily
attributable to an increased number of employee options to new and existing
employees.
Other Income, Net
Other income consists primarily of interest earned on Salon's cash, cash
equivalents and short term investments, offset by interest expense on
borrowings. Other income increased to $355,000 in the three months ended
December 31, 1999 from ($2,000) for the three months ended December 31, 1998 and
increased to $802,000 in the nine months ended December 31, 1999 from $16,000
for the nine months ended December 31, 1998. The increase in other income is
primarily attributable to an increase in the amount of interest earned by Salon
due to an increase in Salon's cash balance as a result of its financing
activities including Salon's initial public offering and Series C Financing
activities during the quarter ended June 30, 1999 and the sale of additional
stock in July 1999.
Preferred Deemed Dividend
The preferred deemed dividend of $11.5 million for the nine months ended
December 31, 1999 is the difference between the offering price of Salon's Series
C preferred stock sold in April 1999, and the deemed fair value of Salon's
common stock on the date of the transaction. This is a one-time non-cash
expense. The preferred dividend expense for the three months ended December 31,
1999 was $0 compared to $59,000 in 1998.
Net Loss
Salon recorded a pro forma net loss of $5.6 million, or $.49 per share for
the three months ended December 31, 1999 compared to a pro forma net loss of
$1.2 million, or $.28 per share, for the three months ended December 31, 1998.
For the nine months ended December 31, 1999 and 1998, Salon recorded a pro forma
net loss of $13.1 million, or $1.25 per share and $3.9 million, or $.96 per
share, respectively. Salon recorded a net loss of $6.4 million, or $.57 per
share for the three months ended December 31, 1999 compared to a net loss of
$1.4 million, or $3.70 per share for three months ended December 31, 1998. Salon
recorded a net loss of $27.2 million for the nine months ended December 31,
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1999, or $3.30 per share compared to a net loss of $4.6 million, or $11.81 per
share for the same period in 1998.
Liquidity and Capital Resources
Since its inception, Salon has primarily financed its operations through
the private placement of its convertible preferred stock and its initial public
offering of common stock. As of December 31, 1999, Salon had approximately $23.9
million in cash and cash equivalents, and short-term investments which was
obtained through Salon's initial public offering in June 1999 and the sale of
the additional stock in July 1999.
Net cash used for operations was $11.1 million for the nine months ended
December 31, 1999, compared to $3.8 million for the nine months ended December
31, 1998. The principal use of cash from operations was the net loss generated
from operations.
Net cash used for investing activities totaled $11.5 million for the nine
months ended December 31, 1999, compared to $394,000 for the nine months ended
December 31, 1998. Net cash used for investing activities in each of these
respective periods consisted of purchases of short-term investments and
purchases of certain equipment.
Net cash provided by financing activities increased to $35.5 million for
the nine months ended December 31, 1999 from net cash used in financing
activities of $3.8 million for the nine months ended December 31, 1998. The
increase was primarily due to the receipt of $24.0 million of net proceeds from
Salon's initial public offering in June 1999 and $10.9 million of net proceeds
from the private placement of preferred stock in April 1999 and $1.0 million for
the sale of additional stock in July 1999.
Salon's capital requirements depend on numerous factors, including the
success of Salon's strategies for generating revenues and the amount of
resources it devotes to investments in its network, sales, marketing and brand
promotion. Salon's expenditures have substantially increased since inception as
its operations and staff have grown and Salon anticipates that its expenditures
will continue to increase substantially for the foreseeable future. In addition,
Salon will continue to evaluate possible investments in businesses, products and
technologies complementary to its existing business.
Salon currently anticipates that its available cash resources will be
sufficient to meet its anticipated needs for working capital and capital
expenditures for at least the next 12 months. Salon may need to raise additional
funds, however, in order to fund more rapid expansion, to develop new or enhance
existing services, to respond to competitive pressures or to acquire
complementary businesses, products or technologies. If Salon raises additional
funds by selling equity securities, the percentage ownership of Salon's
stockholders will be reduced and its stockholders may experience additional
dilution. Salon cannot be sure that additional financing will be available on
terms favorable to Salon, or at all. If adequate funds are not available on
acceptable terms, Salon's ability to fund expansion, react to competitive
pressures, or take advantage of unanticipated opportunities would be
substantially limited. If this occurred, Salon's business would be significantly
harmed.
Year 2000 Compliance
The company has completed its Year 2000 ("Y2K") Project as scheduled,
including addressing leap year calendar date calculation concerns. The
possibility of significant interruptions of normal operations has been reduced.
As of February 9, 2000, the company has operated without any significant or
material Y2K related problems. The company believes that all its critical
systems are Y2K ready. However, there is no guarantee that the company has
discovered all possible failure points.
Salon is heavily dependent on a significant number of third party vendors
to provide both network services and equipment. A significant year 2000-related
disruption of the service or equipment that third
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party vendors provide to Salon could cause Salon's users, advertisers or
sponsors to consider seeking alternate content providers or cause an
unmanageable burden on its technical support, which in turn could harm Salon's
business. Salon is not aware that any of its major customers or third party
suppliers have experienced significant Y2K related problems
To date, Salon has spent an estimated $200,000 on this project. Most of
Salon's expenses have related to the operating costs associated with time spent
by employees and consultants in the evaluation process and year 2000 readiness
matters generally.
Risk Factors That May Affect Our Results of Operations and Financial Condition
Because we have a limited operating history, it is difficult to evaluate our
business and prospects
We originally incorporated in July 1995 and launched our initial Web sites
in November 1995. Because we have a limited operating history, you must consider
the risks and difficulties frequently encountered by early-stage companies like
us in new and rapidly evolving markets, including the market for advertising and
commerce on the Internet. Any future growth and success in our business will
depend substantially upon our ability to attract a larger number of users to our
Web sites and online communities, to increase advertising and sponsorship sales
based on that audience and to meet the challenges described in the risk factors
set forth below.
We lack significant revenues, we have a history of losses and we anticipate
continued losses
We have not achieved profitability and expect to incur operating losses for
the foreseeable future. We incurred net losses attributable to common
stockholders of $27.2 million in the nine months ended December 31 1999 and $6.2
million in the fiscal year ended March 31, 1999. As of December 31, 1999, our
accumulated deficit was $40.0 million. We expect these operating losses to
continue for at least the foreseeable future. We will need to generate
significant revenues to achieve and maintain profitability, and we may not be
able to do so. Even if we do achieve profitability, we may not be able to
sustain or increase profitability on a quarterly or annual basis in the future.
If our revenues grow more slowly than we anticipate or if our operating expenses
exceed our expectations, our financial results would be severely harmed.
Our quarterly operating results are volatile and may adversely affect our stock
price
Our future revenues and operating results are likely to vary significantly from
quarter to quarter due to a number of factors, many of which are outside our
control, and any of which could severely harm our business. These factors
include:
. our ability to attract and retain banner advertisers, advertising
sponsors and electronic commerce sponsors;
. our ability to attract and retain a large number of users;
. the introduction of new Web sites, services or products by us or by
our competitors;
. the timing and uncertainty of our advertising and sponsorship sales
cycles;
. the mix of banner advertisements and sponsorships sold by us or our
competitors;
. seasonal declines in advertising sales, which typically occur in the
first and third calendar quarters;
. the level of Internet usage;
. our ability to attract, integrate and retain qualified personnel;
. our ability to successfully integrate operations and technologies from
acquisitions or other business combinations;
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. 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 three months ended December 31, 1999,
advertising and sponsorship sales accounted for 95% of our net revenues, and in
the fiscal year ended March 31, 1999 they accounted for 94% of our net revenues.
In order to increase our revenues, we will need to attract additional
significant banner advertisers, advertising sponsors and electronic commerce
sponsors on an ongoing basis. We may not be able to attract or retain a
sufficient number of banner advertisers or advertising sponsors in the future,
and if we cannot, our business would likely be severely harmed. Increasing our
advertising and sponsorship revenues depends upon many factors, including
whether we will be able to:
. successfully sell and market our network to advertisers and sponsors;
. increase our user base;
. increase the amount of revenues we receive per sponsorship;
. increase awareness of the Salon brand;
. target advertisements and electronic commerce opportunities to users
with appropriate interests;
. accurately measure the number and demographic characteristics of our
users; and
. attract and retain sales personnel.
If we do not sell a sufficient number of advertisements or sponsorships or do
not engage a sufficient number of advertisers or sponsors during a particular
period, our business could be severely harmed.
Our revenues depend on a limited number of advertisers and sponsors who are not
subject to long-term agreements, and the loss of a number of these advertisers
and sponsors could harm our operating results
Historically, we have relied on a small number of banner advertisers and
advertising sponsors for a significant percentage of our revenues. In the fiscal
year ended March 31, 1999, Borders accounted for approximately 13% of our
revenues. The loss of any of our significant banner advertisers or advertising
sponsors could harm our business. We anticipate that our financial results in
any given period will continue to significantly depend on revenues from a small
number of banner advertisers and advertising sponsors. In addition, particularly
because few banner advertisers and advertising sponsors are
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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.
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.
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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.
We need to hire, integrate and/or retain qualified personnel because these
individuals are important to our growth
Our success significantly depends on the continued services of our key
editorial and design personnel. In addition, because the content of our Web
sites must be perceived by our users as having been created by credible and
notable sources, our success also depends on the name recognition and reputation
of our editorial staff, in particular David Talbot, Salon's editor-in-chief. The
loss of these individuals or other key editorial or design personnel would
likely harm our business.
We expect that we will need to hire additional personnel in all areas
in 1999. Competition for personnel in the Internet industry is intense. We may
be unable to retain our current key employees or
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attract, integrate or retain other qualified employees in the future. If we do
not succeed in attracting new personnel or integrating, retaining and motivating
our current personnel, our business could be harmed.
We may expend significant resources to protect our intellectual property rights
or to defend claims of infringement by third parties, and if we are not
successful we may lose rights to use significant material or be required to pay
significant fees
Our success and ability to compete are significantly dependent on our
proprietary content. We rely exclusively on copyright law to protect our
content. While we actively take steps to protect our proprietary rights, these
steps may not be adequate to prevent the infringement or misappropriation of our
content. Infringement or misappropriation of our content or intellectual
property could severely harm our business. We also license content from various
freelance providers and other third-party content providers. While we attempt to
insure that this content may be freely licensed to us, other parties may assert
claims of infringement against us relating to this content.
We may need to obtain licenses from others to refine, develop, market and
deliver new services. We may not be able to obtain any such licenses on
commercially reasonable terms or at all or rights granted pursuant to any
licenses may not be valid and enforceable.
In April 1999 we acquired the Internet address www.salon.com. Because
www.salon.com is the address of the main home page to our network of Web sites
and incorporates our company name, it is a vital part of our intellectual
property assets. We do not have a registered trademark on the address, and
therefore it may be difficult for us to prevent a third party from infringing
our intellectual property rights in the address. If we fail to adequately
protect our rights in the address, or if a third party infringes our rights in
the address or otherwise dilutes the value of www.salon.com, our business could
be harmed.
Our technology development efforts may not be successful in improving the
functionality of our network which could result in reduced traffic on our
network
We have recently developed a proprietary online publishing system. If this
system does not work as intended, or if we are unable to continue to develop
this system to keep up with the rapid evolution of technology for content
delivery on the Internet, our network of Web sites may not operate properly
which could harm our business. Additionally, software product development
schedules are difficult to predict because they involve creativity and the use
of new development tools and learning processes. Delays in our software
development process could harm our business. Moreover, complex software products
like our online publishing system frequently contain undetected errors or
shortcomings, and may fail to perform or scale as expected. Although we have
tested and will continue to test our publishing system, errors or deficiencies
may be found in the system.
We rely on third parties for several critical functions relating to delivery of
advertising and our Web site performance, and the failure of these third parties
to supply these services in an efficient manner could limit our growth and
impair our business
We rely on a number of third party suppliers for various services,
including Web hosting, banner advertising delivery software, Internet traffic
measurement software and electronic commerce fulfillment services. While we
believe that we could obtain these services from other qualified suppliers on
similar terms and conditions, a disruption in the supply of these services by
our current suppliers could severely harm our business.
We have recently begun to use new third-party software to manage the
delivery of banner advertising on our network of Web sites. If this software
malfunctions or does not deliver the correct banner advertisements to our
network, our advertising revenues could be reduced, and our business could be
harmed.
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We have also recently begun to use new third-party software to measure
traffic on our network of Web sites. If this software malfunctions or does not
accurately measure our user traffic, we may not be able to justify our
advertising rates, and our advertising revenues could be reduced.
Growth in our operations is placing a strain on our resources, and failure to
manage growth effectively could harm our business
We have experienced and are currently experiencing a period of significant
growth. In the year ended December 31, 1999 our number of employees increased
225%. In the three months ended December 31, 1999 our total revenues increased
approximately 193% and our net expenses increased approximately 306% compared to
the three months ended December 31, 1998. If we cannot manage our growth
effectively, we may not be able to coordinate the activities of our technical,
accounting, finance, marketing, sales and production staffs, and our business
could be harmed. We intend to add new subject-specific Web sites to our network,
hire additional staff in all departments, expand existing offices and open new
offices. As part of this growth, we will have to implement new operational
procedures and controls to train and manage our employees and to expand and
coordinate the operations of our various departments. If we acquire new
businesses, we will also need to integrate new operations, technologies and
personnel. If we cannot manage the growth of our network of Web sites, staff,
offices and business generally our business could be harmed.
We may not be able to successfully integrate our acquisitions, and any failure
to integrate could diminish the value of an acquired business or cause
disruptions in our ongoing operations
Acquisitions and business combinations entail numerous operational
risks, including:
. difficulty in the assimilation of acquired operations, technologies or
products;
. diversion of management's attention from other business operations;
. risks of entering markets in which we have limited or no experience; and
. potential loss of key employees of acquired businesses.
We acquired The Well LLC, an online community provider, in March 1999. We
may not be able to successfully integrate The Well LLC or any businesses,
products, technologies or personnel that we might acquire in the future, and if
we cannot, our business could be harmed.
We will need more working capital to expand our network and achieve our business
objectives, and securing financing may be difficult because of the condition of
our business or the uncertain nature of the financial markets
We believe that our current cash resources, combined with the net proceeds
from this offering, will meet our anticipated working capital and capital
expenditure requirements for at least the 12 months. 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,
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preferences or privileges senior to those of our current stockholders.
Additionally, we may not be able to obtain additional financing on favorable
terms, or at all. If adequate capital is not available on acceptable terms, our
ability to expand, take advantage of unanticipated opportunities, develop or
enhance services or otherwise respond to competitive pressures would be
significantly limited. This limitation could harm our business.
Acceptance and effectiveness of Internet advertising and electronic commerce is
unproven and, to the extent it does not continue to grow, our market may not
develop adequately and our business could be harmed
Our success is highly dependent on an increase in the use of the Internet
for advertising and electronic commerce. If the markets for Internet advertising
or electronic commerce do not develop, our business may be severely harmed.
Currently, demand and market acceptance for Internet advertising is
uncertain and may not increase as necessary for our business to grow or succeed.
Many advertisers have little or no experience using the Internet for advertising
purposes. The adoption of Internet advertising, particularly by companies that
have historically relied on traditional media, requires the acceptance of a new
way of conducting business, exchanging information and advertising products and
services. Potential advertisers may believe Internet advertising to be
undesirable or less effective for promoting their products and services relative
to traditional advertising media. If the Internet advertising market fails to
develop or develops more slowly than we expect, our business could be harmed.
Different pricing models are used to sell Internet advertising. It is
difficult to predict which pricing models, if any, will emerge as the industry
standard. This uncertainty makes it difficult to project our future advertising
rates and revenues. Any failure to adapt to pricing models that develop or
respond to competitive pressures could reduce our advertising revenues.
Moreover, "filter" software programs that limit or prevent advertising from
being delivered to an Internet user's computer are commonly available.
Widespread use of this software could adversely affect the commercial viability
of Internet advertising and our business.
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.
24
<PAGE>
Companies may choose to not advertise on Salon or may pay less for advertising
or sponsorships if they do not perceive our measurements or measurements made by
third parties to be reliable.
If use of the Internet does not grow, our business could be harmed
Our success is highly dependent upon continued growth in the use of the
Internet generally and in particular as a medium for content, advertising and
electronic commerce. If Internet usage does not grow, we may not be able to
increase revenues from advertising and sponsorships and this may harm our
business. Internet use by consumers is in an early stage of development, and
market acceptance of the Internet as a medium for content, advertising and
electronic commerce is highly uncertain. A number of factors may inhibit the
growth of Internet usage, including:
. inadequate network infrastructure;
. security concerns;
. inconsistent quality of service; and
. limited availability of cost-effective, high-speed access.
If these or any other factors cause use of the Internet to slow or decline, our
results of operations could be harmed.
Increasing competition among Internet content providers could reduce our
advertising sales or market share, thereby harming our business
The market for Internet content is relatively new, rapidly changing and
intensely competitive. We expect competition for Internet content to continue to
increase and if we cannot compete effectively our business could be harmed.
Additionally, we expect the number of Web sites competing for the attention and
spending of users, advertisers and sponsors to continue to increase, because
there are so few barriers to entry on the Internet.
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
25
<PAGE>
adoption of new standards and protocols to handle increased levels of activity.
If the Internet infrastructure is not adequately developed or maintained, use of
our network of Web sites may be reduced.
Even if the Internet infrastructure is adequately developed and maintained,
we may incur substantial expenditures in order to adapt our services and
products to changing Internet technologies. Such additional expenses could
severely harm our financial results.
We may be held liable for content on our Web sites
As a publisher and distributor of content over the Internet, including
user-generated content on our online communities, we face potential liability
for defamation, negligence, copyright, patent or trademark infringement and
other claims based on the nature and content of the material that is published
or distributed on our network of Web sites. These types of claims have been
brought, sometimes successfully, against online services, Web sites and print
publications in the past. Although we carry general liability insurance, our
insurance may not be adequate to indemnify us for all liability that may be
imposed. Any liability that is not covered by our insurance or is in excess of
our insurance coverage could severely harm our financial condition and business.
Concerns about transactional security may hinder our electronic commerce
strategy by subjecting us to liability or by discouraging commercial
transactions over the internet
A significant barrier to electronic commerce is the secure transmission
of confidential information over public networks. Any breach in our security
could expose us to a risk of loss or litigation and possible liability. We rely
on encryption and authentication technology licensed from third parties to
provide secure transmission of confidential information. As a result of advances
in computer capabilities, new discoveries in the field of cryptography or other
developments, a compromise or breach of the algorithms we use to protect
customer transaction data may occur. A compromise of our security could severely
harm our business. A party who is able to circumvent our security measures could
misappropriate proprietary information, including customer credit card
information, or cause interruptions in the operation of our network of Web
sites.
We may be required to expend significant capital and other resources to
protect against the threat of security breaches or to alleviate problems caused
by these breaches. However, protection may not be available at a reasonable
price or at all. Concerns over the security of electronic commerce and the
privacy of users may also inhibit the growth of the Internet as a means of
conducting commercial transactions.
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
26
<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. For
example, in March 1999, users were unable to access Table Talk for approximately
two weeks as we upgraded our technology to compensate for unexpected growth in
user activity. It is possible that we will experience similar systems failures
in the future and that such failures could harm our business. In addition, our
users depend on Internet service providers, online service providers and other
Web site operators for access to our Web sites. Many of these providers and
operators have experienced significant outages in the past, and could experience
outages, delays and other difficulties due to system failures unrelated to our
systems. Any of these system failures could harm our business.
Governmental regulation of the Internet may restrict our business
There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. Laws and regulations may be adopted
in the future, however, that address issues including user privacy, pricing, and
the characteristics and quality of products and services. An increase in
regulation or the application of existing laws to the Internet could
significantly increase our costs of operations and harm our business. For
example, the Communications Decency Act of 1996 sought to prohibit the
transmission of certain types of information and content over the Web.
Additionally, several telecommunications companies have petitioned the Federal
Communications Commission to regulate Internet service providers and online
service providers in a manner similar to long distance telephone carriers and to
impose access fees on these companies. Imposition of access fees could increase
the cost of transmitting data over the Internet.
Possible state sales and other taxes could adversely affect our results of
operations
We generally do not collect sales or other taxes in respect of goods
sold to users on our network of Web sites. However, one or more states may seek
to impose sales tax collection obligations on out-of-state companies, including
Salon, which engage in or facilitate electronic commerce. A number of proposals
have been made at the state and local level that would impose additional taxes
on the sale of goods and services through the Internet. Such proposals, if
adopted, could substantially impair the growth of electronic commerce and could
reduce our ability to derive revenue from electronic commerce. Moreover, if any
state or foreign country were to successfully assert that we should collect
sales or other taxes on the exchange of merchandise on our network, our
financial results could be harmed.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio. The Company places its
investments with high credit issuers in short-term securities with maturities of
three to twenty four months. The average maturity of the portfolio will not
exceed twelve months. The portfolio includes only marketable securities with
active secondary or resale markets to ensure portfolio liquidity. The Company
has no investments denominated in foreign country currencies and therefore is
not subject to foreign exchange risk.
27
<PAGE>
PART II: OTHER INFORMATION
_______________________________________________________________________________
Item 1. Legal Proceedings.
None at this time.
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Default upon senior securities.
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
--------
10.0 Rainbow Media Holdings stock purchase agreement
10.1 Bravo Website Agreement
10.2 Bravo Production Agreement
27.1 Financial Data Schedule
(b) Reports on Form 8-K. No reports on form 8-K were filed during the
quarter ended December 31, 1999.
28
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed of its behalf by the
undersigned thereunto duly authorized.
SALON.COM
(Registrant)
Dated: By: /s/ Michael O'Donnell 2/14/00
--------------------------------------------
Michael O'Donnell, Chief Executive Officer
Dated: By: /s/ Todd Hagen 2/14/00
--------------------------------------------
Todd Hagen, Chief Financial Officer
29
<PAGE>
EXHIBIT INDEX
Exhibits
--------
10.0 Rainbow Media Holdings stock purchase agreement
10.1 Bravo Website Agreement
10.2 Bravo Production Agreement
27.1 Financial Data Schedule
30
<PAGE>
EXHIBIT 10.0
*Certain information in this document has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect to
the omitted portions.
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made as of December
---------
__, 1999 between Salon.com, a Delaware corporation (the "Company"), and Rainbow
-------
Media Holdings, Inc., a Delaware corporation (the "Purchaser"). The parties
---------
hereby agree as follows:
Sale and Issuance of the Shares; Consideration. Subject to the terms and
- ----------------------------------------------
conditions hereof, at the Closing (as defined below), the Company will issue and
sell to the Purchaser and the Purchaser will purchase from the Company 1,125,000
shares of the Company's $.001 par value, Common Stock (the "Shares") at a
purchase price of $10.50 per share, or an aggregate purchase price of
$11,812,500. In consideration for the Shares, the Purchaser at the Closing will
deliver to the Company a check in the amount of $1,125.00, plus Purchaser's
agreement to make or cause to be made available advertising and/or promotional
inventory for the Company's on-line sites with an aggregate value, determined as
provided below, of $11,811,375 over the period from the date hereof through
December 31, 2009 (subject to extension pursuant to Section 6.2 hereof, the
"Promotional Period"). Purchaser shall provide $11,811,375 of advertising and
promotional inventory in the form of conventional advertising spots on the BRAVO
program service, advertising or promotional inventory on any other program
service, on-line site or broadband service owned, operated or distributed by any
affiliate of the Purchaser, and/or other forms of media promotion available from
the Purchaser or any affiliate of the Purchaser (e.g., arena signage,
billboards, print advertisements); provided that the Purchaser shall deliver or
cause to be delivered [****] of any such value delivered in any calendar year in
the form of advertising and/or promotional inventory of affiliates of the
Purchaser other than Bravo Company ("Bravo"). Conventional advertising spots
shall be valued based upon the [****]. Any conventional advertising spots on
BRAVO provided in any calendar year shall be delivered in accordance with the
following daypart allocation: [****]. Any conventional advertising spots on
other program services described herein which are provided in any calendar year
shall be delivered [****] with an allocation among dayparts similar to the
allocation for BRAVO. Up to [****] of any such value delivered in any calendar
year may, at Purchaser's option, be provided in the form of "integrated
interstitial". The content of any "integrated interstitial" delivered hereunder
shall be produced by the Purchaser or its applicable affiliate using content
supplied by the Company. Integrated interstitial may appear as voice-over
credits on programming or as short-form video pieces appearing during or
immediately adjacent to program credits, but may not include interstitials in
any of the television shows produced by the Company pursuant to the Production
Agreement between Bravo and the Company. Integrated interstitial shall be valued
at [****]. The value of any other forms of media promotion made available from
the Purchaser or any affiliate of the Purchaser (e.g., arena signage,
billboards, print advertisements) shall be determined based upon the then
current market rate for such inventory or other promotional outlet, determined
on an annual basis.
Advertising and/or promotional inventory to be delivered by or on behalf of
Purchaser in any calendar year on the BRAVO program service or on other
affiliates of the Purchaser shall be allocated among such affiliates
substantially in accordance with an advertising plan proposed by Purchaser
within sixty (60) days from the date hereof for calendar year 2000 (and by the
December 1 preceding each calendar year thereafter during the Promotional
Period). Each such annual plan shall include the form of inventory to be
provided (including any conventional advertising spots and integrated
interstitials), the approximate value thereof, and the programming service(s)
and other media, if any, through which such inventory shall be made available.
The chief executive officer of each of the Company and the Purchaser shall
discuss and attempt to resolve any material objection which the Company might
have to such annual plan. The Company shall have the right to require within 15
days of its receipt of the plan that the Purchaser re-allocate the inventory
proposed to be made available on one (1) such programming service (other than
the BRAVO program service) to the BRAVO service or to another affiliate of the
Purchaser, as the Purchaser may determine; provided that if additional inventory
on such other services or media is not then available, then Purchaser may defer
the delivery of such additional inventory to a subsequent period during the
Promotional Period.
* Certain information in this page has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect to
the omitted portions.
31
<PAGE>
The Company shall fully bear the costs of producing advertising and
promotional spots to be aired pursuant to this Section 1. The Purchaser shall
provide or cause to be provided to the Company, within 14 days after the end of
each calendar quarter, a statement which sets forth the advertising and/or
promotional inventory, if any, so made available to the Company during such
calendar quarter, the value thereof, the applicable affiliate of Purchaser which
provided such inventory and the form in which, and times during which, such
inventory was provided (and shall provide an interim, condensed version of such
report on a monthly basis within 14 days after the end of each calendar month).
If during the Promotional Period Bravo effects a radical and fundamental
change in the general overall theme of the programming on the BRAVO programming
service with the intent of targetting a viewing audience with materially
different demographics (e.g., changing from predominantly film and arts
programming to pornographic programming), then for the remainder of the
Promotional Period during which such programming on BRAVO remains materially
altered, the Purchaser shall not have the right to deliver any of the
advertising and/or promotional inventory to be delivered pursuant to this
Section 1 on the BRAVO programming service. If the Purchaser is unable to
deliver all of the remaining undelivered consideration for the Shares during the
balance of the Promotional Period in the form of advertising and/or promotional
inventory in accordance with the terms and conditions of this Agreement, then
the Purchaser may deliver any such remaining consideration to the Company in
cash. Notwithstanding the foregoing, nothing in this Agreement shall interfere
with or prevent the selection of programming to be aired on the BRAVO
programming service.
If during the Promotional Period the Purchaser no longer controls the
entity which operates the BRAVO programming service (for these purposes, control
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of such entity, whether
through ownership of voting securities or partnership or membership interests,
by contract or otherwise), then the Purchaser shall use reasonable efforts to
secure the right thereafter to make available advertising and/or promotional
inventory for the Company's on-line sites on the BRAVO programming service in an
amount equal to at least 60% of the then remaining aggregate value of
advertising and/or promotional inventory to be delivered by or on behalf of the
Purchaser pursuant to this Section 1. If the Purchaser is unable to secure such
right, then the Purchaser shall deliver any such remaining aggregate value to
the Company in cash.
The Purchaser shall not sell or transfer any of the Shares other than to an
affiliate of Purchaser prior to the first anniversary of the Closing Date.
Closing; Delivery.
- -----------------
Closing Date. The closing (the "Closing") comprising the purchase by the
- ------------ -------
Purchaser and sale by the Company of the Shares and the other transactions
contemplated hereby shall be held at the offices of Sullivan & Cromwell, 125
Broad Street, New York, New York 10004 on the second business day following the
date upon which all of the conditions set forth in Section 5 hereof have been
satisfied or waived or at such other time and place as the Company and the
Purchaser may agree in writing (the "Closing Date").
------------
Delivery. Subject to the terms and conditions of this Agreement, at the Closing,
- --------
the Company shall issue and deliver to the Purchaser a certificate representing
the Shares, the Purchaser shall simultaneously issue and deliver a check payable
to the Company in the amount of $1,125.00, and each of the Company and the
Purchaser (or Bravo, as the case may be), shall execute and deliver the
Production Agreement in the form attached hereto as Exhibit B (the "Production
----------
Agreement"),and the On-Line Content Sharing Agreement in the form attached
- ---------
hereto as Exhibit C (the "On-Line Content Sharing Agreement"). This Agreement,
---------------------------------
the Production Agreement and the On-Line Content Sharing Agreement are
hereinafter collectively referred to as the "Transaction Agreements".
Representations and Warranties of the Company. The Company hereby represents and
warrants to the Purchaser that:
Organization and Standing. The Company is a corporation duly organized, validly
- -------------------------
existing and in good standing under the laws of the State of Delaware and has
all requisite corporate power and authority to carry on its businesses as now
conducted and as proposed to be conducted.
Corporate Power. The Company has all requisite corporate power necessary for the
- ---------------
authorization, execution and delivery of this Agreement and the other
Transaction Agreements. Each of the Transaction
<PAGE>
Agreements is a valid and binding obligation of the Company, enforceable in
accordance with its terms, except as the same may be limited by bankruptcy,
insolvency, moratorium, and other laws of general application affecting the
enforcement of creditors' rights.
Capitalization. As of September 30, 1999, the authorized capital stock of the
- --------------
Company is 50,000,000 shares of Common Stock and 5,000,000 shares of Preferred
Stock, and there are issued and outstanding 11,364,674 shares of the Common
Stock and no shares of Preferred Stock. All such issued and outstanding shares
have been duly authorized and validly issued, are fully paid and nonassessable,
and were issued in compliance with all applicable state and federal laws
concerning the issuance of securities. Since September 30, 1999, the Company has
not issued any shares of capital stock other than upon the exercise of stock
options and warrants.
Authorization.
- -------------
Corporate Action. All corporate action on the part of the Company, its officers,
- ----------------
directors and stockholders necessary for the sale and issuance of the Shares and
the authorization, execution and performance of the Company's obligations
hereunder and under the other Transaction Agreements has been taken.
Valid Issuance. The Shares when issued in compliance with the provisions of this
- --------------
Agreement will be validly issued, fully paid and nonassessable and will be free
of restrictions on transfer other than restrictions under the Transaction
Agreements and under applicable federal and state securities laws.
No Preemptive Rights. No person has any right of first refusal or any preemptive
- --------------------
rights in connection with the issuance of the Shares or any future issuances of
securities by the Company.
Compliance with Other Instruments. The execution, delivery and performance of
- ---------------------------------
and compliance with this Agreement or the other Transaction Agreements by the
Company, and the issuance and sale of Shares will not (a) result in any
violation of the Certificate of Incorporation or Bylaws of the Company or in any
violation of or default in any material respect under the terms of any mortgage,
indenture, contract, agreement, instrument, judgment or decree.
Consents. No consent, approval or authorization of or designation, declaration
- --------
or filing with any governmental authority or other third party on the part of
the Company is required in connection with: (a) the valid execution and delivery
of the Transaction Agreements; or (b) the offer, sale or issuance of Shares.
Offering. In reliance on the representations and warranties of the Purchaser in
- --------
Section 4 hereof, the offer, sale and issuance of Shares in conformity with the
terms of this Agreement will not result in a violation of the Securities Act of
1933, as amended (the "Securities Act"), or any state securities laws, including
--------------
the qualification or registration requirements of applicable blue sky laws.
Company Reports; Disclosure.
- ---------------------------
Company Reports. For the purposes of this Agreement, the term "Company Reports"
- --------------- ---------------
shall mean, collectively, each registration statement, report, proxy statement
or information statement filed with the Securities and Exchange Commission (the
"SEC") since January 1, 1999, including the Company's Quarterly Report on Form
---
10-Q for the quarterly period ended September 30, 1999, in the form (including
exhibits, annexes and any amendments thereto) filed with the SEC. As of their
respective dates, the Company Reports complied in all material respects with the
requirements of the Securities Act and the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and did not contain any untrue statement of a
------------
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements made therein, in light of the circumstances in
which they were made, not misleading. Except for the election of two (2)
directors to the Company's Board of Directors and the use by the Company of its
cash on hand in the ordinary course of business, nothing has occurred since
September 30, 1999 which would require the filing of any additional report or of
any amendment to any of the Company Reports with the SEC, or which would cause
any of the Company Reports to contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements made therein, in light of the circumstances in which they were
made, not misleading.
Disclosure. No representation or warranty by the Company in this Agreement, or
- ----------
in any document or certificate furnished or to be furnished to the Purchaser
pursuant hereto or in connection with the
33
<PAGE>
transactions contemplated hereby, when taken together, contains or will contain
any untrue statement of a material fact or omits or will omit to state a
material fact necessary to make the statements made herein and therein, in the
light of the circumstances under which they were made, not misleading. The
Company has either filed with the SEC or fully provided the Purchaser with all
the information necessary for the Purchaser to decide whether to purchase the
Shares.
Representations and Warranties of the Purchaser or Bravo (as the case may be)
- -----------------------------------------------------------------------------
and Restrictions on Transfer Imposed by the Securities Act. The Purchaser
- ----------------------------------------------------------
represents and warrants to the Company as to itself (and Bravo represents and
warrants to the Company as to itself) as follows:
Organization and Standing. The Purchaser is a corporation duly organized,
- -------------------------
validly existing and in good standing under the laws of the State of Delaware
and has all requisite corporate power and authority to carry on its businesses
as now conducted and as proposed to be conducted. Bravo is a partnership duly
organized and validly existing under the laws of the State of New York and has
all requisite partnership power and authority to carry on its business as now
conducted and as proposed to be conducted.
Power. The Purchaser has all requisite corporate power necessary for the
- -----
authorization, execution and delivery of the Transaction Agreements to which it
is a party. Bravo has all requisite partnership power necessary for the
authorization, execution and delivery of the Transaction Agreements to which it
is a party. Each of the Transaction Agreements to which the Purchaser or Bravo
(as the case may be) is a party is a valid and binding obligation of the
Purchaser or Bravo (as the case may be), enforceable against the Purchaser or
Bravo (as the case may be) in accordance with its terms, except as the same may
be limited by bankruptcy, insolvency, moratorium, and other laws of general
application affecting the enforcement of creditors' rights.
Authorization. All corporate action on the part of the Purchaser, its officers,
- -------------
directors and stockholders necessary for the authorization, execution and
performance of the Purchaser's obligations hereunder and under the other
Transaction Agreements to which it is a party have been taken. All partnership
action on the part of Bravo necessary for the authorization, execution and
performance of Bravo's obligations under the Transaction Agreements to which it
is a party have been taken.
Compliance with Other Instruments. The execution, delivery and performance of
- ---------------------------------
and compliance with this Agreement or the other Transaction Agreements to which
Purchaser or Bravo (as the case may be) is a party will not (a) result in any
violation of the Certificate of Incorporation or Bylaws of the Purchaser or of
the partnership agreement of Bravo (as the case may be), or (b) result in any
violation of or default in any material respect under the terms of any mortgage,
indenture, contract, agreement, instrument, judgment or decree to which the
Purchaser or Bravo (as the case may be) is a party or is otherwise subject.
Consents. No consent, approval or authorization of or designation, declaration
- --------
or filing with any governmental authority or other third party on the part of
the Purchaser or Bravo (as the case may be) is required in connection with the
valid execution and delivery of the Transaction Agreements to which it is a
party.
Investment Intent. This Agreement is made with the Purchaser in reliance upon
- -----------------
the Purchaser's representation to the Company, evidenced by the Purchaser's
execution of this Agreement, that the Purchaser is acquiring the Shares for
investment for the Purchaser's own account, and not with a view to, or for
resale in connection with, any distribution or public offering thereof within
the meaning of the Securities Act.
Shares Not Registered. The Purchaser understands and acknowledges that the
- ---------------------
offering of the Shares pursuant to this Agreement will not be registered under
the Securities Act or qualified under applicable blue sky laws on the grounds
that the offering and sale of securities contemplated by this Agreement are
exempt from registration under the Securities Act and exempt from qualifications
available under applicable blue sky laws, and that the Company's reliance upon
such exemptions is predicated upon the Purchaser's representations set forth in
this Agreement. The Purchaser acknowledges and understands that the Shares must
be held for at least 12 months after Closing and thereafter indefinitely unless
the Shares are subsequently registered under the Securities Act and qualified
under applicable blue sky laws or an exemption from such registration and such
qualification is available.
<PAGE>
Knowledge and Experience. The Purchaser (i) has such knowledge and experience in
- ------------------------
financial and business matters as to be capable of evaluating the merits and
risks of the Purchaser's prospective investment in the Shares; (ii) has the
ability to bear the economic risks of the Purchaser's prospective investment;
and (iii) has not been offered the Shares by any form of advertisement, article,
notice or other communication published in any newspaper, magazine, or similar
media or broadcast over television or radio, or any seminar or meeting whose
attendees have been invited by any such media.
Accredited Investor. The Purchaser is an "accredited investor" as that term is
- -------------------
defined in Rule 501(a) under the Securities Act.
Legends. Each certificate representing the Shares may be endorsed with the
- -------
following legends:
Federal Legend. THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
- --------------
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND ARE
"RESTRICTED SECURITIES" AS DEFINED IN RULE 144 PROMULGATED UNDER THE ACT. THE
SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE OR OTHERWISE DISTRIBUTED EXCEPT
(i) IN CONJUNCTION WITH AN EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES UNDER
THE ACT OR (ii) IN COMPLIANCE WITH RULE 144, OR (iii) PURSUANT TO AN OPINION OF
COUNSEL, THAT SUCH REGISTRATION OR COMPLIANCE IS NOT REQUIRED AS TO SAID SALE,
OFFER OR DISTRIBUTION.
Other Legends. Any other legends required by applicable state blue sky laws. The
- -------------
Company need not register a transfer of legended Shares, and may also instruct
its transfer agent not to register the transfer of the Shares, unless the
conditions specified in each of the foregoing legends are satisfied.
Removal of Legend and Transfer Restrictions. Any legend endorsed on a
- -------------------------------------------
certificate pursuant to subsection 4.10(a) and the stop transfer instructions
with respect to such legended Shares shall be removed, and the Company shall
issue a certificate without such legend to the holder of such Shares if such
Shares are registered under the Securities Act and a prospectus meeting the
requirements of Section 10 of the Securities Act is available or if such holder
satisfies the requirements of Rule 144(k).
Conditions to Closing.
- ---------------------
Conditions to the Purchaser's Obligations. The obligation of the Purchaser to
- -----------------------------------------
purchase the Shares at the closing is subject to the fulfillment to the
Purchaser's satisfaction, on or prior to the Closing Date, of the following
conditions, any of which may be waived by the Purchaser:
Representations and Warranties Correct; Performance of Obligations. The
- ------------------------------------------------------------------
representations and warranties made by the Company in Section 3 hereof shall be
true and correct when made, and shall be true and correct in all material
respects on the Closing Date with the same force and effect as if they had been
made on and as of said date (except to the extent any such representation or
warranty expressly speaks of an earlier date). The Company shall have performed
in all material respect all obligations and conditions herein required to be
performed or observed by it on or prior to the Closing Date.
Transaction Agreements. The Company shall have executed each of the Transaction
- ----------------------
Agreements.
Officer's Certificate. The Company shall have delivered a Certificate, executed
- ---------------------
on behalf of the Company by its President, dated the Closing Date, certifying to
the fulfillment of the conditions specified in subsection (1) of this Section
5.1.
Secretary's Certificate. The Company shall have delivered a Certificate,
- -----------------------
executed on behalf of the Company by its Secretary, dated the Closing Date,
certifying the Board of Directors resolutions approving the Transaction
Agreements and the issuance of the Shares.
Opinion of Counsel. The Purchaser shall have received an opinion from Gray Cary
- ------------------
Ware & Freidenrich LLP, dated the Closing Date, reasonably satisfactory to the
Purchaser.
HSR Act. The waiting period under the Hart-Scott-Rodino Antitrust Improvements
- -------
Act, as amended (the "HSR Act") shall have expired or been terminated, if a
filing under the HSR Act is legally required in connection with this Agreement.
Amendment to Rights Agreement. The Third Amended and Restated Rights Agreement,
- -----------------------------
dated as of April 14, 1999, by and among the Company and the holders party
thereto shall have been amended to include the Purchaser as a "Holder" (as
defined therein) for all purposes of such agreement and to provide that all of
the Shares shall be "Registrable Securities" (as defined therein) for all
purposes of such agreement, such amendment to be reasonably satisfactory to the
Purchaser. The Purchaser shall have the right to terminate this Agreement if the
Company is unable to satisfy this condition by December 31, 1999.
35
<PAGE>
Conditions to Obligations of the Company. The Company's obligation to sell and
- ----------------------------------------
issue the Shares at the closing is subject to the fulfillment to the
satisfaction of the company on or prior to the Closing Date of the following
conditions, any of which may be waived by the Company:
Representations and Warranties Correct. The representations and warranties made
- --------------------------------------
by the Purchaser and Bravo in Section 4 hereof shall be true and correct when
made, and shall be true and correct on the Closing Date with the same force and
effect as if they had been made on and as of said date (except to the extent any
such representation or warranty expressly speaks of an earlier date).
Transaction Agreements. The Purchaser of Bravo (as the case may be ) shall have
- ----------------------
executed each of the Transaction Agreements.
Officer's Certificate. The Purchaser and Bravo (as the case may be) shall have
- ---------------------
delivered a Certificate, executed on behalf of each of them by their respective
President, dated the Closing Date, certifying to the fulfillment of the
conditions specified in subsection (1) of this Section 5.2.
HSR Act. The waiting period under the HSR Act shall have expired or been
- -------
terminated, if a filing under the HSR Act is legally required in connection with
this Agreement.
Affirmative Covenants of the Company. The Company hereby covenants and agrees as
- ------------------------------------
follows: Attendance at Board Meetings.
----------------------------
The Company shall permit a representative of the Purchaser to attend all
meetings of its Board of Directors in a nonvoting observer capacity and to
participate in discussions and, in this respect, shall give such representative
timely copies of all notices, minutes, consents, and other material that it
provides to its directors; provided, however, that the Company may require as a
condition precedent to this right that the person proposing to attend any
meeting of the Board of Directors shall agree to hold in confidence and trust
and to act in a fiduciary manner with respect to all confidential or proprietary
information so received during the meetings or otherwise; and provided further,
that the Company reserves the right not to provide information and to exclude
Purchaser (or its representative) from any meeting or portion thereof if
delivery of such information or attendance at such meeting would result in
disclosure of trade secrets or would adversely affect the attorney-client
privilege between the Company and its counsel or if the Purchaser (or its
representative) is a competitor of the Company.
Advertising and Content. The Company shall, throughout the Promotional Period,
- -----------------------
make available to the Purchaser and its affiliates all of the content on the
Company's on-line sites pursuant to the terms of the On-Line Content Sharing
Agreement to the extent required by the Purchaser to satisfy its obligations
under Section 1 hereunder (including without limitation, in connection with the
production of any interstitial programming as described therein). At all times
during the Promotional Period, the general quantity and quality of the content
on the Company's on-line sites shall be maintained at not less than then-current
industry levels and, in any event, no less than the general quantity and quality
of such content on such sites as of the Closing Date. If the Company fails to
comply in any material respect with the requirements of the preceding sentence,
then the Promotional Period shall be extended beyond December 31, 2009 by an
amount equal to 50% of the time period between the date of the Company's failure
to comply and December 31, 2009. The Company covenants and agrees that any
commercial advertisement or other promotional material provided by the Company
to the Purchaser or its affiliates shall not violate the right of privacy of or
constitute a libel or slander against or violate or infringe any law, trademark,
trade name, patent, copyright or any literary, artistic, dramatic or other right
of any person or entity. The Company further acknowledges and agrees that its
use and exploitation of the advertising and/or promotional inventory to be made
available to it pursuant to this Agreement shall be subject to and in accordance
with such rules and restrictions, of which the Company has received or from time
to time may receive written notice, as may be promulgated by the Purchaser or
any of its affiliates.
Miscellaneous.
- -------------
GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED IN ALL RESPECTS BY THE LAWS OF
- -------------
THE STATE OF NEW YORK.
Survival. The representations, warranties, covenants and agreements made herein
- --------
shall survive the Closing of the transactions contemplated hereby,
notwithstanding any investigation made by the Purchaser. All statements as to
factual matters contained in any certificate or other instrument delivered by or
on behalf of the Company pursuant hereto or in connection with the transactions
contemplated hereby shall be deemed
36
<PAGE>
to be representations and warranties by the Company hereunder as of the date of
such certificate or instrument.
Successors and Assigns. Except as otherwise expressly provided herein, the
- ----------------------
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
Entire Agreement. This Agreement and the other documents delivered pursuant
- ----------------
hereto constitute the full and entire understanding and agreement between the
parties with regard to the subjects hereof and thereof and they supersede, merge
and render void every other prior written and/or oral understanding or agreement
among or between the parties hereto.
Notices, etc. All notices and other communications required or permitted
- ------------
hereunder shall be in writing and shall be delivered personally, mailed by first
class mail, postage prepaid, or delivered by courier or overnight delivery,
addressed (a) if to the Purchaser, 1111 Stewart Avenue, Bethpage, New York
11714, Attention: Chief Executive Officer, or such other address as the
Purchaser shall have furnished to the Company in writing or (b) if to the
Company, at 706 Mission Street, 2nd Floor, San Francisco, CA 94103 Attention:
Chief Financial Officer, or at such other address as the Company shall have
furnished to the Purchaser in writing. Notices that are mailed shall be deemed
received five days after deposit in the United States mail.
Severability. In case any provision of this Agreement shall be found by a court
- ------------
of law to be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions of this Agreement shall not in any
way be affected or impaired thereby.
Finder's Fees and Other Fees.
- ----------------------------
The Company (i) represents and warrants that it has retained no finder or broker
in connection with the transactions contemplated by this Agreement and, (ii)
hereby agrees to indemnify and to hold the Purchaser harmless from and against
any liability for commission or compensation in the nature of a finder's fee to
any broker or other person or firm (and the costs and expenses of defending
against such liability or asserted liability) for which the Company, or any of
its employees or representatives, are responsible. The Purchaser (i) represents
and warrants that it has retained no finder or broker in connection with the
transactions contemplated by this Agreement and (ii) hereby agrees to indemnify
and to hold the Company harmless from and against any liability for any
commission or compensation in the nature of a finder's fee to any broker or
other person or firm (and the costs and expenses of defending against such
liability or asserted liability) for which the Purchaser, or any of its
employees or representatives, are responsible.
Expenses. The Company and the Purchaser shall each bear their own expenses
- --------
and legal fees in connection with the consummation of this transaction.
Titles and Subtitles. The titles of the sections and subsections of this
- --------------------
Agreement are for convenience of reference only and are not to be considered in
construing this Agreement.
Non-Recourse. No partner, officer, director, shareholder or other holder of an
- ------------
ownership interest of or in either party to this Agreement shall have any
personal liability in respect of any such party's obligations under this
Agreement by reason of his or its status as such partner, officer, director,
shareholder or other holder.
Counterparts. This Agreement may be executed in any number of counterparts,
- ------------
each of which shall be an original, but all of which together shall constitute
one instrument.
Delays or Omissions. No delay or omission to exercise any right, power or remedy
- -------------------
accruing to the Company or to any holder of any securities issued or to be
issued hereunder shall impair any such right, power or remedy of the Company or
such holder, nor shall it be construed to be a waiver of any breach or default
under this Agreement, or an acquiescence therein, or of or in any similar breach
or default thereafter occurring; nor shall any delay or omission to exercise any
right, power or remedy or any waiver of any
37
<PAGE>
single breach or default be deemed a waiver of any other right, power or remedy
or breach or default theretofore or thereafter occurring. All remedies, either
under this Agreement, or by law otherwise afforded to the Company or any holder,
shall be cumulative and not alternative.
Attorneys' Fees. If any action at law or in equity is necessary to enforce or
- ---------------
interpret the terms of any of the Transaction Agreements, the prevailing party
shall be entitled to reasonable attorneys' fees, costs and disbursements in
addition to any other relief to which such party may be entitled.
Venue. The parties hereby irrevocably submit to the jurisdiction of both the
- -----
courts of the State of California and the State of New York and the Federal
courts of the United States of America located in the State of California and in
the State of New York solely in respect of the interpretation and enforcement of
the provisions of the Transaction Agreements, and in respect of the transactions
contemplated hereby, and hereby waive, and agree not to assert, as a defense in
any action, suit or proceeding for the interpretation or enforcement hereof or
of any such document, that it is not subject thereto or that such action, suit
or proceeding may not be brought or is not maintainable in said courts or that
the venue thereof may not be appropriate or that the Transaction Agreements may
not be enforced in or by such courts, and the parties hereto irrevocably agree
that all claims with respect to such action or proceeding shall be heard and
determined in such a California or New York state or Federal court. The parties
hereby consent to and grant any such court jurisdiction over the person of such
parties and over the subject matter of such dispute and agree that mailing of
process or other papers in connection with any such action or proceeding in the
manner provided in Section 6.5 hereof shall be valid and sufficient service
thereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Stock
Purchase Agreement as of the date first written above.
Salon.com
By: By:/s/ Michael O'Donnell
-------------------------------------
Title: Chief Executive Officer/President
----------------------------------
Rainbow Media Holdings, Inc.
By: By:/s/ Josh Sapan
-------------------------------------
Title: Chief Executive Officer/President
----------------------------------
Bravo Company (as to Section 4.1,4.2,
4.3, 4.4 and 4.5 Only)
By: By:/s/ Josh Sapan
-------------------------------------
Title: Chief Executive Officer
----------------------------------
39
<PAGE>
EXHIBIT 10.1
*Certain information in this document has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect to
the omitted portions.
BRAVO COMPANY
1111 STEWART AVENUE
BETHPAGE, NEW YORK 11714
Salon.com
706 Mission Street, 2/nd/ Floor
San Francisco, CA 94103
Ladies and Gentlemen:
This letter shall confirm the terms of the agreement (the "Agreement")
---------
between Bravo Company ("Bravo") and Salon.com ("Salon") (Bravo and Salon may be
----- -----
referred to as "Party") for the licensing of Content on Websites (as defined
-----
below) Controlled (as defined below) Bravo or Salon and for the sale of
advertising on on-line sites Controlled by Bravo or Salon, respectively.
For the purposes of this Agreement, a "Website" is defined as a site
-------
with pages hosted at a particular URL address which is accessed generally by the
public without charge, such as www.salon.com and "Controlled" shall mean the
------------- ----------
Website is operated by or its operations is controlled by Salon or its
Affiliates ("Salon Controlled Websites") or Bravo or its Affiliates ("Bravo
------------------------- -----
Controlled Websites"). A co-branded Website is not considered Controlled by a
- -------------------
Party. If a Website ceases to be Controlled by a Party, the licenses in this
Agreement shall terminate with respect to such Website sixty (60) days after
such Control terminates. "Affiliates" shall mean companies which are controlled
----------
by a particular company. For these purposes, "control" shall mean the ability,
-------
directly or indirectly, to vote fifty percent (50%) or more of the shares or
interests which elect the management of an entity. "Content" shall mean the
-------
articles, audio or video on a Website, but shall not include advertisements,
chat room contributions or other material not displayed to the public in general
on a Website. "Term" and "Promotional Period" are defined in Section 6.
----
1. Rights Granted.
--------------
(a) Subject to any limitations imposed on Content licensed by third
parties to Bravo, Bravo grants to Salon during the Term a non-exclusive,
worldwide, royalty-free license, with the right to sublicense to Salon
Affiliates on the same terms, the right to reproduce, distribute, publicly
display, publicly perform and modify solely for editorial purposes on Salon
Controlled Websites (i) Content on the Bravotv.com Website or any other Website
Controlled by Bravo or its Affiliates, (ii) which is requested by Salon for use
in connection with a particular related story or related feature on the
Salon.com Website or any other Salon Controlled Website and (iii) which Bravo
agrees to provide, which agreement shall not be unreasonably withheld.
(b) Subject to any limitations imposed on Content licensed by third
parties to Salon, Salon grants to Bravo during the Term a non-exclusive,
worldwide, royalty-free license, with the right to sublicense to Bravo
Affiliates on the same terms, the right to reproduce, distribute, publicly
display, publicly perform and modify solely for editorial purposes on Bravo
Controlled Websites (i) Content on Salon.com or a Salon Controlled Website, (ii)
which is requested by Bravo for use in connection with a particular related
story or related feature on Bravotv.com or any other Bravo Controlled Website
and (iii) which Salon agrees to provide, which agreement shall not be
unreasonably withheld.
(c) Subject to any limitations imposed on Content licensed by third
parties to Salon, Salon grants to Bravo during the Promotional Period, a non-
exclusive, worldwide, royalty-free license with the right to sublicense to BC
Affiliates on the same terms to reproduce, distribute, publicly perform,
publicly display and modify solely for editorial purposes on the Bravo pay
television network as it exists on the
40
<PAGE>
Effective Date or a television programming service operated by a BC Affiliate on
the Effective Date Content in the form of interstitial promotional
advertisements. "BC Affiliates" shall mean a company or entity controlled by,
-------------
controlling or under common control with Bravo; "control" shall mean the right
-------
to vote, directly or indirectly, more than fifty percent (50%) of the shares or
voting interests of the board of directors or management of such entity. The
scope of the license may change upon sixty (60) days prior written notice by
Bravo to Salon if Bravo extends its distribution methods: Salon may give notice
to Bravo during such period of any Content which may not be licensed in the new
channels of distribution and the license for such Content shall not be extended
to new channels of distribution. To the extent Bravo or any of the BC Affiliates
uses Content from Salon Controlled Websites in connection with making available
such promotional inventory, Bravo or such BC Affiliate shall have sole
discretion over which Content is utilized, of how such Content is presented
(including the right to edit and re-format such Content), subject to the rights
of third parties and Salon's reasonable approval, and selection of distribution
platforms (e.g., television, broadband, wireless).
(d) Notwithstanding Paragraphs 1(a) and 1(b) hereof, neither Bravo
nor Salon shall be required to provide to the other Party any Content on any of
its Controlled Websites ("Supplying Party") which Bravo or Salon, as the case
---------------
may be, does not have the right to make available for use on Websites not
Controlled by such Party; provided that each of Bravo and Salon shall use all
reasonable efforts to acquire the right to make Content on Websites Controlled
by such Party available to the other Party ("Receiving Party") hereto as
---------------
contemplated by this Agreement. The Receiving Party shall have the right to
edit, alter or modify Content received from the other Party hereunder unless the
Supplying Party notifies the Receiving Party that the Supplying Party does not
have the right to permit the Receiving Party to edit or modify such Content (in
which event, upon the request of the Receiving Party, the Supplying Party shall
use all reasonable efforts to acquire the right to permit such Content to be
edited or modified as requested by the Receiving Party). Content made available
pursuant to Paragraphs 1(a) and 1(b) hereof may be displayed on the Website
Controlled by the Receiving Party in full or as a synopsys using the headline,
the first few lines of the Content and by providing a link to the Supplying
Party's Website for the balance of the Content.
(e) Each of Bravo and Salon shall provide the other Party with
password-encoded access to a separate server or FTP site created by the
Supplying Party and containing the Content to be provided under Paragraphs 1(a)
or 1(b) hereof. The Supplying Party shall make reasonable commercial efforts to
make access to such FTP site available twenty-four (24) hours per day during
each day of the year, but the Supplying Party shall not be responsible for lack
of access due to problems with the Receiving Party's Internet Service Provider
("ISP"), the Supplying Party's third party web host or general Internet access
---
problems. Each Party shall consult with the other Party on a regular basis
concerning the Content schedules on Websites Controlled by such Party and shall
provide the other Party with such schedules as soon as they are finalized. Upon
the request of a Receiving Party, the Supplying Party shall use all reasonable
efforts to make available to the Receiving Party Content in electronic format
within twenty-four (24) hours' receipt of a request by Receiving Party posting
on the Receiving Party's Website.
(f) Trademarks.
----------
(i) (A) During the term of this Agreement and subject to the
terms and conditions of this Agreement, Salon hereby grants to Bravo, and Bravo
hereby accepts, a nonexclusive, nontransferable, limited, royalty-free license,
without the right to sublicense except to its Affiliates, to use the "Salon"
trademark and logo ("Salon Trademarks") solely to identify the source of Content
----------------
from Salon Controlled Websites and to market such Content in accordance with the
terms of this Agreement.
(B) During the term of this Agreement and subject to the
terms and conditions of this Agreement, Bravo hereby grants to Salon, and Salon
hereby accepts, a nonexclusive,
41
<PAGE>
nontransferable, limited, royalty-free license, without the right to sublicense
except to its Affiliates, to use the "Bravo" trademark and logo ("Bravo
-----
Trademarks") solely to identify the source of Content from Bravo Controlled
- ----------
Websites and to market such Content in accordance with the terms of this
Agreement.
(C) Except in instances when Bravo or any of its
Affiliates uses Content supplied by Salon for delivering the promotional media
contemplated by the Stock Purchase Agreement, the logo of the Supplying Party
shall be featured immediately above or alongside the supplied Content with the
words "Provided by" preceding the trademark and the Supplying Party's on-line
site URL embedded and/or linked in such trademark.
(ii) (A) The nature and quality of the Content publicly
displayed or publicly performed by Bravo in connection with the Salon Trademarks
shall conform to the standards set by Salon as evidenced by the Salon.com
Website at the time. Bravo's use of the Salon Trademarks shall conform to any
style guidelines which Salon may submit to Bravo from time to time. Bravo shall
not physically alter the Salon Trademarks without Salon's prior written consent.
Bravo will cooperate with Salon in facilitating its monitoring and control of
the nature and quality of such Content, and supply Salon with specimens of use
of the Salon Trademarks upon request. Bravo further agrees to (i) take all such
actions as Salon may reasonably request to assist Salon in perfecting its
rights, title and interest in the Salon Trademarks and the goodwill appurtenant
thereto, and (ii) refrain from taking any actions which may dilute the Salon
Trademarks and the goodwill appurtenant thereto.
(B) The nature and quality of the Content publicly
performed or publicly displayed by Salon in connection with the Bravo Trademarks
shall conform to the standards set by Bravo as evidenced by the Bravotv.com
Website at such time. Salon's use of the Bravo Trademarks shall conform to any
style guidelines which Bravo may submit to Salon from time to time. Salon shall
not alter the Bravo Trademarks without Bravo's prior written consent. Salon will
cooperate with Bravo in facilitating its monitoring and control of the nature
and quality of such Content and supply Bravo with specimens of use of the Bravo
Trademarks upon request. Salon further agrees to (i) take all such actions as
Bravo may reasonably request to assist Bravo in perfecting its rights, title and
interest in the Bravo Trademarks and the goodwill appurtenant thereto, and (ii)
refrain from taking any actions which may dilute Bravo's Trademarks and the
goodwill appurtenant thereto.
(iii) (A) Bravo acknowledges and agrees that Salon is the sole
and exclusive owner of the Salon Trademarks and the goodwill appurtenant
thereto. Except as prohibited by law, Bravo agrees that it will not do anything
inconsistent with such ownership either during the term of this Agreement or
thereafter. Bravo agrees that use of the Salon Trademarks by Bravo shall inure
to the benefit of and be solely on behalf of Salon. Bravo acknowledges that its
utilization of the Salon Trademarks will not create or confer any right, title
or interest in the Salon Trademarks in Bravo.
(B) Salon acknowledges and agrees that Bravo is the sole
and exclusive owner of the Bravo Trademarks and the goodwill appurtenant
thereto. Except as prohibited by law, Salon agrees that it will not do anything
inconsistent with such ownership either during the term of this Agreement or
thereafter. Salon agrees that use of the Bravo Trademarks by Salon shall inure
to the benefit of and be solely on behalf of Bravo. Salon acknowledges that its
utilization of the Bravo Trademarks will not create or confer any right, title
or interest in the Bravo Trademarks in Salon.
(iv) (A) Bravo agrees that it will not adopt or use as part or
all of any corporate name, trade name, trademark, service mark or certification
mark, any trademark or other mark confusingly similar to the Salon Trademarks.
Bravo shall use the Salon Trademarks so that they create a separate and distinct
impression from any other trademark that may be used by Bravo. Bravo agrees that
it will not
42
<PAGE>
contest any Salon registration or application for any of the Salon Trademarks.
Bravo shall comply with all applicable laws and regulations pertaining to the
proper use and designation of the Salon Trademarks.
(B) Salon agrees that it will not adopt or use as part or
all of any corporate name, trade name, trademark, service mark or certification
mark, any trademark or other mark confusingly similar to the Bravo Trademarks.
Salon shall use the Bravo Trademarks so that they create a separate and distinct
impression from any other trademark that may be used by Salon. Salon agrees that
it will not contest any Bravo registration or application for any of the Bravo
Trademarks. Salon shall comply with all applicable laws and regulations
pertaining to the proper use and designation of the Bravo Trademarks.
2. Representations and Warranties: Each of Bravo and Salon
------------------------------
represents and warrants to the other that:
(a) All Content made available by the Supplying Party to the
Receiving Party pursuant to Paragraph 1(a), 1(b) or 1(c) hereof, as the case may
be, will be either original or licensed for use as provided in this Agreement by
the person(s) or entity(ies) which have the right to grant such licenses.
(b) The use of Content provided by the Supplying Party by the
Receiving Party as permitted by this Agreement will not violate or infringe on
any rights of any person or entity.
(c) With respect to the non-dramatic public performance rights to any
musical compositions contained in Content made available by a Supplying Party to
the Receiving Party pursuant to Paragraph 1(a) or 1(b) hereof, as the case may
be, such rights shall be (i) controlled by ASCAP, BMI or SESAC; (ii) controlled
by the Supplying Party and not available from a performing rights society, in
which case such rights are granted herein; or (iii) in the public domain in all
jurisdictions.
(d) Each Party has full right, power and authority to enter into this
Agreement and to satisfy all of the obligations to be rendered and satisfied,
respectively, by it hereunder, and there are no claims, facts or circumstances
existing or pending which would prevent such Party's full performance of its
obligations hereunder.
3. Insurance: Throughout the period commencing on the date hereof and
---------
terminating no earlier than the expiration of this Agreement, each Party shall
provide and maintain, in full force and effect, at its own cost and expense, a
broadcaster's and advertiser's liability insurance (errors and omissions
coverage) policy or policies that covers any and all claims arising out of or
relating to (i) errors and omissions relating to media liability or (ii) the
Content licensed to the Receiving Party under this Agreement. Such policy shall
be in the amount of $1,000,000 for any one claim and $3,000,000 in the aggregate
in each annual policy period. Each Party shall furnish the other with a
certificate of insurance evidencing the existence of said insurance coverage,
naming the other Party as an additional insured. No such policy may be cancelled
or materially modified without the other Party's prior approval, such approval
not to be unreasonably withheld.
4. Indemnification.
---------------
(a) Each party ("Indemnifying Party") will defend, indemnify and hold
------------------
harmless or, at its option, settle any claim or action brought against the other
Party, its officers, directors, BC Affiliates and sublicensees ("Indemnified
-----------
Party") to the extent that it is based upon a claim that the Content provided by
- -----
the Indemnifying Party used within the scope of this Agreement violates the
warranties in Section 2, and the Indemnifying Party will pay any costs, damages
and reasonable attorney fees reasonably incurred by the Indemnified Party that
are attributable to such claim which are assessed against the Indemnified Party
in a final judgment and/or settlement. The Indemnified Party agrees that the
Indemnifying Party shall be released from the foregoing obligation unless the
Indemnified Party promptly notifies the Indemnifying
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Party in writing of the claim, or notice of claim, and that the Indemnifying
Party has sole and complete control of the defense and/or settlement of such
claim and the full cooperation of the Indemnified Party therein. The foregoing
states the Indemnifying Party's entire liability to the Indemnified Party with
respect to infringement.
(b) In the event of such infringement, the Indemnifying Party will at
its sole option and expense either:
(i) procure for the Indemnified Party the right to continue
the use of the Indemnifying Party's Content;
(ii) replace or modify the Indemnifying Party's Content to make
its use non-infringing; or
(iii) if, in the Indemnifying Party's reasonable opinion,
neither (a) nor (b) above are commercially feasible, terminate the Indemnified
Party's right to use the infringing Content.
(c) The Indemnifying Party shall have no liability under this Section
for any claim or action where such claim or action arises from, is the result
of, or is in connection with:
(i) any modification made to the Indemnifying Party's Content
after delivery to the Indemnified Party;
(ii) the Indemnified Party continues allegedly infringing
activity after being informed of modifications that would have avoided the
alleged infringement or after being informed that the license is terminated as
provided in Section 4(b)(iii); or
(iii) the Indemnified Party's use of the Indemnifying Party's
Content is not strictly in accordance with the terms of
this Agreement. The Indemnified Party will be liable for
all damages, costs, expenses, settlements and attorneys'
fees related to any claim of infringement arising as a
result of (i)-(iii) of this Article.
(d) If the Supplying Party reasonably believes that the Content
supplied to the Receiving Party may violate the rights of a third party, it may
notify the Receiving Party who agrees to promptly cease using such Content. So
long as the Supplying Party indemnifies the Receiving Party as provided in this
Section 4 for all losses with respect to the period through thirty (30) days
after the date of such notice to the Receiving Party, such breach of Section
2(b) shall not be considered a breach of this Agreement and such indemnity shall
be the sole and exclusive remedy of the Receiving Party.
5. Advertising Representation.
--------------------------
(a) For a period of two (2) years from the date hereof, Bravo
appoints Salon as a non-exclusive advertising sales representative for the sale
of advertising on Bravo Controlled Websites. For a period of two (2) years from
the date hereof, Salon appoints Bravo as a non-exclusive sales representative on
Salon Controlled Websites. Acting in the capacity of such representative, each
of Salon and Bravo are sometimes hereinafter referred to in this Section 5 as a
"Representative". Bravo shall have the right to delegate its rights and
obligations as a Representative for Salon Controlled Websites under this Section
5 to Rainbow Advertising Sales Corporation ("Rainbow Ad Sales") so long as
Rainbow Ad Sales is under common "control" (as defined in Section 1) with Bravo,
provided that Bravo shall guarantee all actions or inaction of Rainbow Ad Sales
which result in a breach by Rainbow Ad Sales of any such obligations so
delegated. Advertising inventory on Controlled Websites shall be made available
to the applicable Representative for sale hereunder in substantially the same
manner and formats that such inventory is made available to all other
advertising representatives for the Controlled Websites (including without
limitation, in-house advertising representatives).
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(b) In consideration of the services of each Representative, each
Representative shall receive a commission of [****]. "Net Advertising Revenue"
-----------------------
is defined as gross advertising revenue less applicable agency commissions
received by the Party Controlling the Website in cash or barter (approved by the
Party Controlling the Website in its sole discretion - the "Advertising Party")
-----------------
from sales of advertising made by such Representative pursuant to this
Agreement; provided the Advertising Party may deduct from future commissions
amounts to reflect failure to pay invoices or provide bartered services. The
Advertising Party shall be responsible for invoicing all advertisers for which a
Representative places advertising on Controlled Websites within ten (10) days
after the end of each calendar month. Each Advertising Party shall remit any
commissions payable hereunder to the applicable Representative within sixty (60)
days of the invoice date. Within ten (10) days after the end of each calendar
month, the Advertising Party shall supply the applicable Representative with
copies of all invoices for sales of advertising made by such Representative.
(c) Notwithstanding the termination or expiration of this Agreement,
each of Bravo and Salon, as the case may be, shall continue to perform all
advertising contracts sold by the applicable Representative prior to such
termination or expiration and to pay all commissions due hereunder.
(d) Each Representative shall provide to the Advertising Party a list
of advertisers that such Representative proposes to solicit for the sale of
advertising on the other's on-line sites. The Advertising Party, in each case,
may, in its sole discretion, authorize the Representative to solicit any
advertiser on the list, or decline to authorize the Representative to solicit
any advertiser on the list. Each Representative shall solicit only those
advertisers authorized by the Advertising Party. Each Representative shall
comply with the policies, directions and specifications governing the sale,
solicitation and/or exhibition of advertising or promotional material on the
Website Controlled by the Advertising Party, of which the applicable
Representative has been advised in writing. The Advertising Party shall have the
right to reject advertisements which fail to comply with any such policies and
directions. Each Representative shall not enter into any barter arrangements on
behalf of the Advertising Party without prior written notice of all material
terms and the express written consent of the Advertising Party. The Advertising
Party shall provide the applicable Representative with the rate card applicable
to advertising sales on its Websites, and each Representative shall notify and
obtain the prior approval of the applicable Party of any reductions from such
rate card other than those which are immaterial in nature.
(e) Each Representative shall have access to any advertising sales
materials created by the other Party in connection with such Party's on-line
sites, at such Party's cost of creating such materials. Any sales and marketing
materials created or proposed for use by each Representative in connection with
the sale or marketing of advertising inventory hereunder shall be approved in
advance by the Advertising Party such approval not to be unreasonably withheld.
6. Term.
----
(a) Except as otherwise provided in this Section 6, the term of the
obligations in Sections 1(a), (b), (d) and (e), (f)(i) and (f)(ii) and all
obligations relating thereto (except as provided in Section 8(n)) shall commence
on the date hereof and shall continue through December 31, 2005 . The term may
be extended by mutual agreement of the Parties. The Term of the licenses in
Section 1(c) and (f) shall commence on the date hereof and terminate upon
December 31, 2009 unless extended as provided in the Stock Purchase Agreement of
even date ("Promotional Period").
------------------
(b) Subject to applicable law, either Party may terminate this
Agreement immediately if the other Party ceases to carry on business as a going
concern, makes a general assignment for the benefit of its creditors, or
appoints a receiver or is a party to any proceeding under bankruptcy or
insolvency legislation.
* Certain information in this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested to the omitted
portions.
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(c) Either Party may terminate this Agreement if the other Party is
in material breach of any of its obligations and such default is not remedied
within thirty (30) days of receipt of written notice thereof; provided that if
the breach is not a failure to pay money and is of such a nature that is cannot
reasonably be cured within such thirty (30) day period, but it is curable and
such Party in good faith begins efforts to cure it within such thirty (30) day
period and continues diligently to do so, such Party shall have a reasonable
additional period not to exceed sixty (60) days from the notice thereafter to
effect the cure.
7. Audits.
------
(a) No more than once annually, either Party shall have the right to have
an inspection and audit of the records of the other Party conducted by an
independent certified public accountant reasonable acceptable to the Party to be
audited (the "Auditor"), which inspection and audit shall be conducted upon
-------
reasonable prior written notice, during regular business hours at the offices of
such other party and in such a manner as not to interfere with its normal
activities. The Auditor will be required to sign a confidentiality agreement in
a form containing terms and conditions customarily found in such agreements. The
Party requesting the audit shall be responsible for the fees and costs of the
Auditor, unless a shortfall of greater than ten percent (10%) is discovered
during such audit, in which case the party audited shall bear the costs of the
audit, in addition to paying the full amount of the shortfall in Revenue, and
all interest due thereon as set forth in Section 7(b) below. All information
received in connection with such audits, and the results thereof, will be deemed
confidential information subject to the terms of Section 8(g). Each Party shall
maintain these records for one year after the Term and such audit rights shall
also survive for such one year period.
(b) Overdue accounts shall be charged interest on a monthly basis,
calculated at an annual rate of the lesser of twelve percent (12%) or the
maximum rate allowed by law.
8. Miscellaneous:
-------------
(a) In no event shall this Agreement be construed to create any
employment, agency, partnership or joint venture relationship between the
parties.
(b) Except as otherwise provided in Section 5(a) hereof and except
for an assignment of this Agreement by either Party to a purchaser of all or
substantially all of the business or assets of such Party, this Agreement shall
not be assigned by either Party in whole or in part without the written consent
of the other, which consent shall not be unreasonably withheld or delayed. Any
assignment in violation of the terms hereof shall be void ab initio and of no
force or effect.
(c) This Agreement, together with the Registration Rights Agreement,
the Stock Purchase Agreement and the Production Agreement, dated the date
hereof, between Salon and Bravo, set forth the entire agreement between the
parties with respect to the subject matter hereof and supersede all prior
understandings and agreements (whether written or oral) related hereto. This
Agreement may not be modified, amended or waived except in a writing signed by
both parties.
(d) Disclaimer. EXCEPT AS EXPRESSLY SET FORTH IN SECTION 2 OF THIS
----------
AGREEMENT, EACH PARTY EXPRESSLY DISCLAIMS ALL OTHER REPRESENTATIONS OR
WARRANTIES, WHETHER EXPRESS, IMPLIED, STATUTORY, OR OTHERWISE, INCLUDING WITHOUT
LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE, OR NON-INFRINGEMENT OF THIRD PARTY RIGHTS.
(e) This Agreement shall be governed by the laws of the State of New
York applicable to agreements entered into and wholly performed therein without
regard to its choice of law provisions, and each Party hereby consents to the
jurisdiction of any state or federal court located in the State of New York.
(f) In the event that Salon should determine to seek any recourse,
action or claim against Bravo to which it may be entitled under or by reason of
this Agreement, Salon hereby agrees that any such recourse, action or claim
shall extend only to Bravo and not to any of Bravo's partners.
(g) (i) Each Party acknowledges that the proprietary information
of the other party which it knows or has reason to know is considered
confidential by the Disclosing Party ("Confidential Information") ("Discloser")
------------------------
and this Agreement is trade secret to, and constitutes confidential information
of the Discloser. The receiving party ("Recipient") therefore agrees to maintain
---------
such items secret and in
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confidence for the Discloser, using no less than reasonable care, and shall not
disclose any of these items to any persons other than employees of Recipient
with a need to know, without the prior written consent of the Discloser.
Unauthorized use or disclosure of Discloser's confidential information may cause
irreparable harm to the Discloser, and the Recipient agrees that the Discloser
shall have the right to seek injunctive relief to enforce the terms of this
Agreement.
(ii) The confidentiality and non-disclosure obligations of the
Parties set out in this Section 8(g) shall not apply to the extent of
Confidential Information that either:
(A) Becomes lawfully available to the general public
from a source other than by a breach of this Agreement;
(B) Is lawfully obtained by the Recipient from a third
party or parties unconnected with Recipient, as applicable, without breach of
any confidentiality obligations;
(C) Is obtained by the obtaining party with the
Discloser's written approval; or
(D) Is disclosed under operation of the law or to
establish the rights of either Party under this Agreement, provided that that
-------------
Party obligated to make such disclosure gives the other Party prompt notice of
such intended disclosure to allow such other Party to attempt to narrow or
prevent such disclosure.
(h) Each of Bravo and Salon shall run during each calendar quarter
during the Term hereof at least 250,000 impressions of advertisements for, and
supplied by, the other Party. An "Impression" shall mean each request by a third
----------
party to a web server on a Website Controlled by a Party which results in a
display of an advertisement relating to the other Party to the requesting party.
Such Impressions may be run on Bravotv.com or Salon.com (as the case may be),
or, subject the prior approval of Bravo or Salon (as the case may be), such
approval not to be unreasonably withheld, any other Controlled Website.
(i) The parties shall consult with each other concerning the
possibility of periodically developing joint on-line sites to support joint
editorial or marketing campaigns.
(j) Any and all notices or other information to be given by one of
the Parties to the other shall be deemed sufficiently given when forwarded by
certified mail (receipt requested), facsimile transmission or hand delivery to
the other Party at the following address:
If to Bravo: Bravo Company
1111 Stewart Avenue
Bethpage, NY 11714
Attn: President
Fax No:____________________
With a copy to:
Rainbow Media Holdings, Inc.
1111 Stewart Avenue
Bethpage, NY 11714
Attn: General Counsel
Fax No: (516) 803-4824
If to Salon.com:
Salon.com
706 Mission Street
2/nd/ Floor
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San Francisco, CA 94103
Attn: Chief Financial Officer
Fax No: (415) 882-8780
With a copy to:
Mark F. Radcliffe, Esq.
Gray, Cary, Ware & Freidenrich LLP
400 Hamilton Avenue
Palo Alto, CA 94301
Fax No: (650) 327-3699
and such notices shall be deemed to have been received on the first business day
following the day of such facsimile transmission or hand delivery, or on the
fifth business day following the day of such forwarding by certified mail. The
address of either Party may be changed at any time by giving ten (10) business
days' prior written notice to the other Party in accordance with the foregoing.
(k) If any term of this Agreement is found to be invalid, illegal or
unenforceable, in whole or in part, by a body of competent jurisdiction, that
term shall be deemed severed from this Agreement to the extent of such
invalidity, illegality or unenforceability, and such invalidity, illegality or
unenforceability shall not affect the validity, legality or enforceability of
any other term of the Agreement.
(l) The failure of a Party to insist upon strict adherence to any
term of this Agreement on any occasion shall not be considered a waiver or
deprive that Party of the right hereafter to insist upon strict adherence to
that term or any other term of this Agreement.
(m) Except for the obligation to make payments hereunder,
nonperformance of either Party shall be excused to the extent that performance
is rendered impossible by strike, fire, flood, governmental action, failure of
suppliers, earthquake, or any other reason where failure to perform is beyond
the reasonable control of the non-performing Party.
(n) The following provisions shall survive termination of the
Agreement: 1(f)(iii), 1(f)(iv), 4, 5(b), 5(c), 7 and 8.
The submission of this Agreement to Salon or its agent or attorney for review or
signature does not constitute an offer to Salon. This instrument shall have no
binding force or effect until its execution and unconditional delivery by both
parties hereto. If you are in agreement with the foregoing, please sign in the
space provided below, whereupon this letter shall become a binding agreement
between Bravo and Salon.
Sincerely,
BRAVO COMPANY
By: /s/ Josh Sapan
-----------------------
Chief Executive Officer
ACCEPTED AND AGREED:
SALON.COM
By: /s/ Michael O'Donnell
-----------------------
Chief Executive Officer
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EXHIBIT 10.2
*Certain information in this document has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
BRAVO COMPANY
1111 STEWART AVENUE
BETHPAGE, NEW YORK 11714
Salon.com
706 Mission Street, 2/nd/ Floor
San Francisco, CA 94103
Ladies and Gentlemen:
This letter shall confirm the terms of the agreement (the "Agreement")
between Bravo Company ("Bravo") and Salon.com ("Producer") for the production by
Producer of a series of half-hour weekly television shows to be aired on and
over the BRAVO programming service (the "Service").
Production of Show.
Producer shall develop and produce a series of twenty-six (26) shows (the "First
Season") about the arts based upon and consistent with the content, reputation
and brand identity of Producer's on-line sites and with a written treatment and
pilot approved by Bravo (the "Shows"), each such show to be a half-hour in
length. The content and quality of the Shows shall be consistent with Bravo's
program positioning and shall meet Bravo's programming and production
guidelines. The parties shall reach mutual agreement as to the budget and
production schedule for the pilot and the First Season of the series; provided,
however, if such mutual agreement is not reached ninety (90) days prior to
Producer's scheduled first rehearsal date, this Agreement shall terminate and
all rights to the Shows shall revert to Producer. Producer shall submit a
rough-cut pilot to Bravo for approval. If Bravo fails to approve the rough-cut
pilot submitted by Producer, then Producer shall revise such pilot to
incorporate Bravo's requests, at Producer's expense. If Bravo then fails to
approve the final pilot as so revised by Producer, then Bravo may elect either
to request Producer make further revisions to the pilot (at Bravo's expense)
until such pilot is acceptable to Bravo, or to terminate this Agreement (in
which case all rights to the Shows shall revert to Producer). Bravo shall advise
Producer whether it approves the rough-cut pilot initially submitted within
twenty-one (21) days after submission thereto within twenty-one (21) days after
re-submission of the pilot to Bravo.
(b) Producer shall have the right to produce the Shows at the studio
of Metro Channel at 481 Eighth Avenue, New York, New York. If Producer elects to
produce the Shows at such studio, then Bravo shall cause Metro Channel LLC
("Metro") to make available to Producer Metro Channel's production and post-
production facilities at such
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studio for the production of the Shows, without charge to Producer, on days and
at times mutually acceptable to the parties; provided, however, that all such
facilities made available to Producer shall be full service and shall include,
without limitation, full multi-camera, audio and lighting packages, production
offices, videotape and audio record machines, post-production facilities
(including audio post-production), studio director, assistant director, stage
managers, editors, and all accompanying below-the-line personnel necessary for
Producer to produce and deliver a weekly half-hour episodic television show
meeting the mutually agreed upon budget, schedule, and the technical
requirements set forth in Section A, and the content and quality requirements of
Bravo as set forth above in Section 1(a). Bravo shall also cause Metro to use
best efforts to make members of Metro's production staff at such studio
reasonably requested by Producer available to Producer. Producer shall be
responsible for all other costs and expenses related to the production of the
Shows; provided, however, that Bravo shall use reasonable efforts to provide
Producer with access to, or assist Producer in negotiating, any pre-production,
production, or post-production related agreements necessary to produce the Shows
at the same rates and under the same terms and conditions as such facilities,
supplies, or personnel are provided to Bravo. Bravo shall be afforded the
opportunity to provide input during the production of each Show and shall have
editorial approval with respect to each Show. The parties contemplate that
Producer shall deliver the pilot to Bravo within six (6) months from the date
hereof, and that the first Show shall be Exhibited on the Service not later than
six (6) months after the approval, if any, of the pilot by Bravo provided that
Producer shall deliver the Shows to Bravo in accordance with the delivery
requirements set forth in Section 7(a), all subsequent episodes comprising the
First Season are to be aired on a regularly scheduled weekly basis, but in no
case shall the 26th episode of the First Season be aired later than the
thirtieth (30th) week following the premiere airing of the first episode.
Rights Granted.
Producer hereby grants to Bravo the following rights:
the exclusive right and license to exhibit, distribute, transmit, display,
exploit, project and perform (collectively, to "Exhibit") the First Run of the
First Season of the Shows in the United States, its territories and possessions
(the "U.S. Territory") by any and all means of television transmission and
delivery (but in no case via the Internet), whether now known or hereafter
developed (Television Distribution"), and on and over the Service. Subject to
Bravo's approval rights set forth herein, each of the Shows shall be Exhibited
by Bravo on the Service at least [****] during the premiere week, with at least
one (1) such exhibition between [****] (the "First Run"). The parties
contemplate that the premiere of each episode of the Shows shall be Exhibited on
the Service on a consecutive weekly regularly scheduled basis in the order
received from the Producer, subject to Bravo's overall scheduling requirements
and constraints.
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the exclusive right and license to Exhibit the First Run of the First Season of
the Shows in Latin America including Mexico, Central America, the Caribbean and
South America (the "Latin American Territory") by Television Distribution, and
on and over Bravo's programming service currently called "Film & Arts" or any
successor thereto (the "Latin American Service").
the exclusive right and license to Exhibit the First Run of the First Season of
the Shows in Canada by Television Distribution, and the exclusive right to
sublicense any or all of the Shows for Television Distribution in Canada
(including without limitation the right to sublicense the Shows to Chum Limited
("Chum") for exhibition on and over the programming service currently called
BRAVO! or any successor thereto with which Chum is associated).
the exclusive right and license to Exhibit the First Run of the First Season of
the Shows by Television Distribution in any other country or territory not
described above.
the exclusive right and license to sublicense the First Run of the First Season
of the Shows for Television Distribution on and over any programming service
owned or operated by any affiliate of Bravo.
For purposes of this Agreement the "Licensed Territories" are the U.S.
Territory, Canada, Latin American Territory, Latin American Service, and any
other territories in which Bravo is licensed to distribute the Shows pursuant to
this Agreement.
The rights granted to Bravo herein shall include the right to use the Shows for
(i) not-for-profit educational purposes, including, but not limited to, the
right to authorize off-air taping for such purposes, (ii) audience and marketing
testing, (iii) sponsor/advertiser screening and (iv) reference and file
purposes; provided, however, that no clips or segments of the Shows may be
incorporated into any "clip show" or "best of" program or sold to any third
party without Producer's prior written approval. The gross proceeds from such
distribution of the Shows shall be shared between Bravo and Producer on a 50/50
basis.
Bravo shall have the right to promote each of the Shows in any manner or media,
including without limitation, the right to use and license others to use
Producer's name, the title of, trailers created for and excerpts from each Show
(including audio portions only) and the name, voice and likeness of and any
biographical material concerning all persons appearing in or connected with each
such Show for the purpose of advertising, promoting and/or publicizing each such
Show, Bravo and the program services on which the Show is Exhibited (except that
Bravo shall not have the right to use same as an endorsement of any other
product or service); provided, however, that Bravo shall make reasonable efforts
to promote the Shows in at least as favorable a manner, media, and number of
exposures as it promotes its most favored regularly scheduled programs aired in
the same or adjacent time slots. Bravo and its permitted sublicensees shall also
have the right to include their respective name, trademark and logo in each of
the Shows to identify Bravo or such sublicensee as the exhibitor of the Shows.
* Certain information in this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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Without limiting any of the rights granted to Bravo hereunder, all Exhibition,
promotion, advertising, marketing, editing and other rights granted to Bravo
herein shall apply to the Service, the Latin American Service, Canada, any other
permitted territory and to any sublicensee permitted hereunder; provided,
however, that to the extent Bravo exercises its right to distribute the Shows,
Bravo's obligations to promote the Shows, as set forth in Section 2(c) above,
shall extend in full to the Licensed Territories.
All other rights with respect to the Shows not expressly granted herein are
reserved by Producer; including, without limitation, the right to distribute the
Shows (i) in any and all markets not included in the Licensed Territories, (ii)
in any market in the Licensed Territories in which Bravo has not entered into an
Agreement to premiere the Shows in the Licensed Territories within forty-five
(45) days of its premiere in the US. Territory, and (iii) in any and all
Licensed Territories, countries, or television markets throughout the world
following the forty-five (45) day exclusive period after Bravo's premiere of any
individual episode.
To the extent Bravo has such resources and rights, Bravo shall make reasonable
efforts to provide Producer access to, and use of, subject only to any
out-of-pocket costs, all of Bravo's stock music, film, and video tape footage,
solely for inclusion in the Shows, unless Bravo shall have a reasonable basis
for keeping such resources proprietary.
License Fee. Except as set forth in Section 2(b), no license fee, production
fee or any other fee shall be payable by Bravo to Producer in connection with
the production of the Shows or for the rights granted by Producer to Bravo
pursuant to this Agreement.
Holdback. Producer represents and warrants that Bravo's Exhibition of each Show
shall be the worldwide premiere of such Show in any media; provided, however,
that Bravo shall first Exhibit each Show throughout the Licensed Territories
within forty-five (45) days of delivery to Bravo by Producer, else Producer
shall be free to premier such Show in any media in any territory.
Exhibitions. With respect to each Show, Bravo shall have the right to [****].
The term "Exhibition Day" shall mean any 24-hour period.
Credits. The name of the Shows shall include a reference to "Salon.com" in a
form approved by each party. All credits, including the size and placement
thereof, shall be subject to Bravo's approval. Producer shall receive a
"Produced by" credit in the main titles in connection with each of the Shows. At
the opening of each Show, there will be a "Bravo Original Production" billboard.
In addition, Bravo shall have the right to designate persons to receive
"Executive in Charge of Production" credit in the end credits.
Delivery Requirements.
All materials for the first Show to be Exhibited hereunder shall be delivered at
least four (4) weeks prior to the start of such Show's scheduled exhibition
date. Assuming the content of the subsequent Shows is topical in nature, the
materials for each such Show shall be delivered at least two (2) weeks prior to
the start of each such Show's scheduled exhibition date. Delivery shall be made
to Bravo, c/o Rainbow Network Communications, 35 North Tyson Avenue, Floral
Park, New York 11001, and shall remain in Bravo's possession throughout the term
of this Agreement. In addition, for each Show delivery shall include (i) one
closed caption transfer; and (ii) a complete and accurate music cue sheet for
music contained in such Show. Delivery shall not be deemed complete unless and
until the Shows are delivered in accordance with this Section 7 and meet the
technical specifications set forth in Schedule A attached hereto.
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(b) At least four (4) weeks prior to the scheduled exhibition date
applicable to the first Show to be Exhibited hereunder (two (2) weeks prior to
such date for each subsequent Show), Producer shall provide Bravo with available
promotional materials including, without limitation, color or black-and-white
slides, transparencies, captioned photographs, brochures, a synopsis and
description of such Show, a complete list of credits, biographies of key talent,
electronic press kits and any trailers and featurettes created for such Show.
Promotional materials should be delivered to the attention of Ms. Dina
Persampire, Bravo Company, 1111 Stewart Avenue, Bethpage, New York 11714-3581.
* Certain information in this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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Editing: Bravo shall have the right to cut, edit, dub, alter and modify the
Shows, but solely as may be necessary to comply with local or national broadcast
standards or any other applicable laws or standards (including obscenity laws or
standards), to meet with scheduling and timing requirements, to create
promotional materials and/or to insert commercial material, and to authorize any
person to do the foregoing.
Representations and Warranties: Producer represents and warrants that:
All materials delivered by Producer hereunder will be either original or
licensed for use by the parties which own or control such rights, and no part of
such materials or the exhibition, promotion or other use of each of the Shows by
Bravo will violate or infringe on any rights whatsoever of any person or entity.
With respect to the non-dramatic public performance rights to musical
compositions contained in each Show, such rights shall be (i) (A) with respect
to the U.S. Territory, controlled by ASCAP, BMI or SESAC, in which event Bravo
shall be solely responsible for paying any fees required to be paid to any such
performing rights society, (B) with respect to Canada, controlled by SOCAN, in
which event, Bravo shall be solely responsible for paying any fees required to
be paid to such performing rights society should Bravo elect to supply any of
the Shows to Chum pursuant to Section 2(a)(iii) hereof and (C) with respect to
the Latin American Territory or any other territories in which Bravo distributes
the Shows, Producer shall not be responsible for paying any fees required to be
paid to any performing rights societies; (ii) controlled by Producer and not
available from a performing rights society, in which case such rights are
granted herein; or (iii) in the public domain.
Producer has full right, power and authority to enter into this Agreement and to
render all of the services and satisfy all of the obligations to be rendered and
satisfied, respectively, by it hereunder, and there are no claims, facts or
circumstances existing or pending which would prevent Producer's full
performance of its obligations hereunder.
Producer's performance hereunder will not be hindered, prevented or adversely
affected by the pendency or occurrence of year 2000 or any other date or
calendar-related data.
The provisions of this Paragraph 9 will survive termination or expiration of
this Agreement.
Insurance: Throughout the period commencing on the date hereof and terminating
no earlier than the expiration of this Agreement (or in the case of the
insurance described in clause (c) below, terminating after the last exhibition
of a Show by Bravo hereunder) the Producer shall provide and maintain, in full
force and effect, at its own cost and expense:
workers compensation coverage for statutory limits and employer's liability
coverage for New York State;
comprehensive general liability insurance for a combined bodily liability,
property damage and personal injury limit of at least $1,000,000 per occurrence;
and
producer's liability (errors and omissions) insurance that covers any and all
claims arising out of or relating to (i) errors and omissions relating to media
liability or (ii) the exhibition of the Shows pursuant to this Agreement. Such
policy shall be written on an occurrence basis and shall be in the amount of at
least $1,000,000 for any one claim arising out of a single occurrence and
$3,000,000 in each annual policy period.
Producer shall furnish Bravo with certificates of insurance evidencing
the existence of said insurance coverage, naming Bravo as an additional insured.
No such policy may be cancelled or materially modified without Bravo's prior
approval, such approval not to be unreasonably withheld. Indemnification:
Producer shall indemnify, defend and hold harmless Bravo, its partners,
officers, affiliates, licensees and sublicensees, from any claim, liability,
loss or damage, including reasonable attorneys' fees and disbursements
(collectively, "Losses"), caused by or arising out of any breach or, in
connection with a third party claim, alleged breach of any representation,
warranty, covenant or agreement of Producer or the exhibition or promotion of
the Shows pursuant to this Agreement. Bravo shall indemnify, defend and hold
harmless Producer, its officers, directors and affiliates from any Losses caused
by or arising out of any breach or, in connection with a third party claim,
alleged breach of any representation, warranty, covenant or agreement of Bravo
hereunder. The provisions of this Paragraph 11 will survive termination or
expiration of this Agreement.
53
<PAGE>
Disclaimer. EXCEPT AS EXPRESSLY SET FORTH IN SECTION 9 OF THIS AGREEMENT,
PRODUCER EXPRESSLY DISCLAIMS ALL OTHER REPRESENTATIONS, CONDITIONS OR
WARRANTIES, WHETHER EXPRESS, IMPLIED, STATUTORY, OR OTHERWISE, INCLUDING WITHOUT
LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE, OR NON-INFRINGEMENT OF THIRD PARTY RIGHTS.
Advertising. Each of Bravo and Producer shall have the right to sell two (2)
minutes of commercial announcement time per each half-hour Show and to retain
all revenue derived therefrom. Bravo shall also have the right to make available
to distributors one (1) minute of commercial announcement time per each half-
hour Show and to exploit any such time not sold by distributors. Any commercial
advertisement provided to or inserted in the Shows by Producer shall not violate
the right of privacy of or constitute a libel or slander against or violate or
infringe any law, trademark, trade name, patent, copyright or any literary,
artistic, dramatic or other right of any person or entity. Producer's use and
exploitation of the commercial time in the Shows available to it hereunder shall
be subject to and in accordance with such rules and restrictions, of which
Producer has received or from time to time may receive written notice, as may be
promulgated by Bravo. Neither party shall have the right to sell commercial
announcement time in any of the Shows to any business operated by a third party
which the other party reasonably believes is a competitor of such other party.
Bravo shall assist Producer in selling such advertising by providing information
and materials which it provides to other marketers of advertising.
Term. Except as otherwise expressly provided in Section 1(a) hereof, the
exclusive rights granted to Bravo pursuant to Section 2 hereof shall terminate
with respect to a particular Show forty-five (45) days after the initial
Exhibition of such Show by Bravo hereunder, after which such rights shall
continue on a non-exclusive basis; provided that after the expiration of Bravo's
exclusive rights with respect to a particular Show, Producer shall not provide
any third party with the right to exploit such Show for other than fair market
value for the rights so provided during the term of the Agreement; provided,
however, that such fair market value may include barter. If the average of the
Nielsen ratings for each of the premiere airings of each of the Shows of the
First Season is at least two-thirds (2/3) of the average of the Nielsen ratings
for Bravo for the day-part during the period each of the Shows is exhibited by
Bravo, then, at Producer's sole and exclusive option, Producer shall produce one
(1) additional series of twenty-six shows in accordance with the terms of this
Agreement (the "Additional Shows") and Bravo shall have the same rights
hereunder with respect to such Additional Shows as are granted to Bravo
hereunder with respect to the Shows.
Miscellaneous:
Producer acknowledges that this Agreement constitutes an agreement whereby Bravo
is engaging Producer as an independent contractor and not an employee of Bravo,
and in no event shall this Agreement be construed to create any employment,
agency or joint venture relationship between the parties.
This is an Agreement for the services of Producer. Accordingly, Producer may not
assign this Agreement or any of its rights or obligations hereunder without the
prior written consent of Bravo, and any assignment by Producer in violation of
the terms hereof shall be void ab initio and of no force or effect. Either party
may freely assign the Agreement and any rights and obligations hereunder to a
purchaser of all or substantially all of the business or assets of the relevant
party.
Producer acknowledges and agrees that Producer will be responsible for all taxes
(e.g. payroll taxes) (other than any sales tax or income tax payable by Bravo in
connection with Bravo's distribution and exhibition of the Shows for which Bravo
shall be solely responsible) and other amounts imposed by any governmental
entity in connection with the services rendered by Producer hereunder.
Producer acknowledges that Bravo is not a party to any collective bargaining
agreement with any guild or union which may claim jurisdiction over the services
to be rendered hereunder and that Bravo will have no obligation with respect to
Producer's status or the status of any independent contractor engaged by
Producer or any employee of Producer or any such independent contractor as a
guild or union member or for any payments which may be required by any such
guild or union.
This Agreement, together with the Registration Rights Agreement, the Stock
Purchase Agreement and the Website Content Agreement, dated the date hereof,
between Salon and Bravo, set forth the entire agreement between the parties with
respect to the subject matter hereof and supersede all prior understandings and
agreements (whether written or oral) related hereto. This Agreement may not be
modified, amended or waived except in a writing signed by both parties.
54
<PAGE>
This Agreement shall be governed by the laws of the State of New York applicable
to agreements entered into and wholly performed therein without regard to its
choice of law provisions, and each party hereby consents to the jurisdiction of
any state or federal court located in the State of New York.
In the event that Producer should determine to seek any recourse, action or
claim to which it may be entitled under or by reason of this Agreement, Producer
hereby agrees that any such recourse, action or claim shall extend only to Bravo
and not to any of Bravo's partners.
Bravo shall cause Metro to discuss with Producer the possibility of Metro and
Producer jointly developing programming based upon the content of Producer's
on-line sites for exhibition on Metro Channel.
(i) Each Party acknowledges that the proprietary information of the
other party which it knows or has reason to know is considered confidential by
the Disclosing Party ("Confidential Information") ("Discloser") and this
------------------------
Agreement is trade secret to, and constitutes confidential information of the
Discloser. The receiving party ("Recipient") therefore agrees to maintain such
---------
items secret and in confidence for the Discloser, using no less than reasonable
care, and shall not disclose any of these items to any persons other than
employees of Recipient with a need to know, without the prior written consent of
the Discloser. Unauthorized use or disclosure of Discloser's confidential
information may cause irreparable harm to the Discloser, and the Recipient
agrees that the Discloser shall have the right to seek and obtain injunctive
relief to enforce the terms of this Agreement.
(ii) The confidentiality and non-disclosure obligations of the Parties
set out in this Section 14(i) shall not apply to the extent of Confidential
Information that either:
(A) Becomes lawfully available to the general public from a
source other than by a breach of this Agreement;
(B) Is lawfully obtained by the obtaining party from a third
party or parties unconnected with Recipient, as applicable, without breach of
any confidentiality obligations;
(C) Is obtained by the obtaining party with the Discloser's
written approval; or
(D) Is disclosed under operation of the law or to establish the
rights of either party under this Agreement, provided that that party obligated
-------------
to make such disclosure gives the other party prompt notice of such intended
disclosure to allow such other party to attempt to narrow or prevent such
disclosure.
Any and all notices or other information to be given by one of the parties to
the other shall be deemed sufficiently given when forwarded by certified mail
(receipt requested), facsimile transmission or hand delivery to the other party
at the following address:
If to Bravo: ____________________________
____________________________
Attn:_______________________
Fax No: ____________________
With a copy to:
____________________________
____________________________
____________________________
Attn:_______________________
Fax No: ____________________
55
<PAGE>
If to Salon.com:
Salon.com
706 Mission Street
2nd Floor
San Francisco, CA 94103
Attn: Chief Financial Officer
Fax No: (415) 882-8780
With a copy to:
Mark F. Radcliffe, Esq.
Gray, Cary, Ware & Freidenrich LLP
400 Hamilton Avenue
Palo Alto, CA 94301
Fax No: (650) 327-3699
and such notices shall be deemed to have been received on the first business day
following the day of such facsimile transmission or hand delivery, or on the
fifth business day following the day of such forwarding by certified mail. The
address of either Party may be changed at any time by giving ten (10) business
days' prior written notice to the other Party in accordance with the foregoing.
If any term of this Agreement is found to be invalid, illegal or unenforceable,
in whole or in part, by a body of competent jurisdiction, that term shall be
deemed severed from this Agreement to the extent of such invalidity, illegality
or unenforceability, and such invalidity, illegality or unenforceability shall
not affect the validity, legality or enforceability of any other term of the
Agreement.
The failure of a party to insist upon strict adherence to any term of this
Agreement on any occasion shall not be considered a waiver or deprive that party
of the right hereafter to insist upon strict adherence to that term or any other
term of this Agreement.
Except for the obligation to make payments hereunder, nonperformance of either
party shall be excused to the extent that performance is rendered impossible by
strike, fire, flood, governmental action, failure of suppliers, earthquake, or
any other reason where failure to perform is beyond the reasonable control of
the non-performing party.
56
<PAGE>
The submission of this Agreement to Producer or its agent or attorney
for review or signature does not constitute an offer to Producer. This
instrument shall have no binding force or effect until its execution and
unconditional delivery by both parties hereto. If you are in agreement with the
foregoing, please sign in the space provided below, whereupon this letter shall
become a binding agreement between Bravo and Producer.
Sincerely,
BRAVO COMPANY
By: /s/ Josh Sapan
-----------------------
Chief Executive Officer
ACCEPTED AND AGREED:
SALON.COM
By:/s/ Michael O'Donnell
- ------------------------
Chief Executive Officer
57
<PAGE>
SCHEDULE A
- ----------
TECHNICAL REQUIREMENTS
This document describes the technical requirements for program materials to be
used by Bravo Company for origination of television programming. All
specifications shown herein apply to Betacam SP 1/2" tapes.
FORMAT FOR VIDEO SUBMASTER
Information shall be recorded on Betacam SP Metal long cassette format only.
Each cassette shall have fifteen seconds of color black followed by one minute
of split-field color bars (EIA or SMPTE standard) at the head of the tape. Color
bars shall be followed by one minute of color black prior to program
information. The end of program material of each reel shall transition directly
to color black. Color black shall continue until the end of the tape.
The program shall be uninterrupted on any reel. No extraneous information, such
as slugs or countdown clocks shall be contained within the program.
There shall be no overlap of program material between reels.
Where programs are broken into more than one reel, there shall be a minimum of
one second of audio without dialogue at the end of the first reel and the
beginning of the second (third or fourth). This will allow transitions between
reels without disturbing dialogue.
Color bar video information shall be accompanied by 1 kilohertz audio tone at +4
dBm on all audio tracks. During the color black portions of the tape all audio
tracks shall be silent with the exception of time code.
Both color and monochrome programs shall meet EIA RS170A standards for levels
and timing of signal components. Monochrome programs shall contain color burst
at its customary location.
Color programs shall use NTSC encoding techniques, except where the master tape
is recorded in component video. In this case color difference signals should be
used, if possible. These color differences signals (Y, R-Y, B-Y) shall adhere to
Sony Betacam format with respect to level and timing.
A standard VITS signal (FCC 73.670) should be recorded on each reel, if
available.
If closed caption is included, it shall appear on line 21 of field 1 of the
vertical blanking interval.
All program audio shall be fully mixed.
Where possible, program audio should be recorded in stereo. All program
materials should be specifically labeled regarding: stereo audio, mono audio,
close captioning, subtitled, etc. Audio channels 1 and 3 should have identical
information on them and audio channels 2 and 4 should have identical information
on them.
SMPTE standard 80-bit, longitudinal, drop-frame time code shall be recorded on
the time code track. It shall be recorded continuously from the beginning of the
reel to the end, with 1:00:00(00) appearing at the first frame of program video
(2:00:00(00) for reel 2, 3:00:00(00) for reel 3, etc.).
Vertical interval time code need not be recorded. If VITC is recorded, it shall
exactly match the longitudinal drop-frame time code. Any discrepancy between
VITC and LTC, or any break or jump in the VITC shall be cause for rejection of
program materials.
Peak white shall be 100 IRE units, with excursions not to exceed 104 IRE units
for specular highlights. Black shall be maintained at a nominal level of 7.5
IRE, with minimum negative excursions not to exceed -5 IRE. The minimum
unweighted signal to noise ratio shall be 50dB.
Differential phase shall not exceed 2 degrees and differential gain shall not
exceed 2 percent.
58
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-Q
and is qualified in its entirety to such financial statements (in thousands,
except per share data)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 13,649
<SECURITIES> 10,240
<RECEIVABLES> 2,508
<ALLOWANCES> 57
<INVENTORY> 16
<CURRENT-ASSETS> 27,368
<PP&E> 2,575
<DEPRECIATION> 894
<TOTAL-ASSETS> 33,650
<CURRENT-LIABILITIES> 6,016
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> 33,639
<TOTAL-LIABILITY-AND-EQUITY> 33,650
<SALES> 5,399
<TOTAL-REVENUES> 5,399
<CGS> 6,576
<TOTAL-COSTS> 21,909
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 802
<INCOME-PRETAX> (15,708)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,708)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,708)
<EPS-BASIC> (3.30)
<EPS-DILUTED> (3.30)
</TABLE>
