-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MM5az6ZRNtaoHW9opGcZhxi5S8j4tri4bLP07Yl5AOU66t6JkIdi+r31vXtEEF8p Z/ENxprmlFguCOxiuaZZkg== /in/edgar/work/20000814/0000929624-00-001173/0000929624-00-001173.txt : 20000921 0000929624-00-001173.hdr.sgml : 20000921 ACCESSION NUMBER: 0000929624-00-001173 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SALON COM CENTRAL INDEX KEY: 0001084332 STANDARD INDUSTRIAL CLASSIFICATION: [7373 ] IRS NUMBER: 943228750 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26395 FILM NUMBER: 700245 BUSINESS ADDRESS: STREET 1: 22 FOURTH STREET STREET 2: 16TH FLOOR CITY: SAN FRANCISCO STATE: CA ZIP: 94103 BUSINESS PHONE: 4158828720 MAIL ADDRESS: STREET 1: 706 MISSION ST CITY: SAN FRANCISCO STATE: CA ZIP: 94103 FORMER COMPANY: FORMER CONFORMED NAME: SALON INTERNET INC DATE OF NAME CHANGE: 19990415 10-Q 1 0001.txt QUARTERLY REPORT ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ---------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from__________to__________ Commission file number 0-27886 SALON.COM (Exact name of Registrant as specified in its charter) Delaware 94-3228750 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 22 Fourth Street, 16th Floor San Francisco, CA 94103 (Address of principal executive offices) ---------------- (415) 645-9200 (Registrant's telephone number, including area code) ---------------- Securities registered pursuant to Section 12(b) of the Act: None ---------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 Par Value (Title of Class) ---------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] The number of outstanding shares of the Registrant's Common Stock, par value $0.001 per share, on July 31, 2000 was 13,865,494 shares. ================================================================================ 1 - -------------------------------------------------------------------------------- FORM 10-Q SALON.COM INDEX - --------------------------------------------------------------------------------
Page PART I FINANCIAL INFORMATION Number ITEM 1: Financial Statements Consolidated Balance Sheets as of June 30, 2000 (unaudited) and March 31, 2000..................................................................... 3 Consolidated Statements of Operations for the three months ended June 30, 2000 and 1999 (unaudited)..................................................... 4 Consolidated Statements of Cash Flows for the three months ended June 30, 2000 and 1999 (unaudited)..................................................... 5 Notes to Consolidated Financial Statements....................................................... 6 ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations............ 10 ITEM 3: Quantitative and Qualitative Disclosures About Market Risk....................................... 25 PART II OTHER INFORMATION ITEM 1: Legal Proceedings................................................................................ 25 ITEM 2. Changes in Securities and Use of Proceeds........................................................ 25 ITEM 3. Defaults upon Senior Securities.................................................................. 25 ITEM 4. Submission of Matters to a Vote of Security Holders.............................................. 25 ITEM 5. Other Information................................................................................ 25 ITEM 6: Exhibits and Reports on Form 8-K................................................................. 25 Signature........................................................................................ 26 Exhibits......................................................................................... 27
2 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- SALON.COM CONSOLIDATED BALANCE SHEETS (in thousands, except for share data)
June 30, March 31, 2000 2000 ----------------- ----------------- Assets (Unaudited) Current assets: Cash and cash equivalents $ 13,865 $ 17,982 Accounts receivable, net 1,419 2,425 Inventories 16 16 Prepaid expenses and other current assets 323 391 ----------------- ----------------- Total current assets 15,623 20,814 Property and equipment, net 2,530 2,312 Other assets 176 186 Intangible assets, net 5,796 4,088 ----------------- ----------------- Total assets $ 24,125 $ 27,400 ================= ================= Liabilities and Stockholders' Equity Current liabilities: Accounts payable and accrued liabilities $ 3,785 $ 4,303 Deferred revenue 331 210 Bank borrowings 60 90 ----------------- ----------------- Total current liabilities 4,176 4,603 ----------------- ----------------- Other long term liabilities 453 473 ----------------- ----------------- Total liabilities $ 4,629 $ 5,076 ----------------- ----------------- Stockholders' Equity: Common stock, $.001 par value; 50,000,000 shares authorized at June 30, 2000 and March 31, 2000 respectively; 13,852,656 and 12,546,569 shares issued and outstanding at June 30, 2000 (unaudited) and March 31, 2000, respectively. $ 13 $ 13 Additional paid-in capital 79,078 78,448 Advertising receivable from stockholder (7,682) (7,884) Unearned compensation (1,238) (2,098) Accumulated deficit (50,675) (46,155) ----------------- ----------------- Total stockholders' equity 19,496 22,324 ----------------- ----------------- Total liabilities and stockholders' equity $ 24,125 $ 27,400 ================= ================= The accompanying notes are an integral part of these consolidated financial statements.
3 SALON.COM CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except for per share data)
Three Months Ended June 30, ---------------------------------------- 2000 1999 ------------------- ------------------- (unaudited) Net revenues $ 1,759 $ 1,005 ------------------- ------------------- Operating expenses: Production, content and product 2,701 2,103 Sales and marketing 2,434 1,830 Research and development 386 230 General and administrative 625 576 Amortization of intangible assets 323 255 Stock-based compensation 17 630 ------------------- ------------------- Total operating expenses 6,486 5,624 ------------------- ------------------- Loss from operations (4,727) (4,619) Other income 207 54 ------------------- ------------------- Net loss (4,520) (4,565) ------------------- ------------------- Preferred deemed dividend - 11,515 ------------------- ------------------- Net loss attributable to common stockholders $ (4,520) $ (16,080) =================== =================== Basic and diluted net loss per share attributable to common stockholders $ (.36) $ (10.10) =================== =================== Weighted average shares used in computing basic and diluted net loss per share attributable to common stockholders 12,638 1,592 =================== =================== The accompanying notes are an integral part of these consolidated financial statements.
4 SALON.COM CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Three Months Ended June 30, ----------------------------- 2000 1999 ------------- ----------- (unaudited) Cash flows from operating activities: Net loss $ (4,520) $ (4,565) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation 17 630 Depreciation and amortization 521 344 Amortization of discount on bank borrowings - 7 Amortization of deferred advertising 202 - Changes in operating assets and liabilities: Accounts receivable 1,005 (64) Inventories - 5 Prepaid expenses and other assets 67 545 Accounts payable (68) 425 Accrued liabilities (691) 1,132 Deferred revenue 122 (168) ---------- --------- Net cash used in operating activities (3,345) (1,709) ---------- --------- Cash flows from investing activities: Purchase of property and equipment (317) (95) Acquisition of MP3Lit (400) - ---------- --------- Net cash used in investing activities (717) (95) ---------- --------- Cash flows from financing activities: Proceeds from issuance of preferred stock and common stock warrants, net - 10,936 Proceeds from issuance of common stock, net - 23,971 Proceeds from exercise of options 20 84 Repayment of leases (45) - Repayment of bank borrowings (30) (276) ---------- --------- Net cash provided by (used in) financing activities (55) 34,715 ---------- --------- Net (decrease)/increase in cash and cash equivalents (4,117) 32,911 Cash and cash equivalents - beginning of period 17,982 754 ---------- --------- Cash and cash equivalents - end of period $ 13,865 $ 33,665 ========== ========= Non-cash investing and financing transactions: Conversion of preferred stock to common stock $ - $ 25,301 ========== ========= Preferred deemed dividend $ - $ 11,515 ========== ========= Unearned compensation in connection with the issuance (cancellation) of stock options $ (859) $ 3,811 ========== ========= Issuance of stock and warrants in connection with acquisition $ 1,469 $ - ========== ========= Issuance of warrants in connection with distribution agreement $ - $ 244 ========== ========= Value assigned to reciprocal advertising agreements $ 45 $ 115 ========== ========= Property and equipment purchased with capital lease $ 94 $ - ========== ========= The accompanying notes are an integral part of these consolidated financial statements.
5 SALON.COM NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The Company Salon.com is an Internet media company that produces a network of eleven subject-specific, demographically targeted Web sites and a variety of online communities designed to attract Internet advertisers and electronic commerce partners. Salon.com was originally incorporated in July 1995 in the State of California and reincorporated in Delaware in June 1999. The company operates in one business segment. 2. Basis of Presentation The accompanying consolidated financial statements as of June 30, 2000 and for the three months ended June 30, 2000 and 1999 are unaudited. The unaudited interim consolidated financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly Salon's financial position, results of operations and cash flows as of June 30, 2000 and for the three months ended June 30, 2000 and 1999. These consolidated financial statements and notes thereto are unaudited and should be read in conjunction with Salon's audited financial statements, filed with the Securities and Exchange Commission on Form 10-K, as amended, as of March 31, 2000. The results for the three months ended June 30, 2000 are not necessarily indicative of the expected results for any other interim period or the fiscal year ending March 31, 2001. These consolidated financial statements contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. Salon has incurred operating losses since inception and has an accumulated deficit. Management's plans to decrease operating losses are to increase revenues while controlling costs. If Salon is unable to generate adequate cash flows from operations, Salon may need to seek additional sources of capital. There can be no assurance that Salon will be able to obtain such funding, if necessary, on acceptable terms or at all. 3. Acquisition of MP3Lit On May 5, 2000, Salon acquired MP3Lit.com (MP3Lit), a web site dedicated to offering spoken word and audio literature recordings in the MP3 format. The acquisition of MP3Lit consisted of the following: (i) 380,400 shares of common stock valued at $3.375 per share; (ii) $400,000 of cash consideration; (iii) warrants to purchase 100,000 shares of common stock over a five-year period at a price of $10.50 per share. These shares were valued at $185,000 using the Black-Sholes option-pricing model, applying an expected life of five years, a weighted risk-free rate of 6.73%, an expected dividend yield of zero percent, a volatility of 90% and a deemed fair value of common stock of $1.85; and (iv) acquisition costs of $135,000. An additional 887,600 shares have been issued and are held in escrow. These shares are contingent upon the meeting of certain business benchmarks over a three-year period. If the business benchmarks are met, the shares will be released to the former stockholders of MP3Lit. When the contingencies are resolved, the shares will be recorded at their fair value on the respective dates, as either an additional cost of the acquisition or as compensation expense of the appropriate period. Salon's acquisition of MP3Lit has been accounted for under the "purchase" method of accounting, which requires the purchase price to be allocated to the acquired assets and liabilities of MP3Lit on the basis of their estimated fair values as of the date of acquisition. The assets acquired consist of net tangible assets, identifiable intangible assets and goodwill. Net tangible assets include primarily accounts receivable, property and equipment and accounts payable. A preliminary review of the identifiable intangible assets indicates the purchase of audio streaming technology which will serve 6 SALON.COM NOTES TO CONSOLIDATED FINANCIAL STATEMENTS as the platform for Salon to launch an audio format, a website and associated traffic, trade and domain names, an acquired workforce and non-compete agreements. Salon is in the process of determining the fair values of the identifiable intangible assets acquired and will allocate the purchase price accordingly. The excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired has been recorded as goodwill. Identifiable intangible assets and goodwill are being amortized on a straight-line basis over the estimated period of benefit of five years. The following unaudited pro forma financial information presents the consolidated results of Salon as if the MP3Lit acquisition had occurred on April 1, 2000 and includes adjustments for amortization of goodwill and other intangible assets. There was no activity for MP3Lit for the period April 1, 1999 to June 30, 1999 as the date of inception of MP3Lit was not until September 1, 1999. This pro forma financial information is not intended to be indicative of future results. Unaudited pro forma consolidated results of operations are as follows: (in thousands, except share data)
Three months ended June 30, 2000 -------------------- (unaudited) Net revenues $ 1,759 ========== Net loss attributable to common stockholders $ (4,554) ========== Basic and diluted net loss per share attributable to common stockholders $ (.35) ==========
4. Summary of Significant Accounting Policies Net Loss Per Share Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common and common stock equivalents outstanding during the period. The calculation of diluted net loss per share excludes shares of common stock equivalents whose effect would be anti-dilutive. Diluted net loss per share attributable to common stockholders for the three months ended June 30, 2000 and 1999 does not include the effect of common stock equivalent shares, comprised of stock options, common stock warrants and contingently issuable shares of 4,103,275 and 2,692,058, respectively, as the effect of their inclusion is anti-dilutive during each period. 7 SALON.COM NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Inventories Inventories, which consist solely of finished goods, are stated at the lower of cost or market. Cost is determined by the first in, first out method. Concentrations No customer accounted for more than 10% of total revenues for the three months ended June 30, 2000. One customer accounted for 11% of revenues for the three months ended June 30, 1999. Barter revenues accounted for 3% of total revenues for the three months ended June 30, 2000 and 11% of revenues for the three months ended June 30, 1999. One customer accounted for 11% of the total accounts receivable balance at June 30, 2000. One customer accounted for 13% of the total accounts receivable balance at June 30, 1999. Financial instruments which potentially subject Salon to concentration of credit risk consist principally of trade accounts receivable. Salon performs ongoing credit evaluations, but does not require collateral. Salon provides an allowance for credit losses. The credit losses have not been significant to date. Salon relies on a number of third party suppliers for various services, including web hosting, banner advertising, delivery software, internet traffic measurement software and electronic commerce fulfillment services. While Salon believes it could obtain these services from other qualified suppliers on similar terms and conditions, a disruption in the supply of these services by the current suppliers could materially harm the business. 8 SALON.COM NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. Stockholders' Equity Stockholders' equity activity for the three months ended June 30, 2000 was as follows:
(in thousands) Advertising Additional Receivable Common Paid-In From Unearned Accumulated Stock Capital Stockholder Compensation Deficit ------------------------------------------------------------------------------ Balance at March 31, 2000 $ 13 $ 78,448 $ (7,884) $ (2,098) $ (46,155) Acquisition of MP3Lit - 1,469 - - - Unearned compensation - (859) - 860 - Amortization of advertising receivable - - 202 - - Exercise of stocks options for cash - 20 - - - Net loss - - - - (4,520) ------------------------------------------------------------------------------ Balance at June 30, 2000 $ 13 $ 79,078 $ (7,682) $ (1,238) $ (50,675) ==============================================================================
If the stock-based compensation for the three months ended June 30, 2000 and 1999 had been allocated across the relevant functional expense categories within operating expenses, it would be allocated as follows:
(in thousands) For the three months ended June 30, --------------------------------------- 2000 1999 -------------------- ------------------ Production, content and product $ 8 $ 232 Sales and marketing 6 182 Research and development 2 30 General and administrative 1 186 -------------------- ------------------ $ 17 $ 630 ==================== ==================
9 - -------------------------------------------------------------------------------- PART I: FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- This section and other parts of this 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act, as amended, that involve risks and uncertainties, including but not limited to statements regarding our strategy, plans, objectives, expectations, intentions, financial performance, and revenue sources. Our actual results may differ significantly from those anticipated or implied in these forward-looking statements as a result of the factors set forth below and in "Management's Discussion and Analysis of Financial Conditions and Results of Operations" and "Factors That May Affect Our Operating Results and Market Price of Stock." In this report, the words "anticipates," "believes," "expects," "intends," "future," and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Overview Salon.com is a leading Internet media company that produces a network of eleven subject-specific, demographically-targeted Web sites, maintains Salon Shop, an e-commerce gateway, and hosts two online communities -- Table Talk, a free interactive forum and The Well, a paid subscription service. In May 2000, Salon acquired MP3Lit.com, a pioneering Web site offering quality spoken word and audio literature recordings in MP3 and Real Audio formats. Salon believes that its network of Web sites combines the thoughtfulness of print, the timeliness of television and the interactivity of talk radio. The main entry and navigation point to Salon's eleven content sites is Salon's home page at www.salon.com. The sites provide news, features, interviews and regular columnists on specific topics, from politics and arts and entertainment to parenting and health, while Salon's online communities allow users to interact and discuss Salon content and other topics via electronic messaging. Because of Salon's reputation for community building, Salon also has agreed with third parties to host communities within its network. Salon's users can access Table Talk or The Well through www.salon.com or through Salon's eleven content Web sites. Salon believes that its original, award-winning content and highly regarded interactive communities allow Salon to attract and retain users who are younger, more affluent, better educated and more likely to make online purchases than typical Internet users. Salon believes its user profile makes its network of Web sites and online communities a valuable media property for advertisers and retailers who are increasingly allocating marketing resources to target consumers online. In June 2000, approximately 2.5 million unique users visited Salon's network of Web sites. During the quarter ended June 30, 2000, approximately 91 million page views were generated. These figures are compared to approximately 47 million page views in the quarter ended June 30, 1999 and 1.3 million unique users in the month of June 1999. A unique user is an individual visitor to Salon's network. Page views are the total number of complete pages retrieved and viewed by visitors to Salon's network. Salon calculates its unique user and page view figures by analyzing the log files that record traffic to Salon's network of Web sites. Unique users are calculated by identifying the individual Internet protocol address of each user who visits the Salon network. Page views are calculated by counting actual page views as recorded in Salon's log files. Since December 1998, these calculations have been performed 10 automatically through the use of Accrue software. Prior to that time, the log files were manually downloaded and analyzed. As of June 30, 2000, Salon had more than 440 advertisers and advertising sponsors. Salon has also recently begun to extend its electronic commerce efforts throughout its network and to develop electronic commerce sponsorships as well as its own online retailing capabilities through Salon Shop. Salon believes that the online spending habits of its users present opportunities for Salon to capture additional revenues, both within Salon Shop and on the Web pages of its commercial partners. Recent Events In May 2000, Salon acquired MP3Lit, a web site dedicated to offering spoken word and audio literature recordings in MP3 format. In addition to obtaining a web site and associated traffic, through this acquisition Salon obtained audio streaming technology that will serve as the platform for Salon to launch an audio format. The future operating and financial performance of Salon will depend in part on its ability to integrate and leverage MP3Lit successfully and to enhance its operating results. Salon's acquisition of MP3Lit was accounted for using the purchase method of accounting. In connection with the acquisition, Salon recorded intangibles and goodwill of approximately $2.0 million which are being amortized on a straight-line basis over five years. An additional 887,600 shares of Salon stock have been issued in connection with the acquisition and are held in escrow. These shares are contingent upon the meeting of certain business benchmarks over a three-year period. If the business benchmarks are met, the shares will be released to the former stockholders of MP3Lit. When the contingencies are resolved, the shares will be recorded at their fair value on the respective dates, as either an additional cost of the acquisition or as compensation expense of the appropriate period. Salon expects to continue to enter into similar business acquisitions that may result in similar or greater charges. Because Internet businesses typically involve significant amounts of intangible assets, future operating results may be adversely affected by amortization of the intangible assets acquired. Results of Operations For the three months ended June 30, 2000 compared to the three months ended June 30, 1999 Net Revenues Net revenues increased 75% to $1.8 million for the three months ended June 30, 2000 from $1.0 million for the three months ended June 30, 1999. The increase was primarily due to Salon's ability to generate significantly higher sponsorship and advertising revenues based on an increase in the number of impressions sold and an increase in the number of sponsors advertising on Salon's Web sites. Sponsorship and advertising revenues accounted for approximately 88% and 80% of net revenues for the three months ended June 30, 2000 and 1999, respectively. Barter transactions, included in sponsorship and advertising revenues, significantly decreased during the three months ended June 30, 2000 versus June 30, 1999, to $45,000, or 3% of total revenues, from $115,000, or 11% of total revenues, respectively. No customer accounted for more than 10% of total revenues for the three months ended June 30, 2000. One customer accounted for 11% of revenues for the three months ended June 30, 1999. Production, Content and Product Production, content and product costs consist primarily of payroll and related costs for Salon's editorial, artistic, and production staffs, The Well and MP3Lit staffs, payments to freelance writers and artists, and telecommunications and computer related expenses for the support and delivery of Salon's Web sites and online communities. Production, content and product costs during the three months ended June 30, 2000 were $2.7 million or 154% of net revenues versus $2.1 million or 209% of net revenues for the three months ended June 30, 1999, a decline of 55 percentage points. Of the 28% increase in production, content and product costs for the three months ended June 30, 2000 versus June 30, 1999, 24% is primarily attributable to increased costs relating to growth in Salon's editorial and art staff, and 4% to additional MP3Lit costs. Sales and Marketing Sales and marketing expenses consist of payroll and related expenses, including commissions, travel expenses and other costs associated with Salon's advertising and sponsorship sales force, as well as advertising, promotional and distribution costs. Sales and marketing expenses were $2.4 million, or 138% of revenues and $1.8 million or 182% of total revenues for the three months ended June 30, 2000 and 1999, respectively. The 33% increase in sales and marketing expenses is primarily attributable to the payroll and associated expenses of expanded sales and business development staffs. Included in sales and marketing expenses are barter expenses of $49,000 and $115,000 for the three months ended June 30, 2000 and 1999, respectively. 11 Research and Development Research and development expenses consist of costs associated with the development and maintenance of technology, including Salon's publishing platform software and archival database, as well as technical support for Salon's Web sites and online communities. Research and development expenses increased 68% to $386,000 in the three months ended June 30, 2000 from $230,000 in the three months ended June 30, 1999. Research and development expenses as a percentage of total revenue decreased to 22% for the three months ended June 30, 2000 from 23% for the three months ended June 30, 1999. The increase in research and development expenses is primarily attributable to salary and payroll related expenses for the technical support of Salon's Websites and online communities. General and Administrative General and administrative expenses consist primarily of salaries, payroll taxes, benefits and related costs for the general corporate functions including executive management, finance, human resources, and legal and other professional fees. General and administrative expenses increased to $625,000 in the three months ended June 30, 2000 from $576,000 in the three months ended June 30, 1999. General and administrative expenses as a percentage of total revenue decreased to 36% for the three months ended June 30, 2000 from 57% for the three months ended June 30, 1999, a 21% decrease. The 9% increase in general and administrative expenses is primarily attributable to salary and related expenses for additional personnel hired to support the growth of Salon's business and activities as a public company and higher professional fees. Amortization of Intangibles Amortization of intangibles consists of the costs associated with the amortization of the intangibles and goodwill associated with the acquisition of The Well and MP3Lit. The acquisition of The Well and MP3Lit are being accounted for using the purchase method of accounting and are being amortized on a straight-line basis over 60 months. Amortization expenses were $323,000, or 18% of net revenue, and $255,000, or 25% of net revenue, for the three months ended June 30, 2000 and 1999, respectively. Stock-based Compensation Stock-based compensation consists of expenses associated with the issuance of stock options and warrants. Stock-based compensation charges were $17,000, or 1% of net revenue for the three months ended June 30, 2000, compared to $630,000, or 63% of net revenue for the three months ended June 30, 1999. The decrease in stock-based compensation was due to the departure of two senior management executives whose options expired and the decline in the Company's stock price during the period. Other Income, Net Other income consists primarily of interest earned on Salon's cash and cash equivalents, offset by interest expense on borrowings. Other income increased to $207,000 in the three months ended June 30, 2000 from $54,000 for the three months ended June 30, 1999. The increase in other income is primarily attributable to an increase in the amount of interest earned by Salon due to the increase in Salon's cash balance as a result of its financing activities in late June and July 1999. 12 Net Loss Salon recorded a net loss of $4.5 million, or $.36 per share for the three months ended June 30, 2000 compared to a net loss of $16.1 million, or $10.10 per share for three months ended June 30, 1999. Liquidity and Capital Resources Since its inception, Salon has primarily financed its operations through the private placement of its convertible preferred stock and its initial public offering of common stock. As of June 30, 2000, Salon had approximately $13.9 million in cash and cash equivalents which was obtained through Salon's initial public offering in June 1999 and the sale of additional stock in July 1999. Net cash used for operations was $3.3 million for the three months ended June 30, 2000, compared to $1.7 million for the three months ended June 30, 1999. The principal use of cash during the three months ended June 30, 2000 was to fund the $4.5 million net loss for the period, with a reduction in accounts receivable generating $1.0 million in cash and a decrease in accrued liabilities reducing cash by $0.7 million. The principal use of cash during the three months ended June 30, 1999 was to fund the $4.6 million net loss for the period offset by increases in accrued expenses and accounts payable that reduced the use of cash by $1.1 million and $.4 million, respectively, and non-cash stock-based compensation of $.6 million that reduced the use of cash. Net cash used in investing activities totaled $717,000 for the three months ended June 30, 2000, compared to $95,000 for the three months ended June 30, 1999. During the three months ended June 30, 2000, the net cash used for investing consisted primarily of the cash consideration of the MP3Lit acquisition and property and equipment purchases. The principal use of cash for investing during the three months ended June 30, 1999 was for property and equipment purchases. Net cash provided by financing activities decreased from $34.7 million for the three months ended June 30, 1999 to $55,000 used in operations for the three months ended June 30, 2000. The cash used in financing activities during the three months ended June 30, 2000 was primarily for the repayment of leases and bank borrowings of $45,000 and $30,000, respectively. The cash provided by financing activities during the three months ended June 30, 1999 was primarily from the net proceeds from the issuance of preferred stock and common stock warrants and the net proceeds from the issuance of common stock during the Company's initial public offering. Salon's capital requirements depend on numerous factors, including the success of Salon's strategies for generating revenues and the amount of resources it devotes to investments in its network, sales, marketing and brand promotion. Salon's expenditures have substantially increased since inception as its operations and staff have grown and Salon anticipates that its expenditures will continue to increase for the foreseeable future but will decrease as a percentage of sales. In addition, Salon will continue to evaluate possible investments in businesses, products and technologies complementary to its existing business. Salon currently anticipates that its available cash resources will be sufficient to meet its anticipated needs for working capital and capital expenditures for at least the next 12 months. Salon may need to raise additional funds, however, in order to fund more rapid expansion, to develop new or enhance existing services, to respond to competitive pressures or to acquire complementary businesses, products or technologies. If Salon raises additional funds by selling equity securities, the percentage ownership of Salon's stockholders will be reduced and its stockholders may experience additional dilution. Salon cannot be sure that additional financing will be available on terms favorable to Salon, or at all. If adequate funds are not available on acceptable terms, Salon's ability to fund expansion, react to competitive pressures, or take advantage of unanticipated opportunities would be substantially limited. If this occurred, Salon's business would be significantly harmed. 13 Factors That May Affect Our Future Results and Market Price of Stock Because we have a limited operating history, it is difficult to evaluate our business and prospects We originally incorporated in July 1995 and launched our initial Web sites in November 1995. Because we have a limited operating history, you must consider the risks and difficulties frequently encountered by early-stage companies like us in new and rapidly evolving markets, including the market for advertising and commerce on the Internet. Any future growth and success in our business will depend substantially upon our ability to attract a larger number of users to our Web sites and online communities, to increase advertising and sponsorship sales based on that audience and to meet the challenges described in the risk factors set forth below. We lack significant revenues, we have a history of losses and we anticipate continued losses We have not achieved profitability and expect to incur operating losses for the foreseeable future. We incurred net losses attributable to common stockholders of $4.5 million in the three months ended June 30, 2000 and $33.4 million in the fiscal year ended March 31, 2000. As of June 30, 2000, our accumulated deficit was $50.7 million. We expect these operating losses to continue for at least the foreseeable future. We will need to generate significant revenues to achieve and maintain profitability, and we may not be able to do so. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis in the future. If our revenues grow more slowly than we anticipate or if our operating expenses exceed our expectations, our financial results would be severely harmed. Our quarterly operating results are volatile and may adversely affect our stock price Our future revenues and operating results are likely to vary significantly from quarter to quarter due to a number of factors, many of which are outside our control, and any of which could severely harm our business. These factors include: o our ability to attract and retain banner advertisers, advertising sponsors and electronic commerce sponsors; o our ability to attract and retain a large number of users; o the introduction of new Web sites, services or products by us or by our competitors; o the timing and uncertainty of our advertising and sponsorship sales cycles; o the mix of banner advertisements and sponsorships sold by us or our competitors; o seasonal declines in advertising sales, which typically occur in the first and third calendar quarters; o the level of Internet usage; o our ability to attract, integrate and retain qualified personnel; o our ability to successfully integrate operations and technologies from acquisitions or other business combinations; o technical difficulties or system downtime affecting the Internet generally or the operation of our Web sites; and 14 o the amount and timing of operating costs and capital expenditures relating to the expansion of our business operations and infrastructure. In order to attract and retain a larger user base, we plan to significantly increase our expenditures on sales and marketing, content development, technology and infrastructure. Many of these expenditures are planned or committed in advance and in anticipation of future revenues. If our revenues in a particular quarter are lower than we anticipate, we may be unable to reduce spending in that quarter. As a result, any shortfall in revenues would likely harm our quarterly operating results. Due to the factors noted above and the other risks discussed in this section, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of future performance. It is possible that in some future periods our results of operations may be below the expectations of public market analysts and investors. If this occurs, the price of our common stock may decline. We depend on banner advertising and sponsorship sales for substantially all of our revenues, and our inability to increase banner advertising and sponsorship revenues would harm our business Our revenues for the foreseeable future will depend substantially on sales of advertising and sponsorships. In the three months ended June 30, 2000, advertising and sponsorship sales accounted for 88% of our net revenues, and in the fiscal year ended June 30, 1999 they accounted for 80% of our net revenues. In order to increase our revenues, we will need to attract additional significant banner advertisers, advertising sponsors and electronic commerce sponsors on an ongoing basis. We may not be able to attract or retain a sufficient number of banner advertisers or advertising sponsors in the future, and if we cannot, our business would likely be severely harmed. If we do not sell a sufficient number of advertisements or sponsorships or do not engage a sufficient number of advertisers or sponsors during a particular period, our business could be severely harmed. Increasing our advertising and sponsorship revenues depends upon many factors, including whether we will be able to: o successfully sell and market our network to advertisers and sponsors; o increase our user base; o increase the amount of revenues we receive per sponsorship; o increase awareness of the Salon brand; o target advertisements and electronic commerce opportunities to users with appropriate interests; o accurately measure the number and demographic characteristics of our users; and o attract and retain sales personnel. Our revenues depend on a limited number of advertisers and sponsors who are not subject to long-term agreements, and the loss of a number of these advertisers and sponsors could harm our operating results Historically, we have relied on a small number of banner advertisers and advertising sponsors for a significant percentage of our revenues. In the three months ended June 30, 2000 Evineyard.com accounted for approximately 7% of our revenue. In the fiscal year ended March 31, 2000 Barnesandnoble.com accounted for 6% of our revenues. The loss of any of our significant banner advertisers or advertising sponsors could harm our business. We anticipate that our financial results in 15 any given period will continue to significantly depend on revenues from a small number of banner advertisers and advertising sponsors. In addition, particularly because few banner advertisers and advertising sponsors are contractually obligated to purchase any advertising in the future, we are unable to anticipate our mix of banner advertisers and advertising sponsors in future fiscal periods. The length of our sales cycles is uncertain and variable and may lead to shortfalls in or revenue and fluctuations in our operating results Our dependence on banner advertising and sponsorships subjects us to the risk of revenue shortfalls because the sales cycles for advertising and sponsorships vary significantly, and during these cycles we may expend substantial funds and management resources while not obtaining advertising or sponsorship revenues. If sales are delayed or do not occur, our financial results for a particular period may be harmed. The time between the date of initial contact with a potential banner advertiser or sponsor and receipt of a purchase order from the advertiser may range from as little as one week to up to nine months. Sales of banner advertising and sponsorships are subject to factors over which we have little or no control, including: o advertisers' and sponsors' budgets; o internal acceptance reviews by advertisers and their agencies; o the timing of completion of advertisements and sponsorships; and o the possibility of cancellation or delay of projects by advertisers or sponsors. We must increase our user base to attract advertisers and sponsors and to generate additional revenue Increasing the size of our user base is critical to selling advertising and sponsorships and to increasing our revenues. If we cannot increase the size of our user base we may not be able to generate additional revenues, which could leave us unable to maintain or grow our business. To increase our user base, we must: o expand our content and communities; o expand our network of distribution partners; o grow Salon brand recognition through advertising and syndication; o enhance our technology to improve the functionality of our network of Web sites; and o offer attractive electronic commerce opportunities to electronic commerce sponsors and users. If we do not achieve these objectives to increase our user base, our business could be severely harmed. Additionally, a significant element of our business strategy is to build loyal online communities because we believe communities help retain actively engaged users. However, the concept of developing these communities on the Web is unproven, and if it is not successful, then it may be more difficult to increase the size of our user base. We must establish and maintain distribution relationships to attract more users to our network We depend on establishing and maintaining distribution relationships with high-traffic Web sites to increase our user base. There is intense competition for relationships with these sites, and we may not 16 be able to enter into such relationships on favorable terms or at all. Even if we enter into distribution relationships with these Web sites, their sites may not attract significant numbers of users, and our Web sites may not attract additional users from these relationships. Moreover, we have paid and may in the future pay significant fees to establish these relationships. We must continually develop compelling content to attract Internet users Our success depends upon our ability to attract and retain a large number of users by delivering original and compelling Internet content and services. If we are unable to develop content and services that allow us to attract, retain and expand a loyal user base possessing high-value demographic characteristics, we will be unable to generate advertising revenues or enter into sponsorships, and our revenues and operating results will be severely harmed. The content and services we provide on our Web sites may not appeal to a sufficient number of Internet users to generate banner-advertising revenues or attract sponsorships. Our ability to develop compelling content depends on several factors, including: o the quality and number of writers and artists who create content for Salon; o the quality of our editorial staff; and o the technical expertise of our production staff. Consumer tastes and preferences change rapidly and we may not be able to anticipate, monitor, and successfully respond to these changes to attract and retain a sufficient number of users for our network of Web sites. Internet users can freely navigate and instantly switch among a large number of Web sites, many of which offer content and services that compete with Salon. In addition, many Web sites offer very specific, highly targeted content that could have greater appeal than our network to particular subsets of our target user base. The controversial content of our Web sites may limit our revenues from banner advertising, advertising sponsorships or electronic commerce sponsorships Many of our Web sites contain, and will continue to contain, content that is politically and culturally controversial. As a result of this content, current and potential advertisers and sponsors may refuse to do business with us. Our outspoken stance on political issues has and may continue to result in negative reactions from some users, commentators and other media outlets. Our promotion of the Salon brand must be successful in order to attract and retain users as well as advertisers, sponsors and strategic partners The success of the Salon brand depends largely on our ability to provide high quality content and services. If Internet users do not perceive our existing content and services to be of high quality, or if we introduce new content and services or enter into new business ventures that are not favorably perceived by users, we may not be successful in promoting and maintaining our brand. Any expansion of the focus of our operations creates a risk of diluting our brand, confusing consumers and decreasing the value of our user base to advertisers. In order to attract and retain users, and to promote the Salon brand, we may need to increase our budgets for content and services or otherwise substantially increase our financial commitment to establishing and maintaining loyalty for the Salon brand name. If we are unable to establish the Salon brand or are forced to substantially increase our expenditures to promote the Salon brand, our business could be severely harmed. 17 We need to hire, integrate and/or retain qualified personnel because these individuals are important to our growth Our success significantly depends on the continued services of our key editorial and design personnel. In addition, because our users must perceive the content of our Web as having been created by credible and notable sources, our success also depends on the name recognition and reputation of our editorial staff, in particular David Talbot, Salon's editor-in-chief. The loss of these individuals or other key editorial or design personnel would likely harm our business. Competition for personnel in the Internet industry is intense. We may be unable to retain our current key employees or attract, integrate or retain other qualified employees in the future. If we do not succeed in attracting new personnel or integrating, retaining and motivating our current personnel, our business could be harmed. We may expend significant resources to protect our intellectual property rights or to defend claims of infringement by third parties, and if we are not successful we may lose rights to use significant material or be required to pay significant fees Our success and ability to compete are significantly dependent on our proprietary content. We rely exclusively on copyright law to protect our content. While we actively take steps to protect our proprietary rights, these steps may not be adequate to prevent the infringement or misappropriation of our content. Infringement or misappropriation of our content or intellectual property could severely harm our business. We also license content from various freelance providers and other third-party content providers. While we attempt to insure that this content may be freely licensed to us, other parties may assert claims of infringement against us relating to this content. We may need to obtain licenses from others to refine, develop, market and deliver new services. We may not be able to obtain any such licenses on commercially reasonable terms or at all or rights granted pursuant to any licenses may not be valid and enforceable. In April 1999 we acquired the Internet address www.salon.com. Because www.salon.com is the address of the main home page to our network of Web sites and incorporates our company name, it is a vital part of our intellectual property assets. We do not have a registered trademark on the address, and therefore it may be difficult for us to prevent a third party from infringing our intellectual property rights in the address. If we fail to adequately protect our rights in the address, or if a third party infringes our rights in the address or otherwise dilutes the value of www.salon.com, our business could be harmed. Our technology development efforts may not be successful in improving the functionality of our network which could result in reduced traffic on our network We have recently developed a proprietary online publishing system. If this system does not work as intended, or if we are unable to continue to develop this system to keep up with the rapid evolution of technology for content delivery on the Internet, our network of Web sites may not operate properly which could harm our business. Additionally, software product development schedules are difficult to predict because they involve creativity and the use of new development tools and learning processes. Delays in our software development process could harm our business. Moreover, complex software products like our online publishing system frequently contain undetected errors or shortcomings, and may fail to perform or scale as expected. Although we have tested and will continue to test our publishing system, errors or deficiencies may be found in the system. 18 We rely on third parties for several critical functions relating to delivery of advertising and our Web site performance, and the failure of these third parties to supply these services in an efficient manner could limit our growth and impair our business We rely on a number of third party suppliers for various services, including Web hosting, banner advertising delivery software, Internet traffic measurement software and electronic commerce fulfillment services. While we believe that we could obtain these services from other qualified suppliers on similar terms and conditions, a disruption in the supply of these services by our current suppliers could severely harm our business. We have recently begun to use new third-party software to manage the delivery of banner advertising on our network of Web sites. If this software malfunctions or does not deliver the correct banner advertisements to our network, our advertising revenues could be reduced, and our business could be harmed. We have also recently begun to use new third-party software to measure traffic on our network of Web sites. If this software malfunctions or does not accurately measure our user traffic, we may not be able to justify our advertising rates, and our advertising revenues could be reduced. Growth in our operations is placing a strain on our resources, and failure to manage growth effectively could harm our business We have experienced a period of significant growth. In the fiscal year ended March 31, 2000 our number of employees increased 143%. In the fiscal year ended March 31, 2000 our total revenues increased approximately 174% and our total operating expenses increased approximately 236% compared to the fiscal year ended March 31, 1999. In the three months ended June 30, 2000 our number of employees declined 7%. In the three months ended June 30, 2000 our total revenues increased approximately 75% and our total operating expenses increased approximately 15% compared to the three months ended June 30, 1999. We may not be able to successfully integrate our acquisitions, and any failure to integrate could diminish the value of an acquired business or cause disruptions in our ongoing operations Acquisitions and business combinations entail numerous operational risks, including: o difficulty in the assimilation of acquired operations, technologies or products; o diversion of management's attention from other business operations; o risks of entering markets in which we have limited or no experience; and o potential loss of key employees of acquired businesses. We acquired The Well LLC, an online community provider, in March 1999 and MP3Lit, a web site dedicated to offering spoken word and audio literature recordings in the MP3 format, in May 2000. We may not be able to successfully integrate The Well LLC, MP3Lit or any businesses, products, technologies or personnel that we might acquire in the future, and if we cannot, our business could be harmed. 19 We will need more working capital to expand our network and achieve our business objectives, and securing financing may be difficult because of the condition of our business or the uncertain nature of the financial markets We believe that our current cash resources will meet our anticipated working capital and capital expenditure requirements for at least the 12 months. We may need to raise additional capital to do the following: o expand our network of Web sites and interactive communities; o increase our electronic commerce opportunities; o aggressively promote awareness of the Salon brand; o make payments under distribution relationships; o respond to competitive pressures; or o acquire complementary businesses or technologies. If we raise additional capital by issuing equity or convertible debt securities, the percentage ownership of our then-current stockholders will be reduced, and such securities may have rights, preferences or privileges senior to those of our current stockholders. Additionally, we may not be able to obtain additional financing on favorable terms, or at all. If adequate capital is not available on acceptable terms, our ability to expand, take advantage of unanticipated opportunities, develop or enhance services or otherwise respond to competitive pressures would be significantly limited. This limitation could harm our business. Acceptance and effectiveness of Internet advertising and electronic commerce is unproven and, to the extent it does not continue to grow, our market may not develop adequately and our business could be harmed Our success is highly dependent on an increase in the use of the Internet for advertising and electronic commerce. If the markets for Internet advertising or electronic commerce do not develop, our business may be severely harmed. Currently, demand and market acceptance for Internet advertising is uncertain and may not increase as necessary for our business to grow or succeed. Many advertisers have little or no experience using the Internet for advertising purposes. The adoption of Internet advertising, particularly by companies that have historically relied on traditional media, requires the acceptance of a new way of conducting business, exchanging information and advertising products and services. Potential advertisers may believe Internet advertising to be undesirable or less effective for promoting their products and services relative to traditional advertising media. If the Internet advertising market fails to develop or develops more slowly than we expect, our business could be harmed. Different pricing models are used to sell Internet advertising. It is difficult to predict which pricing models, if any, will emerge as the industry standard. This uncertainty makes it difficult to project our future advertising rates and revenues. Any failure to adapt to pricing models that develop or respond to competitive pressures could reduce our advertising revenues. Moreover, "filter" software programs that limit or prevent advertising from being delivered to an Internet user's computer are commonly available. Widespread use of this software could adversely affect the commercial viability of Internet advertising and our business. 20 Many retailers have little or no experience using the Internet for electronic commerce. The adoption of electronic commerce, particularly by companies that have historically relied on traditional channels to sell their products and services, requires the acceptance of a new way of conducting business, exchanging information and completing commercial transactions. Potential electronic commerce partners may believe electronic commerce to be undesirable or less effective for selling their products and services relative to traditional channels. If the electronic commerce market fails to develop or develops more slowly than we expect, our business could be harmed. Tracking and measurement standards for advertising may not evolve to the extent necessary to support Internet advertising, thereby creating uncertainty about the viability of our business model There are currently no standards for the measurement of the effectiveness of advertising on the Internet, and the industry may need to develop standard measurements in order to sustain advertising volume or attract new advertisers. Standardized measurements may not develop and if they do not, our business could be harmed. In addition, currently available software programs that track Internet usage and other tracking methodologies are rapidly evolving. The development of such software or other methodologies may not keep pace with our information needs, particularly to support our internal business requirements and those of our advertisers and sponsors. The absence or insufficiency of this information could limit our ability to attract and retain advertisers and sponsors. It is important to our advertisers and sponsors that we accurately measure the demographics of our user base and the delivery of advertisements on our Web sites. We depend on third parties to provide certain of these measurement services. If they are unable to provide these services in the future, we would need to perform them ourselves or obtain them from another provider, if available. This could cause us to incur additional costs or cause interruptions in our business while we are replacing these services. Companies may choose to not advertise on Salon or may pay less for advertising or sponsorships if they do not perceive our measurements or measurements made by third parties to be reliable. If use of the Internet does not grow, our business could be harmed Our success is highly dependent upon continued growth in the use of the Internet generally and in particular as a medium for content, advertising and electronic commerce. If Internet usage does not grow, we may not be able to increase revenues from advertising and sponsorships and this may harm our business. Internet use by consumers is in an early stage of development, and market acceptance of the Internet as a medium for content, advertising and electronic commerce is highly uncertain. A number of factors may inhibit the growth of Internet usage, including the following. If these or any other factors cause use of the Internet to slow or decline, our results of operations could be harmed. o inadequate network infrastructure; o security concerns; o inconsistent quality of service; and o limited availability of cost-effective, high-speed access. Increasing competition among Internet content providers could reduce our advertising sales or market share, thereby harming our business The market for Internet content is relatively new, rapidly changing and intensely competitive. We expect competition for Internet content to continue to increase and if we cannot compete effectively our 21 business could be harmed. Additionally, we expect the number of Web sites competing for the attention and spending of users, advertisers and sponsors to continue to increase, because there are so few barriers to entry on the Internet. Increased competition could result in advertising or sponsorship price reductions, reduced margins or loss of market share, any of which could harm our business. Competition is likely to increase significantly as new companies enter the market and current competitors expand their services. Many of our present and potential competitors are likely to enjoy substantial competitive advantages over us. If we do not compete effectively or if we experience any pricing pressures, reduced margins or loss of market share resulting from increased competition, our business could be harmed. If the Internet infrastructure continues to be unreliable, access to our network may be impaired and our business may be harmed Our success depends in part on the development and maintenance of the Internet infrastructure. If this infrastructure fails to develop or be adequately maintained, our business would be harmed because users may not be able to access our network of Web sites. Among other things, development and maintenance of a reliable infrastructure will require a reliable network backbone with the necessary speed, data capacity, security and timely development of complementary products for providing reliable Internet access and services. The Internet has experienced, and is expected to continue to experience, significant growth in number of users and amount of traffic. If the Internet continues to experience increased numbers of users, frequency of use or increased bandwidth requirements, the Internet infrastructure may not be able to support these increased demands or perform reliably. The Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure, and could face additional outages and delays in the future. These outages and delays could reduce the level of Internet usage and traffic on our network of Web sites. In addition, the Internet could lose its viability due to delays in the development or adoption of new standards and protocols to handle increased levels of activity. If the Internet infrastructure is not adequately developed or maintained, use of our network of Web sites may be reduced. Even if the Internet infrastructure is adequately developed and maintained, we may incur substantial expenditures in order to adapt our services and products to changing Internet technologies. Such additional expenses could severely harm our financial results. We may be held liable for content on our Web sites As a publisher and distributor of content over the Internet, including user-generated content on our online communities, we face potential liability for defamation, negligence, copyright, patent or trademark infringement and other claims based on the nature and content of the material that is published or distributed on our network of Web sites. These types of claims have been brought, sometimes successfully, against online services, Web sites and print publications in the past. Although we carry general liability insurance, our insurance may not be adequate to indemnify us for all liability that may be imposed. Any liability that is not covered by our insurance or is in excess of our insurance coverage could severely harm our financial condition and business. 22 Concerns about transactional security may hinder our electronic commerce strategy by subjecting us to liability or by discouraging commercial transactions over the internet A significant barrier to electronic commerce is the secure transmission of confidential information over public networks. Any breach in our security could expose us to a risk of loss or litigation and possible liability. We rely on encryption and authentication technology licensed from third parties to provide secure transmission of confidential information. As a result of advances in computer capabilities, new discoveries in the field of cryptography or other developments, a compromise or breach of the algorithms we use to protect customer transaction data may occur. A compromise of our security could severely harm our business. A party who is able to circumvent our security measures could misappropriate proprietary information, including customer credit card information, or cause interruptions in the operation of our network of Web sites. We may be required to expend significant capital and other resources to protect against the threat of security breaches or to alleviate problems caused by these breaches. However, protection may not be available at a reasonable price or at all. Concerns over the security of electronic commerce and the privacy of users may also inhibit the growth of the Internet as a means of conducting commercial transactions. Our efforts to engage in electronic commerce may expose us to product liability claims We have and continue to foster relationships with manufacturers or other companies to offer certain products to users through our network of Web sites. We have very limited experience in the sale of products online and the development of relationships with manufacturers or suppliers of these products. Users who purchase products may sue us if any of the products sold on our network are defective, fail to perform properly or injure the user. Liability claims could require us to spend significant time and money in litigation or to pay significant damages. As a result, any such claims, whether or not successful, could severely harm our business. Our systems may fail due to natural disasters, telecommunications failures and other events, any of which would limit user traffic Substantially all of our communications hardware and computer hardware operations for our Web sites are located at Frontier GlobalCenter's facilities in Sunnyvale, California. Fire, floods, earthquakes, power loss, telecommunications failures, break-ins and similar events could damage these systems and cause interruptions in our services. Computer viruses, electronic break-ins or other similar disruptive problems could cause users to stop visiting our network of Web sites and could cause advertisers and sponsors to terminate any agreements with us. If any of these circumstances occurred, our business could be harmed. Our insurance policies may not adequately compensate us for any losses that may occur due to any failures of or interruptions in our systems. We do not presently have a formal disaster recovery plan. Our Web sites must accommodate a high volume of traffic and deliver frequently updated information. It is possible that we will experience systems failures in the future and that such failures could harm our business. In addition, our users depend on Internet service providers, online service providers and other Web site operators for access to our Web sites. Many of these providers and operators have experienced significant outages in 23 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. 24 - -------------------------------------------------------------------------------- PART I: FINANCIAL INFORMATION ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------------------- The Company's exposure to market risk for changes in interest rates relates primarily to the Company's investment portfolio. The Company places its investments with high credit issuers in short-term securities with maturities of less than three months. The average maturity of the portfolio will not exceed twelve months. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. The Company has no investments denominated in foreign country currencies and therefore is not subject to foreign exchange risk. - -------------------------------------------------------------------------------- PART II: OTHER INFORMATION - -------------------------------------------------------------------------------- Item 1. Legal Proceedings. None Item 2. Changes in Securities and Use of Proceeds Not Applicable Item 3. Default upon senior securities. Not Applicable Item 4. Submission of Matters to a Vote of Security Holders. Not applicable Item 5. Other Information. Not applicable Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 10.18 Employment Agreement between Steven Reed and the Company dated May 31, 2000 27.1 Financial Data Schedule (b) Reports on Form 8-K. The Company filed one report on Form 8-K during the three months ended June 30, 2000 and one report on Form 8-K/A subsequent to that period. These filings related to the acquisition of MP3Lit. The report on Form 8-K was filed on May 22, 2000 and reported under Item 2 -Acquisition or Disposition of Assets. The report on Form 8-K/A was filed on July 19, 2000 and reported under Item 7 - Financial Statements, Pro Forma Financial Information and Exhibits. 25 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed of its behalf by the undersigned, thereunto duly authorized. SALON.COM Dated: 08/14/00 /s/ Michael O'Donnell -------------------------------------------- Michael O'Donnell, Chief Executive Officer and President Dated: 08/14/00 /s/ Robert O'Callahan -------------------------------------------- Robert O'Callahan, Chief Financial Officer 26 EXHIBIT INDEX Exhibits -------- 10.18 Employment Agreement between Steven Reed and the Company dated May 31, 2000 27.1 Financial Data Schedule 27 EX-10.18 2 0002.txt EMPLOYMENT AGREEMENT Exhibit 10.18 Employment Agreement between Steven Reed and the Company dated May 31, 2000 May 31, 2000 Mr. Steve Reed 340 Townsend, 4th Floor San Francisco, CA 94107 Dear Steve, I am pleased to offer you a position with Salon as Senior Vice President, Media Sales reporting to Michael O'Donnell CEO & President in our San Francisco office. Your start date will be effective June 10, 2000 or sooner. Here's a summary of the compensation package: o Guaranteed 1st Year Compensation of $320,000 (draw against salary and bonuses). You will receive monthly salary of $26,666.66 (equivalent to salary of $170,000 plus bonus of $150,000 annualized) which will be paid semi-monthly in accordance with Salon's normal payroll procedures; o Accelerators: 3% Sales over quarterly budgets plus 1% over annual target; o Bonus: $100,000 (payable in 4 equal installments); o You will be granted 100,000 employee incentive options (4 year vesting) in accordance with the company's stock option plan, subject to approval by the company's Board of Directors. After your 1st year anniversary, your will be granted another 25,000 new options. In case of a Salon.com merger or sale, and your position is eliminated you would receive one year's worth of compensation and 1 year's accelerated vesting (in addition to the current year). As a Salon employee you will also be eligible to receive certain employee benefits including: o An Insurance program consisting of medical, dental, vision, short term and long term disability and life insurance o 12 days paid vacation and the standard 12 Salon paid holidays o 401K Savings Plan o Salon Employee Stock Purchase Plan Please contact Michele Alcantara, our Employment Manager, if you have any additional questions. She can be reached at (415) 645-9267 or at malcantara@salon.com. This offer expires Wednesday, May 31, 2000. The second page of this letter contains important information about the terms of your employment at Salon. Please read it carefully, sign the bottom and return it to Michele. We're excited to have you join us and we look forward to a mutually successful relationship. Michael O'Donnell Chief Executive Officer Salon.com 1 Terms of Employment This offer is contingent on Salon receiving satisfactory responses from your references. If you choose to accept this offer, your employment with Salon will be voluntarily entered into and will be for no specified period. As a result, you will be free to resign at any time, for any reason or for no reason, as you deem appropriate. Salon will have a similar right and may conclude its employment relationship with you at any time, with or without cause. For purposes of federal immigration law, you will be required to provide Salon with documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided to us within three (3) business days of your date of hire, or our employment relationship with you may be terminated. Salon reserves the right to change or alter as it sees fit and at its sole discretion the terms of your employment including but not limited to employee benefits, your job title, rate of pay and job classification. In the event of any dispute or claim relating to or arising out of our employment relationship, this agreement, or the termination of our employment relationship (including, but not limited to, any claims of wrongful termination or age, sex, disability, race or other discrimination), you and Salon agree that all such disputes shall be fully, finally and exclusively resolved by binding arbitration conducted by the American Arbitration Association in San Jose, California. However, we agree that this arbitration provision shall not apply to any disputes or claims relating to or arising out of the misuse or misappropriation of Salon's trade secrets or proprietary information. To indicate your acceptance of Salon's offer, please sign and date this letter in the space provided below and return it to me. You will also be required to sign an Employee Inventions and Proprietary Rights Assignment Agreement as a condition of your employment. This offer letter and the Terms of Employment, along with any agreements relating to proprietary rights between you and Salon, set forth the terms of your employment with Salon and supersede any prior representations or agreements, whether written or oral. This letter may not be modified or amended except by a written agreement, signed by Salon and by you. Salon.com Agreed to and Accepted /s/ Michael O'Donnell 03/31/00 /s/ Steve Reed 06/01/00 - ----------------------- -------- ---------------------- -------- Michael O'Donnell date Steve Reed date Chief Executive Officer 2 EX-27 3 0003.txt FINANCIAL DATA SCHEDULE
5 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) 3-MOS MAR-31-2001 APR-01-2000 JUN-30-2000 13,865 0 1,699 280 16 15,623 3,818 1,288 24,125 4,176 0 0 0 13 19,483 24,125 1,759 1,759 0 6,486 23 0 230 (4,520) 0 (4,520) 0 0 0 (4,520) (.36) (.36)
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