================================================================================
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, 2004
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 0-26395
SALON MEDIA GROUP, INC.
------------------------------------------------------
(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, 11TH FLOOR
SAN FRANCISCO, CA 94103
----------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
----------------
(415) 645-9200
----------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
----------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE
----------------
(TITLE OF CLASS)
----------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the Registrant is an accelerated filer as defined
by Rule 12b-12 of the act. Yes [_] No [X]
The number of outstanding shares of the Registrant's Common Stock, par value
$0.001 per share, on August 9, 2004 was 14,155,276 shares.
================================================================================
- --------------------------------------------------------------------------------
FORM 10-Q
SALON MEDIA GROUP, INC.
INDEX
- --------------------------------------------------------------------------------
PAGE
PART I FINANCIAL INFORMATION NUMBER
------
ITEM 1: Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 2004 and March 31, 2004 (unaudited)...................... 3
Condensed Consolidated Statements of Operations for the
three months ended June 30, 2004 and 2003 (unaudited) ............ 4
Condensed Consolidated Statements of Cash Flows for the
three months ended June 30, 2004 and 2003 (unaudited) ............ 5
Notes to Condensed Consolidated Financial Statements (unaudited).. 6
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 11
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk........ 26
ITEM 4: Controls and Procedures........................................... 26
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings................................................. 28
ITEM 2. Changes in Securities and Use of Proceeds and Issuer
Purchases of Equity Securities ................................... 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
Signatures........................................................ 29
2
- --------------------------------------------------------------------------------
PART I: FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
SALON MEDIA GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
JUNE 30, MARCH 31,
2004 2004
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 765 $ 696
Accounts receivable, net 821 306
Prepaid expenses and other current assets 335 432
------------ ------------
Total current assets
1,921 1,434
Property and equipment, net 129 89
Prepaid advertising rights 4,280 4,430
Goodwill, net 200 200
Other assets 102 117
------------ ------------
Total assets $ 6,632 $ 6,270
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 1,097 $ 1,125
Deferred revenue 1,095 1,107
Capital lease obligations, current 10 18
------------ ------------
Total current liabilities 2,202 2,250
Long-term liabilities
Warrants payable 3,581 2,621
------------ ------------
Total liabilities 5,783 4,871
------------ ------------
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares
authorized, 7,969 issued and outstanding at June
30, 2004 and 7,552 issued and outstanding at
March 31, 2004 (liquidation value of $19,611 at
June 30, 2004) -- --
Common stock, $0.001 par value, 50,000,000 shares
authorized, 14,155,276 shares issued and
outstanding at June 30, 2004 and March 31, 2004 14 14
Additional paid-in-capital 92,934 92,320
Accumulated deficit (92,099) (90,935)
------------ ------------
Total stockholders' equity 849 1,399
------------ ------------
Total liabilities and stockholders' equity $ 6,632 $ 6,270
============ ============
The accompanying notes are an integral part of these
condensed consolidated unaudited financial statements
3
SALON MEDIA GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
------------------------------
2004 2003
------------ ------------
Net revenues $ 1,733 $ 1,045
------------ ------------
Operating expenses:
Production and content 1,200 1,189
Sales and marketing 468 563
Research and development 135 149
General and administrative 228 371
Amortization of intangibles -- 93
------------ ------------
Total operating expenses 2,031 2,365
------------ ------------
Loss from operations (298) (1,320)
Other income (expense), net (273) (72)
------------ ------------
Net loss (571) (1,392)
Preferred deemed dividend (593) 72
------------ ------------
Net loss attributable to common stockholders $ (1,164) $ (1,320)
============ ============
Basic and diluted net loss per share attributable
to common stockholders $ (0.08) $ (0.09)
Weighted average shares used in computing basic
and diluted net loss per share 14,155 13,997
The accompanying notes are an integral part of these
condensed consolidated unaudited financial statements
4
SALON MEDIA GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
------------------------------
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (571) $ (1,392)
Adjustments to reconcile net loss to net cash used
in operating activities:
Loss from retirement of assets, net -- 43
Warrant re-valuation charges 490 (21)
Depreciation and amortization 94 214
Allowance for recovery of doubtful accounts -- (8)
Amortization of prepaid advertising rights 150 120
Changes in assets and liabilities:
Accounts receivable (515) (80)
Prepaid expenses, other current assets and other
assets 42 (48)
Accounts payable and accrued liabilities (28) 166
Deferred revenue (12) 1
------------ ------------
Net cash used in operating activities (350) (1,005)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (64) (1)
Proceeds from asset sales -- 15
------------ ------------
Net cash provided (used) by investing activities (64) 14
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowing -- 80
Payments to bank -- (19)
Proceeds from issuance of notes payable -- 900
Proceeds from issuance of preferred stock, net 491 --
Principal payments under capital lease obligations (8) (49)
------------ ------------
Net cash provided by financing activities 483 912
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 69 (79)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 696 162
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 765 $ 83
============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of warrants in connection with issuance of
convertible notes payable $ -- $ 89
Preferred deemed dividend in connection with preferred
stock financing 593 (72)
The accompanying notes are an integral part of these
condensed consolidated unaudited financial statements
5
SALON MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
1. THE COMPANY
Salon Media Group, Inc ("Salon") is an Internet media company that
produces a content Website with eight primary subject-specific sections and two
online communities. One of the sections provides audio streaming. Salon was
originally incorporated in July 1995 in the State of California and
reincorporated in Delaware in June 1999. Salon operates in one business segment.
2. BASIS OF PRESENTATION
These interim condensed consolidated financial statements are unaudited
and 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 consolidated financial
position, consolidated results of operations and consolidated cash flows for the
periods presented. The condensed consolidated balance sheet data as of March 31,
2004 is derived from and should be read in conjunction with the audited
financial statements, which are included in Salon's Annual Report on Form 10-K
filed with the Securities and Exchange Commission. Pursuant to the rules of the
Securities and Exchange Commission, these financial statements do not include
all disclosures required by generally accepted accounting principles. The
results for the three months ended June 30, 2004 are not necessarily indicative
of the expected results for any other interim period or for the fiscal year
ending March 31, 2005.
These condensed consolidated financial statements contemplate the
realization of assets and the satisfaction of liabilities in the normal course
of business. Salon has incurred losses and negative cash flows from operations
since inception and has an accumulated deficit at June 30, 2004 of $92,099.
These factors raise substantial doubt about Salon's ability to continue as a
going concern.
Salon has reduced expenses, and may reduce them further, to match
anticipated revenues to reach cash flow breakeven. There can be no assurance
that a further cost cutting exercise will be successful in completely
eliminating the difference between expenditures and revenues or that such
actions would not have a harmful effect on Salon's business and results of
operations. Until cash flow breakeven is reached on a consistent basis, Salon
will have to rely on additional investment capital or other financing
activities. There can be no assurance that Salon will be able to obtain
additional capital on terms, which are favorable, or at all. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
3. CONCENTRATIONS OF CREDIT RISK
No customer accounted for more than 10% of total revenue for the
three-month periods ended June 30, 2004 and June 30, 2003. Two customers
accounted for 11% and 10% of the total accounts receivable balance as of June
30, 2004. Five customers accounted for 21%, 13%, 11%, 11% and 10%, respectively,
of the total accounts receivable balance as of June 30, 2003.
6
SALON MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
4. GOODWILL AMORTIZATION AND INTANGIBLE ASSETS
The following table sets forth information concerning Salon's goodwill
and intangible assets as of June 30, 2004 and March 31, 2004:
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
------------ ------------ ------------
Trade name $ 1,200 $ 1,200 $ --
Proprietary technology 355 355 --
Audio technology 158 158 --
------------ ------------ ------------
Total intangible assets subject to amortization $ 1,713 $ 1,713 $ --
============ ============ ============
Goodwill $ 3,555 $ 3,355 $ 200
------------ ------------ ------------
Total intangible assets not subject to amortization $ 3,555 $ 3,355 $ 200
============ ============ ============
5. NET LOSS PER SHARE
Basic loss per share is computed using the weighted average number of
shares of common stock outstanding during the period. Diluted loss per share is
computed using the weighted average number of common and common stock
equivalents outstanding during the period, as follows:
THREE MONTHS ENDED JUNE 30,
-----------------------------
2004 2003
------------ ------------
Numerator:
Net loss attributable to common stockholders $ (1,164) $ (1,320)
============ ============
Denominator:
Weighted average shares outstanding 14,155,000 14,155,000
Weighted average shares held in escrow -- (158,000)
------------ ------------
Weighted average shares used in computing
basic and diluted net loss per share 14,155,000 13,997,000
============ ============
Basic and diluted net loss per share attributable
to common stockholders $ (0.08) $ (0.09)
============ ============
Antidilutive securities including options, warrants
and convertible preferred stock not included in
net loss attributable to common stockholders per
share calculation 205,229,651 35,519,965
7
SALON MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
If Salon's compensation expense under its stock option plan had been determined
pursuant to Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," Salon's net loss per share would have
been as follows:
THREE MONTHS ENDED JUNE 30,
-----------------------------
2004 2003
------------ ------------
Net loss attributable to common stockholders:
As reported $ (1,164) $ (1,320)
Add back: stock-based employee compensation
expense included in reported net loss -- --
Deduct: total stock-based compensation expense
determined under the fair value based method,
net of related tax (16) (82)
------------ ------------
Pro forma net loss attributable to common
stockholders $ (1,180) $ (1,402)
============ ============
Basic and diluted net loss per share attributable
to common stockholders:
As reported $ (0.08) $ (0.09)
Pro forma net loss per share $ (0.08) $ (0.10)
6. PREFERRED STOCK
On June 4, 2004, Salon issued 417 shares of Series D-1 Preferred stock
and raised a net $491 in cash from four investors. The investors included John
Warnock, a Director of Salon, William Hambrecht, the father of Elizabeth
Hambrecht, Salon's President, Chief Financial Officer and Secretary, and an
entity that William Hambrecht and Elizabeth Hambrecht have an ownership interest
therein. The financing was effected in accordance with the Securities Purchase
Agreement dated as of June 4, 2004 between Salon and the investors.
The 417 shares of Series D-1 preferred were sold at a price of $1,200 per
share. In addition, Salon issued warrants to purchase 807,095 shares common
stock at an exercise price of $0.138 per share. The 417 shares of Series D-1
Preferred Stock are convertible into, and have the voting rights of,
approximately 5,381,000 shares of common stock. Following the transaction: (i)
John Warnock owns approximately 77,245,000 shares of common stock and shares of
common stock issuable upon conversion of the shares of preferred stock he holds
and warrants to purchase approximately 8,552,000 shares of
8
SALON MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
common stock, and (ii) William Hambrecht, either solely or in conjunction with
entities that he has an ownership interest therein, owns approximately
38,501,000 shares of common stock and shares of common stock issuable upon
conversion of the shares of preferred stock he holds directly or indirectly and
warrants to purchase approximately 4,554,000 shares of common stock. The total
outstanding common stock, including shares of common stock issuable upon
conversion of the shares of preferred stock, all with voting rights, after the
transaction, is approximately 190,644,000 shares. Warrants outstanding to
purchase 24,887,000 shares of common stock were outstanding after the
transaction.
The Series D-1 Preferred Stock is convertible into common stock at the
conversion rate determined by dividing the Series D-1 Preferred Stock per share
price of $1,200 by the Series D-1 Conversion Price of $0.093. The conversion to
common stock can take place after Salon has amended its Certificate of
Incorporation and upon securing approval by the Board of Directors and
stockholders to increase the authorized number of shares of Salon's common
stock. The Series D-1 Preferred Stock conversion price is subject to downward
adjustment in the event of certain subsequent Company stock issuances.
The Certificate of Designation of Preferences and Rights of the Series D
preferred stock stipulates that the conversion price to common stock be equal to
70% of the average closing sales price of Salon's common stock for the thirty
days prior to the date of issue of the Series D preferred stock. As a result,
Salon recorded a preferred deemed dividend of $195 which represents the
difference between the offering price of Salon's Series D-1 preferred stock and
the fair value of Salon's common stock into which the preferred stock is
convertible on the date of the transaction. The Purchase Agreement and the
Certificate of Designation of Preferences and Rights of the Series D preferred
stock allows for the sale and issuance of an additional 1,668 shares of Series D
preferred stock.
The holders of the Series D Preferred Stock are entitled dividends of
5.0%, as and if declared by the Board of Directors. In event of a liquidation
event, the holders of Series D Preferred Stock and the holders of the Series C
Preferred Stock rank in parity, and are entitled to receive, prior and in
preference to any distribution of any assets or property of the Company to the
holders of common stock, Series A and B Preferred Stock, an amount per share
equal to $1,200 plus an amount equal to all declared but unpaid dividends, and
in the case of the Series C Preferred Stock, $1,600 per share, plus an amount
equal to all declared but unpaid dividends, based on an annual rate of 8%. If
the assets and funds available for distribution are insufficient to permit the
payment to the holders of Series C and D Preferred Stock of their full
preferential amounts, then the entire assets and funds of Salon legally
available for distribution to stockholders will be distributed among the holders
of Series C and D Preferred Stock ratably in proportion to the full preferential
amounts which they are entitled to receive. After an initial distribution to the
holders of Series C and D Preferred Stock, the holders of the Series A and B
Preferred Stock, who rank in parity, are entitled to receive, prior and in
preference to any distribution of any assets or property of Salon to the holders
of common stock, an amount per share equal to $8,000 plus an amount equal to all
declared but unpaid dividends, based on an annual rate of 8%. If, after the
initial distribution to holders of Series C and D Preferred Stock, the remaining
assets and funds available for distribution are insufficient to permit the
payment to the holders of Series A and B Preferred Stock of the full
preferential amounts, then the entire remaining assets and funds of Salon
legally available for distribution to stockholders will be distributed among the
holders of Series A and B Preferred Stock ratably in proportion to the full
preferential amounts which they are entitled to receive.
9
SALON MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
If, after initial preferential liquidation payments to the holders of
Series A, B, C and D Preferred Stock holders, any assets remain available for
distribution, such assets are to be distributed ratably among the holders of
common stock and preferred stock, based on the shares of common stock then held
by them and issuable upon conversion of the shares of preferred stock then held
by them until aggregate distributions per share reach $12,000 for the holders of
Series A and B Preferred Stock, $2,400 for the holders of Series C Preferred
Stock and $3,600 for the holders of Series D Preferred Stock. Salon has
previously issued 809 shares of Series A Preferred Stock, 125 shares of Series B
Preferred Stock and 6,618 shares of Series C Preferred Stock. If, after payment
has been made to the holders of common stock and holders of preferred stock
mentioned above, any assets remain available for distribution, such assets are
to be distributed ratably among the holders of common stock and the holders of
Series C Preferred Stock, based on the number of shares of common stock then
held by them and issuable upon conversion of the Series C Preferred Stock then
held by them. The holders of Series C Preferred Stock hold approximately 94.2%
of this group of securities.
Preferred stockholders as a group own approximately 95.5% of the
outstanding shares of common stock and common stock issuable upon conversion of
the shares of preferred stock, all with voting rights. In addition, preferred
stockholders as a group hold warrants to purchase approximately 23,681,000
shares of common stock, or 95.2% of the total warrants issued.
7. WARRANT VALUATION
Salon has an inadequate number of authorized common shares to satisfy all
convertible preferred shares, warrant agreements and option grants, which
requires Salon record as an additional liability the value any new warrants
issued, and to re-measure the value of all warrants issued at each balance sheet
period, with such change recorded in Salon's results of operations.
The issuance of 417 shares of Series D-1 preferred stock issued in June
2004 also included the issuance of warrants to purchase 807,095 shares common
stock at an exercise price of $0.138 per share. The warrants were valued at $72
using the Black-Scholes option pricing model, applying an expected life of three
years, a weighted average risk-free interest rate of 3.19%, a volatility of 120%
and a deemed fair value of common stock of $0.12 per share and was recorded as
an additional liability.
The June 30, 2004 re-measurement of value of all warrants then
outstanding resulted in a non-cash charge to operations of $888 and the June 30,
2003 re-measurement of value all warrants then outstanding resulted in a
non-cash benefit to operations of $93, recapped as follows:
THREE MONTHS ENDED
JUNE 30,
----------------------
PURPOSE OF ISSUANCE OF WARRANTS: OPERATING RESULTS AFFECTED 2004 2003
---------- ----------
Editorial collaboration Production and content $ (72) $ 21
Employee severance agreement General and administrative (35)
Issuance of convertible notes Other income (expense), net (383)
Issuance of preferred stock Preferred deemed dividend (398) 72
---------- ----------
$ (888) $ 93
========== ==========
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
This section and other parts of this Form 10-Q contain "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act)
that involve risks and uncertainties, including, but not limited to, statements
regarding our strategy, plans, objectives, expectations, intentions, financial
performance, cash-flow breakeven timing, financing, economic conditions, on-line
advertising, market performance, subscription service plans, and revenue
sources. Although Salon Media Group, Inc. (Salon) believes its plans, intentions
and expectations reflected in such forward-looking statements are reasonable,
Salon gives no assurance those plans, intentions or expectations will be
achieved. Our actual results may differ significantly from those anticipated or
implied in these forward-looking statements as a result of the factors set forth
above and in Salon's public filings. Salon assumes no obligation to update any
forward-looking statements as circumstances change.
Salon's 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 Future Results and
Market Price of Stock." In this report, the words "anticipates," "believes,"
"expects," "estimates," "forecast," "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 is an Internet media company. The main entry and navigation point
to Salon's eight primary subject-specific sections is Salon's home page at
www.salon.com. The Website provides news, features, interviews and regular
columnists on specific topics, from politics and arts and entertainment to
parenting and health. Salon also offers an audio streaming Website, and hosts'
two online communities -Table Talk and The Well, which allow users to discuss
Salon content and interact with other users. The Well is a member-only
discussion community in which members use their real names to post and only
members can view the postings. Table Talk is available for all Internet users to
read, but only subscribers may post.
Salon believes that its original, award-winning content allows it to
attract and retain users who are more affluent, better educated and more likely
to make online purchases than typical Internet users. Salon believes its user
profile makes its Website a valuable media property for advertisers and
retailers who are allocating marketing resources to target consumers online
This section and other parts of this Form 10-Q should be considered in
conjunction with the audited financial statements, which are included in Salon's
Annual Report on Form 10-K, filed with the Securities and Exchange Commission.
Matters of interest therein include, but are not limited to, Salon's disclosure
of critical accounting policies.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 2003
NET REVENUES:
Net revenues increased 66% to $1.7 million for the three months ended
June 30, 2004 from $1.0 million for the three months ended June 30, 2003.
11
Advertising revenues increased to $1.0 million for the three months ended
June 30, 2004 from $0.4 million for the three months ended June 30, 2003. The
$0.6 million increase reflects an overall market improvement for Internet
advertising that Salon was able to capitalize on during the period, acceptance
of Salon's Website access pass advertisement format, and diminishing concerns of
Salon's financial viability by advertisers. Salon estimates that advertising
revenues for the three months ended September 30, 2004 will be approximately
$0.6-$0.7 million.
Salon Premium subscription revenues increased to $0.5 million for the
three months ended June 30, 2004 from $0.4 million for the three months ended
June 30, 2003. The subscription revenue increase was attributable to recognizing
revenue as earned over the subscription period from cash continuously received
from Salon Premium subscribers from the period ended June 30, 2003 to June 30,
2004. For the three months ended June 30, 2004, approximately 17,600 individuals
paid for a one-year subscription to Salon Premium, compared to 15,000 for the
three months ended June 30, 2003. As of June 30, 2004, Salon has approximately
75,700 active subscribers and deferred $1.0 million of revenue, compared to
66,200 active subscribers and deferred revenue of $0.8 million as of June 30,
2003. The overall one-year subscription renewal rate for paid Salon Premium
subscriptions averaged 69% as of June 30, 2004 compared to 76% as of June 30,
2003. Salon estimates that Salon Premium revenues for the three months ended
September 30, 2004 will be approximately $0.5 million.
Subscriptions for Salon's on-line forums were $140,000 for the three
months ended June 30, 2004 compared to $157,000 for the three months ended June
30, 2003, with the decline reflecting a drop in memberships. Revenues from all
other sources were $0.1 million for the three months ended June 30, 2004 and for
the three months ended June 30, 2003. Salon estimates that revenues other than
advertising and Salon Premium subscription revenues for the three months ended
September 30, 2004 will be approximately $0.2 million.
PRODUCTION AND CONTENT:
Production and content expenses were constant at $1.2 million for the
three months ended June 30, 2004 and June 30, 2003. The results for the three
months ended June 30, 2003 include a $0.1 million charge that resulted from
subleasing over-capacity office space in New York, NY, while the results for the
three months ended June 30, 2004 include a $0.1 million charge primarily from a
change in value of warrants issued in December 2003 for editorial collaboration
with a print publisher. With the exception of changes in value for warrants
issued for editorial collaboration, Salon does not anticipate material changes
to production and content expenditures in the near future.
SALES AND MARKETING:
Sales and marketing expenses during the three months ended June 30, 2004
were $0.5 million compared to $0.6 million for the three months ended June 30,
2003, a decline of $0.1 million or 17%. The results for the three months ended
June 30, 2003 include a $0.1 million charge that resulted from subleasing
over-capacity office space in New York, NY, with no comparable charge for the
three months ended June 30, 2004. Salon does not anticipate material changes to
sales and marketing expenditures in the near future.
RESEARCH AND DEVELOPMENT:
Research and development expenses during the three months ended June 30,
2004 of $135,000 were comparable to the $149,000 incurred for the three months
ended June 30, 2003. Salon does not anticipate material future changes in
research and development expenditures.
12
GENERAL AND ADMINISTRATIVE:
General and administrative expenses for the three months ended June 30,
2004 were $228,000 compared to $371,000 for the three months ended June 30,
2003, a decline of $143,000 or 39%. The decline was attributable to a decrease
in salary related costs as existing employees between years absorbed three
positions. The salary related decrease was mitigated by a nominal charge related
to the change in value of warrants issued to Salon's former Chief Executive
Officer and President and charged to operations. Besides charges related to
changes in value of warrants, Salon does not anticipate material future changes
in general and administrative expenditures.
AMORTIZATION OF INTANGIBLES:
Results for the three months ended June 30, 2003 included $0.1 million
for the amortization of intangible assets. All such assets were fully amortized
as of March 31, 2004.
OTHER INCOME (EXPENSE), NET:
Other income (expense), net for the three months ended June 30, 2004 was
a $0.3 million charge compared to a $0.1 million charge for the three months
ended June 30, 2003, an increase of $0.2 million. The results for the three
months ended June 30, 2004 include a non-cash charge of $0.4 million due to a
change in value of warrants issued to former convertible note holders, offset by
$0.1 million of realized income, derived from grant monies received by Salon to
finance editorial content, which Salon's obligation was met during the period.
As of June 30, 2004, predominately no grant monies remain to finance editorial
content. Salon cannot accurately predict if it will receive additional monies to
finance editorial content.
The change in value charge was precipitated by Salon having an inadequate
number of authorized common shares to satisfy all convertible preferred shares,
warrant agreements and option grants, which requires Salon to re-measure the
value of warrants issued at each balance sheet period, with the difference being
charged to operating results. The charge for the three months ended June 30,
2004 was primarily driven by an increase in Salon's per share market price of
$0.14 per share on March 31, 2004 to $0.18 per share on June 30, 2004. Salon
contemplates having a stockholders meeting by December 31, 2004 in which it
expects approval by security stockholders eligible to vote, to increase in the
number of authorized common shares. Upon securing an increase in authorized
common shares, Salon will no longer incur similar charges.
PREFERRED DEEMED DIVIDEND:
On June 4, 2004 Salon issued 417 shares of Series D-1 preferred stock and
received net proceeds of approximately $0.5 million. The transaction resulted in
a $0.2 million non-cash charge ensuing from the difference between the offering
price of Salon's Series D-1 preferred stock and the fair value of Salon's common
stock into which the preferred stock is convertible on the date of the
transaction.
The results for the three months ended June 30, 2004 also includes a
non-cash charge of $0.4 million resulting from revaluing warrants issued to
preferred stockholders. The change in value charge was precipitated by Salon
having an inadequate number of authorized common shares to satisfy all
convertible preferred shares, warrant agreements and option grants, which
requires Salon to re-measure the value of warrants issued at each balance sheet
period, with the difference being charged to operating results. The charge for
the three months ended June 30, 2004 was primarily driven by an increase in
Salon's per share market price of $0.14 per share on March 31, 2004 to $0.18 per
share on June 30, 2004. Salon contemplates having a stockholders meeting by
December 31, 2004 in which it expects approval by
13
security stockholders eligible to vote, to increase the number of authorized
common shares. Upon securing an increase in authorized common shares, Salon will
no longer incur similar charges.
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS:
As a result of the above factors, Salon recorded a net loss attributable
to common stockholders of $1.2 million, or ($0.08) per share for the three
months ended June 30, 2004 compared to a net loss attributable to common
stockholders of $1.3 million, or ($0.09) per share for the three months ended
June 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES:
As of June 30, 2004, Salon had approximately $0.8 million in available
cash, of which $0.5 million was from the issuance of preferred stock on June 4,
2004.
Net cash used in operations was $0.4 million for the three months ended
June 30, 2004, compared to $1.0 million for the three months ended June 30,
2003. The principal use of cash during the three months ended June 30, 2004 was
to fund the $0.6 million net loss for the period and the $0.5 million increase
in accounts receivable, which were offset by $0.7 million of non-cash charges.
The principal use of cash during the three months ended June 30, 2003 was to
fund the $1.4 million net loss for the period and a $0.1 million increase in
accounts receivable, offset by non-cash charges of $0.3 million and an increase
in accounts payable and accrued liabilities of $0.2 million.
Net cash used in investing activities was $0.1 million for the three
months ended June 30, 2004 to acquire computer related equipment, compared to
none for the three months ended June 30, 2003.
Net cash from financing activities provided $0.5 million for the three
months ended June 30, 2004 compared to $0.9 million for the three months ended
June 30, 2003. For the three months ended June 30, 2004, Salon received $0.5
million from the issuance of Series D-1 preferred stock, practically all of
which was from related parties. For the three months ended June 30, 2003 Salon
issued $0.9 million of convertible notes payable, of which $0.8 million was to
related parties, borrowed a net $0.1 million from a bank, and made payments
under capital leases of $0.1 million.
Salon's independent registered public accountants have included a
paragraph in their reports for the fiscal years ended March 31, 2004, March 31,
2003 and March 31, 2002 indicating that substantial doubt exists as to Salon's
ability to continue as a going concern because it has recurring operating losses
and negative cash flows, and an accumulated deficit. Salon has reduced expenses,
and may reduce them further to equal anticipated revenues in order to reach cash
flow break even. Even though Salon had advertising sales for the three months
ended June 30, 2004 of $1.0 million and has not recognized advertising revenues
in excess of $1.0 million since the three month period ended December 31, 2000
when it reached $2.0 million, there is no assurance that Salon can maintain or
increase its current advertising sales levels in future periods. Projected
advertising sales for the three months ended September 30, 2004 are anticipated
to be approximately $0.6-$0.7 million.
Salon's cash projections indicate that it will require an additional
infusion of cash in September 2004 and contemplates issuing 417 shares of
preferred stock at that time for approximately $0.5 million in cash. Cash
projections, based on anticipated future revenues, indicate that Salon will not
need to issue additional preferred stock the remainder of its fiscal year ending
March 31, 2005. The issuance of additional preferred stock may trigger a
preferred deemed dividend charge as the certificate of designation and rights of
the Series D preferred stock stipulate that the stock be issued at an effective
30% discount to the trailing thirty day trading average of Salon's common stock.
14
Salon's common stockholders have experienced considerable dilution from
the issuance of Series A, B, C and D preferred stock. As of June 30, 2004, the
holders of Salon's preferred stock control approximately 95.5% of the voting
securities of Salon, with related parties holding approximately 67.0% of such
securities. Of the related parties, Director John Warnock holds approximately
40.5% of the total voting securities, with the father of Salon's President,
Chief Financial Officer and Secretary either directly or indirectly, controlling
approximately 20.0% of the total voting securities. In the event of a
liquidation event, the liquidation preferences of holders of Salon's preferred
stock will most likely preclude any common stockholder from receiving little, if
any, liquidation distributions. The issuance of additional Series D preferred
stock will result in further dilution to Salon's common stockholders.
RISK FACTORS
FACTORS THAT MAY AFFECT SALON'S FUTURE RESULTS AND MARKET PRICE OF STOCK
SALON'S PROJECTED CASH FLOWS MAY NOT MEET EXPECTATIONS
Salon plans on issuing 417 shares of preferred stock in September 2004
for which it should receive $0.5 million in cash. Cash projections, based on
anticipated future revenues, indicate that Salon will not need to issue
additional preferred stock for the remainder of its fiscal year ending March 31,
2005. If anticipated future revenues do not meet expectations, Salon may need to
issue additional preferred stock, increasing the dilution of common
stockholders, and if Salon is not successful in issuing these securities, its
operations may be adversely affected.
SALON MAY ISSUE ADDITIONAL PREFERRED STOCK AT EFFECTIVE PRICES LOWER THAN
CURRENT COMMON STOCK MARKET PRICES THAT MAY RESULT IN NON-CASH CHARGES TO
OPERATIONS
The certificate of designation and preferences and rights of the Series D
preferred stock stipulates that the Series D conversion price will be equal to
70% of the average closing sales price of Salon's common stock for the thirty
days prior to the date of issue of the Series D preferred stock. Such a discount
may trigger a non-cash preferred deemed dividend charge. The June 2004 issuance
of 417 shares of Series D preferred stock resulted in a $0.2 million preferred
deemed dividend charge to Salon's results of operations. Salon cannot predict to
what extent it may incur preferred deemed dividend charges for subsequent
issuances of Series D preferred stock.
SALON HAS RELIED ON RELATED PARTIES FOR SIGNIFICANT INVESTMENT CAPITAL
Salon has been relying on cash infusions from related parties to fund
operations. The related parties are primarily John Warnock, a Director of Salon,
and William Hambrecht, who has invested either directly or indirectly. Mr.
Hambrecht is the father of Salon's President, Chief Financial Officer, and
Secretary. Out a total of $4.2 million of cash received by Salon from the
issuance of convertible notes payable, $3.5 million was from related parties. In
addition, of the $0.9 million received from the issuance of Series C preferred
stock in December 2003 and February 2004, $0.5 million was from Salon Director
John Warnock and $0.2 million was from the father of Salon's President, Chief
Financial Officer, and Secretary. Of the $0.5 million received in the June 2004
issuance of Series D preferred stock, $249,600 was from Salon Director John
Warnock and $225,600 was either directly or indirectly from the father of
Salon's President, Chief Financial Officer, and Secretary. Salon anticipates
receiving $0.5 million from these same investors in September 2004. Curtailment
of cash investments by related parties could detrimentally impact Salon's cash
availability and its ability to fund its operations.
15
SALON'S PRINCIPAL STOCKHOLDERS CAN EXERCISE A CONTROLLING INFLUENCE OVER SALON'S
BUSINESS AFFAIRS AND THEY MAY MAKE BUSINESS DECISIONS WITH WHICH NON-PRINCIPAL
STOCKHOLDERS DISAGREE THAT MAY AFFECT THE VALUE OF THEIR INVESTMENT
The holders of Salon's Series A, B, C and D preferred stock collectively
own approximately 95.5% of all voting securities as of June 30, 2004. These
stockholders therefore own a controlling interest in Salon. Of this amount,
approximately 67% is held by related parties, of which approximately 20% is
controlled directly or indirectly by the father of Salon's President, Chief
Financial Officer, and Secretary and approximately 40.5% by a Director of Salon.
Therefore, related parties by themselves own a controlling interest in Salon.
If these stockholders were to act together, they would be able to
exercise control over most matters requiring approval by other stockholders,
including the election of directors and approval of significant corporate
transactions. This concentration of ownership could also have the effect of
delaying or preventing a change in control of Salon, which could cause Salon's
stock price to decline.
SALON'S PREFERRED STOCKHOLDERS ARE ENTITLED TO POTENTIALLY SIGNIFICANT
LIQUIDATION PREFERENCES OF SALON'S ASSETS OVER COMMON STOCKHOLDERS IN THE EVENT
OF SUCH AN OCCURRENCE
Salon's Series A, B, C and D preferred stockholders have liquidation
preferences over common stockholders of a minimum of approximately $19.6 million
as of June 30, 2004. In the event of a liquidation event, these holders would
have preference over common stockholders of $19.6 million, or more, and
therefore could affect the value of an investment in Salon's common stock.
Future issuance of preferred stock will increase this liquidation preference.
SALON LACKS SIGNIFICANT REVENUES AND HAS A HISTORY OF LOSSES
Salon has a history of significant losses and expects to incur a loss
from operations for its fiscal year ending March 31, 2005 and potentially in
future years. For the three months ended June 30, 2004, Salon had a loss from
operations of $0.3 million and a net loss attributable to common stockholders of
$1.1 million and had an accumulated deficit of $92.1 million. If and when Salon
does achieve profitability, Salon may not be able to sustain or increase
profitability on a quarterly or annual basis in the future. If revenues grow
more slowly than Salon anticipates or operating expenses exceed expectations,
financial results will most likely be severely harmed and the ability of Salon
to continue its operations will be seriously jeopardized.
Burr, Pilger & Mayer LLP, Salon's independent registered public
accounting firm for the year ended March 31, 2004 included a "going-concern"
audit opinion on the consolidated financial statements for that year.
PricewaterhouseCoopers LLP, Salon's independent registered public accounting
firm for the years ended March 31, 2003, and 2002 included a "going-concern"
audit opinion on the consolidated financial statements for those years. The
audit opinions report substantial doubt about Salon's ability to continue as a
going concern, citing issues such as the history of losses and absence of
current profitability. As a result of the "going-concern" opinions, Salon's
stock price and investment prospects may be adversely affected, thus limiting
financing choices and raising concerns about the realization of value on assets
and operations.
16
SALON'S OPERATIONS REQUIRE ATTRACTIVE CONTENT, SUBSCRIBER INTEREST, AND
CONFIDENCE BY SUBSCRIBERS AND SUPPLIERS THAT THE SUBSCRIPTION OFFERING WARRANTS
THEIR LONG-TERM SUPPORT AND INVESTMENT. THE ABSENCE OF ANY OF THESE FACTORS
COULD IMPAIR THE RESULTS, REVENUE AND CASH FLOW FROM SUBSCRIPTIONS.
Salon is under severe budgetary constraints to limit expenditures. These
constraints affect editorial staffing levels and the purchase of content from
freelance writers. These constraints affect the amount and quality of content
published on Salon's Website and consequently, the positive experience of
Website visitors. The positive experience leads to reoccurring Website visits,
new subscriptions to Salon Premium, and corresponding high renewal rates of
Salon Premium subscribers. As of June 30, 2004 Salon's renewal rate for one-year
paid subscription to Salon Premium was approximately 69%. Salon cannot predict
if this rate will continue in the future or how many new Salon Premium
subscriptions it will acquire.
SALON HAS DEPENDED ON ADVERTISING SALES FOR MUCH OF ITS REVENUES, AND ITS
INABILITY TO MAINTAIN OR INCREASE ADVERTISING REVENUES WILL HARM ITS BUSINESS
Maintaining or increasing Salon's advertising revenues depends upon many
factors, including whether it will be able to:
o successfully sell and market its Website Access Pass advertisements;
o entice non Salon Premium Website visitors to view and advertisers to sell
new ad units and formats;
o maintain a significant number of unique Website visitors and
corresponding significant reach of Internet users;
o maintain a significant number of sellable impressions available to
advertisers;
o successfully sell and market it network to advertisers;
o increase the amount of revenues it receives per advertisement;
o increase awareness of the Salon brand;
o accurately measure the number and demographic characteristics of its
users; and
o attract and retain key sales personnel.
LEGISLATIVE ACTION AND POTENTIAL NEW ACCOUNTING PRONOUNCEMENTS ARE LIKELY TO
CAUSE OUR GENERAL AND ADMINISTRATIVE EXPENSES AND OTHER OPERATING EXPENSES TO
INCREASE
In order to comply with the newly adopted Sarbanes-Oxley Act of 2002 and
proposed accounting changes by the Securities and Exchange Commission, we may be
required to hire additional personnel and utilize additional outside legal,
accounting and advisory services, all of which will cause our general and
administrative costs to increase. Proposed changes in the accounting rules,
including legislative and other proposals to account for employee stock options
as a compensation expense among others, could materially increase the expenses
that we report under generally accepted accounting principles and adversely
affect our operating results.
17
THE LENGTH OF SALON'S SALES CYCLE IS UNCERTAIN AND VARIABLE AND MAY LEAD TO
SHORTFALLS IN REVENUES AND FLUCTUATIONS IN ITS OPERATING RESULTS
Salon's dependence on advertising subjects it to the risk of revenue
shortfalls because the sales cycles for advertising vary significantly, and
during these cycles Salon may expend substantial funds and management resources
while not obtaining advertising revenues. If sales are delayed or do not occur,
Salon's financial results for a particular period may be harmed. The time
between the date of initial contact with a potential customer and the signing of
an advertising order may range from as little as one week to up to several
months. Sales of advertising are subject to factors over which Salon has little
or no control, including:
o advertisers' budgets;
o the acceptability of the Website Access Pass and other forms of rich
media advertisements;
o internal acceptance reviews by advertisers and their agencies;
o the possibility of cancellation or delay of projects by advertisers.
SALON'S STOCK HAS BEEN AND WILL LIKELY CONTINUE TO BE SUBJECT TO SUBSTANTIAL
PRICE AND VOLUME FLUCTUATIONS DUE TO A NUMBER OF FACTORS, MANY OF WHICH WILL BE
BEYOND OUR CONTROL, THAT MAY PREVENT OUR STOCKHOLDERS FROM RESELLING OUR COMMON
STOCK AT A PROFIT
The securities markets have experienced significant price and volume
fluctuations, and the market prices of the securities of Internet companies have
been especially volatile. This market volatility, as well as general economic,
market or political conditions have, and may continue to reduce the market price
of our common stock, regardless of our operating performance. In addition,
Salon's operating results could be below the expectations of public market
analysts and investors, and in response, the market price of our common stock
could decrease significantly.
WITH A VOLATILE SHARE PRICE, SALON MAY BE THE TARGETS OF SECURITIES LITIGATION,
WHICH IS COSTLY AND TIME-CONSUMING TO DEFEND
In the past, following periods of market volatility in the price of a
company's securities, security holders have instituted class action litigation.
Our share price has, in the past, experienced price volatility, and may continue
to do so in the future. Many companies have been subject to this type of
litigation. If the market value of our common stock experiences adverse
fluctuations and we become involved in this type of litigation, regardless of
the merits or outcome, we could incur substantial legal costs and our
management's attention could be diverted, causing our business, financial
condition and operating results to suffer. To date, Salon has not been subject
to such litigation.
SALON'S QUARTERLY OPERATING RESULTS ARE VOLATILE AND MAY ADVERSELY AFFECT ITS
COMMON STOCK PRICE
Salon's 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 Salon's control, and any of which could severely harm Salon's
business. These factors include:
o Salon's ability to attract and retain advertisers and subscribers;
18
o Salon's ability to attract and retain a large number of users;
o the introduction of new Websites, services or products by Salon or by
its competitors;
o the timing and uncertainty of Salon's advertising sales cycles;
o the mix of advertisements sold by Salon or its competitors;
o the economic and business cycle and the recovery speed;
o the level of Internet usage;
o Salon's ability to attract, integrate and retain qualified personnel;
o technical difficulties or system downtime affecting the Internet
generally or the operation of Salon's Website;
o the impact of national economic and diplomatic concerns on the
advertising and news business; and,
o the amount and timing of operating costs.
Due to the factors noted above and the other risks discussed in this
section, one should not rely on quarter-to-quarter comparisons of Salon's
results of operations as an indication of future performance. It is possible
that in some future periods results of operations may be below the expectations
of public market analysts and investors. If this occurs, the price of its common
stock may decline.
THE CONTROVERSIAL CONTENT OF SALON'S WEBSITE MAY LIMIT ITS REVENUES
Salon's Website contains, and will continue to contain, content that is
politically and culturally controversial. As a result of this content, current
and potential advertisers, potential Salon Premium subscribers, or third parties
who contemplate aggregating content, may refuse to do business with Salon.
Salon's outspoken stance on political issues has and may continue to result in
negative reactions from some users, commentators and other media outlets. From
time to time, certain advocacy groups have successfully targeted Salon's
advertisers in an attempt to persuade such advertisers to cease doing business
with Salon. These efforts may be a material impediment to Salon's ability to
grow and maintain advertising revenue.
SALON'S PROMOTION OF THE SALON BRAND MUST BE SUCCESSFUL IN ORDER TO ATTRACT AND
RETAIN USERS AS WELL AS ADVERTISERS AND STRATEGIC PARTNERS
The success of the Salon brand depends largely on its ability to provide
high quality content and services. If Internet users do not perceive Salon's
existing content and services to be of high quality, or if it introduces new
content and services or enters into new business ventures that are not favorably
perceived by users, it may not be successful in promoting and maintaining our
brand. Any change in the focus of its operations creates a risk of diluting our
brand, confusing consumers and decreasing the value of our user base to
advertisers. If Salon is unable to maintain or grow the Salon brand, its
business could be severely harmed.
19
SALON NEEDS TO HIRE, INTEGRATE AND/OR RETAIN QUALIFIED PERSONNEL BECAUSE THESE
INDIVIDUALS ARE IMPORTANT TO ITS GROWTH
Salon's success significantly depends on key editorial personnel. In
addition, because Salon's users must perceive the content of Salon's Website as
having been created by credible and notable sources, Salon's success also
depends on the name recognition and reputation of its editorial staff. Due to
Salon's current operating difficulties, Salon may experience difficulty in
hiring and retaining highly skilled employees with appropriate qualifications.
Salon may be unable to retain its current key employees or attract, integrate or
retain other qualified employees in the future. If Salon does not succeed in
attracting new personnel or retaining and motivating its current personnel, its
business could be harmed.
SALON MAY EXPEND SIGNIFICANT RESOURCES TO PROTECT ITS INTELLECTUAL PROPERTY
RIGHTS OR TO DEFEND CLAIMS OF INFRINGEMENT BY THIRD PARTIES, AND IF SALON IS NOT
SUCCESSFUL IT MAY LOSE RIGHTS TO USE SIGNIFICANT MATERIAL OR BE REQUIRED TO PAY
SIGNIFICANT FEES
Salon's success and ability to compete are significantly dependent on its
proprietary content. Salon relies exclusively on copyright law to protect its
content. While Salon actively take steps to protect its proprietary rights,
these steps may not be adequate to prevent the infringement or misappropriation
of its content. Infringement or misappropriation of its content or intellectual
property could severely harm its business. Salon also licenses content from
various freelance providers and other third-party content providers. While Salon
attempts to ensure that this content may be freely licensed to us, other parties
may assert claims of infringement against us relating to this content.
Salon may need to obtain licenses from others to refine, develop, market
and deliver new services. Salon 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 Salon acquired the Internet address www.salon.com. Because
www.salon.com is the address of the main home page to its Website and
incorporates its company name, it is a vital part of our intellectual property
assets. Salon does 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 Salon fails to adequately
protect its rights in the Website address, or if a third party infringes its
rights in the address, or otherwise dilutes the value of www.salon.com, its
business could be harmed.
SALON'S TECHNOLOGY DEVELOPMENT EFFORTS MAY NOT BE SUCCESSFUL IN IMPROVING THE
FUNCTIONALITY OF ITS NETWORK, WHICH COULD RESULT IN REDUCED TRAFFIC ON ITS
NETWORK OR A LOSS OF SALON PREMIUM SUBSCRIBERS
Salon has developed a proprietary online publishing system and has
developed software to manage its Salon Premium subscription service. If these
systems do not work as intended, or if Salon is unable to continue to develop
these systems to keep up with the rapid evolution of technology for content
delivery and subscription management, its Website or subscription management
systems may not operate properly, which could harm Salon's business.
Additionally, software product design, development and enhancement involve
creativity, expense and the use of new development tools and learning processes.
Delays in software development processes are common, as are project failures,
and either factor could harm Salon's business. Moreover, complex software
products like its online publishing and subscription management systems
frequently contain undetected errors or shortcomings, and may fail to perform or
scale as expected. Although Salon has tested and will continue to test its
systems, errors or deficiencies may be found in these systems that may impact
its business adversely.
20
SALON RELIES ON THIRD PARTIES FOR SEVERAL CRITICAL FUNCTIONS RELATING TO
DELIVERY OF ADVERTISING AND ITS WEBSITE PERFORMANCE, AND THE FAILURE OF THESE
THIRD PARTIES TO SUPPLY THESE SERVICES IN AN EFFICIENT MANNER COULD LIMIT ITS
GROWTH AND IMPAIR ITS BUSINESS
Salon relies on a number of third party suppliers for various services.
While Salon believes that it could obtain these services from other qualified
suppliers on similar terms and conditions, a disruption in the supply of these
services by its current suppliers could severely harm its business.
Salon uses third-party software to manage and measure the delivery of
advertising on its Website. This type of software may fail to perform as
expected. If this software malfunctions or does not deliver the correct
advertisements to its network, Salon's advertising revenues could be reduced,
and its business could be harmed.
Salon uses third-party software to measure traffic on its Website. This
type of software does not always perform as expected. If this software
malfunctions or does not accurately measure its user traffic, Salon may not be
able to justify its advertising rates, and its advertising revenues could be
reduced.
ACCEPTANCE AND EFFECTIVENESS OF INTERNET ADVERTISING IS EVOLVING AND, TO THE
EXTENT IT DOES NOT GROW, SALON'S MARKET MAY NOT DEVELOP ADEQUATELY AND ITS
BUSINESS COULD BE HARMED
Salon's success is highly dependent on an increase in the use of the
Internet. If the markets for Internet advertising or electronic commerce do not
continue to develop, its business may be severely 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 its future advertising
rates and revenues. Any failure to adapt to pricing models that develop or
respond to competitive pressures could reduce its 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 its business.
ADVERTISING PRODUCT OFFERINGS CONTINUE TO CHANGE AND THIS CREATES ADDITIONAL
EFFORT AND UNCERTAINTY ABOUT THIS REVENUE STREAM
Advertisers continue to be attracted by new products, promotional
vehicles and offerings delivered via the Internet. This interest in new products
requires that Salon identify advertiser interests, develop and launch new
advertising products or formats, create appropriate pricing schedules, train the
sales force in the use and sale of new products, manage the obsolescence of
earlier products, and restructure the Salon.com Website to effectively deliver,
track and report new products. New product design, development and launch
involve creativity, expense, technology modifications and learning processes.
While Salon has integrated this activity into its existing operations, the rate
of change could create an environment where Salon is unable to effectively
develop, deliver or track the delivery of products acceptable to the market.
Advertisers are increasingly selecting shorter campaign lengths with less
lead-time until launch. These campaigns have less flexibility in delivery
requirements and limit the ability of Salon to precisely identify future
revenues.
21
TRACKING AND MEASUREMENT STANDARDS FOR INTERNET BASED ADVERTISING MAY NOT EVOLVE
TO THE EXTENT NECESSARY TO SUPPORT INTERNET ADVERTISING, THEREBY CREATING
UNCERTAINTY ABOUT THE VIABILITY OF SALON'S BUSINESS MODEL
Measurement standards for Internet based advertising are evolving. In
addition, software to track Internet usage is also evolving. The development of
such software or other methodologies may not keep pace with Salon's information
needs, particularly to support Salon's internal business requirements and those
of its advertisers. The absence or insufficiency of this information could limit
Salon's ability to attract and retain advertisers.
It is important to Salon's advertisers that Salon accurately presents the
demographics of its user base and the delivery of advertisements on its Website.
Salon depends on third parties to provide certain of the advertiser-requested
services. If they were unable to provide these services in the future, Salon
would need to perform this function itself or obtain them from another provider,
if available. This could cause Salon to incur additional costs or lose revenue
due to a lower level of service. Companies may choose to not advertise on Salon
or may pay less for advertising if they do not perceive our measurements or
measurements made by third parties to be reliable.
IF USE OF THE INTERNET DOES NOT GROW, SALON'S BUSINESS COULD BE HARMED
Salon's 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, it may not be able to
increase revenues from advertising and subscriptions, and this may harm Salon's
business. 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, its results of operations could be harmed.
o inadequate network infrastructure;
o security concerns;
o charging for content;
o inconsistent quality of service; and
o limited availability of cost-effective, high-speed access.
INCREASING COMPETITION AMONG INTERNET CONTENT PROVIDERS COULD REDUCE ITS
ADVERTISING SALES OR MARKET SHARE, THEREBY HARMING ITS BUSINESS
The market for Internet content is relatively new, rapidly changing and
intensely competitive. Salon expects competition for Internet content to
continue to increase, and if it cannot compete effectively, its business could
be harmed. The number of Websites competing for the attention and spending of
users and advertisers may continue to increase with the most trafficked Websites
receiving a disproportionate share of advertising dollars. Salon is not one of
the most trafficked Websites, or even one of the top ten Websites.
Increased competition could result in advertising price reductions or
loss of market share, any of which could harm Salon's business. Competition is
likely to increase significantly as new companies
22
enter the market and current competitors expand their services. Many of Salon's
present and potential competitors are likely to enjoy substantial competitive
advantages over Salon. If Salon does not compete effectively or if it
experiences any pricing pressures or loss of market share resulting from
increased competition, its business could be harmed.
SALON MAY BE HELD LIABLE FOR CONTENT OR THIRD PARTY LINKS ON ITS WEBSITE OR
CONTENT DISTRIBUTED TO THIRD PARTIES
As a publisher and distributor of content over the Internet, including
user-generated content on Salon's online communities and links to third party
Websites that may be accessible through Salon.com, Salon faces potential
liability for defamation, negligence, copyright, patent or trademark
infringement and other claims based on the nature, content or ownership of the
material that is published on or distributed from its Website. These types of
claims have been brought, sometimes successfully, against online services,
Websites and print publications in the past. Other claims may be based on errors
or false or misleading information provided on linked Websites, including
information deemed to constitute professional advice such as legal, medical,
financial or investment advice. Other claims may be based on links to sexually
explicit Websites. Although Salon carries general liability insurance, its
insurance may not be adequate to indemnify Salon for all liabilities imposed.
Any liability that is not covered by its insurance or is in excess of its
insurance coverage could severely harm its financial condition and business.
Implementing measures to reduce its exposure to these forms if liability may
require Salon to spend substantial resources and limit the attractiveness of
Salon's service to users.
CONCERNS ABOUT TRANSACTIONAL SECURITY MAY HINDER ELECTRONIC COMMERCE PROGRAMS BY
SUBJECTING US TO LIABILITY OR BY DISCOURAGING COMMERCIAL TRANSACTIONS OVER THE
INTERNET
A significant barrier to sale of subscriptions and electronic commerce is
the secure transmission of confidential information over public networks. Any
breach in Salon's security could expose it to a risk of loss or litigation and
possible liability. Salon relies on encryption and authentication technology
licensed from third parties to provide secure transmission of confidential
information. As a result of advances in the capabilities of Internet hackers, or
other developments, a compromise or breach of the algorithms we use to protect
customer transaction data may occur. A compromise of Salon's security could
severely harm its 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 its Website.
Salon 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.
SALON'S INTERNALLY DEVELOPED SOFTWARE AND SOFTWARE PLATFORMS PROVIDED BY A THIRD
PARTY TO MANAGE SALON'S SUBSCRIPTION BUSINESS MIGHT FAIL RESULTING IN LOST
SUBSCRIPTION INCOME
Salon's software to manage its subscription business was developed
internally to interface with the software provided by a third party. The third
party's software provides a gateway to authenticate credit card transactions. If
these systems were to fail or not function as intended, credit card transactions
might not be processed and Salon's revenues would therefore be harmed.
23
SALON'S SYSTEMS MAY FAIL DUE TO NATURAL DISASTERS, TELECOMMUNICATIONS FAILURES
AND OTHER EVENTS, ANY OF WHICH WOULD LIMIT USER TRAFFIC
Substantially all of Salon's communications hardware and computer
hardware operations for its Website are in facilities in San Francisco,
California. Fire, floods, earthquakes, power loss, telecommunications failures,
break-ins, supplier failure to meet commitments, and similar events could damage
these systems and cause interruptions in its services. Computer viruses,
electronic break-ins or other similar disruptive problems could cause users to
stop visiting Salon's Website and could cause advertisers to terminate any
agreements with Salon. In addition, Salon could lose advertising revenues during
these interruptions and user satisfaction could be negatively impacted if the
service is slow or unavailable. If any of these circumstances occurred, Salon's
business could be harmed. Salon's insurance policies may not adequately
compensate it for any losses that may occur due to any failures of or
interruptions in our systems. Salon does not presently have a formal disaster
recovery plan.
Salon's Website must accommodate a high volume of traffic and deliver
frequently updated information. It is possible that it will experience systems
failures in the future and that such failures could harm its business. In
addition, its users depend on Internet service providers, online service
providers and other Website operators for access to its Website. 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 its systems. Any of these system failures could harm its business.
HACKERS MAY ATTEMPT TO PENETRATE SALON'S SECURITY SYSTEM; ONLINE SECURITY
BREACHES COULD HARM ITS BUSINESS
Consumer and supplier confidence in Salon's Website depends on
maintaining relevant security features. Security breaches also could damage its
reputation and expose us to a risk of loss or litigation. Experienced
programmers or "hackers" have successfully penetrated sectors of its systems and
Salon expects that these attempts will continue to occur from time to time.
Because a hacker who is able to penetrate its network security could
misappropriate proprietary information or cause interruptions in its products
and services, Salon may have to expend significant capital and resources to
protect against or to alleviate problems caused by these hackers. Additionally,
Salon may not have a timely remedy against a hacker who is able to penetrate its
network security. Such security breaches could materially adversely affect
Salon. In addition, the transmission of computer viruses resulting from hackers
or otherwise could expose us to significant liability. Salon's insurance
policies may not be adequate to reimburse us for losses caused by security
breaches. Salon also faces risks associated with security breaches affecting
third parties with whom it has relationships.
GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES OF THE INTERNET MAY RESTRICT
SALON'S BUSINESS OR RAISE ITS COSTS
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 content, copyrights,
distribution, antitrust matters, 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
Salon's costs of operations and harm Salon's 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. Moreover, it may take years to determine
the extent to which existing laws relating to issues such as
24
property ownership, obscenity, libel and personal privacy are applicable to the
Internet or the application of laws and regulations from jurisdictions whose
laws do not currently apply to its business.
PRIVACY CONCERNS COULD IMPAIR SALON'S BUSINESS
Salon has a policy against using personally identifiable information
obtained from users of its Website and services without the user's permission.
In the past, the Federal Trade Commission has investigated companies that have
used personally identifiable information without permission or in violation of a
stated privacy policy. If Salon uses this information without permission or in
violation of its policy, Salon may face potential liability for invasion of
privacy for compiling and providing information to its corporate customers and
electronic commerce merchants. In addition, legislative or regulatory
requirements may heighten these concerns if businesses must notify Internet
users that the data may be used by marketing entities to direct product
promotion and advertising to the user. Other countries and political entities,
such as the European Union, have adopted such legislation or regulatory
requirements. The United States may adopt similar legislation or regulatory
requirements. If consumer privacy concerns are not adequately addressed, our
business, financial condition and results of operations could be materially
harmed.
POSSIBLE STATE SALES AND OTHER TAXES COULD ADVERSELY AFFECT SALON'S RESULTS OF
OPERATIONS
Salon generally does not collect sales or other taxes from individuals
who sign up for Salon subscriptions. During the year ended March 31, 2003, the
State of California audited Salon's sales tax returns and found Salon in
compliance with its filings and did not object to the fact that it did not
collect sales tax on subscriptions. However, one or more other states may seek
to impose sales tax collection obligations on out-of-state companies, including
Salon, which engage in or facilitate electronic commerce. State and local
governments have discussed and made proposals imposing 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 Salon's
ability to derive revenue from electronic commerce. Moreover, if any state or
foreign country were to assert successfully that Salon should collect sales or
other taxes on the exchange of merchandise on its network or to tax revenue
generated from Salon subscriptions, its financial results could be harmed.
PROVISIONS IN DELAWARE LAW AND OUR CHARTER, STOCK OPTION AGREEMENTS AND OFFER
LETTERS TO EXECUTIVE OFFICERS MAY PREVENT OR DELAY A CHANGE OF CONTROL
Salon is subject to the Delaware anti-takeover laws regulating corporate
takeovers. These anti-takeover laws prevent Delaware corporations from engaging
in a merger or sale of more than 10% of its assets with any stockholder,
including all affiliates and associates of the stockholder, who owns 15% or more
of the corporation's outstanding voting stock, for three years following the
date that the stockholder acquired 15% or more of the corporation's assets
unless:
o the board of directors approved the transaction where the stockholder
acquired 15% or more of the corporation's assets;
o after the transaction where the stockholder acquired 15% or more of the
corporation's assets, the stockholder owned at least 85% of the
corporation's outstanding voting stock, excluding shares owned by
directors, officers and employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held under the plan will be tendered in a tender or exchange
offer; or
25
o on or after this date, the merger or sale is approved by the board of
directors and the holders of at least two-thirds of the outstanding
voting stock that is not owned by the stockholder.
A Delaware corporation may opt out of the Delaware anti-takeover laws if
its certificate of incorporation or bylaws so provide. We have not opted out of
the provisions of the anti-takeover laws. As such, these laws could prohibit or
delay mergers or other takeover or change of control of Salon and may discourage
attempts by other companies to acquire Salon.
Salon's certificate of incorporation and bylaws include a number of
provisions that may deter or impede hostile takeovers or changes of control or
management. These provisions include:
o Salon's board is classified into three classes of directors as nearly
equal in size as possible with staggered three year-terms; and
o special meetings of the stockholders may be called only by the Chairman
of the Board, the Chief Executive Officer or the Board of Directors.
These provisions may have the effect of delaying or preventing a change of
control.
Salon's certificate of incorporation and bylaws provide that it will
indemnify officers and directors against losses that they may incur in
investigations and legal proceedings resulting from their services to Salon,
which may include services in connection with takeover defense measures. These
provisions may have the effect of preventing changes in Salon's management.
In addition, offer letters with executive officers may provide for the
payment of severance and acceleration of options upon the termination of these
executive officers following a change of control of Salon. These provisions in
offer letters could have the effect of discouraging potential takeover attempts.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
Salon does not have an exposure to market risk for changes in interest
rates.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF OUR DISCLOSURE CONTROLS AND INTERNAL CONTROLS
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we conducted
an evaluation of our disclosure controls and procedures, as such term is defined
under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), as of the end of the period covered by this report
(the "Evaluation Date"). Based on this evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that, as of the Evaluation Date, to their
knowledge and belief, our disclosure controls and procedures were effective.
There have been no significant changes (including corrective actions with
regard to significant deficiencies or material weaknesses) in our internal
controls or to our knowledge in other factors that could significantly affect
these controls subsequent to the Evaluation Date.
26
CEO AND CFO CERTIFICATIONS
Attached, as Exhibits 31 and 32, are two separate forms of certifications
of the CEO and the CFO. The certifications attached as Exhibits 31.1 and 31.2
are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002
(the "Section 302 Certification"). The information contained in this Item 4
relates to the Controls Evaluation referred to in the Section 302
Certifications, and should be read with the Section 302 Certifications for a
more complete understanding of the topics presented.
DISCLOSURE CONTROLS AND INTERNAL CONTROLS
Our management, including the CEO and CFO, has a responsibility for
establishing and maintaining adequate disclosure and internal controls over our
financial reporting. Disclosure Controls are procedures that are designed with
the objective of ensuring that information required to be disclosed in our
reports filed under the Securities Exchange Act of 1934, such as this Quarterly
Report on Form 10-Q, is recorded, processed, summarized and reported within the
time periods specified in the SEC rules and forms. Disclosure Controls are also
designed with the objective of ensuring that such information is accumulated and
communicated to our management, including the CEO and CFO, as appropriate to
allow timely decisions regarding required disclosure. Internal Controls are
procedures that are designed with the objective of providing reasonable
assurance that our transactions are properly authorized, our assets are
safeguarded against unauthorized or improper use, and our transactions are
properly recorded and reported, all to permit the preparation of our financial
statements in conformity with GAAP.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS
Our management, including the CEO and CFO, does not expect that our
disclosure controls or our internal controls will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within a company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. In addition, over time, controls may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
27
- --------------------------------------------------------------------------------
PART II: OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS.
Not Applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On June 4, 2004, Salon issued 417 shares of Series D-1 Preferred stock
and warrants to purchase 807,095 shares of common stock and received gross
proceeds of $500,000. The investors included John Warnock, a Director of Salon,
William Hambrecht, the father of Elizabeth Hambrecht, Salon's President, Chief
Financial Officer and Secretary, and an entity that William Hambrecht and
Elizabeth Hambrecht have an ownership interest therein. The capital raised was
for working capital and other general corporate purposes.
The issuance of the shares of Series D-1 Preferred stock and additional
warrants to acquire shares of common stock were deemed exempt from registration
under the Securities Act as a transaction by an issuer not involving public
offering. The investors represented their intention to acquire the securities
for investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the securities
issued in the transactions.
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.
3.4.3(1) Certificate of Designation of Preferences and Rights of
the Series D-1 Preferred Stock, Series D-2 Preferred
Stock, Series D-3 Preferred Stock, Series D-4 Preferred
Stock and Series D-5 Preferred Stock dated as of June 1,
2004.
4.2.82(1) Securities Purchase Agreement dated as of June 4, 2004
between Salon Media Group, Inc. and the Purchasers listed
on the Schedule of Purchasers attached thereto.
4.2.83(1) Form of Common Stock Purchase Warrant dated June 4, 2004
issued by Salon Media Group, Inc.
31.1 Certification of David Talbot, Chairman and Chief
Executive Officer of the Registrant pursuant to Section
302, as adopted pursuant to the Sarbanes-Oxley Act of
2002
28
31.2 Certification of Elizabeth Hambrecht, President, Chief
Financial Officer, and Secretary of the Registrant
pursuant to Section 302, as adopted pursuant to the
Sarbanes-Oxley Act of 2002
32.1 Certification of David Talbot, Chairman and Chief
Executive Officer of the Registrant pursuant to Section
906, as adopted pursuant to the Sarbanes-Oxley Act of
2002
32.2 Certification of Elizabeth Hambrecht, President, Chief
Financial Officer, and Secretary of the Registrant
pursuant to Section 906, as adopted pursuant to the
Sarbanes-Oxley Act of 2002
(1) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K filed on June 16, 2004.
(B) REPORTS ON FORM 8-K.
On June 16, 2004 Salon filed a Current Report on Form 8-K under Item
5 announcing the sale of 417 shares of Series D-1 preferred stock and the
issuance of warrants to purchase 807,095 shares of common stock for which it
received $500,000 in cash.
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 MEDIA GROUP, INC.
Dated: 8/12/04 /s/ David Talbot
------------------------------------
David Talbot
Chairman and Chief Executive Officer
Dated: 8/12/04 /s/ Elizabeth Hambrecht
------------------------------------
Elizabeth Hambrecht
President, Chief Financial Officer, and Secretary
29