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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 SEPTEMBER 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.
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(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
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(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
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(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 November 9, 2004 was 14,588,980 shares.
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FORM 10-Q
SALON MEDIA GROUP, INC.
INDEX
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PAGE
PART I FINANCIAL INFORMATION NUMBER
ITEM 1: Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 2004 and March 31, 2004 (unaudited)................ 3
Condensed Consolidated Statements of Operations for
the three months and six months ended September 30,
2004 and 2003 (unaudited)........................................ 4
Condensed Consolidated Statements of Cash Flows for
the six months ended September 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.............................. 13
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk....... 30
ITEM 4: Controls and Procedures.......................................... 30
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings................................................ 31
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds...... 31
ITEM 3. Defaults upon Senior Securities.................................. 31
ITEM 4. Submission of Matters to a Vote of Security Holders.............. 31
ITEM 5. Other Information................................................ 31
ITEM 6: Exhibits......................................................... 31
Signatures....................................................... 32
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2
PART I: FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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SALON MEDIA GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
SEPTEMBER 30, MARCH 31,
2004 2004
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 547 $ 696
Accounts receivable, net 616 306
Prepaid expenses and other current assets 357 432
------------ ------------
Total current assets 1,520 1,434
Property and equipment, net 164 89
Prepaid advertising rights 4,149 4,430
Goodwill, net 200 200
Other assets 85 117
------------ ------------
Total assets $ 6,118 $ 6,270
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 915 $ 1,125
Deferred revenue 1,116 1,107
Capital lease obligations, current 2 18
------------ ------------
Total current liabilities 2,033 2,250
Long-term liabilities
Warrants payable 1,966 2,621
------------ ------------
Total liabilities 3,999 4,871
------------ ------------
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares
authorized, 8,177 issued and outstanding at
September 30, 2004 and 7,552 issued and outstanding
at March 31, 2004 (liquidation value of $19,801 at
September 30, 2004) -- --
Common stock, $0.001 par value, 50,000,000 shares
authorized, 14,172,464 shares issued and outstanding
at September 30, 2004 and 14,155,276 issued and
outstanding at March 31, 2004 14 14
Additional paid-in-capital
93,186 92,320
Accumulated deficit (91,081) (90,935)
------------ ------------
Total stockholders' equity 2,119 1,399
------------ ------------
Total liabilities and stockholders' equity $ 6,118 $ 6,270
============ ============
The accompanying notes are an integral part of these condensed
consolidated unaudited financial statements
3
SALON MEDIA GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net revenues $ 1,256 $ 1,086 $ 2,989 $ 2,131
------------ ------------ ------------ ------------
Operating expenses:
Production and content 1,004 956 2,204 2,145
Sales and marketing 387 467 855 1,030
Research and development 156 149 291 298
General and administrative 133 322 361 693
Amortization of intangibles -- 97 -- 190
------------ ------------ ------------ ------------
Total operating expenses 1,680 1,991 3,711 4,356
------------ ------------ ------------ ------------
Loss from operations (424) (905) (722) (2,225)
Other income (expense), net 720 (252) 447 (324)
------------ ------------ ------------ ------------
Net profit (loss) 296 (1,157) (275) (2,549)
Preferred deemed dividend 722 (41) 129 31
------------ ------------ ------------ ------------
Net profit (loss) attributable to common stockholders $ 1,018 $ (1,198) $ (146) $ (2,518)
============ ============ ============ ============
Basic net profit (loss) per share attributable
to common stockholders $ 0.07 $ (0.09) $ (0.01) $ (0.18)
Dilutive net profit (loss) per share attributable
to common stockholders $ 0.00 $ (0.09) $ (0.01) $ (0.18)
Weighted average shares used in computing basic net
profit (loss) per share attributable to common
stockholders 14,161 14,090 14,158 14,044
Weighted average shares used in computing dilutive net
profit (loss) per share attributable to common
stockholders 205,148 14,090 14,158 14,044
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
SALON MEDIA GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (275) $ (2,549)
Adjustments to reconcile net loss to net cash used in operating
activities:
Loss from retirement of assets, net -- 43
Warrant re-valuation (406) 48
Depreciation and amortization 178 608
Allowance for recovery of doubtful accounts (1) (8)
Amortization of prepaid advertising rights 281 240
Changes in assets and liabilities:
Accounts receivable (309) (6)
Prepaid expenses, other current assets and other assets (16) (129)
Accounts payable and accrued liabilities (210) 24
Deferred revenue 9 (21)
------------ ------------
Net cash used in operating activities (749) (1,750)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (130) (1)
Proceeds from asset sales -- 15
------------ ------------
Net cash (used) provided by investing activities (130) 14
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowing -- 155
Proceeds from exercise of stock options 2 --
Payments to bank -- (83)
Proceeds from issuance of notes payable -- 1,613
Proceeds from issuance of preferred stock, net 744 --
Principal payments under capital lease obligations (16) (69)
------------ ------------
Net cash provided by financing activities 730 1,616
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (149) (120)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 696 162
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 547 $ 42
============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of stock and warrants in connection with acquisition $ -- $ 5
Issuance of warrants in connection with issuance of convertible
notes payable -- 151
Preferred deemed dividend in connection with preferred stock
financing 218 --
Preferred deemed dividend from warrant re-valuation (347) (31)
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 necessary for a fair
presentation of the financial position and operating results for the interim
periods presented. Other than adjustments related to the issuance of preferred
stock in Note 5 "Preferred Stock" and Note 6 "Warrant Valuation," all entries
are of a normal recurring nature. 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 and six months ended September 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. Except for a profit recorded for the three months ended September
31, 2004 as a direct result of a benefit of $1,641 from the re-valuation of
warrants, Salon has incurred losses and negative cash flows from operations
since inception and has an accumulated deficit at September 30, 2004 of $91,081.
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 would 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 that 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 or six-month periods ended September 30, 2004 and September 30,
2003. One customer accounted for 14% of the total accounts receivable balance as
of September 30, 2004. Four customers accounted for 26%, 16%, 15%, and 13%,
respectively, of the total accounts receivable balance as of September 30, 2003.
6
SALON MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
4. NET PROFIT (LOSS) PER SHARE
Basic net profit (loss) per share is computed using the weighted average
number of shares of common stock outstanding during the period and 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 SIX MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Numerator:
Numerator for basic and diluted net profit
(loss) attributable to common stockholders $ 1,018 $ (1,198) $ (146) $ (2,518)
Denominator:
Weighted average common shares outstanding 14,161,000 14,155,000 14,158,000 14,155,000
Weighted average common shares held in escrow -- (65,000) -- (111,000)
Denominator for basic net profit (loss)
attributable to common stockholders ------------ ------------ ------------ ------------
weighted average shares 14,161,000 14,090,000 14,158,000 14,044,000
Effect of dilutive preferred stock 176,513,000 -- -- --
Effect of dilutive common stock warrants 14,238,000 -- -- --
Effect of dilutive common stock options 236,000 -- -- --
------------ ------------ ------------ ------------
Denominator for dilutive net profit (loss)
attributable to common stockholders per share 205,148,000 14,090,000 14,158,000 14,044,000
Antidilutive securities including options, warrants,
and convertible preferred stock not included in
net loss attributable to common stockholder per
share calculation N/A 36,944,787 207,759,983 36,944,787
For the three months ended September 30, 2004, options to purchase
1,831,000 weighted average shares of common stock and warrants to purchase
609,000 weighted average shares of common stock were excluded from the
computation of dilutive net income per share as the exercise prices of the
securities were greater than the average market price of Salon's common stock
during the period. If Salon's compensation expense under its stock option plan
had been determined pursuant to Statement of
7
SALON MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," Salon's net profit (loss) per share would have been as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net profit (loss) attributable to common stockholders:
As reported $ 1,018 $ (1,198) $ (146) $ (2,518)
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 (10) (22) (26) (104)
Pro forma net profit (loss) attributable to ------------ ------------ ------------ ------------
common stockholders $ 1,008 $ (1,220) $ (172) $ (2,622)
============ ============ ============ ============
Basic net profit (loss) per share attributable to
common stockholders:
As reported $ 0.07 $ (0.09) $ (0.01) $ (0.18)
Pro forma $ 0.07 $ (0.09) $ (0.01) $ (0.19)
Diluted net profit (loss) per share attributable to
common stockholders:
As reported $ 0.00 $ (0.09) $ (0.01) $ (0.18)
Pro forma $ 0.00 $ (0.09) $ (0.01) $ (0.19)
5. PREFERRED STOCK
On June 4, 2004, Salon issued 417 shares of Series D-1 preferred stock
and received $500 in cash and incurred $6 of expenses for a net $494 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. On September 30, 2004, Salon issued 208
shares of Series D-2 preferred stock for $250 in cash from investor John
Warnock, a Director of Salon, and incurred no expenses. The financing was
effected in accordance with Amendment No. 1 to the Securities Purchase Agreement
dated as of September 30, 2004.
8
SALON MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
The 417 shares of Series D-1 preferred stock and 208 shares of Series D-2
preferred stock were sold at a price of $1,200 per share. In addition, Salon
issued to the holders of Series D-1 preferred stock warrants to purchase 807,095
shares common stock at an exercise price of $0.138 per share and issued to the
holder of Series D-2 preferred stock a warrant to purchase 340,363 shares of
common stock at an exercise price of $0.1265. 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 and the 208 shares of Series D-2
preferred stock are convertible into, and have the voting rights of,
approximately 2,269,000 shares of common stock. Following the transactions: (i)
John Warnock owns approximately 79,514,000 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 8,892,000 shares of 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 192,930,000 shares. Warrants outstanding to purchase 25,227,000
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 and the Series D-2
preferred stock is convertible into common stock at the conversion rate
determined by dividing the Series D-2 preferred stock per share price of $1,200
by the Series D-2 Conversion Price of $0.11. 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. Salon anticipates securing
stockholder approval at its November 17, 2004 Annual Meeting of Stockholders.
The Series D-1 and D-2 preferred stock conversion price is subject to downward
adjustment in the event of certain subsequent stock issuances by Salon.
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. In addition,
the warrants to purchase 807,095 shares of common stock issued to the holders of
Series D-1 Preferred Stock were valued at approximately $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. 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 and the fair value of the warrants issued.
Even though the offering price of Salon's Series D-2 preferred stock and
the fair value of Salon's common stock into which the preferred stock is
convertible on the date of the transaction were equal, the warrants issued to
the holders of Series D-2 preferred stock were valued at $26 using the
Black-Scholes option-pricing model, applying an expected life of three years, a
weighted average risk-free interest rate of 2.792%, a volatility of 120% and a
deemed fair value of common stock of $0.11 per share. Due to the difference
between the offering price of Salon's Series D-2 preferred stock and the fair
value of Salon's
9
SALON MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
common stock into which the preferred stock is convertible on the date of the
transaction and the fair value of the warrants issued, Salon recorded a $23
preferred deemed dividend.
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 1,460 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. As of September 30,
2004, no dividend has been declared to the holders of preferred stock.
If, after initial preferential liquidation payments to the holders of
Series A, B, C and D preferred stock, 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. Preferred stockholders as a group own approximately 95.6% 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 24,021,000 shares of common stock, or 95.2% of the total warrants
issued.
10
SALON MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
6. 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 value of
the warrants issued in conjunction with the issuance of Series D-1 and D-2 of
$98 was therefore recorded as an additional liability.
At March 31, 2004, the closing price of Salon's common stock utilized in
re-measuring the value of all warrants issued was $0.14 per share, increasing to
$0.18 per share at June 30, 2004, and decreasing to $0.11 per share at September
30, 2004. The drop in per share price between June 30, 2004 and September 30,
2004 of $.07 and a modest drop in interest rates primarily resulted in the value
of warrants declining by $1,641 for the three-month period ended September 30,
2004 and resulted in a non-cash benefit to the results of operations of $1,641.
The drop in per share price between March 31, 2004 and September 30, 2004 of
$.03 and an increase in interest rates primarily resulted in the value of
warrants declining by $753 for the six-month period ended September 30, 2004 and
resulted in a non-cash benefit to the results of operations of $753. Due
primarily to a $0.01 per share increase in the closing price of Salon's common
stock utilized in re-measuring the value of all warrants issued between June 30,
2003 and September 30, 2003 increasing the value of warrants, Salon recorded a
non-cash charge of $110 to the results of operations for the three-month period
ended September 30, 2003. Slight changes in interest rates between the March 31,
2003 measurement period and the September 30, 2003 measurement period resulted
in a non-cash charge of $17 to the results of operations for the six-month
period ended September 30, 2003. The change in value of warrants is recapped as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
OPERATING RESULTS AFFECTED 2004 2003 2004 2003
---------- ---------- ---------- ----------
Production and content $ 134 $ $ 62 $
General and administrative 68 33
Other income (expense), net 694 (69) 311 (48)
Preferred deemed dividend 745 (41) 347 31
---------- ---------- ---------- ----------
$ 1,641 $ (110) $ 753 $ (17)
========== ========== ========== ==========
11
SALON MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
7. GOODWILL AMORTIZATION AND INTANGIBLE ASSETS
The following table sets forth information concerning Salon's goodwill
and intangible assets as of September 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
============ ============ ============
12
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, which as of August 2004 is available
to Salon Premium subscribers free of charge, 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 AND SIX MONTHS ENDED SEPTEMBER 30, 2004
COMPARED TO THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2003
NET REVENUES:
Net revenues increased 16% to $1.3 million for the three months ended
September 30, 2004 from $1.1 million for the three months ended September 30,
2003 and increased 40% to $3.0 million for the six months ended September 30,
2004 from $2.1 million for the six months ended September 30, 2003.
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Advertising revenues increased to $0.5 million for the three months ended
September 30, 2004 from $0.4 million for the three months ended September 30,
2003 and increased to $1.5 million for the six months ended September 30, 2004
from $0.8 million for the six months ended September 30, 2003. The increase in
advertising revenues 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. The tepid advertising revenues for
the three months ended September 30, 2004 reflects a seasonal slowness
historically incurred during this period. Salon estimates that advertising
revenues for the three months ended December 31, 2004 will be approximately
$1.0-$1.2 million.
Salon Premium subscription revenues increased to $534,000 for the three
months September 30, 2004 from $463,000 for the three months ended September 30,
2003 and increased to $1.0 million for the six months ended September 30, 2004
from $0.9 million for the six months ended September 30, 2003. The increase in
Salon Premium subscription revenues is from an increase in overall
subscriptions. Total paid subscriptions were approximately 21,000 and 40,500 for
the three months and six months ended September 30, 2004, respectively, compared
to approximately 17,700 and 36,000 for the three months and six months ended
September 30, 2003, respectively. As of September 30, 2004, Salon has
approximately 80,900 active subscribers and deferred $1.0 million of revenue,
compared to 72,500 active subscribers and deferred revenue of $0.8 million as of
September 30, 2003. Due to efforts to re-subscribe lapsed subscriptions with
promotional discounts, the renewal rate for one-year paid subscriptions
increased from approximately 69% as of June 30, 2004 to approximately 72% as of
September 30, 2004. The renewal rate for one-year paid subscriptions as of
September 30, 2003 was estimated to range from 65% to 70%. Salon estimates that
Salon Premium revenues for the three months ended December 31, 2004 will be
approximately $0.6 million.
All other sources of revenues were $0.2 million for the three-month
periods ended September 30, 2004 and September 30, 2003, and were $406,000 and
$457,000 for the six months ended September 30, 2004 and September 30, 2003,
respectively. The majority of this revenue is derived from Salon's on-line
forums The Well and Table Talk. Subscription revenues from these on-line forums
were $138,000 and $279,000 for the three months and six months ended September
30, 2004, respectively, compared to $149,000 and $306,000 for the three months
and six months ended September 30, 2003, respectively. On-line forum
subscription revenues declined as Salon made membership to Table Talk available
free of charge to Salon Premium subscribers in August 2004 in order to make it a
more robust on-line forum and discontinued charging approximately 600 members
for this service at that time. Salon estimates that all other sources of revenue
for the three months ended December 31, 2004 will be approximately $0.1 - $0.2
million.
PRODUCTION AND CONTENT:
Production and content expenses during the three months ended September
30, 2004 and September 30, 2003 was $1.0 million. Expenses for the three months
ended September 30, 2004 include an additional $0.1 million of payroll related
costs from opening an office in Washington, DC this year to increase political
coverage and from filling open positions. This increase was offset by a credit
of $0.1 million from a decrease in value of warrants issued in December 2003 for
editorial collaboration with a print publisher.
Production and content expenses during the six months ended September 30,
2004 were $2.2 million compared to $2.1 million for the six months ended
September 30, 2003, an increase of $0.1 million or 3%. Opening an office in
Washington, DC this year with a staff of three to increase political
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coverage and filling open positions, resulted in payroll related costs
increasing by $0.2 million. This increase was offset by a $0.1 million reduction
in various other operating expenses.
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 September 30,
2004 were $0.4 million compared to $0.5 million for the three months ended
September 30, 2003. The decline of $0.1 million or 17% is attributable to
reduced payroll related costs from eliminating four positions between the
periods.
Sales and marketing expenses during the six months ended September 30,
2004 were $0.9 million compared to $1.0 million for the six months ended
September 30, 2003. The decline of $0.1 million or 17% is attributable to $0.1
million of reduced payroll related costs from eliminating four positions between
the periods, and 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 six months ended September 30,
2004. An overall $0.1 million in other general sales and marketing expenses
offset these amounts. 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 September
30, 2004 of $156,000 were comparable to the $149,000 incurred for the three
months ended September 30, 2003. Research and development expenses during the
six months ended September 30, 2004 and September 30, 2003 were $0.3 million.
Salon does not anticipate material future changes in research and development
expenditures.
GENERAL AND ADMINISTRATIVE:
General and administrative expenses for the three months ended September
30, 2004 were $0.1 million compared to $0.3 million for the three months ended
September 30, 2003, a decline of $0.2 million or 59%. The decline was
attributable to a $0.1 million decrease in salary related costs as existing
employees between years absorbed three positions and an approximate credit of
$0.1 million resulting from a decrease in value of warrants issued to Salon's
former Chief Executive Officer and President.
General and administrative expenses for the six months ended September
30, 2004 were $0.4 million compared to $0.7 million for the six months ended
September 30, 2003, a decline of $0.3 million or 48%. The decline was
attributable to a $0.2 million decrease in salary related costs as existing
employees between years absorbed three positions and $0.1 million from a
decrease in general operating expenses. Salon does not anticipate material
future changes in general and administrative expenditures.
AMORTIZATION OF INTANGIBLES:
Results for the three and six months ended September 30, 2003 include
$0.1 million and $0.2 million respectively, for the amortization of intangible
assets. All such assets were fully amortized as of March 31, 2004.
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OTHER INCOME (EXPENSE), NET:
A decline in Salon's common stock price from $0.18 per share at June 30,
2004 to $0.11 at September 30, 2004 primarily accounted for a decrease in value
of warrants previously issued to convertible note holders, resulting in a
non-cash benefit of $0.7 million Other income (expense), net for the three
months ended September 30, 2004. For the three months ended September 30, 2003,
Salon recorded an Other income (expense), net charge of $0.3 million.
Approximately $0.2 million of this charge is attributable to expensing the value
of warrants issued in conjunction with the issuance of convertible notes, and
$0.1 million from the accrual of interest on the notes issued and other nominal
interest related items. The majority of the warrants issued have been to related
parties, primarily John Warnock, a Director of Salon and entities that the
father of Salon's President, Chief Financial Officer, Treasurer and Secretary,
has an ownership interest in.
For the six months ended September 30, 2004 Salon recorded an Other
income (expense), net benefit of $0.4 million. The benefit includes a $0.3
million non-cash credit that resulted from a decrease in value of warrants
previously issued to convertible note holders, and 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 September 30,
2004, very little grant monies remain to finance editorial content. Salon cannot
accurately predict if it will receive additional monies to finance editorial
content.
PREFERRED DEEMED DIVIDEND:
The non-cash preferred deemed dividend benefit of $0.7 million for the
three months ended September 30, 2004 is primarily attributable to a change in
value of warrants previously issued to preferred stockholders.
The non-cash preferred deemed dividend benefit of $0.1 million for the
six months ended September 30, 2004 includes a benefit of $0.3 attributable to a
decrease in value of warrants previously issued to preferred stockholders,
offset by a $0.2 million non-cash preferred deemed dividend charge primarily
from the June 4, 2004 issuance of 417 shares of Series D-1 preferred stock,
which represented 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 and the value of
the warrants issued in the transaction.
NET PROFIT (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS:
As a result of the above factors, which included a benefit of $1.6
million from the decline in value of warrants previously issued, Salon recorded
a net profit attributable to common stockholders of $1.0 million, or $0.07 per
basic share, or $0.00 per diluted share, for the three months ended September
30, 2004, compared to a net loss attributable to common stockholders of $1.2
million, or ($0.09) per share for the three months ended September 30, 2003.
Also as a result of the above factors, which included a benefit of $0.8 million
from the decline in value of warrants previously issued, Salon recorded a net
loss attributable to common stockholders of $0.1 million, or $(0.01) per share
for the six months ended September 30, 2004 compared to a net loss attributable
to common stockholders of $2.5 million, or ($0.18) per share for the six months
ended September 30, 2003.
The change in value of warrants effect on Salon's results of operations
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 applied to operating
results. At Salon's Annual Stockholders Meeting to be held on November 17, 2004,
Salon contemplates approval by its
16
stockholders' to amend Salon's Certificate of Incorporation to increase the
number of authorized shares of common stock from 50,000,000 to 600,000,000. Such
approval will preclude Salon from having to record similar future charges or
benefits in its results of operations.
LIQUIDITY AND CAPITAL RESOURCES:
As of September 30, 2004, Salon had approximately $0.5 million in
available cash, of which approximately $250,000 was from the issuance of
preferred stock on September 30, 2004.
Net cash used in operations was $0.7 million for the six months ended
September 30, 2004, compared to $1.8 million for the three months ended
September 30, 2003. The principal use of cash during the three months ended
September 30, 2004 was to fund the $0.3 million net loss for the period and the
$0.3 million increase in accounts receivable, which were offset by $0.1 million
of non-cash charges. The principal use of cash during the six months ended
September 30, 2003 was to fund the $2.5 million net loss for the period, which
was primarily offset by $0.9 million of non-cash charges.
Net cash used in investing activities was $0.1 million for the six months
ended September 30, 2004 to acquire computer related equipment, compared to none
for the six months ended September 30, 2003.
Net cash from financing activities provided $0.7 million for the six
months ended September 30, 2004 compared to $1.6 million for the six months
ended September 30, 2003. For the six months ended September 30, 2004, Salon
received approximately $0.7 million net from the issuance of Series D-1 and D-2
preferred stock, practically all of which was from related parties. For the six
months ended September 30, 2003, Salon issued $1.6 million of convertible notes
payable, of which $1.4 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 advertising sales for the six months ended
September 30, 2004 have increased by 99% to $1.5 million compared to the six
months ended September 30, 2003, 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 December 31, 2004
are anticipated to be approximately $1.0 - $1.2 million. Salon believes that
based on current traffic to its Website, and its current network of servers,
that this projected advertising revenue represents the peak advertising revenue
that it can attain. Salon is therefore deploying new software, servers and other
computer related equipment to allow it to serve additional advertisements on its
Website to surpass this range. Salon may experience some disruption to it
Website and its ability to serve advertisements during this transition.
Salon's cash projections indicate that it will require an additional
infusion of cash during the three months ended December 31, 2004 for working
capital needs and to finance relocation of its San Francisco corporate office to
another location in San Francisco. As such, Salon contemplates issuing 209
shares of preferred stock during the period for approximately $251,000 in cash.
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.
17
As Salon's lease for its corporate office expires on February 28, 2005,
Salon is contemplating moving to a new office space to reduce its current
monthly rent expense from approximately $26,000 per month to $17,000 to $20,000
per month for terms of four to six years. Deposits for new office space,
potential tenant improvements and costs associated with moving an office are
expected to be financed with cash on hand, cash to be generated from operations
and from the issuance of preferred stock contemplated to occur by December 31,
2004. Salon at this time does not anticipate issuing preferred stock during its
fourth quarter ending March 31, 2005. However, it may need to issue additional
preferred stock either immediately before or after this time, if relocation
efforts prove to be more costly than anticipated. There is no guarantee that
Salon will be able to issue additional preferred stock.
Salon's common stockholders have experienced considerable dilution from
the issuance of Series A, B, C and D preferred stock. As of September 30, 2004,
the holders of Salon's preferred stock control approximately 95.6% of the voting
securities of Salon, with related parties holding approximately 69% of such
securities. Of the related parties, Director John Warnock holds approximately
41% 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 209 shares of preferred stock by December 31, 2004
for which it should receive approximately $251,000 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, or relocation
efforts of its San Francisco corporate office are more costly than anticipated,
Salon may need to issue additional preferred stock, increasing the dilution of
common stockholders. If Salon is not successful in issuing preferred stock, 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-1 preferred stock resulted in a $0.2 million preferred
deemed dividend charge to Salon's results of operations. However, the issuance
of Series D-2 in September 30, 2004 resulted in a negligible $23,000 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.
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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 of a total of $4.2 million of cash received by Salon from the
issuance of convertible notes payable, approximately $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-1 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 also
received from Director John Warnock approximately $250,000 on September 30, 2004
from the issuance of Series D-2 preferred stock. Salon anticipates receiving
$251,000 either directly or indirectly from William Hambrecht by December 31,
2004. Curtailment of cash investments by related parties could detrimentally
impact Salon's cash availability and its ability to fund its operations.
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 95.6% of all voting securities as of September 30, 2004. These
stockholders therefore own a controlling interest in Salon. Of this amount,
approximately 69% 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 41% by Director John Warnock.
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 all 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 $19.8 million
as of September 30, 2004. In the event of a liquidation event, these holders
would have preference over common stockholders of $19.8 million, or more, and
therefore could affect the value of an investment in Salon's common stock. The
current liquidation preferences of Salon's preferred stockholders is
significantly higher than Salon's market capitalization listed in various
financial publications which is calculated by multiplying the number of
outstanding shares of Salon common stock and the reported closing trading prices
on the Over-The-Counter Bulletin Board. 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 six months ended September 30,
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2004, Salon had a net loss attributable to common stockholders of $0.1 million
after recording a benefit of $0.8 million from re-valuing warrants, and had an
accumulated deficit of $91.1 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 have been and will continue to be adversely
affected, thus limiting financing choices and raising concerns about the
realization of value on assets and operations.
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 September 30, 2004 Salon's renewal rate for
one-year paid subscription to Salon Premium was approximately 73%. 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;
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o increase awareness of the Salon brand;
o improve the technology for serving advertising on our Website;
o handle temporary high volume traffic spikes to its Website;
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.
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.
21
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;
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.
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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.
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.
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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.
SALON RELIES ON SOFTWARE, PURCHASED FROM AN INDEPENDENT SUPPLIER, TO DELIVER AND
REPORT SOME OF ITS ADVERTISING, THE FAILURE OF WHICH COULD IMPAIR OUR BUSINESS
Salon uses software, purchased from an independent supplier, to manage
and measure the delivery of advertising on its Website. The software is
essential to Salon whenever an advertiser does not stipulate ad serving from a
third party such as Doubleclick. This type of software may fail to perform as
expected. If this software malfunctions, advertisements may not be served
correctly on our Website, or the software does not accurately capture impression
information, then Salon's advertising revenues could be reduced, and its
business could be harmed.
SALON IS UPGRADING ITS SOFTWARE UTILIZED IN SERVING ITS ADVERTISEMENTS, IN
TANDEM WITH ADDING TO, AND CHANGING THE CONFIGURATION OF ITS SERVERS, AND ADDING
OTHER COMPUTER RELATED HARDWARE, IN ORDER TO INCREASE THE NUMBER OF
ADVERTISEMENTS IT CAN SERVE, A FAILURE OF WHICH COULD IMPAIR OUR BUSINESS
In order to improve Salon's Website infrastructure, Salon needs to
upgrade the software utilized in serving advertisements. The upgrade to the ad
serving software should facilitate deploying additional servers, thereby
increasing the speed that our content and advertisements can be served to a
Website visitor's browser and improve our ability to geo-target advertisements.
These upgrades should also enable Salon to reduce the over-delivery of
advertisement impressions by improving reporting capabilities, allowing Salon to
serve more ads within a given period of time. The improved management of
impressions should increase our inventory of impressions available to be sold to
advertisers, allowing Salon to increase its advertising revenues. The increase
in the number of infrastructure servers should also allow more Website visitors
access to our content, thereby increasing our traffic, and corresponding
impressions available to be sold to advertisers. A failure in implementing the
upgraded software and
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corresponding computer hardware could constrain the number of impressions
available to advertisers and Salon's ability to increase advertising revenues.
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.
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
25
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 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
26
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.
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
27
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 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.
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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
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.
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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
Our management evaluated, with the participation of our Chief Executive
Officer and our Chief Financial Officer, the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this Quarterly
Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures are effective to ensure that information we are required to disclose
in reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There was no change in our internal control over financial reporting that
occurred during the period covered by this Quarterly Report on Form 10-Q that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
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- --------------------------------------------------------------------------------
PART II: OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS.
Not Applicable
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On September 30, 2004, Salon issued 208 shares of Series D-2 Preferred
stock and warrants to purchase 340,363 shares of common stock and received gross
proceeds of $249,600 from John Warnock, a Director of Salon. The capital raised
was for working capital and other general corporate purposes.
The issuance of the shares of Series D-2 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.
(a) EXHIBITS.
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
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
99.1(1) Press Release dated August 5, 2004
31
(1) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K filed on August 5, 2004.
(B) REPORTS ON FORM 8-K.
On August 5, 2004 Salon filed a Current Report on Form 8-K under Item
12 announcing the results of operations for the three months ended June 30,
2004.
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: 11/12/04 /s/ David Talbot
--------------------------------------------
David Talbot
Chairman and Chief Executive Officer
Dated: 11/12/04 /s/ Elizabeth Hambrecht
--------------------------------------------
Elizabeth Hambrecht
President, Chief Financial Officer, and Secretary
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