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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 DECEMBER 31, 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
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(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 February 7, 2005 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
December 31, 2004 and March 31, 2004 (unaudited)................. 3
Condensed Consolidated Statements of Operations for
the three months and nine months ended December 31,
2004 and 2003 (unaudited)........................................ 4
Condensed Consolidated Statements of Cash Flows for
the nine months ended December 31, 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................................................ 32
ITEM 6: Exhibits......................................................... 32
Signatures....................................................... 33
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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)
DECEMBER 31, MARCH 31,
2004 2004
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 460 $ 696
Accounts receivable, net 1,128 306
Prepaid expenses and other current assets 262 432
---------- ----------
Total current assets 1,850 1,434
Property and equipment, net 139 89
Prepaid advertising rights 3,990 4,430
Goodwill, net 200 200
Other assets 68 117
---------- ----------
Total assets $ 6,247 $ 6,270
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 864 $ 1,125
Deferred revenue 1,119 1,107
Capital lease obligations, current 1 18
---------- ----------
Total current liabilities 1,984 2,250
Long-term liabilities
Warrants payable -- 2,621
---------- ----------
Total liabilities 1,984 4,871
---------- ----------
---------- ----------
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, 8,177
issued and outstanding at December 31, 2004 and 7,552 issued and
outstanding at March 31, 2004 (liquidation value of $19,991 at
December 31, 2004) -- --
Common stock, $0.001 par value, 600,000,000 shares
authorized, 14,588,980 shares issued and outstanding
at December 31, 2004 and 14,155,276 issued and
outstanding at March 31, 2004 14 14
Additional paid-in-capital 94,935 92,320
Accumulated deficit (90,686) (90,935)
---------- ----------
Total stockholders' equity 4,263 1,399
---------- ----------
Total liabilities and stockholders' equity $ 6,247 $ 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 NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------- --------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net revenues $ 2,150 $ 1,273 $ 5,139 $ 3,404
---------- ---------- ---------- ----------
Operating expenses:
Production and content 1,131 1,069 3,335 3,214
Sales and marketing 551 649 1,406 1,679
Research and development 158 150 449 448
General and administrative 163 371 524 1,064
Amortization of intangibles -- 86 -- 276
---------- ---------- ---------- ----------
Total operating expenses 2,003 2,325 5,714 6,681
---------- ---------- ---------- ----------
Income (loss) from operations 147 (1,052) (575) (3,277)
Other income (expense), net 125 (134) 572 (458)
---------- ---------- ---------- ----------
Net profit (loss) 272 (1,186) (3) (3,735)
Preferred deemed dividend 123 (1) 252 30
---------- ---------- ---------- ----------
Net profit (loss) attributable to common stockholders $ 395 $ (1,187) $ 249 $ (3,705)
========== ========== ========== ==========
Basic net profit (loss) per share attributable
to common stockholders $ 0.03 $ (0.08) $ 0.02 $ (0.26)
Dilutive net profit (loss) per share attributable
to common stockholders $ 0.00 $ (0.08) $ 0.00 $ (0.26)
Weighted average shares used in computing
basic net profit (loss) per share
attributable to common stockholders 14,507 14,155 14,275 14,081
Weighted average shares used in computing
dilutive net profit (loss) per share
attributable to common stockholders 203,387 14,155 202,762 14,081
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)
NINE MONTHS ENDED
DECEMBER 31,
--------------------------
2004 2003
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3) $ (3,735)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss from retirement of assets, net -- 43
Warrant re-valuation (541) (9)
Depreciation and amortization 299 1,024
Allowance for recovery of doubtful accounts 2 (8)
Gain on issuance of common stock for trade payable (25) --
Amortization of prepaid advertising rights 440 600
Changes in assets and liabilities:
Accounts receivable (824) (122)
Prepaid expenses, other current assets and other assets 9 (97)
Accounts payable and accrued liabilities (195) (31)
Deferred revenue 12 162
---------- ----------
Net cash used in operating activities (826) (2,173)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (139) (1)
Proceeds from asset sales -- 15
---------- ----------
Net cash (used) provided by investing activities (139) 14
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowing -- 182
Proceeds from exercise of stock options 2 --
Payments to bank -- (182)
Proceeds from issuance of notes payable -- 2,513
Proceeds from issuance of preferred stock, net 744 490
Principal payments under capital lease obligations (17) (84)
---------- ----------
Net cash provided by financing activities 729 2,919
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (236) 760
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 696 162
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 460 $ 922
========== ==========
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 and preferred stock -- 293
Issuance of warrants in connection with other agreements 100
Issuance of common stock for trade payable 41 --
Preferred deemed dividend in connection with preferred stock financing 218 --
Preferred deemed dividend from warrant re-valuation (470) (30)
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 nine months ended December
31, 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, and a profit of $395 for the three months ended December 31, 2004, of
which $258 was a benefit from the re-valuation of warrants, Salon has incurred
losses and negative cash flows from operations since inception and has an
accumulated deficit at December 31, 2004 of $90,686. 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
may 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 nine-month periods ended December 31, 2004 and December 31, 2003.
One customer accounted for 12% of the total accounts receivable balance as of
December 31, 2004. Two customers accounted for 20% and 13% of the total accounts
receivable balance as of December 31, 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 profit (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 NINE MONTHS ENDED
DECEMBER 31 DECEMBER 31
----------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Numerator:
Numerator for basic and diluted net profit
(loss) attributable to common stockholders $ 395 $ (1,187) $ 249 $ (3,705)
Denominator:
Weighted average common shares outstanding 14,507,000 14,155,000 14,275,000 14,155,000
Weighted average common shares held in escrow -- -- -- (74,000)
------------ ------------ ------------ ------------
Denominator for basic net profit (loss)
attributable to common stockholders
weighted average shares 14,507,000 14,155,000 14,275,000 14,081,000
Effect of dilutive preferred stock 178,758,000 -- 175,976,000 --
Effect of dilutive common stock warrants 10,118,000 -- 12,502,000 --
Effect of dilutive common stock options 4,000 -- 9,000 --
------------ ------------ ------------ ------------
Denominator for dilutive net profit (loss)
attributable to common stockholders per share 203,387,000 14,155,000 202,762,000 14,081,000
Antidilutive securities including options,
warrants, and convertible preferred stock not
included in net loss attributable to common
stockholder per share calculation -- 187,699,000 -- 187,699,000
For the three and nine months ended December 31, 2004, options to
purchase 3,617,000 and 3,590,000, respectively, weighted average shares of
common stock and warrants to purchase 1,450,000 and 1,336,000, respectively,
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 NINE MONTHS ENDED
DECEMBER 31 DECEMBER 31
-------------------------- --------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net profit (loss) attributable to common stockholders:
As reported $ 395 $ (1,187) $ 249 $ (3,705)
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 (2) (94) (28) (198)
---------- ---------- ---------- ----------
Pro forma net profit (loss) attributable to common
stockholders $ 393 $ (1,281) $ 221 $ (3,903)
========== ========== ========== ==========
Basic net profit (loss) per share attributable
to common stockholders:
As reported $ 0.03 $ (0.08) $ 0.02 $ (0.26)
Pro forma $ 0.03 $ (0.09) $ 0.02 $ (0.28)
Diluted net profit (loss) per share attributable
to common stockholders:
As reported $ 0.00 $ (0.08) $ 0.00 $ (0.26)
Pro forma $ 0.00 $ (0.09) $ 0.00 $ (0.28)
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 193,347,000 shares. Warrants outstanding to purchase approximately
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 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 the Series D
preferred stock is called.
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, during the
period ended June 30, 2004, Salon recorded a preferred deemed dividend of $195
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 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 was
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 common stock into which the preferred stock was convertible on
the date of the transaction and
9
SALON MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
the fair value of the warrants issued, Salon recorded a $23 preferred deemed
dividend during the period ended September 30, 2004.
As of December 31, 2004, 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 Salon 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 common stock issuable on conversion of preferred stock, until
the 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. 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
Up until November 22, 2004, Salon had an inadequate number of
authorized common shares to satisfy all convertible preferred shares, warrant
agreements and option grants, which required Salon to 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. At Salon's Annual Meeting of Stockholders held on
November 17, 2004, the stockholders approved an amendment to the certificate of
incorporation to increase the number of authorized common shares from 50,000,000
to 600,000,000, with such certificate being filed by the Delaware Secretary of
State on November 22, 2004. All warrants then outstanding were re-valued as of
November 22, 2004, resulting in a benefit of $258 that was recorded in Salon's
results of operations for the period ending December 31, 2004. There no longer
being a liability due to the increase in authorized shares of common stock, the
$1,708 was reversed and the amount included as additional paid-in-capital.
The impact of having an inadequate number of authorized shares and its
effect on the valuation of warrants resulted in the following benefits and
(charges) to Salon's results of operations:
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- ---------------------
OPERATING RESULTS AFFECTED 2004 2003 2004 2003
-------- -------- -------- --------
Production and content $ 21 $ $ 83 $
General and administrative 10 43
Other income (expense), net 104 58 415 10
Preferred deemed dividend 123 (1) 470 30
-------- -------- -------- --------
$ 258 $ 57 $ 1,011 $ 40
======== ======== ======== ========
7. GOODWILL AMORTIZATION AND INTANGIBLE ASSETS
The following table sets forth information concerning Salon's goodwill
and intangible assets as of December 31, 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
======== ======== ========
11
SALON MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
8. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standard No. 123R, "Share-Based
Payment" (SFAS No. 123R). Under SFAS No. 123R, options and similar awards will
be measured at fair value on the awards' grant date, based on the estimated
number of awards that are expected to vest, and valued either with the
Black-Scholes or a binomial option-pricing model. The value of the awards will
be recorded as compensation expense over the vesting period of the award.
Utilizing the modified prospective application method, Salon contemplates
adopting SFAS No. 123R on July 1, 2005. Based on option grants made, and
contemplated to be made by March 31, 2005, Salon estimates that it will incur
compensation expense of $0.4 - $0.7 million for its fiscal year ending March 31,
2006 based on a share price of common stock of $0.14.
8. ISSUANCE OF COMMON STOCK FOR TRADE PAYABLE
On October 11, 2004, Salon's Board of Directors approved the issuance
of 416,516 shares of common stock to satisfy $66 owed to a vendor based on a
$0.1577 per share price. As the closing price of Salon's common stock was $0.10
per share on October 18, 2004, the date the shares were issued, Salon recorded a
gain of $25 in its results of operations.
10. SUBSEQUENT EVENTS
On February 2, 2005 Salon issued 209 shares of Series D-2 preferred
stock for $250 in cash from two investors and incurred no expenses. The
investors included 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 Amendment No. 2 to the Securities
Purchase Agreement dated as of February 2, 2005. The 209 shares of Series D-2
preferred stock were sold at a price of $1,200 per share. In addition, Salon
issued warrants to purchase 341,999 shares common stock at an exercise price of
$0.161 per share. The transaction will result in a $92 non-cash charge to
Salon's results of operations for its period ending March 31, 2005 ensuing from
the difference between 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.
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 audio streaming 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 NINE MONTHS ENDED DECEMBER 31, 2004
COMPARED TO THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2003
NET REVENUES:
Net revenues increased 69% to $2.2 million for the three months ended
December 31, 2004 from $1.3 million for the three months ended December 31, 2003
and increased 51% to $5.1 million for the nine months ended December 31, 2004
from $3.4 million for the nine months ended December 31, 2003.
13
Advertising revenues increased to $1.3 million for the three months
ended December 31, 2004 from $0.6 million for the three months ended December
31, 2003, or 124%, and increased to $2.9 million for the nine months ended
December 31, 2004 from $1.4 million for the nine months ended December 31, 2003,
or 109%. The increase in advertising revenues reflects an overall market
improvement for Internet advertising that Salon was able to capitalize on,
acceptance of Salon's Website access pass advertisement format, and diminishing
concerns of Salon's financial viability by advertisers. During the month of
December 2004, Salon delivered $0.6 million of advertisements, which based on
visitor website traffic that month, represented the maximum advertising revenue
that can be generated. In order to increase this monthly threshold, Salon will
have to increase the number of unique visitors to its Website, either through
partnerships with other websites, marketing efforts, or other business
relationships, to draw additional traffic to its website, thereby increasing the
number of impressions potentially available to be sold to advertisers. As
Salon's fourth quarter has historically been weaker than its just completed
third quarter, Salon estimates that advertising revenues for the three months
ended March 31, 2005 will be approximately $0.6 - $0.7 million.
Salon Premium subscription revenues increased to $0.6 million for the
three months December 31, 2004 from $0.5 million for the three months ended
December 31, 2003 and increased to $1.6 million for the nine months ended
December 31, 2004 from $1.4 million for the nine months ended December 31, 2003.
The increase in Salon Premium subscription revenues is due to an increase in
overall subscriptions. Total paid subscriptions were approximately 23,800 and
64,200 for the three months and nine months ended December 31, 2004,
respectively, compared to approximately 18,700 and 54,600 for the three months
and nine months ended September 30, 2003, respectively. The large number of
subscribers acquired during the three months ended December 31, 2004 is
attributable to capitalizing on reader interest in Salon's political coverage
during the final months of the 2004 presidential campaign, which created
opportunities to promote membership drives, either singly or in conjunction with
third parties.
As of December 31, 2004, Salon has approximately 89,100 active
subscribers and deferred $1.1 million of revenue, compared to 73,700 active
subscribers and deferred revenue of $0.8 million as of December 31, 2003. Due to
efforts to re-subscribe lapsed subscriptions with promotional discounts, the
renewal rate for one-year paid subscriptions is approximately 73% as of December
31, 2004 compared to approximately 60% to 65% as of December 31, 2003. Salon
estimates that Salon Premium revenues for the three months ended March 31, 2005
will be approximately $0.6 million.
All other sources of revenues were $0.2 million for the three-month
periods ended December 31, 2004 and December 31, 2003, and were $0.6 million and
$0.7 million for the nine months ended December 31, 2004 and December 31, 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 $122,000 and $401,000 for the three months and nine months ended December
31, 2004, respectively, compared to $149,000 and $456,000 for the three months
and nine months ended December 31, 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 March 31, 2005 will be approximately $0.1 - $0.2
million.
PRODUCTION AND CONTENT:
Production and content expenses during the three months ended December
31, 2004 and December 31, 2003 was $1.1 million, with all expense categories
being generally constant between years.
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Production and content expenses during the nine months ended December
31, 2004 were $3.3 million compared to $3.2 million for the nine months ended
December 31, 2003, an increase of $0.1 million or 4%. Opening an office in
Washington, DC this year with a staff of three to increase political 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 December
31, 2004 were $551,000 compared to $649,000 for the three months ended December
31, 2003. The decline of $0.1 million or 15% is attributable to utilizing $0.2
million fewer advertising credits this year compared to last year, offset
predominately by $75,000 in increased sales commissions resulting from the $1.3
million in advertising sales during the current quarter.
Sales and marketing expenses during the nine months ended December 31,
2004 were $1.4 million compared to $1.7 million for the nine months ended
December 31, 2003. The decline of $0.3 million or 16% is attributable to
utilizing $0.2 million fewer advertising credits this year compared to last
year, and the results for the nine months ended December 31, 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 nine months ended December 31, 2004.
Even though salary-related costs were constant between periods, the sales
commission component was $0.1 million higher than the prior year period,
triggered by an increase in advertising sales, offset by a like amount of
savings from the elimination of staff positions between periods.
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
December 31, 2004 of $158,000 were comparable to the $150,000 incurred for the
three months ended December 31, 2003. Research and development expenses during
the nine months ended December 31, 2004 and December 31, 2003 were $0.4 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
December 31, 2004 were $0.2 million compared to $0.4 million for the three
months ended December 31, 2003, a decline of $0.2 million or 56%. The decline
was attributable to a $0.1 million decrease in salary-related costs as existing
employees between years absorbed three positions and $0.1 million of other
general expense reductions.
General and administrative expenses for the nine months ended December
31, 2004 were $0.5 million compared to $1.1 million for the nine months ended
December 31, 2003, a decline of $0.6 million or 51%. The decline was
attributable to a $0.3 million decrease in salary related costs as existing
employees between years absorbed three positions, $0.1 million from a change in
value of warrants issued to a former CEO, and $0.1 million of other general
expense reductions. Salon does not anticipate material future changes in general
and administrative expenditures.
15
AMORTIZATION OF INTANGIBLES:
Results for the three and nine months ended December 31, 2003 include
$0.1 million and $0.3 million respectively, for the amortization of intangible
assets. All such assets were fully amortized as of March 31, 2004.
OTHER INCOME (EXPENSE), NET:
At Salon's Annual Meeting of Stockholders held on November 17, 2004,
the stockholders approved an amendment to the certificate of incorporation to
increase the number of authorized common shares from 50,000,000 to 600,000,000,
with such certificate being filed by the Delaware Secretary of State on November
22, 2004. The value of all warrants then outstanding was re-valued as of
November 22, 2004, the last day that Salon had an obligation to record such a
valuation, and a corresponding liability. Due primarily to a $0.01 per share
drop in the price of Salon's common stock from September 30, 2004, the prior
measurement period, to November 22, 2004, Salon recorded a benefit of $258,000,
of which $104,000 was attributable to warrants issued to former convertible note
holders. As such, the $104,000 benefit was included as a component of Other
income (expense), net during the three months ended December 31, 2004. The
($0.1) million Other income (expense), net during the three months ended
December 31, 2003 was primarily interest expense on the then outstanding $4.2
million of convertible notes.
The change in value of warrants between March 31, 2004 and November
22, 2004, the final measurement period, resulted in a benefit of $0.4 million,
which was included as a component of Other income (expense), net during the nine
months ended December 31, 2004. Also included in the nine months ended December
31, 2004 is $0.2 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 December 31, 2004, no grant monies remain to finance editorial
content. Salon cannot accurately predict if it will receive additional monies to
finance editorial content. The ($0.4) million Other income (expense), net during
the three months ended December 31, 2003 included ($0.1) million interest
expense on the then outstanding convertible notes and ($0.3) million charge
attributable to expensing the value of warrants issued in conjunction with the
issuance of convertible notes.
PREFERRED DEEMED DIVIDEND:
The non-cash preferred deemed dividend benefit of $0.1 million for the
three months ended December 31, 2004 is attributable to a change in value of
warrants previously issued to preferred stockholders.
The non-cash preferred deemed dividend benefit of $0.3 million for the
nine months ended December 31, 2004 includes a benefit of $0.5 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 $0.3
million from the decline in value of warrants previously issued, Salon recorded
a net profit attributable to common stockholders of $0.4
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million, or $0.03 per basic share, or $0.00 per diluted share, for the three
months ended December 31, 2004, compared to a net loss attributable to common
stockholders of $1.2 million, or ($0.08) per share for the three months ended
December 31, 2003. Also as a result of the above factors, which included a
benefit of $1.0 million from the decline in value of warrants previously issued,
Salon recorded a net profit attributable to common stockholders of $0.2 million,
or $0.02 per share for the nine months ended December 31, 2004 compared to a net
loss attributable to common stockholders of $3.7 million, or ($0.26) per share
for the nine months ended December 31, 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. Under generally accepted accounting principles, the
inadequacy required 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 held on November 17, 2004, Salon's
stockholders approved an amendment to 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 was filed with the Delaware Secretary of State on
November 22, 2004, precluding Salon from having to record future charges or
benefits in its results of operations. As of November 22, 2004, Salon
relinquished its then $1.7 million warrant liability and recorded this amount as
additional paid-in capital in its balance sheet.
LIQUIDITY AND CAPITAL RESOURCES:
As of December 31, 2004, Salon had approximately $0.5 million in
available cash. On February 2, 2005, Salon received approximately $250,000 from
the issuance of 209 shares of Series D-2 preferred stock.
Net cash used in operations was $0.8 million for the nine months ended
December 31, 2004, compared to $2.2 million for the nine months ended December
31, 2003. The principal use of cash during the nine months ended December 31,
2004 was to fund the $0.8 million increase in accounts receivable and $0.2
million decrease in accounts payable, which were offset by $0.2 million of
non-cash charges. The principal use of cash during the nine months ended
December 31, 2003 was to fund the $3.7 million net loss for the period, which
was primarily offset by $1.7 million of non-cash charges.
Net cash used in investing activities was $0.1 million for the nine
months ended December 31, 2004 to acquire computer related equipment, compared
to none for the nine months ended December 31, 2003.
Net cash from financing activities provided $0.7 million for the nine
months ended December 31, 2004 compared to $2.9 million for the nine months
ended December 31, 2003. For the nine months ended December 31, 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 nine
months ended December 31, 2003, Salon issued $2.5 million of convertible notes
payable, of which $2.3 million was to related parties, borrowed and paid back
$0.2 million from a bank, and made payments under capital leases of $0.1 million
and received $0.5 million from the issuance of Series C preferred stock.
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
17
sales for the nine months ended December 31, 2004 have increased by 109% to $2.9
million compared to the nine months ended December 31, 2003, there is no
assurance that Salon can maintain or increase its current advertising sales
levels in future periods.
During the three months ended December 31, 2004, Salon recorded $1.3
million of advertising revenue, of which $0.6 million was recorded in the month
of December 2004. Based on Salon's computer related infrastructure and website
traffic experienced during December 2004, Salon has determined that the $0.6
million of advertising revenue represents the maximum monthly advertising
revenue that Salon can recognize in a month. In order to increase this monthly
threshold, Salon will have to increase the number of unique visitors to its
Website, either through partnerships with other websites, marketing efforts, or
other business relationships, to draw additional traffic to its website, thereby
increasing the number of impressions potentially available to be sold to
advertisers. There can be no guarantee that Salon will be successful in these
endeavors.
On February 2, 2005, Salon issued 209 shares of preferred stock for
approximately $251,000 in cash. The issuance of additional preferred stock will
result in a preferred deemed dividend charge of $0.1 million. Based on current
cash projections, Salon does not contemplate issuing additional shares of
preferred stock during calendar year 2005.
As Salon's lease for its corporate office was due to expire on
February 28, 2005, on January 13, 2005 Salon entered into a new lease agreement
for its corporate office in San Francisco, CA with the lease commencing on or
about March 1, 2005. The terms of the lease stipulate that no rent be paid the
first four months of the agreement and approximately $19,000 per month the
remainder of the initial lease year. The effective base lease expense expected
over the four-year term of the lease will be approximately $19,900 per month. On
execution of the lease, a deposit of approximately $98,800 and first month rent
payment of approximately $18,700 were required.
Salon's common stockholders have experienced considerable dilution
from the issuance of Series A, B, C and D preferred stock. As of December 31,
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. Based on the
closing price of Salon's common stock of $0.17 per share on February 1, 2005 and
14,588,980 outstanding shares of common stock, in the event of a liquidation
event, the liquidation preferences of holders of Salon's preferred stock will
preclude any common stockholder from receiving any liquidation distributions.
The issuance of additional shares of Series D preferred stock will result in
further dilution to Salon's common stockholders.
RECENT ACCOUNTING PRONOUNCEMENTS:
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 123R, "Share-Based Payment" (SFAS
No. 123R). Under SFAS No. 123R, options and similar awards will be measured at
fair value on the awards' grant date, based on the estimated number of awards
that are expected to vest, and valued either with the Black-Scholes or a
binomial option-pricing model. The value of the awards will be recorded as
compensation expense over the vesting period of the award. Utilizing the
modified prospective application method, Salon contemplates adopting SFAS No.
123R on July 1, 2005. Based on option grants made, and contemplated to be made
by March 31, 2005, Salon estimates that it will incur compensation expense of
$0.4 - $0.7 million for its fiscal year ending March 31, 2006 based on a share
price of common stock of $0.14.
18
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 issued 209 shares of preferred stock on February 2, 2005 and
received 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 the 2005 calendar year. If anticipated future
revenues do not meet expectations, Salon may need to issue additional preferred
stock, increasing the dilution of common stockholders. If Salon is not
successful in issuing preferred stock, or raising other equity or debt
financing, 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 the issue of Series D preferred stock is called by
Salon. 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
and the February 2, 2005 issuance of 209 shares of Series D-2 will result in a
$0.1 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, if any.
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. On February 2, 2005, Salon
received approximately $251,000 either directly or indirectly from William
Hambrecht, with one of the entities being indirectly held by Elizabeth
Hambrecht, Salon's President, Chief Financial Officer, and Secretary.
Curtailment of cash investments by related parties could detrimentally impact
Salon's cash availability and its ability to fund its operations.
19
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 December 31,
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 to common stockholders of the first approximately $20.0 million in
potential liquidation preferences as of December 31, 2004. In the event of a
liquidation event, these holders would have preference over common stockholders
of the first $20.0 million of liquidation preferences, and considerably more if
the liquidation preferences were in excess of $20 million, 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 HAS HISTORICALLY LACKED 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 nine months ended December 31, 2004, Salon had a net
profit attributable to common stockholders of $0.2 million after recording a
benefit of $1.0 million from re-valuing warrants, and had an accumulated deficit
of $90.7 million. Despite Salon achieving profitability for the nine months
ended December 31, 2004 of $0.2 million, primarily from recording a benefit of
$1.0 million from revaluing outstanding warrants, 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
20
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 December 31, 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 Site 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 generated
from Website visitors available to advertisers;
o successfully sell and market it network to advertisers;
o increase the amount of the advertising order it receives;
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.
21
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
will 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.
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
22
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; and
o the amount and timing of operating costs.
Due to the factors noted above and the other risks discussed in this
section, one should not rely on quarter-to-quarter comparisons of Salon's
results of operations as an indication of future performance. It is possible
that in some future periods results of operations may be below the expectations
of public market analysts and investors. If this occurs, the price of its common
stock may decline.
THE CONTROVERSIAL CONTENT OF SALON'S WEBSITE MAY LIMIT ITS REVENUES
Salon's Website contains, and will continue to contain, content that
is politically and culturally controversial. As a result of this content,
current and potential advertisers, potential Salon Premium subscribers, or third
parties who contemplate aggregating content, may refuse to do business with
Salon. Salon's outspoken stance on political issues has and may continue to
result in negative reactions from some users, commentators and other media
outlets. From time to time, certain advocacy groups have successfully targeted
Salon's advertisers in an attempt to persuade such advertisers to cease doing
business with Salon. These efforts may be a material impediment to Salon's
ability to grow and maintain advertising revenue.
23
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 history of losses, 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, which could severely harm its business. Salon also licenses
content from various freelance providers and other third-party content
providers. While Salon attempts to ensure that this content may be freely
licensed to us, other parties may assert claims of infringement against us
relating to this content.
Salon may need to obtain licenses from others to refine, develop,
market and deliver new services. Salon may not be able to obtain any such
licenses on commercially reasonable terms or at all or rights granted pursuant
to any licenses may not be valid and enforceable.
In April 1999 Salon acquired the Internet address www.salon.com.
Because www.salon.com is the address of the main home page to its Website and
incorporates its company name, it is a vital part of our intellectual property
assets. Salon does not have a registered trademark on the address, and therefore
it may be difficult for us to prevent a third party from infringing on 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.
24
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.
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
25
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.
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
It is important to Salon's advertisers that Salon accurately presents
the demographics of its user base and the delivery of advertisements on its
Website. Salon depends on third parties to provide certain of the
advertiser-requested services. If they were unable to provide these services in
the future, Salon would need to perform this function itself or obtain them from
another provider, if available. This could cause Salon to incur additional costs
or lose revenue due to a lower level of service. Companies may choose to not
advertise on Salon or may pay less for advertising if they do not perceive our
measurements or measurements made by third parties to be reliable.
IF USE OF THE INTERNET DOES NOT GROW, SALON'S BUSINESS COULD BE HARMED
Salon's success is highly dependent upon continued growth in the use
of the Internet generally and in particular as a medium for content, advertising
and electronic commerce. If Internet usage does not grow, it may not be able to
increase revenues from advertising and subscriptions, and this may harm Salon's
business. A number of factors may inhibit the growth of Internet usage,
including the following. If these or any other factors cause use of the Internet
to slow or decline, its results of operations could be harmed.
o inadequate network infrastructure;
o security concerns;
o charging for content;
o inconsistent quality of service; and
o limited availability of cost-effective, high-speed access.
INCREASING COMPETITION AMONG INTERNET CONTENT PROVIDERS COULD REDUCE SALON'S
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.
26
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 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 of 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.
27
SALON'S SYSTEMS MAY FAIL DUE TO NATURAL DISASTERS, TELECOMMUNICATIONS FAILURES
AND OTHER EVENTS, ANY OF WHICH WOULD LIMIT USER TRAFFIC
Substantially all of Salon's communications hardware and computer
hardware operations for its Website are in facilities in San Francisco,
California. Fire, floods, earthquakes, power loss, telecommunications failures,
break-ins, supplier failure to meet commitments, and similar events could damage
these systems and cause interruptions in its services. Computer viruses,
electronic break-ins or other similar disruptive problems could cause users to
stop visiting Salon's Website and could cause advertisers to terminate any
agreements with Salon. In addition, Salon could lose advertising revenues during
these interruptions and user satisfaction could be negatively impacted if the
service is slow or unavailable. If any of these circumstances occurred, Salon's
business could be harmed. Salon's insurance policies may not adequately
compensate it for any losses that may occur due to any failures of or
interruptions in our systems. Salon does not presently have a formal disaster
recovery plan.
Salon's Website must accommodate a high volume of traffic and deliver
frequently updated information. It is possible that it will experience systems
failures in the future and that such failures could harm its business. In
addition, its users depend on Internet service providers, online service
providers and other Website operators for access to its Website. Many of these
providers and operators have experienced significant outages in the past, and
could experience outages, delays and other difficulties due to system failures
unrelated to its systems. Any of these system failures could harm its business.
HACKERS MAY ATTEMPT TO PENETRATE SALON'S SECURITY SYSTEM; ONLINE SECURITY
BREACHES COULD HARM ITS BUSINESS
Consumer and supplier confidence in Salon's Website depends on
maintaining relevant security features. Security breaches also could damage its
reputation and expose us to a risk of loss or litigation. Experienced
programmers or "hackers" have successfully penetrated sectors of its systems and
Salon expects that these attempts will continue to occur from time to time.
Because a hacker who is able to penetrate its network security could
misappropriate proprietary information or cause interruptions in its products
and services, Salon may have to expend significant capital and resources to
protect against or to alleviate problems caused by these hackers. Additionally,
Salon may not have a timely remedy against a hacker who is able to penetrate its
network security. Such security breaches could materially adversely affect
Salon. In addition, the transmission of computer viruses resulting from hackers
or otherwise could expose us to significant liability. Salon's insurance
policies may not be adequate to reimburse us for losses caused by security
breaches. Salon also faces risks associated with security breaches affecting
third parties with whom it has relationships.
GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES REGARDING 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
28
property ownership, obscenity, libel and personal privacy are applicable to the
Internet or the application of laws and regulations from jurisdictions whose
laws do not currently apply to its business.
PRIVACY CONCERNS COULD IMPAIR SALON'S BUSINESS
Salon has a policy against using personally identifiable information
obtained from users of its Website and services without the user's permission.
In the past, the Federal Trade Commission has investigated companies that have
used personally identifiable information without permission or in violation of a
stated privacy policy. If Salon uses this information without permission or in
violation of its policy, Salon may face potential liability for invasion of
privacy for compiling and providing information to its corporate customers and
electronic commerce merchants. In addition, legislative or regulatory
requirements may heighten these concerns if businesses must notify Internet
users that the data may be used by marketing entities to direct product
promotion and advertising to the user. Other countries and political entities,
such as the European Union, have adopted such legislation or regulatory
requirements. The United States may adopt similar legislation or regulatory
requirements. If consumer privacy concerns are not adequately addressed, our
business, financial condition and results of operations could be materially
harmed.
POSSIBLE STATE SALES AND OTHER TAXES COULD ADVERSELY AFFECT SALON'S RESULTS OF
OPERATIONS
Salon generally does not collect sales or other taxes from individuals
who sign up for Salon subscriptions. During the year ended March 31, 2003, the
State of California audited Salon's sales tax returns and found Salon in
compliance with its filings and did not object to the fact that it did not
collect sales tax on subscriptions. However, one or more other states may seek
to impose sales tax collection obligations on out-of-state companies, including
Salon, which engage in or facilitate electronic commerce. State and local
governments have discussed and made proposals imposing taxes on the sale of
goods and services through the Internet. Such proposals, if adopted, could
substantially impair the growth of electronic commerce and could reduce Salon's
ability to derive revenue from electronic commerce. Moreover, if any state or
foreign country were to assert successfully that Salon should collect sales or
other taxes on the exchange of merchandise on its network or to tax revenue
generated from Salon subscriptions, its financial results could be harmed.
PROVISIONS IN DELAWARE LAW AND OUR CHARTER, STOCK OPTION AGREEMENTS AND OFFER
LETTERS TO EXECUTIVE OFFICERS MAY PREVENT OR DELAY A CHANGE OF CONTROL
Salon is subject to the Delaware anti-takeover laws regulating
corporate takeovers. These anti-takeover laws prevent Delaware corporations from
engaging in a merger or sale of more than 10% of its assets with any
stockholder, including all affiliates and associates of the stockholder, who
owns 15% or more of the corporation's outstanding voting stock, for three years
following the date that the stockholder acquired 15% or more of the
corporation's assets unless:
o the board of directors approved the transaction where the
stockholder acquired 15% or more of the corporation's assets;
o after the transaction where the stockholder acquired 15% or more
of the corporation's assets, the stockholder owned at least 85%
of the corporation's outstanding voting stock, excluding shares
owned by directors, officers and employee stock plans in which
employee participants do not have the right to determine
confidentially whether shares held under the plan will be
tendered in a tender or exchange offer; or
29
o on or after this date, the merger or sale is approved by the
board of directors and the holders of at least two-thirds of the
outstanding voting stock that is not owned by the stockholder.
A Delaware corporation may opt out of the Delaware anti-takeover laws
if its certificate of incorporation or bylaws so provide. We have not opted out
of the provisions of the anti-takeover laws. As such, these laws could prohibit
or delay mergers or other takeover or change of control of Salon and may
discourage attempts by other companies to acquire Salon.
Salon's certificate of incorporation and bylaws include a number of
provisions that may deter or impede hostile takeovers or changes of control or
management. These provisions include:
o Salon's board is classified into three classes of directors as
nearly equal in size as possible with staggered three year-terms;
and
o special meetings of the stockholders may be called only by the
Chairman of the Board, the Chief Executive Officer or the Board
of Directors.
These provisions may have the effect of delaying or preventing a change of
control.
Salon's certificate of incorporation and bylaws provide that it will
indemnify officers and directors against losses that they may incur in
investigations and legal proceedings resulting from their services to Salon,
which may include services in connection with takeover defense measures. These
provisions may have the effect of preventing changes in Salon's management.
In addition, offer letters with executive officers may provide for the
payment of severance and acceleration of options upon the termination of these
executive officers following a change of control of Salon. These provisions in
offer letters could have the effect of discouraging potential takeover attempts.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
Salon does not have an exposure to market risk for changes in interest
rates.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF OUR DISCLOSURE CONTROLS AND INTERNAL CONTROLS
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 CONTROLS OVER FINANCIAL REPORTING
There was no change in our internal controls 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 controls 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 October 11, 2004, Salon's Board of Directors approved the issuance
of 416,516 shares of common stock to satisfy $66,000 owed to a vendor based on a
$0.1577 per share price. The stock certificate for 416,516 shares of common
stock was issued on October 18, 2004.
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At Salon's Annual Meeting of Stockholders held on November 17, 2004, the
following individuals were elected to the Board of Directors:
Votes For Votes Withheld
----------- -----------
Class I Directors
-----------------
George Hirsch 183,359,486 86,426
John Warnock 183,358,954 86,958
Deepak Desai 183,360,154 85,758
Class II Directors
------------------
Robert Ellis 183,358,336 87,576
David Talbot 183,359,786 86,126
Class III Directors
-------------------
Elizabeth Hambrecht 183,359,954 85,958
Robert McKay 183,359,136 86,776
James Rosenfield 183,359,354 86,558
Jann Wenner 183,359,161 86,751
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The following proposals were approved at the Annual Meeting of Stockholders:
Affirmative Negative Votes Not
Votes Votes Withheld Voted
----------- ----------- ----------- -----------
1. Approve the Salon Media Group, Inc.
2004 Stock Plan. 177,743,563 110,900 14,620 5,576,829
2. Approve an amendment to Restated
Certificate of Incorporation to Increase
The Number of Authorized Shares of
Common Stock 183,313,562 130,701 1,649 --
3. Effect a Reverse Stock Split of Outstanding
Common Stock by a Ratio of 1:10 174,965,374 327,096 8,153,442 --
4. Effect a Reverse Stock Split of Outstanding
Common Stock by a Ratio of 1:12 174,965,373 327,097 8,153,442 --
5. Effect a Reverse Stock Split of Outstanding
Common Stock by a Ratio of 1:15 174,965,373 327,097 8,153,442 --
6. Effect a Reverse Stock Split of Outstanding
Common Stock by a Ratio of 1:20 181,776,109 327,097 1,342,707 --
7. Ratify the Appointment of Burr, Pilger &
Mayer LLP as the Independent Registered
Public Accountants of the Company for
The Year Ending March 31, 2005 183,074,004 369,009 2,899 --
ITEM 5. OTHER INFORMATION.
Not applicable
ITEM 6. EXHIBITS.
(a) EXHIBITS.
3.3.1(3) Certificate of Amendment to Restated Certificate of
Incorporation, dated as of November 19, 2004.
4.2.84(1) Amendment No. 1 To Securities Purchase Agreement dated as of
September 30, 2004
4.2.85(1) Common Stock Purchase Warrant dated September 30, 2004 issued by
Salon Media Group, Inc.
31.1 Certification of Elizabeth Hambrecht, Chief Executive Officer and
President of the Registrant pursuant to Section 302, as adopted
pursuant to the Sarbanes-Oxley Act of 2002
31.2 Certification of Conrad Lowry, Chief Financial Officer, and
Secretary of the Registrant pursuant to Section 302, as adopted
pursuant to the Sarbanes-Oxley Act of 2002
32
32.1 Certification of Elizabeth Hambrecht, Chief Executive Officer and
President of the Registrant pursuant to Section 906, as adopted
pursuant to the Sarbanes-Oxley Act of 2002
32.2 Certification of Conrad Lowry, Chief Financial Officer, and
Secretary of the Registrant pursuant to Section 906, as adopted
pursuant to the Sarbanes-Oxley Act of 2002
99.2(2) Press Release dated August 5, 2004
(1) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K filed on October 6, 2004.
(2) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K filed on November 12, 2004.
(3) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K filed on December 13, 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: 02/14/05 /s/ Elizabeth Hambrecht
--------------------------------------------
Elizabeth Hambrecht
Chief Executive Officer and President
Dated: 02/14/05 /s/ Conrad Lowry
--------------------------------------------
Conrad Lowry
Chief Financial Officer and Secretary
33