How to Read a 10Q: Salon
Posted Fri Apr 20 08:44:49 2001 by sbaldwin |
By Steve Gilliard
Source Document: http://www.sec.gov/Archives/edgar/data/1084332/0000929624-01-000215.txt"
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In our look at Salon, we see a company which is losing money steadily,
with no real hope of profitability, not now or in the future. By
looking at a variety of financial statements, it is clear that no
subscription plan is likely to save the company. They have lost nearly
$60M in six years and continue to burn almost $1.8m a month, if not
more. Yet, this has taken place despite ongoing layoffs, reduction in
content and increased advertising. None of which appears to have
worked.
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These consolidated financial statements contemplate the realization
of assets and the satisfaction of liabilities in the normal course of
business. Salon has incurred losses since inception and has an
accumulated deficit at December 31, 2000 of $59,784,000. The operating
loss in the nine months ended December 31, 2000 includes the write-down
of certain long-lived assets acquired in connection with the purchase
of MP3Lit.com (MP3Lit). Management's plans to decrease operating losses
are to increase revenues while controlling costs. If Salon in unable to
generate sufficient cash flows from operations, Salon may seek
additional sources of capital. There can be no assurance that Salon
will be able to obtain such financing, if necessary, on terms which are
favorable or at all.
| Wow.
a loss rate of $12 million a year. $1m a month. While that is obviously
not applicable over the life of the company, the average rate of loss
has been over $1m a month, every month.
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Two customers accounted for 13% and 10% of total revenues for the
three months ended December 31, 2000 and no customer accounted for more
than 10% of total revenue for the nine months ended December 31, 2000.
No customer accounted for more than 10% of revenues for the three
months or nine months ended December 31, 1999. Salon did not record any
barter revenues for the three months ended December 31, 2000 and
recorded $462,000 of barter revenue or 15% of total revenues for the
three months ended December 31, 1999. Barter revenues accounted for
$63,000 or 1% of total revenues for the nine months ended December 31,
2000 and $940,000 or 17% of revenues for the nine months ended December
31, 1999. One customer accounted for 10% of the total accounts
receivable balance at December 31, 2000 and no customer accounted for
10% or more of total accounts receivable at March 31, 2000.
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Another company relying on a limited advertiser base to provide revenue in a down market.
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Net Revenues: Net revenues decreased 25% to $2.3 million for the
three months ended December 31, 2000 from $3.0 million for the three
months ended December 31, 1999 and increased 15% to $6.2 million for
the nine months ended December 31, 2000 from $5.4 million for the nine
months ended December 31, 1999. The decrease was attributable to an
overall decrease in web-based advertising during the 2000 Christmas
season compared to the 1999 Christmas season and an overall decline in
advertising by internet-based businesses this year compared to last
year. Sponsorship and banner advertising revenues accounted for
approximately 71% and 94% of net revenues for the three months ended
December 31, 2000 and 1999, respectively. For the nine months ended
December 31, 2000 and 1999, these percentages were 82% and 90%,
respectively. Barter transactions, included in sponsorship and
advertising revenues, were $0 during the three months ended December
31, 2000 compared to $0.5 million for the three months ended December
31, 1999 or 15% of total sales
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When you look at the way the company discloses its debt, you
immediately see that Salon appears to be playing cute with the reader.
They are separating the first three quarters from the last quarter.
Why? To make the reader add the losses up in their head. In most cases,
you read over it. Their revenue was $8.3m in 2000 and $9.4 in 1999.
In an average financial news story, the reporter would concentrate on the last quarter and not the entire year.
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Production, Content and Product:
Production, content and product costs consist primarily of payroll
and related costs for Salon's editorial, artistic, and production
staffs, online communities staff, Salon Audio staffs, payments to
freelance writers and artists, and telecommunications and computer
related expenses for the support and delivery of Salon's Web sites and
online communities. Production, content and product costs during the
three months ended December 31, 2000 were $2.5 million or 110% of net
revenues versus $2.7 million or 88% of net revenues for the three
months ended December 31, 1999, a decline of 6%. The 6% decrease in
production, content and product costs for the three months ended
December 31, 2000 versus December 31, 1999, is primarily attributable
to a $0.3 million decrease in stock-based compensation between periods.
In December 2000, Salon eliminated nine staff positions to reduce
expenses.
| Cute.
They only discuss the revenues for the last three months. So they took
in $2.3m in the last quarter of 2000 and spent $2.5 million on content
ALONE. Please explain how subscriptions will save this company? How
will this work? They are spending more than they take in per quarter on
CONTENT alone. That's people like me. Editors. Photographers. Design.
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Effective October 1, 2000 Salon determined that no significant
income could be generated in the near future from the sale of digital
downloadable spoken word recordings which was Salon's intent in
acquiring of MP3Lit in May 2000. Accordingly, Salon wrote off the
amortized balance of goodwill associated with the acquisition and
recorded an impairment charge of $1.7 million for the three months
ended December 31, 2000.
| OK,
no one, not even Napster, has made money on music people listen to. Who
the fuck makes money on spoken word MP3's? What were they thinking?
That audiobooks would make the leap?
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As a result of the above factors, Salon recorded a net loss after
taxes of $5.6 million, or $0.43 per share loss for the three months
ended December 31, 2000 compared to a net loss after taxes of $6.4
million, or $0.57 per share loss for three months ended December 31,
1999. Salon recorded a net loss after taxes of $13.6 million, or $1.06
per share loss for the nine months ended December 31, 2000 compared to
a net loss after taxes of $15.8 million, or $1.90 per share loss for
the nine months ended December 31, 1999. In December 2000, Salon
eliminated twenty positions and an additional four positions subsequent
to December 31, 2000 to reduce payroll costs.
Salon currently anticipates that its available cash resources will
be sufficient to meet its anticipated needs for working capital and
capital expenditures for approximately the next three to six months,
depending on the revenues generated during the period and the
continuing reduction of operating expenses. Salon will most likely need
to raise additional funds, however, to fund operations, to fund its
software development efforts, and to develop new or enhance existing
services. If Salon raises additional funds by selling equity
securities, or securities which convert into equity securities, the
percentage ownership of Salon's stockholders will be reduced and its
stockholders will most likely experience additional dilution. Salon
cannot be sure that additional financing will be available on terms
favorable to Salon, or at all. If adequate funds are not available on
acceptable terms, if at all, Salon's ability to continue operations,
react to competitive pressures, or take advantage of unanticipated
opportunities will be substantially limited. In addition, Salon's
business could be significantly adversely affected.
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The stock is worth $0.35. Who will buy it (excepting their officers)?
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Our success significantly depends on key editorial and design
personnel. In addition, because our users must perceive the content of
our Web as having been created by credible and notable sources, our
success also depends on the name recognition and reputation of our
editorial staff, in particular David Talbot, Salon's founder and
editor-in-chief.
Our future success depends to a significant extent on the continued
services of key personnel, particularly, David Talbot, Salon's
editor-in-chief and Michael O'Donnell, Chief Executive Officer. We
currently have no employment agreement with Mr. Talbot and we do not
maintain "key person" life insurance for any of our personnel. The loss
of the services of Mr. Talbot, Mr. O'Donnell, or other key employees
would likely have a significantly adverse effect on our business.
Oh
yeah. Anyone can lose money. His key editorial vision is costing the
company $1.8 million a month. And Salon is not eager to display the
salaries of their officers on their 10K, 10Q or on their web site. But
being intrepid, we found them.
Source: http://view.equill.com/id/af3ed0e33d31fcb4"
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David Talbot, 47 Chairman, Editor-in-Chief $226K
Michael O'Donnell, 35 CEO, Pres $226K
Patrick Hurley, 37 Sr. VP, Operations $119K
Robert O'Callahan, 49 VP of Fin. and Admin., CFO,
Treasurer --
Jeffrey Dickerson, 26 VP of Technology $178K
Dollar amounts are as of 31-Mar-2000 and compensation values are
for the fiscal year ending on that date; "Pay" is salary, bonuses,
etc...
Oppenheimer Enterprise Fund 267,900 $72,333
Nationwide Separate Account Trust-Small Company Fund 24,000 $6,480
Spartan Total Market Index Fund 5,600 $1,512
Spartan Extended Market Index Fund 4,600 $1,242
Oppenheimer Small Cap Growth Variable Account 3,600
$972
Vantagepoint Mid/Small Company Fund 300 $81
Bear Stearns Asset Management, Inc. 644,330 $173,969
Portola Group, Inc. 395,670 $106,831
MDT Advisors Inc. 386,598 $104,381
Morgan Stanley Dean Witter & Company 10,000 $2,700
Taunus Corporation 1,244 $336
Unionbancal Corp 700 $189
Bear, Stearns & Company 400 $108
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So why does Talbot get over $200K a year to lose money? A better question to ask is why does he get to buy stock at
$0.20 a share.
Oh yeah. Let's explain this again. When a company allows directors to
buy stock, they have the ability to turn it over, because someone, day
traders, penny stock players, think they can play the stock. He will
make money off these shares. Other players have been dumping the stock
over the last few months, realizing that they were fucked.
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Why Salon is Failing
Salon has made $8 million in the last calendar year while
spending $30 million. It spent more on content alone than it took in during 2000. Who the hell is running this company.
For all the dewy-eyed whiners who think they can save Salon by
subscribing, think again. This company is allergic to raising money.
They have ridiculous expenses, with a bloated staff and they have never
gotten around to the reality that their company is way too large to
make money in this capacity. Charging readers will not solve this
problem, nor will ad sales or any other revenue enhancer, not even
porn. Salon currently has a burn rate of $1.8 million a month. What is
even worse is the burn is spreading, not contracting. They're spending
even more money as they lose money.
Another issue has to be these inflated executive salaries. Once
again, Officer salary is more than cash. Relative to his old-media
brethren, Talbot and his fellow officers are making fairly high
salaries, with access to stocks. What most observers do not get is
this: A million shares at $1 a share is a million dollars. A lot of
money. Most of their expenses are paid for by the company, as they can
be under the law. But what it does is defray their daily living costs.
Some companies expense everything. Some just meals and travel. At the
senior executive level, a lot more gets covered. And it saves them
thousands a year.
Also consider that Salon hired a lot of friends and family as they
started up. There is every reason to factor that in with their
inexplicable growth. Salon is a pre-boom company, as is iVillage. Their
high spending patterns along with their poor management (and losing
$60m is poor management), have gone on for years with management
friendly, even management lackey, boards, allowing all kinds of
expenditures on their behalf.
Take Talbot -- without the web, he would have remained a section
editor at one of the least distinguished major newspapers in America,
the SF Examiner.
It is unlikely he would have been hired by a national paper to be a
section editor, much less run a major publication where he was expected
to manage millions a year in budget.
Salon's management has never been willing to deal with cost
containment. How can a company, knowing that economic conditions are
getting worse, ramp up their spending? Which Salon did.
They own properties of dubious value. The Well is relic of the
mid-90's and stagnant, having lost much of its influence as the web
grew. The only people who see value in it are the Bay Area elites who
used it in the first place. Looking at the top officers bios, you see
one missing gap: magazine experience. Yes, magazines can be a scam. But
they are critical to the kind of work Salon does, since it really isn't
a newspaper. Instead, it's another group of techies trying to run a
magazine. Not one even mid-level publishing executive who might not
fall in love with money drains like the Well or MP3Lit, a truly
dim-witted idea, or trying to charge subscriptions.
Make no mistake, this is their final gasp, and one should not be
fooled into thinking that a subscription will help save them. It might
bump up the stock price, it might make news, but subs cannot and should
not be used to cover for an inept management that has refused to reduce
costs to a reasonable level. Their expenditures INCREASED as the
company's stock value, never high, fell through the floor and into
delisting land.
What is not being said about Salon's management is that while you
may like the content, 148 people, AFTER layoffs, says the management
there is not serious about either stemming losses or getting costs
under control. While Salon had a relatively dim reception in the equity
markets, people need to get a clue. Any entry into those markets
enriches the officers, who will own enough shares to make money, even
as the company craps out. The only way employees can cash in is if the
stock holds it value. Salon didn't. No company can lose a million a
month and then watch it climb to nearly $2m a month in under a year.
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