-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, W2pDLmI4cb0HQXDiaDKqGCgUHalATSSL+QgdIGSEq0VLic8FtzkSJpoZ87sUcWSO QV+DzGJkebvjUAvXpwp3sQ== 0000950153-00-000516.txt : 20000417 0000950153-00-000516.hdr.sgml : 20000417 ACCESSION NUMBER: 0000950153-00-000516 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 20000414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUEPASA COM INC CENTRAL INDEX KEY: 0001078099 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ADVERTISING [7310] IRS NUMBER: 860879433 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-25565 FILM NUMBER: 601523 BUSINESS ADDRESS: STREET 1: ONE ARIZONA CENTER STREET 2: 400 E VAN BUREN CITY: PHOENIX STATE: AZ ZIP: 85004 BUSINESS PHONE: 6027160100 MAIL ADDRESS: STREET 1: ONE ARIZONA CENTER STREET 2: 400 E VAN BUREN CITY: PHOENIX STATE: AZ ZIP: 85004 10-Q/A 1 10-Q/A 1 . SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A AMENDMENT NO. 1 (Mark One) For the quarterly period ended June 30, 1999 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 ________ quepasa.com, inc. (Exact name of registrant as specified in its charter) Nevada 86-0879433 (State or other jurisdiction of (I.R.S. Employer Identification) incorporation or organization) One Arizona Center 400 East Van Buren 4th Floor Phoenix, AZ 85004 (Address of principal executive offices) (602) 716-0100 (Registrant's telephone number, including area code) Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class Outstanding at August 12, 1999 - ------------------------------------------------------------ ------------------------------------------- Common stock, $_.001______ par value 14,375,833
Transitional Small Business Disclosure Format: [ ] Yes [X] No EXPLANATORY NOTE This amendment to the Quarterly Report on Form 10-Q for the period ended June 30, 1999 is being filed to reflect changes to the Company's financial statements as discussed in Note 2 of ITEM 1 of this Filing. These changes are reflected in the Company's Annual Report on Form 10K, filed on March 30, 2000. 2 QUEPASA.COM, INC. INDEX
PART I. FINANCIAL INFORMATION PAGE NO. Item 1. Condensed Financial Statements (unaudited) Condensed Balance Sheets at June 30, 1999, restated and December 31, 1998..................................3 Condensed Statements of Operations for the Three Months Ended June 30, 1999, restated and 1998 and the Six Months Ended June 30, 1999, restated and 1998..........................................................................4 Condensed Statement of Changes in Stockholders' Equity for the Period from Inception (June 25, 1997) to the Year Ended December 31, 1998 and the Six Months Ended June 30, 1999, restated.....................................................5 Condensed Statements of, restated Cash Flows for the Six Months Ended June 30, 1999, restated and 1998..........................................................................6 Notes to Condensed Financial Statements....................................................................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................................10 Item 3. Quantitative and Qualitative Disclosures About Market Risk................................................14 PART II. OTHER INFORMATION Item 1. Legal Proceedings.........................................................................................15 Item 2. Changes in Securities and Use of Proceeds.................................................................15 Item 6. Exhibits and Reports on Form 8-K..........................................................................15 Signatures........................................................................................................... 16
3 QUEPASA.COM, INC. (A DEVELOPMENT STAGE COMPANY) CONDENSED BALANCE SHEETS ITEM 1. CONDENSED FINANCIAL STATEMENTS
June 30, 1999 December 31, Restated 1998 ------------- ------------ (Unaudited) ASSETS Current assets Cash and cash equivalents $ 11,802,504 $ 2,199,172 Trading securities 27,497,041 -- Deposits receivable -- 1,533,632 Stock subscription receivable -- 125,000 Forgivable loans 422,537 396,540 Prepaid advertising 926,090 -- Prepaid - other 70,293 -- ------------ ------------ Total current assets 40,718,465 4,254,344 Property and equipment 837,687 354,620 Other assets Deposits and other assets 31,000 2,500 ------------ ------------ Total assets $ 41,587,152 $ 4,611,464 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 1,013,255 $ 71,222 Accrued commissions -- 215,233 Stock subscription -- 337,500 License fees payable 54,166 64,165 Accrued payroll and related taxes 17,765 2,922 ------------ ------------ Total current liabilities 1,085,186 691,042 Long-term liabilities Note payable - Stockholder 2,245,081 -- ------------ ------------ Total liabilities 3,330,267 691,042 ------------ ------------ Commitments and contingencies Stockholders' equity Preferred stock, authorized 5,000,000 shares - none issued or outstanding Common stock, authorized 50,000,000 shares, $0.001 par value; issued and outstanding 13,825,833 (June 30, 1999) and 9,075,833 shares (December 31, -- -- 1998) 13,826 9,076 Additional paid-in capital 63,892,797 10,427,477 Deferred advertising services (5,687,500) -- Deficit accumulated during the development stage (19,962,238) (6,516,131) ------------ ------------ Total stockholders' equity 38,256,885 3,920,422 ------------ ------------ $ 41,587,152 $ 4,611,464 ============ ============
See notes to condensed financial statements. - 3 - 4 QUEPASA.COM, INC. (A DEVELOPMENT STAGE COMPANY) CONDENSED STATEMENTS OF OPERATIONS
Cumulative from Inception Three Months Ended Six Months Ended (June 25, June 30, June 30, 1997) to ---------------------------- ---------------------------- June 30, 1999 1999 1999 Restated 1998 Restated 1998 Restated ------------ ------------ ------------ ------------ ------------ (Unaudited) (Unaudited) (Unaudited) Gross revenue $ 16,562 $ -- $ 16,562 $ -- $ 16,562 Less commissions (8,119) (8,119) (8,119) ------------ ------------ ------------ ------------ ------------ Net Revenue 8,443 8,443 8,443 Operating expenses Product and content development expenses 278,872 6,360 465,563 10,690 880,436 Advertising and marketing expenses 3,062,841 5,078 5,125,448 5,078 5,375,867 Stock based compensation expenses 4,385,251 4,986,614 4,864,251 4,986,614 10,129,615 General and administrative expenses 1,934,866 16,284 2,885,165 25,421 3,423,500 ------------ ------------ ------------ ------------ ------------ Total operating expenses 9,661,830 5,014,336 13,340,427 5,027,803 19,809,418 ------------ ------------ ------------ ------------ ------------ Loss from operations (9,653,387) (5,014,336) (13,331,984) (5,027,803) (19,800,975) Other income (expense) Interest expense (113,122) (2,500) (133,122) (2,500) (182,116) Interest income and other 2,568 -- 17,946 -- 19,800 Unrealized gain on trading securities 1,053 -- 1,053 -- 1,053 ------------ ------------ ------------ ------------ ------------ Net other income (expenses) (109,501) (2,500) (114,123) (2,500) (161,263) ------------ ------------ ------------ ------------ ------------ Net loss $ (9,762,888) $ (5,016,836) $(13,446,107) $ (5,030,303) $(19,962,238) ============ ============ ============ ============ ============ Net loss per share, basic and diluted $ (.98) $ (.55) $ (1.42) $ (.55) $ (2.17) ============ ============ ============ ============ ============ Weighted average number of shares outstanding, basic and diluted 9,920,338 9,075,833 9,500,419 9,075,833 9,180,533 ============ ============ ============ ============ ============
See notes to condensed financial statements. - 4 - 5 QUEPASA.COM, INC. (A DEVELOPMENT STAGE COMPANY) CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Deficit Accumulated Common Stock Additional Deferred During the ------------------------- Paid-in Advertising Development Shares Amount Capital Services Stage Total --------- ------------ ------------ ----------- ------------ ------------ Balances, December 31, 1997 5,680,000 $ 5,680 $ (5,660) -- $ (2,903) $ (2,883) Issuance of common stock and stock based compensation, May 1998 1,420,000 1,420 4,985,294 -- -- 4,986,714 Issuance of common stock in conversion of note payable ($1.56 per share), November 1998 666,666 667 1,039,113 -- -- 1,039,780 Issuance of common stock in conversion of note payable ($1.00 per share), November 1998 50,000 50 49,950 -- -- 50,000 Issuance of common stock for cash at $3.75 per share, net of $640,587 of offering costs, November and December 1998 1,259,167 1,259 4,080,030 -- -- 4,081,289 Issuance of compensatory stock options to employees, October through December 1998 -- -- 278,750 -- -- 278,750 Net loss for the year -- -- -- -- (6,513,228) (6,513,228) --------- ------------ ------------ ------------ ------------ ------------ Balances, December 31, 1998 9,075,833 9,076 10,427,477 -- (6,516,131) 3,920,422 (1999 activity is unaudited) Issuance of compensatory stock options to employees, officers and directors, restated -- -- 4,314,270 -- -- 4,314,270 Issuance of stock to officers and directors, restated 50,000 50 549,950 -- -- 550,000 Issuance of common stock for advertising services, April 1999, restated 650,000 650 5,686,850 $(5,687,500) -- 0 Issuance of common stock for consulting services, restated 50,000 50 549,950 -- -- 550,000 Proceeds from initial public offering, net of $5,631,700 of offering costs, June 1999 4,000,000 4,000 42,364,300 -- -- 42,368,300 Net loss for the period (unaudited), restated -- -- -- -- (13,446,107) (13,446,107) ------------ ------------ ------------ ------------ ------------ ------------ Balances, June 30, 1999 (unaudited), restated 13,825,833 $ 13,826 $ 63,892,797 $(5,687,500) $(19,962,238) $ 38,256,885 ============ ============ ============ ============ ============ ============
See notes to condensed financial statements. - 5 - 6 QUEPASA.COM, INC. (A DEVELOPMENT STAGE COMPANY) CONDENSED STATEMENTS OF CASH FLOWS
Cumulative from Inception Six Months Ended (June 25, June 30, 1997) to --------------------------------- June 30 1999 1999 Restated 1998 Restated ------------ ------------ ------------ (Unaudited) (Unaudited) Cash flows from operating activities Net loss $(13,446,107) $ (5,030,303) $(19,962,238) ------------ ------------ ------------ Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 60,924 4,986,614 67,456 Stock based compensation 4,864,270 -- 10,129,634 Consulting services received in exchange for stock 550,000 -- 550,000 Unrealized gain on trading securities (1,053) -- (1,053) Accrued interest on convertible notes payable -- -- 39,780 Increase (decrease) in cash resulting from changes in assets and liabilities: Deposits receivable 1,533,632 -- -- Prepaid advertising (926,090) -- (926,090) Prepaid - other (70,293) -- (70,293) Deposits and other assets (28,500) -- (31,000) Accounts payable 942,033 5,863 1,013,255 Licensing fees payable (9,999) -- 54,166 Accrued payroll and related taxes 14,843 -- 17,765 ------------ ------------ ------------ Net cash used in operating activities (6,516,340) (37,826) (9,118,618) ------------ ------------ ------------ Cash flows from investing activities Purchase of fixed assets (543,991) (14,031) (905,143) Forgivable loans (25,997) (31,600) (422,537) Purchase of trading securities, net (27,495,988) -- (27,495,988) ------------ ------------ ------------ Net cash used in investing activities (28,065,976) (45,631) (28,823,668) ------------ ------------ ------------ Cash flows from financing activities Net proceeds from private placements -- -- 4,081,289 Proceeds from convertible note payable -- 100,000 1,100,000 Stock subscription receivable 125,000 -- -- Proceeds from issuance of note payable - Stockholder 2,245,081 -- 2,245,081 Accrued commissions (215,233) -- -- Stock subscription (337,500) -- (337,500) Proceeds from initial public offering, net of offering costs 42,368,300 -- 42,368,300 Stock subscription -- -- 337,500 Proceeds from issuance of common stock -- -- 120 Payments on notes payable -- -- (50,000) ------------ ------------ ------------ Net cash provided by financing activities 44,185,648 100,000 49,744,790 ------------ ------------ ------------ Net increase in cash and cash equivalents 9,603,332 16,543 11,802,504 Cash and cash equivalents, beginning of period 2,199,172 2,582 -- ------------ ------------ ------------ Cash and cash equivalents, end of period $ 11,802,504 $ 19,125 $ 11,802,504 ============ ============ ============ Cash paid for interest $ 133,122 $ 2,500 $182,116 ========== =========== ======== Supplemental schedule of non-cash investing and financing activities: Stock issued in exchange for advertising credits $5,687,500 -- $5,687,500 ========== =========== ========== Convertible notes converted into common stock -- $1,090,000 $1,090,000 ========== =========== ==========
See notes to condensed financial statements. - 6 - 7 QUEPASA.COM, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED FINANCIAL STATEMENTS NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION Quepasa.com, inc. (the Company), a Nevada Corporation, was incorporated in June 1997. The Company is a Spanish-language Internet portal and community. The Company's web site contains several features including a search engine, news, maps, free web pages, chat and free e-mail. The Company's portal draws viewers to its Web site by providing a one-stop destination for identifying, selecting and accessing resources, services, content and information on the Web. The Company provides users with information and interactive content centered around the Spanish language. The Company is a development-stage company that has not had any significant revenue since inception. During 1998, the Company changed its name from Internet Century, Inc. to quepasa.com, inc. The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments and reclassifications considered necessary for a fair and comparable presentation have been included and are of a normal recurring nature. Operating results for the six months ended June 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. The enclosed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Registration Statement on Form S-1 including the related prospectus dated June 24, 1999. NOTE 2 - RESTATEMENT While finalizing the year-end financial statement amounts as of December 31, 1999, the Company identified certain matters that were not appropriately reflected in the quarterly financial information. These matters included issuance of 50,000 shares of common stock to the chief executive officer, pursuant to his employment agreement, compensation expense and adjustment to amortization of compensation expense for common stock options issued to employees, adjustment of equity and deferred advertising for common stock issued in exchange for advertising, and various financial statement reclassifications. Therefore, the quarterly financial information as of and for the three and six month periods ended June 30, 1999 have been restated to properly reflect these matters in accordance with generally accepted accounting principles. The net loss of the Company for the three-month period ended June 30, 1999 increased from $9.1 million to $9.8 million and basic and diluted net loss per share increased from $(.92) to $(.98). The net loss of the Company for the six-month period ended June 30, 1999 increased from $12.8 million to $13.4 million and basic and diluted net loss per share increased from $(1.35) to $(1.42). The net loss of the Company cumulative from inception (June 25, 1997) through June 30, 1999 increased from $19.3 million to $20.0 million and basic and diluted net loss per share increased from $(2.11) to $(2.17). Additionally, deficit accumulated during the development state increased from $19.3 million to $20.0 million. These changes are reflected in the Company's Annual Report on Form 10-K filed on March 30, 2000. NOTE 3 - CASH AND CASH EQUIVALENTS The Company invests certain of its excess cash in debt instruments of the U.S. Government, its agencies, and of high quality corporate issuers. All instruments are highly liquid with an original maturity of three months or less and are considered cash equivalents. NOTE 4 - TRADING SECURITIES Trading securities at June 30, 1999 consist of corporate debt securities. The Company classifies its trading securities in one of three categories: trading, available-for-sale, or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those securities in which the Company has the ability and intent to hold the security until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale. Trading and available-for-sale securities are recorded at market value. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized holding gains and losses on trading securities are included in earnings. Realized gains and losses for trading securities are included in earnings and are derived using the specific identification method for determining the cost of securities. All trading securities held at June 30, 1999 are categorized as trading. - 7 - 8 NOTE 5 - SHAREHOLDERS' EQUITY On June 24, 1999, the Company completed its initial public offering of 4,000,000 shares of its Common Stock. Net proceeds to the Company aggregated approximately $42,400,000. In July 1999, the underwriters exercised an overallotment option and purchased 600,000 shares for $7.2 million. NOTE 6 - DEFERRED ADVERTISING In April 1999, the Company issued 600,000 shares of common stock and a warrant to purchase 1,000,000 shares of common stock at $14.40 per share in exchange for television advertising and other advertising services valued at $5,000,000 (restated). Also in April 1999, the Company issued 50,000 shares of common stock to LKS/Garcia in exchange for advertising services valued at $688,000 (restated). NOTE 7 - SUBSEQUENT EVENT On August 2, 1999, the Company filed a lawsuit in Arizona Superior Court, Maricopa County, against Jeffrey Peterson, a director of the Company and the Company's former Chief Technology Officer, and David Hansen, the Company's former Lead Programmer. The Company terminated the employment of Messrs. Peterson and Hansen on July 31, 1999. The lawsuit alleges that Messrs. - 8 - 9 Peterson and Hansen, in breach of their employment agreements with the Company and Mr. Peterson's duties as a director of the Company, (a) pursued the establishment of a new business venture that will be competitive with the Company, (b) solicited employees of the Company to participate in their business venture and (c) made statements to employees and others intended to cause injury to the Company. The lawsuit seeks an injunction to enjoin Messrs. Peterson and Hansen from pursuing a competing business venture, soliciting any of the Company's employees or otherwise interfering with the Company's contractual relationships or prospective business opportunities. The lawsuit also seeks compensatory and punitive damages in an amount to be determined at trial. In mid July 1999, MCW Holdings, L.L.C. and related entities ("MCW") asserted that on or about April 14, 1999, the Company's former Chief Executive Officer, Jeffrey Peterson, signed a letter obligating the Company to lease from MCW approximately 23,750 square feet of office space in a project under development in Tempe, Arizona for seven years at an initial annual base rent of $593,750 per year, with annual increases of 3-5%. The Company does not believe it has any obligation to enter into a lease for this space and is continuing to investigate possible courses of action with respect to this matter. The Company has been informed that Edwin C. Lynch, a director of the Company between April 26 and June 15, 1999, has an interest in the project. Alan Mishkin, who was nominated as a director of the Company but whose nomination was withdrawn in February 1999, also has an interest in the project. MCW has threatened to commence litigation for damages in excess of $30 million if the Company does not enter into a lease agreement as allegedly required by the letter. - 9 - 10 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report contains 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, including, without limitation, statements regarding the Company's expectations, beliefs, intentions or future strategies that are signified by the words "Expects", "Anticipates", "Intends", "Believes", or similar language. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. In evaluating the Company's business, prospective investors should carefully consider the information set forth below and under the caption "Risk Factors" contained in the registration statement on Form S-1 as filed on March 10, 1999 and effective on June 24, 1999. The Company cautions investors that its business and financial performance are subject to substantial risks and uncertainties. OVERVIEW The Company is a development stage company that commenced operations on June 25, 1997. The operations for the period June 25, 1997 through approximately May 1998 were limited to organizing the Company, raising operating capital, hiring initial employees and drafting a business plan. From May 1998 to present, the Company was engaged primarily in product development. For these reasons, the Company believes that period to period comparisons of its operating results are not meaningful and the results for any period should not be relied upon as an indication of future performance. The Company currently expects to significantly increase its operating expenses to expand its advertising and marketing efforts and to fund greater levels of product development. As a result of these factors, the Company expects to continue to incur significant losses on a quarterly and annual basis for the foreseeable future. RESULTS OF OPERATIONS PRODUCT AND CONTENT DEVELOPMENT Product and content development expenses were $279,000 for the quarter ended June 30, 1999 as compared to $6,000 for the quarter ended June 30, 1998. For the six months ended June 30, 1999 product and content development expenses totaled $466,000 compared to $11,000 for the six months ended June 30, 1998. For the six months ended June 30, 1999, this amount was comprised of approximately $225,000 of salaries, $115,000 of internet connection charges and $125,000 under the terms of the Company's search technology licensing agreement with Inktomi. - 10 - 11 ADVERTISING AND MARKETING Advertising and marketing expenses were $3.1 million for the quarter ended June 30, 1999 compared to $5,000 for the quarter ended June 31, 1998. For the six months ended June 30, 1999, advertising and marketing expenses totaled $5.1 million compared to $5,000 for the six months ended June 30, 1998. For the six months ended June 30, 1999 advertising and marketing expenses were primarily comprised of $2.4 million paid in connection with a nationwide advertising campaign with a Spanish-language radio broadcaster, $750,000 paid under the terms of a contract with a Spanish-language television broadcaster, $400,000 for advertising services paid to an entity partially owned by a former director of the Company and $1.3 million for promotional items and other miscellaneous advertising. Additionally in April 1999, the Company issued 600,000 shares of common stock and a warrant to purchase 1,000,000 shares of common stock at $14.40 per share in exchange for an advertising credit valued at $5.7 million (restated) to be used ratably over 5 years. STOCK BASED COMPENSATION Stock based compensation for the quarter ended June 30, 1999 was $4.4 million (restated) compared to $5.0 million for the quarter ended June 30, 1998. For the six months ended June 30, 1999 stock based compensation totaled $4.9 million (restated) compared to $5.0 million for the six months ended June 30, 1998. During the three months ended June 30, 1999 the Company issued a total of 350,000 options and 50,000 shares of common stock to the Chairman and Chief Executive Officer. Additionally, the Company's former Chairman and Chief Executive Officer transferred 50,000 shares of common stock to the current Chairman and Chief Executive Officer. As a result of these transactions and additional options granted and transferred to employees during this period approximately $4.4 million (restated) of compensation expense was recognized. Additionally, during the first quarter of 1999, the Company recognized $480,000 for the issuance of options to employees and directors. In May 1998, 1,420,000 of shares of common stock were issued to a former officer of the Company. As a result of this issuance, approximately $5.0 million of stock based compensation was recognized during the six months ended June 30, 1998. GENERAL AND ADMINISTRATIVE General and administrative expense was $1.9 million (restated) and $16,000 for the quarter ended June 30, 1999 and 1998, respectively. For the six months ended June 30, 1999 General and Administrative expense was $2.9 million (restated) compared to $25,000 for the same period during 1998. The expense for the six months ended June 30, 1999 consists primarily of $1.4 million for salaries and benefits, $250,000 for recruiting expense, $315,000 for facilities rent and utilities, $650,000 (restated) for professional fees, $280,000 for office expense and other miscellaneous items and $61,000 for depreciation. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1999, the Company had cash and cash equivalents and trading securities totalling $39.3 million. Since inception, the Company has primarily financed its operations through private placements of common stock and convertible debt which totaled approximately $5.2 million, a $2.0 loan advanced by a former principal stockholder and approximately $2.7 million advanced from a principal stockholder and - 11 - 12 former officer. Additionally, on June 24, 1999, the Company raised approximately $42.4 million, net of offering costs, through an initial public offering of its common stock. Net cash used in operating activities was $6.5 million for the six months ended June 30, 1999 and $38,000 for the comparable period in 1998. Net cash used by operations for the 1999 period consisted of the net loss of $13.4 million (restated) and an increase in prepaid advertising of $926,000 million offset by a non-cash expense for stock based compensation of $4.9 million (restated) and changes in assets and liabilities, primarily from a decrease in deposits receivable of $1.5 million and an increase in accounts payable of $942,000. Net cash used in operations for the 1998 period primarily resulted from a $5.0 million loss offset by a $5.0 million non-cash expense for stock based compensation. Net cash used in investing activities was $28.1 million (restated) for the six months ended June 30, 1999 and $45,600 for the comparable period in 1998. The majority of the increase is attributed to $27.5 million in net purchases of trading securities and $544,000 for the purchase of fixed assets. For the 1998 period the amount was used for the purchase of fixed assets and issuance of forgivable loans. Net cash provided by financing activities was $44.2 million for the six months ended June 30, 1999 and $100,000 for the comparable 1998 period. In the six months ended June 30, 1999 the cash provided was comprised of $42.4 million of net proceeds from the initial public offering of the Company's common stock and from the issuance of a note payable to its founder for $2.2 million. The amount provided during the 1998 period was from the issuance of convertible notes payable. Currently, the Company has commitments under non-cancelable operating leases for office facilities and office equipment requiring payments of $168,000 through December 1999 and $734,000 thereafter. The Company is required to pay $590,000 pursuant to the terms of the Inktomi search technology licensing agreement through September 2001. The Inktomi agreement may require additional payments based upon the level of use; however, the Company believes the additional payments, if any, will not be material. The Company is also obligated to pay approximately $246,000 in 1999 and $129,000 in 2000 for technology and content used on its Web site portal provided by Reuters, WeatherLabs, GTE and Exodus. The Company is required to pay an additional $1.0 million under our sponsorship agreement with the Arizona Diamondbacks in July 1999, $1.0 million under an advertising agreement with Telemundo for broadcasts over 26 weeks commencing in August 1999, and $400,000 under an agreement with the Miami Herald paid monthly through March 2000. The Company will recognize the expense related to advertising, content and technology agreements in a manner consistent with the timing of the services provided for under the terms of the respective agreements. Generally, the services are received evenly over the terms of the agreements. The Company currently believes that cash and cash equivalents will be sufficient to meet its current operating, development, capital improvement and any other needs for the next eighteen months. There can be no assurance, however, that the Company will not require additional financing in the future. Although the Company does not believe it will be necessary to raise additional funds in the near term, it may need additional funds at a later date to respond to competitive pressures or to acquire complimentary products, features, businesses or technology. If the Company were required to obtain additional financing in the future, there can be no assurance that such sources of capital will be available on terms favorable to the Company, if at all. - 12 - 13 YEAR 2000 ISSUE The Company depends on the delivery of information over the Internet, a medium which is susceptible to the Year 2000 Issue. The "Year 2000 Issue" is typically the result of limitations of certain software written using two digits rather than four to define the applicable year. If software with date-sensitive functions is not Year 2000 compliant, it may recognize a date using "00" as the year 1900 rather than the year 2000. The Year 2000 Issue could result in a system failure or miscalculations causing significant disruption of our operations, including, among other things, interruptions in Internet traffic, accessibility of our Web site, delivery of our service, transaction processing or searching and other features of our services. It is possible that this disruption will continue for an extended period of time. The Company depends on information contained primarily in electronic format, in databases and computer systems maintained by third parties and the Company. The disruption of third-party systems or the Company's systems interacting with these third party systems could prevent the Company from delivering search results or other services in a timely manner which could materially adversely affect the Company's business and results of operations. The Company has assessed its information technology equipment and systems, which includes its development servers and workstations and production server monitoring software. The Company also uses multiple software systems for internal business purposes, including accounting, e-mail, human resources and development. Most of this equipment and software has been purchased within the last 18 months. The Company has obtained Year 2000 compliance information from the vendors of this equipment and software. Based on this research the Company's management does not believe that these systems contain Year 2000 deficiencies. However, the Company has not conducted its own tests to determine to what extent software running on any of our hardware platforms fails to properly recognize Year 2000 dates. The Company has reviewed the current version of its internally developed free e-mail application to determine Year 2000 compliance. The Company's management has searched through the software code for this application and has determined that it correctly recognizes Year 2000 date codes. The Company has identified and has begun assessing non-information technology embedded systems such as voice mail, office security, fire prevention and other systems. Management generally believes that the Company's non-information technology embedded systems do not present Year 2000 issues. Although management believes that the Company will be Year 2000 compliant, the Company uses third party equipment and software that may not be Year 2000 compliant. Management has contacted the majority of the Company's critical third party service suppliers by telephone asking about the status of their Year 2000 program. The Company has received responses from approximately 72% of its third party suppliers. The Company has received a written response from GTE and has been referred to information made publicly available by Reuters, Exodus, Microsoft and Dell Computer. Management intends to send letters to the remaining third party service - 13 - 14 suppliers regarding their Year 2000 readiness. All suppliers responding to date have asserted that their products will be Year 2000 compliant. In the event the Company does not receive satisfactory commitments from a key supplier, management will make plans for continuing availability of service through alternate channels. The Company expects to have certification that all key vendors and suppliers are Year 2000 compliant during the third quarter of 1999. To date, the Company has not incurred any material expenditures in connection with evaluating Year 2000 issues. All of the Company's expenditures have related to the opportunity cost of time spent by the employees identifying and evaluating Year 2000 compliance matters. The Company has not developed a Year 2000 specific contingency plan. If Year 2000 compliance issues are discovered, management will evaluate the need for contingency plans relating to such issues. The Company intends to actively work with its suppliers to minimize the risks of business disruptions resulting from Year 2000 issues and develop contingency plans where necessary. Such plans may include using alternative suppliers and service providers. The Company expects to have such plans in place by the fourth quarter of 1999. The worst case scenario related to Year 2000 issues would involve a major shutdown of the Internet, which would result in a total loss of revenue to us until it was resolved. SYSTEM CONVERSION The Company intends to migrate its production system from Microsoft Windows NT to Sun Solaris in the 3rd and 4th quarters 1999. While the Company may experience interruptions in service in the course of this migration, it is taking all reasonable steps to minimize such interruptions. The Company estimates it will spend $1.5 million on this migration in 1999. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company's exposure to market risk for changes in interest rates relates primarily to the increase or decrease in the amount of interest income it can earn on its investment portfolio. The Company does not plan to use derivative financial instruments in its investment portfolio. Management plans to ensure the safety and preservation of our invested principal funds by limiting default risks, market risk and reinvestment risk. Management plans to mitigate default risk by investing in high-credit quality securities. - 14 - 15 PART II - OTHER INFORMATION Item 1. Legal Proceedings See description of legal proceedings in Note 7 to the Notes to Financial Statements contained herein. Item 2. Changes in Securities and Use of Proceeds On June 24, 1999 the Company completed a public offering of 4,000,000 shares of Common Stock at an initial public offering price of $12.00 per share, resulting in net proceeds to the Company of $42.4 million. The gross proceeds of the offering were $48.0 million and the expenses incurred were $4.3 million for underwriting discounts and commissions and $1.3 for other expenses including legal, accounting and printing costs. The Company used the net proceeds of the offering as follows: (1) $2.5 million repayment of a working capital loan and a bridge loan, (2) $607,000 for marketing and advertising expenses, (3) $520,000 for general and administrative expenses, (4) $146,000 for development and acquisition of additional content and features for the Company's Website and (5) $41,000 to purchase equipment. In addition, $38.6 million is expected to be used for marketing and advertising, to develop and acquire additional content and features, for general and administrative expenses, to purchase additional technology and equipment and for working capital. As of the date of the Quarterly Report, the balance of the net proceeds was invested in short-term, investment grade, interest-bearing securities. Item 6. Exhibits and Reports on Form 8-K a. The exhibits listed in the accompanying Index to Exhibits are filed as part of this Report on Form 10-Q. b. Reports on Form 8-K: 1) On August 2, 1999, the Company filed a report on Form 8-K announcing (i) termination of employment of the Chief Technology Officer. 2) On August 9, 1999, the Company filed a report on Form 8-K announcing that it had hired three vice presidents. - 15 - 16 Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SIGNATURES Date: April 14, 2000 Signature /s/ Gary L. Trujillo ----------------------------------------- Gary L. Trujillo President Date: April 14, 2000 Signature /s/ Juan C. Galan ----------------------------------------- Juan C. Galan Chief Financial Officer - 16 - 17 EXHIBIT INDEX ------------- Exhibit No. Description - ------- ----------- 27 Financial Data Schedule EX-27 2 EX-27
5 6-MOS DEC-31-1998 JUN-30-1999 11,802,504 27,497,041 0 0 0 40,718,465 905,143 67,456 41,587,152 1,085,186 0 0 0 13,826 38,243,059 38,256,885 8,443 8,443 0 0 13,340,427 0 133,122 (13,446,107) 0 (13,446,107) 0 0 0 (9,762,888) (1.42) (1.42)
-----END PRIVACY-ENHANCED MESSAGE-----