-----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, Bt06Y8yMDLFYcvpOh7ZA6KFyuZoLWCornvJAfn8J9We4nx5f/KGy7n+JdgiU+NJ0 3PY+jc1rJHVNP02nYQNacg== 0000950153-00-000517.txt : 20000417 0000950153-00-000517.hdr.sgml : 20000417 ACCESSION NUMBER: 0000950153-00-000517 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 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: 601524 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 September 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 November 8, 1999 - ------------------------------------ --------------------------------------- Common stock, $_.001______ par value 14,652,921 Transitional Small Business Disclosure Format: [ ] Yes [X] No EXPLANATORY NOTE This amendment to the Quarterly Report on Form 10-Q for the period ended September 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 Condensed Balance Sheets at September 30, 1999 (unaudited), restated and December 31, 1998................. 3 Condensed Statements of Operations for the Three Months Ended September 30, 1999, restated and 1998 (unaudited) and the Nine Months Ended September 30, 1999, restated and 1998 (unaudited)......................................................... 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 Nine Months Ended September 30, 1999 (unaudited), restated................................... 5 Condensed Statements of Cash Flows for the Nine Months Ended September 30, 1999, restated and 1998 (unaudited)......................................................... 7 Notes to Condensed Financial Statements (unaudited)........................................................ 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................................ 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk................................................ 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings......................................................................................... 17 Item 2. Changes in Securities and Use of Proceeds................................................................. 17 Item 6. Exhibits and Reports on Form 8-K.......................................................................... 18 Signatures .......................................................................................................... 19
3 QUEPASA.COM, INC. (A DEVELOPMENT STAGE COMPANY) CONDENSED BALANCE SHEETS ITEM 1. CONDENSED FINANCIAL STATEMENTS
September 30, 1999 December 31, Restated 1998 ------------ ------------ ASSETS (Unaudited) Current assets Cash and cash equivalents $ 9,589,565 $ 2,199,172 Trading securities 27,857,096 -- Deposits receivable -- 1,533,632 Stock subscription receivable -- 125,000 Accounts receivable (net of allowance of $2,766) 227,904 Forgivable loans 439,030 396,540 Prepaid expenses 6,502,480 -- ------------ ------------ Total current assets 44,616,075 4,254,344 Property and equipment 1,825,461 354,620 Deposits and other assets 57,437 2,500 ------------ ------------ Total assets $ 46,498,973 $ 4,611,464 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 2,511,354 $ 71,222 Stock subscription -- 337,500 Allowance for legal disputes 400,000 -- Accrued liabilities 2,895,508 282,320 ------------ ------------ Total current liabilities 5,806,862 691,042 Long-term liabilities Note payable - Stockholder 2,245,082 -- ------------ ------------ Total liabilities 8,051,944 691,042 ------------ ------------ Commitments and contingencies Redeemable common stock 2,000,000 -- Stockholders' equity Preferred stock, authorized 5,000,000 shares - none issued or outstanding Common stock, authorized 50,000,000 shares, $.001 par value: Issued and outstanding 14,425,833 (September 30, 1999) and 9,075,833 shares (December 31, 1998) 14,426 9,076 Additional paid-in capital 69,925,657 10,427,477 Deferred advertising services (5,234,375) -- Deficit accumulated during the development stage (28,258,679) (6,516,131) ------------ ------------ Total stockholders' equity 36,447,029 3,920,422 ------------ ------------ $ 46,498,973 $ 4,611,464 ============ ============
See notes to condensed financial statements. -3- 4 QUEPASA.COM, INC. (A DEVELOPMENT STAGE COMPANY) CONDENSED STATEMENTS OF OPERATIONS (unaudited)
Cumulative from Inception Three Months Ended Nine Months Ended (June 25, September 30, September 30, 1997) to ---------------------------- ---------------------------- September 30, 1999 1999 1999 Restated 1998 Restated 1998 Restated ------------ ------------ ------------ ------------ ------------ Gross revenue $ 153,582 $ -- $ 170,144 $ -- $ 170,144 Less commissions (25,898) -- (34,017) -- (34,017) ------------ ------------ ------------ ------------ ------------ Net revenue 127,684 -- 136,127 -- 136,127 Operating expenses Product and content development expenses 798,844 75,459 1,264,407 86,149 1,679,280 Advertising and marketing expenses 6,151,987 45,480 11,277,435 50,558 11,527,854 Stock based compensation expenses 43,463 -- 4,907,714 4,986,614 10,173,078 General and administrative expenses 1,879,233 171,387 4,764,398 196,808 5,302,733 ------------ ------------ ------------ ------------ ------------ Total operating expenses 8,873,527 292,326 22,213,954 5,320,129 28,682,945 ------------ ------------ ------------ ------------ ------------ Loss from operations (8,745,843) (292,326) (22,077,827) (5,320,129) (28,546,818) Other income (expense) Interest expense (79,465) -- (212,587) (2,500) (261,581) Interest income and other 494,972 (28,430) 512,918 (28,430) 514,772 Unrealized gain on trading securities 33,895 -- 34,948 -- 34,948 ------------ ------------ ------------ ------------ ------------ Net other income (expense) 449,402 (28,430) 335,279 (30,930) 288,139 ------------ ------------ ------------ ------------ ------------ Net loss $ (8,296,441) $ (320,756) $(21,742,548) $ (5,351,059) $(28,258,679) ============ ============ ============ ============ ============ Net loss per share, basic and diluted $ (.58) $ (.04) $ (1.96) $ (.59) $ (2.90) ============ ============ ============ ============ ============ Weighted average number of shares outstanding, basic and diluted 14,301,920 9,075,833 11,118,507 9,075,833 9,750,954 ============ ============ ============ ============ ============
See notes to condensed financial statements. -4- 5 QUEPASA.COM, INC. (A DEVELOPMENT STAGE COMPANY) CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (unaudited)
Deficit Accumulated Additional Deferred During the Common Stock 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 and common stock to employees, officers and directors, restated -- -- 4,357,732 -- -- 4,357,732 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 5,389,975 (5,234,375) -- 156,250 Issuance of common stock for consulting services, restated 50,000 50 549,950 -- -- 550,000
See notes to condensed financial statements. -5- 6 QUEPASA.COM, INC. (A DEVELOPMENT STAGE COMPANY) CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT), CONTINUED (unaudited)
Deficit Accumulated Additional Deferred During the Common Stock Paid-in Advertising Development Shares Amount Capital Services Stage Total ------------ ------------ ------------ ------------ ------------ ------------ 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 Proceeds from underwriter overallotment, net of $913,127 of offering cost, July 1999 600,000 600 6,286,273 -- -- 6,286,873 Net loss for the period (unaudited), restated -- -- -- -- (21,742,548) (21,742,548) ------------ ------------ ------------ ------------ ------------ ------------ Balances, September 30, 1999 (unaudited), restated 14,425,833 $ 14,426 $ 69,925,657 $ (5,234,375) $(28,258,679) $ 36,447,029 ============ ============ ============ ============ ============ ============
See notes to condensed financial statements. -6- 7 QUEPASA.COM, INC. (A DEVELOPMENT STAGE COMPANY) CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Cumulative from Inception (June Nine Months Ended 25, 1997) to September 30, September 30 1999 1999 Restated 1998 Restated ------------ ------------ --------------- Cash flows from operating activities Net loss $(21,742,548) $ (5,351,059) $(28,258,679) ------------ ------------ ------------ Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 149,822 -- 156,354 Stock based compensation 4,907,732 4,986,614 10,173,096 Consulting services received in exchange for stock 550,000 -- 550,000 Amortization of deferred advertising 156,250 -- 156,250 Accrued interest on convertible notes payable -- -- 39,780 Unrealized gain on trading securities (34,948) -- (34,948) Increase (decrease) in cash resulting from changes in assets and liabilities: Accounts receivable (227,904) -- (227,904) Deposits receivable 1,533,632 -- -- Prepaid expenses (4,502,480) -- (4,502,480) Deposits and other assets (58,308) (2,500) (60,808) Accounts payable 2,440,132 33,500 2,511,354 Provision for legal disputes 400,000 -- 400,000 Accruals 2,828,421 310 2,895,508 ------------ ------------ ------------ Net cash used in operating activities (13,600,199) (333,135) (16,202,477) ------------ ------------ ------------ Cash flows from investing activities Purchase of fixed assets (1,617,292) (42,985) (1,978,444) Purchase of trading securities, net (27,822,148) -- (27,822,148) Forgivable loans (42,490) (109,881) (439,030) ------------ ------------ ------------ Net cash used in investing activities (29,481,930) (152,866) (30,239,622) ------------ ------------ ------------ Cash flows from financing activities Net proceeds from private placements -- -- 4,081,289 Proceeds from convertible note payable -- 1,100,000 1,100,000 Stock subscription receivable 125,000 -- -- Proceeds from issuance of note payable - Stockholder 2,245,082 -- 2,245,082 Accrued commissions (215,233) -- -- Stock subscription (337,500) -- -- Proceeds from initial public offering, & overallotment, net of offering costs 48,655,173 -- 48,655,173 Proceeds from issuance of common stock -- -- 120 Payments on notes payable -- (50,000) (50,000) ------------ ------------ ------------ Net cash provided by financing activities 50,472,522 1,050,000 56,031,664 ------------ ------------ ------------ Net increase in cash and cash equivalents 7,390,393 563,999 9,589,565 Cash and cash equivalents, beginning of period 2,199,172 2,582 -- ------------ ------------ ------------ Cash and cash equivalents, end of period $ 9,589,565 $ 566,581 $ 9,589,565 ============ ============ ============ Cash paid for interest $ 212,587 $ 2,500 $ 261,581 ============ ============ ============ Supplemental schedule of non-cash investing and financing activities: Stock issued in exchange for advertising credits $ 5,234,375 -- $ 5,234,375 ============ ============ ============ Convertible notes converted into common stock -- $ 1,090,000 $ 1,090,000 ============ ============ ============
See notes to condensed financial statements. -7- 8 QUEPASA.COM, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited) 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 nine months ended September 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. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which was originally to be effective for the Company's financial statements as of January 1, 2000. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of Effective Date of FASB Statement No. 133." The SFAS No. 137 defers the effective date of SFAS No. 133 by one year in order to give companies more time to study, understand and implement the provisions of SFAS No. 133 and to complete information system modifications. The SFAS No. 133 established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that entities record all derivatives as either assets or liabilities, measured at fair value, with any change in fair value recognized in earnings or in other comprehensive income, depending on the use of the derivative and whether it qualifies for hedge accounting. If certain conditions are met, a derivative may be specifically designated as (a) a liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, and available-for-sale security, or a foreign-currency-denominated forecasted transaction. -8- 9 Under this Statement, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. Those methods must be consistent with the entity's approach to managing risk. The Company is in the process of evaluating the effects that this Statement will have on its financial reporting and disclosures. Certain reclassification have been made to the 1998 financial statements and notes to conform to the statement classifications used in 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, deferred advertising, accrued liabilities and advertising expense to record an advertising agreement, and various financial statement reclassifications. Therefore, the quarterly financial information as of and for the three and nine month periods ended September 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 September 1999 decreased from $8.33 million to $8.30 million and basic and diluted net loss per share remain unchanged at $(.58). The net loss of the Company for the nine-month period ended September 1999 increased from $21.1 million to $21.7 million and basic and diluted net loss per share increased from $(1.91) to $(1.96). The net loss of the Company cumulative from inception (June 25, 1997) through September 1999 increased from $27.7 million to $28.3 million and basic and diluted net loss per share increased from $(2.84) to $(2.90). Additionally, deficit accumulated during the development stage increased from $27.7 million to $28.3 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 September 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 September 30, 1999 are categorized as trading. 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 $42.4 million. In July 1999, the underwriters exercised an overallotment option and purchased 600,000 shares with net proceeds aggregating approximately $6.3 million. NOTE 6 - REDEEMABLE COMMON STOCK AND 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 $5.0 million. Also in April 1999, the Company issued 50,000 shares of Common Stock to LKS/Garcia in exchange for advertising services valued at $234,000 (restated). The amounts are expensed as advertising as the other advertising services are rendered. As of September 30, 1999, $5.2 million (restated) of this amount is included in stockholders' equity as deferred advertising services. In September 1999, the Company entered into a $6.0 million agreement with Estefan Enterprises, Inc. (Estefan) whereby Gloria Estefan is to act as spokesperson for the Company through December 31, 2000 and the Company will sponsor her United States concert tour. The terms of the agreement required the payment of $2.0 million upon signing the agreement, $2.0 million to be paid in fiscal year 2000 and issuance of 156,863 shares of redeemable common stock valued at $2.0 million ($12.75 per share). If the closing price of the Company's common stock on September 1, 2000 is less than $12.75 per share, Estefan will have the option to return the stock to the Company in exchange for $2.0 million cash. If Estefan sells its shares of common stock of the Company for more than $18.75 per share they are obligated to return to the Company a number of shares which, when multiplied by the sales price, equals 50% of the difference between the sale price and $18.75 multiplied by the number of shares being sold on such date (up to a maximum value of $6.0 million). Amounts related to this contract are recorded as prepaid advertising and are being amortized over the term of the contract. -9- 10 NOTE 7 - NET LOSS PER SHARE - BASIC AND DILUTED Basic net loss per share is computed on the weighted average number of common shares outstanding during each period. Diluted net loss per share is computed based on the weighted average number of common and common stock equivalent shares outstanding during each period, except in those circumstances where common equivalent shares would be antidilutive. Common equivalent shares are antidilutive at September 30, 1999 and 1998 and therefore basic and diluted net loss per share are the same. NOTE 8 - LEGAL PROCEEDINGS AND SUBSEQUENT EVENTS On October 12, 1999, a lawsuit was filed against the Company in the United States District Court for the Northern District of California in San Francisco (No. C 99 4530 WHO) by Whatshappenin.com, Inc., the operator of an Internet Web site titled "whatshappenin.com." The lawsuit alleges, among other things, that "whatshappenin.com" is a trademark of the plaintiff, that "que pasa" is the Spanish language equivalent of "what's happening" or "what's happenin'" and that the Company's use of "quepasa.com" infringes the plaintiff's trademark and constitutes unfair competition and false advertising. The lawsuit asks the court to enjoin the Company from using the name "quepasa.com," to order the United States Commissioner for Patents and Trademarks to refuse any pending application for the trademark "QuePasa.com" or cancel any existing registration for the trademark "QuePasa.com," and to order the Company to assign its registration of the domain name "quepasa.com" to the plaintiff. The lawsuit also seeks unspecified amounts for compensatory damages, punitive damages, attorneys' fees, and costs. The Company intends to vigorously defend this lawsuit and believes it is without merit. On November 1, 1999, the Company announced the settlement of a lawsuit with Jeffrey Peterson, the Company's co-founder and former Chief Executive Officer, and David Hansen, a former employee. In connection with the settlement, Mr. Peterson has resigned as a Director of the Company, he will retain 37,500 stock options, exercisable at $1.50 per share, his other stock options have been canceled and the Company has paid him $200,000. The terms of Mr. Peterson's lock-up agreement with the Company, entered into at the time of its initial public offering, remain in effect. Under the lock-up, Mr. Peterson may not sell any shares, including the shares underlying his options, until June 2001. In addition, the Company repaid the loan from Mr. Peterson totaling approximately $2.3 million and has forgiven notes from Mr. Peterson and Mr. Hansen totaling approximately $50,000. At the same time, the Company also settled a dispute with MCW Holdings, L.L.C. with respect to office space in Tempe, Arizona. The Company paid $150,000 in conjunction with the settlement of this dispute. -10- 11 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 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 REVENUE Gross and net revenue were $154,000 and $128,000 respectively for the three months ended September 30, 1999. The Company launched its Web site in the fourth quarter 1998 and first generated revenue during the second quarter 1999. During the third quarter 1999 revenue was derived from two sources; 1) banner advertising arrangements under which we receive revenue based on cost per thousand ad impressions (CPM) and on cost per clicks and 2) sponsor agreements which allow advertisers to sponsor an area or receive an exclusivity on an area within our Web site. Approximately 50% of the gross revenue was generated from each of these two sources. Banner advertising is sold by an independent agent who receives a commission, which varies from 30% to 50% of gross banner advertising depending on the volume of ad impressions during a month. Effective March 1, 2000, the Company will terminate its agreement with this independent sales agent. The Company currently plans to hire its own internal sales force to sell banner advertising -11- 12 and generate sponsorship agreements. In addition, the Company plans to supplement its sales efforts through the use of an independent sales agent for run of network banner advertising and additional site specific advertising sales. No single advertiser utilizing banner ads amounted to over 10% of total gross revenue. Two companies accounted for all the sponsor agreement revenue and each was over 10% of gross revenue. One of these sponsorships was with Telemundo and totaled approximately 23% of gross revenue. Telemundo is a shareholder in the Company and its Chief Operating Officer is on the Company's Board of Directors. Sponsor revenues are recognized ratably over the term of the agreement. PRODUCT AND CONTENT DEVELOPMENT Product and content development expenses were $799,000 for the quarter ended September 30, 1999 as compared to $75,000 for the quarter ended September 30, 1998. For the nine months ended September 30, 1999 product and content development expenses totaled $1.3 million compared to $86,000 for the nine months ended September 30, 1998. For the nine months ended September 30, 1999, this amount was comprised of approximately $530,000 of salaries and $560,000 of Internet connection charges and payments under the terms of the Company's search technology licensing agreement. ADVERTISING AND MARKETING Advertising and marketing expenses were $6.2 million for the quarter ended September 30, 1999 compared to $45,000 for the quarter ended September 30, 1998. For the nine months ended September 30, 1999, advertising and marketing expenses totaled $11.3 million compared to $51,000 for the nine months ended September 30, 1998. For the nine months ended September 30, 1999 advertising and marketing expenses were primarily comprised of the following; 1) $3.3 million paid in connection with a nationwide advertising campaign with a Spanish-language radio broadcaster, 2) $1.8 million for an outdoor advertising campaign (billboards, buses, etc.), 3) $1.6 million for television advertising ($980,000 of which was paid to Telemundo), 4) $1.5 million paid to the Arizona Diamondbacks under a marketing, promotions and sports information plan for the 1999 major league baseball season (a member of the Company's Board of Directors is Chief Executive Officer of the Arizona Diamondbacks), 5) $1.3 million for advertising services paid to an entity partially owned by a former director of the Company and 6) $1.2 million for promotional items and other miscellaneous advertising. STOCK BASED COMPENSATION Stock based compensation was $43,000 (restated) and zero for the quarters ended September 30, 1999 and 1998, respectively. For the nine months ended September 30, 1999 stock based compensation totaled $4.9 million (restated) compared to $5.0 million for the nine months ended September 30, 1998. During the second quarter 1999 the Company issued a total of 350,000 options to the President 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 this transaction and additional options granted during the nine months ended September 30, 1999 approximately $4.9 million (restated) of compensation expense was recognized. -12- 13 In May 1998, 1,420,000 of shares of common stock were issued to a former officer of the Company. As a result of these issuances, approximately $5.0 million of stock based compensation was recognized during the nine months ended September 30, 1998. GENERAL AND ADMINISTRATIVE General and administrative expenses were $1.9 million for the quarter ended September 30, 1999 compared to $171,000 for the quarter ended September 30, 1998. For the nine months ended September 30, 1999, general and administrative expenses totaled $4.8 million (restated) compared to $197,000 for the nine months ended September 30, 1998. The expense for the nine months ended September 30, 1999 consists primarily of $2.7 million for salaries, benefits and recruiting, $400,000 provision for settlement of certain legal disputes, $320,000 for facilities rent and utilities, $800,000 (restated) for professional fees and $150,000 for depreciation. INTEREST EXPENSE Interest expense was $79,000 for the quarter ended September 30, 1999 compared to zero for the quarter ended September 30, 1998. For the nine months ended September 30, 1999, interest expense totaled $213,000 compared to $2,500 for the nine months ended September 30, 1998. Interest expense is from a note payable to stockholder and was paid off in conjunction with the settlement of legal disputes described in Note 8. INTEREST INCOME AND OTHER Interest income and other was $495,000 for the quarter ended September 30, 1999 compared to $(28,000) for the quarter ended September 30, 1998. For the nine months ended September 30, 1999, interest income and other totaled $513,000 compared to $(28,000) for the nine months ended September 30, 1998. For the nine months ended September 30, 1999 interest income and other consists primarily of interest income from investments of certain of the Company's excess cash in debt instruments of the U.S. Government, its agencies, and of high quality corporate issuers. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1999, the Company had cash and cash equivalents and trading securities totalling $37.5 million. On June 24, 1999, the Company raised approximately $42.4 million, net of offering costs, through an initial public offering (IPO) of its common stock and during July 1999 the Company raised an additional $6.3 million, net of offering costs, from the exercise of an option granted to its underwriters to cover overallotments from the IPO. Prior to the IPO, the Company 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 (repaid from proceeds of the IPO) and approximately $2.7 million advanced from the Company's co-founder and former Chief Executive Officer (which has been repaid). -13- 14 Net cash used in operating activities was $13.6 million for the nine months ended September 30, 1999 and $333,000 for the comparable period in 1998. Net cash used by operations for the 1999 period consisted of the net loss of $21.7 million (restated) and an increase in prepaid expenses of $4.5 million (restated) 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, an increase in accounts payable, of $2.4 million and an increase in accruals of $2.8 million. Net cash used in operations for the 1998 period primarily resulted from a $5.4 million loss offset by a $5.0 million non-cash expense for stock based compensation. Net cash used in investing activities was $29.5 million (restated) for the nine months ended September 30, 1999 and $153,000 for the comparable period in 1998. The majority of the increase in 1999 is attributed to $27.8 million in net purchases of trading securities and $1.6 million for the purchase of fixed assets. For the 1998 period the amount was used for the purchase of fixed assets and issuance of forgiveable loans. Net cash provided by financing activities was $50.5 million for the nine months ended September 30, 1999 and $1.1 million for the comparable 1998 period. In the nine months ended June 30, 1999 the cash provided was comprised of $48.7 million of net proceeds from the IPO (including the exercise of an option granted to the underwriters to cover overallotments), and from the issuance of a note payable to its co-founder and former Chief Executive Officer for $2.3 million. The amount provided during the 1998 period was from the issuance of convertible notes payable, which have since been converted to common stock. Currently, the Company has commitments under non-cancelable operating leases for office facilities and office equipment requiring payments of approximately $80,000 through December 1999 and $889,000 thereafter. The Company is obligated to pay $2.0 million in 2000 under an agreement with Estefan Enterprises, Inc. (Estefan). In addition, if the closing price of the Company's common stock on September 1, 2000 is less than $12.75 per share Estefan will have the option to return 156,863 shares of the Company's common stock (issued to Estefan in September, 1999) to the Company in exchange for $2.0 million cash. The Company is required to pay $500,000 pursuant to the terms of its search technology licensing agreement with Inktomi 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 $145,000 in 1999 and $435,000 through 2001 for technology and content used on its Web site portal provided by Reuters, GTE, Zacks, Associated Press, Screaming Media and Exodus. The Company is required to pay approximately $750,000 under an advertising agreement with Telemundo for broadcasts over 26 weeks commencing in August 1999, $215,000 under an agreement with the Miami Herald paid monthly through June 2000 and $160,000 under an agreement with Fox Sports Espanol for advertising through December 1999. The Company is also obligated under an agreement with a company owned by a former Director to provide advertising and marketing advisory services through July 2000. The total remaining commitment under this agreement is $450,000 in 1999 and $1.1 million in 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 fifteen months. There -14- 15 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. 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 -15- 16 contacted substantially all of the Company's critical third party service suppliers regarding the status of their Year 2000 program. The Company has received responses from substantially all 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, Dell Computer, Sun Microsystems and Oracle. Management intends to contact the remaining third party service suppliers regarding their Year 2000 readiness. All suppliers who have responded have asserted that their products will be or are 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 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 the Company until it was resolved. SYSTEM CONVERSION The Company intends to migrate its production system from Microsoft Windows NT to Sun Solaris in the fourth quarter of 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. -16- 17 PART II - OTHER INFORMATION Item 1. Legal Proceedings See description of legal proceedings in Note 8 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. In July 1999 the Company sold an additional 600,000 shares of Common Stock at an offering price of $12.00 per share, from the exercise of an option granted to its underwriter to cover overallotments from its initial public offering. The gross proceeds of the offering were $7.2 million and the expenses incurred were $650,000 for underwriting discounts and commissions and $250,000 for other expenses including legal, accounting and other offering 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) $6.9 million for marketing and advertising expenses, (3) $2.3 million for general and administrative expenses, (4) $496,000 for development and acquisition of additional content and features for the Company's Website and (5) $412,000 to purchase equipment. In addition, $36.1 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. In September 1999, the Company issued 156,863 shares of redeemable common stock to Estefan Enterprises, Inc. (Estefan) in connection with an agreement whereby Gloria Estefan will act as spokesperson for the Company through December 31, 2000 and the Company will sponsor Ms. Estefan's concert tour. The securities were issued to Estefan in a transaction not involving a public offering that was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. In addition to the terms described in Note 4 to the accompanying notes to financial statements, after the first anniversary of this agreement Estefan will have demand and piggyback registration rights. -17- 18 Item 6. Exhibits and Reports on Form 8K 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. 3) On September 3, 1999, the Company filed a report on Form 8-K announcing that it had replaced Ehrhardt Keefe Steiner & Hottman, P.C. with Deloitte & Touche LLP as its independent accountants. 4) On November 1, 1999, the Company filed a report on Form 8-K announcing the settlement of its lawsuit against Jeffrey Peterson, the Company's co-founder and former Chief Executive Officer. -18- 19 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 -19- 20 EXHIBIT INDEX
Exhibit No. Description - ----------- ----------- 10.1 Agreement with Estefan Enterprises, Inc.(1) 10.2 Registration Rights Agreement with Estefan Enterprises, Inc.(1) 27.1 Financial Data Schedule
- ----------- (1) Previously Filed -20- EX-27.1 2 EX-27.1
5 9-MOS DEC-31-1999 SEP-30-1999 9,589,565 27,857,096 230,670 2,766 0 44,616,075 1,981,815 156,354 46,498,973 5,806,862 0 0 0 14,426 36,432,603 46,498,973 136,127 136,127 0 22,213,954 0 0 212,587 (21,742,548) 0 (21,742,548) 0 0 0 (21,742,548) (1.96) (1.96)
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