<PAGE> 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.
<PAGE> 2
QUEPASA.COM, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
--------------------- --------
<S> <C> <C>
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
</TABLE>
<PAGE> 3
QUEPASA.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEETS
ITEM 1. CONDENSED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
September 30,
1999 December 31,
Restated 1998
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
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
============ ============
</TABLE>
See notes to condensed financial statements.
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<PAGE> 4
QUEPASA.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
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
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
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
============ ============ ============ ============ ============
</TABLE>
See notes to condensed financial statements.
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<PAGE> 5
QUEPASA.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional Deferred During the
Common Stock Paid-in Advertising Development
Shares Amount Capital Services Stage Total
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
See notes to condensed financial statements.
-5-
<PAGE> 6
QUEPASA.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT), CONTINUED
(unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional Deferred During the
Common Stock Paid-in Advertising Development
Shares Amount Capital Services Stage Total
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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
============ ============ ============ ============ ============ ============
</TABLE>
See notes to condensed financial statements.
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<PAGE> 7
QUEPASA.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative from
Inception (June
Nine Months Ended 25, 1997) to
September 30, September 30
1999 1999
Restated 1998 Restated
------------ ------------ ---------------
<S> <C> <C> <C>
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
============ ============ ============
</TABLE>
See notes to condensed financial statements.
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<PAGE> 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-
<PAGE> 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.
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<PAGE> 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-
<PAGE> 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
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<PAGE> 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.
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<PAGE> 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).
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<PAGE> 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-
<PAGE> 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
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<PAGE> 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.
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<PAGE> 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.
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<PAGE> 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.
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<PAGE> 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-
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.1 Agreement with Estefan Enterprises, Inc.(1)
10.2 Registration Rights Agreement with Estefan Enterprises, Inc.(1)
27.1 Financial Data Schedule
</TABLE>
- -----------
(1) Previously Filed
-20-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 9,589,565
<SECURITIES> 27,857,096
<RECEIVABLES> 230,670
<ALLOWANCES> 2,766
<INVENTORY> 0
<CURRENT-ASSETS> 44,616,075
<PP&E> 1,981,815
<DEPRECIATION> 156,354
<TOTAL-ASSETS> 46,498,973
<CURRENT-LIABILITIES> 5,806,862
<BONDS> 0
0
0
<COMMON> 14,426
<OTHER-SE> 36,432,603
<TOTAL-LIABILITY-AND-EQUITY> 46,498,973
<SALES> 136,127
<TOTAL-REVENUES> 136,127
<CGS> 0
<TOTAL-COSTS> 22,213,954
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 212,587
<INCOME-PRETAX> (21,742,548)
<INCOME-TAX> 0
<INCOME-CONTINUING> (21,742,548)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,742,548)
<EPS-BASIC> (1.96)
<EPS-DILUTED> (1.96)
</TABLE>
