<PAGE> 1
. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
(Mark One)
For the quarterly period ended June 30, 1999
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _________
Commission File Number ________
quepasa.com, inc.
(Exact name of registrant as specified in its charter)
Nevada 86-0879433
(State or other jurisdiction of (I.R.S. Employer Identification)
incorporation or organization)
One Arizona Center
400 East Van Buren 4th Floor
Phoenix, AZ 85004
(Address of principal executive offices)
(602) 716-0100
(Registrant's telephone number, including area code)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [ ] Yes [X] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at August 12, 1999
- ------------------------------------------------------------ -------------------------------------------
<S> <C>
Common stock, $_.001______ par value 14,375,833
</TABLE>
Transitional Small Business Disclosure Format: [ ] Yes [X] No
EXPLANATORY NOTE
This amendment to the Quarterly Report on Form 10-Q for the period ended June
30, 1999 is being filed to reflect changes to the Company's financial statements
as discussed in Note 2 of ITEM 1 of this Filing. These changes are reflected in
the Company's Annual Report on Form 10K, filed on March 30, 2000.
<PAGE> 2
QUEPASA.COM, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C>
Item 1. Condensed Financial Statements (unaudited)
Condensed Balance Sheets at June 30, 1999, restated and December 31, 1998..................................3
Condensed Statements of Operations for the Three Months Ended
June 30, 1999, restated and 1998 and the Six Months Ended
June 30, 1999, restated and 1998..........................................................................4
Condensed Statement of Changes in Stockholders' Equity for the Period from
Inception (June 25, 1997) to the Year Ended December 31,
1998 and the Six Months Ended June 30, 1999, restated.....................................................5
Condensed Statements of, restated Cash Flows for the Six Months Ended
June 30, 1999, restated and 1998..........................................................................6
Notes to Condensed Financial Statements....................................................................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................................14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.........................................................................................15
Item 2. Changes in Securities and Use of Proceeds.................................................................15
Item 6. Exhibits and Reports on Form 8-K..........................................................................15
Signatures........................................................................................................... 16
</TABLE>
<PAGE> 3
QUEPASA.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEETS
ITEM 1. CONDENSED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
June 30,
1999 December 31,
Restated 1998
------------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 11,802,504 $ 2,199,172
Trading securities 27,497,041 --
Deposits receivable -- 1,533,632
Stock subscription receivable -- 125,000
Forgivable loans 422,537 396,540
Prepaid advertising 926,090 --
Prepaid - other 70,293 --
------------ ------------
Total current assets 40,718,465 4,254,344
Property and equipment 837,687 354,620
Other assets
Deposits and other assets 31,000 2,500
------------ ------------
Total assets $ 41,587,152 $ 4,611,464
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,013,255 $ 71,222
Accrued commissions -- 215,233
Stock subscription -- 337,500
License fees payable 54,166 64,165
Accrued payroll and related taxes 17,765 2,922
------------ ------------
Total current liabilities 1,085,186 691,042
Long-term liabilities
Note payable - Stockholder 2,245,081 --
------------ ------------
Total liabilities 3,330,267 691,042
------------ ------------
Commitments and contingencies
Stockholders' equity
Preferred stock, authorized 5,000,000 shares - none issued or outstanding
Common stock, authorized 50,000,000 shares, $0.001 par value; issued and
outstanding 13,825,833 (June 30, 1999) and 9,075,833 shares (December 31, -- --
1998) 13,826 9,076
Additional paid-in capital 63,892,797 10,427,477
Deferred advertising services (5,687,500) --
Deficit accumulated during the development stage (19,962,238) (6,516,131)
------------ ------------
Total stockholders' equity 38,256,885 3,920,422
------------ ------------
$ 41,587,152 $ 4,611,464
============ ============
</TABLE>
See notes to condensed financial statements.
- 3 -
<PAGE> 4
QUEPASA.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative
from
Inception
Three Months Ended Six Months Ended (June 25,
June 30, June 30, 1997) to
---------------------------- ---------------------------- June 30,
1999 1999 1999
Restated 1998 Restated 1998 Restated
------------ ------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Gross revenue $ 16,562 $ -- $ 16,562 $ -- $ 16,562
Less commissions (8,119) (8,119) (8,119)
------------ ------------ ------------ ------------ ------------
Net Revenue 8,443 8,443 8,443
Operating expenses
Product and content development expenses 278,872 6,360 465,563 10,690 880,436
Advertising and marketing expenses 3,062,841 5,078 5,125,448 5,078 5,375,867
Stock based compensation expenses 4,385,251 4,986,614 4,864,251 4,986,614 10,129,615
General and administrative expenses 1,934,866 16,284 2,885,165 25,421 3,423,500
------------ ------------ ------------ ------------ ------------
Total operating expenses 9,661,830 5,014,336 13,340,427 5,027,803 19,809,418
------------ ------------ ------------ ------------ ------------
Loss from operations (9,653,387) (5,014,336) (13,331,984) (5,027,803) (19,800,975)
Other income (expense)
Interest expense (113,122) (2,500) (133,122) (2,500) (182,116)
Interest income and other 2,568 -- 17,946 -- 19,800
Unrealized gain on trading securities 1,053 -- 1,053 -- 1,053
------------ ------------ ------------ ------------ ------------
Net other income (expenses) (109,501) (2,500) (114,123) (2,500) (161,263)
------------ ------------ ------------ ------------ ------------
Net loss $ (9,762,888) $ (5,016,836) $(13,446,107) $ (5,030,303) $(19,962,238)
============ ============ ============ ============ ============
Net loss per share, basic and diluted $ (.98) $ (.55) $ (1.42) $ (.55) $ (2.17)
============ ============ ============ ============ ============
Weighted average number of shares
outstanding, basic and diluted 9,920,338 9,075,833 9,500,419 9,075,833 9,180,533
============ ============ ============ ============ ============
</TABLE>
See notes to condensed financial statements.
- 4 -
<PAGE> 5
QUEPASA.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Additional Deferred During the
------------------------- 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 to employees, officers and
directors, restated -- -- 4,314,270 -- -- 4,314,270
Issuance of stock to officers and
directors, restated 50,000 50 549,950 -- -- 550,000
Issuance of common stock for
advertising services, April 1999,
restated 650,000 650 5,686,850 $(5,687,500) -- 0
Issuance of common stock for
consulting services, restated 50,000 50 549,950 -- -- 550,000
Proceeds from initial public
offering, net of $5,631,700 of
offering costs, June 1999 4,000,000 4,000 42,364,300 -- -- 42,368,300
Net loss for the period (unaudited),
restated -- -- -- -- (13,446,107) (13,446,107)
------------ ------------ ------------ ------------ ------------ ------------
Balances, June 30, 1999 (unaudited),
restated 13,825,833 $ 13,826 $ 63,892,797 $(5,687,500) $(19,962,238) $ 38,256,885
============ ============ ============ ============ ============ ============
</TABLE>
See notes to condensed financial statements.
- 5 -
<PAGE> 6
QUEPASA.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative
from Inception
Six Months Ended (June 25,
June 30, 1997) to
--------------------------------- June 30
1999 1999
Restated 1998 Restated
------------ ------------ ------------
<S> <C> <C> <C>
(Unaudited) (Unaudited)
Cash flows from operating activities
Net loss $(13,446,107) $ (5,030,303) $(19,962,238)
------------ ------------ ------------
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 60,924 4,986,614 67,456
Stock based compensation 4,864,270 -- 10,129,634
Consulting services received in exchange for stock 550,000 -- 550,000
Unrealized gain on trading securities (1,053) -- (1,053)
Accrued interest on convertible notes payable -- -- 39,780
Increase (decrease) in cash resulting from changes in
assets and liabilities:
Deposits receivable 1,533,632 -- --
Prepaid advertising (926,090) -- (926,090)
Prepaid - other (70,293) -- (70,293)
Deposits and other assets (28,500) -- (31,000)
Accounts payable 942,033 5,863 1,013,255
Licensing fees payable (9,999) -- 54,166
Accrued payroll and related taxes 14,843 -- 17,765
------------ ------------ ------------
Net cash used in operating activities (6,516,340) (37,826) (9,118,618)
------------ ------------ ------------
Cash flows from investing activities
Purchase of fixed assets (543,991) (14,031) (905,143)
Forgivable loans (25,997) (31,600) (422,537)
Purchase of trading securities, net (27,495,988) -- (27,495,988)
------------ ------------ ------------
Net cash used in investing activities (28,065,976) (45,631) (28,823,668)
------------ ------------ ------------
Cash flows from financing activities
Net proceeds from private placements -- -- 4,081,289
Proceeds from convertible note payable -- 100,000 1,100,000
Stock subscription receivable 125,000 -- --
Proceeds from issuance of note payable - Stockholder 2,245,081 -- 2,245,081
Accrued commissions (215,233) -- --
Stock subscription (337,500) -- (337,500)
Proceeds from initial public offering, net of offering costs 42,368,300 -- 42,368,300
Stock subscription -- -- 337,500
Proceeds from issuance of common stock -- -- 120
Payments on notes payable -- -- (50,000)
------------ ------------ ------------
Net cash provided by financing activities
44,185,648 100,000 49,744,790
------------ ------------ ------------
Net increase in cash and cash equivalents 9,603,332 16,543 11,802,504
Cash and cash equivalents, beginning of period 2,199,172 2,582 --
------------ ------------ ------------
Cash and cash equivalents, end of period $ 11,802,504 $ 19,125 $ 11,802,504
============ ============ ============
Cash paid for interest $ 133,122 $ 2,500 $182,116
========== =========== ========
Supplemental schedule of non-cash investing and
financing activities:
Stock issued in exchange for advertising credits $5,687,500 -- $5,687,500
========== =========== ==========
Convertible notes converted into common stock -- $1,090,000 $1,090,000
========== =========== ==========
</TABLE>
See notes to condensed financial statements.
- 6 -
<PAGE> 7
QUEPASA.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION
Quepasa.com, inc. (the Company), a Nevada Corporation, was incorporated in June
1997. The Company is a Spanish-language Internet portal and community. The
Company's web site contains several features including a search engine, news,
maps, free web pages, chat and free e-mail. The Company's portal draws viewers
to its Web site by providing a one-stop destination for identifying, selecting
and accessing resources, services, content and information on the Web. The
Company provides users with information and interactive content centered around
the Spanish language.
The Company is a development-stage company that has not had any significant
revenue since inception.
During 1998, the Company changed its name from Internet Century, Inc. to
quepasa.com, inc.
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and notes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments and reclassifications considered
necessary for a fair and comparable presentation have been included and are of
a normal recurring nature. Operating results for the six months ended June 30,
1999 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999. The enclosed financial statements should be read
in conjunction with the financial statements and notes thereto included in the
Company's Registration Statement on Form S-1 including the related prospectus
dated June 24, 1999.
NOTE 2 - RESTATEMENT
While finalizing the year-end financial statement amounts as of December 31,
1999, the Company identified certain matters that were not appropriately
reflected in the quarterly financial information. These matters included
issuance of 50,000 shares of common stock to the chief executive officer,
pursuant to his employment agreement, compensation expense and adjustment to
amortization of compensation expense for common stock options issued to
employees, adjustment of equity and deferred advertising for common stock
issued in exchange for advertising, and various financial statement
reclassifications. Therefore, the quarterly financial information as of and
for the three and six month periods ended June 30, 1999 have been restated to
properly reflect these matters in accordance with generally accepted
accounting principles. The net loss of the Company for the three-month period
ended June 30, 1999 increased from $9.1 million to $9.8 million and basic and
diluted net loss per share increased from $(.92) to $(.98). The net loss of
the Company for the six-month period ended June 30, 1999 increased from
$12.8 million to $13.4 million and basic and diluted net loss per share
increased from $(1.35) to $(1.42). The net loss of the Company cumulative
from inception (June 25, 1997) through June 30, 1999 increased from
$19.3 million to $20.0 million and basic and diluted net loss per share
increased from $(2.11) to $(2.17). Additionally, deficit accumulated during
the development state increased from $19.3 million to $20.0 million. These
changes are reflected in the Company's Annual Report on Form 10-K filed on
March 30, 2000.
NOTE 3 - CASH AND CASH EQUIVALENTS
The Company invests certain of its excess cash in debt instruments of the U.S.
Government, its agencies, and of high quality corporate issuers. All instruments
are highly liquid with an original maturity of three months or less and are
considered cash equivalents.
NOTE 4 - TRADING SECURITIES
Trading securities at June 30, 1999 consist of corporate debt securities. The
Company classifies its trading securities in one of three categories: trading,
available-for-sale, or held-to-maturity. Trading securities are bought and held
principally for the purpose of selling them in the near term. Held-to-maturity
securities are those securities in which the Company has the ability and intent
to hold the security until maturity. All other securities not included in
trading or held-to-maturity are classified as available-for-sale.
Trading and available-for-sale securities are recorded at market value.
Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Unrealized holding gains and
losses on trading securities are included in earnings. Realized gains and losses
for trading securities are included in earnings and are derived using the
specific identification method for determining the cost of securities. All
trading securities held at June 30, 1999 are categorized as trading.
- 7 -
<PAGE> 8
NOTE 5 - SHAREHOLDERS' EQUITY
On June 24, 1999, the Company completed its initial public offering of 4,000,000
shares of its Common Stock. Net proceeds to the Company aggregated approximately
$42,400,000. In July 1999, the underwriters exercised an overallotment option
and purchased 600,000 shares for $7.2 million.
NOTE 6 - DEFERRED ADVERTISING
In April 1999, the Company issued 600,000 shares of common stock and a warrant
to purchase 1,000,000 shares of common stock at $14.40 per share in exchange for
television advertising and other advertising services valued at $5,000,000
(restated). Also in April 1999, the Company issued 50,000 shares of common stock
to LKS/Garcia in exchange for advertising services valued at $688,000
(restated).
NOTE 7 - SUBSEQUENT EVENT
On August 2, 1999, the Company filed a lawsuit in Arizona Superior Court,
Maricopa County, against Jeffrey Peterson, a director of the Company and the
Company's former Chief Technology Officer, and David Hansen, the Company's
former Lead Programmer. The Company terminated the employment of Messrs.
Peterson and Hansen on July 31, 1999. The lawsuit alleges that Messrs.
- 8 -
<PAGE> 9
Peterson and Hansen, in breach of their employment agreements with the Company
and Mr. Peterson's duties as a director of the Company, (a) pursued the
establishment of a new business venture that will be competitive with the
Company, (b) solicited employees of the Company to participate in their business
venture and (c) made statements to employees and others intended to cause injury
to the Company. The lawsuit seeks an injunction to enjoin Messrs. Peterson and
Hansen from pursuing a competing business venture, soliciting any of the
Company's employees or otherwise interfering with the Company's contractual
relationships or prospective business opportunities. The lawsuit also seeks
compensatory and punitive damages in an amount to be determined at trial.
In mid July 1999, MCW Holdings, L.L.C. and related entities ("MCW") asserted
that on or about April 14, 1999, the Company's former Chief Executive Officer,
Jeffrey Peterson, signed a letter obligating the Company to lease from MCW
approximately 23,750 square feet of office space in a project under development
in Tempe, Arizona for seven years at an initial annual base rent of $593,750 per
year, with annual increases of 3-5%. The Company does not believe it has any
obligation to enter into a lease for this space and is continuing to investigate
possible courses of action with respect to this matter. The Company has been
informed that Edwin C. Lynch, a director of the Company between April 26 and
June 15, 1999, has an interest in the project. Alan Mishkin, who was nominated
as a director of the Company but whose nomination was withdrawn in February
1999, also has an interest in the project. MCW has threatened to commence
litigation for damages in excess of $30 million if the Company does not enter
into a lease agreement as allegedly required by the letter.
- 9 -
<PAGE> 10
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including, without limitation, statements regarding the Company's
expectations, beliefs, intentions or future strategies that are signified by the
words "Expects", "Anticipates", "Intends", "Believes", or similar language. All
forward-looking statements included in this document are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statements. Actual results could
differ materially from those projected in the forward-looking statements. In
evaluating the Company's business, prospective investors should carefully
consider the information set forth below and under the caption "Risk Factors"
contained in the registration statement on Form S-1 as filed on March 10, 1999
and effective on June 24, 1999. The Company cautions investors that its
business and financial performance are subject to substantial risks and
uncertainties.
OVERVIEW
The Company is a development stage company that commenced operations on June 25,
1997. The operations for the period June 25, 1997 through approximately May 1998
were limited to organizing the Company, raising operating capital, hiring
initial employees and drafting a business plan. From May 1998 to present, the
Company was engaged primarily in product development. For these reasons, the
Company believes that period to period comparisons of its operating results are
not meaningful and the results for any period should not be relied upon as an
indication of future performance. The Company currently expects to significantly
increase its operating expenses to expand its advertising and marketing efforts
and to fund greater levels of product development. As a result of these factors,
the Company expects to continue to incur significant losses on a quarterly and
annual basis for the foreseeable future.
RESULTS OF OPERATIONS
PRODUCT AND CONTENT DEVELOPMENT
Product and content development expenses were $279,000 for the quarter ended
June 30, 1999 as compared to $6,000 for the quarter ended June 30, 1998. For the
six months ended June 30, 1999 product and content development expenses totaled
$466,000 compared to $11,000 for the six months ended June 30, 1998. For the six
months ended June 30, 1999, this amount was comprised of approximately $225,000
of salaries, $115,000 of internet connection charges and $125,000 under the
terms of the Company's search technology licensing agreement with Inktomi.
- 10 -
<PAGE> 11
ADVERTISING AND MARKETING
Advertising and marketing expenses were $3.1 million for the quarter ended June
30, 1999 compared to $5,000 for the quarter ended June 31, 1998. For the six
months ended June 30, 1999, advertising and marketing expenses totaled $5.1
million compared to $5,000 for the six months ended June 30, 1998. For the six
months ended June 30, 1999 advertising and marketing expenses were primarily
comprised of $2.4 million paid in connection with a nationwide advertising
campaign with a Spanish-language radio broadcaster, $750,000 paid under the
terms of a contract with a Spanish-language television broadcaster, $400,000 for
advertising services paid to an entity partially owned by a former director of
the Company and $1.3 million for promotional items and other miscellaneous
advertising. Additionally in April 1999, the Company issued 600,000 shares of
common stock and a warrant to purchase 1,000,000 shares of common stock at
$14.40 per share in exchange for an advertising credit valued at $5.7 million
(restated) to be used ratably over 5 years.
STOCK BASED COMPENSATION
Stock based compensation for the quarter ended June 30, 1999 was $4.4 million
(restated) compared to $5.0 million for the quarter ended June 30, 1998. For the
six months ended June 30, 1999 stock based compensation totaled $4.9 million
(restated) compared to $5.0 million for the six months ended June 30, 1998.
During the three months ended June 30, 1999 the Company issued a total of
350,000 options and 50,000 shares of common stock to the Chairman and Chief
Executive Officer. Additionally, the Company's former Chairman and Chief
Executive Officer transferred 50,000 shares of common stock to the current
Chairman and Chief Executive Officer. As a result of these transactions and
additional options granted and transferred to employees during this period
approximately $4.4 million (restated) of compensation expense was recognized.
Additionally, during the first quarter of 1999, the Company recognized $480,000
for the issuance of options to employees and directors. In May 1998, 1,420,000
of shares of common stock were issued to a former officer of the Company. As a
result of this issuance, approximately $5.0 million of stock based compensation
was recognized during the six months ended June 30, 1998.
GENERAL AND ADMINISTRATIVE
General and administrative expense was $1.9 million (restated) and $16,000 for
the quarter ended June 30, 1999 and 1998, respectively. For the six months ended
June 30, 1999 General and Administrative expense was $2.9 million (restated)
compared to $25,000 for the same period during 1998. The expense for the six
months ended June 30, 1999 consists primarily of $1.4 million for salaries and
benefits, $250,000 for recruiting expense, $315,000 for facilities rent and
utilities, $650,000 (restated) for professional fees, $280,000 for office
expense and other miscellaneous items and $61,000 for depreciation.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had cash and cash equivalents and trading
securities totalling $39.3 million. Since inception, the Company has primarily
financed its operations through private placements of common stock and
convertible debt which totaled approximately $5.2 million, a $2.0 loan advanced
by a former principal stockholder and approximately $2.7 million advanced from a
principal stockholder and
- 11 -
<PAGE> 12
former officer. Additionally, on June 24, 1999, the Company raised approximately
$42.4 million, net of offering costs, through an initial public offering of its
common stock.
Net cash used in operating activities was $6.5 million for the six months ended
June 30, 1999 and $38,000 for the comparable period in 1998. Net cash used by
operations for the 1999 period consisted of the net loss of $13.4 million
(restated) and an increase in prepaid advertising of $926,000 million offset by
a non-cash expense for stock based compensation of $4.9 million (restated) and
changes in assets and liabilities, primarily from a decrease in deposits
receivable of $1.5 million and an increase in accounts payable of $942,000. Net
cash used in operations for the 1998 period primarily resulted from a $5.0
million loss offset by a $5.0 million non-cash expense for stock based
compensation.
Net cash used in investing activities was $28.1 million (restated) for the six
months ended June 30, 1999 and $45,600 for the comparable period in 1998. The
majority of the increase is attributed to $27.5 million in net purchases of
trading securities and $544,000 for the purchase of fixed assets. For the 1998
period the amount was used for the purchase of fixed assets and issuance of
forgivable loans.
Net cash provided by financing activities was $44.2 million for the six months
ended June 30, 1999 and $100,000 for the comparable 1998 period. In the six
months ended June 30, 1999 the cash provided was comprised of $42.4 million of
net proceeds from the initial public offering of the Company's common stock and
from the issuance of a note payable to its founder for $2.2 million. The amount
provided during the 1998 period was from the issuance of convertible notes
payable.
Currently, the Company has commitments under non-cancelable operating leases for
office facilities and office equipment requiring payments of $168,000 through
December 1999 and $734,000 thereafter. The Company is required to pay $590,000
pursuant to the terms of the Inktomi search technology licensing agreement
through September 2001. The Inktomi agreement may require additional payments
based upon the level of use; however, the Company believes the additional
payments, if any, will not be material. The Company is also obligated to pay
approximately $246,000 in 1999 and $129,000 in 2000 for technology and content
used on its Web site portal provided by Reuters, WeatherLabs, GTE and Exodus.
The Company is required to pay an additional $1.0 million under our sponsorship
agreement with the Arizona Diamondbacks in July 1999, $1.0 million under an
advertising agreement with Telemundo for broadcasts over 26 weeks commencing in
August 1999, and $400,000 under an agreement with the Miami Herald paid monthly
through March 2000. The Company will recognize the expense related to
advertising, content and technology agreements in a manner consistent with the
timing of the services provided for under the terms of the respective
agreements. Generally, the services are received evenly over the terms of the
agreements.
The Company currently believes that cash and cash equivalents will be sufficient
to meet its current operating, development, capital improvement and any other
needs for the next eighteen months. There can be no assurance, however, that the
Company will not require additional financing in the future. Although the
Company does not believe it will be necessary to raise additional funds in the
near term, it may need additional funds at a later date to respond to
competitive pressures or to acquire complimentary products, features, businesses
or technology. If the Company were required to obtain additional financing in
the future, there can be no assurance that such sources of capital will be
available on terms favorable to the Company, if at all.
- 12 -
<PAGE> 13
YEAR 2000 ISSUE
The Company depends on the delivery of information over the Internet, a medium
which is susceptible to the Year 2000 Issue. The "Year 2000 Issue" is typically
the result of limitations of certain software written using two digits rather
than four to define the applicable year. If software with date-sensitive
functions is not Year 2000 compliant, it may recognize a date using "00" as the
year 1900 rather than the year 2000. The Year 2000 Issue could result in a
system failure or miscalculations causing significant disruption of our
operations, including, among other things, interruptions in Internet traffic,
accessibility of our Web site, delivery of our service, transaction processing
or searching and other features of our services. It is possible that this
disruption will continue for an extended period of time.
The Company depends on information contained primarily in electronic format, in
databases and computer systems maintained by third parties and the Company. The
disruption of third-party systems or the Company's systems interacting with
these third party systems could prevent the Company from delivering search
results or other services in a timely manner which could materially adversely
affect the Company's business and results of operations.
The Company has assessed its information technology equipment and systems, which
includes its development servers and workstations and production server
monitoring software. The Company also uses multiple software systems for
internal business purposes, including accounting, e-mail, human resources and
development. Most of this equipment and software has been purchased within the
last 18 months. The Company has obtained Year 2000 compliance information from
the vendors of this equipment and software. Based on this research the Company's
management does not believe that these systems contain Year 2000 deficiencies.
However, the Company has not conducted its own tests to determine to what extent
software running on any of our hardware platforms fails to properly recognize
Year 2000 dates.
The Company has reviewed the current version of its internally developed free
e-mail application to determine Year 2000 compliance. The Company's management
has searched through the software code for this application and has determined
that it correctly recognizes Year 2000 date codes.
The Company has identified and has begun assessing non-information technology
embedded systems such as voice mail, office security, fire prevention and other
systems. Management generally believes that the Company's non-information
technology embedded systems do not present Year 2000 issues.
Although management believes that the Company will be Year 2000 compliant, the
Company uses third party equipment and software that may not be Year 2000
compliant. Management has contacted the majority of the Company's critical third
party service suppliers by telephone asking about the status of their Year 2000
program. The Company has received responses from approximately 72% of its third
party suppliers. The Company has received a written response from GTE and has
been referred to information made publicly available by Reuters, Exodus,
Microsoft and Dell Computer. Management intends to send letters to the remaining
third party service
- 13 -
<PAGE> 14
suppliers regarding their Year 2000 readiness. All suppliers responding to date
have asserted that their products will be Year 2000 compliant. In the event the
Company does not receive satisfactory commitments from a key supplier,
management will make plans for continuing availability of service through
alternate channels. The Company expects to have certification that all key
vendors and suppliers are Year 2000 compliant during the third quarter of 1999.
To date, the Company has not incurred any material expenditures in connection
with evaluating Year 2000 issues. All of the Company's expenditures have related
to the opportunity cost of time spent by the employees identifying and
evaluating Year 2000 compliance matters.
The Company has not developed a Year 2000 specific contingency plan. If Year
2000 compliance issues are discovered, management will evaluate the need for
contingency plans relating to such issues. The Company intends to actively work
with its suppliers to minimize the risks of business disruptions resulting from
Year 2000 issues and develop contingency plans where necessary. Such plans may
include using alternative suppliers and service providers. The Company expects
to have such plans in place by the fourth quarter of 1999.
The worst case scenario related to Year 2000 issues would involve a major
shutdown of the Internet, which would result in a total loss of revenue to us
until it was resolved.
SYSTEM CONVERSION
The Company intends to migrate its production system from Microsoft Windows NT
to Sun Solaris in the 3rd and 4th quarters 1999. While the Company may
experience interruptions in service in the course of this migration, it is
taking all reasonable steps to minimize such interruptions. The Company
estimates it will spend $1.5 million on this migration in 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to the increase or decrease in the amount of interest income it can
earn on its investment portfolio. The Company does not plan to use derivative
financial instruments in its investment portfolio. Management plans to ensure
the safety and preservation of our invested principal funds by limiting default
risks, market risk and reinvestment risk. Management plans to mitigate default
risk by investing in high-credit quality securities.
- 14 -
<PAGE> 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See description of legal proceedings in Note 7 to the Notes to
Financial Statements contained herein.
Item 2. Changes in Securities and Use of Proceeds
On June 24, 1999 the Company completed a public offering of
4,000,000 shares of Common Stock at an initial public offering
price of $12.00 per share, resulting in net proceeds to the
Company of $42.4 million. The gross proceeds of the offering
were $48.0 million and the expenses incurred were $4.3 million
for underwriting discounts and commissions and $1.3 for other
expenses including legal, accounting and printing costs. The
Company used the net proceeds of the offering as follows: (1)
$2.5 million repayment of a working capital loan and a bridge
loan, (2) $607,000 for marketing and advertising expenses, (3)
$520,000 for general and administrative expenses, (4) $146,000
for development and acquisition of additional content and
features for the Company's Website and (5) $41,000 to purchase
equipment. In addition, $38.6 million is expected to be used
for marketing and advertising, to develop and acquire
additional content and features, for general and
administrative expenses, to purchase additional technology and
equipment and for working capital. As of the date of the
Quarterly Report, the balance of the net proceeds was invested
in short-term, investment grade, interest-bearing securities.
Item 6. Exhibits and Reports on Form 8-K
a. The exhibits listed in the accompanying Index to
Exhibits are filed as part of this Report on
Form 10-Q.
b. Reports on Form 8-K:
1) On August 2, 1999, the Company filed a
report on Form 8-K announcing (i)
termination of employment of the Chief
Technology Officer.
2) On August 9, 1999, the Company filed a
report on Form 8-K announcing that it had
hired three vice presidents.
- 15 -
<PAGE> 16
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIGNATURES
Date: April 14, 2000 Signature /s/ Gary L. Trujillo
-----------------------------------------
Gary L. Trujillo
President
Date: April 14, 2000 Signature /s/ Juan C. Galan
-----------------------------------------
Juan C. Galan
Chief Financial Officer
- 16 -
<PAGE> 17
EXHIBIT INDEX
-------------
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
<CASH> 11,802,504
<SECURITIES> 27,497,041
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 40,718,465
<PP&E> 905,143
<DEPRECIATION> 67,456
<TOTAL-ASSETS> 41,587,152
<CURRENT-LIABILITIES> 1,085,186
<BONDS> 0
0
0
<COMMON> 13,826
<OTHER-SE> 38,243,059
<TOTAL-LIABILITY-AND-EQUITY> 38,256,885
<SALES> 8,443
<TOTAL-REVENUES> 8,443
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 13,340,427
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 133,122
<INCOME-PRETAX> (13,446,107)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,446,107)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,762,888)
<EPS-BASIC> (1.42)
<EPS-DILUTED> (1.42)
</TABLE>
