===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K/A
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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: 0-25565
QUEPASA.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 84-0879433
------ (I.R.S. EMPLOYER IDENTIFICATION
(STATE OR OTHER JURISDICTION OF NO.)
INCORPORATION OR ORGANIZATION)
ONE ARIZONA CENTER, 400 E. VAN BUREN 85004
4TH FLOOR, PHOENIX, AZ (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 602-716-0100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
NONE. NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 219.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. |_|
The aggregate market value of the voting stock held by non-affiliates of
the registrant on March 29, 2000, based upon the closing price of the Common
Stock on the Nasdaq National Market, was approximately $95,020,286.
The number of outstanding shares of the registrant's Common Stock as of
March 29, 2000 was approximately 17,401,734 shares.
===============================================================================
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's preliminary proxy statement, which will be
issued to stockholders in conjunction with the 2000 Annual Meeting of
Stockholders, are incorporated by reference in Part III.
CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K/A and the information incorporated by
reference may include "forward-looking statements" within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. In particular, we
direct your attention to Item 1. Business, Item 2. Properties, Item 3. Legal
Proceedings, Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation, Item 7A. Quantitative and Qualitative Disclosures
About Market Risk, and Item 8. Financial Statements and Supplementary Data. We
intend the forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements in these sections. All statements
regarding our expected financial position and operating results, our business
strategy, our financing plans and the outcome of any contingencies are forward-
looking statements. These statements can sometimes be identified by our use of
forward-looking words such as "may," "believe," "plan," "will," "anticipate,"
"estimate," "expect," "intend" and other phrases of similar meaning. Known and
unknown risks, uncertainties and other factors could cause the actual results to
differ materially from those contemplated by the statements. The forward-looking
information is based on various factors and was derived using numerous
assumptions.
Although we believe that our expectations expressed in these
forward-looking statements are reasonable, we cannot promise that our
expectations will turn out to be correct. Our actual results could be materially
different from our expectations, including the following:
o we may lose members or fail to grow our member base;
o we may not successfully integrate new members or assets obtained through
acquisitions;
o we may fail to compete with existing and new competitors;
o we may not be able to sustain our current growth;
o we may not adequately respond to technological developments impacting the
Internet;
o we may fail to identify and correct problems associated with system
migration and
o we may not be able to find needed financing.
This list is intended to identify some of the principal factors that could
cause actual results to differ materially from those described in the
forward-looking statements included elsewhere in this report. These factors are
not intended to represent a complete list of all risks and uncertainties
inherent in our business, and should be read in conjunction with the more
detailed cautionary statements included in this Annual Report on Form 10-K/A
under the caption "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Risk Factors," our other SEC filings and
our press releases.
2
PART I
ITEM 1. BUSINESS
INTRODUCTION
Quepasa.com is a Bilingual (Spanish/English) Internet portal and online
community focused initially on the U.S. Hispanic market. We provide users with
information and interactive content centered around the Spanish language.
Because the language preference of many acculturated U.S. Hispanics is English,
we also offer our users the ability to access information and services in the
English language. We draw viewers to our Web site by providing a one-stop
destination for identifying, selecting and accessing resources, services,
content and information on the Web. Our online community includes a search
engine, free e-mail, Spanish and English-language news feeds, chat rooms,
message boards, auction and e-commerce sites. We anticipate that our principal
source of revenue will be fees paid by third parties for advertising their
products and services on our Web site, sponsorship revenue for specific areas
within our Web site, auction revenue from our recent acquisition of eTrato.com,
e-commerce revenues from our recent acquisitions of credito.com and
realestateespanol.com and through other acquisitions and partnerships.
INDUSTRY BACKGROUND
GROWTH OF THE INTERNET AND THE WORLD WIDE WEB
The Internet is evolving into a global medium, allowing millions of
individuals throughout the world to communicate, share information and engage in
commerce electronically. The Web is an interactive environment which facilitates
the exchange of information and entertainment among users worldwide. According
to Jupiter Communications, the number of people worldwide accessing the Web will
grow from approximately 232 million at year end 1999 to 498 million by 2003.
This growth is expected to be driven by the large and growing number of personal
computers installed in homes and offices, the declining prices of personal
computers, the improvements in network infrastructure, the availability of
faster and cheaper Internet access, and the increasing familiarity with and
acceptance of the Internet by businesses and consumers. Web usage is also
expected to continue to grow rapidly due to unique characteristics that
differentiate it from traditional media, such as real-time access to interactive
content, real-time communication capabilities and the absence of geographic or
temporal limitations.
GROWTH OF INTERNET ADVERTISING AND INTERNET COMMERCE
With the growth in the number of Internet users and content providers, the
Internet is developing the attributes of a conventional mass medium, where
advertising subsidizes content delivered to users. In fact, technological
advances and the acceptance of the medium by businesses have led to rapid growth
in Internet advertising spending. Tools not available in traditional advertising
media, such as real-time measurement of consumers accessing an advertiser's Web
site through an advertising banner, further increase the attractiveness of Web
advertising by giving advertisers real-time feedback on advertising campaigns.
Forrester Research, Inc. estimates that spending on Web-based advertising will
increase from $1.5 billion in 1998 to more than $15.0 billion in 2003.
The growing acceptance and use of the Web has created an opportunity for
businesses to conduct commerce over the Internet. Forrester Research estimates
that transactions on the Internet are expected to increase from approximately
$51.0 billion in 1998 to more than $1.4 trillion in 2003. Businesses typically
use the Internet to offer standard products and services that can be easily
described with graphics and text and that do not necessarily require a physical
presence for purchase of items, such as airline tickets, books and investment
securities. The focus of electronic commerce transactions evolved from companies
facilitating Internet transactions between businesses to, more recently,
companies targeting business-to-consumer transactions. Internet commerce enables
these companies to develop relationships with customers on a global basis
without making significant investments in traditional sales and distribution
infrastructure.
OUR MARKET IN THE UNITED STATES
We believe that the Spanish-language Internet market in the United States
is characterized by a growing Hispanic population, increasing Hispanic
purchasing power, greater advertising spending on Spanish-language media,
continuing use of the Spanish language by U.S. Hispanics and increasing computer
ownership and Internet usage by Hispanic households.
HISPANIC POPULATION GROWTH AND CONCENTRATION
3
A large number of our users are Hispanics, one of the most rapidly growing
segments of the U.S. population. According to the U.S. Census Bureau and
published sources, the Hispanic population:
o Was estimated to be 29.6 million or 11% of the total U.S. population
in 1998, an increase of approximately 32% from 22.5 million or 9% of
the total U.S. population in 1990;
o Is expected to account for 43% of the total U.S. population growth
between 1998 and 2010 and is expected to grow to 41.1 million or 14%
of the total U.S. population by 2010; and
o Is relatively young, with almost 70% of U.S. Hispanics under 35,
compared with less than 50% of non-Hispanics, and with a median age of
26, compared to 35 for the rest of the population.
We believe the relative youth of the Hispanic population will furnish
growth opportunities for products and services that appeal to a younger market,
such as that found on the Internet. In addition, 70% of all U.S. Hispanics live
in 12 metropolitan areas, which makes U.S. Hispanics an attractive demographic
group for advertisers, enabling them to cost effectively deliver messages to a
highly targeted audience.
INCREASING HISPANIC PURCHASING POWER
Total U.S. Hispanic purchasing power:
o Rose at a compound annual growth rate of 7.5%, compared with 4.9% for
the rest of the population from 1993 to 1998.
o Was projected to be $383.0 billion in 1999, an increase of
approximately 84% since 1990.
o Is expected to account for $443.0 billion or 7% of U.S. consumer
expenditures by 2000, and $938.0 billion or 9% of U.S. consumer
expenditures by 2010.
GREATER SPANISH-LANGUAGE ADVERTISING SPENDING
According to Hispanic Business Magazine, $1.9 billion of total advertising
expenditures in the U.S. were directed toward Spanish-language media in 1999,
representing a 12% increase over 1998's total, and the highest year-to-year
percentage increase since 1993. In only five years, total advertising
expenditures in the Hispanic market have more than doubled from $829.7 million.
CONTINUING USE OF THE SPANISH-LANGUAGE BY U.S. HISPANICS
According to published sources, approximately 90% of U.S. Hispanic adults
speak Spanish at home. Moreover, U.S. Hispanics are expected to continue to
speak Spanish because:
o Approximately two-thirds of U.S. Hispanic adults were born outside the
U.S.;
o Hispanic immigration into the U.S. is continuing;
o Hispanics generally seek to preserve their cultural identity; and
o Population concentration encourages communication in Spanish.
INCREASING COMPUTER OWNERSHIP AND INTERNET USAGE BY HISPANICS
A February 1998 study by The Tomas Rivera Policy Institute estimates that
between 1994 and 1998 the percentage of U.S. Hispanic households that owned
computers increased from 13% to 30%, while U.S. Hispanic households with
Internet access grew from 2% to 15%, which amounted to approximately 650%
Internet access growth in four years. In addition, an independent study
indicated that as of 1998 approximately 2.4 million Hispanics owned personal
home computers in the top seven U.S. Hispanic markets, an increase of 58% from
1996.
4
OUR MARKET OUTSIDE THE UNITED STATES
Spanish is the world's third most spoken language, used by approximately
350 million native speakers. In addition, twenty-one countries consider Spanish
their primary language. Internet usage in Spain is increasing rapidly. For
example, a study by the Spanish Internet Users Association indicated that
approximately 2.3 million Spaniards accessed the Internet in 1998 and the number
is projected to grow to 8.7 million by 2001.
The Spanish-speaking Latin American market is comprised of Mexico, Central
America, parts of South America and the Spanish-speaking countries of the
Caribbean. Factors such as growing competition in telecommunications markets,
declining prices for personal computers and Internet access and favorable
demographics position Latin America as a strong potential growth market for
Internet products and services. According to International Data Corporation, the
number of Internet users in Latin America, excluding Portuguese-speaking
Brazilians, is expected to increase from 2.5 million at year end 1998 to 11.7
million at year end 2003. In particular, the number of Internet users in Mexico
is expected to increase from approximately 700,000 at year end 1998 to
approximately 3.9 million by the end of 2003, which represents a 43% compounded
annual growth rate.
THE QUEPASA.COM STRATEGY
Our strategy is to establish quepasa.com as a leading worldwide bilingual
(Spanish/English) online community offering the quepasa.com services to Hispanic
Internet users residing first in the United States then in Latin America, Europe
and other regions of the world. In order to accomplish this objective, we intend
to continue to focus on developing content, a high volume of traffic, and strong
brand recognition of the quepasa.com name. The basis of our strategy is to
provide Spanish and English-language Internet users with an innovative,
technologically-advanced, content-rich Web community that creates value for the
user and establishes our platform as an attractive medium for advertisers,
marketers and companies engaged in electronic commerce.
We are establishing quepasa.com as a leading Spanish-language Web community
by executing a business strategy that includes:
DEVELOPING QUEPASA.COM IN THE UNITED STATES AND THEN GLOBALLY AS A LEADING
BRAND ASSOCIATED WITH THE INTERNET FOR SPANISH-LANGUAGE USERS
Our short range goal is to establish quepasa.com as the leading brand among
U.S. Hispanic Internet users. We believe that establishing and then promoting
the quepasa.com brand is critical to our ability to attract users and
advertisers to our Web site. We also believe that branding and consumer loyalty
on the Internet are dependent upon our ability to differentiate our services and
to enhance our users' experience by continually offering innovative technology
and appealing features and effectively marketing these features to existing and
potential users of our Web site. We intend to improve our technical expertise to
develop innovative new services, as well as enhance and expand existing
services. We also intend to continue our brand development through:
o Our exclusive agreement with NetZero, Inc. whereby their subscribers
may select a customized quepasa.com start page;
o Advertising on the Internet to on-line users;
o Network television;
o Internet advertising;
o Additional strategic partnerships;
o Additional marketing and distribution arrangements;
o Special event sponsorships; and
o Public and community relations programs.
ACQUIRING AND DEVELOPING ADDITIONAL CONTENT AND FEATURES FOR THE
QUEPASA.COM COMMUNITY
In addition to its search engine, quepasa.com provides content and
community features for the Hispanic Internet user, including free e-mail,
Spanish-language news feeds, worldwide weather information, chat rooms, message
boards, e-commerce and an auction
5
site. In order to provide some of this content, we have entered into agreements
with content providers such as Associated Press, Hispanic Business Magazine and
Reuters for Spanish-language news, WeatherLabs for worldwide weather
information, Zacks Investment Research for stock quotes and charts, and STATS,
Inc. for sports scores and statistics. These arrangements allow us to increase
our Web site content in order to attract and retain Hispanic Internet users and
to solidify our position as an easy-to-use interface for Spanish and
English-language Web services and information. We have also entered into a
relationship with Telemundo that will provide us with unique content. We intend
to add additional content and features through acquisition, licensing and
internal development.
ENTERING INTO STRATEGIC RELATIONSHIPS WITH BUSINESS PARTNERS WHO OFFER
UNIQUE MEDIA, CONTENT, TECHNOLOGY AND DISTRIBUTION CAPABILITIES
We intend to continue to establish strategic relationships with companies
that will enhance our services and increase our user base. We have strategic
relationships with companies such as Telemundo, Hispanic Business Magazine,
Miami Herald Online, Inktomi, Arizona Diamondbacks, GTE, Associated Press,
Reuters, Zacks Investment Research and STATS, Inc. These and other relationships
are summarized under "Our Business -- Our Strategic Relationships."
EXPANDING INTO ADDITIONAL SPANISH-SPEAKING MARKETS
We seek to establish quepasa.com as a leading destination site for
Spanish-speaking Internet users throughout the world. At the present time, the
majority of our users reside in the United States. As Internet access improves
and usage increases, we intend to allocate future resources to develop our brand
in non-U.S. Spanish-speaking markets, such as Latin America and Spain.
GENERATING REVENUE FROM THE SALE OF ADVERTISING, SPONSORSHIPS, AUCTIONS AND
THROUGH ELECTRONIC COMMERCE
Until February 29, 2000, most of our Internet Advertising was sold pursuant
to an agreement with 24/7 Media, a leading provider of Internet Advertising
Solutions. Commencing March 1, 2000 we will sell substantially all of our
advertising through our own internal sales force. We have hired six sales people
located throughout the United States who will be responsible for direct sales of
advertising banners and sponsorships on our Web site.
We will also generate revenue through auctions on our recently acquired
eTrato.com web site. We will generate electronic commerce revenue through the
sale of products on our eTrato.com Web site, from our affiliate mall, which is
currently operating on our site and real estate services on our
realestateespanol.com site.
THE QUEPASA.COM COMMUNITY
SERVICES AND CONTENT.
In November 1998, we launched the quepasa.com Web site which allows
individuals to quickly access content and features which appeal to Hispanic
Internet users. Although our content is directed toward Spanish-speaking users,
to better serve the U.S. Hispanic population, quepasa.com is also offered in
English. By combining existing services with specialized information from
leading content providers, quepasa.com provides subject or category specific
content including topical news, worldwide weather information, free e-mail,
chat, message boards, search capabilities, auctions, access to financing
products on our credito.com web site and real estate services on our
realestateespanol.com site.
The quepasa.com Web site currently offers a number of categories of topical
interest, including the following:
Noticias (News)
Etretenimiento (Entertainment)
Salud (Health)
Mundo Latino (Latino World)
Recetario (Recipe Box)
Compras (Shopping)
Negocios y Finanzas (Business & Finance)
Deportes (Sports)
Computadoras y Tecnologia (Science & Technology)
Empleo (Employment)
6
Educacion (Education)
Temas de Sociedad (People & Society)
Subastas (Auctions)
SEARCH ENGINE. The quepasa.com search engine helps users find information
on the Web by searching through quepasa.com's index of Web documents. Our search
technology is provided by Inktomi which enables us to provide customers with a
variety of online search services.
FREE E-MAIL, CHAT AND MESSAGE BOARD FEATURES. quepasa.com offers free
e-mail and free Web community services that consist of chat services and message
boards. These features enable users to discuss topics of mutual interest by
participating in ongoing discussions or by creating their own topics for
discussion.
24 HOUR REAL-TIME NEWS, WEATHER, MAPS AND GAMES. quepasa.com offers
worldwide news coverage from Associated Press, Reuters and Hispanic Business
Magazine including worldwide editorialized, topical news covering areas of
special interest to Hispanic users (in Spanish and English), as well as a
Spanish and English-language news feed that we format and edit internally to
provide broad coverage of news that is of special interest to Hispanic users.
Our users are also able to search a database of archived news stories over the
prior 30-day period. Through an agreement with WeatherLabs, we offer worldwide
weather information, including real time weather reports and forecasts, for
5,000 U.S. and 2,400 international cities. We were the first to offer maps and
door-to-door driving directions in both Spanish and English in connection with a
partnership with MapQuest Global Corporation and a bilingual "yellow-pages"
directory through a partnership with MapQuest.com Inc. We also offer several
internally developed games on our Web site for free.
OTHER SERVICES. We will offer our members unified messaging, PC-to-phone
and calling card services as part of an agreement with Net2Phone. Through an
agreement with GlobalEnglish Corporation we offer English language online
learning to our members and through an agreement with X:Drive, we offer free
Internet hard drive space.
OUR STRATEGIC RELATIONSHIPS
We have established strategic relationships with leading providers of
media, content and technology designed to:
o provide access to unique content;
o enhance our services;
o extend our audience reach;
o increase user traffic on our Web site;
o provide enhanced Web site functionality; and
o provide us with additional revenues.
These relationships include:
TELEMUNDO. In April 1999, we entered into a strategic agreement with
Telemundo, a leading Spanish-language television broadcaster that has served the
U.S. Hispanic market for over 11 years. Under this agreement, we issued
Telemundo 600,000 shares of our common stock valued at $7.2 million (restated)
and warrants valued at $2.9 million (restated) to purchase 1,000,000 shares of
our common stock exercisable up to and including June 25, 2001 at $14.40 per
share. In exchange, we received a $5.0 million advertising credit on the
Telemundo television network at the rate of $1.0 million for each of the next
five years. The excess of the total of $10.1 million over the $5.0 million
advertising credit is recorded as prepaid marketing services and amortized over
the term of the agreement. This Agreement also required that we purchase $1.0
million of advertising from Telemundo, and that we will collaborate regarding
online content development, co-branded marketing promotions and other
complementary aspects of our businesses.
X:DRIVE. In October 1999, we entered into a one-year agreement with
X:Drive, an Internet hard drive company, whereby quepasa.com members are
provided with free Internet hard drive space. In connection with this agreement
X:Drive is obligated to pay
7
to us a slotting fee, a set-up fee and a commission for each new account
generated from our Web site.
NET2PHONE. In November 1999, we entered into a one-year agreement with
Net2Phone, a leading provider of voice-enhanced Internet communications
services, to offer quepasa.com's users unified messaging, PC-to-phone and
calling card services. Under the agreement, Net2Phone will provide $2.50 worth
of free phone-to-phone talk time to all quepasa.com users up to a maximum of
500,000 users and we have the right to buy one million additional printed phone
cards for up to $1.50 each with $2.50 worth of talk time on each card. In
connection with this agreement, we will be paid a commission on fees paid to
Net2Phone by quepasa.com users, we will receive a sponsorship fee from Net2Phone
and they will purchase advertising on our Web site.
NETZERO. In December 1999, we entered into a one-year agreement with
NetZero, a provider of dial-up free Internet access services in the United
States, whereby their subscribers may select a customized quepasa.com start
page. Under the agreement, we will pay a fee to NetZero each time the
quepasa.com customized start page is displayed to a NetZero subscriber (logon
fee) and an additional fee if the subscriber visits any quepasa.com site by
using any of the buttons on the NetZero site (referral fee). In addition, we are
obligated to purchase $1.0 million of CD's, which provide access to the NetZero
internet access services, and an additional $1.0 million of CD's in the event we
have paid an aggregate of $6.0 million for logon and referral fees.
OTHER STRATEGIC RELATIONSHIPS. We have entered into agreements to purchase
marketing, technology and content with:
o Estefan Enterprises, Inc.-- a 15 month agreement whereby Gloria
Estefan will act as a spokesperson for quepasa.com and quepasa.com
will sponsor her United States concert tour;
o STATS, Inc.-- a one-year sports scores and statistics agreement;
o Zacks Investment Research-- a one-year stock quotes and charting data
agreement;
o Arizona Diamondbacks -- a marketing, promotions and sports information
plan for the 2000 major league baseball season;
o Inktomi-- a three year search technology agreement;
o GTE Internetworking-- a one year networking technology agreement;
o Reuters NewMedia -- a 26 month agreement under which we obtain news,
business and sports information;
o Associated Press -- a two year agreement under which we obtain, news,
business and sports information;
o MapQuest.com, Inc.-- a bilingual "yellow-pages" directory;
o MapQuest Global Corporation -- a one-year agreement to provide maps
and door-to-door driving directions in both Spanish and English; and
o WeatherLabs -- a one year weather information agreement.
MARKETING AND ADVERTISING OF THE QUEPASA.COM SITE
Our marketing goal is to increase membership and page views on the
quepasa.com Web site and to develop the quepasa.com brand in the United States
and then globally as a leading brand associated with the Internet for Hispanics.
Our marketing plan includes the use of multiple advertising media, such as
national network television, and Web-based advertising.
In February 1999, we chose Garcia/LKS advertising agency as our global
marketing partner because of its strong track record in building brands and
launching products in the Hispanic market. Garcia/LKS is led by principals
Lionel Sosa and Luis Garcia. The agency has represented Fortune 500 companies,
including Coca Cola, Levi-Strauss, Proctor & Gamble and Sprint. The agency has
also provided demographic specific marketing expertise for the political
campaigns of President Ronald Reagan, President George Bush and Texas Governor
George W. Bush. We pay Garcia/LKS $40,000 per month under an agreement
cancelable by either party on 60 days notice.
In March 1999, we launched an advertising campaign with the Telemundo
Network Group. Telemundo, which is owned by Sony
8
and Liberty Media, is a leading Spanish-language television broadcaster that has
served the U.S. Hispanic market for over 11 years. Telemundo's affiliate base,
covering 63 television markets, reaches approximately 85% of all U.S. Hispanic
households. Sony and Liberty Media provide Telemundo with substantial financial
resources, strong management and a vast programming library. Telemundo intends
to draw on this library in order to target a younger, bilingual Hispanic
audience. Telemundo's programming includes shows such as "Cinemundo Primer," a
primetime program featuring popular U.S. and Latin American movies, many
appearing for the first time on Spanish-language television, "Ocurrio Asi de
Noche," an Emmy award-winning investigative news magazine, and "Discovery"
offering nature, science, technology and history programming from the Discovery
Channel.
In April 1999, we initiated nationwide radio advertising campaign with
Hispanic Broadcasting Corporation (HBC), the largest Spanish radio broadcaster
in the United States, with approximately 19 million Spanish-speaking listeners.
HBC owns and operates 42 stations in 11 of the top 15 Hispanic markets,
including the most-listened to Spanish-language stations in nine markets. We
believe the sponsorship with HBC will provide us with an effective platform to
communicate our message to our target audience, because approximately 65% of
U.S. Hispanics reside in HBC's top 15 markets. The quepasa.com sponsorship with
HBC includes the purchase of airtime in the top Hispanic radio markets, "on-air
promos" by radio personalities and prominent sponsorships of HBC community
festivals and events involving HBC radio stations, such as the Calle Ocho
Festival in the Little Havana area of Miami. Calle Ocho is the largest street
festival in the U.S., attended by more than one million people in 1999.
In September 1999, we entered into an agreement with Estefan Enterprises,
Inc. whereby Gloria Estefan will act as a spokesperson for quepasa.com through
December 31, 2000 and quepasa.com will sponsor her United States concert tour.
In connection with this agreement, we will produce radio and television spots
and print and on-line advertisements utilizing Gloria Estefan's name, image,
likeness, voice and music. We have also created a co-branded Web page which is
devoted exclusively to this relationship and contains pertinent information and
purchasing opportunities including information on Gloria Estefan's video's,
album's, concert tour dates, ticket information and song lyrics. We will also
receive tickets for each of the concerts on Gloria Estefan's tour to be used for
contests and promotions. Ms. Estefan will participate in three chat sessions
hosted by quepasa.com and will make at least two personal community appearances
to promote the Internet, her concert tour, her music and educational
opportunities for Hispanics.
We also intend to increase our Web site traffic by increasing the number
and visibility of entry points to the quepasa.com Web site, co-branding and
other marketing arrangements with content providers and high-traffic
Spanish-language Web sites. Through an agreement with NetZero, their subscribers
may opt for a customized quepasa.com home page. In addition to the NetZero
agreement, we have arranged with the Miami Herald Online to promote our Web site
on the Miami Herald Online network of sites.
In an effort to increase page views, Web site operators are increasingly
adding content and other features to their sites to encourage users to spend
more time there. We intend to regularly enhance our technological features and
services and update our content in order to encourage consumers to use our Web
site more frequently. To this end, we have launched a flexible, subject-based
format for our services and content to provide consumers with ease of use.
Our impressions, which represent the number of times our server delivers an
advertisement to a user, grew from approximately 103,700 monthly impressions in
January 1999 to approximately 9,343,000 impressions for the month of December
1999 and to a total of approximately 54,256,000 impressions for the year-ended
December 1999. In addition, our user session length grew from an average of
approximately 7 minutes to approximately 16 minutes. Total user sessions grew
from 40,284 in January 1999 to 800,000 in December 1999. Between February 28 and
December 31, 1999 our registered members grew from 201 to approximately 210,000.
We believe that this growth in our Web site traffic was a result of our
advertising campaigns and the continued development of our Web site content and
features.
OUR PLAN TO SELL ADVERTISING AND SPONSORSHIPS ON THE QUEPASA.COM SITE
During the year ended December 31, 1999, we recognized approximately
$466,000 in revenue from banner advertisements or 69% of our total revenues.
During the same period we recognized $205,000 in revenue from sponsorships or
31% of our total revenues. During the year-ended December 31, 1999, we
recognized $119,000 of barter revenue which is included in the amount previously
noted. The dollar amount of banner advertising and sponsorships is expected to
increase in the future as the membership and traffic on our Web site increases;
however, the percent of banner advertising and sponsorships to total revenues is
expected to decline as auction and e-commerce revenue increases. We plan to sell
advertising and sponsorships utilizing our own internal sales force which will
be strategically located throughout the United States. Our agreement with 24/7
Media was terminated effective February 29, 2000. 24/7 Media acted as our
advertising sales agent for a commission of up to 50% of gross billings. 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.
9
Advertisements on the quepasa.com site are the banner or billboard style,
which are designed to display additional advertisements as the consumer selects
various topics on the Web site. From each advertisement screen, users can
proceed directly to an advertiser's own Web site, thus enabling the advertiser
to directly interact with a user who has expressed interest in the
advertisement.
We also intend to develop innovative approaches for advertisers through
advancements by others in demographic trending and consumer tracking. We seek to
attract the largest possible Web audience in the Hispanic Internet market, in
order to give advertisers the most efficient and effective advertising
placements. We are developing services that encourage consumers to provide
demographic and interest information that can be used to more effectively target
our advertising. Our recently launched membership registration system requires
users to create a quepasa.com account in order to access our chat, e-mail and
message board services. At the time of registration, users are assigned a unique
user identification and password after providing us with personal information
that will allow advertisers to target users with a specific demographic profile.
Users can access their quepasa.com account and personalized settings from any
Internet access device.
OUR PLAN TO DEVELOP AN ONLINE AUCTION COMMUNITY
Our goal is to become the most popular auction community for Hispanic
Internet users. Our acquisition of eTrato.com in January 2000 will enable us to
move toward this goal. eTrato.com is an online, auction community that:
o facilitates transactions from consumer-to-consumer,
business-to-consumer and business-to-business;
o links Hispanic buyers and sellers of goods and services;
o aids transactions with online tools for payment and fulfillment;
o provides a secure and easy to understand environment for conducting
e-business.
Members of the eTrato.com community can list products or services in the
site's online auction or classifieds section in Spanish, English or both. If
users request, eTrato.com will translate to either language, for a small fee.
Some of the features of the site include escrow payment services, customs and
shipping estimates and options, currency conversion tools, chat and discussion
forums, a trading resource center and directory, advanced auction functions such
as image hosting, user ratings and bulk item uploading and specialized
business-to-business areas with sealed bid and reverse auction formats.
eTrato.com will also have live online customer service in order to help users
have a positive first experience. We expect online auction revenue from the
following sources:
o revenue splits on the sale of value-added trading services (e.g.
escrow and freight forwarding);
o premium service fees and premium listing upgrades providing the seller
with more prominent ad space
o the auctioning of our own products through the site;
o fees paid by third parties for advertising their products and services
on the site; and
o translation services.
It is estimated that the volume of auction-based or market-priced Internet
commerce transactions is close to $4 billion, or 10% of total Internet trading
today. Projections are for this number to grow to nearly $129 billion and 29% of
the market by the year 2002. We are unaware of any companies which have
successfully targeted the Spanish-language segment of this market. While the
online trading market and in particular the auction market is very competitive,
we believe that eTrato.com's Spanish/English language advantage represents an
attractive alternative for Hispanic users.
OUR PLAN TO DEVELOP AN ON-LINE FINANCING AND REAL ESTATE SERVICES COMMUNITY
In January 2000, we acquired credito.com, an internet company that will
provide our members with information, interactive tools and resources to help
them build and manage their credit needs and will provide a secure and easy
process to apply for a wide variety of credit products and services. The site
will also provide lenders with the opportunity to communicate with credit
educated customers using its consumer profiling and marketing technologies. We
will offer our members the ability to apply for mortgage loans, credit
10
cards, auto finance loans, home equity loans and student loans.
In March 2000, we acquired realestateespanol.com, a real estate services
site providing the Hispanic-American community with extensive home buying
services in both English and Spanish. realestateespanol.com has been designated
the official internet site of the National Association of Hispanic Real Estate
Professionals (NAHREP). Quepasa.com members will be able to search for a real
estate agent, access school information, take virtual tours, apply for a
mortgage, and view homes for sale among the more than 800,000 online listings
provided through a partnership with homeseekers.com.
OUR DEVELOPMENT AND ACQUISITION OF WEB SITE TECHNOLOGIES
We believe we can differentiate our services and promote the quepasa.com
brand by developing innovative proprietary technology and integrating technology
licensed from third parties where appropriate. Our strategy is to develop or
obtain technologies that are able to expand with the growth in content of the
Internet.
In July 1998, we entered into a three-year agreement with Inktomi to
provide search engine capability for our quepasa.com Web site. Under the terms
of the agreement, we pay Inktomi a minimum fee of $750,000 over the three-year
period for Inktomi's search engine services. The fee could increase based upon
the number of searches performed by Inktomi for our users.
Inktomi's search engine technology enables us to provide a variety of
online search services to our customers. Inktomi provides and manages all
hardware, software and operational aspects of its search engine and the
associated database of Internet content. Inktomi also provides us with a
programming interface and software tools to enable us to custom design our
search service user interface. Separating the user interface enables this
portion of the service to reside in a different physical location from the
Inktomi search engine and to run on our choice of computer equipment. In
addition, we can customize our user interface as to look, feel and functionality
and can change the user interface at any time without affecting the operation of
the Inktomi search engine.
Inktomi's search engine consists of a crawler, an indexer and search engine
servers. The crawler and indexer are software programs that collect and organize
information and store that information on the cluster of search engine servers.
The search engine servers are a collection of workstations that are linked
together as a coupled cluster through the use of Inktomi's software. The search
engine servers provide powerful full-text query operations, including full
Boolean support, phrase and adjacency searching, date restrictions and the
recognition of multimedia files and other embedded objects. Search results are
relevance-ranked using state-of-the-art text indexing methods.
Services which link our users to our Web site and to Inktomi's search
engine are provided to us by GTE. GTE delivers complete network solutions,
dedicated Internet access, high performance Internet hosting, managed Internet
security, network management, systems integration and Web-based applications
development for integrating the Internet into business operations.
COMPETITORS AND COMPETITIVE FACTORS AFFECTING OUR BUSINESS
The market for Internet products, services, advertising and commerce is
intensely competitive, and we expect that competition will continue to
intensify. We believe that the principal competitive factors in these markets
are name recognition, distribution arrangements, functionality, performance,
ease of use, the number of value-added services and features, and quality of
support. Our primary competitors are other companies providing portal and online
community services, especially to the Spanish-language Internet users, such as
Yahoo!Espanol, America Online Latin America, StarMedia, Terra Network, El Sitio,
YUPI, Prodigy and Microsoft networks in Latin America, Mexico and Spain.
In addition, a number of companies offering Internet products and services,
including our direct competitors, recently began integrating multiple features
within the products and services they offer to users. Integration of Internet
products and services is occurring through development of competing products and
through acquisitions of, or entering into joint ventures and/or licensing
arrangements involving, competitors. For example, the Web browsers offered by
Netscape and Microsoft, which are the two most widely-used browsers and
substantial sources of traffic for us, may incorporate and promote information,
search and retrieval capabilities in future releases or upgrades that could make
it more difficult for Internet viewers to find and use our products and
services.
Microsoft recently announced it intended to license products and services
from AltaVista and that it will feature and promote AltaVista services on the
Microsoft Network and other Microsoft online properties. We expect that such
search services may be tightly integrated into the Microsoft operating system,
the Internet Explorer browser, and other software applications, and that
11
Microsoft will promote such services within the Microsoft Network or through
other Microsoft-affiliated end-user services such as MSNBC or WebTV Networks,
Inc.
Many large media companies have announced that they are contemplating
developing Internet navigation services and are attempting to become "gateway"
sites for Web users. In the event these companies develop such portal or
community sites, we could lose a substantial portion of our user traffic.
Further, entities that sponsor or maintain high-traffic Web sites or that
provide an initial point of entry for Internet viewers, such as the Regional
Bell Operating Companies or Internet service providers, such as Microsoft and
America Online, currently offer and can be expected to consider further
development, acquisition or licensing of Internet search and navigation
functions. These functions may be competitive with those offered by us. Our
competitors could also take actions that could make it more difficult for
viewers to find and use our products and services. Consolidations, integration
and strategic relationships involving competitors could have a material adverse
effect on our business.
In addition to the larger portals and online communities, we compete with a
number of smaller portals and communities that provide region-specific
information to users or market to users with specific interests.
Most of our existing competitors, as well as new competitors such as
Spanish-language media companies, other portals, communities and Internet
industry consolidators, have significantly greater financial, technical and
marketing resources than we do. There can be no assurance that our competitors
will not offer Internet products and services that are superior to ours or that
achieve greater market acceptance. There can be no assurance that we will be
able to compete successfully against current or future competitors or that
competition will not have a material adverse effect on our business.
EMPLOYEES
At December 31, 1999, we had 80 employees, including our seven executive
officers.
ITEM 2. PROPERTIES
We lease approximately 13,277 square feet of space for our executive
offices in Phoenix, Arizona for $24,341 per month pursuant to a lease which
expires in November 2002.
ITEM 3. LEGAL PROCEEDINGS
We are from time to time involved in various legal proceedings incidental
to the conduct of our business. We believe that the outcome of all such pending
legal proceedings will not in the aggregate have a material adverse effect on
our business, financial condition, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"PASA."
The following table sets forth the high and low closing prices of our
common stock as reported on the Nasdaq National Market from June 24, 1999
(effective date of Initial Public Offering) through March 29, 2000.
STOCK PRICE
---------------
HIGH LOW
---- ----
1999
Second Quarter................................ $ 14.625 $ 13.750
Third Quarter................................. $ 25.875 $ 7.750
Fourth Quarter................................ $ 15.000 $ 6.250
2000
First Quarter (January 1-March 29, 2000)...... $ 12.500 $ 6.312
At March 29, 2000, the last reported sales price of our common stock was
$6.312 per share. Based on information supplied by certain of record holders of
our common stock, we estimate that there are approximately 268 record holders of
our common stock. We have never declared or paid any dividends on our common
stock. Because we currently intend to retain future earnings to finance growth,
we do not anticipate paying any cash dividends in the foreseeable future.
During the fiscal year ended December 31, 1999, we issued unregistered
securities as set forth below:
1. In 1999, we issued 50,000 shares of common stock to the Chairman and
Chief Executive Officer, in connection with his employment agreement.
2. In April of 1999, we issued 25,000 shares of common stock to an entity
owned by the Chairman and Chief Executive Officer.
3. In April of 1999, we issued 25,000 shares of common stock to Verde
Investments Inc. for consulting services.
4. In April 1999 we issued 650,000 shares of common stock to two
companies for advertising services.
5. In September 1999 we issued 156,863 shares of redeemable common stock
in connection with a spokesperson agreement.
6. In October 1999, we issued 30,225 shares of common stock to two former
directors in connection with the exercise of stock options.
In each of the above transactions, we relied on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933.
During 1999, we granted options to purchase 3,065,500 shares of common
stock under our stock option plan with a weighted average exercise price of
$9.03 per share. Our directors and employees exercised options to purchase
110,225 shares of common stock with a weighted average exercise price of $5.44
per share.
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. In July 1999, the
Company sold an additional 600,000 shares of Common Stock at $12.00 per share
from the exercise of an option granted to its underwriter to cover
overallotments from its initial public offering, resulting in additional net
proceeds of $6.3 million. The aggregate gross proceeds from these issuances were
$55.2 million and the expenses incurred were $4.95 million for underwriting
discounts and commissions and $1.55 for other expenses including legal,
accounting and printing costs. As of December 31, 1999, 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) $10.5 million for marketing and advertising
expenses, (3) $6.3 million for general and administrative expenses, (4) $1.3
million for development and acquisition of additional content and features for
the Company's Website and (5) $1.3 million to purchase equipment. The remainder
of the proceeds are 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. The balance of the net proceeds was invested in short-term,
investment grade, interest-bearing securities.
13
ITEM 6 -- SELECTED FINANCIAL DATA
The following is a summary of selected financial data of quepasa.com as of
and for the years ended December 31, 1999 and 1998 and for the period from
inception, June 25, 1997 through December 31, 1997. This data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and quepasa.com's Financial Statements and the Notes
thereto appearing elsewhere in this document.
INCEPTION
(JUNE 25, 1997)
THROUGH
1999 DECEMBER 31,
(RESTATED) 1998 1997
---------- ----- ---------
STATEMENT OF OPERATIONS DATA:
Net revenue............................ $ 556,244 $ -- $ --
Loss from operations................... (30,038,037) (6,465,288) (3,703)
Net loss............................... (29,261,363) (6,513,228) (2,903)
Basic and diluted loss per share....... (2.44) (.98) --
BALANCE SHEET DATA:
Cash and cash equivalents.............. $ 6,961,592 $ 2,199,172 $ 2,582
Short-term investments................. 22,237,656 -- --
Working capital (deficit).............. 28,141,206 3,563,302 (2,883)
Total assets........................... 44,350,992 4,611,464 2,582
Total stockholders' equity (deficit)... 40,066,244 3,920,422 (2,883)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition and results of
operations for the years ended December 31, 1999 and 1998 and the period from
June 25, 1997 (inception) through December 31, 1997 should be read in
conjunction with our financial statements, the notes related thereto, and the
other financial data included elsewhere in this Form 10-K/A.
OVERVIEW
We commenced operations on June 25, 1997. The operations for the period
June 25, 1997 through May 1998 were limited to organizing quepasa.com, raising
operating capital, hiring initial employees and drafting a business plan. From
May 1998 to present, we were engaged primarily in content development and
acquisition. In May 1999, we launched our first media-based branding and
advertising campaign in the United States. Significant revenues did not commence
until the fourth quarter of 1999. For these reasons, we believe that
period-to-period comparisons of our operating results are not meaningful and the
results for any period should not be relied upon as an indication of future
performance. We currently expect to significantly increase our operating
expenses as we expand our sales, marketing and advertising efforts and to fund
greater levels of content development. As a result of these factors, we expect
to continue to incur significant losses on a quarterly and annual basis for the
foreseeable future.
On January 28, 2000 we acquired eTrato.com, an online trading community
developed especially for the Spanish language or bilingual Internet user for
681,818 shares of common stock valued at $9.6 million.
On January 28, 2000 we acquired credito.com, an online credit and
personal finance company targeted to the U.S. Hispanic population and
available in both Spanish and English for a purchase price of $8.4 million
consisting of 681,818 shares of common stock valued at $11 per share and
assumption of an $887,000 note payable. Contingent consideration consisted of
warrants to purchase 681,818 shares of common stock exercisable upon
credito.com's achievement of certain gross revenue performance objectives in
both the first and second years of operation.
On March 9, 2000, we acquired RealEstateEspanol.com, a real estate services
site providing the Hispanic-American community with bilingual home buying
services. The purchase price for RealEstateEspanol.com consisted of 335,925
shares of the Company's common stock valued at $3.0 million and the assumption
of $300,000 in debt paid immediately following the closing of the acquisition.
14
INTRODUCTION TO RESULTS OF OPERATIONS
NET REVENUES.
We expect to derive future net revenues from three principal sources:
o advertising on our Website;
o sales of sponsorships for different areas within our Website; and
o e-commerce related revenue.
ADVERTISING REVENUE. In 1999, we have derived approximately 69% of our net
revenues from the sale of advertisements on our Web site which are received
principally from:
o advertising arrangements under which we receive fixed fees for banners
placed on our Web site for specified periods of time; and
o reciprocal services arrangements, under which we exchange advertising
space on our Web site for advertising or services from other parties.
Advertising revenues are recognized ratably based on the number of
impressions displayed, provided that the Company has no obligations remaining at
the end of a period and collection of the resulting receivable is probable.
Company obligations typically include guarantees of a minimum number of
impressions. To the extent that minimum guaranteed impressions are not met, the
Company defers recognition of the corresponding revenues until the remaining
guaranteed impression levels are achieved. Payments received from advertisers
prior to displaying their advertisements on the Company's Web site are recorded
as deferred revenue.
SPONSORSHIP REVENUE. The Company also derives revenues from the sale of
sponsorships for certain areas or an exclusivity for certain areas within our
Web site. These sponsorships are for periods up to one year. The Company
recognizes revenue during the initial setup, if required under the unique terms
of each sponsorship agreement (e.g. co-branded Web site), to the extent that
actual costs are incurred. The balance of the sponsorship is recognized ratably
over the period of time of the related agreement. Payments received from
sponsors prior to displaying their advertisements on the Company's Web site are
recorded as deferred revenue.
E-COMMERCE REVENUE. We currently do not derive revenues from auctions.
However, eTrato.com's offerings will include English and Dutch auctions, reverse
auctions, sealed bid auctions and classifieds, image hosting for online auctions
and classifieds, escrow payment services, freight forwarding, "Yo Quiero"
listing where users can post notices seeking specific items in a reverse auction
format, import and export services, customs and tariff tables and
category-specific discussion boards. The Company also created an affiliate mall
with relationships with over 150 vendors, which include, Amazon.com, Etoys.com,
JCrew, etc. We also expect to generate revenues by providing bilingual real
estate services via RealEstateEspanol.
BARTER REVENUE. The Company in the ordinary course of business enters into
reciprocal service arrangements whereby the Company provides advertising service
to third parties in exchange for advertising services in other media. Revenues
and expenses from these agreements are recorded at the fair value of services
provided or received, whichever is more determinable in the circumstances. The
fair value represents market prices negotiated on an arm's-length basis. Revenue
from reciprocal service arrangements is recognized as income when advertisements
are delivered on the Company's Web site. Expense from reciprocal services
arrangements is recognized when the Company's advertisements are run in other
media, which are typically in the same period when the reciprocal service
revenue is recognized. Related expenses are classified as advertising and
marketing expenses. During the years ended December 31, 1999 and 1998 and for
the period from inception (June 25, 1997) through December 31, 1997, revenues
and related expenses attributable to reciprocal services totaled approximately
$119,000, $0 and $0, respectively.
OPERATING EXPENSES
Our principal operating expenses consist of:
o product and content development expenses;
15
o advertising and marketing expenses;
o stock based compensation expense; and
o general and administrative expenses.
PRODUCT AND CONTENT DEVELOPMENT EXPENSES. Product and content development
expenses consist of personnel costs associated with the development, testing and
upgrading of our Web site and systems, purchases of content and specific
technology, particularly software, and telecommunications links and access
charges.
ADVERTISING AND MARKETING EXPENSES. Our advertising and marketing expenses
consist primarily of salaries and expenses of marketing and sales personnel, and
other marketing-related expenses including, most significantly, our mass
media-based branding and advertising activities. We expect these marketing and
sales expenses to increase for the foreseeable future as a result of:
o our mass media-based branding and advertising strategy; and
o the expansion of our sales force personnel.
STOCK BASED COMPENSATION EXPENSE. Stock based compensation expense relates
to the issuance of common stock and stock options granted in 1998 and the first
half of 1999. These stock options were granted at various exercise prices. It
was determined that certain stock options were issued with exercise prices less
than fair market value on the date of grant and as a result stock based
compensation expense is recognized to the extent that stock options were vested.
Substantially all of the stock options, which were issued at less than fair
market value, were fully vested at the time of grant.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of costs related to corporate personnel, occupancy costs,
general operating costs and corporate professional fee expenses, such as legal
and accounting fees. We expect that we will incur additional corporate, general
and administrative expenses related to the growth of our business and our
operation as a public company. Accordingly, we anticipate that these expenses
will continue to increase in future periods.
OTHER INCOME (EXPENSE)
Other income (expenses) consists primarily of interest expense, net of
interest earned. Following our initial public offering, we invested most of our
assets in cash or cash equivalents, which are either debt instruments of the
U.S. Government, its agencies, or high quality commercial paper. Interest income
will decrease over time as cash is used to fund operations.
HISTORICAL RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Our results of operations for the year ended December 31, 1999 were
characterized by increased expenses that more than offset revenue growth during
the period. We reported a net loss of $29.3 million for the year ended December
31, 1999, compared to a net loss of $6.5 million for the year ended December 31,
1998. During the year ended December 31, 1999, we have been principally engaged
in product development, which included hiring personnel for our content and
technology departments. In addition, we launched a mass media-based branding and
advertising campaign, hired marketing, sales and development personnel and a
management team. We plan to establish our own sales force during 2000 and expand
our recently acquired auction and credit sites. We anticipate that these recent
developments will contribute to an increase in our revenues and expenses in
future periods.
NET REVENUES
Gross and net revenue were $671,000 and $556,000 respectively for the year
ended December 31, 1999. We launched our Web site in the fourth quarter 1998 and
first generated revenue during the second quarter 1999. During 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 exclusivity on an area within our Web site. Approximately 69% of the
gross revenue was generated from banner advertising and 31% was generated from
sponsorship agreements. Banner advertising has been sold by an independent agent
who received a commission, which varied from 30% to 50% of gross banner
advertising depending on the volume of ad impressions during a month. Effective
February 29, 2000, we have terminated
16
our agreement with this independent sales agent. We are in the process of hiring
our own internal sales force to sell banner advertising and generate sponsorship
agreements. In addition, we plan to supplement our sales efforts through the use
of an independent sales agent for run of network banner advertising and
additional site-specific advertising sales. With the exception of Net2Phone and
Autonation, representing 20.5% and 11.5% of gross revenue respectively, no other
single advertiser utilizing banner ads or sponsorship agreements amounted to
over 10% of total gross revenue. Sponsor revenues are recognized ratably over
the term of the agreement. During the year-ended December 31, 1999, we
recognized $119,000 of barter revenue which is included in the amounts noted
above.
OPERATING EXPENSES
PRODUCT AND CONTENT DEVELOPMENT EXPENSES. Our product and content
development expenses increased to $2.3 million for the year ended December 31,
1999 from $415,000 for the year ended December 31, 1998. The period-to-period
increase was principally attributable to:
o an increase in personnel costs relating to the development of content
and technological support to $1,185,000 for the year ended December
31, 1999 from $173,000 for the year ended December 31, 1998;
o an increase in expenses for telecommunications links to $642,000 for
the year ended December 31, 1999 from $187,000 for the year ended
December 31, 1998; and
o an increase in third-party content expenses to $334,000 for the year
ended December 31, 1999 from $3,181 for the year ended December 31,
1998.
ADVERTISING AND MARKETING EXPENSES. Our marketing and sales expenses
increased to $16.7 million for the year ended December 31, 1999 from $250,000
for the year ended December 31, 1998. This increase was principally attributable
to:
o an increase to $14.1 million in costs of our initial mass media-based
branding and advertising campaign;
o an increase in marketing and sales personnel costs to $332,000 for the
year ended December 31, 1999 from $45,000 in the year ended December
31, 1998 and
o amortization of advertising agreements amounting to $1.8 million for
the year ended December 31, 1999.
STOCK-BASED COMPENSATION. We incurred stock-based compensation expense of
$5.0 million for the year ended December 31, 1999 compared to $5.3 million for
the year ended December 31, 1998. During the first and second quarters of 1999,
we recognized $4.9 million for the issuance of options to employees and
directors. During 1999 we issued a total of 950,000 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 $2.5 million of compensation expense was recognized during
the year ended December 31, 1999. In May 1998, 3,566,714 shares were transferred
by an existing stockholder to officers, consultants and employees. Also in May
1998, 1,420,000 of shares of common stock were issued to a former officer of
quepasa.com and an outside advisor. In addition, 215,000 stock options were
granted to employees in the fourth quarter of 1998. As a result of these
issuances, approximately $5.3 million of stock based compensation was recognized
during the year ended December 31, 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative
expenses increased to $6.6 million for the year ended December 31, 1999 from
$535,000 for the year ended December 31, 1998. This increase was principally
attributable to an increase in administrative personnel costs to $3.4 million
for the year ended December 31, 1999 from $260,000 the year ended December 31,
1998.
OTHER INCOME (EXPENSE)
Other income (expense), which primarily consists of interest income and
unrealized gains or losses on trading securities, offset by interest expense,
was $777,000 for the year ended December 31, 1999 compared to $(48,000) for the
year ended December 31, 1998. This change resulted primarily from interest
income earned and unrealized gains on the proceeds of the June 1999 initial
public offering. In October 1999 we paid off the note payable-stockholder and as
a result we expect that for the foreseeable future our interest income will
exceed our interest expense.
17
YEAR ENDED DECEMBER 31, 1998 COMPARED TO PARTIAL YEAR 1997 (FROM INCEPTION
JUNE 25, 1997 THROUGH DECEMBER 31, 1997)
The operations for the period June 25, 1997 through approximately May 1998
were limited to organizing quepasa.com, raising operating capital, hiring
initial employees and drafting a business plan. In 1998 we hired several
management and other employees, raised working capital for development and
operation and launched the quepasa.com Web site. We had no revenue during the
partial year 1997 or during 1998. As a result, our results of operations for
1998 were characterized by increasing expenses. We reported a net loss of $6.5
million for 1998, compared to a net loss of $3,000 for 1997. Our results of
operations for 1997 reflect a partial year consisting of approximately six
months.
NET REVENUES
We had no revenue during the partial year ended 1997 or during year ended
1998.
OPERATING EXPENSES
PRODUCT AND CONTENT DEVELOPMENT EXPENSES. Our product and content
development expenses increased to $415,000 for the year ended 1998 from zero for
partial year ended 1997. The 1998 expense consists of:
o personnel costs of $173,000; and
o expenses for telecommunications links for our Web site of $187,000.
ADVERTISING AND MARKETING EXPENSES. Our advertising and marketing expenses
increased to $250,000 for 1998 from zero for partial year 1997. The 1998 expense
primarily consists of advertising expenses.
STOCK-BASED COMPENSATION. Our stock-based compensation expenses increased
to $5.3 million for 1998 from zero for partial year 1997. In May 1998, 3,566,714
shares were transferred by an existing stockholder to officers, consultants and
employees. Also in May 1998, 1,420,000 of shares of common stock were issued to
a former officer of quepasa.com and an outside advisor. In addition, 215,000
stock options were granted to employees in the fourth quarter of 1998. As a
result of these issuances, approximately $5.3 million of stock based
compensation was recognized during the year ended December 31, 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative
expenses increased to $535,000 for the year ended 1998 from $4,000 for partial
year 1997. The increase was principally attributable to:
o an increase in personnel costs in corporate and administrative
functions to $260,000 in 1998 from $4,000 in 1997; and
o increases to $75,000 from zero in professional fees, to $27,000 from
zero in rent and utilities and to $173,000 from zero in other office
and related expenses.
OTHER INCOME (EXPENSE)
Other income (expense), which primarily consists of interest income offset
by interest expense was $(48,000) in 1998 compared to $1,000 for the partial
year 1997. The 1998 net expense was primarily related to interest expense
incurred on convertible notes payable.
LIQUIDITY AND CAPITAL RESOURCES
We have substantial liquidity and capital resource requirements, but
limited sources of liquidity and capital resources. We have generated net losses
and negative cash flows from our inception and anticipate that we will
experience substantial and increasing net losses and negative cash flows for at
least the next several years. As we implement our strategy and seek to take
advantage of our market opportunity, we anticipate that our liquidity and
capital resource requirements will increase significantly.
From our inception to date, we have relied principally upon equity
investments to support the development of our business. We expect to continue to
rely mainly on further equity offerings to provide financing.
At December 31, 1999, we had $7.0 million in cash and cash equivalents and
$22.2 million in short-term investments. On June 24,
18
1999, we raised approximately $42.4 million, net of offering costs, through an
initial public offering of our common stock and during July 1999 we raised an
additional $6.3 million, net of offering costs, from the exercise of an option
granted to our underwriters to cover overallotments from the initial public
offering. Prior to the initial public offering, we primarily financed our
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 initial public offering) and
approximately $2.7 million advanced from quepasa.com's co-founder and former
Chief Executive Officer (which has been repaid).
Net cash used in operating activities was $41.9 million for the year ended
December 31, 1999 and $3.0 million for the year ended December 31, 1998. Net
cash used by operations in 1999 consisted of the net loss of $29.3 million,
$22.1 million in net purchases of trading securities and an increase in prepaid
expenses of $2.2 million (restated) offset by a non-cash expense for stock based
compensation and amortization of $6.0 million, a decrease in deposits receivable
of $1.5 million, an increase in accounts payable of $2.7 million and an increase
in accrued liabilities of $1.0 million (restated). Net cash used in operations
for 1998 primarily resulted from a $6.5 million loss and an increase in deposits
receivable of $1.5 million offset by a $5.3 million non-cash expense for stock
based compensation.
Net cash used in investing activities was $2.0 million for the year ended
December 31, 1999 and $757,692 for the year ended December 31, 1998. The
increase is attributed to $2 million of fixed asset purchases.
Net cash provided by financing activities was $48.7 million for the year
ended December 31, 1999 and $5.6 million for the year ended December 31, 1998.
The increase is primarily attributed to net proceeds received from our initial
public offering of $48.7 million, including the exercise of the underwriter's
overallotment.
Currently, we have commitments under non-cancelable operating leases for
office facilities and equipment requiring payments of $972,000. We are obligated
to pay $2.0 million in 2000 under an agreement with Estefan Enterprises, Inc. In
addition, if the closing price of our common stock on September 1, 2000 is less
than $12.75 per share Estefan Enterprises will have the option to return 156,863
shares of our common stock (issued to Estefan Enterprises in September, 1999) to
us in exchange for $2.0 million cash. We are required to pay $437,500 pursuant
to the terms of our search technology licensing agreement with Inktomi through
September 2001. The Inktomi agreement may require additional payments based upon
the level of use; however, we believe the additional payments, if any, will not
be material. Including the Inktomi agreement, we are obligated to pay
approximately $1.5 million in 2000 for technology and content used on our Web
site portal furnished by service providers such as Reuters, GTE, Zacks,
Associated Press, STATS, Inc., EFE News Services and Exodus. We are required to
pay an additional $1.5 million under our sponsorship agreement with the Arizona
Diamondbacks for the 2000 baseball season. In addition, under a one-year
agreement with NetZero, Inc. (NetZero), they will provide free internet access
along with our content to the U.S. Hispanic market and we are obligated to pay a
fee for their subscribers who accessed our Web site. This fee ranges from $.10
to $.15 per user session (user session fees), however, we are required to make
an advance payment to Net Zero of $1 million and maintain this advance payment
deposit amount at least equal to 125% of the prior month amount due for the user
session fees. We are also committed to spend at least $1 million for the
production and distribution of CD's containing the customized NetZero service.
In the event we have paid an aggregated of $6 million for user session fees we
are obligated to spend an additional $1 million for CD's. We are required to pay
$24,100 monthly under an agreement with the Miami Herald through June 2000. We
are also obligated under an agreement with a company owned by a former Director
to provide advertising and marketing advisory services through February 2000.
The total remaining commitment under this agreement is $290,000 in 2000. We 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.
We expect to continue to incur costs, particularly sales, marketing and
advertising costs, product content and development costs, general and
administrative costs and technology and equipment purchase costs during 2000 in
order to expand our business. We expect to expend the largest portion of our
existing capital on sales, marketing and advertising expenses and product
content and development costs and do not expect sufficient revenue to be
realized to offset these costs. We believe that our cash on hand will be
sufficient to meet our working capital and capital expenditure needs through the
second quarter of 2001. We believe it will be necessary for us to raise
additional capital in the next twelve months. In the event we are not able to
raise capital our ability to continue operations will be severely impacted and
could include a significant reduction in our advertising spending, a reduction
in our personnel and other spending cuts which could have an adverse effect on
the Company. There can be no assurance that we will be successful in raising the
necessary funds or that these funds will be on terms which are beneficial to us.
SYSTEM ISSUES
19
We depend on the delivery of information over the Internet, a medium that
depends on information contained primarily in electronic format, in databases
and computer systems maintained by third parties and us. A disruption of
third-party systems or our systems interacting with these third party systems
could prevent us from delivering search results or other services in a timely
manner, which could materially adversely affect our business and results of
operations.
We do not anticipate that this migration process, which is expected to be
completed in the first half of 2000, will affect the continuous operations of
our network. However, any break in the continuous operations of our network
could have a material adverse effect on our operating expenses, our brand and
our business. We estimate that we will spend $500,000 on this migration in 2000.
RISK FACTORS
You should carefully consider the risks described below.
OUR OPERATING HISTORY IS EXTREMELY LIMITED
We were incorporated in June 1997 and have generated no significant revenue
to date. Accordingly, we have no operating history upon which an investor can
evaluate us, and our prospects are subject to the risks and uncertainties
encountered by companies that are in the early stages of operation and
particularly companies which operate in the new and rapidly evolving Internet
market.
These risks include, among others, our ability to:
o expand the contents and services on our Web site;
o maintain and increase levels of traffic on our Web site;
o increase awareness of our quepasa.com.com brand;
o attract advertisers and sponsors to our Web site;
o generate significant revenues from e-commerce;
o respond effectively to competitive pressure;
o maintain our current, and develop new, strategic relationships;
o recruit and retain personnel, including sales, content and technology
personnel;
o anticipate and adapt to developing markets;
o upgrade and develop our systems and infrastructure;
o respond to any failure of our network and to handle efficiently our
Web traffic; and
o manage our rapidly expanding operations.
If we are unsuccessful in addressing these and other risks, our business,
financial condition and results of operations will be materially and adversely
affected.
WE EXPECT FUTURE LOSSES AND WILL NEED MORE CAPITAL
We have never been profitable. As of December 31, 1999, we had an
accumulated deficit of approximately $35.8 million. Our limited operating
history and the uncertainty of the Internet market in which we operate our
business make any prediction of our future results of operations difficult or
impossible. We expect to increase our selling expenses to develop our own
internal sales force. We also expect our expenses to increase from the
distribution agreement with NetZero, Inc. and from the acquisitions of
eTrato.com, credito.com and realestateespanol.com. We do not expect that our
revenue will cover our expenses in the foreseeable future. As a
20
result, we will continue to incur significant losses and will need to raise
additional capital. We cannot assure that we will be able to raise additional
capital and we do not know what the terms of such capital raising would be. Any
future sale of our equity securities would dilute the ownership and control of
our stockholders.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH ACQUISITIONS
In the first quarter of 2000, we acquired the stock of three companies. As
part of our long-term business strategy, we continually evaluate strategic
acquisitions of businesses. Acquisitions often involve a number of special
risks, including the following:
o we may experience difficulty integrating acquired operations and
personnel;
o we may be unable to retain acquired subscribers;
o the acquisition may disrupt our ongoing business;
o we may not be able to successfully incorporate acquired technology and
rights into our offerings and maintain uniform standards, controls,
procedures, and policies;
o the businesses we acquire may fail to achieve the revenues and
earnings we anticipated;
o we may ultimately be liable for contingent and other liabilities, not
previously disclosed to us, of the companies that we acquire; and
o our resources may be diverted in asserting and defending our legal
rights.
We may not successfully overcome problems encountered in connection with
our recent and potential future acquisitions. In addition, an acquisition could
materially adversely affect our operating results by:
o causing us to incur additional debt;
o forcing us to amortize expenses related to goodwill and other
intangible assets;
o diluting our stockholders' ownership interest.
WE WILL BE UNABLE TO GENERATE SUFFICIENT REVENUE IF OUR TARGET AUDIENCE
DOES NOT ACCEPT OUR PRODUCTS AND SERVICES
We have been promoting our site for less than one year and we cannot give
assurances that the Spanish-speaking population will accept our products and
services or that we will attract repeat users to our Web site. Because the
market for our products and services is new and evolving, it is difficult to
predict the future growth rate, if any, and the size of the market we have
targeted. If the market develops more slowly than we expect or becomes saturated
with competitors, or if our products and services are not accepted by the
market, we will be unable to generate enough revenue to offset our expenses and
to earn profits.
OUR INABILITY TO DEVELOP THE QUEPASA.COM BRAND WILL SIGNIFICANTLY REDUCE OUR
REVENUE
We believe that maintaining the quepasa.com brand is of critical importance
to our efforts to attract and expand our user base and our advertising,
sponsorships and e-commerce revenues. We also believe that brand recognition
will become more important due to the increasing number of Internet sites.
Promotion and enhancement of the quepasa.com brand will depend largely on our
success in providing high quality products and services and Web site content
that is of interest to the worldwide Spanish-speaking population. We cannot
assure that success. Even if our desired results are achieved, it is likely that
we will expend significant additional amounts in further developing and
maintaining brand loyalty. Failure to develop brand loyalty among our users
could result in our being unable to generate enough revenue to offset our
expenses and to earn profits.
WE WILL BE ADVERSELY AFFECTED IF THE INTERNET DOES NOT BECOME WIDELY ACCEPTED
AS A MEDIUM FOR ADVERTISING AND E-COMMERCE
We will need revenue from the sale of advertisements and sponsorships on
our Web pages and from e-commerce transactions to offset expenses. At the
present time, Web advertisers generally enter into only short-term advertising
contracts. Because Web site
21
advertising is a new phenomenon, few advertisers have significant experience
with the Web as an advertising medium. Consequently, many advertisers have not
devoted a substantial portion of their advertising expenditures to Web-based
advertising, and may not find Web-based advertising to be effective for
promoting their products and services as compared to traditional print and
broadcast media.
No standards have yet been widely accepted for the measurement of the
effectiveness of Web-based advertising, and we can give no assurance that such
standards will be developed or adopted sufficiently to sustain Web-based
advertising as a significant advertising medium. We cannot give assurances that
banner advertising, the predominant revenue producing mode of advertising
currently used on the Web, will be accepted as an effective advertising medium
or that we can effectively transition to any other forms of Web-based
advertising, should they develop. Software programs are available that limit or
remove advertisements from an Internet user's desktop. This software, if
generally adopted by users, may materially and adversely affect Web-based
advertising.
OUR WEB SITE OPERATIONS COULD BE IMPAIRED IF WE LOSE THE SERVICES OF THIRD
PARTY TECHNOLOGY AND CONTENT PROVIDERS
Our business depends upon third parties, including providers of technology,
infrastructure, content and features.
We supplement our Web site directory listings with Web search results
provided by Inktomi under a non-exclusive agreement. We depend upon Inktomi for
ongoing maintenance and technical support to ensure accurate and rapid
presentation of search results to users of our Web site. Termination of our
relationship with Inktomi or Inktomi's failure to renew our agreement upon
expiration could result in substantial additional costs to us in developing or
replacing technology. We also rely on GTE for our Internet and Critical Path for
our e-mail connections. Any interruption in the Internet access provided by GTE
or any other provider of access could disrupt our Web site operations and impair
relations with our users.
We license content, including technology and related databases, from third
parties for portions of our quepasa.com Web site, including news from Associated
Press, Reuters, Hispanic Business and EFE News Services, weather from
WeatherLabs, stock quotes and other stock information from Zacks Investment
Research and sports scores and statistics from STATS, Inc. Any errors, delays or
failures experienced in connection with these third party technologies and
services could have a negative effect on our relationship with users of our Web
site, could materially and adversely affect our brand and our business and could
subject us to liability to third parties for business negligence such as
defamation or libel.
SYSTEM FAILURE COULD DISRUPT OUR WEB SITE OPERATIONS
The continued and uninterrupted performance of our hardware and software is
critical to our reputation and our success in attracting traffic to our Web
site. Users of our site and our services, such as our e-mail services, may
become dissatisfied by system failures that may limit our Web site services.
Sustained or repeated system failures could significantly reduce the traffic on
our Web site and may impair our reputation and brand name. Our operations depend
on our ability to protect our computer systems from damage from fire, power
loss, water damage, telecommunications failures, vandalism and other malicious
acts, and similar unexpected adverse events.
The number of pages of information transmitted over our network, commonly
referred to as "page views," has continued to increase over time. We are
actively trying to increase our level of page views. As a result, our network
must accommodate a high volume of traffic, often at unexpected times. We have
experienced periodic capacity constraints in terms of our ability to serve our
increasing user volumes. In addition, we have had reliability problems with two
of our internally developed applications, chat and e-mail, and as a result we
are currently outsourcing these two applications. We are in the process of
improving our network infrastructure to ensure that we will be able to handle
future increases in traffic. We are migrating our platform and our applications
to a Unix platform using Sun Microsystems servers. We do not anticipate that
this migration process, which is expected to be completed in the first half of
2000, will affect the continuous operations of our network. However, any break
in the continuous operations of our network could have a material adverse effect
on our operating expenses, our brand and our business.
We may, from time to time, experience interruptions due to several factors
including hardware failures, unsolicited bulk e-mail and operating system
failures. Because our revenues depend on the number of users of our network, we
will be adversely affected if we experience frequent or long system delays or
interruptions. If delays or interruptions continue to occur our users could
perceive our network as being unreliable, traffic on our Web site could
deteriorate and our brand could be adversely affected. Any failure on our part
to minimize or prevent capacity constraints or system interruptions could have
an adverse effect on our brand and our business.
We may not carry enough business interruption insurance to compensate for
losses that may occur as a result of any of these adverse events. We also depend
upon Internet browsers and Internet service providers that provide users with
access to the Internet
22
and our Web site. Users may experience difficulties due to system failures
unrelated to our systems. Any disruption in Internet access by Internet service
providers and other third party access providers, or any failure of such
providers to handle higher volumes of user traffic, could disrupt our Web site
operations and impair relations with our users.
OUR MANAGEMENT IS INEXPERIENCED AND MAY NOT BE ABLE TO MANAGE OUR GROWTH
Several executive officers and members of our board of directors joined us
in 1999, our management team has worked together for less than a year and none
of our executive officers has extensive experience managing a rapidly growing
business enterprise. Any growth we experience will place a significant strain on
our management and financial resources. Any inability of our management to
manage growth effectively could increase our operating expenses, impair our
marketing efforts and limit the development of our Web site.
GROWTH OF OUR WEB SITE MAY BE LIMITED BY GOVERNMENTAL REGULATIONS
Government regulation has not materially restricted use of the Internet in
our markets to date. However, the legal and regulatory environment pertaining to
the Internet remains relatively undeveloped and may change. New laws and
regulations could be adopted, and existing laws and regulations could be applied
to the Internet and, in particular, to e-commerce. New laws and regulations may
be adopted with respect to the Internet covering, among other things, sales and
other taxes, user privacy, pricing controls, characteristics and quality of
products and services, consumer protection, cross-border commerce, libel and
defamation, intellectual property matters and other claims based on the nature
and content of Internet materials. Any laws or regulations adopted in the future
affecting the Internet could subject us to substantial liability. Such laws or
regulations could also adversely affect the growth of the Internet generally,
and decrease the acceptance of the Internet as a communications and commercial
medium. In addition, the growing use of the Internet has burdened the existing
telecommunications infrastructure. Areas with high Internet use relative to the
existing telecommunications structure have experienced interruptions in phone
service leading local telephone carriers to petition regulators to govern
Internet service providers and impose access fees on them. Such regulations, if
adopted in the United States or other places, could increase significantly the
costs of communicating over the Internet, which could in turn decrease the
demand for our products and services. The adoption of various proposals to
impose additional taxes on the sale of goods and services through the Internet
could also reduce the demand for Web-based commerce.
WE MAY FACE LIABILITY FOR INFORMATION CONTENT AND COMMERCE-RELATED ACTIVITIES
Because materials may be downloaded by the services that we operate or
facilitate and the materials may subsequently be distributed to others, we could
face claims for errors, defamation, negligence, or copyright or trademark
infringement based on the nature and content of such materials. We could also be
exposed to liability because of the listings that we select and make available
through our Web site, or through content and materials posted by users in chat
room and message board services that we provide. We could face personal injury
or other product liability claims arising from the use of products sold through
our Web site. We offer e-mail services, which expose us to potential liabilities
or claims resulting from unsolicited e-mail, lost or misdirected messages,
illegal or fraudulent use of e-mail or interruptions or delays in e-mail
service. Even to the extent that claims made against us do not result in
liability, we may incur substantial costs in investigating and defending such
claims.
Although we carry general liability insurance, our insurance may not cover
all potential claims to which we are exposed or may not be adequate to indemnify
us for all liabilities that may be imposed. Any imposition of liability that is
not covered by insurance or is in excess of insurance coverage could have a
material adverse effect on our financial condition. In addition, the increased
attention focused on liability issues as a result of these lawsuits and
legislative proposals could impact the overall growth of Internet use.
CONCERNS ABOUT SECURITY OF E-COMMERCE TRANSACTIONS AND CONFIDENTIALITY OF
INFORMATION ON THE INTERNET MAY REDUCE THE USE OF OUR WEB SITE AND IMPEDE OUR
GROWTH
A significant barrier to e-commerce and confidential communications over
the Internet has been the need for security. Internet usage could decline if any
well-publicized compromise of security occurred. We may incur significant costs
to protect against the threat of security breaches or to alleviate problems
caused by these breaches. Unauthorized persons could attempt to penetrate our
network security. If successful, they could misappropriate proprietary
information or cause interruptions in our services. As a result, we may be
required to expend capital and resources to protect against or to alleviate
these problems. Security breaches could have a material adverse effect on our
business, financial condition and results of operations.
COMPETITION FOR INTERNET USERS MAY LIMIT TRAFFIC ON, AND THE VALUE OF OUR WEB
SITE
23
The market for Internet products and services and the market for Internet
advertising and electronic commerce arrangements are extremely competitive, and
we expect that competition will continue to intensify. There are many companies
that provide Web sites and online destinations targeted to Spanish-language
Internet users. Competition for visitors, advertisers and e-commerce partners is
intense and is expected to increase significantly in the future because there
are no substantial barriers to entry in our market. We believe that the
principal competitive factors in these markets are name recognition,
distribution arrangements, functionality, performance, ease of use, the number
of services and features provided and the quality of support. Our primary
competitors are other companies providing portal or other online services,
especially to Spanish-language Internet users such as StarMedia, Terra Network,
El Sitio, Yahoo! Espanol, America Online Latin America, Yupi, Prodigy and
Microsoft networks in Latin America, Mexico and Spain. Most of our competitors,
as well as a number of potential new competitors, have significantly greater
financial, technical and marketing resources than we do. Our competitors may
offer Internet products and services that are superior to ours or that achieve
greater market acceptance. There can be no assurance that competition will not
limit traffic on, and the value of, our Web site.
TECHNOLOGICAL CHANGES COULD IMPAIR OUR ABILITY TO COMPETE AND SUBJECT US TO
SIGNIFICANT EXPENDITURES
The market for Internet products and services is characterized by rapid
technological developments, frequent new product and service introductions and
evolving industry standards. The emerging character of these products and
services and their rapid evolution will require that we continually improve the
performance, features and reliability of our Internet content, particularly in
response to competitive offerings. There can be no assurance that we will be
successful in responding quickly, cost effectively and sufficiently to these
developments. In addition, the widespread adoption of new Internet technologies
or standards could require substantial expenditures by us to modify or adapt our
Web site and services and could fundamentally affect the character, viability
and frequency of Web-based advertising, either of which could have a material
adverse effect on our business. In addition, new Internet services or
enhancements offered by us may contain design flaws or other defects that could
require costly modifications or result in a loss of consumer confidence.
OUR STOCK PRICE IS HIGHLY VOLATILE
In the past, our common stock has traded at volatile prices. We believe
that the market prices will continue to be subject to significant fluctuations
due to various factors and events that may or may not be related to our
performance. If the market value of our common stock decreased substantially, we
could be delisted from the Nasdaq National Market. Consequently, you could find
it difficult or impossible to sell your stock or to determine the value of your
stock.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations, which have particularly affected the market
prices of the stocks of Internet-sector companies and which may be unrelated to
the operating performance of such companies. Furthermore, our operating results
and prospects from time to time may be below the expectations of public market
analysts and investors. Any such event could result in a material decline in the
price of your stock.
WE HAVE NO INTENTION TO PAY DIVIDENDS
We have never paid any cash dividends on our common stock. We currently
intend to retain all future earnings, if any, for use in our business and do not
expect to pay any dividends in the foreseeable future.
FUTURE SALES OF OUR COMMON STOCK OR SHARES ISSUABLE UPON EXERCISE OF STOCK
OPTIONS COULD ADVERSELY AFFECT OUR STOCK PRICE AND OUR ABILITY TO RAISE FUNDS IN
NEW STOCK OFFERINGS
As of March 29, 2000, we have 17,401,734 shares of common stock
outstanding. Sale of substantial amounts of common stock, or the perception that
sales could occur, could reduce the market price of the common stock. Currently,
there are outstanding stock options or common stock purchase warrants to acquire
5,770,381 shares of common stock at exercise prices ranging from $1 to $19.80
per share, including 2,081,818 common stock purchase warrants subject to demand
and piggy-back registration rights.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Emerging Issues Task Force (the "EITF") provides guidance on the
recognition of Internet barter advertising revenues and expenses in various
circumstances. In November 1999, the EITF commenced discussions on EITF No.
99-17, "Accounting for Advertising Barter Transactions," concluding that
revenues and expenses from advertising barter transactions should be recognized
at
24
the fair value of the advertising surrendered or received only when an entity
has a historical practice of receiving or paying cash for similar advertising
transactions. EITF No. 99-17 is effective and will be applied prospectively to
all transactions occurring after January 20, 2000. quepasa does not expect that
the adoption of EITF No. 99-17 will have a material impact on its consolidated
financial statements.
In March 2000, EITF No. 00-02 ACCOUNTING FOR WEB SITE DEVELOPMENT COSTS was
issued which addresses how an entity should account for costs incurred in web
site development. The provisions of EITF No. 00-02 distinguish between those
costs incurred during the development, application and infrastructure
development stage and those costs incurred during the operating stage. EITF No.
00-02 is effective on and after June 30, 2000, although early adoption is
encouraged. We do not expect that the adoption of EITF No. 00-02 will have a
material impact on our consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not have any derivative financial instruments as of December 31,
1999. We invest our cash in money market funds and corporate bonds, classified
as cash and cash equivalents and trading securities, which are subject to
minimal credit and market risk. Our interest income arising from these
investments is sensitive to changes in the general level of interest rates. In
this regard, changes in interest rates can affect the interest earned on our
cash equivalents and trading securities. To mitigate the impact of fluctuations
in interest rates, we generally enter into fixed rate investing arrangements
(corporate bonds). As of December 31, 1999, a 10 basis point change in interest
rates would have a potential impact on quepasa's interest earnings of
approximately $22,000, which is clearly immaterial to its consolidated financial
statements.
25
ITEM 8. FINANCIAL STATEMENTS
QUEPASA.COM, INC.
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
----
FINANCIAL STATEMENTS
Report of Independent Auditors-- KPMG LLP................... 27
Report of Independent Auditors-- EKS&H...................... 28
Balance Sheets as of December 31, 1999 and 1998............. 29
Statements of Operations for the Years Ended December 31,
1999 and 1998 and For The Period From Inception (June
25, 1997) through December 31, 1997...................... 30
Statements of Stockholders' Equity (Deficit) for the Years
Ended December 31, 1999 and 1998 and For The Period
From Inception (June 25, 1997) through December 31,
1997..................................................... 31
Statements of Cash Flows for the Years Ended December 31,
1999 and 1998 and For The Period From Inception (June
25, 1997) through December 31, 1997...................... 32
Notes to Financial Statements............................... 33
26
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
quepasa.com, inc.:
We have audited the accompanying balance sheet of quepasa.com, inc. (the
Company) as of December 31, 1999 and the related statements of operations,
stockholders' equity (deficit) and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the financial position of quepasa.com, inc. as of December 31, 1999
and the results of its operations and its cash flows for the year then ended, in
conformity with generally accepted accounting principles.
As more fully described in Note 14, (1) prepaid expenses, accrued
liabilities and deferred advertising expense have been restated to eliminate the
accrual of amounts to be paid in fiscal 2000 and to reclassify a portion of
prepaid expense as contra-redeemable common stock, and (2) prepaid marketing
services and additional paid-in capital have been restated to reflect an
increase in the value assigned to shares of common stock and warrants issued in
exchange for marketing services.
/s/ KPMG LLP
Phoenix, Arizona
March 24, 2000
27
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
quepasa.com, inc.
Phoenix, Arizona
We have audited the accompanying balance sheet of quepasa.com, inc. as of
December 31, 1998 and the related statements of operations, changes in
stockholders' equity (deficit) and cash flows for the year ended December 31,
1998 and from Inception (June 25, 1997) to December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements as free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of quepasa.com, inc. as of
December 31, 1998, and the results of its operations and its cash flows for the
year ended December 31, 1998 and from Inception (June 25, 1997) to December 31,
1997, in conformity with generally accepted accounting principles.
As more fully described in Note 14, the net loss per share for 1998 has
been restated to reflect the weighting of the shares from the date of their
issuance.
/s/ EHRHARDT KEEFE STEINER & HOTTMAN PC
--------------------------------------------------
Ehrhardt Keefe Steiner & Hottman PC
February 17, 1999
Denver, Colorado
28
QUEPASA.COM, INC.
BALANCE SHEETS
DECEMBER 31,
--------------------
1999 1998
(RESTATED)
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 6,961,592 $ 2,199,172
Trading securities..................................... 22,237,656 --
Accounts receivable (net of allowance for doubtful
accounts of $4,813 and $0, respectively)............. 297,170 --
Deposits receivable.................................... -- 1,533,632
Stock subscription receivable.......................... -- 125,000
Forgivable loans....................................... 368,042 396,540
Prepaid expenses....................................... 2,161,494 --
------------ -----------
Total current assets........................... 32,025,954 4,254,344
Prepaid marketing services .............................. 10,120,192 --
Property and equipment, net.............................. 2,051,103 354,620
Other assets............................................. 153,743 2,500
------------ -----------
Total assets............................................. $ 44,350,992 $ 4,611,464
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable....................................... $ 2,775,347 $ 71,222
Accrued commissions.................................... -- 215,233
Stock subscription..................................... -- 337,500
Deferred license fees.................................. -- 64,165
Accrued liabilities.................................... 1,023,984 2,922
Deferred revenue....................................... 85,417 --
------------ -----------
Total current liabilities...................... 3,884,748 691,042
Redeemable common stock.................................. 2,000,000 --
Deferred advertising expense............................. (1,600,000) --
Stockholders' equity:
Preferred stock, authorized 5,000,000 shares, no par
value,-- none issued or outstanding.................... -- --
Common stock, authorized 50,000,000 shares, $0.001 par
value; issued and outstanding 14,536,058 shares and
9,075,833 shares, respectively......................... 14,536 9,076
Additional paid-in capital .............................. 75,829,202 10,427,477
Accumulated deficit ..................................... (35,777,494) (6,516,131)
------------ -----------
Total stockholders' equity .................... 40,066,244 3,920,422
Commitments, contingencies and subsequent events (notes 5,
7, 8, 9 and 13)........................................ -- --
------------ -----------
Total liabilities and stockholders' equity (deficit)..... $ 44,350,992 $ 4,611,464
============ ===========
See accompanying notes to financial statements.
29
QUEPASA.COM, INC.
STATEMENTS OF OPERATIONS
INCEPTION
(JUNE 25, 1997)
YEARS ENDED DECEMBER 31, THROUGH
-------------------------------- DECEMBER 31,
1999 1998 1997
--------------- --------------- ---------------
Gross revenue............................. $ 670,639 $ -- $ --
Less commissions.......................... (114,395) -- --
------------ ----------- ----------
Net revenue............................... 556,244 -- --
Operating expenses:
Product and content development expenses 2,319,391 414,873 --
Advertising and marketing expenses ..... 16,735,517 250,419 --
Stock based compensation expenses....... 4,951,177 5,265,364 --
General and administrative expenses..... 6,588,196 534,632 3,703
------------ ----------- ----------
Total operating expenses........ 30,594,281 6,465,288 3,703
------------ ----------- ----------
Loss from operations...................... (30,038,037) (6,465,288) (3,703)
Other income (expense)
Interest expense........................ (238,858) (48,994) --
Interest income and other............... 855,408 1,054 800
Unrealized gain on trading securities... 160,124 -- --
------------ ----------- ----------
Net other income (expenses)............... 776,674 (47,940) 800
------------ ----------- ----------
Net loss ................................. $(29,261,363) $(6,513,228) $ (2,903)
============ =========== ==========
Net loss per share, basic and diluted
(restated)................................. $ (2.44) (.98) $ --
============ =========== ==========
Weighted average number of shares
outstanding, basic and diluted............. 12,011,088 6,671,052 5,680,000
============ =========== ==========
See accompanying notes to financial statements.
30
QUEPASA.COM, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION (JUNE 25, 1997) THROUGH
DECEMBER 31, 1997 AND THE YEARS ENDED DECEMBER 31, 1998 AND 1999
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
--------------------------- CAPITAL
SHARES AMOUNT (RESTATED) DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------
Issuance of common stock for cash from
initial capitalization ................. 5,680,000 $ 5,680 $ (5,660) $ -- $ 20
Net loss for the period .................. -- -- -- (2,903) (2,903)
------------ ------------ ------------ ------------ ------------
Balances, December 31, 1997 .............. 5,680,000 5,680 (5,660) (2,903) (2,883)
Issuance of common stock and stock based
compensation ........................... 1,420,000 1,420 4,985,294 -- 4,986,714
Issuance of common stock in conversion
of note payable ($1.56 per share) ...... 666,666 667 1,039,113 -- 1,039,780
Issuance of common stock in conversion
of note payable ($1.00 per share) ........ 50,000 50 49,950 -- 50,000
Issuance of common stock for cash at $3.75
per share, net of $641,000 of offering
costs .................................. 1,259,167 1,259 4,080,030 -- 4,081,289
Issuance of compensatory stock options to
employees .............................. -- -- 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
Issuance of compensatory stock options
to employees, officers and directors ... -- -- 4,401,195 -- 4,401,195
Issuance of stock to officers and
directors .............................. 50,000 50 549,950 -- 550,000
Issuance of common stock and warrants
for advertising and marketing services . 650,000 650 10,753,917 -- 10,754,567
Issuance of common stock for consulting
services ............................... 50,000 50 549,950 -- 550,000
Proceeds from initial public offering,
net of $7,364,000 (restated) of offering
costs .................................. 4,000,000 4,000 42,364,300 -- 42,368,300
Proceeds from underwriter overallotment,
net of $913,000 of offering costs ...... 600,000 600 6,286,273 -- 6,286,873
Proceeds from exercise of common stock
options ................................ 110,225 110 496,140 -- 496,250
Net loss for the year .................... -- -- -- (29,261,363) (29,261,363)
------------ ------------ ------------ ------------ ------------
Balances, December 31, 1999 .............. 14,536,058 $ 14,536 $ 75,829,202 $(35,777,494) $ 40,066,244
============ ============ ============ ============ ============
See accompanying notes to financial statements.
31
QUEPASA.COM, INC.
STATEMENTS OF CASH FLOWS
INCEPTION
YEAR ENDED (JUNE 25, 1997)
DECEMBER 31, YEAR ENDED THROUGH
1999 (RESTATED) DECEMBER 31, DECEMBER 31,
1998 1997
------------ -----------
Cash flows from operating activities:
Net loss ........................................ $(29,261,363) $ (6,513,228) $ (2,903)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization ................ 341,887 6,532 --
Forgiveness of forgivable loans .............. 28,498 -- --
Stock based compensation ..................... 4,951,195 5,265,364 --
Consulting services received in exchange for
stock ...................................... 550,000 -- --
Amortization of prepaid advertising .......... 1,034,375 -- --
Accrued interest on convertible notes
payable .................................... -- 39,780 --
Unrealized gain on trading securities ........ (160,124) -- --
Increase (decrease) in cash resulting from
changes in assets and liabilities:
Purchase of trading securities, net ........ (22,077,532) -- --
Accounts receivable ........................ (297,170) -- --
Deposits receivable ........................ 1,533,632 (1,533,632) --
Prepaid expenses ........................... (2,161,494) -- --
Other assets ............................... (175,790) (2,500) --
Accounts payable ........................... 2,704,125 65,757 5,465
Accrued liabilities ........................ 1,021,062 2,922 --
Deferred revenue ........................... 21,252 64,165 --
------------ ------------ ------------
Net cash (used in) provided by
operating activities ................. (41,947,447) (2,604,840) 2,562
------------ ------------ ------------
Cash flows from investing activities:
Forgivable loans ................................ -- (396,540) --
Purchase of fixed assets ........................ (2,013,823) (361,152) --
------------ ------------ ------------
Net cash used in investing activities ... (2,013,823) (757,692) --
------------ ------------ ------------
Cash flows from financing activities:
Stock subscription receivable ................... 125,000 (125,000) --
Net proceeds from private placements ............ -- 4,081,289 --
Proceeds from convertible note payable .......... -- 1,100,000 --
Accrued commissions ............................. (215,233) 215,233 --
Stock subscription .............................. (337,500) 337,500 --
Proceeds from initial public offering and
overallotment, net of offering costs ......... 48,655,173 -- --
Proceeds from exercise of common stock
options ...................................... 496,250 -- --
Proceeds from issuance of common stock .......... -- 100 20
Payments on notes payable ....................... -- (50,000) --
------------ ------------ ------------
Net cash provided by financing activities 48,723,690 5,559,122 20
------------ ------------ ------------
Net increase in cash and cash equivalents ......... 4,762,420 2,196,590 2,582
Cash and cash equivalents, beginning of period 2,199,172 2,582 --
------------ ------------ ------------
Cash and cash equivalents, end of period .......... $ 6,961,592 $ 2,199,172 $ 2,582
============ ============ ============
Interest paid ..................................... $ 238,858 48,994 --
============ ============ ============
Supplemental disclosure of non-cash financing and investing activities:
32
1999 1998 1997
(RESTATED)
Stock and warrants issued in exchange for
advertising and marketing services ........ $ 12,755,000 -- --
============ ========== ==
Convertible notes converted into common
stock ..................................... -- $1,090,000 --
============ ========== ==
Barter transactions ....................... $ 119,000 -- --
============ ========== ==
33
QUEPASA.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(1) THE COMPANY
Quepasa.com, inc. (the "Company"), a Nevada Corporation, was incorporated
in June 1997. The Company is a Hispanic Internet portal and community.
quepasa.com offers a number of services such as a search engine,
Spanish-language news feeds, free Web pages, worldwide weather information,
chat, games, maps, message boards and free e-mail. The Company's portal draws
viewers to their Web site by providing a one-stop destination for identifying,
selecting and accessing resources, services, content and information on the Web.
The Company is targeted to provide users with information and interactive
content centered around the Spanish language.
The Company has not had any significant revenue since inception and there
is no assurance that the Company will generate significant revenue or earn
profits in the future.
During 1998, the Company changed its name from Internet Century, Inc. to
quepasa.com, inc.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USES OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Additionally, such estimates and assumptions affect the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year financial statement
amounts to conform to current year presentation.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk are principally accounts receivable, cash and
investments. The Company maintains ongoing credit evaluations of its customers
and generally does not require collateral. The Company provides reserves for
potential credit losses and such losses have not exceeded management
expectations. Periodically during the year the Company maintains cash and
investments in financial institutions in excess of the amounts insured by the
federal government.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and highly liquid debt
instruments with original maturities of three months or less.
TRADING SECURITIES
Trading securities at December 31, 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. Unrealized holding gains
and losses, net of the related tax effect, on available-for-sale securities are
excluded from earnings and are reported as a separate component of other
comprehensive income until realized. Realized gains and losses for trading
securities are included in earnings and are derived using the specific
identification method for determining the cost of
34
securities. All trading securities held at December 31, 1999 are categorized as
trading.
REVENUE RECOGNITION
The Company's revenues are derived principally from the sales of banner
advertisements and sponsorships. The Company sells banner advertising primarily
on a cost-per-thousand impressions, or "CPM" basis, under which advertisers and
advertising agencies receive a guaranteed number of "impressions," or number of
times that an advertisement appears in pages viewed by users of the Company's
Web site, for a fixed fee. The Company's contracts with advertisers and
advertising agencies for these types of contracts cover periods ranging from one
to twelve months. Advertising revenues are recognized ratably based on the
number of impressions displayed, provided that the Company has no obligations
remaining at the end of a period and collection of the resulting receivable is
probable. Company obligations typically include guarantees of a minimum number
of impressions. To the extent that minimum guaranteed impressions are not met,
the Company defers recognition of the corresponding revenues until the remaining
guaranteed impression levels are achieved. Payments received from advertisers
prior to displaying their advertisements on the Company's Web site are recorded
as deferred revenue.
The Company also derives revenues from the sale of sponsorships for certain
areas or an exclusivity for certain areas within our Web site. These
sponsorships are for periods up to one year. The Company recognizes revenue
during the initial setup, if required under the unique terms of each sponsorship
agreement (e.g. co-branded Web site), to the extent that actual costs are
incurred. The balance of the sponsorship is recognized ratably over the period
of time of the related agreement. Payments received from sponsors prior to
displaying their advertisements on the Company's Web site are recorded as
deferred revenue.
The Company also derives revenue from slotting fees, setup fees, and
commissions. Slotting fees revenue is recognized ratably over the period the
services are provided. Setup fees revenue is recognized during the initial setup
to the extent that direct costs are incurred. The remaining revenue derived from
setup fees is deferred and amortized ratably over the term of the applicable
agreement. Commission revenue related to X:Drive is recognized in the month in
which a new account is established (i.e., services are provided). Commissions
revenue and expenses related to Net2Phone is recognized during the month in
which the service is provided.
The Company in the ordinary course of business enters into reciprocal
service arrangements (barter transactions) whereby the Company provides
advertising service to third parties in exchange for advertising services in
other media. Revenues and expenses from these agreements are recorded at the
fair value of services provided or received, whichever is more determinable in
the circumstances. The fair value represents market prices negotiated on an
arms' length basis. Revenue from reciprocal service arrangements is recognized
as income when advertisements are delivered on the Company's Web site. Expense
from reciprocal services arrangements is recognized when the Company's
advertisements are run in other media, which are typically in the same period
when the reciprocal service revenue is recognized. Related expenses are
classified as advertising and marketing expenses in the accompanying statements
of operations. During the years ended December 31, 1999 and 1998 and for the
period from inception (June 25, 1997) through December 31, 1997, revenues and
related expenses attributable to reciprocal services totaled approximately
$119,000, $0 and $0, respectively.
The EITF provides guidance on the recognition of Internet barter
advertising revenues and expenses in various circumstances. In November 1999,
the EITF commenced discussions on EITF No. 99-17, "Accounting for Advertising
Barter Transactions," concluding that revenues and expenses from advertising
barter transactions should be recognized at the fair value of the advertising
surrendered or received only when an entity has a historical practice of
receiving or paying cash for similar advertising transactions. EITF No. 99-17 is
effective and will be applied prospectively to all transactions occurring after
January 20, 2000. The Company does not expect that the adoption of EITF No.
99-17 will have a material impact on its consolidated financial statements.
DEPOSITS RECEIVABLE
Deposits receivable at December 31, 1998 represents refunds due from a
media company for advances paid by the Company under an advertising agreement,
which was canceled prior to advertising services being rendered. The amount was
received subsequent to December 31, 1998.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
expense is generally provided on a straight-line basis using estimated useful
lives of the assets which range from two to five years. Leasehold improvements
are amortized on a straight-line basis over the shorter of the lease term or the
estimated useful lives of the related improvements. Expenditures for repairs and
35
maintenance are charged to operations as incurred and improvements which extend
the useful lives of the assets are capitalized.
PRODUCT AND CONTENT DEVELOPMENT
Costs incurred in the classification and organization of listings within
the Company's Web site are charged to expense as incurred. In accordance with
SOP 98-1, material software development costs, costs of development of new
products and costs of enhancements to existing products, incurred during the
application development stage are capitalized. Based upon the Company's product
development process, and the constant modification of the Company's Web site,
costs incurred by the Company during the application development stage have been
insignificant.
In March 2000, EITF No. 00-02, ACCOUNTING FOR WEB SITE DEVELOPMENT COSTS,
was issued which addresses how an entity should account for costs incurred in
web site development. EITF No. 00-02 distinguishes between those costs incurred
during the development, application and infrastructure development stage and
those costs incurred during the operating stage. EITF No. 00-02 is effective on
and after June 30, 2000 although early adoption is encouraged. The Company does
not expect that the adoption of EITF No. 00-02 will have a material impact on
its consolidated financial statements.
Pursuant to Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," the Company
capitalizes certain material development costs incurred during the acquisition
development stage, including costs associated with coding, software
configuration, upgrades and enhancements.
INCOME TAXES
The Company utilizes the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to
future undiscounted net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value of the assets less costs to sell.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments, which
principally include cash and cash equivalents, trading securities, accounts
receivable deposits receivable, stock subscription receivable, forgivable loans,
accounts payable, accrued commissions, stock subscription, and accrued
liabilities approximates fair market value because of the short term nature of
the instruments. The fair market value of the Company's debt instruments are
based on the amount of future cash flows associated with a cash instrument using
the Company's borrowing rate.
STOCK-BASED COMPENSATION
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. As such, compensation
expense is recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. The Company has adopted the
disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation,
which permits entities to provide pro forma net earnings (loss) and pro forma
earnings (loss) per share disclosures for employee stock option grants as if the
fair-value-based method as defined in SFAS No. 123 had been applied.
36
The Company uses one of the most widely used option pricing models, the
Black-Scholes model (Model), for purposes of valuing its stock option grants.
The Model was developed for use in estimating the fair value of traded options
that have no vesting restrictions and are fully transferable. In addition, it
requires the input of highly subjective assumptions, including the expected
stock price volatility, expected dividend yields, the risk free interest rate,
and the expected life. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the value determined by the Model is not necessarily
indicative of the ultimate value of the granted options.
NET LOSS PER SHARE
Basic loss per share is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company. Stock options and warrants are
excluded because they are anti-dilutive.
ADVERTISING COSTS
Advertising costs are expensed as incurred in accordance with Statement of
Position 93-7, "Reporting on Advertising Costs". Advertising costs for the years
ended December 31, 1999 and 1998 and for the period from inception (June 25,
1997) through December 31, 1997 totaled $15,884,000, $132,000 and $0,
respectively. The Company recognizes the advertising expense in a manner
consistent with how the related advertising is displayed or broadcast.
Advertising production costs are expensed as incurred.
SEGMENT REPORTING
The Company utilizes the management approach in designating business
segments. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments. The Company's one segment
provides Internet Portal and On-Line Community services in both Spanish and
English to the Hispanic market. The Company's initial focus is on the U.S.
Hispanic market, with substantially all of the Company's assets in and revenues
originating from the United States. With the exception of Net2Phone and
Autonation, representing 20.5% and 11.5% of gross revenue respectively, no other
single advertiser utilizing banner ads or sponsorship agreements amounted to
over 10% of total gross revenue. Sponsor revenue is recognized ratably over the
term of the agreement.
(3) TRADING SECURITIES
A summary of cost and estimated fair values of trading securities as of
December 31, 1999 follows:
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ----------- ----------- -----------
Corporate debt securities........... $22,077,532 $ 160,124 $ 0 $22,237,656
=========== ========= === ===========
There were no trading securities as of December 31, 1998. Proceeds from the
sale of trading securities were $105,895,000 in 1999. There were no realized
gains or losses during 1999.
(4) BALANCE SHEET COMPONENTS (IN THOUSANDS)
DECEMBER 31,
---------------
1999
(RESTATED) 1998
--------- ----
PREPAID EXPENSES:
Prepaid advertising...................... $ 1,516 $ --
Prepaid consulting....................... 4 --
Prepaid insurance........................ 390 --
Prepaid maintenance...................... 90 --
Prepaid content.......................... 58 --
Other prepaid expenses................... 103 --
------- -----
$ 2,161 $ --
======= =====
PROPERTY AND EQUIPMENT:
Computer equipment and software.......... $ 1,874 $ 345
37
Furniture, fixtures, equipment and other. 367 16
Leasehold improvements................... 147 --
------- -----
2,388 361
Less accumulated depreciation and
amortization............................. (337) (6)
------- -----
Property and equipment................... $ 2,051 $ 355
======= =====
ACCRUED LIABILITIES:
Payroll taxes withheld................... $ 2 $ 2
Insurance payments withheld.............. -- 1
Advertising.............................. 762 --
Accrued vacation......................... 77 --
Prizes payable........................... 15 --
Accrued expenses......................... 168 --
------- -----
$ 1,024 $ 3
======= =====
(5) LEASES
OPERATING LEASES
The Company entered into a three and one-half year lease agreement for its
corporate offices commencing June 1, 1999. The monthly lease payments range from
$24,341 to $26,000. The lease expires November 30, 2002; however, if the
landlord is unable to meet the expansion requirements of the Company, the
Company may terminate the lease with three months notice any time after the
twenty-four month term. In addition, in connection with its previous
headquarters location, the Company has a 3-year lease agreement for offices in
Las Vegas, NV. The lease payments range from $1,732 to $1,771 per month and the
lease expires on August 14, 2001.
Future minimum rental payments under non-cancelable operating and equipment
leases are as follows:
YEARS ENDING DECEMBER 31,
-------------------------
2000....................... $ 343,000
2001....................... 340,000
2002....................... 289,000
---------
$ 972,000
=========
Facilities and equipment lease expense for the years ended December 31,
1999 and 1998 and for the period from inception (June 25, 1997) to December 31,
1997 was $311,000, $45,000 and $0, respectively.
(6) INCOME TAXES
No provision for federal and state income taxes has been recorded as the
Company has incurred net operating losses through December 31, 1999. Sources of
deferred tax liabilities and their tax effects follows:
DECEMBER 31,
-----------------------
1999 1998
----------- ----------
Net operating loss
carryforwards................ $ 10,535,000 $ 6,910,000
Nondeductible expenses....... (79,000) (5,265,000)
Other........................ 255,000 --
------------ -----------
Gross deferred tax assets.... 10,711,000 1,645,000
Valuation allowance.......... (10,711,000) (1,645,000)
------------ -----------
$ -- $ --
============ ===========
The allowance for deferred tax assets as of December 31, 1999 and 1998 was
$10,711,000 and 1,645,000, respectively. The net change in the total valuation
allowance for the year ended December 31, 1999 was an increase of $9,066,000.
The Company believes sufficient uncertainty exists regarding the realization of
the tax assets such that a full valuation allowance is appropriate.
At December 31, 1999, the Company had approximately $8,528,000 of federal
net operating loss carryforwards for tax reporting purposes available to offset
future taxable income, if any. These carryforwards expire in 2018 and 2019. The
Company has approximately $2,007,000 of state net operating loss carryforwards
for tax reporting purposes which expire in 2004.
(7) COMMITMENTS
38
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with many of its
employees and all of its executive officers. The agreements provide for base
salary, forgivable loans and bonus provisions. The forgivable loans are
recognized ratably as expense over the loan period, or upon termination of the
employee if the loan is forgiven at that time.
ADVERTISING CONTRACTS
In April 1999, the Company entered into an agreement with Telemundo
Network Group LLC (Telemundo). A director of the Company serves as the Chief
Operating Officer of Telemundo. Under this agreement, we issued Telemundo
600,000 shares of our common stock and warrants to purchase 1,000,000 shares
of our common stock exercisable up to and including June 25, 2001 at $14.40
per share (see note 9). In exchange, we received a $5.0 million advertising
credit on the Telemundo television network at the rate of $1.0 million for
each of the next five years. After completion of the IPO, the shares and
warrants became fully vested and were not subject to return for
nonperformance by Telemundo. The fair value of the transaction was measured
and based on the fair value of the common stock issued at our IPO price of
$12.00 per share plus $2,920,192 (restated), assigned to the warrants based
upon the Black-Scholes pricing model using a 50% volatility rate. The Company
began amortizing the $5.0 million advertising credit on January 1, 2000,
after the cash purchase from Telemundo of $1 million in advertising services
in 1999. The remaining balance of prepaid marketing services of $5,120,192
(restated) is amortized over the term of the agreement (5 years). This
agreement also provides that (1) we will collaborate regarding online content
development, co-branded marketing promotions, and other complementary aspects
of our businesses, (2) we will cross-link each other's websites, and (3)
exclusivity provisions for a period of six months.
In April 1999, the Company issued 50,000 shares of its Common Stock to an
entity partially owned by a former director of the Company for advertising and
marketing services valued at $634,000 (see note 9). The value of the stock and
the related advertising costs were adjusted at each quarterly reporting period
based on the then fair value of the stock issued through the final measurement
date (December 31, 1999). The advertising costs were amortized on a
straight-line basis over the full term of the contract as the services were
performed ratably over the period. In August 1999, the Company entered into a
one-year agreement with this company with a monthly commitment of $150,000.
Payment during the first 5 months of the agreement included amortization of the
prepaid amount from the issuance of common stock. This agreement has been
amended, reducing the monthly commitment to $50,000 for January 2000, and to
$40,000 for the remaining term of the agreement.
In March 1999, the Company entered into a sponsorship agreement with the
Arizona Diamondbacks. A director of the Company serves as the Arizona
Diamondbacks' Chief Executive Officer and General Manager. Under this agreement,
the Company will receive English and Spanish television and radio broadcast
time, ballpark signage, and Internet and print promotions for the 2000 season
for a sponsorship fee of $1.5 million which is payable during 2000. The $1.5
million sponsorship fee will be recognized as expense ratably over the 2000
baseball season.
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 (see note 9).
INTERNET ACCESS AGREEMENT
On December 14, 1999, the Company entered into a one-year agreement with
NetZero, Inc. (NetZero), where they will provide free internet access along with
our content to the U.S. Hispanic market. According to the terms of this
agreement, we are obligated to pay a fee for their subscribers who access our
Web site. This fee ranges from $.10 to $.15 per user session (user session
fees). We are also committed to spend at least $1 million for the production and
distribution of CD's containing the customized NetZero service. In the event we
have paid an aggregate of $6 million for user session fees we are obligated to
spend an additional $1 million for CD's. In addition, according to the terms of
the agreement, the Company made a $1 million advance payment which will be
applied against future user session fees incurred by the Company. The Company is
obligated to maintain an advance payment amount in future months equal to at
least 125% of the amount due the prior month for such user session fees. The
user session fees and the production and distribution costs for the CD's will be
expensed as incurred.
CONTENT
39
The Company has various agreements with companies, which provide content
for the Company's Web site. The agreements are for one to two years and require
payments totaling an estimated $1.5 million in 2000.
Included in the required payments for content in 2000 are payments which
are to be made to Inktomi. On July 21, 1998, the Company entered an Information
Services Agreement (the "Agreement") with Inktomi Corporation ("Inktomi")
whereby Inktomi is to provide certain services, including but not limited to,
search services enabling the Company to access Inktomi database of Internet Web
sites. The agreement requires quarterly payments ranging from $60,000 to $75,000
and expires in August 2001. While the agreement provides for certain additional
payments based upon actual use of Inktomi's services, the Company believes
additional payments, if any, will not be material. The license will be expensed
on a straight-line basis over the term of the agreement of three years.
A summary of minimum payments under the Inktomi licensing agreement are as
follows as of December 31, 1999:
YEARS ENDING DECEMBER 31,
-------------------------
2000....................... $ 250,000
2001....................... 187,500
---------
$ 437,500
=========
The license fee expense was $227,000, $104,000 and $0 for the years ended
December 31, 1999 and 1998 and for the period from inception (June 25, 1997) to
December 31, 1997, respectively.
(8) CONTINGENCIES
LEGAL PROCEEDINGS
The Company from time to time is involved in various legal proceedings
incidental to the conduct of its business. The Company believes that the outcome
of all such pending legal proceedings will not in the aggregate have a material
adverse effect on the Company's business, financial condition, results of
operations or liquidity.
(9) STOCKHOLDERS' EQUITY
INITIAL CAPITALIZATION
Upon incorporation on June 25, 1997, the Company issued 5,680,000 shares of
common stock for $20.00 to the co-founders of the Company.
CONVERTIBLE NOTE PAYABLE
In May 1998, the Company issued $100,000 of convertible debt. The
convertible debt accrued interest at 12% per annum and was scheduled to mature
on the earlier of May 31, 2000 or the closing date of the Company's initial
public offering. The Company had the right to convert unpaid note principal plus
any accrued interest into 100,000 shares of common stock at any time during the
term of the Note. In November 1998, the Company converted $50,000 of the Note
into 50,000 shares of the Company's common stock and repaid the balance of
$50,000.
In July 1998, the Company issued $1,000,000 of convertible debt. The
convertible debt accrued interest at 12% per annum and was payable on the
earlier of May 31, 2000 or at the closing date of the Company's initial public
offering, if any. The Company had the right to convert unpaid principal plus any
accrued interest into 666,666 shares of common stock at any time during the term
of the notes. The Company believes this conversion feature was based on the fair
market value of the common stock on the date of issuance. In November 1998, the
notes and accrued interest of $39,780 were converted into 666,666 shares of the
Company's common stock.
STOCK SPLIT
In October 1998, the Company's board of directors authorized a 284 for one
stock split. The financial statements have been presented as if the split had
occurred at inception.
PRIVATE PLACEMENT
40
During November and December of 1998, the Company issued 1,259,167 shares
of common stock in a private placement for cash at $3.75 per share. The Company
received proceeds of $4,081,289 net of related costs of $640,587. In January
1999, $125,000 of the proceeds were received and were reflected as stock
subscription receivable. Of the related costs, $215,233 were unpaid as of
December 31, 1998.
During December 1998, the Company received excess proceeds of $337,500 with
respect to these private placements. These amounts were refunded upon the
investor's request in January 1999.
COMMON STOCK ISSUED IN EXCHANGE FOR ADVERTISING
In April 1999, the Company issued 600,000 shares of common stock valued at
$7.2 million (restated) and a warrant to purchase 1,000,000 shares of common
stock at $14.40 per share to Telemundo in exchange for television advertising
credit valued at $5.0 million and other marketing services. The warrant was
valued at $2,920,192 (restated) using the Black-Scholes option-pricing model.
The $5 million advertising credit as of December 31, 1999, is included in
prepaid marketing services on the balance sheet.
Also in April of 1999, the Company issued 50,000 shares of common stock to
LKS/Garcia in exchange for advertising services valued at $634,000.
INITIAL PUBLIC OFFERING
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 with net proceeds aggregating
approximately $6.3 million.
REDEEMABLE COMMON STOCK -- SPOKESPERSON AGREEMENT
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). The value of the stock and the
related advertising costs were originally determined by an independent third
party and were adjusted at each quarterly reporting period based on the then
fair value of the stock issued through the final measurement date. 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 have been restated (note 14) and are
recorded as prepaid expense, deferred advertising expense and redeemable common
stock and are being amortized on a straight-line basis over the term of the
contract. The Company recognized $1.2 million of amortization in 1999.
OUTSTANDING WARRANTS
As of December 31, 1999, the Company had outstanding warrants for the
purchase of 1,400,000 common shares of our common stock. The holders of these
warrants are as follows: 1,000,000 warrants held by Telemundo with a strike
price of $14.40 per share and 400,000 warrants held by Cruttenden Roth with a
strike price of $19.80 per share. They were valued at $2,920,192 (restated) and
$1,732,000 (restated), respectively, on the date of grant using the
Black-Scholes option-pricing model. The assumptions used for the Telemundo
warrants are as follows: expected dividend yield 0%, risk-free interest rate of
4.5%, expected volatility of 50% and expected life of 2 years. The assumptions
used for the Cruttenden Roth warrants are as follows: expected dividend yield
0%, risk-free interest rate of 5.67%, expected volatility of 50% and expected
life of 5 years.
PROCEEDS FROM EXERCISE OF COMMON STOCK OPTIONS
During 1999, current and former employees and directors exercised common
stock options for the purchase of 110,225 shares of the Company's common stock.
The proceeds from these issuances totaled $496,000.
41
(10) LOSS PER SHARE
A summary of the reconciliation from basic loss per share to diluted loss
per share follows for the years ended December 31, 1999 and 1998 and the period
from inception (June 25, 1997) through December 31, 1997:
YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
------------- ------------- ------------
Loss available to common stockholders $ (29,261,363) $(6,513,228) $ (2,903)
============= =========== ===========
Basic EPS-weighted average shares
outstanding (restated) ............ 12,011,088 6,671,052 5,680,000
============= =========== ===========
Basic and diluted loss per share
(1998 restated) ..................... $ (2.44) $ (.98) --
============= =========== ===========
Stock options not included in diluted
EPS since antidilutive ............ 2,987,000 215,000 --
============= =========== ===========
Warrants not included in dilutive EPS
since antidilutive ................ 1,400,000 -- --
============= =========== ===========
(11) STOCK OPTION PLAN AND EMPLOYEE COMPENSATORY STOCK
In October 1998, the Company adopted and later amended a Stock Option Plan
(the "Plan"), which provides for the granting of options to officers, directors,
and consultants. The plan permits the granting of "incentive stock options"
meeting the requirements of Section 422A of the Internal Revenue Code as well as
"nonqualified" which do not satisfy the requirements of that section. 6,000,000
shares of common stock have been restricted under the plan for the granting of
options. The Plan will be in effect until November 1, 2009, unless extended by
the Company's stockholders. The options are exercisable to purchase stock for a
period of ten years from the date of grant.
Incentive stock options granted pursuant to this Plan may not have an
option price that is less than the fair market value of the stock on the date
the option is granted. Incentive stock options granted to significant
stockholders shall have an option price of not less than 110% of the fair market
value of the stock on the date of the grant. Prior to the Company's initial
public offering, the fair market value of the stock was determined based on
similar transactions with independent third parties and the mid-point of the
proposed initial public offering price range ($10 to $12 per share) based on
discussions with underwriters in late January 1999. Subsequent to the Company's
initial public offering, the fair market value of the stock was determined based
on the closing trading price of the Company's stock on the date of grant.
Options granted under the plan vest one-third at the end of each of the three
years of service following the grant date. The board of directors of the Company
may waive the vesting requirements at its discretion. All stock options issued
under the Plan are exercisable for a period of 10 years from the date of grant.
During May 1998, the Company issued 1,420,000 shares of common stock to
Michael Silberman, then an officer of the Company. 296,492 of those shares of
common stock were issued to Mr. Silberman in error, and at the Company's
request, he transferred those shares to an outside advisor. Also during May
1998, Jeffrey S. Peterson, the Company's then Chairman and Chief Executive
Officer, transferred 3,566,714 existing shares to several employees and outside
advisors. The fair market value of the common stock on the date of these
issuances was determined to be $1.00 based on the issuance of convertible debt
in May of 1998, which was convertible into common stock at $1.00 per share.
Approximately $5 million in compensation expense is reflected in the December
31, 1998 financial statements as a result of these transactions.
Had the Company determined compensation cost based on the fair value at the
date of grant for its stock options under SFAS 123, the Company's net loss per
share would have been increased to the pro forma amounts presented below:
INCEPTION
YEAR ENDED YEAR ENDED (JUNE 25, 1997)
DECEMBER 31, DECEMBER 31, THROUGH
1999 (RESTATED) 1998 DECEMBER 31,
(RESTATED) 1997
---------- --------------
Net loss
As reported.................. $(29,261,363) $ (6,513,228) $ 2,903
Pro forma ................... $(36,036,997) $(11,434,405) $ 2,903
42
Basic and diluted loss per share
as reported ................. $ (2.44) $ (.98) $ --
Pro forma ................... $ (3.00) $ (1.71) $ --
For the purposes of SFAS 123 pro forma net loss and pro forma net loss per
share, the fair value of option grants is estimated on the date of grants
utilizing the Black-Scholes option-pricing model with the following weighted
average assumptions for 1999: expected life of 5 years, expected volatility of
61%, risk-free interest rates of 5.52% and a 0% dividend yield; and for 1998:
expected life of 5 years, 67% weighted average volatility, risk-free interest
rate of 6% and a 0% dividend yield. The per share weighted average fair value of
stock options granted under the Plan for the periods ended December 31, 1999 and
1998 were $5.91 and $2.63, respectively, using the Black-Scholes option-pricing
model and the assumptions listed above.
Summarized information relating to the stock option plan is as follows:
WEIGHTED
COMMON AVERAGE
STOCK EXERCISE
OPTIONS PRICE
--------- ---------
Outstanding, December 31, 1997 -- $ --
Granted....................... 215,000 $ 2.45
--------- ------
Outstanding, December 31, 1998 215,000 $ 2.45
Granted....................... 3,065,500 $ 9.03
Exercised..................... (110,225) $ 5.44
Cancelled or forfeited........ (183,275) $ 5.15
--------- ------
Outstanding, December 31, 1999.. 2,987,000 $ 8.92
========= ======
Exercisable, December 31, 1999.. 1,393,387 $ 7.80
========= ======
A summary of the stock options granted at December 31, 1999 are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ------------------------
WEIGHTED-
NUMBER AVERAGE NUMBER WEIGHTED-
OUTSTANDING REMAINING WEIGHTED- EXERCISABLE AVERAGE
RANGE OF AS OF CONTRACTUAL AVERAGE AS OF EXERCISE
EXERCISE PRICES 12/31/99 LIFE EXERCISE PRICE 12/31/99 PRICE
-------------------- ------------ ------------ --------------- ------------ ---------
$ 0.0000 - $ 1.8500 117,500 8.9 $ 1.26 82,500 $ 1.37
$ 5.5501 - $ 7.4000 500,000 9.4 $ 7.00 500,000 $ 7.00
$ 7.4001 - $ 9.2500 1,380,500 9.4 $ 7.87 556,999 $ 7.97
$ 9.2501 - $11.1000 260,000 9.4 $ 10.16 180,000 $ 10.27
$11.1001 - $12.9500 479,000 9.6 $ 11.93 50,000 $ 12.32
$12.9501 - $14.8000 30,000 9.5 $ 13.83 10,000 $ 14.00
$14.8001 - $16.6500 200,000 9.6 $ 15.00 13,888 $ 15.00
$16.6501 - $18.5000 20,000 9.6 $ 18.12 0 $ 0.00
-------- --- ------- -------- -------
2,987,000 9.4 $ 8.92 1,393,387 7.80
(12) RELATED PARTY TRANSACTIONS
In May 1998, Jeffrey S. Peterson, then our Chairman and Chief Executive
Officer, conveyed an aggregate of 3,566,714 shares of his common stock to
Michael A. Hubert, Kevin Dieball, Keith Fredriksen, The Monolith Limited
Partnership and Richard Whelan, for $.00035 per share. The shares were
conveyed at that time to induce these five persons to provide strategic
planning and business development services to us.
In July 1998, we loaned Mr. Peterson $100,000 pursuant to his employment
agreement. We agreed that if Mr. Peterson was employed by us on April 1, 1999
the loan would be forgiven, which subsequently occurred. The loan bore
interest at 10% per annum. Similar loans were made to several other of our
officers including our Chief Executive Officer, Gary L. Trujillo, to whom we
loaned $100,000. Mr. Trujillo's loan bears interest at 10% per annum with 50%
of the loan forgiven in October 1999 and the remaining 50% in April 2000.
In April 1999, the Company issued 50,000 shares of its Common Stock to
an entity partially owned by a former director of the Company for advertising
and marketing services valued at $634,000 (see note 9). In August 1999, the
Company entered into a one-year agreement with this company with a monthly
commitment of $150,000. Payment during the first 5 months of the agreement
included amortization of the prepaid amount from the issuance of common
stock. This agreement has been amended, reducing the monthly commitment to
$50,000 for January 2000 and to $40,000 for the remaining term of the
agreement.
43
In March 1999, The Monolith Limited Partnership, a former principal
stockholder, sold 216,436 shares of our common stock at $7.00 per share and
lent us $2.0 million for working capital. The loan bore interest at 12% per
annum through June 1999 and then 14% per annum through March 2001 and was
repaid with a portion of the proceeds of the initial public offering.
Interest expense totaled $80,685 for the year ended December 31, 1999.
In March 1999, Mr. Peterson sold 446,000 shares of our common stock,
comprised of 396,000 shares at $7.00 per share and 50,000 shares at $6.00 per
share, to a group of investors, including 25,000 shares sold to each of Jerry
J. Colangelo and Edwin C. Lynch both of who subsequently became directors.
Mr. Peterson agreed to loan us up to $3.0 million of the proceeds from the
sale of his common stock at any time prior to the completion of the offering
to be used by us for working capital. The loans bore monthly interest of 12%
per annum for four months and then 14% per annum for the next 20 months, at
which time each loan would become due. Interest expense totaled $158,173 for
the year ended December 31, 1999. All loans from Mr. Peterson have been paid
in full.
In April 1999, the Company issued 25,000 shares of common stock in
exchange for consulting services provided by Southwest Harvard Group, a
company owned by Mr. Trujillo, who subsequently became our Chairman and Chief
Executive Officer that same month. The shares were valued at the fair market
value of common stock at the date of issuance which was determined to be $11
per share based on the most recent similar transactions. The total cost of
the stock of $275,000 and related expenses were recorded in the month the
services were performed.
In April 1999, the Company granted the Chairman and Chief Executive
Officer options to purchase up to 350,000 shares of common stock exercisable
at $7 per share, all of which vested immediately. Approximately $1.4 million
of compensation expense was recorded for the year ended December 31, 1999 as
a result of this transaction.
In April 1999, the Company issued 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. Approximately $1.1
million in compensation expense was recorded as a result of these
transactions.
In April 1999, the Company entered into a $1.5 million sponsorship
agreement, payable in cash, with the Arizona Diamondbacks, a major league
baseball team. The sponsorship fee was recognized as expense ratably over the
1999 baseball season. This agreement has been extended for the 2000 baseball
season. Jerry J. Colangelo, who subsequently became one of our directors, is
the Chief Executive Officer and Managing General Partner of the Arizona
Diamondbacks. In April 1999, the Company entered into a sponsorship agreement
with Telemundo. Subsequently, Telemundo became a principal stockholder of the
Company and Alan J. Sokol its Chief Operating Officer became one of its
directors.
In June 1999, L. William Seidman, one of our directors, purchased 6,794
shares and 348 shares of our common stock from Kevin Dieball and Monolith,
respectively, for $6.75 per share. Mr. Trujillo purchased 15,000 shares of
our common stock from Monolith for $6.75 per share. Also, Internet Partners,
LLC, a limited liability company in which Mr. Colangelo is one of four
members, purchased 260,000 shares of our common stock from Monolith at $6.75
per share.
In June 1999, Mr. Peterson and Michael A. Hubert, a former officer and
director, entered into a voting trust agreement which provides that until
June 24, 2004, Messrs. Seidman and Trujillo shall vote all shares of our
common stock owned by Messrs. Peterson and Hubert (currently an aggregate of
1,618,704 shares) in the same proportion as those shares voted by our
nonaffiliated stockholders. In our opinion, the transactions described above
were on terms no less favorable than those which could have been obtained
from unaffiliated third parties.
In September 1999, the Company granted the Chairman and Chief Executive
Officer options to purchase up to 600,000 shares of common stock exercisable
at $7.75 per share which vest over 3 years. The exercise price was determined
to be equal to the fair value based on the closing trading price per share on
the grant date. Therefore, no compensation expense was recorded as a result
of this transaction.
The Company has forgivable loans due from employees amounting to
$368,000 and $397,000 as of December 31, 1999 and 1998, respectively. These
loans are granted as recruiting and retention incentives and are deemed 50
percent forgiven after six months of employment and 100 percent forgiven
after 12 months of employment.
44
(13) SUBSEQUENT EVENTS
On January 1, 2000, the Company initiated a qualified contributory
401(k) plan, that covers all employees who have attained the age of 21. Each
participant may elect to contribute up to 15 percent of his or her gross
compensation up to the amount allowed by the Internal Revenue Service. The
Company has the option to make a discretionary employer matching contribution
at any time.
On January 28, 2000, the Company acquired eTrato.com, an on-line trading
community developed especially for the Spanish language or bilingual Internet
user for 681,818 shares of common stock valued at $9.6 million. An additional
681,818 shares will be held in escrow pending the outcome of certain revenue
and web site contingencies over the 6-month period following the acquisition.
The value of the stock was determined using the average stock price between
the merger agreement date and the date the merger was publicly announced, or
$14.09 per share.
On January 28, 2000, the Company acquired credito.com, an on-line credit
company targeted to the U.S. Hispanic population for a purchase price of $8.4
million consisting of 681,818 shares of common stock valued at $11 per share
and assumption of an $887,000 note payable. The Company included the 681,818
shares of common stock issued unconditionally in determining the cost of
credito.com recorded at the date of acquisition. Contingent consideration
consisted of warrants to purchase 681,818 shares of common stock exercisable
upon credito.com's achievement of certain performance objectives related to
gross revenue as of January 2001 and January 2002. The value of the stock was
determined using the average stock price between the date of the merger
agreement and the date the merger was publicly announced, or $11 per share.
On March 9, 2000, the Company acquired realestateespanol.com, a real
estate services site providing the Hispanic-American community with bilingual
home buying services. The purchase price for realestateespanol.com consisted
of 335,925 shares of the Company's common stock valued at $3.0 million and
the assumption of $300,000 in debt paid immediately following the closing of
the acquisition. Contingent consideration consisted of 248,834 shares of
common stock which were held in escrow pending realestateespanol.com's
achievement of gross revenue targets within 12 months of the date of the
agreement. The value of the stock was determined using the average stock
price between the date of the merger agreement and the date the merger was
publicly announced, or $8.83 per share.
(14) RESTATEMENT
As discussed in Note 9, in September 1999, the Company entered into a
$6.0 million agreement with Estefan pursuant to which Estefan is to act as
spokesperson for the Company through December 31, 2000 and the Company will
sponsor her United States concert tour. Upon execution of the agreement, the
Company recognized a prepaid asset in the amount of $6.0 million in
connection with the Company's payment to Estefan of $2.0 million in cash, the
Company's issuance to Estefan of $2.0 million worth of its common stock, and
the Company's accrual of a liability in the amount of $2.0 million for the
payments due to Estefan in fiscal 2000. Because there was a risk of
forfeiture of common stock in the event of Estefan's nonperformance and
because the agreement did not contain a significant disincentive for
Estefan's nonperformance, the common stock was not deemed issued for
accounting purposes. Furthermore, payment of the $2.0 million due Estefan in
installments beginning in fiscal 2000 was dependent on Estefan's continued
future performance. In other words, the Company did not have a present
obligation to make the installment payments prior to their respective due
dates. Accordingly, the Company is restating its 1999 balance sheet to
reverse the accrual of the liability for the fiscal 2000 payments, to
recognize a contra-redeemable common stock account in the amount of $2.0
million and to reduce prepaid expense by $4.0 million.
The Company entered into an agreement with Telemundo in which the
Company originally valued the transaction at the value of the $5.0 million of
advertising credits to be received in accordance with SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, and placed a $0 valuation on the
warrants issued using the minimum value method. The Company has revised the
value of the common stock issued using the IPO price of $12.00 a share for a
total of $7.2 million, and valued the warrants at $2,920,000 using the
Black-Scholes option pricing model with a 50% volatility rate. As a result of
the increased valuation, the deferred marketing service, which has been
reclassified as a prepaid asset, as well as additional paid-in capital, was
increased from $5.0 million to $10,120,000.
The Company also revised the calculations of the weighted average number
of shares outstanding to reflect the weighting of the shares from the date of
this issuance. The net loss per share for 1998 increased $.26 a share from
$.72 to $.98. There was no impact on the net loss per share for 1997.
(15) QUARTERLY FINANCIAL DATA - UNAUDITED
45
A summary of the quarterly data for the years ended December 31, 1999 and
1998 follows:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
--------- --------- --------- --------- ---------
1999:
Gross revenues ............. $ -- 16 154 501 671
========= ====== ====== ====== =======
Net Revenue ................ $ -- 8 128 420 556
========= ====== ====== ====== =======
Operating expenses ......... $ 3,679 9,661 8,874 8,380 30,594
========= ====== ====== ====== =======
Loss from operations ....... $ (3,679) (9,653) (8,746) (7,960) (30,038)
========= ====== ====== ====== =======
Net (loss) ......... $ (3,683) (9,763) (8,296) (7,519) (29,261)
========= ====== ====== ====== =======
Net loss per share, basic $ (.41) (.98) (.58) (.52) (2.44)
and diluted ............... ========= ====== ====== ====== =======
1998:
Gross revenues ............. $ -- -- -- -- --
========= ====== ====== ====== =======
Net Revenue ................ $ -- -- -- -- --
========= ====== ====== ====== =======
Operating expenses ......... $ 14 5,014 292 1,145 6,465
========= ====== ====== ====== =======
Loss from operations ....... $ (14) (5,014) (292) (1,145) (6,465)
========= ====== ====== ====== =======
Net loss ........... $ (14) (5,016) (321) (1,162) (6,513)
========= ====== ====== ====== =======
Net loss per share, basic and
diluted (restated) .......... $ -- (.79) (.05) (.15) (.98)
========= ====== ====== ====== =======
46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On December 11, 1998 we engaged BDO Seidman, LLP as our independent public
accountant. BDO Seidman, LLP resigned as our independent public accountant on
February 4, 1999 because they were unwilling to be associated with our financial
statements due to the background of one of our employees. We employed this
employee from January 1, 1999 through February 15, 1999 at which time he
resigned. The employee was never appointed as an officer or director of
quepasa.com, inc. He owned 443,500 shares of our common stock and was an
employee of WGM Corporation, the general partner of The Monolith Limited
Partnership, a former principal stockholder.
Prior to their resignation, BDO Seidman, LLP had not completed their audits
of any of our financial statements for any period. There were no disagreements
between us and BDO Seidman, LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures
which, if not resolved to the satisfaction of BDO Seidman, LLP would have caused
them to make reference to the matter in their report. We allowed BDO Seidman,
LLP to read and make comment on this disclosure.
On February 10, 1999, we engaged Ehrhardt Keefe Steiner & Hottman, P.C.
(EKSH) as our independent public accountants. Prior to their appointment, we did
not consult with them on issues relating to our accounting principles or the
type of audit opinion with respect to our financial statements to be issued by
them.
On September 3, 1999, we replaced EKSH with Deloitte & Touche LLP as our
independent accountants. There were no disagreements with EKSH on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure. During the past two fiscal years and the subsequent interim
period preceding the date of the change in independent accountants, we had not
consulted with Deloitte & Touche LLP regarding (i) the application of accounting
principles to a completed or proposed transaction or (ii) the type of audit
opinion that might be rendered on our financial statements.
On January 18, 2000 we replaced Deloitte & Touche LLP with KPMG LLP as our
independent accountants. Prior to their replacement, Deloitte & Touche LLP had
not completed their audit of any of our financial statements for any period.
There were no disagreements with Deloitte & Touche LLP on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure. During the past two fiscal years and the subsequent interim
period preceding the date of the change in independent accountants, we had not
consulted with KPMG LLP regarding (i) the application of accounting principles
to a completed or proposed transaction or (ii) the type of audit opinion that
might be rendered on our financial statements.
47
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required by Part III, Item 10, is included in the Company's
Proxy Statement relating to the Company's 2000 annual meeting of stockholders,
and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information required by Part III, Item 11, is included in the Company's
Proxy Statement relating to the Company's 2000 annual meeting of stockholders,
and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required by Part III, Item 12, is included in the Company's
Proxy Statement relating to the Company's 2000 annual meeting of stockholders,
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by Part III, Item 13, is included in the Company's
Proxy Statement relating to the Company's 2000 annual meeting of stockholders,
and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as a part of this report:
The following financial statements of quepasa.com, inc. are filed as part
of this Form 10-K/A.
PAGE
----
Independent Auditors' Report-- KPMG LLP........................... 27
Independent Auditors' Report-- EKS&H.............................. 28
Balance Sheets as of December 31, 1999 and 1998................... 29
Statements of Operations for the Years Ended December 31,
1999 and 1998 and for the Period From Inception (June 25,
1997) through December 31, 1997................................. 30
Statements of Stockholders' Equity for the Years Ended
December 31, 1999 and 1998 and for the Period From
Inception (June 25, 1997) through December 31, 1997............. 31
Statements of Cash Flows for the Years Ended December 31,
1999 and 1998 and for the Period From Inception (June 25,
1997) through December 31, 1997................................. 32
Notes to Financial Statements..................................... 33
(2) Financial Statement Schedules:
Not applicable
(b) Reports on Form 8-K.
(1) 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.
(2) On December 23, 1999, the Company filed a report on Form 8-K announcing
it had promoted Juan C. Galan to Chief Financial Officer.
(c) Exhibits:
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the city of
Phoenix, state of Arizona, on May 18, 2001.
quepasa.com, inc.
By: /s/ GARY L. TRUJILLO
--------------------------------------------------
Name: Gary L. Trujillo
Title: President, Chief Executive Officer and
Chairman of the Board of Directors
(PRINCIPAL EXECUTIVE OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, report
has been signed below by the following persons in the capacities and on the
dates indicated:
NAME TITLE DATE
---- ----- ----
/s/ GARY L. TRUJILLO President, Chief Executive Officer and May 18, 2001
-------------------------------------- Chairman of the Board of Directors
Gary L. Trujillo (PRINCIPAL EXECUTIVE OFFICER)
/s/ ROBERT J. TAYLOR Chief Financial Officer, Secretary and May 18, 2001
-------------------------------------- Treasurer (PRINCIPAL FINANCIAL
Robert J. Taylor OFFICER AND PRINCIPAL ACCOUNTING OFFICER)
/s/ JERRY J. COLANGELO Director May 18, 2001
--------------------------------------
Jerry J. Colangelo
Director May 18, 2001
--------------------------------------
Jose Maria Figueres
/s/ LOUIS OLIVAS Director May 18, 2001
--------------------------------------
Louis Olivas
/s/ L. WILLIAM SEIDMAN Director May 18, 2001
--------------------------------------
L. William Seidman
/s/ MICHAEL WECK Director May 18, 2001
--------------------------------------
Michael Weck
49
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
3.01 Articles of Incorporation of the Registrant, as amended (1)
3.02 Bylaws of the Registrant, as amended (1)
4.01 1998 Stock Option Plan of the Registrant, as amended, and forms of
Option Agreements (1)
4.02 Registration Rights Agreement dated as of September 1, 1999, by and
between the Registrant and Estefan Enterprises, Inc. (2)
4.03 Registration Rights Agreement dated as of January 26, 2000, by and
among the Registrant, Verde Capital Partners, LLC and Verde
Reinsurance Company, Ltd. (5)
4.04 Common Stock Purchase Warrant dated January 26, 2000, issued to Verde
Capital Partners, LLC (5)
4.05 Common Stock Purchase Warrant dated January 26, 2000, issued to Verde
Reinsurance Company, Ltd. (5)
4.06 Registration Rights Agreement dated as of January 28, 2000, by and
among the Registrant, Verde Capital Partners, LLC, Alphabit Media
Ventures, LLC, Designet S.A. de C.V., Designet Ventures, LLC and
Cruttenden Roth Incorporated, Ltd. (5)
4.07 Promissory Note dated as of January 28, 2000, from the Registrant to
Verde Capital Partners, LLC (5)
4.08 Escrow Agreement dated as of January 28, 2000, by and among
the Registrant, Verde Capital Partners, LLC, Alphabit Media Ventures,
LLC, Designet S.A. de C.V., Designet Ventures, LLC, Cruttenden Roth
Incorporated and Norwest Bank Arizona, N.A. (5)
4.09 Registration Rights Agreement dated as of March 9, 2000, by and among
the Registrant, Gary Acosta and John Beneventi (5)
4.10 Escrow Agreement dated as of March 9, 2000, by and among the
Registrant, Gary Acosta, John Beneventi and Norwest Bank Arizona,
N.A. (5)
9.01 Voting Trust Agreement (1)
10.01 Agreement with Reuters NewMedia, Inc., as amended (1)
10.02 Office Lease of the Registrant (Arizona) (1)
10.03 Agreement with WeatherLabs, Inc. (1)
10.04 Agreement with GTE Internetworking, Inc. (1)
10.05 Agreement with Garcia/LKS (1)
10.06 Amendment to Agreement with Garcia/LKS (5)
10.07 Agreement with Telemundo Network Group LLC (1)
10.08 Common Stock Purchase Warrant dated April 14, 1999, issued to
Telemundo Network Group LLC (1)
10.09 Agreement with Arizona Diamondbacks (1)
10.10 Agreement with Miami Herald Online (1)
10.11 Agreement with Inktomi Corporation (1)
10.12 Amendment to Agreement with Inktomi Corporation (5)
50
10.13 Agreement with Estefan Enterprises, Inc. (2)
10.15 Second Amended and Restated Employment Agreement with Gary
Trujillo (5)
10.16 Second Amended and Restated Employment Agreement with Juan Galan (5)
10.17 Second Amended and Restated Employment Agreement with Robert
Taylor (5)
10.18 Agreement with NetZero, Inc. (5)
10.19 Merger Agreement dated as of December 17, 1999, by and among
the Registrant, eTrato Acquisition, Inc., eTrato.com, inc., Verde
Capital Partners, LLC, Alphabit Media Ventures, LLC, Designet S.A. de
C.V., Designet Ventures, LLC and Cruttenden Roth Incorporated (5)
10.20 Merger Agreement dated as of January 17, 2000, by and among
the Registrant, Credito Acquisition, Inc., credito.com, inc., Verde
Capital Partners, LLC and Verde Reinsurance Company, Ltd. (5)
10.21 Agreement and Plan of Merger dated as of March 9, 2000, by and among
the Registrant, credito.com, inc., realestateespanol.com, inc.,
Century Finance USA, Inc. d/b/a RealEstateEspanol.com, Inc., Gary
Acosta and John Beneventi (5)
16.01 Letter from BDO Seidman, LLP (1)
16.02 Letter from Ehrhardt, Keefe, Steiner & Hottman, P.C. (3)
16.03 Letter from Deloitte & Touche LLP (4)
21.01 Subsidiaries of the Registrant (5)
23.01 Consent of Ehrhardt, Keefe, Steiner & Hottman, P.C. (set forth in the
report of EKS&H contained in Item 8) (5)
23.02 Consent of KPMG LLP (5)
27.01 Financial Data Schedule (5)
----------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 333-74201).
(2) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999.
(3) Incorporated by reference to the Registrant's Current Report on Form 8-K
dated September 3, 1999.
(4) Incorporated by reference to the Registrant's Current Report on Form 8-K
dated January 18, 2000.
(5) Previously filed with the Registrant's Annual Report on Form 10-K dated
March 30, 2000.
51