UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
(MARK ONE)
/ / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
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
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
7904 E. CHAPARRAL RD., STE. A110 85250
PMB 160, SCOTTSDALE, AZ (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 480-949-3749
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 / / No /X/
The number of outstanding shares of the registrant's Common Stock as of
November 14, 2001 was approximately 17,763,291 shares.
QUEPASA.COM, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2001 (unaudited)
and December 31, 2000.........................................................................1
Condensed Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 2001 and 2000 (unaudited).................................................2
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2001 and 2000 (unaudited).......................................................3
Notes to Condensed Consolidated Financial Statements............................................4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .........17
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................28
Item 2. Changes in Securities and Use of Proceeds......................................................28
Item 3. Defaults Upon Senior Securities................................................................28
Item 4. Submissions of Matters to a Vote of Security Holders...........................................28
Item 5. Other Information..............................................................................29
Item 6. Exhibits and Reports on Form 8-K...............................................................29
Signatures ...............................................................................................30
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUEPASA.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
2001 DECEMBER 31,
ASSETS (UNAUDITED) 2000
------------------ --------------------
Current assets:
Cash and cash equivalents $ 5,098,318 $ 3,940,232
Trading securities -- 2,393,964
Accounts receivable, net of allowance for doubtful accounts
of $176,717 and $184,100, respectively 3,982 242,275
Other receivable -- 981,870
Prepaid expenses 131,885 302,242
Other current assets -- 158,421
------------------ -------------------
Total current assets 5,234,185 8,019,004
Property and equipment, net -- 103,244
Assets held for sale 5,000 282,000
------------------ -------------------
$ 5,239,185 $ 8,404,248
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 190,356 $ 354,743
Accrued liabilities 122,147 149,344
Deferred revenue 50,223 202,292
------------------ -------------------
Total current liabilities 362,726 706,379
------------------ -------------------
Stockholders' equity:
Preferred stock, authorized 5,000,000 shares, $0.001 par value -
none issued or outstanding -- --
Common stock, authorized 50,000,000 shares; $0.001 par value;
17,763,291 shares issued and outstanding at September 30, 2001
and December 31, 2000 17,763 17,763
Additional paid-in capital 104,451,784 104,420,534
Accumulated deficit (99,593,088) (96,740,428)
------------------ -------------------
Total stockholders' equity 4,876,459 7,697,869
------------------ -------------------
$ 5,239,185 $ 8,404,248
================== ===================
See accompanying notes to condensed consolidated financial statements.
1
QUEPASA.COM, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------- -----------------------------------
2001 2000 2001 2000
---------------- ---------------- -------------- ----------------
Gross revenue $ 30,134 $ 885,677 $ 177,334 $ 2,428,330
Less commissions -- (45,975) (2,636) (185,509)
---------------- ---------------- -------------- ----------------
Net revenue 30,134 839,702 174,698 2,242,821
================ ================ ============== ================
Operating expenses:
Product and content development 16,544 1,645,177 392,487 5,143,178
Advertising and marketing -- 4,219,136 421,845 15,405,918
General and administrative 770,464 1,426,354 2,425,438 4,821,355
Amortization of goodwill -- 1,752,229 -- 4,583,847
---------------- ---------------- -------------- ----------------
Total operating expenses 787,008 9,042,896 3,239,770 29,954,298
---------------- ---------------- -------------- ----------------
Loss from operations (756,874) (8,203,194) (3,065,072) (27,711,477)
---------------- ---------------- -------------- ----------------
Other income (expense):
Interest expense (315) (2,214) (2,254) (53,461)
Interest income and other 54,925 194,398 228,870 1,096,347
Realized and unrealized loss on trading securities -- (3,018) (14,204) (140,127)
---------------- ---------------- -------------- ----------------
Other income, net 54,610 189,166 212,412 902,759
---------------- ---------------- -------------- ----------------
Loss before the cumulative effect of a change in
accounting principle (702,264) (8,014,028) (2,852,660) (26,808,718)
Cumulative effect of a change in accounting principle -- -- -- (64,583)
---------------- ---------------- -------------- ----------------
Net loss $ (702,264) (8,014,028) (2,852,660) (26,873,301)
================ ================ ============== ================
Loss per share before cumulative effect of a change in
accounting principle, basic and diluted $ (0.04) $ (0.45) $ (0.16) $ (1.56)
---------------- ---------------- -------------- ----------------
Net loss per share, basic and diluted $ (0.04)$ (0.45) $ (0.16) $ (1.57)
================ ================ ============== ================
Weighted average number of shares
outstanding, basic and diluted 17,763,291 17,763,291 17,763,291 17,146,753
================ ================ ============== ================
See accompanying notes to condensed consolidated financial statements.
2
QUEPASA.COM, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------
2001 2000
----------------- ----------------
Cash flows from operating activities:
Net loss $ (2,852,660) $ (26,873,301)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 103,244 6,348,242
Stock based compensation 31,250 61,638
Forgiveness of forgivable loans -- 333,703
Amortization of prepaid marketing services -- 2,211,715
Amortization of deferred advertising -- 766,666
Short-term gain on trading securities -- (2,820)
Realized and unrealized loss on trading securities 14,204 140,127
Cumulative effect of change in accounting principle -- 64,583
Increase (decrease) in cash resulting from changes in assets and
liabilities:
Sale of trading securities, net 2,379,760 14,907,879
Accounts receivable 238,293 (158,108)
Prepaid expenses 170,357 195,597
Other receivable and other current assets 1,140,291 (6,816,377)
Accounts payable (164,387) (2,190,065)
Accrued liabilities (27,197) (826,949)
Deferred revenue (152,069) 74,791
----------------- ----------------
Net cash provided by (used in) operating activities 881,086 (11,762,679)
----------------- ----------------
Cash flows from investing activities:
Proceeds from assets held for sale 277,000 --
Cash paid for acquisitions -- (238,793)
Cash received in acquisition -- 578,730
Purchase of property and equipment -- (239,516)
----------------- ----------------
Net cash provided by investing activities 277,000 100,421
----------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of stock -- 9,000,000
Proceeds from exercise of stock options -- 367,801
Proceeds from draws on line of credit -- 12,286
Payments on notes payable -- (2,382,669)
----------------- ----------------
Net cash provided by financing activities -- 6,997,418
----------------- ----------------
Net increase (decrease) in cash and cash equivalents 1,158,086 (4,664,840)
Cash and cash equivalents, beginning of year 3,940,232 6,961,592
================= ================
Cash and cash equivalents, end of period $ 5,098,318 $ 2,296,752
================= ================
Supplemental disclosure of non-cash operating, financing and investing
activities:
Interest paid $ 2,254 $ 32,175
================= ================
Barter transactions $ -- $ 1,153,633
================= ================
Notes payable assumed in acquisitions $ -- $ 2,370,383
================= ================
Issuance of stock in acquisition $ -- $ 20,073,032
================= ================
See accompanying notes to condensed consolidated financial statements.
3
QUEPASA.COM, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2001 and 2000
(1) THE COMPANY
quepasa.com, inc. (the "Company" or "quepasa") is a Bilingual
(Spanish/English) Internet portal and online community focused on the
United States Hispanic market. We provide users with information and
content centered around the Spanish language. Because the language
preference of many U.S. Hispanics is English, we also offer our users
the ability to access information in the English language.
(2) LIQUIDITY
To date, the Company's expenses have significantly exceeded revenue
and there is no assurance that the Company will earn profits in the
future. The Company's auditors issued their independent auditors'
report dated May 8, 2001 (except as to the second paragraph of Note
10(a) and Note 16 to the December 31, 2000 consolidated financial
statements, which are as of August 6, 2001) stating that the Company
has suffered recurring losses from operations, has an accumulated
deficit, has been unable to successfully execute its business plan,
and management is considering alternatives for the Company, all of
which raise substantial doubt about its ability to continue as a going
concern.
By April 30, 2001, the Company downsized its workforce to three
individuals, disposed of certain assets, and continues to terminate
long-term commitments. Management believes that as a result of its
significant cost-cutting measures, there is sufficient cash to operate
through the second quarter of 2002. Management of the Company and the
Board of Directors continue to evaluate alternatives for the Company
including disposing of assets and investigating merger opportunities.
On August 6, 2001, the Company executed an agreement to merge with an
unrelated entity (see note 4).
(3) BASIS OF PRESENTATION
The Company's accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and pursuant
to rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for a complete
financial statement presentation. In the Company's opinion, such
unaudited interim information reflects all adjustments, consisting
only of normal recurring adjustments, necessary to present our
financial position and results of operations for the periods
presented. The Company's results of operations for interim periods are
not necessarily indicative of the results to be expected for a full
fiscal year. The Company's condensed consolidated balance sheet as of
December 31, 2000, was derived from its audited consolidated financial
statements as of that date but does not include all the information
and footnotes required by accounting principles generally accepted in
the United States of America. The Company suggests that these
condensed consolidated financial statements be read in conjunction
with the audited consolidated financial statements included in its
Annual Report on Form 10-K as of and for the year ended December 31,
2000.
Gross revenue increased by $63,334 for the three months ended
September 30, 2000 and decreased by $138,958 for the nine months ended
September 30, 2000 to reflect the adoption of Staff Accounting
Bulletin No. 101 as of January 1, 2000. In addition, a cumulative
effect of a change in accounting principle in the amount of $64,583
has been recognized. Refer to note 4 under "revenue recognition" in
the Company's Form 10-K as of and for the year-ended December 31,
2000.
4
(4) MERGER AGREEMENT
On August 6, 2001, the Company entered into a merger agreement that
would result in the company becoming a wholly owned subsidiary of
Great Western Land and Recreation, Inc. Great Western is an
Arizona-based, privately held real estate development company with
holdings in Arizona, New Mexico and Texas. Great Western's business
focuses primarily on condominiums, apartments, residential lots and
recreational property development. In addition to holding completed
developments in metropolitan areas of Arizona, New Mexico and Texas,
Great Western also owns and is currently developing the Wagon Bow
Ranch in northwest Arizona and the Willow Springs Ranch in central New
Mexico. In the merger, each share of quepasa common stock will be
converted into one share of Great Western common stock.
Immediately following the merger the Company's current shareholders
would own approximately 49% of Great Western and Amortibanc
Management, L.C., Great Western's current sole shareholder, would own
approximately 51% of Great Western. In addition, Amortibanc holds
warrants to purchase 14,827,175 shares of Great Western common stock
that, if exercised, would increase its ownership to a maximum of 65%
of the outstanding common stock of Great Western on a fully diluted
basis (including an aggregate of 400,000 stock options with an
exercise price of $0.15 per share held by our directors and President,
but not including quepasa options or warrants that are considerably
out of the money). Amortibanc's warrant is exercisable at any time,
and from time to time for ten years following the merger closing.
Under the terms of the warrant, Amortibanc may purchase 4,942,392
shares of Great Western common stock for $.30 per share, 4,942,392
shares for $.60 per share and 4,942,391 shares for $1.20 per share.
Amortibanc may purchase shares by paying cash for such shares or by
surrendering the right to receive a number of shares having an
aggregate market value equal to the purchase price for such shares.
Following the merger, the combined company's common stock will be
publicly traded under the Great Western name. The merger will be
accounted for using the purchase method of accounting. The merger is
subject to certain closing conditions, including quepasa stockholder
approval. There can be no assurance that the Company will consummate
the merger transaction.
(5) SIGNIFICANT TRANSACTIONS AND WORKFORCE REDUCTIONS
On January 28, 2000, the Company acquired credito.com, an on-line
credit company targeted to the U.S. Hispanic population for an
aggregate 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 an additional 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. credito.com did not meet the performance objectives as of
January 2001, and consequently, the warrants were returned to the
Company. The value of the common 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. The Company
accounted for the acquisition using the purchase method of accounting.
Accordingly, the purchase price was allocated to the assets purchased
and the liabilities assumed based upon the estimated fair values on
the date of the acquisition. The excess of the purchase price over the
fair value of the net assets acquired was approximately $7.8 million
and was recorded as goodwill, which was being amortized on a
straight-line basis over a 3-year period. On December 27, 2000, the
Company's Board of Directors approved the development of a plan of
liquidation and sale of the Company's assets in the event that no
strategic transaction involving the Company could be achieved.
Accordingly, the Company
5
performed an impairment analysis of all long-lived assets and
identifiable intangibles in accordance with accounting principles
generally accepted in the United States of America. As a result, the
unamortized balance of goodwill of $5.6 million recorded in
conjunction with the transaction was written off in the fourth quarter
of 2000.
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 an aggregate purchase price of $10.85
million, consisting of 681,818 shares of the Company's common stock
valued at $14.09 per share, and assumption of a $1.25 million
promissory note. The note payable was due on January 28, 2002, and had
a stated interest rate at the greater of 6% per annum or the
applicable federal rate in effect with respect to debt instruments
having a term of two years. This note was paid in full on May 8, 2000.
The value of the common stock was determined using the average stock
price between the merger agreement date and the date the merger was
publicly announced on December 20, 1999. Contingent consideration
consisted of an additional 681,818 shares of common stock which were
held in escrow to be released to the seller pending the outcome of
certain revenue and website contingencies over the six-month period
following the acquisition. The contingencies were not met, and
consequently, these shares were returned to quepasa subsequent to
year-end and cancelled. The acquisition was accounted for using the
purchase method of accounting and, accordingly, the purchase price was
allocated to the assets purchased and the liabilities assumed based
upon the estimated fair value at the date of acquisition. The excess
of the purchase price over the fair value of the net assets acquired
was approximately $10.1 million and was recorded as goodwill, which
was being amortized on a straight-line basis over a period of 3 years.
On December 27, 2000, the Company's Board of Directors approved the
development of a plan of liquidation and sale of the Company's assets
in the event that no strategic transaction involving the Company could
be achieved. Accordingly, the Company performed an impairment analysis
of all long-lived assets and identifiable intangibles in accordance
with accounting principles generally accepted in the United States of
America. As a result, the balance of unamortized goodwill of $7.3
million recorded in conjunction with the transaction was written off
in the fourth quarter of 2000.
On March 9, 2000, the Company acquired RealEstateEspanol.com, a real
estate services site providing the Hispanic-American community with
bilingual home buying services, for an aggregate purchase price of
$3.3 million, consisting of 335,925 shares of the Company's common
stock for $8.83 per share and assumption of $300,000 in debt which was
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 common stock was determined using the average stock price
between the merger agreement date and the date the merger was publicly
announced. RealEstateEspanol.com did not meet the agreed-upon targets
contingent to the seller receiving the shares of common stock held in
escrow, and consequently, these shares were returned to quepasa and
cancelled subsequent to year-end. The acquisition was accounted for
using the purchase method of accounting, and, accordingly, the
purchase price was allocated to the assets purchased and the liability
assumed based upon the estimated fair value at the date of
acquisition. The excess of the purchase price over the fair value of
the net assets acquired was approximately $3.2 million and was
recorded as goodwill, which was being amortized on a straight-line
basis over a period of 3 years. On December 27, 2000, the Company's
Board of Directors approved the development of a plan of liquidation
and sale of the Company's assets in the event that no strategic
transaction involving the Company could be achieved. Accordingly, the
Company performed an impairment analysis of all long-lived assets and
identifiable intangibles in accordance with accounting principles
generally accepted in the United States of America. As a result, the
balance of
6
unamortized goodwill of $5.6 million recorded in conjunction with the
transaction was written off in the fourth quarter of 2000.
On March 30, 2000, Gateway, Inc. invested $9.0 million in exchange for
1,428,571 shares of common stock, which represented 7.6% of quepasa's
outstanding common stock. The amount attributable to common stock and
additional paid-in capital was $7,685,712, the value of the 1,428,571
shares of common stock on the date issued ($5.38 per share).
Additionally, quepasa granted a 60-day warrant to acquire 483,495
shares of common stock at $7 per share. The warrants were valued at
approximately $386,000 using the Black Scholes option-pricing model.
The assumptions used for the Gateway warrants are as follows: expected
dividend yield 0%, risk-free interest rate of 5.67%, expected
volatility of 147%, and expected life of two months. In the event
there was a change in ownership of quepasa in excess of 30% prior to
September 30, 2000, and for a price per share less than $7.00, Gateway
had a right to be reimbursed for the differential in the per share
amount. quepasa also committed itself to use a substantial portion of
the proceeds of Gateway's investment to further its community and
educational initiative program, which included distributing computers
purchased from Gateway accompanied with Spanish language technical
support, providing Internet access, and training for quepasa's
subscribers. The Company purchased $5.8 million of computers, net of
$928,500 of a volume purchase discount, pursuant to this agreement to
be used for promotional activities. The Company took title to the
computers upon the close of the transaction. Since the Company had no
warehousing facilities, the computers were segregated from Gateway's
inventory in third party warehouse locations and the Company was
responsible for the payment of warehouse storage charges. These
computers were expensed as donated.
In the fourth quarter of 2000, the Company halted virtually
all-promotional activities to conserve cash. In December 2000, the
Company, at the direction of the Board of Directors, initiated
discussions and sold the majority of its remaining computer inventory
back to Gateway at a $3.5 million loss. The Company was required to
approach Gateway first as the original purchase agreement allowed the
Company to use the computers only for promotional activities. However,
several months after the Gateway transaction closed, as a result of
the decline in stock prices for internet businesses, the Company
substantially curtailed its business activities because it was unable
to obtain financing. Only a small number of the computers had been
used in promotional activities at that time. In the fourth quarter of
2000, the Company's Board of Directors instructed management to
liquidate the computer inventory, and management initiated discussions
with Gateway regarding the prohibition on resale, at which time, the
Company and Gateway negotiated the resale back to Gateway at the price
stated above. The Company recognized $158,421 of expense related to
the donation of its remaining 200 computers to a third party during
the first quarter of 2001. At March 31, 2001, the Company had no
computer inventory remaining.
In September 1999, the Company entered into an agreement with Estefan
Enterprises, Inc. whereby Gloria Estefan would act as spokesperson for
the Company through December 31, 2000 and the Company would sponsor
her United States 2000 concert tour. Ms. Estefan's tour was
subsequently postponed, and consequently the original terms of the
spokesperson agreement were renegotiated. The revised spokesperson
agreement called for the return of the 156,863 shares of redeemable
common stock to the Company, cancellation of the put option for those
shares and cancellation of the final cash installment. The Company
obtained the right of first refusal for the sponsorship of Ms.
Estefan's next United States and Latin America tours. The Company
recognized $1.2 million and $2.3 million of amortization in relation
to the Estefan agreement during the three and six months ended June
30, 2000, respectively, in relation to the original contract. The
issuance of the 156,863 shares of redeemable common stock was reversed
in the second quarter of 2000.
7
In December 1999, RealEstateEspanol.com and the National Association
of Hispanic Real Estate Professionals entered into an Internet
Endorsement Agreement, pursuant to which, in exchange for NAHREP's
endorsement of the RealEstateEspanol.com website,
RealEstateEspanol.com was required to pay NAHREP an annual $50,000 fee
over a ten-year term. Thereafter, in connection with the Internet
Endorsement Agreement, in October 2000, RealEstateEspanol.com, NAHREP,
the National Council of La Raza and Freddie Mac entered into a
Memorandum of Understanding ("MOU") which, among other things, set
forth the business relationship through which the parties agreed to
implement a program to deliver the benefits of technology to mortgage
origination for low and moderate income Hispanic and Latino borrowers.
Contemporaneously, RealEstateEspanol.com and NAHREP entered into an
agreement which set forth the terms and conditions of their rights and
obligations under the MOU.
Under the MOU, among other things, (1) RealEstateEspanol.com was
required to (a) develop a web-based technology tool to be distributed
to NCLR and NCLR affiliates, and (b) donate 200 computers, at no
charge, to NAHREP for distribution to NCLR and NCLR affiliates for
promotional purposes, (2) Freddie Mac was required to provide an
aggregate dollar amount of $250,000 as sponsorship fees to NAHREP, and
(3) NAHREP was required, in turn, to deliver the same to
RealEstateEspanol.com towards the initial development of the
technology tool discussed above. In May 2001, all of the parties
agreed to either terminate certain of the agreements or release
RealEstateEspanol.com from its duties and obligations thereunder. In
exchange for such termination or release, as the case may be,
RealEstateEspanol.com (a) transferred ownership of, and exclusive
rights to, the in-process technology tool to NAHREP, (b) granted
NAHREP a non-exclusive license to operate and use the
realestaeespanol.com website the content thereon and any related
technology tools, (c) granted NAHREP an exclusive license to operate
and use any related domain names, (d) permitted NAHREP to retain the
full amount of the unpaid sponsorship fee to be paid by Freddie Mac to
NAHREP for development of the technology tool, and (e) permitted
NAHREP to retain ownership of the previously donated computers in the
first quarter of 2001. The $100,000 sponsorship collected in 2000 was
amortized over a six-month period through March 31, 2001.
During the first quarter of 2001, the Company reduced its workforce as
part of management's effort to enhance the Company's competitive
position, utilize its assets more efficiently, and conserve remaining
cash. The Company recognized $44,000 in employee severance and
termination costs for the three months ended March 31, 2001, relating
to the reduction in the workforce of approximately 17 employees. As of
March 31, 2001, all employee severance and termination costs incurred
in 2001 had been paid. There were no additional employee severance or
termination costs incurred in the second or third quarters of 2001.
(6) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) USES OF ESTIMATES
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America 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.
(B) RECLASSIFICATIONS
Certain reclassifications have been made to prior year financial
statement amounts to conform to the current year presentation.
8
(C) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial
statements of quepasa and its three wholly owned subsidiaries.
All significant intercompany balances and transactions have been
eliminated in consolidation.
(D) CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments which potentially subject the Company to
concentrations of credit risk are principally accounts
receivable, cash and cash equivalents and trading securities. 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. During the three months ended September 30, 2001, one
customer accounted for 100% of gross revenue. During the three
months ended September 30, 2000, two customers accounted for 19%
and 11% of gross revenue. During the nine months ended September
30, 2001, two customers accounted for 51% and 28% of gross
revenue. During the nine months ended September 30, 2000, one
customer accounted for 18% of gross revenue. No other single
advertiser utilizing banner ads or sponsorship agreements
amounted to or exceeded 10% of the total gross revenue.
(E) 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.
(F) SECURITIES
The Company classifies its 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 securities at December 31, 2000
consisted of corporate debt securities.
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 operations. Unrealized holding gains
and losses, net of the related tax effect, on available-for-sale
securities are excluded from operations and are reported as a
separate component of other comprehensive income until realized.
Realized gains and losses from trading securities are included in
operations and are derived using the specific identification
method for determining the cost of securities. All securities
held at December 31, 2000 were categorized as trading. The
Company had no securities at September 30, 2001.
(G) REVENUE RECOGNITION
The Company's revenue is 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 website, for a fixed fee. The Company's contracts
9
with advertisers and advertising agencies for these types of
contracts cover periods ranging from one to twelve months.
Advertising revenue is 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 revenue until
the remaining guaranteed impression levels are achieved. Payments
received from advertisers prior to displaying their
advertisements on the Company's website are recorded as deferred
revenue.
The Company also derives revenue from the sale of sponsorships
for certain areas or a sponsorship exclusivity for certain areas
within its website. These sponsorships are typically for periods
up to one year. Prior to the adoption of Staff Accounting
Bulletin (SAB) 101, the Company recognized revenue during the
initial setup, if required under the unique terms of each
sponsorship agreement (e.g., co-branded website), to the extent
that actual costs were incurred. The balance of the sponsorship
was recognized ratably over the period of time of the related
agreement. The Company adopted SAB 101 in the fourth quarter of
2000. As such, the Company records initial setup fees as deferred
revenue and recognizes the fee over the term of the related
agreement.
The Company also derives revenue from slotting fees, set-up fees
and commissions. Slotting fees revenue is recognized ratably over
the period the services are provided. Setup fee 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). Commission revenue and expenses related to
Net2Phone are 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. Revenue 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 website. 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
three months ended September 30, 2001 and 2000, revenue
attributable to reciprocal services totaled zero and
approximately $428,000, respectively, and related expenses
totaled zero and approximately $428,000, respectively. During the
nine months ended September 30, 2001 and 2000, revenue
attributable to reciprocal services totaled zero and
approximately $1.2 million, respectively, and related expenses
totaled zero and approximately $1.2 million, respectively.
In November 1999, the EITF commenced discussions on EITF No.
99-17, ACCOUNTING FOR ADVERTISING BARTER TRANSACTIONS, concluding
that revenue 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. In evaluating "similarity," the Company ensured
reasonableness of
10
the target market, circulation, timing, medium, size, placement,
and location of the advertisement. In cases where the total
dollar amount of barter revenue exceeded the total amount of the
"similar" cash transaction, the total barter amount was capped at
the lower cash amount. EITF No. 99-17 was effective and was
applied prospectively to all transactions occurring after January
20, 2000.
(H) COMPUTER PROMOTIONS INVENTORY
Computer promotions inventory is recorded at cost and included in
other current assets. The computer promotions inventory is
charged to expense on an individual basis as each computer is
donated.
(I) 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 maintenance are charged to operations as incurred
and improvements, which extend the useful lives of the assets,
are capitalized.
(J) PRODUCT AND CONTENT DEVELOPMENT
Costs incurred in the classification and organization of listings
within the Company's website 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 website, costs incurred by the Company during the
application development stage have been insignificant.
In March 2000, EITF No. 00-02, ACCOUNTING FOR WEBSITE DEVELOPMENT
COSTS, was issued which addresses how an entity should account
for costs incurred in website development. EITF 00-02
distinguishes between those costs incurred during the
development, application and infrastructure development stage and
those costs incurred during the operating stage. EITF 00-02 was
effective on and after June 30, 2000, although early adoption was
encouraged. The adoption of EITF No. 00-02 did not have a
material impact on the Company's 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 capitalized certain material development costs incurred
during the acquisition development stage, including costs
associated with coding, software configuration, upgrades and
enhancements.
(K) 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
11
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment
date.
(L) 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 exceeds 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.
(M) 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, other receivable, accounts
payable, and accrued liabilities approximates fair value because
of the short term nature of the instruments.
(N) 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 net 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.
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.
(O) NET LOSS PER SHARE
Basic loss per share is computed by dividing net loss available
to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted loss 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.
12
(P) ADVERTISING COSTS
Advertising costs are expensed as incurred in accordance with
Statement of Position 93-7, "Reporting on Advertising Costs."
Advertising costs for the three months ended September 30, 2001
and 2000 totaled zero and $1.5 million, respectively. Advertising
costs for the nine months ended September 30, 2001 and 2000
totaled $23,000 and $6.1 million, 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.
(Q) 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 segment. 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.
(7) COMMITMENTS
(A) EMPLOYMENT AGREEMENTS
The Company has entered into employment and other agreements with
its executive officer and four non-employee directors. Under the
terms of the employment agreement with its remaining employee,
the Company and the other parties thereto agreed to various
provisions relating to base salary, forgivable loans and
severance and bonus arrangements. The Company recognized the
forgivable loans ratably as expense over the full loan period, or
earlier, if the loan is forgiven on the date of the particular
employee's termination of employment with the Company, according
to such employee's employment agreement.
In the event of a change of control or liquidation, the Company
may be required to pay up to a maximum of $300,000 in severance
payments under the Company's existing employment agreements with
its remaining officer and other agreements with its four
non-employee directors as follows:
Robert J. Taylor's employment agreement terminates on its own
terms on March 8, 2002, but the Company may terminate his
employment for any reason, with or without cause. On October 10,
2001, Taylor and the Company amended Taylor's employment
agreement to provide for a bonus payment in the amount of
$100,000, which is payable to Taylor upon the earlier to occur of
(a) a change of control, (b) March 8, 2002 or (c) termination
without cause by the Company. In addition, upon the closing of
the merger with Great Western Land and Recreation Inc., all of
Taylor's 193,334 unvested options will become fully vested and
exercisable.
A change of control in the Company will also trigger a cash
payment due to the Company's four non-employee directors. As of
March 2001, the Company agreed to pay each non-employee director
a payment of $50,000 for past and current services, payable only
upon any change of control in or liquidation of the Company. In
addition, 200,000 unvested options previously granted to the
non-employee directors with an exercise price of $0.15 per share
will become fully vested and exercisable.
13
During October 2001, the Company's chief executive officer agreed
to terminate his employment with the Company (see Note 10).
(B) ADVERTISING CONTRACTS
In April 1999, the Company entered into an agreement with
Telemundo Network Group LLC (Telemundo). The Chief Operating
Officer of Telemundo served as director of the Company through
January, 2001. Under this agreement, the Company issued Telemundo
600,000 shares of its common stock and a warrant to purchase
1,000,000 shares of its common stock exercisable up to and
including June 25, 2001 at $14.40 per share. In exchange, the
Company 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 warrant became fully vested and were not subject to return
for nonperformance by Telemundo. The fair value of the
transactions was measured and based on the fair value of the
common stock issued at the Company's IPO price of $12.00 per
share plus $2,920,192 assigned to the warrant 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 a cash purchase from Telemundo of $1.0
million in advertising services in 1999. The remaining balance of
prepaid marketing services of $5,120,192 was to be amortized over
the term of the agreement (5 years). This agreement also provides
(1) that the parties will collaborate regarding online content
development, co-branded marketing promotions, and other
complementary aspects of its business, (2) that the parties will
cross-link each other's websites, and (3) exclusivity provisions
for a period of six months. On December 27, 2000, the Company's
Board of Directors approved the development of a plan of
liquidation and sale of the Company's assets in the event that no
strategic transaction involving the Company could be achieved.
Accordingly, the Company performed an impairment analysis of all
long-lived assets and identifiable intangibles in accordance with
generally accepted accounting principles. As a result, the
Company wrote off the $7.6 million remaining unamortized prepaid
marketing services in the fourth quarter of 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. 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 was amended, reducing the monthly commitment to $50,000
for January 2000 and to $40,000 through October 2000. The
agreement continued on a month-to-month basis with payments
totaling $437,000 through December 2000, when it was terminated.
During 2000 and 1999, the Company was a party to a sponsorship
agreement with the Arizona Diamondbacks major league baseball
team. A director of the Company serves as the Arizona
Diamondbacks' Chief Executive Officer and General Manager. Under
this agreement, the Company received English and Spanish
television and radio broadcast time, ballpark signage, and
Internet and print promotions for an annual sponsorship fee of
$1.5 million which was payable in cash during each season. This
agreement was not renewed for the 2001 season. The $1.5 million
annual sponsorship fee was recognized as expense ratably over the
1999 and 2000 baseball seasons.
14
(C) CONTENT AND WEBSITE ADMINISTRATION
During 2000, 1999 and 1998, the Company had various agreements
with third parties to provide content to the Company's website
and incurred license fee expense of zero and $403,000 for the
three months ended September 30, 2001 and 2000, respectively. The
Company incurred license fee expense of $17,000 and $1.4 million
for the nine months ended September 30, 2001 and 2000,
respectively. The Company paid $41,000 during the three months
ended March 31, 2001 to terminate all content development
agreements. The Company has outsourced the hosting and
administration of its website for approximately $2,000 per month.
(8) CONTINGENCIES
In February 2001, the Company initiated arbitration against Telemundo
to defend the enforceability of an agreement between us, and submitted
a damages claim for $4.3 million, plus reasonable attorneys' fees and
costs. Alleging that the Company breached the agreement by failing to
develop and maintain the Telemundo web site, Telemundo asserted a
damages claim in the arbitration for $655,000, plus reasonable
attorneys' fees and costs. The Company does not believe that it has
breached the agreement and intends to vigorously assert its rights
thereunder, particularly its right to use or transfer any unused
advertising credits. Arbitration proceedings were held in October
2001. While the Company believes it will be successful in the
arbitration proceeding, there can be no assurance that it will
succeed. Accordingly, the accompanying consolidated financial
statements do not include a provision for loss, if any, that might
result from the ultimate outcome of this matter.
On November 1, 2001 an action was filed against quepasa in the First
Judicial District Court of the State of Nevada by five quepasa
stockholders, Mark Kucher, Gregory Steers, Nick Tintor, Bruce Randle
and Michael Silberman. The filing seeks an order compelling quepasa to
hold an annual meeting of stockholders to elect directors, enjoining
quepasa from closing the merger with Great Western until its annual
meeting has taken place and prohibiting quepasa from selling, leasing,
exchanging or dissipating its assets until its annual meeting has
taken place. The action is based upon provisions of quepasa's bylaws
and Nevada corporate law that provide that under certain circumstances
stockholders may seek an order that a stockholder meeting be held. On
November 13, 2001, quepasa removed the action to the United States
District Court for the District of Nevada. As previously announced,
quepasa will hold an annual meeting of stockholders following
clearance by the Securities and Exchange Commission of the combined
proxy statement and registration statement filed by quepasa and Great
Western on October 16, 2001. At this meeting, directors will be
elected and the merger with Great Western will be voted on by the
stockholders. Also as previously announced, stockholder approval is
required before the Great Western merger can close.
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.
15
(9) LOSS PER SHARE
A summary of the reconciliation from basic loss per share to diluted
loss per share follows for the three and nine months ended
September 30, 2001 and 2000:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- ------------------------------
2001 2000 2001 2000
------------- ------------- ------------- ---------------
Loss before cumulative effect of a
change in accounting principle $ (702,264) $ (8,014,028) $ (2,852,660) $ (26,808,718)
============= ============= ============= ===============
Net loss $ (702,264) $ (8,014,028) $ (2,852,660) $ (26,873,301)
============= ============= ============= ===============
Weighted average number of shares
outstanding, basic and diluted 17,763,291 17,763,291 17,763,291 17,146,753
============= ============= ============= ===============
Loss per share before cumulative
effect of a change in accounting
principle, basic and diluted $ (.04) $ (.45) $ (.16) $ (1.56)
============= ============= ============= ===============
Basic and diluted net loss per share $ (.04) $ (.45) $ (.16) $ (1.57)
============= ============= ============= ===============
Stock options not included in diluted
EPS since antidilutive 2,142,500 3,105,475 2,142,500 3,105,475
============= ============= ============= ===============
Warrants not included in dilutive EPS
since antidilutive 400,000 2,081,818 400,000 2,081,818
============= ============= ============= ===============
(10) SUBSEQUENT EVENTS
On August 1, 2001, we and our landlord agreed to terminate the lease
for our corporate headquarters, which expires on November 30, 2002,
for a $130,000 lump sum payment. Our rent under the lease would have
been $416,000 for the period between August 1, 2001 and November 30,
2002. Our attempts to sublet the space were unsuccessful because of
the softening office rental market in Phoenix. We vacated the space on
October 31, 2001, relocating our corporate headquarters to a
significantly smaller site that we have rented on a month-to-month
basis, free of charge.
On October 3, 2001, Gary L. Trujillo agreed to terminate his
employment with the Company, effective October 15, 2001. Mr. Trujillo
remains Chairman and as a director of the Company. As part of his
termination agreement, Mr. Trujillo received a lump sum payment of
$700,000, which constitutes a substantially discounted payment due him
under his former employment agreement with the Company.
On October 11, 2001, the Company loaned Great Western $500,000. This
loan bears interest at the prime rate plus 1% and is secured by a
pledge of limited liability interests representing a 25% interest in
an apartment project in Glendale, Arizona.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q 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. Financial Statements, Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operation - Risk
Factors and Item 3. Quantitative and Qualitative Disclosures About Market Risk.
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 future business operations, our proposed merger transaction, our
potential liquidation 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.
The following discussion of our financial condition and results of
operations for the three and nine months ended September 30, 2001 and 2000
should be read in conjunction with our condensed consolidated financial
statements, the notes related thereto, and the other financial data included
elsewhere in this Form 10-Q.
OVERVIEW
We commenced operations on June 25, 1997. Prior to May 1998, our operations were
limited to organizing quepasa.com, raising operating capital, hiring initial
employees and drafting a business plan. From May 1998 through May 1999, we were
engaged primarily in content development and acquisition. In May 1999, we
launched our first media-based branding and advertising campaign in the U.S.
Significant revenues from our business activities did not commence until the
fourth quarter of 1999. In the first quarter of 2000, we significantly increased
our operating expenses as we expanded our sales, marketing and advertising
efforts.
In May 2000, the Company announced its engagement of Friedman, Billings, Ramsey
& Co., an investment banking firm, to assist in developing strategic
alternatives to maximize stockholder value. Under the terms of the agreement, in
exchange for a nonrefundable retainer and other fees and costs, Friedman
Billings agreed to, among other things, evaluate the Company and its operations
and projected results, conduct comparable company analyses, identify and
participate in discussions with potential investors or purchasers, conduct board
presentations and provide a fairness opinion, assist the Company with the
liquidation of certain assets and distribution thereof to the Company's
stockholders and provide other customary investment banking services. That
Agreement was amended on March 22, 2001 and again on September 5, 2001,
primarily, to modify the compensation terms. Accordingly, under the terms of the
current agreement, as amended, the Company paid Friedman Billings a total
nonrefundable retainer of $200,000 and is required to pay, in cash, a minimum
"Success Fee" of $150,000 which is to be calculated based on the type of
transaction consummated; provided, that, if the Success Fee, when calculated, is
greater than $350,000, the Company is required to pay Friedman Billings $350,000
payable in cash, plus an amount payable in warrants of the surviving
corporation/merger partner. In that event, the warrant amount shall be
determined by dividing the dollar amount of the Success Fee in excess of
$350,000 by the Company's closing stock price on the day the Purchase
Transaction (including the Great Western merger) is closed. Similarly, the
strike price of the warrants shall be equal to the closing price of the
Company's stock price on the closing date. The Company is also obligated to pay
for all of Friedman Billings' out-of-pocket expenses up to $150,000.
Following the announcement and during the remainder of 2000, we reduced our work
force by approximately 80% and significantly reduced the products and content we
provide, and our marketing, sales and general operating
17
expenses, in order to conserve cash. We continue to review the size of our work
force, the products and content we provide and our marketing, sales and general
operating costs with a view to conserve cash.
The Company has been unable to develop a revenue stream to support the carrying
value of its long-lived and intangible assets. Accordingly, on December 27,
2000, our Board of Directors approved the development of a plan of liquidation
and sale of our assets in the event that no strategic transaction involving the
Company can be achieved. As a result, we performed an impairment analysis of all
long-lived assets and all identifiable intangibles. Included in our $61.0
million net loss for 2000 is a $24.9 million non-cash asset impairment charge
that consists of the following: goodwill and domain and license agreements -
$16.2 million unamortized balance; prepaid marketing services - $7.6 million
unamortized balance; and property and equipment - $1.1 million representing the
excess carrying value over sale proceeds. We also recognized a $3.5 million loss
on the resale of our computer promotions inventory to Gateway in December 2000.
We anticipate that these developments will contribute to a decrease in both our
revenue and expenses in future periods as compared to 2000.
In addition, during the first quarter of 2001, the following events occurred:
- In January 2001, Alan Sokol resigned from our Board of Directors.
- Our common stock was delisted from the Nasdaq National Market in
January 2001. In March 2001, our common stock began trading on the
Over-The-Counter Bulletin Board.
- We received a cash payment from Gateway, Inc. in January 2001, in an
amount equal to $981,870 for the computers that we sold back to
Gateway in December 2000.
- On February 1, 2001, Jose Ronstadt resigned as an officer of the
Company.
- In order to conserve cash and limit the services and content we
provide, we (1) terminated most of our strategic relationships with
our third-party content and service providers, (2) suspended
operations of the eTrato.com and credito.com web sites, (3)
outsourced the hosting and administration of the quepasa.com web
site for approximately $2,000 per month, and (4) sold substantially
all of our furniture, computer and server equipment and office
equipment for $277,000 in cash.
- On March 15, 2001, we granted an aggregate of 400,000 stock options
to our remaining officers and directors. The options are exercisable
at $.15 per share (representing a 33% premium over the $.10 closing
price on March 15, 2001) and vest ratably over a 3-year period, or
immediately upon a change of control or liquidation. Of that number,
we granted 100,000 to each of Gary Trujillo and Robert Taylor, and
50,000 to each of our four non-employee directors.
- On March 22, 2001, we agreed to pay each of our four non-employee
directors a lump sum payment of $50,000 for prior and current
service, upon the occurrence of a Significant Event, defined as a
change of control or liquidation of the Company.
During the second quarter of 2001, the following events occurred:
- As of April 30, 2001, we had reduced our work force from 20
employees at December 31, 2000, to 3 employees, and one full-time
and several part-time contractors.
- In December 1999, realestateespanol.com and the National Association
of Hispanic Real Estate Professionals entered into an Internet
Endorsement Agreement, pursuant to which, in exchange for NAHREP's
endorsement of the realestateespanol.com website, realestateespanol
was required to pay NAHREP an annual $50,000 fee over a ten-year
term. Thereafter, in connection with the Internet Endorsement
Agreement, in October 2000, realestateespanol.com, NAHREP, the
National Council of La Raza and Freddie Mac entered into a
Memorandum of Understanding which, among other things, set forth the
business relationship through which the parties agreed to implement
a program to deliver the benefits of technology to mortgage
origination for low and moderate income Hispanic and Latino
18
borrowers. Contemporaneously, realestateespanol and NAHREP entered
into an agreement which set forth the terms and conditions of their
rights and obligations under the MOU.
Under the MOU, among other things, (1) realestateespanol was
required to (a) develop a web-based technology tool to be
distributed to NCLR and NCLR affiliates, and (b) donate 200
computers, at no charge, to NAHREP for distribution to NCLR and NCLR
affiliates for promotional purposes, (2) Freddie Mac was required to
provide an aggregate dollar amount of $250,000 as sponsorship fees
to NAHREP, and (3) NAHREP was required, in turn, to deliver the same
to realestateespanol towards the initial development of the
technology tool discussed above. In May 2001, all of the parties
agreed to either terminate certain of the agreements or release
realestateespanol from its duties and obligations thereunder. In
exchange for such termination or release, as the case may be,
realestateespanol (a) transferred ownership of, and exclusive rights
to, the in-process technology tool to NAHREP, (b) granted NAHREP a
non-exclusive license to operate and use the realestaeespanol.com
website, the content thereon and any related technology tools, (c)
granted NAHREP an exclusive license to operate and use any related
domain names, (d) permitted NAHREP to retain the full amount of the
unpaid sponsorship fee to be paid by Freddie Mac to NAHREP for
development of the technology tool, and (e) permitted NAHREP to
retain ownership of the previously donated computers in the first
quarter of 2001. The $100,000 sponsorship collected in 2000 was
amortized over a six month period through March 31, 2001.
- On June 21, 2001, Michael Weck resigned from our Board of Directors.
- On June 25, 2001, under the agreement between us and Telemundo, the
warrants previously issued to Telemundo to purchase 1,000,000 shares
of our common stock at $14.40 per share expired on their own terms.
None of the warrants were exercised.
During the third quarter of 2001, the following events occurred:
- On August 1, 2001, we and our landlord agreed to terminate the lease
for our corporate headquarters, which expires on November 30, 2002,
for a $130,000 lump sum payment. Our rent under the lease would have
been $416,000 for the period between August 1, 2001 and November 30,
2002. Our attempts to sublet the space were unsuccessful because of
the softening office rental market in Phoenix. We vacated the space
on October 31, 2001, relocating our corporate headquarters to a
significantly smaller site that we have rented on a month-to-month
basis, free of charge.
- In 1999, Jeffrey S. Peterson, our former chief executive officer and
director, 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 covered by the agreement in the same proportion as
those shares voted by our unaffiliated stockholders. Previously, Mr.
Hubert transferred all of his shares of our common stock. In August
2001, Mr. Peterson transferred all but 70,000 of his shares of our
common stock (or an aggregate of 1,261,083 shares). Accordingly,
there are currently 70,000 shares in the voting trust.
- On August 6, 2001, we entered into a merger agreement that would
result in the company becoming a wholly owned subsidiary of Great
Western Land and Recreation, Inc. Great Western is an Arizona-based,
privately held real estate development company with holdings in
Arizona, New Mexico and Texas. Great Western's business focuses
primarily on condominiums, apartments, residential lots and
recreational property development. In addition to holding completed
developments in metropolitan areas of Arizona, New Mexico and Texas,
Great Western also owns and is currently developing the Wagon Bow
Ranch in northwest Arizona and the Willow Springs Ranch in central
New Mexico. In the merger, each share of quepasa common stock will
be converted into one share of Great Western common stock.
Immediately following the merger, our current stockholders will own
approximately 49% of Great Western and Amortibanc Management, L.C.,
Great Western's current sole stockholder, will own approximately 51%
of Great Western. In addition, Amortibanc holds warrants to purchase
14,827,175
19
shares of Great Western common stock that, if exercised, would
increase its ownership to a maximum of 65% of the outstanding common
stock of Great Western on a fully diluted basis (including an
aggregate of 400,000 stock options with an exercise price of $0.15
per share held by our directors and President, but not including
quepasa options or warrants that are considerably out of the money).
Amortibanc's warrant is exercisable at any time, and from time to
time, for ten years following the merger closing. Under the terms of
the warrant, Great Western may purchase 4,942,392 shares of Great
Western common stock for $.30 per share, 4,942,392 shares for $.60
per share and 4,942,391 shares for $1.20 per share. Great Western
may purchase the stock by paying cash for such shares or by
surrendering the right to receive a number of shares having an
aggregate market value equal to the purchase price for such shares.
Following the merger, the combined company's common stock will be
publicly traded under the Great Western name. The merger will be
accounted for using the purchase method of accounting. The merger is
subject to certain closing conditions, including quepasa stockholder
approval. There can be no assurance that we will consummate the
merger transaction.
- On September 24, 2001, we filed our final responses to comments that
we received from the SEC in connection with our 1999 Form 10-K and
2000 Form 10-Q's. We simultaneously filed all remaining delinquent
documents required to be filed with the SEC. As of November 14,
2001, we are current on all of our required securities filings.
- In September 2001, because we were not current in making our 1934
Securities and Exchange Act filings with the Securities and Exchange
Commission pending resolution of the comments, our common stock was
de-listed from the OTC and now trades in the "pink sheets."
Subsequent to the third quarter of 2001, the following events occurred:
- On October 3, 2001, Gary L. Trujillo agreed to terminate his
employment with the Company, which termination was effective October
15, 2001. Mr. Trujillo remains Chairman and a director of the
Company. As part of his termination agreement, Mr. Trujillo received
a lump sum payment of $700,000, which constitutes a substantially
discounted payment due him under his former employment agreement
with the Company. Robert Taylor, the Company's Chief Financial
Officer, was appointed President. The Company amended Mr. Taylor's
employment agreement to provide a bonus payment in the amount of
$100,000, in lieu of any severance payment, to be payable on the
earlier of (a) an event constituting a change of control, (b) March
8, 2002 or (c) termination without cause by the Company. In
addition, effective March 8, 2002, Mr. Taylor's salary will be
reduced to $125,000.
- On October 11, 2001, in connection with an amendment to the merger
agreement, we loaned Great Western $500,000. The loan bears interest
at the prime rate plus 1% and is secured by a pledge of limited
liability company interests owned by an affiliate of Great Western
that represent a 25% interest in an apartment project in Glendale,
Arizona. Interest on the loan is payable quarterly; the first
quarterly interest payment was prepaid on October 11, 2001. The loan
matures on the earlier of April 11, 2002 or the date the merger
agreement is terminated. Great Western may use the proceeds of the
loan for working capital, investment in new properties, capital
expenditures, purchases of quepasa common stock in open-market or
privately negotiated transactions and payment of merger transaction
costs.
- On October 16, 2001, we concluded testimony in a hearing held in
connection with the Telemundo Network Group LLC arbitration. The
hearing closed on October 30, 2001. The arbitrator is required to
issue his decision and the corresponding award to the prevailing
party no later than November 30, 2001. As of November 14, 2001, the
arbitrator has not issued that decision or award. See Item 3 - Legal
Proceedings in our Annual Report on Form 10-K filed on September 20,
2001, for background information concerning our arbitration with
Telemundo Network Group LLC.
20
- On October 16, 2001, we filed a form PREM14A Preliminary Proxy
Statement with the SEC related to our proposed merger with Great
Western. The document is subject to SEC review and comment before we
are permitted to mail the Proxy to our stockholders. We anticipate
holding an annual meeting early in the first quarter of 2002 to,
among other things, allow stockholders to vote on the proposed
merger.
We have been unsuccessful in executing our business plan and developing a
revenue stream to support the carrying value of our long-lived and intangible
assets, have incurred substantial losses since inception and have an accumulated
deficit of $99.6 million as of September 30, 2001. 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.
THE QUEPASA.COM COMMUNITY
quepasa.com, inc. is a Bilingual (Spanish/English) Internet portal and online
community focused on the United States Hispanic market. We provide users with
information and content centered around the Spanish language. Because the
language preference of many U.S. Hispanics is English, we also offer our users
the ability to access information in the English language.
RESULTS OF OPERATIONS
INTRODUCTION.
NET REVENUE: We expect to derive future net revenue from one principal
source: the sale of advertising on our web site.
ADVERTISING REVENUE: For the nine month period ended September 30, 2001, we
derived approximately 58% of our net revenues from the sale of advertisements on
our web site which are received principally from advertising arrangements under
which we receive fixed fees for banners placed on our web site for specified
periods of time or for a specified number of delivered ad impressions. During
the first quarter of 2001, we discontinued the use of our banner ad software and
sought a third-party outsourcer for our banner ad sales and service. As of
November 14, 2001, we have been unsuccessful in retaining a third-party
outsourcer for our banner ad sales and service, and are not currently generating
new advertising sales.
SPONSORSHIP REVENUE. For the nine month period ended September 30, 2001, we
derived approximately 42% of our net revenue from the sale of sponsorships for
certain areas or exclusive sponsorship rights for certain areas within our web
site. These sponsorships typically cover periods up to 1 year. We recognize
revenue during the initial setup, if required under the unique terms of each
sponsorship agreement (e.g. co-branded web site), ratably over the life of the
related agreement. Payments received from sponsors before the advertisements are
displayed on our web site are recorded as deferred revenue. We have not received
any new sponsorship sales on our website during the nine month period ended
September 30, 2001, and do not anticipate new sponsorship sales for the
foreseeable future.
Our principal expenses are: Product and Content Development, Advertising and
Marketing and General and Administrative.
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER, 2000 AND THE NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE
NINE MONTHS ENDED SEPTEMBER 30, 2000
Our results of operations for the three and nine months ended September 30, 2001
and 2000 were characterized by expenses that significantly exceeded revenues
during such periods. We reported a net loss of $702,000 for the three months
ended September 30, 2001, compared to a net loss of $8.0 million for the three
months ended September 30, 2000 and reported a net loss of $2.9 million for the
nine months ended September 30, 2001, compared to a net loss of $26.9 million
for the nine months ended September 30, 2000. During the three and nine months
ended September 30, 2001, we focused on reducing our cash expenses in all
operation areas, including product and content, marketing and advertising,
personnel and general and administrative expenses.
21
During the periods from December 31, 2000 through September 30, 2001, in order
to conserve cash, we:
- reduced our employee count from 20 to 3 professionals, as compared to 72
professionals as of September 30, 2000;
- suspended the web site operations of eTrato.com, inc., an online auction
web site linking Hispanic buyers and sellers of goods and services, and
credito.com, inc., a Spanish language Internet web site providing
personal credit content and information. We acquired eTrato and credito
in January 2000;
- outsourced the hosting and administration of the quepasa.com web site for
approximately $2,000 per month; and
- terminated most of our strategic relationships with our third party
content and service providers.
NET REVENUES
Net revenue decreased 96% to $30,000 for the three months ended September 30,
2001 from $840,000 for the three months ended September 30, 2000. For the nine
months ended September 30, 2001, net revenues decreased 92% to $175,000 from
$2.2 million for the nine months ended September 30, 2000. The decrease in
revenue resulted from the Company's curtailment of operations and the reduction
of advertising on our website.
OPERATING EXPENSES
PRODUCT AND CONTENT DEVELOPMENT EXPENSES. Our product and content
development expenses decreased 99% to $17,000 for the three months ended
September 30, 2001, compared to $1.6 million for the three months ended
September 30, 2000. For the nine months ended September 30, 2001, our product
and content development expenses decreased 92% to $392,000 from $5.1 million for
the nine months ended September 30, 2000. For the three and nine months ended
September 30, 2001 and 2000, the period-to-period decrease was principally
attributable to:
- a decrease in personnel costs relating to the development of content and
technological support to (a) zero for the three months ended September
31, 2001, compared to $740,000 for the three months ended September 30,
2000 and (b) $85,000 for the nine months ended September 31, 2001,
compared to $2.3 million for the nine months ended September 30, 2000;
- a reduction in the products and content we provide;
- the suspension of the operation of the eTrato.com and credito.com web
sites;
- the outsourcing of the hosting and administration of the quepasa.com and
realestateespanol.com web sites; and
- termination of most of our strategic relationships with third-party
content and service providers.
ADVERTISING AND MARKETING EXPENSES. Our marketing, advertising and
sales expenses decreased 100% to zero for the three months ended September 30,
2001, compared to $4.2 million for the three months ended September 30, 2000.
For the nine months ended September 30, 2001, marketing, advertising and sales
expenses decreased 97% to $422,000 from $15.4 million for the nine months ended
September 30, 2000. For the three and nine months ended September 30, 2001 and
2000, the period-to-period decrease was principally attributable to:
- a decrease in marketing and sales personnel costs to (a) zero for the
three months ended September 30, 2001, compared to $585,000 for the three
months ended September 30, 2000 and (b) $100,000 for the nine months
ended September 30, 2001, compared to $1.9 million for the nine months
ended September 30, 2000;
- a decrease in advertising expenditures amounting to (a) zero for the
three months ended September 30, 2001 compared to $1.5 million expended
on the maintenance of brand awareness for the three months ended
22
September 30, 2000 and (b) $23,000 for the nine months ended September
30, 2001, compared to $6.1 million for the nine months ended September
30, 2000; and
- a decrease in the amortization of the NetZero, Telemundo and Gloria
Estefan contracts which approximated $1.5 million and $6.3 million for
the three and nine months ended September 30, 2000 and zero in 2001.
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative
expenses decreased 45% to $770,000 for the three months ended September 30,
2001, compared to $1.4 million for the three months ended September 30, 2000.
For the nine months ended September 30, 2001, our general and administrative
expenses decreased 50% to $2.4 million from $4.8 million for the nine months
ended September 30, 2000. For the three and nine months ended September 30,
2001, the period-to-period decrease was principally attributable to a reduction
in our work force. Our professional fees, consisting primarily of legal and
accounting fees and expenses, were $455,000, depreciation and rent was $76,000
and our office and related expenses were $85,000 for the three months ended
September 30, 2001, compared to $132,000, $473,000 and $352,000 for the three
months ended September 30, 2000. For the nine months ended September 30, 2001,
our professional fees were $1.2 million, depreciation and rent was $269,000 and
our office and related expenses were $250,000, compared to $857,000, $1.1
million, and $1.4 million for the nine months ended September 30, 2000. Stock
based compensation decreased to $2,500 for the three months ended September 30,
2001, compared to $21,000 for the three months ended September 30, 2000. For the
nine months ended September 30, 2001, stock based compensation decreased to
$31,000, compared to $62,000 for the nine months ended September 30, 2000. Stock
based compensation for the three and nine months ended September 30, 2001 is
comprised of expense recognized in accordance with APB Opinion No. 25, for
various employee stock options vesting over time. The expense recognized for the
three and nine months ended September 30, 2000 consisted primarily of the
immediate vesting of employee stock options.
AMORTIZATION OF GOODWILL. Amortization for the three and nine months
ended September 30, 2001 was zero, compared to $1.8 million and $4.6 million for
the three and nine month periods ended September 30, 2000, respectively. There
was no amortization of goodwill during the three and nine months ended September
30, 2001 as a result of the write-off of goodwill in the fourth quarter of 2000.
At December 31, 2000, we determined that the fair market value of certain
acquired assets was significantly below their respective carrying values. As a
result, we recorded asset impairment charges of $24.9 million in the fourth
quarter of 2000.
OTHER INCOME (EXPENSE). Other income (expense), which consists
primarily of interest expense, net of interest earned, decreased 71% to $55,000
for the three months ended September 30, 2001, compared to $189,000 for the
three months ended September 30, 2000. For the nine months ended September 30,
2001, other income (expense) decreased 77% to $212,000 from $903,000. Following
our initial public offering in 1999 and continuing through 2000, we invested
most of our assets in cash or cash equivalents, which were 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.
LIQUIDITY AND CAPITAL RESOURCES
We have substantial liquidity and capital resource requirements, but limited
sources of liquidity and capital resources. We have generated significant net
losses and negative cash flows from our inception and anticipate that we will
experience continued net losses and negative cash flows for the foreseeable
future. Our auditors issued their independent auditors' report dated May 8, 2001
(except as to the second paragraph of Note 10(a) and Note 16 to the consolidated
financial statements, which are as of August 6, 2001) on our consolidated
financial statements for 2000 stating that our recurring losses, accumulated
deficit and our inability to successfully execute our business plan, among other
things, raise substantial doubt about our ability to continue as a going
concern.
From our inception to date, we have relied principally upon equity investments
to support the development of our business. We have retained the
investment-banking firm of Friedman, Billings, Ramsey & Co., Inc. to explore
alternatives including strategic alliances, significant equity investments in us
or a merger or the sale of all or a significant portion of our business.
23
As of September 30, 2001 and November 14, 2001, we had $5.1 million and $3.5
million (after the loan to Great Western and the termination payment to Gary
Trujillo), respectively, in cash and cash equivalents and no short term
investments, compared to $2.3 million and $7.2 million, respectively, at
September 30, 2000. On June 24, 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. In March 2000, we raised $9.0
million by issuing 1,428,571 shares of our common stock to Gateway Companies,
Inc.
Net cash provided by operations for the nine months ended September 30, 2001,
consisted of a net loss of $2.9 million, $2.4 million net proceeds from the sale
of trading securities and the collection of $1.1 million of the other receivable
and other current assets. Net cash used in operations for the nine months ended
September 30, 2000 consisted of a net loss of $26.9 million, $14.9 million net
proceeds from the sale of trading securities, a decrease in accrued liabilities
of $827,000 and a decrease in accounts payable of $2.2 million offset by a
decrease in other assets of $6.8 million, and non-cash expenses for the
depreciation of fixed assets and amortization of $6.3 million and amortization
of prepaid marketing services and deferred advertising of $3.0 million. Net cash
provided by operations for the nine months ended September 30, 2001 primarily
resulted from the curtailment of the Company's operations.
Net cash provided by investing activities amounted to $277,000 for the nine
months ended September 30, 2001 and $100,000 for the nine months ended September
30, 2000. The $277,000 resulted from the sale of assets held for sale.
Net cash provided by financing activities was zero for the nine months ended
September 30, 2001 and $7.0 million for the nine months ended September 30,
2000. The Company was unable to raise any capital during the nine months ended
September 30, 2001.
As of December 31, 2000, we had commitments under non-cancelable operating
leases for office facilities requiring payments of $629,000 through the end of
the longest-term agreement scheduled to expire in November 2002. However, as a
result of a reduction in our work force and inability to execute our business
strategy, on August 1, 2001, we executed an agreement with our landlord pursuant
to which we made a $130,000 lump sum payment for any and all amounts due and
owing under the lease, including any and all future amounts to be paid
thereunder. Under the terms of that agreement, because we did not receive
earlier notice to vacate from our landlord, as of October 31, 2001, we vacated
the property and are currently subletting space, free of charge, from our
proposed merger partner, Great Western.
We expect to continue to incur costs, particularly general and administrative
costs during the fourth quarter of 2001, primarily consisting of legal and
accounting fees and expenses, 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 2002. We believe it will be necessary for us to raise
additional capital, conclude one or more strategic transactions or merge or sell
quepasa by year-end 2001. In the event we are not able to raise capital,
conclude one or more strategic transactions or merge or sell quepasa during that
period, our ability to continue operations will be severely impacted and could
have a significant adverse effect on us. There can be no assurance that we will
be successful in raising the necessary funds, concluding one or more strategic
transactions, merging or selling quepasa or that the terms of any such
transaction will be beneficial to us.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies
criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately. Statement 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142
and that intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for
26
impairment in accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
We are required to adopt the provisions of Statement 141 immediately, except
with regard to business combinations initiated prior to July 1, 2001, which we
expect to account for using the pooling-of-interests method, and Statement 142
effective January 1, 2002. Furthermore, any goodwill and any intangible asset
determined to have an indefinite useful life that is required in a purchase
business combination completed after June 30, 2001 will not be amortized but
will continue to be evaluated for impairment in accordance wit the appropriate
pre-Statement 142 accounting literature. Goodwill and intangible assets acquired
in business combinations completed before July 1, 2001 will continue to be
amortized prior to the adoption of Statement 142. Management does not believe
that adoption of Statements 141 and 142 will have a material impact on our
consolidated financial statements.
On October 3, 2001, the FASB issued Statement No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While Statement No. 144 supersedes statement No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, it
retains many of the fundamental provisions of that Statement.
Statement No. 144 also supersedes the accounting and reporting provisions of APB
Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF
DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY
OCCURRING EVENTS AND TRANSACTIONS, for the disposal of a segment of a business.
However, it retains the requirement in Opinion No. 30 to report separately
discontinued operations and extends that reporting to a component of an entity
that either has been disposed of (by sale, abandonment, or in a distribution to
owners) or is classified as held for sale. By broadening the presentation of
discontinued operations to include more disposal transactions, the FASB has
enhanced management's ability to provide information that helps financial
statement users to assess the effects of a disposal transaction on the ongoing
operation of an entity. Statement No. 144 is effective for fiscal years
beginning after December 15, 2001. At the current time, management does not
believe that the adoption of this statement on January 1, 2002 will have a
material impact on the Company's financial position.
RISK FACTORS
You should carefully consider the risks described below.
WE HAVE INCURRED SUBSTANTIAL OPERATING LOSSES AND OUR AUDITORS HAVE ISSUED A
"GOING CONCERN" AUDIT OPINION.
Our consolidated financial statements as of December 31, 2000 have been prepared
on the assumption that we will continue as a going concern. Our auditors issued
their independent auditors' report dated May 8, 2001 (except as to the second
paragraph of Note 10(a) and Note 16 to the consolidated financial statements,
which are dated as of August 6, 2001) stating that the Company has suffered
recurring losses from operations, has an accumulated deficit, has not been able
to successfully execute its business plan, and is considering liquidating the
Company, all of which raise substantial doubt about our ability to continue as a
going concern.
THERE CAN BE NO ASSURANCES THAT THE PROPOSED MERGER WILL BE CONSUMMATED, AND
FAILURE TO COMPLETE THE MERGER COULD HAVE SUBSTANTIAL CONSEQUENCES TO THE
COMPANY.
On August 6, 2001, we executed a merger agreement with Great Western Land and
Recreation, Inc., an unrelated entity which operates as a privately-held real
estate development company. This merger can only be completed, though, if we and
our potential merger partner meet all the closing conditions set forth in the
definitive merger documents, including, but not limited to, approval by our
stockholders, as well as completion of required filings with the Securities and
Exchange Commission. There can be no assurances that we or Great Western will be
able to meet all of the closing conditions set forth in such definitive merger
documents. Regardless of whether an actual merger is consummated, we have
incurred and will continue to incur significant expenses negotiating and
executing the definitive merger documents and attempting to comply with all the
closing conditions. In light of our limited cash reserves and negative operating
cash flow, if the merger fails to be completed we may have no option other than
to liquidate.
25
WE HAVE FAILED TO EXECUTE OUR BUSINESS PLAN, ARE NOT CURRENTLY GENERATING NEW
REVENUE AND EXPECT FUTURE LOSSES.
We have never been profitable and have failed to execute our business plan. We
have incurred losses and experienced negative operating cash flow for each month
since our formation. As of September 30, 2001, we had an accumulated deficit of
approximately $99.6 million. Our operating history and the general downturn of
the Internet market in which we operate our business makes predictions of our
future results of operations difficult or impossible. In addition, because we
elected to substantially reduce our operations and terminate most of our
employees we are not currently generating any new revenue, nor do we have
employees, equipment, or any plan in place which would allow us to begin
generating any new revenue in the foreseeable future. The limited revenue we do
have will not cover our expenses in the foreseeable future and we do not believe
we will be able to raise additional capital or debt financing. As a result, we
will continue to incur significant losses and eventually may be required to
liquidate if our proposed merger is not consummated.
WE HAVE SUBSTANTIALLY REDUCED OUR OPERATIONS AND TERMINATED MOST OF OUR
EMPLOYEES.
During the period from December 31, 2000 through September 30, 2001, we
substantially reduced the extent and scope of our operations. In order to
conserve cash and limit the services and content we provide, we terminated most
of our strategic relationships with our third-party content and service
providers, suspended operations of the eTrato.com and credito.com websites,
outsourced the hosting and administration of the quepasa.com website and sold
substantially all of our furniture, computer and server equipment and office
equipment. We discontinued the use of our banner advertising software and sought
a third-party outsourcer for our banner advertising sales and service, but have
been unsuccessful in retaining such a third-party outsourcer. There are no
current negotiations taking place with any potential outsourcers at this time
and the prospects of obtaining future revenue from this kind of arrangement in
the near future is doubtful. In addition, we have reduced our employee count to
2 professionals, as compared to 104 professionals as of March 31, 2000. As a
result of this reduction we are currently receiving no new revenue from our
website operations.
COMPETITION FOR INTERNET USERS MAY LIMIT TRAFFIC ON, AND THE VALUE OF, OUR
WEBSITE.
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 for the limited number of
customers in our market. There are many companies that provide websites and
online destinations targeted to Spanish-language Internet users. Competition for
visitors and advertisers 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
Lycos, El Sitio, Yahoo! Espanol, America Online Latin America, MSN and Univision
online. 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 website.
WE WILL BE ADVERSELY AFFECTED IF THE INTERNET DOES NOT BECOME WIDELY ACCEPTED
AS A MEDIUM FOR ADVERTISING.
For our website to have value, it must be able to generate revenue from the sale
of advertising. 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.
Software programs are available that limit or remove advertisements from an
Internet user's
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desktop. This software, if generally adopted by users, may materially and
adversely affect web-based advertising and the value of our website.
SYSTEM FAILURE COULD DISRUPT OUR WEBSITE OPERATIONS.
We may, from time to time, experience interruptions in the transmission of our
website due to several factors including hardware and operating system failures.
Because our website's value depends 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 to be unreliable, traffic on our website 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.
OUR WEBSITE MAY BE LIMITED BY GOVERNMENTAL REGULATION.
Government regulations have not materially restricted use of the Internet in our
markets to date. However, the legal and regulatory environment related 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 U.S. or other places, could increase significantly the costs of
communicating over the Internet, which could in turn decrease the value of our
website. 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. 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, results of operations and liquidity.
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.
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.
Our common stock is no longer traded on the Nasdaq National Market but is traded
on Pink Sheets. This may make it more difficult to buy or sell our common stock.
In addition, our stockholders could find it difficult or impossible to sell
their stock or to determine the value of their stock.
EMPLOYEES
As of November 14, 2001, we had 2 employees and one part-time contractor. We
continue to review the size of our work force in light of our evolving business
plan.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not have any derivative financial instruments as of September 30, 2001. 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
September 30, 2001, a 10 basis point change in interest rates would have a
potential impact on our interest earnings of less than $2,000 for the three
months ended September 30, 2001, which is clearly immaterial to our consolidated
financial statements.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
TELEMUNDO ARBITRATION - See Item 3 - Legal Proceedings in our Annual Report on
Form 10-K filed on September 20, 2001, for background information concerning our
arbitration with Telemundo Network Group LLC. On October 16, 2001, we concluded
testimony in an arbitration hearing with Telemundo Network Group LLC. The
hearing officially closed on October 30, 2001. The arbitrator is required to
issue his decision and any corresponding award to the prevailing party no later
than November 30, 2001. As of November 14, 2001, the arbitrator has not issued
his decision or any award.
STOCKHOLDER MEETING LITIGATION -- On November 1, 2001 an action was filed
against quepasa in the First Judicial District Court of the State of Nevada by
five quepasa stockholders, Mark Kucher, Gregory Steers, Nick Tintor, Bruce
Randle and Michael Silberman. The filing seeks an order compelling quepasa to
hold an annual meeting of stockholders to elect directors, enjoining quepasa
from closing the merger with Great Western until its annual meeting has taken
place and prohibiting quepasa from selling, leasing, exchanging or dissipating
its assets until its annual meeting has taken place. The action is based upon
provisions of quepasa's bylaws and Nevada corporate law that provide that under
certain circumstances stockholders may seek an order that a stockholder meeting
be held. On November 13, 2001, quepasa removed the action to the United States
District Court for the District of Nevada. As previously announced, quepasa will
hold an annual meeting of stockholders following clearance by the Securities and
Exchange Commission of the combined proxy statement and registration statement
filed by quepasa and Great Western on October 16, 2001. At this meeting,
directors will be elected and the merger with Great Western will be voted on by
the stockholders. Also as previously announced, stockholder approval is required
before the Great Western merger can close.
From time to time, we are involved in various other 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- ------------------------
10.01 Termination Agreements for Arizona Center Lease, dated
August 1, 2001 and October 1, 2001
10.02 Financial Advisor Agreement between quepasa.com,, inc.
and Friedman, Billings, Ramsey & Co., Inc., dated
December 28, 1999, and amendments
thereto dated March 22, 2001 and
September 5, 2001
10.03 Great Western - Promissory Note
10.04 Great Western - Guaranty
10.05 Great Western - Pledge Agreement
b. REPORTS ON FORM 8-K.
On August 15, 2001, the Company filed a Current Report on Form 8-K announcing
that (1) it had executed a definitive merger agreement with Great Western Land
and Recreation, Inc. and (2) it had resolved all issues with the Securities and
Exchange Commission relating to its 1999 Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q for the first three quarters of 2000 and a Current Report
on Form 8-K, previously filed with the Commission on April 14, 2000.
On August 16, 2001, the Company filed a Current Report on Form 8-K attaching the
press released dated August 15, 2001 announcing that the Company had resolved
all issues with the Commission relating to its 1999 Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q for the first three quarters of 2000 and a
Current Report on Form 8-K, previously filed with the Commission on April 14,
2000.
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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 November 14, 2001.
quepasa.com, inc.
By: /s/ Robert J. Taylor
-------------------------------------
Name: Robert J. Taylor
Title: President, Chief Financial Officer
(PRINCIPAL FINANCIAL OFFICER)
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