Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Annual Report -- [x] Reg. S-K Item 405 71 411K
2: EX-10.13 Material Contract 6 34K
3: EX-10.14 Material Contract 4 16K
4: EX-10.15 Material Contract 5 21K
5: EX-21.01 Subsidiaries of the Registrant 1 4K
6: EX-23.01 Consent of Experts or Counsel 1 7K
7: EX-23.02 Consent of Experts or Counsel 1 6K
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
ONE ARIZONA CENTER, 400 E. VAN BUREN 85004
4TH FLOOR, PHOENIX, AZ (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 602-716-0100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
NONE. NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes No /X/
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 219.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $2,459,784, based upon the price of the last trade
of the common stock as indicated by an over-the-counter bulletin board, which
reflects the average bid and asked prices, on August 15, 2001 of $.139 per
share.
The number of outstanding shares of the registrant's common stock as of
August 15, 2001 was approximately 17,763,291 shares.
===============================================================================
CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K and the information incorporated by
reference may include "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. In
particular, we direct your attention to Item 1. Business, Item 2. Properties,
Item 3. Legal Proceedings, Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation, Item 7A. Quantitative and
Qualitative Disclosures About Market Risk, and Item 8. Financial Statements
and Supplementary Data. We intend the forward-looking statements to be
covered by the safe harbor provisions for forward-looking statements in these
sections. All statements regarding our expected financial position and
operating results, our business strategy, our 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.
PART I
ITEM 1. BUSINESS
INTRODUCTION
quepasa.com, inc. (the "Company"), a Nevada corporation, 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.
In May 2000, our Board of Directors announced the engagement of Friedman,
Billings, Ramsey & Co., an investment banking firm, to assist us in
developing strategic alternatives to maximize shareholder value. 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 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.
On December 27, 2000, we announced that our Board had approved the
development of a plan of liquidation and sale of our assets in the event that
no strategic transaction could be achieved. Since that time, we actively
pursued the sale of our assets and responded to numerous inquiries from
interested parties. On August 6, 2001, we executed a merger agreement with an
unrelated, privately-held real estate development company. Following
consummation of the merger, our shareholders will own 49% of the combined
companies and the surviving company's sole shareholder will own 51%. In
addition, upon the effective date of the merger, the surviving company's sole
stockholder will receive warrants to purchase additional shares of the
surviving company's shares that, if exercised, would increase its ownership
to a maximum of 65%. The combined company's common stock will be publicly
traded following the merger under the name of the surviving company. There
can be no assurances that we will consummate the proposed transaction.
Please refer to ITEM 1 -- DEVELOPMENTS SINCE DECEMBER 31, 2000 below for
a discussion of other developments since December 31, 2000 and ITEM 7
-MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS for a discussion of our independent auditor's report
modification for substantial doubt about our ability to continue as a going
concern.
1
OUR MARKET IN THE U.S.
We believe that the Spanish-language Internet market in the U.S. is
characterized by a growing Hispanic population, increasing Hispanic purchasing
power, greater advertising spending on Spanish-language media, continuing use of
the Spanish language by U.S. Hispanics and increasing computer ownership and
Internet usage by Hispanic households.
HISPANIC POPULATION GROWTH AND CONCENTRATION
A large number of our users are Hispanics, one of the most rapidly
growing segments of the U.S. population. According to the U.S. Census Bureau
and published sources, the Hispanic population:
- Was estimated to be 35.3 million or 12.5% of the total U.S. population in
2000, an increase of approximately 57% from 22.5 million or 9% of the
total U.S. population in 1990;
- Is expected to account for 43% of the total U.S. population growth
between 1998 and 2010 and is expected to grow to 41.1 million or 14% of
the total U.S. population by 2010; and
- Is relatively young, with almost 70% of U.S. Hispanics under 35, compared
to less than 50% of non-Hispanics, and with a median age of 26, compared
to 35 for the rest of the population.
We believe the relative youth of the Hispanic population will furnish growth
opportunities for products and services that appeal to a younger market, such as
that found on the Internet. In addition, 70% of all U.S. Hispanics live in 12
metropolitan areas, which makes U.S. Hispanics an attractive demographic group
for advertisers, enabling them to cost effectively deliver messages to a highly
targeted audience.
INCREASING HISPANIC PURCHASING POWER
Total U.S. Hispanic purchasing power:
- Rose at a compound annual growth rate of 7.5%, compared with 4.9% for the
rest of the population from 1993 to 1998.
- Was projected to be $443.0 billion or 7% of U.S. consumer expenditures by
2000, and $938.0 billion or 9% of U.S. consumer expenditures by 2010.
CONTINUING USE OF THE SPANISH-LANGUAGE BY U.S. HISPANICS
According to published sources, approximately 90% of U.S. Hispanic adults
speak Spanish at home. Moreover, U.S. Hispanics are expected to continue to
speak Spanish because:
- Approximately two-thirds of U.S. Hispanic adults were born outside the
U.S.;
- Hispanic immigration into the U.S. is continuing;
- Hispanics generally seek to preserve their cultural identity; and
- Population concentration encourages communication in Spanish.
THE QUEPASA.COM COMMUNITY
STRATEGY
Our strategy is to establish quepasa.com as a bilingual (Spanish/English)
online community, offering our content to Hispanic Internet users primarily in
the U.S.
2
WEBSITE CONTENT.
In November 1998, we launched the quepasa.com website which allows
individuals to quickly access content and features which appeal to Hispanic
Internet users. Although our content is directed toward Spanish-speaking users,
to better serve the U.S. Hispanic population, quepasa.com is also offered in
English.
In the second half of 2000, we reduced the products and content we offered
in order to conserve our cash.
MARKETING OF THE QUEPASA.COM SITE
During the first three quarters of 2000, we attempted to increase our
website traffic by increasing the number and visibility of entry points to
the quepasa.com website, co-branding and other marketing arrangements with
content providers and high-traffic Spanish-language websites. We also
attempted to increase page views, by adding content and other features to our
site to encourage retention of visitors on the site. In the fourth quarter of
2000, in order to conserve cash, we ceased marketing our website and began
terminating most of our co-branding and marketing arrangements with content
providers and significantly reduced the services and content we provide.
ADVERTISING ON THE QUEPASA.COM SITE
Advertisements on our website are the banner or billboard style, which
are designed to display additional advertisements as the consumer selects
various topics on the website. From each advertisement banner, users can
proceed directly to an advertiser's own website, thus enabling the advertiser
to directly interact with a user who has expressed interest in the
advertisement. 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 August 31, 2001, we have been unsuccessful in
retaining a third-party outsourcer for our banner ad sales and service.
OUR ON-LINE AUCTION AND CREDIT COMMUNITIES
In January 2000, we acquired eTrato.com, inc., an online auction site
linking Hispanic buyers and sellers of goods and services, and credito.com,
inc., a Spanish language Internet company providing personal credit content
and information. In the first quarter of 2001, in order to conserve cash, we
suspended operation of the eTrato.com and credito.com websites.
OUR ON-LINE REAL ESTATE SERVICES COMMUNITY
In March 2000, we acquired realestateespanol.com, a real estate services
site providing the Hispanic-American community with home buying services in
both English and Spanish. quepasa.com members via realestateespanol.com are
able to search for a real estate agent, apply for a mortgage, and view homes
for sale among the more than 800,000 online listings provided through a
partnership with homeseekers.com. At the time of the acquisition,
realestateespanol was already a party to an Internet Endorsement Agreement
with the National Association of Hispanic Real Estate Professionals, 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, 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
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
3
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.
The carrying value of the website, approximately $27,000, was expensed in the
second quarter of 2001. The $100,000 of sponsorship fees collected in 2000
was amortized over six months commencing October 1, 2000 with $50,000 of
deferred revenue remaining as of December 31, 2000. The 200 computers
remaining in inventory on December 31, 2000 were donated to NAHREP in 2001
and expensed in the first quarter of 2001.
See ITEM 1 -- DEVELOPMENTS SINCE DECEMBER 31, 2000.
COMPETITORS AND COMPETITIVE FACTORS AFFECTING OUR BUSINESS
The market for Internet products, services, advertising and commerce is
intensely competitive, and we expect that competition will continue to
intensify. We believe that the principal competitive factors in these markets
are name recognition, distribution arrangements, functionality, performance,
ease of use, the number of value-added services and features, and quality of
support. Our primary competitors are other companies providing portal and
online community services, especially to the Spanish-language Internet users,
such as Yahoo!Espanol, America Online Latin America, Univision Online,
StarMedia, Terra Lycos, MSN and El Sitio.
In addition, a number of companies offering Internet products and
services, including our direct competitors, recently began integrating
multiple features within the products and services they offer to users.
Integration of Internet products and services is occurring through
development of competing products and through acquisitions of, or entering
into joint ventures and/or licensing arrangements involving other, Internet
companies and our competitors. For example, the web browsers offered by
Netscape and Microsoft, which are the two most widely-used browsers and
substantial sources of traffic for us, may incorporate and promote
information, search and retrieval capabilities in future releases or upgrades
that could make it more difficult for Internet viewers to find and use our
products and services.
Many large media companies have announced that they are contemplating
developing Internet navigation services and are attempting to become
"gateway" sites for web users. In the event these companies develop such
portal or community sites, we could lose a substantial portion of our user
traffic. Further, entities that sponsor or maintain high-traffic websites or
that provide an initial point of entry for Internet viewers, such as the
Regional Bell Operating Companies or Internet service providers, such as
Microsoft and America Online, currently offer and can be expected to consider
further development, acquisition or licensing of Internet search and
navigation functions. These functions may be competitive with those that we
offer. Our competitors could also take actions that could make it more
difficult for viewers to find and use our products and services.
Consolidations, integration and strategic relationships involving competitors
could have a material adverse effect on our business.
In addition to the larger portals and online communities, we compete with
a number of smaller portals and communities that provide region-specific
information to users or market to users with specific interests.
Most of our existing competitors, as well as new competitors such as
Spanish-language media companies, other portals, communities and Internet
industry consolidators, have significantly greater financial, technical and
marketing resources than we do. Many of our competitors offer Internet
products and services that are superior to ours and achieve greater market
acceptance. There can be no assurance that we will be able to compete
successfully against current or future competitors or that competition will
not have a material adverse effect on our business.
EMPLOYEES
On December 31, 1999, we had 80 employees and on December 31, 2000, we
had 20 employees. Our average number of employees during 2000 was 64. See
ITEM 1 --DEVELOPMENTS SINCE DECEMBER 31, 2000 below.
4
DEVELOPMENTS SINCE DECEMBER 31, 2000
STRATEGIC TRANSACTION
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. The merger agreement represents a stock for stock offering, pursuant
to which each share of quepasa common stock will be converted into one share
of Great Western common stock.
Immediately following the merger our 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 one or more 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 (except for an aggregate of 400,000
unvested stock options with an exercise price of $0.15 per share held by our
directors, Chief Executive Officer and Chief Operating Officer). The 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 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 is subject to
certain closing conditions and stockholder approval. There can be no
assurance that we will consummate the merger transaction.
TERMINATION OF STRATEGIC RELATIONSHIPS
In the first quarter of 2001, 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.
SUSPENSION OF THE ETRATO.COM AND CREDITO.COM WEBSITE OPERATIONS
In the first quarter of 2001, in order to conserve cash, we suspended
operation of the eTrato.com and credito.com websites.
NATIONAL ASSOCIATION OF HISPANIC REAL ESTATE PROFESSIONAL AGREEMENTS
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 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
5
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.
REDUCTION IN WORK FORCE
As of April 30, 2001, in order to conserve cash, we reduced our work
force from 20 employees at December 31, 2000 to 3 employees. We also have one
full-time and several part-time contractors. We continue to review the size
of our work force in light of our evolving business plan.
OUTSOURCING OF OUR QUEPASA.COM WEBSITE
In the first quarter of 2001, as a result of our reduction in work force
and in order to conserve cash, we sold all of our internal computer and
server equipment and outsourced the hosting and administration of the
quepasa.com website for approximately $2,000 per month.
SALE OF FURNITURE AND EQUIPMENT
In March 2001, in order to conserve cash and as a result of our reduction
in work force, we sold substantially all of our furniture, computer equipment
and office equipment for $282,000 cash.
SALE OF COMPUTERS
In December 2000, we sold for $981,870 to Gateway, Inc. a substantial
portion of the computers we purchased from Gateway one year earlier. We
received a cash payment from Gateway in January 2001.
NASDAQ DELISTING
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 (OTCBB).
STOCK OPTION ISSUANCES
In March, 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 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 non-employee directors.
SEVERANCE ARRANGEMENTS
During 2000, we reduced our workforce as part of management's effort to
enhance our competitive position, utilize our assets more efficiently, and
conserve remaining cash. As a result, we recognized $683,000 in employee
severance and termination costs relating to the reduction in workforce of
approximately 69 employees. In the event of a change of control or
liquidation, the Company may be required to pay up to a maximum of $1.2
million in severance payments under the Company's existing employment
agreements with its remaining officers and other agreements with its
non-employee directors as follows:
Pursuant to the pending merger agreement with Great Western Land and
Recreation, Inc., Gary L. Trujillo and Robert J. Taylor will be terminated at
the closing thereof, triggering certain severance obligations of the Company.
Under Taylor's employment agreement, Taylor's employment terminates on its
own terms on March 8, 2002, but the Company may terminate his employment for
any reason, with or without cause. If the Company terminates Taylor's
employment without cause before
6
the end of Taylor's employment term, the Company is required to pay Taylor a
severance payment in the amount of $100,000, which payment is due and payable
immediately upon termination. In addition, all of Taylor's 193,334 unvested
options will become fully vested and exercisable upon the closing of the
merger. Trujillo's employment terminates on its own terms on April 26, 2004,
and the Company may not terminate his employment without cause. Trujillo has
agreed to terminate his employment with the Company at the merger closing in
exchange for a discounted lump sum payment of the compensation due him over
the remaining term of his agreement. Trujillo will receive up to
approximately $850,000 in connection with the termination of his employment
agreement, which amount will be reduced by any monthly salary payments made
to Trujillo. In addition, all of Trujillo's 286,111 unvested options will
become fully vested and exercisable upon the closing of the merger.
A change of control in the Company will also trigger a cash payment due
to the Company's 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
ITEM 2. PROPERTIES
During 2000, we leased approximately 13,277 square feet of space for our
executive offices in Phoenix, Arizona for $25,400 per month, increasing to
$26,000 in July 2001, pursuant to a lease which expires in November 2002. As
a result of our reduction in work force and changes in 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. We are required to vacate the property on the earlier to occur of
October 31, 2001 or upon 30-days prior written notice from our landlord. As
of August 31, 2001, we have not received a written notice to vacate.
ITEM 3. LEGAL PROCEEDINGS
TELEMUNDO ARBITRATION
On April 27, 1999, we entered into an agreement with Telemundo Network
Group LLC (Telemundo). In January 2001, Telemundo asserted that the agreement
was terminated alleging that we had failed to develop and maintain the
Telemundo website. In February 2001, we initiated arbitration against
Telemundo to defend the enforceability of the agreement, and submitted a
damages claim for $4.3 million, plus reasonable attorneys' fees and costs.
Telemundo also asserted a damages claim for $655,000, plus reasonable
attorneys' fees and costs. We do not believe that we have breached the
agreement and intend to vigorously assert our rights thereunder, particularly
our right to use or transfer any unused advertising credits. A hearing date
for the arbitration has been set for October 1, 2001. While we believe we
will be successful in the arbitration proceeding, there can be no assurance
that we will succeed.
We are from time to time involved in various other legal proceedings
incidental to the conduct of our business. We believe that the outcome of all
other pending legal proceedings will not in the aggregate have a material
adverse effect on our business, financial condition, results of operations or
liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock was traded on the Nasdaq National Market under the
symbol "PASA" through December 26, 2000. On December 27, 2000, following the
announcement that our Board approved the development of a plan of liquidation
and sale of our assets, the Nasdaq Stock Market halted trading on our common
stock. On January 25, 2001, we announced that our common stock had been
delisted from the Nasdaq National Market. Our common stock did not trade on
the Nasdaq
7
National Market between December 27, 2000 and January 25, 2001. In March
2001, our common stock began trading on the OTCBB.
The following table sets forth the high and low closing prices of our
common stock as reported on the Nasdaq National Market from June 24, 1999
(effective date of Initial Public Offering) through December 26, 2000.
[Download Table]
STOCK PRICE
---------------
HIGH LOW
---- ----
1999
Second Quarter (effective June 24, 1999)..... $14.625 $13.750
Third Quarter................................ $25.875 $ 7.750
Fourth Quarter............................... $15.000 $ 6.250
2000
First Quarter................................ $12.500 $ 5.375
Second Quarter............................... $ 6.625 $ 1.563
Third Quarter................................ $ 1.688 $ 0.840
Fourth Quarter (through December 26, 2000)... $ 0.938 $ 0.094
The following table sets forth the high and low closing prices of our
common stock as reported on (1) the over-the-counter market (frequently
referred to as "pink sheets") for the interim period of December 27, 2000
through March 13, 2001 and (2) the OTCBB from March 13, 2001 through August 15,
2001.
[Download Table]
STOCK PRICE
--------------
HIGH LOW
---- ----
2001
First Quarter ............................ $0.170 $0.070
Second Quarter............................ $0.160 $0.110
Third Quarter (through August 15, 2001)... $0.140 $0.105
DIVIDEND POLICY
We have never declared or paid any dividends on our common stock. We do
not anticipate paying any cash dividends in the foreseeable future.
SALE OF UNREGISTERED SECURITIES
Since December 31, 1997, we issued unregistered securities as set forth
below:
1. In May 1998, we issued 1,420,000 shares of common stock to Michael
Silberman. 296,492 of those shares of common stock were issued to Mr.
Silberman in error, and at the Company's request, he transferred those
shares to an outside director. The consideration received for such
shares was $1,420.
2. In November 1998, we issued 50,000 shares of common stock to Enver Zaky
upon conversion of $50,000 of convertible debt issued in May 1998.
3. In November 1998, we issued 666,666 shares of common stock to Mitchell
Pierce and Tim Pring upon conversion of $1,000,000 of convertible debt
issued in July 1998.
4. In November and December 1998, an aggregate of 1,259,167 shares of
common stock was issued in a private placement. The consideration
received for such shares was $4,721,876.
5. In April 1999, we issued 50,000 shares of common stock to Gary Trujillo
as compensation under his employment agreement.
8
6. In April 1999, we issued 25,000 shares of common stock to Southwest
Harvard Group, an entity owned by Mr. Trujillo, for consulting services
provided to us.
7. In April 1999, we issued 600,000 shares of common stock and a warrant
to purchase 1,000,000 shares of common stock, exercisable in 2 years,
with an exercise price of 120% of the public offering price, to
Telemundo for $5 million of advertising credit on the Telemundo
television network. 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 transaction was measured and based
on the fair value of the common stock issued at our IPO price of $12.00
per share plus $2,920,192 assigned to the warrant based on the
Black-Scholes pricing model using a 50% volatility rate. As of June 25,
2001, the warrant issued to Telemundo was not exercised, and therefore,
expired.
8. In April 1999, we issued 50,000 shares of common stock to Garcia/LKS
for advertising services valued at $634,000.
9. On June 24, 1999, we completed an initial public offering of 4,000,000
shares of common stock at a price of $12.00 per share, resulting in net
proceeds to us of $42.4 million. In July 1999, we sold an additional
600,000 shares of common stock at $12.00 per share from the exercise of
an option granted to our underwriter to cover overallotments from our
offering, resulting in additional net proceeds of $6.3 million. The
aggregate gross proceeds from these issuances were $55.2 million and
the cash expenses incurred were $4.95 million for underwriting
discounts and commissions and $1.55 million for other expenses
including legal, accounting and printing costs. We used the net
proceeds of the offering: (1) to repay a working capital loan and a
bridge loan, (2) for marketing and advertising expenses, (3) for
general and administrative expenses, (4) for development and
acquisition of additional content and features for the our website and
(5) to purchase equipment. The balance of the net proceeds was invested
in short-term, investment grade, interest-bearing securities.
10. In September 1999, we issued 156,863 shares of redeemable common stock
to Estefan Enterprises, Inc. in connection with a spokesperson
agreement. Because Ms. Estefan's tour was postponed, the spokesperson
agreement was renegotiated. Under the revised spokesperson agreement,
the 156,863 shares of common stock were returned to quepasa.
11. In January 2000, we issued 681,818 shares of common stock valued at
approximately $9.6 million to the stockholders of eTrato.com to acquire
eTrato.com. Contingent consideration consisted of 681,818 shares of
common stock which were held in escrow, deliverable upon eTrato's
achievement of certain performance targets. In March 2001, because
eTrato failed to achieve such targets, the escrowed shares were
returned to us and canceled.
12. In January 2000, we issued 681,818 shares of common stock valued at
approximately $8.4 million in the aggregate, to acquire credito.com,
Inc. Contingent consideration consisted of a warrant to purchase
681,818 shares of common stock, exercisable upon the achievement of
certain performance targets. In March 2001, because credito.com failed
to achieve certain performance targets, its right to exercise the
warrant was terminated.
13. In March 2000, we issued 335,925 shares of common stock valued at
approximately $3 million to acquire realestateespanol.com, Inc.
Contingent consideration consisted of 248,834 shares of common stock
which were held in escrow, deliverable upon realestateespanol's
achievement of certain performance targets by the one-year anniversary
date of the acquisition. In April 2001, because realestateespanol
failed to achieve such targets, the escrowed shares were returned to us
and canceled.
14. In March 2000, we granted Gateway an option to acquire up to 483,495
additional shares of our common stock at $7 per share. The option was
only exercisable, in whole, on or before May 30, 2000. Gateway did not
exercise the option.
15. From December 31, 1997 through December 31, 2000, we granted options to
purchase 4,432,313 shares of common stock under our stock option plan
with a weighted average exercise price of $8.66 per share. Our
directors and employees exercised options to purchase 209,325 shares of
common stock with a weighted average exercise price of $4.62 per share.
In addition, 1,399,203 options were forfeited or canceled. As of
December 31, 2000, there were 2,823,785 options outstanding with a
weighted average exercise price of $8.35.
9
No underwriters were used in connection with these sales and issuances except
for the issuance of the common stock in our public offering in (9) above. The
sales and issuances of these securities, with the exception of those in (9)
above, were exempt from registration under either (a) Rule 701 of the Securities
Act of 1933 promulgated thereunder on the basis that these securities were
offered and sold either pursuant to a written compensatory benefit plan or
pursuant to written contracts relating to consideration, as provided by Rule
701, or (b) Section 4(2) of the Securities Act of 1933 on the basis that the
transaction did not involve a public offering.
ITEM 6 - SELECTED FINANCIAL DATA
The following is a summary of selected financial data of quepasa.com as of
and for each of the years in the three-year period ended December 31, 2000, 1999
and 1998 and for the period from inception, June 25, 1997 through December 31,
1997. This data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," our consolidated
financial statements and the notes thereto appearing elsewhere in this document.
[Enlarge/Download Table]
INCEPTION
(JUNE 25, 1997)
THROUGH
DECEMBER 31,
2000 1999 1998 1997
----------------- ---------------- --------------- ----------------
STATEMENT OF OPERATIONS DATA:
Net revenue $ 2,611,748 $ 556,244 $ -- $ --
Loss from operations (61,926,199) (30,038,037) (6,465,288) (3,703)
Net loss (60,962,934) (29,261,363) (6,513,228) (2,903)
Basic and diluted loss per (3.52) (2.44) (0.98) --
share
BALANCE SHEET DATA:
Cash and cash equivalents $ 3,940,232 $ 6,961,592 $ 2,199,172 $ 2,582
Trading securities 2,393,964 22,237,656 -- --
Working capital (deficit) 7,312,625 28,141,206 3,563,302 (2,883)
Total assets 8,404,248 44,350,992 4,611,464 2,582
Total stockholders' equity
(deficit) 7,697,869 40,066,244 3,920,422 (2,883)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations for the years ended December 31, 2000, 1999 and 1998 should be read
in conjunction with our consolidated financial statements, the notes related
thereto, and the other financial data included elsewhere in this Form 10-K.
OVERVIEW
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 half of 2000, we significantly increased our operating expenses as we
expanded our sales, marketing and advertising efforts. In May 2000, our Board
announced the engagement of Friedman, Billings, Ramsey & Co., an
investment-banking firm, to assist us in developing strategic alternatives to
maximize stockholder value. Following such announcement and during the
remainder of 2000, in order to conserve cash, we reduced our workforce by
approximately 80% and significantly reduced the products and content we
provided and our marketing, sales and general operating expenses. We have
been unsuccessful in executing our business plan, have incurred substantial
losses since inception and have an accumulated deficit of $96.7 million as of
10
December 31, 2000. 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.
In the first quarter of 2000 we acquired the following three companies:
- In January 2000, we acquired eTrato.com, an online auction site linking
Hispanic buyers and sellers of goods and services.
- In January 2000, we acquired credito.com, a Spanish language Internet
company providing personal credit content and information.
- In March 2000, we acquired realestateespanol.com, a real estate services
site providing the Hispanic-American community with home buying services in both
English and Spanish.
In March 2000, we issued 1,428,571 shares of our common stock to Gateway
Companies, Inc. valued at $5.38 per share for an aggregate $10.0 million in
cash. Simultaneously, we purchased 7,300 of Gateway's Astro computers and paid
Gateway a nonrefundable $1.0 million for related co-marketing/co-branding
services. However, the Gateway agreement did not obligate Gateway to render any
specific marketing or advertising services to us; instead, any services that
Gateway would provide were to be determined and mutually agreed upon at a later,
unspecified date. Accordingly, because Gateway was not obligated to provide any
services, never indicated that it would provide any such services, and in fact,
never provided any co-marketing or co-branding services, we determined that the
marketing/advertising component of the arrangement with Gateway had no value and
reduced the $10.0 million received in cash by the $1.0 million cash payment to
Gateway.
The Company 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 our subscribers. Pursuant to the agreement, we purchased $5.8
million of computers, net of $928,500 of a volume purchase discount, for
promotional activities. We took title to the computers upon the close of the
transaction. However, since we did not have any warehousing facilities, the
computers were segregated from Gateway's inventory in third-party warehouse
locations. We remained responsible for the payment of warehouse storage charges.
The computers were recorded as computer promotions inventory in other current
assets on the accompanying balance sheet and expensed as donated.
We also granted Gateway additional substantive rights under the agreement,
including, among other things: (1) a warrant to acquire up to 483,495 additional
shares of our common stock for cash, valued at $386,000, at the same purchase
price per share paid for the original 1,428,571 shares, which option expired,
unexercised, on May 30, 2000, (2) a right of first refusal, (3) a right of
participation in future stock issuances, (4) registration rights, (5) an
exclusive sales right, and (6) a "right of resale" pursuant to which, in the
event of a change in our ownership 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, which right expired on its own
terms.
In May 2000 and again in November 2000, we announced layoffs that would
ultimately reduce our workforce by approximately 80% between April 1, 2000 and
December 31, 2000. The purpose of these staff reductions was to conserve cash.
As of August 31, 2001, we had three employees and one full-time and several
part-time contractors.
On December 27, 2000, we announced that our Board had approved the
development of a plan of liquidation and sale of our assets in the event that no
strategic transaction can be achieved. As a result, we 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, we recorded a $24.9 million asset impairment charge.
During the first quarter of 2001, we actively pursued the sale of our
assets and responded to numerous inquiries from interested parties. 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. The
merger agreement
11
represents a stock for stock offering, pursuant to which each share of
quepasa common stock will be converted into one share of Great Western common
stock.
Immediately following the merger our 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 one or more 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 (except for an aggregate of 400,000
unvested stock options with an exercise price of $0.15 per share held by our
directors, Chief Executive Officer and Chief Operating Officer). The 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 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 is subject to certain closing
conditions and stockholder approval. There can be no assurance that we will
consummate the merger transaction.
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. We reduced our work force from 80 employees on December 31, 1999
to 20 employees on December 31, 2000, and again, to 3 employees as of April 30,
2001.
Our independent accountants issued their 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 been unable to successfully execute its business plan, and is
considering alternatives for the Company, all of which raise substantial doubt
about its ability to continue as a going concern. Management is currently
planning to close on the proposed merger agreement with Great Western. However,
in the event that the merger is not consummated, management is likely to
consider, but is not limited to, seeking out new prospective merger partners,
attempting to sell further assets or pursuing a plan of liquidation.
INTRODUCTION TO RESULTS OF OPERATIONS
NET REVENUE
We expected to derive future net revenue from one principal source: the sale
of advertising on our website.
ADVERTISING REVENUE. In 2000, we derived approximately 62.4% of our net
revenue from the sale of advertisements on our website which are received
principally from:
- advertising arrangements under which we receive fixed fees for banners
placed on our website for specified periods of time or for a specified
number of delivered ad impressions; and
- reciprocal services arrangements, under which we exchange advertising
space on our website for advertising or services from other parties.
Advertising revenue is recognized ratably based on the number of impressions
displayed, provided that we have no obligations remaining at the end of a period
and collection of the resulting receivable is probable. Our obligations
typically include guarantees of a minimum number of impressions. To the extent
that minimum guaranteed impressions are not met, we defer recognition of the
corresponding revenue until the remaining guaranteed impression levels are
achieved. Payments received from advertisers prior to displaying their
advertisements on our website are recorded as deferred revenue.
SPONSORSHIP REVENUE. We also derived revenue from the sale of sponsorships
for certain areas or exclusive sponsorship rights for certain areas within our
website. 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 website), ratably
12
over the period of time of the related agreement. Payments received from
sponsors prior to displaying their advertisements on our website are recorded
as deferred revenue.
E-COMMERCE REVENUE. We derived an insignificant amount of revenue in 2000
from e-commerce related transactions. Although we offered various e-commerce
related services to our user base in the form of auctions and third-party
affiliate relationships, we did not recognize significant revenue from these
services.
BARTER REVENUE. In the ordinary course of business, we enter into reciprocal
service arrangements (barter transactions) whereby we provide 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 under the
circumstances. The fair value represents market prices negotiated on an
arm's-length basis. Revenue from reciprocal service arrangements is recognized
as income when advertisements are delivered on our website. Expense from
reciprocal services arrangements is recognized when our advertisements are run
in other media, which are typically in the same period when the reciprocal
service revenue is recognized. Related expenses are classified as advertising
and marketing expenses. During 2000 and 1999, revenue and related expenses
attributable to reciprocal services totaled approximately $1.3 million and
$119,000, respectively. In 2000 and 1999, barter revenue represented 45.9% and
17.7%, respectively, of total gross revenue.
- In addition, the barter advertising was conducted in the same media (i.e.,
our website). In evaluating "similarity," we ensured reasonableness of 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.
OPERATING EXPENSES
Our principal operating expenses consisted of:
- product and content development expenses;
- advertising and marketing expenses;
- general and administrative expenses; and
- amortization of goodwill and asset impairment charges.
PRODUCT AND CONTENT DEVELOPMENT EXPENSES. Product and content development
expenses consist of personnel costs associated with the development, testing and
upgrading of our website and systems, purchases of content and specific
technology, particularly software, and telecommunications links and access
charges. We continue to reduce the products and content we provide as we reduce
our operating expenses and conserve cash.
ADVERTISING AND MARKETING EXPENSES. Our advertising and marketing expenses
consist primarily of salaries and expenses of marketing and sales personnel, and
other marketing-related expenses including our mass media-based branding and
advertising activities and our distribution agreement with NetZero. We have
continued to reduce our marketing and sales expenses as we reduce our operating
expenses and conserve cash.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of costs related to corporate personnel, occupancy costs,
general operating costs and corporate professional fee expenses, such as legal
and accounting fees. Because we have reduced our personnel and general operating
expenses, we expect that future period expenses will be less than those in 2000.
However, because we operate as a public company, we anticipate that certain
significant legal and accounting expenses will continue in future periods.
AMORTIZATION OF GOODWILL AND ASSET IMPAIRMENT CHARGES. During the fourth
quarter of 2000, we performed an impairment analysis of all long-lived assets
and all identifiable intangibles. We determined that the fair value of
certain acquired assets and certain identifiable intangibles was
significantly below their respective carrying values. As a result, we
recorded a $24.9 million impairment charge related to goodwill and domain and
license agreements, prepaid marketing
13
services and property and equipment. In addition, we realized amortization of
goodwill expenses totaling $5.8 million in 2000.
OTHER INCOME (EXPENSE). Other income (expense) consists primarily of
interest expense, net of interest earned. Following our initial public offering
in 1999 and continuing through 2000, we invested most of our assets in cash or
cash equivalents, which are either debt instruments of the U.S. Government, its
agencies, or high quality commercial paper. Interest income will decrease over
time as cash is used to fund operations.
RESULTS OF OPERATIONS
2000 COMPARED TO 1999
Our results of operations in 2000 were characterized by increased expenses
that significantly exceeded revenue growth during the same period. We reported a
net loss of $61.0 million in 2000, compared to a net loss of $29.3 million in
1999. During 2000, and during the first quarter in particular, we were
principally engaged in both expanding our human resources across all areas of
the Company, including the staffing of an internal sales force, and in continued
brand-building and marketing agreements to drive users to our website. In
addition, we acquired three operating subsidiaries, credito.com, eTrato.com,
realestateespanol.com, which we continued to fund through 2000.
On January 28, 2000, we 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 a $887,000 note payable. We included the 681,818 shares of common
stock issued unconditionally in determining the cost of credito.com recorded on
the acquisition date. Contingent consideration consisted of warrants to purchase
681,818 shares of common stock exercisable upon credito.com's achievement of
certain performance objectives related to gross revenue as of January 2001 and
January 2002. credito.com did not meet the performance objectives as of January
2001, and consequently, the warrants were returned to us. 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. We
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 acquisition
date. 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 can be achieved. Accordingly, the Company
performed an impairment analysis of all long-lived assets and identifiable
intangibles in accordance with generally accepted accounting principles 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. The results of operations of credito.com have
been included in the accompanying statement of operations for 2000 from the
acquisition date.
On January 28, 2000, we 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 our common stock valued at $14.09 per share (or $9.6
million in the aggregate), and assumption of a $1.25 million promissory note.
The note payable was due in whole on January 28, 2002, and has 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 date of the merger
agreement and the date the merger was publicly announced, on December 20,
1999. Contingent consideration consisted of 681,818 shares of common stock
which were held in escrow to be released to the sellers of eTrato pending the
outcome of certain revenue and website contingencies over the six-month
period following the acquisition. The contingencies were not met, and
consequently, those shares were returned to us subsequent to year-end and
cancelled. We 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 value at
the acquisition date. 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 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 performed an impairment analysis of all long-lived
assets and identifiable intangibles in accordance with generally accepted
accounting principles in the United States of America. As a
14
result, the balance of unamortized goodwill of $5.6 million recorded in
conjunction with the transaction was written off in the fourth quarter of
2000. The results of operations of eTrato.com have been included in the
accompanying statement of operations for 2000 from the acquisition date.
On March 9, 2000, we 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 our common stock valued at $3.0 million, or $8.83 per
share, and assumption of $300,000 in debt paid immediately following the
closing of the acquisition. Contingent consideration consisted of 248,834
shares of common stock which were held in escrow pending
realestateespanol.com's achievement of gross revenue targets within 12 months
of the date of the agreement. The value of the common stock was determined
using the average stock price between the date of the merger agreement and
the date the merger was publicly announced. realestateespanol.com did not
meet the agreed-upon targets contingent to its ability to receive the shares
of common stock held in escrow, and consequently, those shares were returned
to us and cancelled subsequent to year-end. We accounted for the acquisition
using the purchase method of accounting. Accordingly, the purchase price was
allocated to the assets purchased and the liability assumed based upon the
estimated fair value at the acquisition date. 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 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 performed an
impairment analysis of all long-lived assets and identifiable intangibles in
accordance with generally accepted accounting principles in the United States
of America. As a result, the balance of unamortized goodwill of $2.4 million
recorded in conjunction with the transaction was written off in the fourth
quarter of 2000. The results of operations of realestateespanol.com have been
included in the accompanying statement of operations for 2000 from the
acquisition date.
As a result of our continued losses and failure to execute our business
plan, beginning in the second quarter of 2000, we determined it was necessary to
begin a program of cash conservation, especially in light of the difficult
capital market climate at that time. We focused on reducing our cash expenses in
all operational areas, including product and content, marketing, sales,
personnel and general and administrative expenses. On May 9, 2000 and again on
November 14, 2000, we announced reductions in our workforce that ultimately
resulted in an 80% reduction in our employee base at December 31, 2000. During
the period from April 1, 2000 through December 31, 2000, we reduced our employee
count from 101 to 20 professionals and significantly reduced our product and
content, and marketing and sales and general and operating expenses, in order to
conserve our remaining cash as we continued to consider our strategic
alternatives. As of April 30, 2001, we had 3 full-time employees.
On May 26, 2000, we announced the retention of the investment banking firm,
Friedman, Billings, Ramsey & Co., to help us explore strategic alternatives,
including strategic alliances, significant equity investments in us or a merger
or sale of all or a significant portion of our business. During the period from
May through October 2000, we and Friedman Billings met with and evaluated
numerous potential merger partners, in some cases, engaging in extended
negotiations. Ultimately, we could not reach agreement on a potential merger
transaction.
In December 2000, we announced that our Board had approved the development
of a plan of liquidation and sale of our assets. We also announced a bid date
and instructions for all interested parties to submit monetary bids for any and
all assets. These announcements generated additional expressions of interest in
a merger transaction which we and Friedman Billings pursued in the first quarter
of 2001. As a result, we entered into a merger transaction with Great Western
Land and Recreation, Inc., a privately-held real estate development corporation.
Also in the first quarter of 2001, we sold substantially all of our office
furniture, computer inventory and equipment for $1.3 million, the operation of
the quepasa.com and realestateespanol.com websites was outsourced, and the
operation of the eTrato.com and credito.com websites were suspended.
While management continued to develop and support its websites and pursue
its original business plan, the Company continued to amortize its goodwill
through November 30, 2000. Additionally, 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
15
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.
NET REVENUE
Gross and net revenue were $2.8 million and $2.6 million, respectively, in
2000, and $671,000 and $556,000, respectively, in 1999. We launched our website
in the fourth quarter 1998 and first generated revenue during the second quarter
1999. During 2000, revenue was derived from two principal sources: (1) banner
advertising arrangements under which we receive revenue based on cost per
thousand ad impressions (CPM) or for ad campaigns that run for specified periods
of time and (2) sponsorship agreements which allow advertisers to sponsor an
area or receive sponsorship exclusivity on an area within our website.
Approximately 62% of the gross revenue was generated from banner advertising and
38% was generated from sponsorship agreements in 2000 compared to 69% and 31%,
respectively, in 1999. During the first quarter of 2000, we hired an internal
sales force to sell banner advertising placements and sponsorship campaigns on
our website. Banner advertising inventory was previously sold by an independent
agent, who received a commission through an exclusive agreement, which varied
from 30% to 50% of gross banner advertising depending on the volume of ad
impressions during a month. Effective February 29, 2000, we terminated our
exclusive agreement with this independent sales agent. In addition to hiring our
own internal sales force, we supplemented our sales efforts through the use of
an independent sales agent for run of network banner advertising and additional
site-specific advertising sales. With the exception of Folgers, representing 16%
of gross revenue, no other single advertiser utilizing banner ads or sponsorship
agreements amounted to over 10% of total gross revenue. Sponsor revenue are
recognized ratably over the term of the agreement. During the year-ended
December 31, 2000, we recognized $1.3 million of barter revenue which is
included in the amounts noted above. In 2000, barter revenue represented 45.9%
of total gross revenue compared to 17.7% in 1999.
OPERATING EXPENSES
PRODUCT AND CONTENT DEVELOPMENT EXPENSES. Our product and content
development expenses increased to $6.4 million in 2000 from $2.3 million in
1999. The period-to-period increase was principally attributable to:
- an increase in personnel costs relating to the development of content and
technological support to $2.875 million in 2000 from $1.2 million in 1999;
- an increase in expenses for telecommunications links to $794,000 in 2000
from $642,000 in 1999; and
- an increase in third-party and internal content expenses to $2.8 million
in 2000 from $334,000 in 1999. Included in the $2.8 million are content
expenses totaling $824,000 related to the continued design and development
of our three operating subsidiaries: realestateespanol.com, eTrato.com and
credito.com.
ADVERTISING AND MARKETING EXPENSES. Our marketing and sales expenses
increased to $20.8 million in 2000 from $16.7 million in 1999. This increase was
principally attributable to:
- an increase in marketing and sales personnel costs to $2.4 million in
2000 from $332,000 in 1999;
- a $3.5 million charge associated with the resale of computer promotions
inventory to Gateway in December 2000 resulting from the Board of
Directors' instructions to liquidate computer inventory and halt
promotional activities;
- $3.0 million increase related to our marketing and distribution agreement
with NetZero in 2000;
- $921,000 associated with various computer and miscellaneous giveaways and
promotions in 2000; and
- a decrease in general advertising expense to $9.8 million in 2000 from
$15.9 million in 1999 resulting from management's decision to reduce
expenses and conserve cash.
16
AMORTIZATION OF GOODWILL AND ASSET IMPAIRMENT CHARGES. During 2000, we
completed the acquisitions of eTrato.com, credito.com and realestateespanol.com.
We accounted for these three acquisitions using the purchase method of
accounting. We recorded approximately $21 million of goodwill related to these
acquisitions with a three-year amortization period. Amortization of goodwill
amounted to $5.8 million for the eleven months ended November 30, 2000, based
upon a three-year amortization schedule.
In the months prior to December 2000, management cut expenses and
personnel to conserve cash. While management continued to develop and support
its websites and pursue its original business plan, the Company continued to
amortize its goodwill through November 30, 2000. Additionally, 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.
IMPAIRMENT OF TELEMUNDO ADVERTISING CREDIT. In April 1999, we entered
into an agreement with Telemundo whereby we received a $5.0 million advertising
credit on the Telemundo television network at the rate of $1.0 million for each
of the next five years. Under the agreement, Telemundo received 600,000 shares
of our common stock valued at $12 per share, or $7.2 million, and a warrant
valued at $2.9 million to purchase 1,000,000 shares of our common stock
exercisable at $14.40 per share up to and including June 25, 2001. After
completion of our IPO, the shares and warrant became fully vested and were not
subject to return for nonperformance by Telemundo. We also agreed to design and
build a website for Telemundo. We used approximately $840,000 of the advertising
credits. As a result of our decision to stop advertising and marketing the
quepasa.com website and to develop a plan of liquidation in the event that a
strategic transaction involving quepasa does not occur, these advertising
credits will not be used under our current business plan. We believe we have the
right to use or transfer the entire unused advertising credit and that such
right has substantial value; however, there is no guarantee that any value will
be established for this advertising credit upon the ultimate resolution of the
related arbitration. Under generally accepted accounting principals, we are
required to perform an impairment analysis and, accordingly, we wrote down the
$4.2 million remaining deferred advertising credit to zero as of December 31,
2000. We are currently in arbitration with Telemundo regarding this agreement.
See PART 1, ITEM 3 - LEGAL PROCEEDINGS above.
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative
expenses decreased to $6.6 million in 2000 from $11.5 million in 1999. This
decrease is attributable to a decrease in administrative personnel expenses to
$1.9 million in 2000 from $3.4 million in 1999. Professional fee expenses,
including legal and accounting, increased to $1.2 million in 2000 from $690,000
in 1999. Additionally, we have reduced our general operating expenses to $2.0
million in 2000 from $6.0 million in 1999. Finally, stock based compensation
decreased to $82,000 in 2000 from $5.0 million in 1999.
OTHER INCOME (EXPENSE)
Other income (expense), which primarily consists of interest income and
unrealized gains or losses on trading securities, offset by interest expense,
was $1,028,000 in 2000 compared to $777,000 in 1999.
1999 COMPARED TO 1998
Our results of operations in 1999 were characterized by increased expenses
that significantly exceeded revenue growth during the same period. We reported a
net loss of $29.3 million in 1999, compared to a net loss of $6.5 million in
1998. During 1999, we were principally engaged in product development, which
included hiring personnel for our content and technology departments. In
addition, we launched a mass media-based branding and advertising campaign, and
hired marketing, sales and development personnel and a management team.
17
NET REVENUE
Gross and net revenue were $671,000 and $556,000 respectively in 1999. We
launched our website in the fourth quarter 1998 and first generated a limited
amount of revenue during the second quarter 1999. During 1999, revenue was
derived from two sources: (1) banner advertising arrangements under which we
receive revenue based on cost per thousand ad impressions (CPM) and on cost
per clicks and (2) sponsor agreements which allow advertisers to sponsor an
area or receive sponsorship exclusivity on an area within our website.
Approximately 69% of the gross revenue was generated from banner advertising
and 31% was generated from sponsorship agreements. Banner advertising has
been sold by an independent agent who received a commission, which varied
from 30% to 50% of gross banner advertising depending on the volume of ad
impressions during a month. With the exception of Net2Phone and AutoNation,
representing 20.5% and 11.5% of gross revenue respectively, no other single
advertiser utilizing banner ads or sponsorship agreements amounted to over
10% of total gross revenue in 1999. Sponsor revenues are recognized ratably
over the term of the agreement. During 1999, we recognized $119,000 barter
revenue, which is included in the amounts noted above. In 1999, barter
revenue represented 17.7% of total gross revenue.
OPERATING EXPENSES
PRODUCT AND CONTENT DEVELOPMENT EXPENSES. Our product and content
development expenses increased to $2.3 million in 1999 from $415,000 in 1998.
The period-to-period increase was principally attributable to:
- an increase in personnel costs relating to the development of content and
technological support to $1.2 million in 1999 from $173,000 in 1998;
- an increase in expenses for telecommunications links to $642,000 in 1999
from $187,000 in 1998; and
- an increase in third-party content expenses to $334,000 in 1999 from
$3,181 in 1998.
ADVERTISING AND MARKETING EXPENSES. Our marketing and sales expenses
increased to $16.7 million in 1999 from $250,000 in 1998. This increase was
principally attributable to:
- an increase to $14.1 million in costs of our initial mass media-based
branding and advertising campaign;
- an increase in marketing and sales personnel costs to $332,000 in 1999
from $45,000 in 1998 and
- amortization of advertising agreements amounting to $2.5 million in 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative expenses
increased to $11.5 million in 1999 from $5.8 million in 1998. This increase was
attributable to an increase in administrative personnel costs to $3.4 million in
1999 from $260,000 in 1998, and stock-based expense of $5.0 million in 1999
compared to $5.3 million in 1998. During the first and second quarters of 1999,
we recognized $4.9 million for the issuance of options to employees and
directors. During 1999, we issued a total of 950,000 options and 50,000 shares
of common stock to the Chairman and Chief Executive Officer. Additionally, our
former Chairman and Chief Executive Officer transferred 50,000 shares of common
stock to the current Chairman and Chief Executive Officer. As a result of these
transactions $2.5 million of compensation expense was recognized during the
year-ended December 31, 1999. In May 1998, 3,566,714 shares were transferred by
an existing stockholder to officers, consultants and employees. Also in May
1998, 1,420,000 of shares of common stock were issued to a former officer of
quepasa.com and an outside advisor. In addition, 215,000 stock options were
granted to employees in the fourth quarter of 1998. As a result of these
issuances, approximately $5.3 million of stock based compensation was recognized
during 1998.
OTHER INCOME (EXPENSE)
Other income (expense), which primarily consists of interest income and
unrealized gains or losses on trading securities, offset by interest expense,
was $777,000 in 1999 compared to $(48,000) in 1998. This change primarily
resulted from interest income earned and unrealized gains on the proceeds of
the June 1999 initial public offering. In October 1999, we
18
paid off the note payable-stockholder and as a result we expect that for the
foreseeable future our interest income will exceed our interest expense.
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 independent accountants have issued their 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 our recurring losses and accumulated deficit, 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 sale of all or a significant portion of our business.
At December 31, 2000, we had $3.9 million in cash and cash equivalents and
$2.4 million in short-term investments compared to $7.0 million and $22.2
million, respectively at December 31, 1999. 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 the our common stock
to Gateway Companies, Inc.
Net cash used in operating activities was $10.1 million in 2000 as compared
to $41.9 million in 1999. Net cash used by operations in 2000 consisted of the
net loss of $61.0 million, a decrease in accounts payable and accrued
liabilities of $3.4 million and a decrease in other assets of $6.7 million. This
is offset by an increase in the sale of trading securities of $19.7 million and
non-cash expenses of $24.9 million in asset impairment charges and $8.1 million
in depreciation and amortization, respectively. Net cash used in operations for
1999 primarily resulted from a $29.3 million loss, $22.1 million in net
purchases of trading securities and an increase in prepaid expenses of $2.2
million offset by a non-cash expense for stock-based compensation and
amortization of $5.0 million, a decrease in deposits receivable of $1.5 million,
an increase in accounts payable of $2.7 million and an increase in accrued
liabilities of $1.0 million.
Net cash used in investing activities was $98,700 in 2000 as compared to
$2.0 million net cash used in 1999. The decrease is attributed to a decrease in
the purchase of fixed assets and the net cash received from acquisitions during
2000.
Net cash provided by financing activities was $7.0 million in 2000 as
compared to $48.7 million in 1999. The decrease is primarily attributed to the
decrease in proceeds from the sale of stock, including proceeds from our 1999
initial public offering, and exercise of stock options offset by the payment of
$2.4 million to retire DEBT.
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 that is scheduled to expire in November 2002.
However, as a result of our 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 its lease, including any and all future amounts to
be paid thereunder. In addition, we are required to vacate the property on the
earlier to occur of October 31, 2001 or upon 30-days prior written notice from
the landlord. As of August 31, 2001, we have not received a written notice to
vacate.
We expect to continue to incur costs, particularly general and
administrative costs during 2001, 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 in that
time period, our ability to continue operations will be severely impacted and
could have a significant adverse effect on us and our business. There can
19
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 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 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 it expects 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 are 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. The Company does not believe that adoption of
Statements 141 and 142 will have a material impact on our financial
statements.
SYSTEM ISSUES
We depend on the delivery of information over the Internet, a medium that
depends on information contained primarily in electronic format, in databases
and computer systems maintained by us and third-parties. A disruption of
third-party systems or our systems interacting with these third party systems
could prevent us from delivering services in a timely manner, which could
have a material adverse affect our business and results of operations.
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
independent accountants have issued their 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 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
20
with all the closing conditions. This merger transaction is also subject to
our potential merger partner delivering to us audited financial statements
and real estate appraisals satisfactory to us. 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.
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 December 31, 2000, we had an
accumulated deficit of approximately $96.7 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 March 31, 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 reduced our
employee count from 20 to 3 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. See PART I, ITEM 1 - BUSINESS - COMPETITORS AND COMPETITIVE FACTORS
AFFECTING OUR BUSINESS above.
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
21
available that limit or remove advertisements from an Internet user's
desktop. This software, if generally adopted by users, may materially and
adversely affect web-based advertising 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 the OTCBB. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not have any derivative financial instruments as of December 31,
2000. 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
22
and market risk. Our interest income arising from these investments is
sensitive to changes in the general level of interest rates. In this regard,
changes in interest rates can affect the interest earned on our cash
equivalents and trading securities. To mitigate the impact of fluctuations in
interest rates, we generally enter into fixed rate investing arrangements
(corporate bonds). As of December 31, 2000, a 10 basis point change in
interest rates would have a potential impact on our interest earnings of
approximately $4,500, which is clearly immaterial to our consolidated
financial statements.
ITEM 8. FINANCIAL STATEMENTS
The financial statements required pursuant to this Item are included
in Item 14 on this Form 10-K and are presented beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On December 11, 1998, we engaged BDO Seidman, LLP (BDO Seidman) as our
independent public accountant. BDO Seidman resigned as our independent public
accountant on February 4, 1999 because they were unwilling to be associated
with our financial statements due to the background of one of our employees.
We employed this employee from January 1, 1999 through February 15, 1999 at
which time he resigned. The employee was never appointed as an officer or
director of quepasa.com, inc. He owned 443,500 shares of our common stock and
was an employee of WGM Corporation, the general partner of The Monolith
Limited Partnership, a former principal stockholder.
Prior to their resignation, BDO Seidman had not completed their audits of
any of our financial statements for any period. There were no disagreements
between us and BDO Seidman on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures
which, if not resolved to the satisfaction of BDO Seidman, would have caused
them to make reference to the matter in their report. We allowed BDO Seidman
to read and make comment on this disclosure.
On February 10, 1999, we engaged Ehrhardt Keefe Steiner & Hottman, P.C.
(EKSH) as our independent public accountants. Prior to their appointment, we
did not consult with them on issues relating to our accounting principles or
the type of audit opinion with respect to our financial statements to be
issued by them.
On September 3, 1999, we replaced EKSH with Deloitte & Touche LLP
(Deloitte & Touche) as our independent accountants. There were no
disagreements with EKSH on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure. During the
past two fiscal years and the subsequent interim period preceding the date of
the change in independent accountants, we had not consulted with Deloitte &
Touche regarding (1) the application of accounting principles to a completed
or proposed transaction or (2) the type of audit opinion that might be
rendered on our financial statements.
On January 18, 2000, we replaced Deloitte & Touche with KPMG LLP as our
independent accountants. Prior to their replacement, Deloitte & Touche had
not completed their audit of any of our financial statements for any period.
There were no disagreements with Deloitte & Touche on any matter of
accounting principles or practices, financial statement disclosure or
auditing scope or procedure. During the past two fiscal years and the
subsequent interim period preceding the date of the change in independent
accountants, we had not consulted with KPMG LLP regarding (1) the application
of accounting principles to a completed or proposed transaction or (2) the
type of audit opinion that might be rendered on our financial statements.
23
PART III
ITEM 10. OUR DIRECTORS AND EXECUTIVE OFFICERS.
MEMBERS OF OUR BOARD
DIRECTORS
GARY L. TRUJILLO, 40, joined us in April 1999 as President and a
director and was appointed to Chairman, Chief Executive Officer and President
in June 1999. In 1990, Mr. Trujillo founded Southwest Harvard Group, a
Hispanic-owned and operated business consulting firm and served as its Chief
Executive Officer and President from inception until April 1999. Mr. Trujillo
is a director of Southwest Harvard Group, Blue Cross and Blue Shield of
Arizona, Wells Fargo & Co., Arizona (Advisory Board), The Arizona Community
Foundation and South Mountain Community College ACE Entrepreneur Program.
Mr. Trujillo is a member of the Greater Phoenix Leadership and The Young
Presidents Organization. In 1998, Mr. Trujillo received the Individual
Business Minority Advocate Award and was voted by Arizona Business Journal as
one of the most influential members of the Arizona Hispanic business
community. Mr. Trujillo started his career as an investment banker with
Salomon Brothers, Inc. in New York City. Mr. Trujillo holds a B.S. degree in
Accounting from Arizona State University and an M.B.A. degree from Harvard
Business School.
L. WILLIAM SEIDMAN, 79, joined us as a director in June 1999. He is
the Chief Business Commentator on cable network's CNBC-TV, the publisher of
Bank Director magazine and the founder of Board Member magazine. Since 1991,
he has consulted with numerous organizations, including Deposit Corporation
of Japan, Tiger Management, J.P. Morgan, Inc., The World Bank, BDO Seidman,
Nippon Credit Bank of Japan and The Capital Group. He is currently a member
of the Board of Directors of Fiserv. Inc., Intelidata, Inc., Clark Bardes and
LML Payment Systems Inc. From 1985 to 1991, he served as the fourteenth
chairman of the Federal Deposit Insurance Corporation (FDIC). Mr. Seidman
became the first chairman of the Resolution Trust Corporation (RTC) in 1989
and served as such until 1991. While at the RTC, he supervised the creation
of an 8,000 person agency handling over $500 billion in assets from failed
Savings and Loans. Prior to serving as Chairman of the FDIC, he was Dean of
the College of Business at Arizona State University, one of America's largest
business colleges.
Mr. Seidman served under President Gerald Ford as Assistant for
Economic Affairs from 1974 to 1977 and under President Ronald Reagan as
co-chair of the White House Conference on Productivity from 1983 to 1984.
Mr. Seidman was Vice-Chairman and Chief Financial Officer of Phelps Dodge
Corporation from 1977 to 1982. He was a director of Phelps Dodge Corporation,
The Conference Board and United Bancorp of Arizona. In the 1960s, Mr. Seidman
founded Sumercom, a TV, radio and newspaper company, where he was Chief
Executive Officer until 1974, when the company was sold. Mr. Seidman was
managing partner of Seidman and Seidman, certified public accountants (now
BDO Seidman), from 1968 to 1974. Under his management, the firm expanded from
a small family enterprise to become one of the largest public accounting
firms in the nation. Mr. Seidman also served as chairman (1970) and director
of the Detroit Bank of the Federal Reserve Bank of Chicago from 1966 to 1970.
Mr. Seidman holds an A.B. degree from Dartmouth (Phi Beta Kappa) and an LL.B.
degree from Harvard Law School, and is an honors graduate with an MBA degree
from the University of Michigan.
JERRY J. COLANGELO, 61, joined us as a director in April 1999. He
has served as the President and Chief Executive Officer of the Phoenix Suns
professional basketball team since 1987 and was the Suns' General Manager
from 1968 to 1987. He has also served as Chief Financial Officer and Managing
General Partner of the Arizona Diamondbacks professional baseball team since
1995. Mr. Colangelo is a director of Stratford American Corporation, a
holding company for real estate property.
JOSE MARIA FIGUERES, 44, joined us as a director in May 1999. He
served as the elected President of Costa Rica from 1994 to 1998, and has
served as Managing Director of the Centre for Global Agenda at the World
Economic Forum since August 2000. Between 1998 and August 2000, he served as
president of the Costa Rican Foundation for Sustainable Development. He also
serves in executive positions with numerous charities in Costa Rica and
elsewhere. Mr. Figueres studied industrial engineering at the United States
Military Academy at West Point and earned a Masters degree in Public
Administration from Harvard University.
24
LOUIS OLIVAS, 54, joined us as a director in June 1999. He has been
employed by Arizona State University since 1979, first as at Arizona State
University's assistant director for the Center for Executive Development and
then as the Center's director from 1982 to 1986. He is a tenured associate
professor in the Management Department, College of Business. He has published
nearly 50 articles in the fields of personnel, management, training and small
business operations. Dr. Olivas has served on numerous national boards and
commissions, including Chairman of the Hispanic Caucus and the American
Association for Higher Education and Dean of the National Hispanic Corporate
Council Institute. For the past 12 years, Dr. Olivas has also served as the
assistant vice president for academic affairs at Arizona State University.
Previously he served as the director of Executive Development and Education
for Western Savings and Loan Association, director of Employee Development
for the City of Phoenix, and as a consultant, instructor and developer of
various executive development programs involving Fortune 500 companies.
ALAN J. SOKOL resigned as a director in January 2001.
JOSE RONSTADT resigned as an officer in February 2001.
MICHAEL WECK resigned as a director on June 21, 2001.
EXECUTIVE OFFICERS
GARY L. TRUJILLO. Mr. Trujillo's biography is included in PART III,
ITEM 10 - OUR DIRECTORS AND EXECUTIVE OFFICERS - MEMBERS OF OUR BOARD above.
ROBERT J. TAYLOR, 32, joined us in March 1999 as Vice President of
Strategy and Operations and subsequently became Senior Vice President of
Strategy and Operations in August 1999. He has served as our Chief Operating
Officer, Chief Financial Officer and Secretary since January 2000, November
2000 and April 2001, respectively. From August 1997 to March 1999, he was a
Senior Consultant for CSC Index, the management consulting division of
Computer Sciences Corporation. During his tenure with CSC, Mr. Taylor focused
his business consulting on large-scale change initiatives, strategy
implementation, new business start-ups and organizational design for Fortune
500 organizations. From January 1992 to August 1995, Mr. Taylor held the
positions of Production Supervisor and Senior Industrial Engineer with
Michelin Tire Corporation. Mr. Taylor received a B.S. degree in Industrial
and Systems Engineering from Virginia Tech University, an M.B.A. degree from
the J.L. Kellogg Graduate School of Management at Northwestern University and
a Master of Engineering Management degree from the Robert R. McCormick School
of Engineering at Northwestern University.
SECTION 16(b) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our directors, officers and persons who beneficially own more than
ten percent of a registered class of our equity securities to file reports of
ownership and changes in ownership with the Securities and Exchange
Commission. Directors, officers and greater than ten percent beneficial
owners are required by the Security and Exchange Commission's regulations to
furnish us with copies of all Section 16(a) forms they file.
Based upon a review of filings with the Securities and Exchange
Commission and written representations that no other reports were required,
we believe during 2000 that all of our directors and executive officers
complied with the reporting requirements of Section 16(a) of the Securities
Exchange Act of 1934.
25
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides certain summary information concerning
the compensation earned by our (1) Chief Executive Officer and (2) the other
two executive officers who were employed by us on December 31, 2000 and whose
salary and bonus for 2000 exceeded $100,000, for services rendered in all
capacities to us and our subsidiaries for fiscal years ended December 31,
2000 and 1999. None of the employees listed below were employed by us in 1998
nor did any of our employees earn more than $100,000 in 1998. The listed
individuals shall be referred to as the "Named Executive Officers."
SUMMARY COMPENSATION TABLE
[Enlarge/Download Table]
Annual Compensation Long Term Compensation
-----------------------------------------------------------------------------------------------------------------------
Securities
Name and Principal Other Annual Restricted Stock Underlying
Positions Year Salary Bonus Compensation Awards Options
-----------------------------------------------------------------------------------------------------------------------
Gary L. Trujillo 2000 $247,500 - - $83,538 (1) - - - -
Chairman, Chief
Executive Officer 1999 $126,783 - - $64,500 (2) $837,500 (3) 950,000
and President
-----------------------------------------------------------------------------------------------------------------------
Robert J. Taylor 2000 $175,001 $50,000 (4) $16,500 (5) - - 100,000
Chief Operating
Officer, Chief
Financial Officer and 1999 $97,154 - - $16,500 (6) - - 150,000
Senior Vice
President
-----------------------------------------------------------------------------------------------------------------------
Jose A. Ronstadt (7) 2000 $150,000 $75,000 (8) $51,875 (9) - - - -
Former Senior Vice
President
1999 $34,375 - - - - - - 150,000
-------------------------
(1) Of this amount, $52,500 represents forgiveness of remaining 50% of
$100,000 loan to Mr. Trujillo (see note (2) below) plus interest upon the
12 month anniversary of Mr. Trujillo's employment (April 26, 2000),
$19,038 represents vacation pay and $12,000 represents a monthly vehicle
allowance.
(2) Of this amount, $52,500 represents forgiveness of 50% of a $100,000 loan
to Mr. Trujillo plus interest upon the six month anniversary of Mr.
Trujillo's employment (October 26, 1999) and $12,000 represents a monthly
vehicle allowance.
(3) Represents the dollar value of an award of 100,000 shares of common stock
granted to Mr. Trujillo under his employment agreement, 50,000 shares of
which were issued by us and 50,000 shares of which were transferred by our
former chief executive officer.
(4) Mr. Taylor received a stay bonus of $50,000 paid in two equal payments of
$25,000 on September 1, 2000 and December 1, 2000.
(5) Of this amount, $10,500 represents forgiveness of remaining 50% of $20,000
loan to Mr. Taylor (see note (6) below) plus interest upon the 12 month
anniversary of Mr. Taylor's employment (March 8, 2000) and $6,000
represents a monthly vehicle allowance.
26
(6) Of this amount, $10,500 represents forgiveness of 50% of a $20,000 loan to
Mr. Taylor plus interest upon the six month anniversary of Mr. Taylor's
employment (September 8, 1999) and $6,000 represents a monthly vehicle
allowance.
(7) Mr. Ronstadt resigned on February 1, 2001.
(8) Mr. Ronstadt received a stay bonus of $75,000 paid in two equal payments
of $37,500 on September 1, 2000 and December 1, 2000.
(9) Represents forgiveness of $50,000 loan plus interest upon the six month
(June 30, 2000) and 12 month (December 30, 2000) anniversaries of Mr.
Ronstadt's employment.
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
The following table contains information concerning the stock
options granted to the Named Executive Officers during 2000. All of the
grants are governed by the terms and conditions of our Amended and Restated
1998 Stock Option Plan. No stock appreciation rights were granted to the
Named Executive Officers during 2000.
OPTIONS GRANTS IN 2000
[Enlarge/Download Table]
INDIVIDUAL GRANTS IN 2000
---------------------------------------------------------------------------------------------------------------------
Number of
Shares of Percent of Potential Realizable
Common Total Value at Assumed Annual
Stock Options Rate of Stock Price
Underlying Granted to Appreciation for the
Options Employees in Exercise Grant Expiration Option Term
Name Granted Fiscal Year Price Date Date 5% 10%
---------------------------------------------------------------------------------------------------------------------
Robert J. Taylor 100,000 (1) 39.0% $9.00 02/02/2000 02/02/2010 $566,005 $1,434,368
-----------------------
(1) These options were granted under our Stock Option Plan and vest ratably on
each of the first three anniversaries from the date of grant. If Mr.
Taylor's employment is terminated without "cause" (as defined in Mr.
Taylor's employment agreement), the options vest immediately.
AGGREGATED OPTIONS/SAR EXERCISES AND 2000 YEAR-END VALUES
No Named Executive Officer exercised options to purchase our stock during the
fiscal year ended December 31, 2000.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
Mr. Trujillo's employment agreement is for a term of five years
beginning April 26, 1999, with an annual base salary of $225,000 and with
automatic 10% increases each year commencing January 1, 2000. In the event a
transaction occurs constituting a "change of control" (as defined in his
employment agreement), we or our successor would remain responsible for the
payment of Mr. Trujillo's salary through the end of his employment term and all
unexercised options held by Mr. Trujillo will automatically and immediately vest
and be exercisable as to all shares covered thereby. Mr. Trujillo's employment
agreement included the grant of 100,000 shares of common stock, 50,000 of which
were issued by us and 50,000 of which shares were transferred by our former
chief executive officer. (Note 10)
Mr. Taylor's employment agreement is for a term of three years from
March 8, 1999, with an annual base salary of $175,000. If Mr. Taylor's
employment is terminated without "cause" (as defined in his employment
agreement), we are required to pay him a severance of $100,000 and all
unexercised options held by him will automatically and immediately vest and be
exercisable as to all shares covered thereby. In addition, Mr. Taylor received a
$50,000 stay bonus, paid in two equal installments on September 1, 2000 and
December 1, 2000. (Note 10)
In March 2001, we commenced paying each non-employee director $500 for
each meeting such member attends, either in person or by telephone. In addition,
each non-employee director received an option to purchase 50,000 shares of our
27
common stock under our Stock Option Plan that vests ratably on each of the
first 3 anniversaries from the grant date or immediately upon a change of
control. Also in March 2001, the Compensation Committee of our Board approved
the payment of $50,000 to each non-employee director, other than Mr. Weck,
for past and current services rendered, payable upon a change of control or
liquidation. (Note 10)
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee in 2000 were Jerry J.
Colangelo, L. William Seidman and Dr. Louis Olivas.
In April 1999, we entered into a $1.5 million sponsorship agreement
with the Arizona Diamondbacks, a major league baseball team. This agreement
was extended for the 2000 baseball season. Jerry J. Colangelo, who became one
of our directors in April 1999, is the Chief Executive Officer and Managing
General Partner of the Arizona Diamondbacks. This agreement was terminated
prior to the 2001 baseball season.
In June 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.
In our opinion, the transactions described above were on terms no
less favorable than those which could have been obtained from unaffiliated
third parties.
28
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors has prepared the
following report on our policies with respect to the compensation of executive
officers for 2000. Decisions on compensation of our executive officers generally
are made by the Compensation Committee. The Compensation Committee also
administers our Amended and Restated 1998 Stock Option Plan.
Our executive compensation policies are designed to:
* attract, motivate and retain experienced and qualified executives;
* increase our overall performance;
* increase stockholder value; and
* enhance the performance of individual executives.
We seek to pay competitive salaries based upon individual
performance combined with our overall performance relative to corporate
objectives, taking into account individual contributions and performance
levels. The Compensation Committee believes that the level of base salaries
should generally fall in the mid-range of executive compensation paid by
comparable telecommunications and Internet service companies. In addition, it
is our policy to grant stock options to executives upon commencement of their
employment with us and periodically thereafter as appropriate in order to
strengthen the alliance of interest between such executives and our
stockholders.
The following describes in more specific terms the elements of
compensation that implement our executive compensation policies, with
specific reference to compensation reported for 2000:
Base Salaries. Base salaries for executive officers are initially
determined by evaluating the responsibilities of the position, the experience
and knowledge of the individual, and the competitive marketplace for
executive talent, including a comparison to base salaries paid for similar
positions at other companies which are deemed appropriate comparisons for
compensation purposes.
Annual salary adjustments are recommended by the Chief Executive
Officer after evaluating the previous year's performance and considering the
new responsibilities of each executive officer. The members of the
Compensation Committee (Messrs. Colangelo, Seidman and Dr. Olivas) perform
the same review of the Chief Executive Officer's performance. Individual
performance evaluations take into account such factors as achievement of
specific goals that are driven by our strategic plan and attainment of
specific individual objectives. The weight given to the various factors
affecting an executive officer's base salary level is determined on a
case-by-case basis.
Stock Option Grants. Pursuant to our Amended and Restated 1998 Stock
Option Plan, executive officers and other employees are eligible to receive
compensation in the form of options to purchase shares of our common stock.
The Compensation Committee grants stock options to our executive
officers in order to align their interests with the interests of our
stockholders. Stock options are considered by the Compensation Committee to
be an effective long-term incentive because the executives' gains are linked
to increases in the stock value, which in turn provide stockholder gains. The
Compensation Committee generally grants options to new executive officers and
other key employees upon commencement of their employment with us and
periodically thereafter upon the attainment of certain performance goals
established by the Compensation Committee. The options generally are granted
at an exercise price equal to the market price of the common stock on the
date of grant (or 110% of the market price in the case of an optionee
beneficially owning more than 10% of the outstanding common stock). Options
granted to executive officers generally vest over a period of three years
following the date of grant. The option term is ten years. The greater the
appreciation of the stock price in future periods, the greater the benefit to
the holder of the options, thus providing an additional incentive to
executive officers to create additional value for our stockholders.
Management believes that stock options have been helpful in attracting and
retaining skilled executive personnel.
29
In determining grants of options for executive officers, the
Compensation Committee has reviewed competitive data of long-term incentive
practices at other companies that are deemed appropriate comparisons for
compensation purposes.
Chief Executive Officer Compensation. The executive compensation policy
described above is followed in setting Mr. Trujillo's compensation. Mr. Trujillo
generally participates in the same executive compensation plans and arrangements
available to the other senior executives. Accordingly, his compensation consists
of an annual base salary and long-term equity-linked compensation in the form of
stock options. The Compensation Committee's general approach in establishing Mr.
Trujillo's compensation is to be competitive with peer companies. Due to Mr.
Seidman's long standing personal friendship with Mr. Trujillo, Mr. Seidman
abstained from voting on any aspect of Mr. Trujillo's compensation.
Mr. Trujillo's compensation in 2000 consisted of a base salary of
$247,500 (including a monthly vehicle allowance). Mr. Trujillo's salary for 2000
was based on, among other factors, our performance and the compensation of chief
executive officers of comparable companies, although his compensation was not
targeted to any particular group of these companies.
Compensation Deductibility Policy. Under Section 162(m) of the Internal
Revenue Code of 1986, as amended, and applicable Treasury regulations, no tax
deduction is allowed for annual compensation in excess of $1 million paid to any
of our five most highly compensated executive officers. However,
performance-based compensation that has been approved by stockholders is
excluded from the $1 million limit if, among other requirements, the
compensation is payable only upon attainment of pre-established, objective
performance goals and the Board committee that establishes such goals consists
only of "outside directors" as defined for purposes of Section 162(m). All three
members of the Compensation Committee qualify as "outside directors." The
Compensation Committee intends to maximize the extent of tax deductibility of
executive compensation under the provisions of Section 162(m) so long as doing
so is compatible with its determinations as to the most appropriate methods and
approaches for the design and delivery of compensation to our executive
officers.
Respectfully submitted,
Compensation Committee
Jerry J. Colangelo
L. William Seidman
Dr. Louis Olivas
30
AUDIT COMMITTEE REPORT
The members of the Audit Committee for the year ended December 31, 2000
were Dr. Louis Olivas, Jose Maria Figueres and L. William Seidman. The Audit
Committee has prepared the following report detailing its policies and
responsibilities relating to the auditing of our financial statements.
The Audit Committee oversees our financial reporting process on behalf
of the Board of Directors. Management has the primary responsibility for the
financial statements and the reporting process including the systems of internal
controls. In fulfilling its oversight responsibilities, the Audit Committee
reviewed the audited financial statements in the Annual Report on Form 10-K with
management including a discussion of the quality, not just the acceptability, of
the accounting principles, the reasonableness of significant judgments, and the
clarity of disclosures in the financial statements.
Together with our independent auditors, KPMG LLP (who are responsible
for expressing an opinion on the conformity of those audited financial
statements with generally accepted accounting principles), the Audit Committee
reviewed the independent auditors' judgments as to the quality, not just the
acceptability, of our accounting principles and such other matters as are
required to be discussed with the Audit Committee under generally accepted
auditing standards. In addition, the Audit Committee has discussed the
independence of KPMG LLP from management and our company generally, including
the matters in the written disclosures required by the Independence Standards
Board.
The Audit Committee discussed with KPMG LLP the overall scope and plans
for their respective audits. The Audit Committee meets with KPMG LLP, with and
without management present, to discuss the results of their examinations, their
evaluations of our internal controls, and the overall quality of our financial
reporting.
The aggregate fees billed by KPMG LLP for professional services
rendered for the audit of our annual financial statements and the reviews of the
financial statements included in our Form 10-K for the fiscal year ended
December 31, 2000 were $136,442. For the fiscal year ended December 31, 2000,
KPMG LLP was not paid a fee for, and did not provide, directly or indirectly,
any services relating to the design or implementation of our information system,
local area network or any hardware or software system. KPMG LLP was paid a fee
for financial reviews of our filings on Form 8-K and Form S-3 (and amendments
thereto), due diligence procedures and preparation of our federal and state
income tax returns, etc. Aggregate fees billed by KPMG LLP for these matters
were $50,994.
In reliance on the reviews and discussions referred to above, the Audit
Committee recommended to the Board of Directors (and the Board of Directors has
approved) that the audited financial statements be included in the Annual Report
on Form 10-K as of and for the year ended December 31, 2000 for filing with the
Securities and Exchange Commission. The Audit Committee and the Board of
Directors have also recommended, subject to shareholder approval, the selection
of KPMG LLP as our independent auditors for the fiscal year ending December 31,
2001.
Respectfully submitted,
Audit Committee
Dr. Louis Olivas
Jose Maria Figueres
L. William Seidman
31
STOCK PERFORMANCE GRAPH
The following indexed line graph indicates the total return to our
stockholders from June 24, 1999, the date on which our Common Stock began
trading on NASDAQ, through December 26, 2000, the last full trading day prior to
the date that NASDAQ halted trading and ultimately delisted our stock from
NASDAQ, as compared to the total return for The NASDAQ Stock Market (U.S.) Index
and the Chase H&Q Internet Index. The calculations in the graph assume that $100
was invested on June 24, 1999 in our Common Stock and in each index and also
assume dividend reinvestment.
COMPARISON OF CUMULATIVE TOTAL RETURN SINCE JUNE 24, 1999 AMONG
(a) QUEPASA.COM, INC., (b) THE NASDAQ STOCK MARKET (U.S.) INDEX AND
(c) THE CHASE H&Q INTERNET INDEX
QUEPASA.COM, INC.,
JP MORGAN H&Q INTERNET INDEX
NASDAQ STOCK MARKET -- U.S. INDEX
[Download Table]
Nasdaq Stock JP Morgan H&Q Nasdaq Stock
Market-U.S. Internet Dates Quepasa.com, Inc. Market-U.S.
------------ ------------- ---------- ----------------- ------------
845.453 416.50 6/24/1999 100.00 100.00
900.956 458.71 Jun-99 114.58 106.56
884.708 404.60 Jul-99 140.63 104.64
922.119 425.95 Aug-99 83.33 109.07
923.386 471.52 Sep-99 65.10 109.22
997.393 521.35 Oct-99 63.54 117.97
1118.741 657.07 Nov-99 85.42 132.32
1364.746 912.76 Dec-99 105.73 161.42
1314.116 855.80 Jan-00 79.69 155.43
1563.804 1088.00 Feb-00 62.50 184.97
1531.672 953.38 Mar-00 56.25 181.17
1288.290 718.48 Apr-00 28.65 152.38
1132.880 604.46 May-00 14.06 134.00
1331.669 707.27 Jun-00 13.54 157.51
1259.521 663.11 Jul-00 9.38 148.98
1408.339 769.34 Aug-00 9.90 166.58
1225.310 680.39 Sep-00 7.55 144.93
1124.218 576.45 Oct-00 4.69 132.97
866.770 384.40 Nov-00 1.04 102.52
32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information known to us with
respect to the beneficial ownership of our Common Stock as of August 15, 2001,
(i) by all persons who are beneficial owners of 5% or more of our Common Stock,
(ii) each director and Named Executive Officer and (iii) all current directors
and executive officers as a group. Unless otherwise indicated, each of the
stockholders has sole voting and investment power with respect to the shares
beneficially owned, subject to community property laws, where applicable.
[Enlarge/Download Table]
Amount and Nature of Percent of
Name and Address Beneficial Ownership Shares
of Beneficial Owner as of August 15, 2001 Outstanding (1)
----------------------------------------------------------------------------------------------------------------------
Five Percent Stockholders:
Gateway Companies, Inc. (2) 1,428,571 8.0%
Mercator Minerals Ltd. (3) 1,213,583 6.8%
Mark Kucher (4) 1,657,672 4.7%
Ernest C. Garcia II (5) 927,471 5.2%
Directors and Named Executive Officers
Gary L. Trujillo (6) 839,443 4.7%
L. William Seidman (6) 222,778 1.3%
Jerry J. Colangelo 70,472 *
Jose Maria Figueres 68,944 *
Louis Olivas 71,083 *
Jose Ronstadt (7) 50,000 *
Alan Sokol (8) 610,667 3.4%
Robert J. Taylor 153,334 *
All Directors and Executive Officers as a Group (8 persons) 1,356,054 (9) 7.6%
* Represents beneficial ownership of less than one percent of the outstanding
shares of common stock.
(1) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, a
person is deemed to be the beneficial owner, for purposes of this table, of
any shares of common stock if such person has or shares voting power or
investment power with respect to such security, or has the right to acquire
beneficial ownership at any time within 60 days after August 15, 2001. For
purposes of this table, "voting power" is the power to vote or direct the
voting of shares and "investment power" is the power to dispose or direct
the disposition of shares.
(2) The address for Gateway Companies, Inc. is 4545 Towne Centre Court, San
Diego, CA 92121.
(3) The address for Mercator Minerals Ltd. is 2420 N. Huachuca Drive, Tucson,
AZ 85745.
(4) The address for Mark Kucher 1410-700 W. Georgia Street, Vancouver, British
Columbia, Canada.
(5) Consists of 927,471 shares of our common stock held by Verde Capital
Partners, LLC, Verde Reinsurance Company, Ltd. and Verde Investments, Inc.
Mr. Garcia owns a majority interest in Verde Capital, Verde Reinsurance and
Verde Investments. The address for Ernest C. Garcia is 2575 East Camelback
Road, Suite 700, Phoenix, AZ 85016.
(6) Includes 70,000 shares of common stock, which will be voted by Messrs.
Seidman and Trujillo pursuant to a voting trust agreement with our former
chief executive officer, Jeffrey Peterson.
(7) Mr. Ronstadt resigned as an officer in February 2001. As of the date of his
resignation, 50,000 of Mr. Ronstadt's options had vested. Mr. Ronstadt did
not exercise his option to purchase those vested shares, and therefore,
those options have expired.
33
(8) Consists of 600,000 shares of our common stock held by Telemundo Network
Group LLC. Mr. Sokol is Chief Operating Officer of Telemundo. The business
address for Mr. Sokol is 2470 West 8th Avenue, Hialeah, FL 33010. Mr. Sokol
resigned as a director in January 2001. As of the date of his resignation,
10,667 of Mr. Sokol's options had vested. Mr. Sokol did not exercise his
option to purchase those vested shares, and therefore, those options have
expired.
(9) These figures equal less than the sum of each column because they include
the 70,000 shares held by the voting trust disclosed in note (6) only once
and excludes information regarding Mr. Ronstadt, our former Senior Vice
President of Content Development and Mr. Sokol, a former member of our
board of directors.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In April 1999, we issued 50,000 shares of our common stock to
Garcia/LKS, which is partially owned by our former director, Lionel Sosa, for
advertising and marketing services valued at $634,000. In August 1999, we
entered into a one-year agreement with Garcia/LKS with a monthly commitment of
$150,000. Payment during the first five 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 for February 2000 through September 2000. In October 2000,
the monthly commitment was reduced to $20,000. We terminated the agreement in
December 2000.
As of December 31, 2000, we had forgivable loans due from former
employees amounting to $12,569, all of which we have since decided to write off.
These loans were granted as recruiting and retention incentives and were deemed
50% forgiven after six months and 100% forgiven after 12 months of employment.
In March 2000, we acquired realestateespanol.com. At the time of this
acquisition, realestateespanol was a party to an Internet Endorsement Agreement
with NAHREP, 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 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. At the time realestateespanol and
NAHREP entered into the original agreements, and thereafter agreed to the terms
and conditions regarding its termination and release therefrom, Gary Acosta, an
officer of both realestateespanol and us, served as director of NAHREP. In
addition, in June 2000, he became the Chief Executive Officer of NAHREP.
The carrying value of the website, approximately $27,000, was expensed
in the second quarter of 2001. The $100,000 of sponsorship fees collected in
2000 was amortized over six months commencing October 1, 2000 with $50,000 of
deferred revenue remaining as of December 31, 2000. The 200 computers remaining
in inventory on December 31, 2000 were donated to NAHREP in 2001 and expensed in
the first quarter of 2001.
34
For a summary of certain transactions and relationships between us and
our associated entities, and among our directors, executive officers and
stockholders and our associated entities, see "Compensation Committee Interlocks
and Insider Participation."
In our opinion, the transactions described above were on terms no less
favorable than those which could have been obtained from unaffiliated third
parties.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as a part of this report:
The following financial statements of quepasa.com, inc. are filed as
part of this Form 10K.
[Download Table]
PAGE
----
Report of Independent Auditors - KPMG LLP............... F-1
Report of Independent Auditors - EKS&H.................. F-2
Consolidated Balance Sheets as of December 31, 2000,
and 1999............................................... F-3
Consolidated Statements of Operations for the Years
Ended December 31, 2000, 1999 and 1998................ F-5
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 2000, 1999 and 1998........... F-6
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2000, 1999 and 1998................ F-8
Notes to Consolidated Financial Statements.............. F-10
Financial Statement Schedules:
Not applicable
(b) Reports on Form 8-K.
On August 15, 2001, the Company filed a 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 related 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, filed with the Commission on April 14, 2000.
On August 16, 2001 the Company filed a Report on Form 8-K attaching the
press release dated August 15, 2001, announcing that the Company had resolved
all issues with the Commission related 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, filed with the Commission on April 14, 2000.
(c) Exhibits:
[Enlarge/Download Table]
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
3.01 Articles of Incorporation of the Registrant, as amended (1)
3.02 Bylaws of the Registrant, as amended (1)
4.01 1998 Stock Option Plan of the Registrant, as amended, and forms of Option Agreements (1)
4.02 Registration Rights Agreement dated as of January 26, 2000, by and among the
Registrant, Verde Capital Partners, LLC and Verde Reinsurance Company, Ltd. (5)
4.03 Registration Rights Agreement dated as of January 28, 2000, by and among the
Registrant, Verde Capital Partners, LLC,
35
Alphabit Media Ventures, LLC, Designet S.A. de C.V., Designet Ventures, LLC and
Cruttenden Roth Incorporated, Ltd. (5)
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
4.04 Registration Rights Agreement dated as of March 9, 2000, by and among the Registrant,
Gary Acosta and John Beneventi (5)
9.01 Voting Trust Agreement (1)
10.01 Office Lease of the Registrant (Arizona) (1)
10.02 Agreement with Garcia/LKS (1)
10.03 Amendment to Agreement with Garcia/LKS (5 )
10.04 Agreement with Telemundo Network Group LLC (1)
10.05 Common Stock Purchase Warrant dated April 14, 1999, issued to Telemundo Network Group
LLC (1)
10.06 Agreement with Arizona Diamondbacks (1)
10.07 Second Amended and Restated Employment Agreement with Gary Trujillo (5)
10.08 Second Amended and Restated Employment Agreement with Robert Taylor (5)
10.09 Merger Agreement dated as of December 17, 1999, by and among the Registrant, eTrato
Acquisition, Inc., eTrato.com, inc., Verde Capital Partners, LLC, Alphabit Media
Ventures, LLC, Designet S.A. de C.V., Designet Ventures, LLC and Cruttenden Roth
Incorporated (5)
10.10 Merger Agreement dated as of January 17, 2000, by and among the Registrant, Credito
Acquisition, Inc., credito.com, inc., Verde Capital Partners, LLC and Verde
Reinsurance Company, Ltd. (5)
10.11 Agreement and Plan of Merger dated as of March 9, 2000, by and among the Registrant,
credito.com, inc., Realestateespanol.com, inc., Century Finance USA, Inc. d/b/a
RealEstateEspanol.com, Inc., Gary Acosta and John Beneventi (5)
10.12 Stock Purchase and Investor Rights Agreement (includes Purchase Agreement between
Gateway Companies, Inc. and quepasa.com, inc. (6)
10.13 Internet Endorsement Agreement dated December 1, 1999, by and among
RealEstateEspanol.com and National Association of Hispanic Real Estate rPofessionals*
10.14 Memorandum of Understanding dated October 3, 2000, by and among realestateespanol,
National Association of Hispanic Real Estate Professionals, National Council of La
Raza and Freddie Mac*
10.15 Agreement dated October 4, 2000, by and among realestateespanol and National
Association of Hispanic Real Estate Professionals*
21.01 Subsidiaries of the Registrant*
23.01 Consent of KPMG LLP *
23.02 Consent of Ehrhardt, Keefe, Steiner & Hottman, P.C.*
24.01 Power of Attorney (8)
-------------
36
(1) Incorporated by reference to the Registrant's Registration Statement on Form
S-1 (File No. 333-74201).
(2) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999.
(3) Incorporated by reference to the Registrant's Current Report on Form 8-K
dated September 3, 1999.
(4) Incorporated by reference to the Registrant's Current Report on Form 8-K
dated January 18, 2000.
(5) Incorporated by reference to the Registrant's 1999 Annual Report on Form
10-K dated March 30, 2000.
(6) Incorporated by reference to the Registrant's Current Report on Form 8-K
dated April 14, 2000.
(7) Incorporated by reference to the Registrant's Current Report on Form 8-K
dated August 3, 2000.
(8) Included in Part IV of this Annual Report on Form 10-K under the caption
"Signatures."
* Included herewith.
37
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 September 20, 2001.
quepasa.com, inc.
By: /s/ Gary L. Trujillo
--------------------------------
Name: Gary L. Trujillo
Title: President, Chief Executive
Officer and Chairman of the Board of
Directors
(PRINCIPAL EXECUTIVE OFFICER)
Each person whose signature appears below constitutes and appoints Gary L.
Trujillo his attorney-in-fact, with power of substitution in any and all
capacities, to sign any amendments to this Annual Report on Form 10-K, and to
file the same with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that the attorney-in-fact or his substitute or substitutes may do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, report
has been signed below by the following persons in the capacities and on the
dates indicated:
[Download Table]
NAME TITLE DATE
---- ----- ----
/s/ Gary L. Trujillo President, Chief Executive Officer September 20, 2001
------------------------- and Chairman of the Board of
Gary L. Trujillo Directors (PRINCIPAL EXECUTIVE
OFFICER)
/s/ Robert J. Taylor Chief Financial Officer and September 20, 2001
------------------------- Chief Operating Officer
Robert J. Taylor (PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER)
Director September __, 2001
-------------------------
Jerry J. Colangelo
Director September __, 2001
-------------------------
Jose Maria Figueres
/s/ Louis Olivas Director September 20, 2001
-------------------------
Louis Olivas
/s/ L. William Seidman Director September 20, 2001
-------------------------
L. William Seidman
38
QUEPASA.COM, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
[Enlarge/Download Table]
PAGE
Report of Independent Auditors - KPMG LLP....................................................................... F-1
Report of Independent Auditors - EKS&H.......................................................................... F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999.................................................... F-3
Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998...................... F-5
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998............ F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998...................... F-8
Notes to Consolidated Financial Statements...................................................................... F-10
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
quepasa.com, inc.:
We have audited the accompanying consolidated balance sheets of quepasa.com,
inc. (the Company) as of December 31, 2000 and 1999 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the two-year period ended December 31, 2000. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of quepasa.com, inc. as of December
31, 2000 and 1999 and the results of their operations and their cash flows for
each of the years in the two-year period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations, has an accumulated deficit, has been unable to successfully
execute its business plan, and is considering alternatives for the Company that
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ KPMG LLP
---------------------------
KPMG LLP
Phoenix, Arizona
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
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders quepasa.com, inc.:
We have audited the consolidated statements of operations, stockholders' equity
and cash flows for the year ended December 31, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of quepasa.com, inc.
for the year ended December 31, 1998, in conformity with accounting principles
generally accepted in the United States of America.
/s/ EHRHARDT KEEFE STEINER & HOTTMAN PC
---------------------------------------
Ehrhardt Keefe Steiner & Hottman PC
February 17, 1999
Denver, Colorado
F-2
QUEPASA.COM, INC.
Consolidated Balance Sheets
[Enlarge/Download Table]
DECEMBER 31,
2000 1999
ASSETS
Current assets:
Cash and cash equivalents $ 3,940,232 $ 6,961,592
Trading securities 2,393,964 22,237,656
Accounts receivable, net of allowance for doubtful accounts
of $184,100 and $4,813, respectively 242,275 297,170
Other receivable 981,870 -
Forgivable loans - 368,042
Prepaid expenses 302,242 2,161,494
Other current assets 158,421 -
------------- -------------
Total current assets 8,019,004 32,025,954
Prepaid marketing services - 10,120,192
Property and equipment, net 103,244 2,051,103
Assets held for sale 282,000 -
Other assets - 153,743
------------- -------------
$ 8,404,248 $ 44,350,992
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 354,743 $ 2,775,347
Accrued liabilities 149,344 1,023,984
Deferred revenue 202,292 85,417
------------- -------------
Total current liabilities 706,379 3,884,748
------------- -------------
Redeemable common stock - 2,000,000
Deferred advertising expense - (1,600,000)
Stockholders' equity:
Preferred stock, authorized 5,000,000 shares, no par value -
none issued or outstanding - -
Common stock, authorized 50,000,000 shares; $0.001 par value;
17,763,291 and 14,536,058 shares issued and outstanding at
December 31, 2000 and 1999, respectively 17,763 14,536
Additional paid-in capital 104,420,534 75,829,202
Accumulated deficit (96,740,428) (35,777,494)
------------- -------------
F-3
Total stockholders' equity 7,697,869 40,066,244
------------- -------------
Commitments, contingencies and subsequent events (see notes 2, 7, 8, 10, 11, 13
and 16)
$ 8,404,248 $ 44,350,992
============= =============
See accompanying notes to consolidated financial statements.
F-4
[Enlarge/Download Table]
QUEPASA.COM, INC.
Consolidated Statements of Operations
YEARS ENDED DECEMBER 31,
2000 1999 1998
Gross revenue $ 2,815,818 $ 670,639 $ -
Less commissions (204,070) (114,395) -
------------- ------------- ------------
Net revenue 2,611,748 556,244 -
Operating expenses:
Product and content development expenses 6,431,604 2,319,391 414,873
Advertising and marketing expenses 20,854,247 16,735,517 250,419
General and administrative expenses 6,576,773 11,539,373 5,799,996
Amortization of goodwill 5,752,002 - -
Asset impairment charges 24,923,321 - -
------------- ------------- ------------
Total operating expenses 64,537,947 30,594,281 6,465,288
------------- ------------- ------------
Loss from operations (61,926,199) (30,038,037) (6,465,288)
------------- ------------- ------------
Other income (expense):
Interest expense (55,119) (238,858) (48,994)
Interest income and other 1,220,274 855,408 1,054
Short-term gain on trading securities 2,820 - -
Unrealized gain (loss) on trading securities (140,127) 160,124 -
------------- ------------- ------------
Net other income (expenses) 1,027,848 776,674 (47,940)
------------- ------------- ------------
Loss before the cumulative effect of a
change in accounting principle (60,898,351) (29,261,363) (6,513,228)
Cumulative effect of a change in accounting
principle [see note 4(g)] (64,583) - -
------------- ------------- ------------
Net loss $ (60,962,934) $ (29,261,363) $ (6,513,228)
------------- ------------- ------------
Loss per share before the cumulative effect
of a change in accounting principle and
net loss per share, basic and diluted $ (3.52) $ (2.44) $ (0.98)
============= ============= ============
Weighted average number of shares
outstanding, basic and diluted 17,301,729 12,011,088 6,671,052
============= ============= ============
See accompanying notes to consolidated financial statements.
F-5
QUEPASA.COM, INC.
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2000, 1999 and 1998
[Enlarge/Download Table]
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
Balances, December 31, 1997 5,680,000 $ 5,680 $ (5,660) $ (2,903) $ (2,883)
Issuance of common stock and
stock based compensation 1,420,000 1,420 4,985,294 - 4,986,714
Issuance of common stock in
conversion of note payable
($1.56 per share) 666,666 667 1,039,113 - 1,039,780
Issuance of common stock in
conversion of note payable
($1.00 per share) 50,000 50 49,950 - 50,000
Issuance of common stock for
cash at $3.75 per share, net
of $641,000 of offering costs 1,259,167 1,259 4,080,030 - 4,081,289
Issuance of compensatory stock
options to employees - - 278,750 - 278,750
Net loss - - - (6,513,228) (6,513,228)
Balances, December 31, 1998 9,075,833 9,076 10,427,477 (6,516,131) 3,920,422
---------- ---------- ------------- ------------ -------------
Issuance of compensatory stock
options to employees, officers
and directors - - 4,401,195 - 4,401,195
Issuance of stock to officers and
directors 50,000 50 549,950 - 550,000
Issuance of common stock and
warrants for advertising and
marketing services 650,000 650 10,753,917 - 10,754,567
Issuance of common stock for
consulting services 50,000 50 549,950 - 550,000
Proceeds from initial public
offering,
net of $7,364,000 of 4,000,000 4,000 42,364,300 - 42,368,300
offering costs
Proceeds from underwriter 600,000 600 6,286,273 - 6,286,873
of offering costs
Proceeds from exercise of common 110,225 110 496,140 - 496,250
stock options
F-6
Net loss - - - (29,261,363) (29,261,363)
---------- ---------- ------------- ------------ -------------
Balances, December 31, 1999 14,536,058 14,536 75,829,202 (35,777,494) 40,066,244
Issuance of common stock in 1,699,561 1,700 20,071,334 20,073,034
acquisitions -
Issuance of common stock and warrants
for cash 1,428,571 1,429 8,070,072 - 8,071,501
Issuance of compensatory stock
options to employees, 82,184 82,184
officers and directors - - -
Proceeds from exercise of common 99,100 98 367,742 367,840
stock options -
Net loss - - - (60,962,934) (60,962,934)
---------- ---------- ------------- ------------ -------------
Balances, December 31, 2000 17,763,290 $ 17,763 $ 104,420,534 $(96,740,428) $ 7,697,869
========== ========== ============= ============ =============
See accompanying notes to consolidated financial statements.
F-7
QUEPASA.COM, INC.
Consolidated Statements of Cash Flows
[Enlarge/Download Table]
YEARS ENDED DECEMBER 31,
2000 1999 1998
Cash flows from operating activities:
Net loss $ (60,962,934) $ (29,261,363) $ (6,513,228)
Adjustments to reconcile net loss to net cash used in operating
activities:
Asset impairment charge 24,923,321 - -
Depreciation and amortization 8,057,249 341,887 6,532
Loss on sale of computers 3,527,692 - -
Stock based compensation 82,184 4,951,195 5,265,364
Forgiveness of forgivable loans 355,474 28,498 -
Consulting services received in exchange for stock - 550,000 -
Amortization of prepaid advertising - 1,034,375 -
Amortization of prepaid marketing services 2,545,820 - -
Amortization of deferred advertising 766,666 - -
Accrued interest on convertible notes payable - - 39,780
Short-term gain on trading securities (2,820) - -
Unrealized loss (gain) on trading securities 140,127 (160,124) -
Cumulative effect of change in accounting principle 64,583 - -
Increase (decrease) in cash net of acquisitions resulting from
changes in:
Sale (purchase) of trading securities, net 19,706,385 (22,077,532) -
Accounts receivable 54,895 (297,170) -
Deposits receivable - 1,533,632 (1,533,632)
Prepaid expenses 684,113 (2,161,494) -
Other assets (6,710,890) (175,790) (2,500)
Accounts payable (2,524,143) 2,704,125 65,757
Accrued liabilities (877,539) 1,021,062 2,922
Deferred revenue 52,292 21,252 64,165
------------- -------------- -------------
Net cash used in operating activities (10,117,525) (41,947,447) (2,604,840)
------------- -------------- -------------
Cash flows from investing activities:
Forgivable loans - - (396,540)
Cash paid for acquisitions (238,793) - -
Cash received in acquisition 578,730 - -
Purchase of property and equipment (241,232) (2,013,823) (361,152)
------------- -------------- -------------
Net cash provided by (used in) investing activities 98,705 (2,013,823) (757,692)
------------- -------------- -------------
Cash flows from financing activities:
F-8
Stock subscription receivable - 125,000 (125,000)
Net proceeds from private placements - - 4,081,289
Proceeds from convertible note payable - - 1,100,000
Accrued commissions - (215,233) 215,233
Stock subscription - (337,500) 337,500
Proceeds from initial public offering and overallotment, net of offering - 48,655,173 -
costs
Proceeds from exercise of common stock options 367,840 496,250 -
Proceeds from issuance of common stock 9,000,000 - 100
Proceeds from draws on line of credit 12,289 - -
Payments on notes payable (2,382,669) - (50,000)
----------- ----------- ----------
Net cash provided by financing activities 6,997,460 48,723,690 5,559,122
----------- ----------- ----------
Net increase (decrease) in cash and cash equivalents (3,021,360) 4,762,420 2,196,590
Cash and cash equivalents, beginning of year 6,961,592 2,199,172 2,582
----------- ----------- ----------
Cash and cash equivalents, end of year $ 3,940,232 $ 6,961,592 $2,199,172
=========== =========== ==========
Supplemental statement of cash flow information - interest paid $ 55,003 $ 238,858 $ 48,994
=========== =========== ==========
Supplemental disclosure of non-cash financing and investing activities:
Stock and warrants issued in exchange for advertising and marketing
services $ - $12,755,000 $ -
=========== =========== ==========
Convertible notes converted into common stock $ - $ - $ 1,090,000
=========== =========== ==========
Barter transactions $ 1,291,201 $ 119,000 $ -
=========== =========== ==========
Sale of computers in exchange for receivable $ 981,870 $ - $ -
=========== =========== ==========
Acquisitions through balance of stock and notes payable and assumption
of liabilities $22,549,853 $ - $ -
=========== =========== ==========
Write-off of prepaid advertising due to return of redeemable
common stock and cancellation of installation payment $ 2,500,000 $ - $ -
=========== =========== ==========
See accompanying notes to consolidated financial statements.
F-9
QUEPASA.COM, INC.
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(1) THE COMPANY
quepasa.com, inc. (the "Company" or quepasa), a Nevada Corporation, was
incorporated in June 1997. The Company is a Bilingual Internet portal and
on-line community focused on the United States Hispanic market. quepasa
offers a number of services in both Spanish and English such as a search
engine, news feeds, chat, games, maps, message boards and free e-mail.
The Company's portal draws viewers to its website by providing a one-stop
destination for identifying, selecting and accessing resources, services,
content and information on the Web. Because the language preference of
many U.S. Hispanics is English, it also offers users the ability to
access information and services in the English language.
During 1998, the Company changed its name from Internet Century, Inc.
to quepasa.com, inc.
(2) LIQUIDITY AND ASSET IMPAIRMENT CHARGE
The Company's consolidated financial statements are prepared using
accounting principles generally accepted in the United States of America
applicable to a going concern, which contemplate the realization of
assets and satisfaction of liabilities in the normal course of business.
The Company has incurred net losses from operations since inception and
has an accumulated deficit of $96.7 million through December 31, 2000.
During 2000, the Company actively pursued the sale of its assets as well
as responded to numerous inquiries from interested parties. 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 can
be achieved resulting from the Company's inability to execute its
business plan or to develop a revenue stream to support the carrying
value of its assets. By April 30, 2001, the Company downsized its
workforce to three individuals, disposed of certain assets, and
reduced its long-term commitments. While 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. Subsequent to year-end, the Company executed an
agreement to merge with an unrelated entity (see note 16). The
consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
While management continued to develop and support its websites and pursue
its original business plan, the Company continued to amortize its
goodwill through November 30, 2000. As a result of the Board of
Directors' decision on December 27, 2000 to liquidate and sell the
Company's assets, and because the Company has been unable to develop a
revenue stream to support the carrying value of its long-lived and
intangible assets, the Company performed an impairment analysis of all
long-lived assets and its identifiable intangibles in accordance with
accounting principles generally accepted in the United States of America.
The fair value of the long-lived assets and its identifiable intangibles
was determined to approximate $385,000. As a result, the Company recorded
a $24.9 million impairment charge related to such assets as follows:
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. In addition, the Company recorded a
$3.5 million loss on the sale of computer promotions inventory, which is
included in advertising and marketing expenses at December 31, 2000 (see
note 3).
(3) 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 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
F-10
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 performed an impairment analysis of all long-lived assets and
identifiable intangibles in accordance with generally accepted
accounting principles 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 (see note 2). The results of operations of credito.com have
been included in the accompanying statement of operations for 2000
from the acquisition date.
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 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
generally accepted accounting principles in the United States of America.
As a result, the balance of unamortized goodwill of $5.6 million recorded
in conjunction with the transaction was written off in the fourth quarter
of 2000 (see note 2). The results of operations of eTrato.com have been
included in the accompanying statement of operations for 2000 from the
acquisition date.
On March 9, 2000, the Company acquired RealEstateEspanol.com, (REE) 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
generally accepted accounting principles in the United States of America.
As a result, the balance of unamortized goodwill of $2.4 million recorded
in conjunction with the transaction was written off in the fourth quarter
of 2000 (see note 2). The results of operations of RealEstateEspanol.com
have been included in the accompanying statement of operations for 2000
from the acquisition date.
F-11
The following summary, prepared on a pro forma basis, combines the
consolidated results of operations (unaudited) as if the acquisitions had
taken place on January 1, 1999. Amortization of goodwill related to the
acquisitions of credito.com, eTrato.com, and RealEstateEspanol.com has
been recorded for the period of inception, August 17, 1999, June 16,
1999, and August 30, 1999, respectively, through December 31, 1999 based
on an estimated useful life of 3 years. Such pro forma amounts are not
necessarily indicative of what the actual results of operations might
have been if the acquisitions had been effective on January 1, 1999,
including $6,425,000 and $3,139,000 amortization of goodwill in 2000 and
1999, respectively, (in thousands, except per share amounts):
[Download Table]
YEARS ENDED DECEMBER 31,
--------------------------------
2000 1999
-------------- -------------
(Unaudited)
Gross revenue $ 2,816 $ 671
Net revenue 2,612 556
Operating expenses 65,494 33,927
Net loss 61,919 (32,602)
Net loss per share, basic and diluted (3.58) (2.71)
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 (see note 2). 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. Virtually all promotional activities were halted in order to
conserve cash. 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 Director's 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.
At December 31, 2000, the Company had $158,421 of computer inventory
remaining, which was included in other current assets. This inventory was
donated to NAHREP and expensed in the first quarter of 2001 (see note 7).
F-12
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 calls 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 $2.3 million and $1.2 million of
amortization in relation to the Estefan agreement during 2000 and 1999,
respectively, in relation to the original contract. The issuance of the
156,863 shares of redeemable common stock was reversed [see note 12(f)
for expanded discussion].
During 2000, 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
$683,000 in employee severance and termination costs for the year ended
December 31, 2000, relating to the reduction in the workforce of
approximately 69 employees, which is classified as follows: $300,000 in
production and content development expense, $152,000 in sales and
marketing, and $231,000 in general and administrative expenses. As of
December 31, 2000, all employee severance and termination costs incurred
in 2000 had been paid.
(4) 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.
(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
2000, one customer accounted for 16% of gross revenue. During
1999, two customers accounted for 21% and 12% of gross revenue. No
other single advertiser utilizing banner ads or sponsorship
agreements amounted to or exceeded 10% of total gross revenues.
(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-13
(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 and
1999 consist 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 for 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 and 1999 are categorized as trading.
(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 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. In
connection with the adoption of this principle, the Company
recorded a $64,583 cumulative effect of change in accounting
principle, net loss increased $87,709 for the year ended December
31, 2000 and deferred revenue of $152,292 was recorded as of
December 31, 2000. Payments received from sponsors prior to
displaying their advertisements on the Company's website are
recorded as deferred revenue. The pro forma effect of retroactive
application on the results of operations for the years ended
December 31, 2000, 1999 and 1998, follows:
[Download Table]
2000 1999 1998
----------------- ----------------- ------------------
Net loss:
As reported $ (60,963,000) $ (29,261,000) $ (6,513,000)
Pro forma $ (60,898,000) $ (29,326,000) $ (6,513,000)
Net loss per share:
As reported $ (3.52) $ (2.44) $ (0.98)
Pro forma $ (3.52) $ (2.44) $ (0.98)
F-14
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
years ended December 31, 2000, 1999 and 1998, revenue and related
expenses attributable to reciprocal services totaled approximately
$1,291,000, $119,000 and $0, 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 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.
F-15
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 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 exceed the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying
amount or fair value of the assets less costs to sell. During
2000, the Company recognized an impairment charge of $24.9 million
(see note 2).
(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, forgivable loans, 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.
F-16
(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.
(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 years ended December 31, 2000, 1999 and
1998 totaled $9,768,000, $15,884,000 and $132,000, 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.
(5) TRADING SECURITIES
A summary of cost and estimated fair values of trading securities as of
December 31, 2000 and 1999 follows:
[Enlarge/Download Table]
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------------ ------------------ ------------------ -------------------
2000:
Corporate debt securities $ 2,534,091 $ - $ 140,127 $ 2,393,964
================== ================== ================== ===================
1999:
Corporate debt securities $ 22,077,532 $ 160,124 $ - $ 22,237,656
================== ================== ================== ===================
Proceeds from the sale of trading securities were $105,856,000 and
$105,895,000 in 2000 and 1999, respectively. Realized gains totaled
$2,820, $0 and $0 during 2000, 1999 and 1998, respectively.
(6) BALANCE SHEET COMPONENTS (IN THOUSANDS)
[Enlarge/Download Table]
DECEMBER 31,
------------------------------------------------
2000 1999
--------------------- -------------------------
Prepaid expenses:
Prepaid advertising $ - $ 1,516
Prepaid consulting - 4
Prepaid insurance 240 390
Prepaid maintenance 3 90
Prepaid content - 58
Other prepaid expenses 59 103
--------------------- -------------------------
$ 302 $ 2,161
===================== =========================
F-17
Property and equipment:
Computer equipment and software $ 72 $ 1,874
Furniture, fixtures, equipment and other 7 367
Leasehold improvements 97 147
--------------------- -------------------------
176 2,388
Less accumulated depreciation and amortization (73) (337)
--------------------- -------------------------
Property and equipment $ 103 $ 2,051
===================== =========================
Accrued liabilities:
Payroll taxes withheld $ 14 $ 2
Advertising - 762
Accrued vacation 51 77
Prizes payable - 15
Other accrued expenses 84 168
--------------------- -------------------------
$ 149 $ 1,024
===================== =========================
(7) SPONSORSHIP FEE
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 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.
The carrying value of the website, approximately $27,000, was expensed in the
second quarter of 2001. The $100,000 of sponsorship fees collected in 2000 was
amortized over six months commencing October 1, 2000 with $50,000 of deferred
revenue remaining as of December 31, 2000. The 200 computers remaining in
inventory on December 31, 2000 were donated to NAHREP in 2001 and expensed in
the first quarter of 2001.
F-18
(8) LEASES
OPERATING LEASES
The Company entered into a three and one-half year lease agreement for
its corporate offices commencing June 1, 1999. The monthly lease payments
range from $24,341 to $26,000. The lease expires November 30, 2002. In
addition, in connection with its previous headquarters location, the
Company has a 3-year lease agreement for offices in Las Vegas, NV. The
lease payments range from $1,732 to $1,771 per month and the lease
expires on August 14, 2001.
Future minimum rental payments under non-cancelable operating and
equipment leases are as follows:
[Download Table]
Years ending December 31,
2001 $ 342,000
2002 287,000
---------------------
$ 629,000
=====================
Facilities and equipment lease expense for the years ended December 31,
2000, 1999 and 1998 was $391,000, $311,000 and $45,000, respectively. As
a result of the reduction in the Company's workforce and change in the
business strategy, the Company has executed an agreement with its
landlord to terminate its office lease for all office space in its
current headquarters location (see note 16).
(9) INCOME TAXES
No provision for federal and state income taxes has been recorded as the
Company has incurred significant net operating losses from inception
through December 31, 2000. Sources of deferred tax assets and their tax
effects follows:
[Download Table]
DECEMBER 31,
--------------------------------------------
2000 1999
--------------------- ---------------------
Net operating loss carryforwards $ 21,038,000 $ 10,535,000
Nondeductible expenses 841,000 (79,000)
Other - 255,000
--------------------- ---------------------
Gross deferred tax assets 21,879,000 10,711,000
Valuation allowance (21,879,000) (10,711,000)
--------------------- ---------------------
$ - $ -
===================== =====================
The allowance for deferred tax assets as of December 31, 2000 and 1999
was $21,879,000 and $10,711,000, respectively. The net change in the
total valuation allowance for the years ended December 31, 2000 and 1999
was an increase of $11,168,000 and $9,066,000, respectively. The Company
believes sufficient uncertainty exists regarding the realization of the
tax assets such that a full valuation allowance is appropriate.
At December 31, 2000, the Company had approximately $52,594,000 of
federal net operating loss carryforwards for tax reporting purposes
available to offset future taxable income, if any. These carryforwards
begin to expire in 2018 and 2019. The Company has approximately
$52,594,000 of state net operating loss carryforwards for tax
reporting purposes, which begin to expire in 2002. Due to the
frequency of equity transactions within the Company, it is likely the
use of the net operating loss carryforwards will be limited in
accordance with Section 382 of the Internal Revenue Code. A
determination as to this limitation will be made at a future date as
the net operating losses are utilized.
F-19
(10) COMMITMENTS
(a) EMPLOYMENT AGREEMENTS
The Company has entered into employment and other agreements with
many of its employees and all of its executive officers and
non-employee directors. Under the terms of the employment
agreements with its employees, 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 $1.2 million in
severance payments under the Company's existing employment
agreements with its remaining officers and other agreements with
its non-employee directors as follows:
Pursuant to the pending merger agreement with Great Western Land
and Recreation, Inc., Gary L. Trujillo and Robert J. Taylor will
be terminated at the closing thereof, triggering certain severance
obligations of the Company. Under Taylor's employment agreement,
Taylor's employment terminates on its own terms on March 8, 2002,
but the Company may terminate his employment for any reason, with
or without cause. If the Company terminates Taylor's employment
without cause before the end of Taylor's employment term, the
Company is required to pay Taylor a severance payment in the
amount of $100,000, which payment is due and payable immediately
upon termination. In addition, all of Taylor's 193,334 unvested
options will become fully vested and exercisable upon the closing
of the merger. Trujillo's employment terminates on its own terms
on April 26, 2004, and the Company may not terminate his
employment without cause. Trujillo has agreed to terminate his
employment with the Company at the merger closing in exchange for
a discounted lump sum payment of the compensation due him over the
remaining term of his agreement. Trujillo will receive up to
approximately $850,000 in connection with the termination of his
employment agreement. That amount will be reduced by any monthly
salary payments made to Trujillo. In addition, all of Trujillo's
286,111 unvested options will become fully vested and exercisable
upon the closing of the merger.
A change of control in the Company will also trigger a cash
payment due to the Company's 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.
(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 (see note 16). 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 (see notes 12 and
16). 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 is amortized over the
term of the agreement (5 years), resulting in expense of
$1,707,000 for the year ended December 31, 2000. This agreement
also provides (1) that the parties will collaborate regarding
online content development, co-branded marketing promotions,
F-20
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 in the United States of
America. As a result, the Company wrote off the unamortized $7.6
million remaining prepaid marketing services as of December 31,
2000 (see note 2).
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
2000 and 1999 baseball seasons.
(c) INTERNET ACCESS AGREEMENT
On December 14, 1999, the Company entered into a one-year
agreement with NetZero, Inc. (NetZero), where it provided free
internet access along with the Company's content to the U.S.
Hispanic market. According to the terms of this agreement, the
Company was obligated to pay a fee for their subscribers who
accessed the Company's website. This fee ranged from $.10 to $.15
per user session (user session fees). The Company was also
committed to spend at least $1.0 million for the production and
distribution of CD's containing the customized NetZero service. In
addition, according to the terms of the agreement, the Company
made a $1.0 million advance payment which was applied against
future user session fees incurred by the Company. The Company was
obligated to maintain an advance payment amount each month equal
to at least 125% of the amount due the prior month for such user
session fees. The user session fees and the production and
distribution costs for the CD's were expensed as incurred. The
Company had no advance payments with NetZero as of December 31,
2000. As of December 31, 2000, all obligations were met and the
agreement was terminated.
(d) CONTENT
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 $815,000, $227,000 and $104,000
for the years ended December 31, 2000, 1999 and 1998,
respectively. Subsequent to year-end, the Company paid $41,000 to
terminate all content development agreements.
(11) 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
F-21
breached the agreement by failing to develop and maintain the
Telemundo website, 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. A hearing
date for the arbitration has been set for October 1, 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 financial statements do not include a provision for loss,
if any, resulting from the ultimate outcome of this matter.
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.
(12) STOCKHOLDERS' EQUITY
(a) CONVERTIBLE NOTE PAYABLE
In May 1998, the Company issued $100,000 of convertible debt. The
convertible debt accrued interest at 12% per annum and was
scheduled to mature on the earlier of May 31, 2000 or the closing
date of the Company's initial public offering. The Company had the
right to convert unpaid note principal plus any accrued interest
into 100,000 shares of common stock at any time during the term of
the note. In November 1998, the Company converted $50,000 of the
note into 50,000 shares of the Company's common stock and repaid
the balance of $50,000.
In July 1998, the Company issued $1,000,000 of convertible debt.
The convertible debt accrued interest at 12% per annum and was
payable on the earlier of May 31, 2000 or at the closing date of
the Company's initial public offering. The Company had the right
to convert unpaid principal plus any accrued interest into 666,666
shares of common stock at any time during the term of the notes.
The Company believes this conversion feature was based on the fair
market value of the common stock on the date of issuance. In
November 1998, the notes and accrued interest of $39,780 were
converted into 666,666 shares of the Company's common stock.
(b) PRIVATE PLACEMENT
During November and December of 1998, the Company issued 1,259,167
shares of common stock in a private placement for cash at $3.75
per share. The Company received proceeds of $4,081,289 net of
related costs of $640,587. In January 1999, $125,000 of the
proceeds were received and were reflected as stock subscription
receivable as of December 31, 1998.
During December 1998, the Company received excess proceeds of
$337,500 with respect to these private placements. These amounts
were refunded upon the investor's request in January 1999.
(c) COMMON STOCK ISSUED IN EXCHANGE FOR ADVERTISING
In April 1999, the Company issued 600,000 shares of common stock
valued at $7.2 million and a warrant to purchase 1,000,000 shares
of common stock at $14.40 per share to Telemundo in exchange for a
television advertising credit valued at $5.0 million and other
marketing services. The warrant was valued at $2,920,192 using the
Black-Scholes option-pricing model. The $5.0 million advertising
credit as of December 31, 1999, is included in prepaid marketing
services on the balance sheet. Since the Company's Board of
Directors approve the development of a plan of liquidation and
sale of its assets in December 2000 and since the Company has not
been able to develop a revenue stream to support the carrying
value of its long-lived and intangible assets, the Company
reviewed long-term assets and identifiable intangibles for
impairment as of December 31, 2000. Consequently, the Company
wrote off the $7.6 million remaining prepaid marketing services to
zero as of December 31, 2000 (see note 2).
Also in April of 1999, the Company issued 50,000 shares of common
stock to Garcia/LKS in exchange for advertising services valued at
$634,000 [see note 10(b)].
F-22
(d) INITIAL PUBLIC OFFERING
On June 24, 1999, the Company completed its initial public
offering of 4,000,000 shares of its common stock. Net proceeds to
the Company aggregated approximately $42,400,000. In July 1999,
the underwriters exercised an overallotment option and purchased
600,000 shares with net proceeds aggregating approximately
$6,300,000.
(e) REDEEMABLE COMMON STOCK - SPOKESPERSON AGREEMENT
In September 1999, the Company entered into a $6,000,000 agreement
with Estefan Enterprises, Inc. (Estefan) whereby Gloria Estefan
was to act as spokesperson for the Company through December 31,
2000 and the Company would sponsor her United States concert tour.
The terms of the agreement required the payment of $2,000,000 upon
signing the agreement, $2,000,000 to be paid in fiscal year 2000
and issuance of 156,863 shares of redeemable common stock valued
at $2,000,000 ($12.75 per share). The value of the stock and the
related advertising costs were originally determined by an
independent third party and were adjusted at each quarterly
reporting period based on the then fair value of the stock issued
through the final measurement date. If the closing price of the
Company's common stock on September 1, 2000 was less than $12.75
per share, Estefan would have the option to return the stock to
the Company in exchange for $2,000,000 cash (put option). If
Estefan sells its shares of common stock of the Company for more
than $18.75 per share, it was obligated to return to the Company a
number of shares which, when multiplied by the sales price, equals
50% of the difference between the sale price and $18.75 multiplied
by the number of shares being sold on such date (up to a maximum
value of $6.0 million). Amounts related to this original contract
were recorded as prepaid expense, redeemable common stock and
deferred advertising expense and were being amortized on a
straight-line basis over the term of the contract. In June 2000,
the United States Concert Tour was cancelled and the original
terms of the agreement with Estefan were renegotiated. The revised
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 $500,000
cash installment. The Company recognized $2,300,000 and $1,200,000
of amortization expense in 2000 and 1999, respectively, in
relation to the original contract. The issuance of the 156,863
shares of redeemable common stock was reversed, in part, against
deferred advertising expense.
(f) OUTSTANDING WARRANTS
As of December 31, 2000 and 1999, the Company had outstanding
warrants for the purchase of 2,081,818 and 1,400,000 common shares
of our common stock, respectively. The holders of the outstanding
warrants as of December 31, 2000 are as follows: 681,818
contingent warrants held by Verde Capital Partners LLC and Verde
Reinsurance Company, Ltd. (Verde) (see note 3), 1,000,000 warrants
held by Telemundo with a strike price of $14.40 per share and
400,000 warrants held by Cruttenden Roth with a strike price of
$19.80 per share. The holders of the outstanding warrants as of
December 31, 1999 were as follows: 1,000,000 warrants held by
Telemundo with a strike price of $14.40 per share and 400,000
shares held by Cruttenden Roth with a strike price of $19.80 per
share. The Verde warrants were contingent on certain performance
objectives to be met by credito.com. As the agreed-upon targets
were not met, the Verde warrants were returned to quepasa and
cancelled subsequent to year-end. Similarly, the Telemundo
warrants expired unexercised on June 25, 2001 (see note 16). The
Company accounted for the Telemundo and Cruttenden Roth warrants
as prepaid marketing services and a net entry to additional
paid-in capital, respectively. The Telemundo and Cruttenden Roth
warrants were valued at $2,920,000 and $1,732,000, respectively,
on the date of grant using the Black-Scholes option-pricing model.
The assumptions used for the Telemundo warrants are as follows:
expected dividend yield 0%, risk-free interest rate of 4.5%,
expected volatility of 50%, and expected life of two years. The
assumptions used for the Cruttenden Roth warrants are as follows:
expected dividend yield 0%, risk-free interest rate of 5.67%,
expected volatility of 50%, and expected life of five years.
F-23
(g) PROCEEDS FROM EXERCISE OF COMMON STOCK OPTIONS
During 2000 and 1999, current and former employees and directors
exercised common stock options for the purchase of shares of the
Company's common stock. The proceeds from these issuances totaled
$368,000 and $496,000 during 2000 and 1999, respectively.
(h) STOCK SPLIT
In October 1998, the Company's Board of Directors authorized a 284
for one stock split. The consolidated financial statements have
been presented as if the split had occurred at inception.
(13) LOSS PER SHARE
A summary of the reconciliation from basic loss per share to diluted loss
per share follows for the years ended December 31, 2000, 1999 and 1998:
[Enlarge/Download Table]
YEARS ENDED DECEMBER 31,
----------------------------------------------------
2000 1999 1998
------------- ------------- -------------------
Loss before the cumulative effect of a change in
accounting principle $ (60,898,351) $ (29,261,363) $ (6,513,228)
============== ============== ===================
Net loss $ (60,962,934) $ (29,261,363) $ (6,513,228)
============== ============== ===================
Basic EPS-weighted average shares outstanding 17,301,729 12,011,088 6,671,052
============== ============== ===================
Basic and diluted loss per share before the cumulative
effect of a change in accounting principle and basic
and diluted net loss per share $ (3.52) $ (2.44) $ (0.98)
============== ============== ===================
Stock options not included in diluted EPS since 2,823,785 2,987,000 215,000
antidilutive
============== ============== ===================
Warrants not included in diluted EPS since antidilutive 2,081,818 1,400,000 -
============== ============== ===================
Contingent shares not included in basic and diluted EPS total 930,652, 0
and 0 for the years ended December 31, 2000, 1999 and 1998, respectively.
Warrants to purchase 1,681,818 shares of the Company's common stock (see
note 16) and approximately 1,081,000 stock options have expired
subsequent to December 31, 2000.
(14) STOCK OPTION PLAN AND EMPLOYEE COMPENSATORY STOCK
In October 1998, the Company adopted and later amended a Stock Option
Plan (the "Plan"), which provides for the granting of options to
officers, directors, and consultants. The plan permits the granting of
"incentive stock options" meeting the requirements of Section 422A of the
Internal Revenue Code as well as "nonqualified" which do not satisfy the
requirements of that section. 6,000,000 shares of common stock have been
restricted under the plan for the granting of options. The Plan will be
in effect until November 1, 2009, unless extended by the Company's
stockholders. The options are exercisable to purchase stock for a period
of ten years from the date of grant.
F-24
Incentive stock options granted pursuant to this Plan may not have an
option price that is less than the fair market value of the stock on the
date the option is granted. Incentive stock options granted to
significant stockholders shall have an option price of not less than 110%
of the fair market value of the stock on the date of the grant. Prior to
the Company's initial public offering, the fair market value of the stock
was determined based on similar transactions with independent third
parties and the mid-point of the proposed initial public offering price
range ($10 to $12 per share) based on discussions with underwriters in
late January 1999. Subsequent to the Company's initial public offering,
the fair market value of the stock was determined based on the closing
trading price of the Company's stock on the date of grant. Options
granted under the plan vest one-third at the end of each of the three
years of service following the grant date. The Board of Directors of the
Company may waive the vesting requirements at its discretion. All stock
options issued under the Plan are exercisable for a period of 10 years
from the date of grant.
During May 1998, the Company issued 1,420,000 shares of common stock to
Michael Silberman, then an officer of the Company. 296,492 of those
shares of common stock were issued to Mr. Silberman in error, and at the
Company's request, he transferred those shares to an outside advisor.
Also during May 1998, Jeffrey S. Peterson, the Company's then Chairman
and Chief Executive Officer, transferred 3,566,714 existing shares to
several employees and outside advisors. The fair market value of the
common stock on the date of these issuances was determined to be $1.00
based on the issuance of convertible debt in May of 1998, which was
convertible into common stock at $1.00 per share. Approximately $5.0
million in compensation expense is reflected in the December 31, 1998
financial statements as a result of these transactions.
Stock based compensation totaled $82,184, $4,951,195 and $5,265,364 for
the years ended December 31, 2000, 1999 and 1998, respectively. Stock
based compensation for the year ended December 31, 2000, was classified
in production and content development expense. Stock based compensation
for the year ended December 31, 1999, was classified as follows: $200,372
to production and content development expense, $61,012 to advertising and
marketing expense, and $4,689,793 to general and administrative expense.
Stock based compensation for the year ended December 31, 1998, was
primarily allocated to general and administrative expense.
Had the Company determined compensation cost based on the fair value at
the date of grant for its stock options under SFAS 123, the Company's net
loss per share would have been increased to the pro forma amounts
presented below:
[Enlarge/Download Table]
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
2000 1999 1998
-------------- --------------- ---------------
Net loss:
As reported (60,962,934) (29,261,363) (6,513,228)
Pro forma (66,094,658) (36,036,997) (11,434,405)
Basic and diluted net loss per share:
As reported $ (3.52) $ (2.44) $ (0.98)
Pro forma (3.82) (3.00) (1.71)
For purposes of SFAS 123, pro forma net loss and pro forma net loss per
share, the fair value of option grants is estimated on the date of grants
utilizing the Black-Scholes option-pricing model with the following
weighted average assumptions: 2000 - expected life of three years,
expected volatility of 186%, risk-free interest rate of 5.0% and a 0%
dividend yield; 1999 - expected life of five years, expected volatility
of 61%, risk-free interest rate of 5.52% and a 0% dividend yield; 1998 -
expected life of five years, 67% weighted average volatility, risk-free
interest rate of 6% and a 0% dividend yield. The per share weighted
average fair value of stock options granted under the Plan for the years
ended December 31, 2000, 1999 and 1998 were $7.91, $5.91 and $2.63,
respectively, using the Black-Scholes option-pricing model and the
assumptions listed above.
Summarized information relating to the stock option plan follows:
F-25
[Download Table]
WEIGHTED
COMMON AVERAGE
STOCK EXERCISE
OPTIONS PRICE
------------ ----------
Outstanding, December 31, 1997 - -
Granted 215,000 $ 2.45
------------ ----------
Outstanding, December 31, 1998 215,000 2.45
Granted 3,065,500 9.03
Exercised (110,225) 5.44
Cancelled or forfeited (183,275) 5.15
------------ ----------
Outstanding, December 31, 1999 2,987,000 8.92
Granted 1,151,813 8.84
Exercised (99,100) 3.71
Cancelled or forfeited (1,215,928) 10.63
------------ ----------
Outstanding, December 31, 2000 2,823,785 $ 8.35
------------ ----------
------------ ----------
Exercisable, December 31, 2000 1,444,149 $ 8.00
------------ ----------
------------ ----------
A summary of the stock options granted at December 31, 2000 follows:
[Enlarge/Download Table]
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED-
AVERAGE
NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AS OF 12/31/00 LIFE PRICE AS OF 12/31/00 PRICE
---------------- -------------- ------------ ---------------- -------------- ----------------
$ 0.00 - $ 1.85 52,500 5.7 $ 1.36 37,500 $ 1.50
$ 5.55 - $ 7.40 635,000 6.7 $ 7.02 500,000 $ 7.00
$ 7.40 - $ 9.25 1,478,950 6.0 $ 8.05 617,899 $ 7.88
$ 9.25 - $11.10 368,334 4.4 $10.29 178,334 $10.26
$11.10 - $12.95 289,001 6.5 $11.63 110,416 $11.68
-------------- ------------ ---------------- -------------- ----------------
2,823,785 6.0 $ 8.35 1,444,149 $ 8.00
-------------- ------------ ---------------- -------------- ----------------
-------------- ------------ ---------------- -------------- ----------------
(15) RELATED PARTY TRANSACTIONS
In May 1998, Jeffrey S. Peterson, then our Chairman and Chief Executive
Officer, conveyed an aggregate of 3,566,714 shares of his common stock to
Michael A. Hubert, Kevin Dieball, Keith Fredriksen, The Monolith Limited
Partnership and Richard Whelan, for $.00035 per share. The shares were
conveyed at that time to induce these five persons to provide strategic
planning and business development services to us.
F-26
In July 1998, the Company loaned Mr. Peterson $100,000 pursuant to his
employment agreement. The Company agreed that if Mr. Peterson was
employed by the Company on April 1, 1999 the loan would be forgiven,
which subsequently occurred. The loan bore interest at 10% per annum.
Similar loans were made to several other of our officers including our
Chief Executive Officer, Gary L. Trujillo, to whom the Company loaned
$100,000. Mr. Trujillo's loan bore interest at 10% per annum with 50% of
the loan forgiven in October 1999 and the remaining 50% in April 2000.
In March 1999, The Monolith Limited Partnership, a former principal
stockholder, sold 216,436 shares of our common stock at $7.00 per share
and loaned the Company $2.0 million for working capital. The loan bore
interest at 12% per annum through June 1999 and then 14% per annum
through March 2001 and was repaid with a portion of the proceeds of the
initial public offering. Interest expense totaled $80,685 for the year
ended December 31, 1999.
In March 1999, Mr. Peterson sold 446,000 shares of our common stock,
comprised of 396,000 shares at $7.00 per share and 50,000 shares at $6.00
per share, to a group of investors, including 25,000 shares sold to each
of Jerry J. Colangelo and Edwin C. Lynch both of who subsequently became
directors. Mr. Peterson agreed to loan the Company up to $3.0 million of
the proceeds from the sale of his common stock at any time prior to the
completion of the offering to be used by the Company for working capital.
The loans bore monthly interest of 12% per annum for four months and then
14% per annum for the next 20 months, at which time each loan would
become due. Interest expense totaled $158,173 for the year ended December
31, 1999. All loans from Mr. Peterson were paid in full during 1999.
In April 1999, the Company issued 25,000 shares of common stock in
exchange for consulting services provided by Southwest Harvard Group, a
company owned by Mr. Trujillo, who subsequently became our Chairman and
Chief Executive Officer that same month. The shares were valued at the
fair market value of common stock at the date of issuance which was
determined to be $11 per share based on the most recent similar
transactions. The total cost of the common stock of $275,000 and related
expenses were recorded in the month the services were performed.
In April 1999, the Company issued 50,000 shares of its common stock to an
entity partially owned by a former director of the Company for
advertising and marketing services valued at $634,000 (see note 10). 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.
In April 1999, the Company granted the Chairman and Chief Executive
Officer options to purchase up to 350,000 shares of common stock
exercisable at $7 per share, all of which vested immediately.
Approximately $1.4 million of compensation expense was recorded for the
year ended December 31, 1999 as a result of this transaction.
In April 1999, the Company issued 50,000 shares of common stock to the
Chairman and Chief Executive Officer. Additionally, the Company's former
Chairman and Chief Executive Officer transferred 50,000 shares of common
stock to the current Chairman and Chief Executive Officer. As a result of
these transactions, approximately $1.1 million in compensation expense
was recorded for the year ended December 31, 1999.
In April 1999, the Company entered into a $1.5 million sponsorship
agreement, payable in cash, with the Arizona Diamondbacks, a major league
baseball team. The sponsorship fee was recognized as expense ratably over
the 2000 and 1999 baseball seasons. A director of the Company serves as
the Chief Executive Officer and Managing General Partner of the Arizona
Diamondbacks.
In April 1999, the Company entered into a sponsorship agreement with
Telemundo. Subsequently, Telemundo became a principal stockholder of the
Company and Alan J. Sokol its Chief Operating Officer became one of its
directors.
F-27
In June 1999, L. William Seidman, one of our directors, purchased 6,794
shares and 348 shares of our common stock from Kevin Dieball and
Monolith, respectively, for $6.75 per share, the then estimated fair
value. Mr. Trujillo purchased 15,000 shares of our common stock from
Monolith for $6.75 per share. Also, Internet Partners, LLC, a limited
liability company in which Mr. Colangelo is one of four members,
purchased 260,000 shares of our common stock from Monolith at $6.75 per
share.
In June 1999, Mr. Peterson and Michael A. Hubert, a former officer and
director of the Company, entered into a voting trust agreement which
provides that, until June 24, 2004, Messrs. Seidman and Trujillo shall
vote all shares of the Company's common stock owned by Messrs. Peterson
and Hubert in the same proportion as those shares voted by the Company's
non-affiliated stockholders. Subsequent to December 31, 2000, Peterson
sold all but 60,000 shares (an aggregate of 1,261,083 shares) of the
Company's common stock that he held. Accordingly, the voting trust is
currently entitled to vote only the remaining 60,000 shares owned by
Peterson. In the Company's opinion, the transactions described above were
on terms no less favorable than those which could have been obtained from
unaffiliated third parties (see note 16).
In September 1999, the Company granted the Chairman and Chief Executive
Officer options to purchase up to 600,000 shares of common stock
exercisable at $7.75 per share, which vest monthly over 3 years. The
exercise price was determined to be equal to the fair value based on the
closing trading price per share on the grant date. Therefore, no
compensation expense was recorded as a result of this transaction.
The Company had forgivable loans due from employees amounting to $368,000
as of December 31, 1999. These loans were granted as recruiting and
retention incentives and were deemed 50 percent forgiven after six months
of employment and 100 percent forgiven after 12 months of employment.
There were no forgivable loans outstanding at December 31, 2000.
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
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. An officer of RealEstateEspanol.com and the Company
served as a director and became the Chief Executive Officer of NAHREP.
(16) SUBSEQUENT EVENTS
In January 2001, Alan Sokol resigned from the Company's Board of
Directors.
F-28
In January 2001, the Company's common stock was delisted from the Nasdaq
National Market. In March 2001, the Company's common stock began trading
on the Over-The-Counter Bulletin Board (OTCBB).
On February 1, 2001, Jose Ronstadt resigned as an officer of the Company.
In March 2001, the Company sold substantially all of its furniture,
computer equipment and office equipment for $282,000 in cash.
On March 15, 2001, the Company granted an aggregate of 400,000 stock
options to its officers and directors, with an exercise price of $.15 per
share of common stock (representing a 33% premium over the $.10 closing
price on March 15, 2001). As a result, the Company did not record any
compensation expense related to these grants. Of those options, the
Company granted 100,000 options to each of Mr. Taylor and Mr. Trujillo.
The Company granted each of the remaining directors 50,000 options.
On March 22, 2001, the Company agreed to pay each of its 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.
On June 21, 2001, Michael Weck resigned from the Company's Board of
Directors.
On June 25, 2001, under the agreement between the Company and Telemundo,
the warrant previously issued to Telemundo to purchase 1,000,000 shares
of the Company's common stock at $14.40 per share expired on their own
terms. The warrant was not exercised.
In August 2001, Peterson sold all but 70,000 of his remaining shares of
the Company's common stock. Accordingly, the voting trust currently is
entitled to vote only those 70,000 shares on Peterson's behalf, according
to the terms and conditions of the voting trust agreement.
On August 1, 2001, the Company and its landlord executed an agreement
pursuant to which the Company made a $130,000 lump sum payment to the
landlord for any and all amounts due and owing under its lease, including
any and all future amounts to be paid thereunder. The Company is required
to vacate the property on the earlier to occur of October 31, 2001, or
upon 30-days prior written notice from the landlord. As of August 31,
2001, the Company has not received such written notice to vacate from the
landlord.
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. The merger agreement
represents a stock for stock offering, pursuant to which each share of
quepasa common stock will be converted into one share of Great Western
common stock.
Immediately following the merger current quepasa 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 one or more 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 (except for an aggregate
of 400,000 unvested stock options with an exercise price of $0.15 per
share held by our directors, Chief Executive Officer and Chief Operating
Officer). The 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.
F-29
Great Western 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 is subject to
certain closing conditions and stockholder approval. There can be no
assurance that the Company will consummate the merger transaction.
(17) QUARTERLY FINANCIAL DATA - UNAUDITED
The 2000 quarterly financial data, as reported in the Company's
previously filed Quarterly Reports on Form 10-Q(A), has been adjusted to
reflect the implementation of SAB 101 in the fourth quarter of 2000,
retroactive to January 1, 2000. Periods beginning before January 1, 2000
have not been adjusted, as the effect of the change in accounting
principle could not be reasonably determined.
A summary of the quarterly data for the years ended December 31, 2000 and
1999 follows (in thousands, except net loss per share):
[Enlarge/Download Table]
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
-------- -------- --------- --------- --------
2000:
Gross revenues $ 471 $ 1,072 $ 885 $ 388 $ 2,816
======== ======== ========= ========= ========
Net revenue $ 406 $ 998 $ 839 $ 369 $ 2,612
======== ======== ========= ========= ========
Operating expenses $ 11,569 $ 9,343 $ 9,043 $ 34,583 $ 64,538
======== ======== ========= ========= ========
Loss from operations $(11,163) $(8,345) $(8,204) $(34,214) $(61,926)
======== ======== ========= ========= ========
Loss before the cumulative effect
of a change in
accounting principle $(10,880) $(7,914) $(8,014) $(34,090) $(60,898)
======== ======== ========= ========= ========
Net loss $(10,945) $(7,914) $(8,014) $(34,090) $(60,963)
======== ======== ========= ========= ========
Net loss per share, basic and
diluted $ (.69) $ (.44) $ (.45) $ (1.92) $ (3.52)
======== ======== ========= ========= ========
The fourth quarter of 2000 reflects asset impairment charges of $24.9
million (see note 2).
F-30
[Enlarge/Download Table]
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
-------- -------- --------- --------- --------
1999:
Gross revenues $ - $ 16 $ 154 $ 501 $ 671
======== ======== ========= ========= ========
Net revenue $ - $ 8 $ 128 $ 420 $ 556
======== ======== ========= ========= ========
Operating expenses $ 3,679 $ 9,661 $ 8,874 $ 8,380 $ 30,594
======== ======== ========= ========= ========
Loss from operations $(3,679) $(9,653) $(8,746) $(7,960) $(30,038)
======== ======== ========= ========= ========
Net loss $(3,683) $(9,763) $(8,296) $(7,519) $(29,261)
======== ======== ========= ========= ========
Net loss per share, basic and
diluted $ (.41) $ (.98) $ (.58) $ (.52) $ (2.44)
======== ======== ========= ========= ========
The first quarter of 2000 reflects advertising and marketing expenses of
$683,000 related to the 1999 amortization of prepaid marketing services
as a part of the Telemundo advertising agreement. The Company did not
adjust the amortization in its 1999 Form 10-K/A due to the immaterial
impact on its results of operations.
F-31
Dates Referenced Herein and Documents Incorporated by Reference
| Referenced-On Page |
|---|
| This ‘10-K405’ Filing | | Date | | First | | Last | | | Other Filings |
|---|
| |  |
| | 11/1/09 | | 64 |
| | 6/24/04 | | 29 | | 68 | | | 8-K |
| | 4/26/04 | | 8 | | 60 |
| | 11/30/02 | | 59 |
| | 3/8/02 | | 7 | | 60 | | | SC 13D |
| | 1/28/02 | | 15 | | 51 |
| | 1/1/02 | | 21 |
| | 12/31/01 | | 32 | | 59 | | | 10-K, 8-K |
| | 10/31/01 | | 8 | | 69 |
| | 10/1/01 | | 8 | | 62 |
| Filed on: | | 9/20/01 | | 39 |
| | 8/31/01 | | 4 | | 69 |
| | 8/16/01 | | 36 | | | | | 8-K, NTN 10Q |
| | 8/15/01 | | 1 | | 36 | | | 10-Q/A, 8-K, 8-K/A |
| | 8/14/01 | | 59 |
| | 8/6/01 | | 2 | | 69 | | | 8-K |
| | 8/1/01 | | 8 | | 69 |
| | 7/1/01 | | 21 |
| | 6/30/01 | | 21 | | | | | 10-Q, NTN 10Q |
| | 6/25/01 | | 10 | | 69 |
| | 6/21/01 | | 26 | | 69 |
| | 5/8/01 | | 13 | | 41 |
| | 4/30/01 | | 7 | | 50 |
| | 3/31/01 | | 22 | | | | | 10-Q, NT 10-Q |
| | 3/22/01 | | 69 |
| | 3/15/01 | | 7 | | 69 |
| | 3/13/01 | | 9 |
| | 2/1/01 | | 28 | | 69 |
| | 1/25/01 | | 8 | | 9 |
| For Period End: | | 12/31/00 | | 1 | | 70 | | | NT 10-K |
| | 12/30/00 | | 28 |
| | 12/27/00 | | 2 | | 61 |
| | 12/26/00 | | 8 | | 33 |
| | 12/1/00 | | 27 | | 28 |
| | 11/30/00 | | 16 | | 50 |
| | 11/14/00 | | 16 | | | | | 10-Q |
| | 10/4/00 | | 37 |
| | 10/3/00 | | 37 |
| | 10/1/00 | | 5 | | 58 |
| | 9/30/00 | | 12 | | 52 | | | 10-Q, 10-Q/A |
| | 9/1/00 | | 27 | | 63 |
| | 8/3/00 | | 38 | | | | | 8-K |
| | 6/30/00 | | 28 | | 56 | | | 10-Q, 10-Q/A, S-3 |
| | 5/31/00 | | 62 |
| | 5/30/00 | | 10 | | 12 |
| | 5/26/00 | | 16 | | | | | 8-K |
| | 5/9/00 | | 16 |
| | 5/8/00 | | 15 | | 51 |
| | 4/26/00 | | 27 |
| | 4/14/00 | | 36 | | 38 | | | 10-Q/A, 8-K, 8-K/A |
| | 4/1/00 | | 12 | | 16 |
| | 3/31/00 | | 22 | | | | | 10-Q, 10-Q/A |
| | 3/30/00 | | 38 | | 52 | | | 10-K, 8-K |
| | 3/9/00 | | 16 | | 51 | | | 8-K |
| | 3/8/00 | | 27 |
| | 2/29/00 | | 17 |
| | 1/28/00 | | 15 | | 51 | | | 8-K |
| | 1/26/00 | | 36 | | | | | 8-K |
| | 1/20/00 | | 55 |
| | 1/18/00 | | 24 | | 38 | | | 8-K |
| | 1/17/00 | | 37 |
| | 1/1/00 | | 28 | | 70 |
| | 12/31/99 | | 5 | | 70 | | | 10-K, 10-K/A |
| | 12/20/99 | | 15 | | 51 |
| | 12/17/99 | | 37 |
| | 12/14/99 | | 61 |
| | 12/1/99 | | 37 |
| | 10/26/99 | | 27 |
| | 9/30/99 | | 38 | | | | | 10-Q, 10-Q/A |
| | 9/8/99 | | 28 |
| | 9/3/99 | | 24 | | 38 | | | 8-K |
| | 8/30/99 | | 52 |
| | 8/17/99 | | 52 |
| | 6/24/99 | | 9 | | 63 | | | 424B1, S-1/A |
| | 6/16/99 | | 52 | | | | | S-1/A |
| | 6/1/99 | | 59 |
| | 4/27/99 | | 8 |
| | 4/26/99 | | 28 |
| | 4/14/99 | | 37 |
| | 4/1/99 | | 67 |
| | 3/8/99 | | 28 |
| | 2/17/99 | | 42 |
| | 2/15/99 | | 24 |
| | 2/10/99 | | 24 |
| | 2/4/99 | | 24 |
| | 1/1/99 | | 24 | | 52 |
| | 12/31/98 | | 11 | | 65 |
| | 12/11/98 | | 24 |
| | 12/31/97 | | 9 | | 66 |
| | 6/25/97 | | 11 |
| List all Filings |
↑Top
Filing Submission 0000912057-01-532920 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)
Copyright © 2024 Fran Finnegan & Company LLC – All Rights Reserved.
About — Privacy — Redactions — Help —
Mon., Apr. 29, 10:53:29.1pm ET 