<Page>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________________ TO __________________
COMMISSION FILE NUMBER: 0-25565
QUEPASA.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 84-0879433
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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]
The number of outstanding shares of the registrant's Common Stock as of
September 20, 2001 was approximately 17,763,291 shares.
<Page>
QUEPASA.COM, INC.
INDEX
<Table>
<Caption>
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2001 (unaudited)
and December 31, 2000................................................ 1
Condensed Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 2001 and 2000 (unaudited).................. 2
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2001 and 2000 (unaudited)............................. 3
Notes to Condensed Consolidated Financial Statements................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk............. 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................... 25
Item 2. Changes in Securities and Use of Proceeds.............................. 25
Item 3. Defaults Upon Senior Securities........................................ 25
Item 4. Submissions of Matters to a Vote of Security Holders................... 26
Item 5. Other Information...................................................... 26
Item 6. Exhibits and Reports on Form 8-K....................................... 26
Signatures...................................................................... 27
</Table>
<Page>
PART 1. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUEPASA.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
(UNAUDITED)
Current assets:
Cash and cash equivalents $ 5,745,615 $ 3,940,232
Trading securities -- 2,393,964
Accounts receivable, net of allowance for doubtful accounts
of $176,717 and $184,100, respectively 15,282 242,275
Other receivable -- 981,870
Prepaid expenses 161,482 302,242
Other current assets -- 158,421
------------- -------------
Total current assets 5,922,379 8,019,004
Property and equipment, net -- 103,244
Assets held for sale 5,000 282,000
------------- -------------
Total assets $ 5,927,379 $ 8,404,248
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 186,165 $ 354,743
Accrued liabilities 84,617 149,344
Deferred revenue 80,357 202,292
------------- -------------
Total current liabilities 351,139 706,379
------------- -------------
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 shares issued and outstanding 17,763 17,763
Additional paid-in capital 104,449,301 104,420,534
Accumulated deficit (98,890,824) (96,740,428)
------------- -------------
Total stockholders' equity 5,576,240 7,697,869
------------- -------------
Total liabilities and stockholders' equity $ 5,927,379 $ 8,404,248
============= =============
</Table>
See accompanying notes to condensed consolidated financial statements.
1
<Page>
QUEPASA.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2001 2000 2001 2000
(NOTE 3) (NOTE 3)
Gross revenue $ 30,967 $ 1,072,078 $ 147,200 $ 1,542,653
Less commissions -- (74,873) (2,636) (139,534)
------------ ------------ ------------ ------------
Net revenue 30,967 997,205 144,564 1,403,119
------------ ------------ ------------ ------------
Operating expenses:
Product and content development 41,375 1,777,581 375,943 3,498,001
Advertising and marketing 53,565 4,111,568 421,845 11,186,782
General and administrative 791,270 1,701,486 1,654,974 3,395,001
Amortization of goodwill -- 1,752,228 -- 2,831,619
------------ ------------ ------------ ------------
Total operating expenses 886,210 9,342,863 2,452,762 20,911,403
------------ ------------ ------------ ------------
Loss from operations (855,243) (8,345,658) (2,308,198) (19,508,284)
Other income (expense):
Interest expense (884) (19,889) (1,939) (51,247)
Interest income and other 73,092 468,736 173,945 899,129
Short-term gain on trading securities -- -- -- 2,820
Realized and unrealized loss
on trading securities -- (17,960) (14,204) (137,109)
------------ ------------ ------------ ------------
Other income, net 72,208 430,887 157,802 713,593
------------ ------------ ------------ ------------
Loss before the cumulative effect of a
change in accounting principle (783,035) (7,914,771) (2,150,396) (18,794,691)
Cumulative effect of a change in
accounting principle -- -- -- (64,583)
------------ ------------ ------------ ------------
Net loss $ (783,035) $ (7,914,771) $ (2,150,396) $(18,859,274)
============ ============ ============ ============
Net loss per share, basic and diluted:
Loss before cumulative effect of a
change in accounting principle and
net loss per share, basic and diluted $ (0.04) $ (0.44) $ (0.12) $ (1.12)
============ ============ ============ ============
Weighted average number of shares
outstanding, basic and diluted 17,763,291 17,906,142 17,763,291 16,835,096
============ ============ ============ ============
</Table>
See accompanying notes to condensed consolidated financial statements.
2
<Page>
QUEPASA.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30,
----------------------------------
2001 2000
------------ ------------
Cash flows from operating activities:
Net loss $ (2,150,396) $(18,859,274)
Adjustments to reconcile net loss to net
cash provided by (used in)operating activities:
Depreciation and amortization 103,244 3,416,816
Stock based compensation 28,767 41,092
Forgiveness of forgivable loans -- 361,875
Amortization of prepaid marketing services -- 1,565,485
Amortization of deferred advertising -- 766,666
Consulting services received in exchange for stock -- 137,109
Realized and unrealized loss on trading securities 14,204 --
Cumulative effect of change in accounting principle -- 64,583
Short-term gain on trading securities -- (2,820)
Increase (decrease) in cash resulting from changes
in assets and liabilities:
Sale of trading securities, net 2,379,760 12,059,183
Accounts receivable 226,993 (65,091)
Prepaid expenses 140,760 (1,101,651)
Other receivable and other assets 1,140,291 (6,658,890)
Accounts payable (168,578) (1,262,345)
Accrued liabilities (64,727) (638,467)
Deferred revenue (121,935) 132,292
------------ ------------
Net cash provided by (used in) operating activities 1,528,383 (10,043,437)
------------ ------------
Cash flows from investing activities:
Proceeds from assets held for sale 277,000 --
Forgivable loans -- (87,000)
Cash paid for acquisitions -- (238,793)
Cash received in acquisition -- 578,730
Purchase of property and equipment -- (244,376)
------------ ------------
Net cash provided by investing activities 277,000 8,561
------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of stock -- 9,000,000
Proceeds from the exercise of stock options -- 367,801
Proceeds from draws on line of credit -- 12,286
Payment of notes payable -- (2,382,669)
------------ ------------
Net cash provided by financing activities -- 6,997,418
------------ ------------
Net increase (decrease) in cash and cash equivalents 1,805,383 (3,037,458)
Cash and cash equivalents, beginning of period 3,940,232 6,961,592
------------ ------------
Cash and cash equivalents, end of period $ 5,745,615 $ 3,924,134
============ ============
Supplemental disclosure of non-cash operating,
financing and investing activities:
Interest paid $ 1,939 $ 32,175
============ ============
Barter transactions $ -- $ 725,394
============ ============
Notes payable assumed in acquisitions $ -- $ 2,370,383
============ ============
Issuance of stock in acquisitions $ -- $ 20,073,032
============ ============
</Table>
See accompanying notes to condensed consolidated financial statements.
3
<Page>
QUEPASA.COM, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2001 and 2000
(1) THE COMPANY
quepasa.com, inc. (the "Company" or "quepasa") is a Bilingual
(Spanish/English) Internet portal and online community focused on the
United States Hispanic market. We provide users with information and
content centered around the Spanish language. Because the language
preference of many U.S. Hispanics is English, we also offer our users the
ability to access information in the English language.
(2) LIQUIDITY
To date, the Company's expenses have significantly exceeded revenue and
there is no assurance that the Company will earn profits in the future. The
Company's 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
December 31, 2000 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.
By April 30, 2001, the Company downsized its workforce to three
individuals, disposed of certain assets, and continues to terminate
long-term commitments. Management believes that as a result of its
significant cost-cutting measures, there is sufficient cash to operate
through the second quarter of 2002. Management of the Company and the Board
of Directors continue to evaluate alternatives for the Company including
disposing of assets and investigating merger opportunities. On August 6,
2001, the Company executed an agreement to merge with an unrelated entity
(see note 9).
(3) BASIS OF PRESENTATION
The Company's accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and pursuant to
rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for a complete
financial statement presentation. In the Company's opinion, such unaudited
interim information reflects all adjustments, consisting only of normal
recurring adjustments, necessary to present our financial position and
results of operations for the periods presented. The Company's results of
operations for interim periods are not necessarily indicative of the
results to be expected for a full fiscal year. The Company's condensed
consolidated balance sheet as of December 31, 2000, was derived from its
audited consolidated financial statements as of that date but does not
include all the information and footnotes required by accounting principles
generally accepted in the United States of America. The Company suggests
that these condensed consolidated financial statements be read in
conjunction with the audited consolidated financial statements included in
its Annual Report on Form 10-K as of and for the year ended December 31,
2000.
Gross revenue increased by $56,666 for the three months ended June 30, 2000
and decreased by $202,292 for the six months ended June 30, 2000 to reflect
the adoption of Staff Accounting Bulletin No. 101 as of January 1, 2000. In
addition, a cumulative effect of a change in accounting principle in the
amount of $64,583 has been recognized. Refer to note 4 under "revenue
recognition" in the Company's Form 10-K as of and for the year-ended
December 31, 2000.
(4) 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
4
<Page>
QUEPASA.COM, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2001 and 2000
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 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
accounting principles generally accepted in the United States of America.
As a result, the unamortized balance of goodwill of $7.3 million recorded
in conjunction with the transaction was written off in the fourth quarter
of 2000.
On January 28, 2000, the Company acquired eTrato.com, an on-line trading
community developed especially for the Spanish language or bilingual
Internet user, for an aggregate purchase price of $10.85 million,
consisting of 681,818 shares of the Company's common stock valued at $14.09
per share, and assumption of a $1.25 million promissory note. The note
payable was due on January 28, 2002, and had a stated interest rate at the
greater of 6% per annum or the applicable federal rate in effect with
respect to debt instruments having a term of two years. This note was paid
in full on May 8, 2000. The value of the common stock was determined using
the average stock price between the merger agreement date and the date the
merger was publicly announced on December 20, 1999. Contingent
consideration consisted of 681,818 shares of common stock which were held
in escrow to be released to the seller pending the outcome of certain
revenue and website contingencies over the six-month period following the
acquisition. The contingencies were not met, and consequently, these shares
were returned to quepasa subsequent to year-end and cancelled. The
acquisition was accounted for using the purchase method of accounting and,
accordingly, the purchase price was allocated to the assets purchased and
the liabilities assumed based upon the estimated fair value at the date of
acquisition. The excess of the purchase price over the fair value of the
net assets acquired was approximately $10.1 million and was recorded as
goodwill, which was being amortized on a straight-line basis over a period
of 3 years. On December 27, 2000, the Company's Board of Directors approved
the development of a plan of liquidation and sale of the Company's assets
in the event that no strategic transaction involving the Company could be
achieved. Accordingly, the Company performed an impairment analysis of all
long-lived assets and identifiable intangibles in accordance with
accounting principles generally accepted in the United States of America.
As a result, the balance of unamortized goodwill of $5.6 million recorded
in conjunction with the transaction was written off in the fourth quarter
of 2000.
On March 9, 2000, the Company acquired RealEstateEspanol.com, a real estate
services site providing the Hispanic-American community with bilingual home
buying services, for an aggregate purchase price of $3.3 million,
consisting of 335,925 shares of the Company's common stock for $8.83 per
share and assumption of $300,000 in debt which was paid immediately
following the closing of the acquisition. Contingent consideration
consisted of 248,834 shares of common stock which were held in escrow
pending RealEstateEspanol.com's achievement of gross revenue targets within
12 months of the date of the agreement. The value of the common stock was
determined using the average stock price between the merger agreement date
and the date the merger was publicly announced. RealEstateEspanol.com did
not meet the agreed-upon targets contingent to the seller receiving the
shares of common stock held in escrow, and consequently, these shares were
returned to quepasa and cancelled subsequent to year-end. The acquisition
was accounted for using the purchase method of accounting, and,
accordingly, the purchase price was allocated to the assets purchased and
the liability assumed based upon the estimated fair value at the date of
acquisition. The excess of the purchase price over the fair value of the
net assets acquired was approximately $3.2 million and was recorded as
goodwill, which was being amortized on a straight-line basis over a period
5
<Page>
QUEPASA.COM, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2001 and 2000
of 3 years. On December 27, 2000, the Company's Board of Directors approved
the development of a plan of liquidation and sale of the Company's assets
in the event that no strategic transaction involving the Company could be
achieved. Accordingly, the Company performed an impairment analysis of all
long-lived assets and identifiable intangibles in accordance with
accounting principles generally accepted in the United States of America.
As a result, the balance of unamortized goodwill of $2.4 million recorded
in conjunction with the transaction was written off in the fourth quarter
of 2000.
On March 30, 2000, Gateway, Inc. invested $9.0 million in exchange for
1,428,571 shares of common stock, which represented 7.6% of quepasa's
outstanding common stock. The amount attributable to common stock and
additional paid-in capital was $7,685,712, the value of the 1,428,571
shares of common stock on the date issued ($5.38 per share). Additionally,
quepasa granted a 60-day warrant to acquire 483,495 shares of common stock
at $7 per share. The warrants were valued at approximately $386,000 using
the Black Scholes option-pricing model. The assumptions used for the
Gateway warrants are as follows: expected dividend yield 0%, risk-free
interest rate of 5.67%, expected volatility of 147%, and expected life of
two months. In the event there was a change in ownership of quepasa in
excess of 30% prior to September 30, 2000, and for a price per share less
than $7.00, Gateway had a right to be reimbursed for the differential in
the per share amount. quepasa also committed itself to use a substantial
portion of the proceeds of Gateway's investment to further its community
and educational initiative program, which included distributing computers
purchased from Gateway accompanied with Spanish language technical support,
providing Internet access, and training for quepasa's subscribers. The
Company purchased $5.8 million of computers, net of $928,500 of a volume
purchase discount, pursuant to this agreement to be used for promotional
activities. The Company took title to the computers upon the close of the
transaction. Since the Company had no warehousing facilities, the computers
were segregated from Gateway's inventory in third party warehouse locations
and the Company was responsible for the payment of warehouse storage
charges. These computers were expensed as donated.
In the fourth quarter of 2000, the Company halted virtually all promotional
activities to conserve cash. In December 2000, the Company, at the
direction of the Board of Directors, initiated discussions and sold the
majority of its remaining computer inventory back to Gateway at a $3.5
million loss. The Company was required to approach Gateway first as the
original purchase agreement allowed the Company to use the computers only
for promotional activities. However, several months after the Gateway
transaction closed, as a result of the decline in stock prices for internet
businesses, the Company substantially curtailed its business activities
because it was unable to obtain financing. Only a small number of the
computers had been used in promotional activities at that time. In the
fourth quarter of 2000, the Company's Board of Directors instructed
management to liquidate the computer inventory, and management initiated
discussions with Gateway regarding the prohibition on resale, at which
time, the Company and Gateway negotiated the resale back to Gateway at the
price stated above. The Company recognized $158,421 of expense related to
the donation of 200 computers during the first quarter of 2001. At March
31, 2001, the Company had no computer inventory remaining.
In September 1999, the Company entered into an agreement with Estefan
Enterprises, Inc. whereby Gloria Estefan would act as spokesperson for the
Company through December 31, 2000 and the Company would sponsor her United
States 2000 concert tour. Ms. Estefan's tour was subsequently postponed,
and consequently the original terms of the spokesperson agreement were
renegotiated. The revised spokesperson agreement called for the return of
the 156,863 shares of redeemable common stock to the Company, cancellation
of the put option for those shares and cancellation of the final cash
installment. The Company obtained the right of first refusal for the
sponsorship of Ms. Estefan's next United States and Latin America tours.
The Company recognized $1.2 million and $2.3 million of amortization in
relation to the Estefan agreement during the three and six months ended
June 30, 2000, respectively, in relation to the original contract. The
issuance of the 156,863 shares of redeemable common stock was reversed in
the second quarter of 2000.
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
6
<Page>
QUEPASA.COM, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2001 and 2000
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 ("MOU") which, among other
things, set forth the business relationship through which the parties
agreed to implement a program to deliver the benefits of technology to
mortgage origination for low and moderate income Hispanic and Latino
borrowers. Contemporaneously, realestateespanol and NAHREP entered into an
agreement which set forth the terms and conditions of their rights and
obligations under the MOU.
Under the MOU, among other things, (1) realestateespanol was required to
(a) develop a web-based technology tool to be distributed to NCLR and NCLR
affiliates, and (b) donate 200 computers, at no charge, to NAHREP for
distribution to NCLR and NCLR affiliates for promotional purposes, (2)
Freddie Mac was required to provide an aggregate dollar amount of $250,000
as sponsorship fees to NAHREP, and (3) NAHREP was required, in turn, to
deliver the same to realestateespanol towards the initial development of
the technology tool discussed above. In May 2001, all of the parties agreed
to either terminate certain of the agreements or release realestateespanol
from its duties and obligations thereunder. In exchange for such
termination or release, as the case may be, realestateespanol (a)
transferred ownership of, and exclusive rights to, the in-process
technology tool to NAHREP, (b) granted NAHREP a non-exclusive license to
operate and use the realestaeespanol.com website the content thereon and
any related technology tools, (c) granted NAHREP an exclusive license to
operate and use any related domain names, (d) permitted NAHREP to retain
the full amount of the unpaid sponsorship fee to be paid by Freddie Mac to
NAHREP for development of the technology tool, and (e) permitted NAHREP to
retain ownership of the previously donated computers in the first quarter
of 2001. The $100,000 sponsorship fee collected in 2000 was amortized over
a six-month period through March 31, 2001.
During the three months ended March 31, 2001, the Company reduced its
workforce as part of management's effort to enhance the Company's
competitive position, utilize its assets more efficiently, and conserve
remaining cash. The Company recognized $44,000 in employee severance and
termination costs for the three months ended March 31, 2001, relating to
the reduction in the workforce of approximately 17 employees. As of March
31, 2001, all employee severance and termination costs incurred in 2001 had
been paid. There were no additional employee severance or termination costs
incurred in the second quarter of 2001.
(5) 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.
7
<Page>
QUEPASA.COM, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2001 and 2000
(d) CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments which potentially subject the Company to
concentrations of credit risk are principally accounts receivable,
cash and cash equivalents and trading securities. The Company
maintains ongoing credit evaluations of its customers and generally
does not require collateral. The Company provides reserves for
potential credit losses and such losses have not exceeded management
expectations. Periodically during the year, the Company maintains cash
and investments in financial institutions in excess of the amounts
insured by the federal government. During the three months ended June
30, 2001, one customer accounted for 97% of gross revenue. During the
three months ended June 30, 2000, one customer accounted for 36% of
gross revenue. During the six months ended June 30, 2001, two
customers accounted for 41% and 34% of gross revenue. During the six
months ended June 30, 2000, two customers accounted for 28% and 11% of
gross revenue. No other single advertiser utilizing banner ads or
sponsorship agreements amounted to or exceeded 10% of the total gross
revenue.
(e) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and highly liquid debt
instruments with original maturities of three months or less.
(f) SECURITIES
The Company classifies its securities in one of three categories:
trading, available-for-sale, or held-to-maturity. Trading securities
are bought and held principally for the purpose of selling them in the
near term. Held-to-maturity securities are those securities in which
the Company has the ability and intent to hold the security until
maturity. All other securities not included in trading or
held-to-maturity are classified as available-for-sale. Trading
securities at December 31, 2000 consisted of corporate debt
securities.
Trading and available-for-sale securities are recorded at market
value. Held-to-maturity securities are recorded at amortized cost,
adjusted for the amortization or accretion of premiums or discounts.
Unrealized holding gains and losses on trading securities are included
in operations. Unrealized holding gains and losses, net of the related
tax effect, on available-for-sale securities are excluded from
operations and are reported as a separate component of other
comprehensive income until realized. Realized gains and losses from
trading securities are included in operations and are derived using
the specific identification method for determining the cost of
securities. All securities held at December 31, 2000 were categorized
as trading. The Company had no securities at June 30, 2001.
(g) REVENUE RECOGNITION
The Company's revenue is derived principally from the sales of banner
advertisements and sponsorships. The Company sells banner advertising
primarily on a cost-per-thousand impressions, or "CPM" basis, under
which advertisers and advertising agencies receive a guaranteed number
of "impressions," or number of times that an advertisement appears in
pages viewed by users of the Company's website, for a fixed fee. The
Company's contracts 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.
8
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QUEPASA.COM, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2001 and 2000
The Company also derives revenue from the sale of sponsorships for
certain areas or a sponsorship exclusivity for certain areas within
its website. These sponsorships are typically for periods up to one
year. Prior to the adoption of Staff Accounting Bulletin (SAB) 101,
the Company recognized revenue during the initial setup, if required
under the unique terms of each sponsorship agreement (e.g., co-branded
website), to the extent that actual costs were incurred. The balance
of the sponsorship was recognized ratably over the period of time of
the related agreement. The Company adopted SAB 101 in the fourth
quarter of 2000. As such, the Company records initial setup fees as
deferred revenue and recognizes the fee over the term of the related
agreement.
The Company also derives revenue from slotting fees, set-up fees and
commissions. Slotting fees revenue is recognized ratably over the
period the services are provided. Setup fee revenue is recognized
during the initial setup to the extent that direct costs are incurred.
The remaining revenue derived from setup fees is deferred and
amortized ratably over the term of the applicable agreement.
Commission revenue related to X:Drive is recognized in the month in
which a new account is established (i.e. services are provided).
Commission revenue and expenses related to Net2Phone are recognized
during the month in which the service is provided.
The Company in the ordinary course of business enters into reciprocal
service arrangements (barter transactions) whereby the Company
provides advertising service to third parties in exchange for
advertising services in other media. Revenue and expenses from these
agreements are recorded at the fair value of services provided or
received, whichever is more determinable in the circumstances. The
fair value represents market prices negotiated on an arms' length
basis. Revenue from reciprocal service arrangements is recognized as
income when advertisements are delivered on the Company's website.
Expense from reciprocal services arrangements is recognized when the
Company's advertisements are run in other media, which are typically
in the same period when the reciprocal service revenue is recognized.
Related expenses are classified as advertising and marketing expenses
in the accompanying statements of operations. During the three months
ended June 30, 2001 and 2000, revenue attributable to reciprocal
services totaled zero and approximately $613,000, respectively, and
related expenses totaled zero and approximately $564,000,
respectively. During the six months ended June 30, 2001 and 2000,
revenue attributable to reciprocal services totaled zero and
approximately $725,000, respectively, and related expenses totalled
zero and approximately $725,000, 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
9
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QUEPASA.COM, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2001 and 2000
charged to operations as incurred and improvements, which extend the
useful lives of the assets, are capitalized.
(j) PRODUCT AND CONTENT DEVELOPMENT
Costs incurred in the classification and organization of listings
within the Company's website are charged to expense as incurred. In
accordance with SOP 98-1, material software development costs, costs
of development of new products and costs of enhancements to existing
products incurred during the application development stage are
capitalized. Based upon the Company's product development process, and
the constant modification of the Company's website, costs incurred by
the Company during the application development stage have been
insignificant.
In March 2000, EITF No. 00-02, ACCOUNTING FOR WEBSITE DEVELOPMENT
COSTS, was issued which addresses how an entity should account for
costs incurred in website development. EITF 00-02 distinguishes
between those costs incurred during the development, application and
infrastructure development stage and those costs incurred during the
operating stage. EITF 00-02 was effective on and after June 30, 2000
although early adoption was encouraged. The adoption of EITF No. 00-02
did not have a material impact on the Company's consolidated financial
statements.
Pursuant to Statement of Position 98-1, ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE, the Company
capitalized certain material development costs incurred during the
acquisition development stage, including costs associated with coding,
software configuration, upgrades and enhancements.
(k) INCOME TAXES
The Company utilizes the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
The effect 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.
(m) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments, which
principally include cash and cash equivalents, trading securities,
accounts receivable, other receivable, accounts payable, and accrued
liabilities approximates fair value because of the short term nature
of the instruments.
(n) STOCK-BASED COMPENSATION
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense is recorded on the date of grant only if
the current market price of the underlying stock exceeded the exercise
price. The Company has adopted the
10
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QUEPASA.COM, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2001 and 2000
disclosure provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to provide pro forma net earnings
(loss) and pro forma net earnings (loss) per share disclosures for
employee stock option grants as if the fair-value-based method as
defined in SFAS No. 123 had been applied.
The Company uses one of the most widely used option pricing models,
the Black-Scholes model (Model), for purposes of valuing its stock
option grants. The Model was developed for use in estimating the fair
value of traded options that have no vesting restrictions and are
fully transferable. In addition, it requires the input of highly
subjective assumptions, including the expected stock price volatility,
expected dividend yields, the risk free interest rate, and the
expected life. Because the Company's stock options have
characteristics significantly different from those of traded options,
and because changes in subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the value
determined by the Model is not necessarily indicative of the ultimate
value of the granted options.
(o) NET LOSS PER SHARE
Basic loss per share is computed by dividing net loss available to
common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted loss per share reflects the
potential dilution that could occur if securities or contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the
earnings of the Company. Stock options and warrants are excluded
because they are anti-dilutive.
(p) ADVERTISING COSTS
Advertising costs are expensed as incurred in accordance with
Statement of Position 93-7, "Reporting on Advertising Costs."
Advertising costs for the three months ended June 30, 2001 and 2000
totaled zero and $1.8 million, respectively. Advertising costs for the
six months ended June 30, 2001 and 2000 totaled $23,000 and $4.6
million, respectively. The Company recognizes the advertising expense
in a manner consistent with how the related advertising is displayed
or broadcast. Advertising production costs are expensed as incurred.
(q) SEGMENT REPORTING
The Company utilizes the management approach in designating business
segments. The management approach designates the internal organization
that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable
segment. The Company's one segment provides Internet Portal and
On-Line Community services in both Spanish and English to the Hispanic
market. The Company's initial focus is on the U.S. Hispanic market,
with substantially all of the Company's assets in and revenues
originating from the United States.
(6) COMMITMENTS
(a) EMPLOYMENT AGREEMENTS
The Company has entered into employment and other agreements with its
two (2) 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
11
<Page>
QUEPASA.COM, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2001 and 2000
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.
Under this agreement, the Company issued Telemundo 600,000 shares of
its common stock and a warrant to purchase 1,000,000 shares of its
common stock exercisable up to and including June 25, 2001 at $14.40
per share. In exchange, the Company received a $5.0 million
advertising credit on the Telemundo television network at the rate of
$1.0 million for each of the next five years. After completion of the
IPO, the shares and warrant became fully vested and were not subject
to return for nonperformance by Telemundo. The fair value of the
transactions was measured and based on the fair value of the common
stock issued at the Company's IPO price of $12.00 per share plus
$2,920,192 assigned to the warrant based upon the Black-Scholes
pricing model using a 50% volatility rate. The Company began
amortizing the $5.0 million advertising credit on January 1, 2000,
after a cash purchase from Telemundo of $1.0 million in advertising
services in 1999. The remaining balance of prepaid marketing services
of $5,120,192 was to be amortized over the term of the agreement (5
years). This agreement also provides (1) that the parties will
collaborate regarding online content development, co-branded marketing
promotions, and other complementary aspects of its business, (2) that
the parties will cross-link each other's websites, and (3) exclusivity
provisions for a period of six months. On December 27, 2000, the
Company's Board of Directors approved the development of a plan of
liquidation and sale of the Company's assets in the event that no
strategic transaction involving the Company could be achieved.
Accordingly, the Company performed an impairment analysis of all
long-lived assets and identifiable intangibles in accordance with
generally accepted accounting principles. As a result, the Company
wrote off the $7.6 million remaining unamortized prepaid marketing
services in the fourth quarter of 2000.
In April 1999, the Company issued 50,000 shares of its common stock to
an entity partially owned by a former director of the Company for
advertising and marketing services valued at $634,000. The value
12
<Page>
QUEPASA.COM, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2001 and 2000
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) CONTENT AND WEBSITE ADMINISTRATION
During 2000, 1999 and 1998, the Company had various agreements with
third parties to provide content to the Company's website and incurred
license fee expense of $4,000 and $446,000 for the three months ended
June 30, 2001 and 2000, respectively. The Company incurred license fee
expense of $17,000 and $1.0 million for the six months ended June 30,
2001 and 2000, respectively. The Company paid $41,000 during the three
months ended March 31, 2001 to terminate all content development
agreements. The Company has outsourced the hosting and administration
of its website for approximately $2,000 per month.
(7) CONTINGENCIES
In February 2001, the Company initiated arbitration against Telemundo to
defend the enforceability of an agreement between us, and submitted a
damages claim for $4.3 million, plus reasonable attorneys' fees and costs.
Alleging that the Company breached the agreement by failing to develop and
maintain the Telemundo web site, Telemundo asserted a damages claim in the
arbitration for $655,000, plus reasonable attorneys' fees and costs. The
Company does not believe that it has breached the agreement and intends to
vigorously assert its rights thereunder, particularly its right to use or
transfer any unused advertising credits. 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, that might result 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.
13
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QUEPASA.COM, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2001 and 2000
(8) LOSS PER SHARE
A summary of the reconciliation from basic loss per share to diluted loss
per share follows for the three months ended March 31, 2001 and 2000:
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30,
---------------------------------- ---------------------------------
2001 2000 2001 2000
------------- ------------ ------------ ------------
Net loss $ (783,025) $ (7,914,771) $ (2,150,396) $(18,859,274)
============= ============ ============ ============
Basic EPS-weighted average shares outstanding 17,763,291 17,906,142 17,763,291 16,835,096
============= ============ ============ ============
Basic and diluted net loss per share $ (.04) (.44) $ (.12) (1.12)
============= ============ ============ ============
Stock options not included in diluted EPS
since antidilutive 2,142,500 3,653,126 2,142,500 3,653,126
============= ============ ============ ============
Warrants not included in dilutive EPS
since antidilutive 400,000 2,081,818 400,000 2,081,818
============= ============ ============ ============
</Table>
(9) SUBSEQUENT EVENTS
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 warrants 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 September 20, 2001,
the Company has not received such written notice to vacate from the
landlord.
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
14
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QUEPASA.COM, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2001 and 2000
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, Amortibanc may purchase 4,942,392
shares of Great Western common stock for $.30 per share, 4,942,392 shares
for $.60 per share and 4,942,391 shares for $1.20 per share. Amortibanc may
purchase shares by paying cash for such shares or by surrendering the right
to receive a number of shares having an aggregate market value equal to the
purchase price for such shares.
Following the merger, the combined company's common stock will be publicly
traded under the Great Western name. The merger will be accounted for using
the purchase method of accounting. The merger is subject to certain closing
conditions and stockholder approval. There can be no assurance that we will
consummate the merger transaction.
15
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q and the information incorporated by
reference may include "forward-looking statements" within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. In particular, we
direct your attention to Item 1. Financial Statements, Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operation - Risk
Factors and Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We intend the forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements in these sections. All statements
regarding our expected financial position and operating results, our business
strategy, our future business operations, our proposed merger transaction, our
potential liquidation plans and the outcome of any contingencies are
forward-looking statements. These statements can sometimes be identified by our
use of forward-looking words such as "may," "believe," "plan," "will,"
"anticipate," "estimate," "expect," "intend" and other phrases of similar
meaning. Known and unknown risks, uncertainties and other factors could cause
the actual results to differ materially from those contemplated by the
statements. The forward-looking information is based on various factors and was
derived using numerous assumptions. Although we believe that our expectations
expressed in these forward-looking statements are reasonable, we cannot promise
that our expectations will turn out to be correct. Our actual results could be
materially different from our expectations.
The following discussion of our financial condition and results of
operations for the three and six months ended June 30, 2001 and 2000 should be
read in conjunction with our condensed consolidated financial statements, the
notes related thereto, and the other financial data included elsewhere in this
Form 10-Q.
OVERVIEW
We commenced operations on June 25, 1997. Prior to May 1998, our operations were
limited to organizing quepasa.com, raising operating capital, hiring initial
employees and drafting a business plan. From May 1998 through May 1999, we were
engaged primarily in content development and acquisition. In May 1999, we
launched our first media-based branding and advertising campaign in the U.S.
Significant revenues from our business activities did not commence until the
fourth quarter of 1999. In the first quarter of 2000, we significantly increased
our operating expenses as we expanded our sales, marketing and advertising
efforts.
In May 2000, 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.
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.
Also during the first quarter of 2001:
o In January 2001, Alan Sokol resigned from our Board of Directors.
o 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.
16
<Page>
o We received a cash payment from Gateway, Inc. in January 2001, in an
amount equal to $981,870 for the computers that we sold back to
Gateway in December 2000.
o On February 1, 2001, Jose Ronstadt resigned as an officer of the
Company.
o In order to conserve cash and limit the services and content we
provide, we (1) terminated most of or strategic relationships with our
third-party content and service providers, (2) suspended operations of
the eTrato.com and credito.com web sites, (3) outsourced the hosting
and administration of the quepasa.com web site for approximately
$2,000 per month, and (4) sold substantially all of our furniture,
computer and server equipment and office equipment for $277,000 in
cash.
o On March 15, 2001, we granted an aggregate of 400,000 stock options to
our remaining officers and directors. The options are exercisable at
$.15 per share (representing a 33% premium over the $.10 closing price
on March 15, 2001) and vest ratably over a 3-year period, or
immediately upon a change of control or liquidation. Of that number,
we granted 100,000 to each of Gary Trujillo and Robert Taylor, and
50,000 to each of our non-employee directors.
o On March 22, 2001, we agreed to pay each of our non-employee directors
a lump sum payment of $50,000 for prior and current service, upon the
occurrence of a Significant Event, defined as a change of control or
liquidation of the Company.
During the second quarter of 2001, the following events occurred:
o As of April 30, 2001, we had reduced our work force from 20 employees
at December 31, 2000, to 3 employees, and one full-time and several
part-time contractors.
o 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 in the
first quarter of 2001. The $100,000 sponsorship collected in 2000 was
amortized over a six month period through March 31,2001
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o On June 21, 2001, Michael Weck resigned from our Board of Directors.
o On June 25, 2001, under the agreement between us and Telemundo, the
warrants previously issued to Telemundo to purchase 1,000,000 shares
of our common stock at $14.40 per share expired on their own terms.
None of the warrants were exercised.
o On August 1, 2001, we and our landlord executed an agreement pursuant
to which we made a $130,000 lump sum payment to our landlord for any
and all amounts due or to become due under our office lease. We are
required to vacate the property on the earlier to occur of October 31,
2001, or upon 30-days written notice from the landlord. As of
September 20, 2001, we have not received a written notice to vacate.
o Jeffrey S. Peterson, our former chief executive officer and director,
and Michael A. Hubert, a former officer and director, previously
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.
o 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, Amortibanc may
purchase 4,942,392 shares of Great Western common stock for $.30 per
share, 4,942,392 shares for $.60 per share and 4,942,391 shares for
$1.20 per share. Amortibanc may purchase shares by paying cash for
such shares or by surrendering the right to receive a number of shares
having an aggregate market value equal to the purchase price for such
shares.
Following the merger, the combined company's common stock will be
publicly traded under the Great Western name. The merger will be
accounted for using the purchase method of accounting. The merger is
subject to certain closing conditions and stockholder approval. There
can be no assurance that we will consummate the merger transaction.
We have been unsuccessful in executing our business plan and developing a
revenue stream to support the carrying value of our long-lived and intangible
assets, have incurred substantial losses since inception and have an accumulated
deficit of $98.9 million as of June 30, 2001. For these reasons, we believe that
period-to-period comparisons of our operating results are not meaningful and the
results for any period should not be relied upon as an indication of future
performance.
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THE QUEPASA.COM COMMUNITY
quepasa.com, inc. is a Bilingual (Spanish/English) Internet portal and online
community focused on the United States Hispanic market. We provide users with
information and content centered around the Spanish language. Because the
language preference of many U.S. Hispanics is English, we also offer our users
the ability to access information in the English language.
RESULTS OF OPERATIONS
INTRODUCTION.
NET REVENUE: We expect to derive future net revenue from one principal
source: the sale of advertising on our web site.
ADVERTISING REVENUE: For the six month period ended June 30, 2001, we
derived approximately 49% of our net revenues from the sale of advertisements on
our web site which are received principally from advertising arrangements under
which we receive fixed fees for banners placed on our web site for specified
periods of time or for a specified number of delivered ad impressions. During
the first quarter of 2001, we discontinued the use of our banner ad software and
sought a third-party outsourced for our banner ad sales and service. As of
September 20, 2001, we have been unsuccessful in retaining a third-party
outsourcer for our banner ad sales and service.
SPONSORSHIP REVENUE. For the six month period ended June 30, 2001, we
derived approximately 51% of our net revenue from the sale of sponsorships for
certain areas or exclusive sponsorship rights for certain areas within our web
site. These sponsorships typically cover periods up to 1 year. We recognize
revenue during the initial setup, if required under the unique terms of each
sponsorship agreement (e.g. co-branded web site), ratably over the period of
time of the related agreement. Payments received from sponsors prior to
displaying their advertisements on our web site are recorded as deferred
revenue.
Our principal expenses are: Product and Content Development, Advertising
and Marketing and General and Administrative.
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THE THREE MONTHS ENDED JUNE, 2000
AND THE SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
2000
Our results of operations for the three and six months ended June 30, 2001 and
2000 were characterized by expenses that significantly exceeded revenues during
the periods. We reported a net loss of $783,000 for the three months ended June
30, 2001, compared to a net loss of $7.9 million for the three months ended June
30, 2000 and reported a net loss of $2.2 million for the six months ended June
30, 2001, compared to a net loss of $18.9 million for the six months ended June
30, 2000 . During the three and six months ended June 30, 2001, we focused on
reducing our cash expenses in all operation areas, including product and
content, marketing and advertising, personnel and general and administrative
expenses.
During the periods from December 31, 2000 through June 30, 2001, in order to
conserve cash, we:
o reduced our employee count from 20 to 3 professionals, as compared to
72 professionals as of June 30, 2000;
o suspended the web site operations of eTrato.com, inc., an online
auction web site linking Hispanic buyers and sellers of goods and
services, and credito.com, inc., a Spanish language Internet web site
providing personal credit content and information. We acquired eTrato
and credito in January 2000;
o outsourced the hosting and administration of the quepasa.com web site
for approximately $2,000 per month; and
o terminated most of our strategic relationships with our third party
content and service providers.
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NET REVENUES
Net revenue decreased 97% to $31,000 for the three months ended June 30, 2001
from $997,000 for the three months ended June 30, 2000. For the six months ended
June 30, 2001, net revenues decreased 90% to $145,000 from $1.4 million for the
six months ended June 30, 2000. The decrease in revenue resulted from the
Company's curtailment of operations.
OPERATING EXPENSES
PRODUCT AND CONTENT DEVELOPMENT EXPENSES. Our product and content
development expenses decreased 98% to $41,000 for the three months ended June
30, 2001, compared to $1.8 million for the three months ended June 30, 2000. For
the six months ended June 30, 2001, our product and content development expenses
decreased 89% to $376,000 from $3.5 million for the six months ended June 30,
2000. For the three and six months ended June 30, 2001 and 2000, the
period-to-period decrease was principally attributable to:
o an decrease in personnel costs relating to the development of content
and technological support to (a) zero for the three months ended June
31, 2001, compared to $761,000 for the three months ended June 30,
2000 and (b) $85,000 for the six months ended June 31, 2001, compared
to $1.6 million for the six months ended June 30, 2000;
o a reduction in the products and content we provide;
o the suspension of the operation of the eTrato.com and credito.com web
sites;
o the outsourcing of the hosting and administration of the quepasa.com
and realestateespanol.com web sites; and
o termination of most of our strategic relationships with third-party
content and service providers.
ADVERTISING AND MARKETING EXPENSES. Our marketing, advertising and sales
expenses decreased 99% to $54,000 for the three months ended June 30, 2001,
compared to $4.1 million for the three months ended June 30, 2000. For the six
months ended June 30, 2001, marketing, advertising and sales expenses decreased
96% to $422,000 from $11.2 million for the six months ended June 30, 2000. For
the three and six months ended June 30, 2001 and 2000, the period-to-period
decrease was principally attributable to:
o a decrease in marketing and sales personnel costs to (a) $31,000 for
the three months ended June 30, 2001, compared to $761,000 for the
three months ended June 30, 2000 and (b) $100,000 for the six months
ended June 30, 2001, compared to $1.4 million for the six months ended
June 30, 2000;
o a decrease in advertising expenditures amounting to (a) zero for the
three months ended June 30, 2001 compared to $1.8 million expended on
the maintenance of brand awareness for the three months ended June 30,
2000 (b) $23,000 for the six months ended June 30, 2001, compared to
$4.6 million for the six months ended June 30, 2000; and
o a decrease in the amortization of the NetZero, Telemundo and Gloria
Estefan contracts which approximated $3.5 million in the first quarter
of 2000 and zero in 2001.
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative expenses
decreased 53% to $791,000 for the three months ended June 30, 2001, compared to
$1.7 million for the three months ended June 30, 2000. For the six months ended
June 30, 2001, our general and administrative expenses decreased 51% to $1.7
million from $3.4 million for the six months ended June 30, 2000. For the three
and six months ended June 30, 2001, the period-to-period decrease was
principally attributable to a reduction in our work force. Our professional fees
were $364,000, depreciation and rent was $94,000 and our office and related
expenses were $32,000 for the three months ended June 30, 2001, compared to
$318,000, $291,000 and $630,000 for the three months ended June 30, 2000. For
the six months ended June 30, 2001, our professional fees were $802,000,
depreciation and rent was $192,000 and our office and related expenses were
$57,000, compared to $725,000, $706,000 and $1.0 million for the six months
ended June 30, 2000. Stock based compensation decreased to $2,500 for the three
months ended June 30, 2001,
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compared to $21,000 for the three months ended June 30, 2000. For the six months
ended June 30, 2001, stock based compensation decreased to $29,000, compared to
$41,000 for the six months ended June 30, 2000. Stock based compensation for the
three and six months ended June 30, 2001 is comprised of expense recognized in
accordance with APB Opinion No. 25, for various employee stock options vesting
over time. The expense recognized for the three and six months ended June 30,
2000 consisted primarily of the immediate vesting of employee stock options.
AMORTIZATION OF GOODWILL. Amortization for the three and six months ended
June 30, 2001 was zero, compared to $1.8 million and $2.8 million for the three
and six month periods ended June 30, 2000, respectively. There was no
amortization of goodwill during the three and six months ended June 30, 2001 as
a result of the write-off of goodwill in the fourth quarter of 2000.
At December 31, 2000, we determined that the fair market value of certain
acquired assets was significantly below their respective carrying values. As a
result, we recorded asset impairment charges of $24.9 million in the fourth
quarter of 2000.
OTHER INCOME (EXPENSE). Other income (expense), which consists primarily of
interest expense, net of interest earned, decreased 83% to $72,000 for the three
months ended June 30, 2001, compared to $431,000 for the three months ended June
30, 2000. For the six months ended June 30, 2001, other income (expense)
decreased 78% to $158,000 from $714,000. 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.
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 independent auditor's
report dated May 8, 2001 (except as to the second paragraph of Note 10(a) and
Note 16 to the consolidated financial statements, which are as of August 6,
2001) on our consolidated financial statements for 2000 stating that our
recurring losses, accumulated deficit and our inability to successfully execute
our business plan, among other things, raise substantial doubt about our ability
to continue as a going concern.
From our inception to date, we have relied principally upon equity investments
to support the development of our business. We have retained the
investment-banking firm of Friedman, Billings, Ramsey & Co., Inc. to explore
alternatives including strategic alliances, significant equity investments in us
or a merger or the sale of all or a significant portion of our business.
As of June 30, 2001, we had $5.7 million in cash and cash equivalents and no
short term investments, compared to $3.9 million and $10.0 million, respectively
at June 30, 2000. On June 24, 1999, we raised approximately $42.4 million, net
of offering costs, through an initial public offering of our common stock and
during July 1999, we raised an additional $6.3 million, net of offering costs,
from the exercise of an option granted to our underwriters to cover
overallotments from the initial public offering. In March 2000, we raised $9.0
million by issuing 1,428,571 shares of the our common stock to Gateway
Companies, Inc.
Net cash provided by operations for the six months ended June 30, 2001,
consisted of a net loss of $2.2 million, $2.4 million net proceeds from the sale
of trading securities and the collection of $1.1 million of the other receivable
and other current assets. Net cash used in operations for the six months ended
June 30, 2000 consisted of a net loss of $18.9 million, $12.1 million net
proceeds from the sale of trading securities, an increase in prepaid expenses of
$1.1 million, an increase in other assets of $6.7 million, a decrease in accrued
liabilities of $638,000 and a decrease in accounts payable of $1.3 million
offset by non-cash expenses for the depreciation of fixed assets and
amortization of $3.4 million and amortization of prepaid marketing services and
deferred advertising of $2.3 million. Net cash provided by operations for the
six months ended June 30, 2001 primarily resulted from the curtailment of the
Company's operations.
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Net cash provided by investing activities amounted to $277,000 for the six
months ended June 30, 2001 and $8,600 for the six months ended June 30, 2000.
The $277,000 resulted from the sale of assets held for sale.
Net cash provided by financing activities was zero for the six months ended June
30, 2001 and $7.0 million for the six months ended June 30, 2000. The Company
was unable to raise any capital during the six months ended June 30, 2001.
As of December 31, 2000, we had commitments under non-cancelable operating
leases for office facilities requiring payments of $629,000 through the end of
the longest-term agreement scheduled to expire in November 2002. However, as a
result of 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 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 the landlord. As of
September 20, 2001, we have not received a written notice to vacate.
We expect to continue to incur costs, particularly general and administrative
costs during the third and fourth quarters of 2001, including our website
administration of approximately $2,000 per month, and do not expect sufficient
revenue to be realized to offset these costs. We believe that our cash on hand
will be sufficient to meet our working capital and capital expenditure needs
through the second quarter of 2002. We believe it will be necessary for us to
raise additional capital, conclude one or more strategic transactions or merge
or sell quepasa by year-end 2001. In the event we are not able to raise capital,
conclude one or more strategic transactions or merge or sell quepasa during that
period, our ability to continue operations will be severely impacted and could
have a significant adverse effect on us. There can be no assurance that we will
be successful in raising the necessary funds, concluding one or more strategic
transactions, merging or selling quepasa or that the terms of any such
transaction will be beneficial to us.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies
criteria 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. Management does not believe
that adoption of Statements 141 and 142 will have a material impact on our
consolidated financial statements.
RISK FACTORS
You should carefully consider the risks described below.
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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 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 June 30, 2001, we had an accumulated deficit of
approximately $98.9 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
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targeted to Spanish-language Internet users. Competition for visitors and
advertisers is intense and is expected to increase significantly in the future
because there are no substantial barriers to entry in our market. We believe
that the principal competitive factors in these markets are name recognition,
distribution arrangements, functionality, performance, ease of use, the number
of services and features provided and the quality of support. Our primary
competitors are other companies providing portal or other online services,
especially to Spanish-language Internet users such as StarMedia, Terra Lycos, El
Sitio, Yahoo! Espanol, America Online Latin America, MSN and Univision online.
Most of our competitors, as well as a number of potential new competitors, have
significantly greater financial, technical and marketing resources than we do.
Our competitors may offer Internet products and services that are superior to
ours or that achieve greater market acceptance. There can be no assurance that
competition will not limit traffic on, and the value of, our website.
WE WILL BE ADVERSELY AFFECTED IF THE INTERNET DOES NOT BECOME WIDELY
ACCEPTED AS A MEDIUM FOR ADVERTISING.
For our website to have value, it must be able to generate revenue from the sale
of advertising. Many advertisers have not devoted a substantial portion of their
advertising expenditures to web-based advertising, and may not find web-based
advertising to be effective for promoting their products and services as
compared to traditional print and broadcast media.
No standards have yet been widely accepted for the measurement of the
effectiveness of web-based advertising, and we can give no assurance that such
standards will be developed or adopted sufficiently to sustain web-based
advertising as a significant advertising medium. We cannot give assurances that
banner advertising, the predominant revenue producing mode of advertising
currently used on the web, will be accepted as an effective advertising medium.
Software programs are available that limit or remove advertisements from an
Internet user's 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.
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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.
EMPLOYEES
As of September 20, 2001, we had 3 employees and 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not have any derivative financial instruments as of June 30, 2001. We
invest our cash in money market funds and corporate bonds, classified as cash
and cash equivalents and trading securities, which are subject to minimal credit
and market risk. Our interest income arising from these investments is sensitive
to changes in the general level of interest rates. In this regard, changes in
interest rates can affect the interest earned on our cash equivalents and
trading securities. To mitigate the impact of fluctuations in interest rates, we
generally enter into fixed rate investing arrangements (corporate bonds). As of
June 30, 2001, a 10 basis point change in interest rates would have a potential
impact on our interest earnings of less than $2,000 for the three months ended
June 30, 2001, which is clearly immaterial to our consolidated financial
statements.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
TELEMUNDO ARBITRATION - See Item 3 - Legal Proceedings in our Annual Report on
Form 10-K filed on September 20, 2001, for background information concerning our
arbitration with Telemundo Network Group LLC.
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 such pending
legal proceedings will not in the aggregate have a material adverse effect on
our business, financial condition, results of operations or liquidity.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS.
The exhibits listed in the accompanying Index to Exhibits are filed as part of
this Report on Form 10-Q.
b. REPORTS ON FORM 8-K.
On August 15, 2001, the Company filed a Current Report on Form 8-K announcing
that (1) it had executed a definitive merger agreement with Great Western Land
and Recreation, Inc. and (2) it had resolved all issues with the Securities and
Exchange Commission relating to its 1999 Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q for the first three quarters of 2000 and a Current Report
on Form 8-K, previously filed with the Commission on April 14, 2000.
On August 16, 2001, the Company filed a Current Report on Form 8-K attaching the
press released dated August 15, 2001 announcing that the Company had resolved
all issues with the Commission relating to its 1999 Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q for the first three quarters of 2000 and a
Current Report on Form 8-K, previously filed with the Commission on April 14,
2000.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the city of
Phoenix, state of Arizona, on September 24, 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)
By: /s/ Robert J. Taylor
---------------------------
Name: Robert J. Taylor
Title: Chief Financial Officer
(PRINCIPAL FINANCIAL OFFICER)
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