UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

 

FORM 10-K

 

 

ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2001

 

OR

 

o	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)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to section 12(g) of the Act:

Common Stock, par value $.001 per share

(Title of Class)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x   No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 219.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

 

The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $2,316,099.29, based upon the price of the last trade of the common stock as indicated by an over-the-counter bulletin board, which reflects the average bid and asked prices, on March 1, 2002 of $0.135 per share.

 

The number of outstanding shares of the registrant’s common stock as of March 1, 2002 was approximately 17,163,291 shares.

 

 

CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K and the information incorporated by reference may include “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. In particular, we direct your attention to Item 1. Business, Item 2. Properties, Item 3. Legal Proceedings, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation, Item 7A. Quantitative and Qualitative Disclosures About Market Risk, and Item 8. Financial Statements and Supplementary Data.  We intend the forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these sections. All statements regarding our expected financial position and operating results, our business strategy, our future business operations, 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.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive proxy statement, which will be issued to shareholders in conjunction with the 2002 Annual Meeting of Stockholders, are incorporated by reference in Part III of this Annual Report on Form 10-K.

 

PART I

 

Item 1.  Business

 

Introduction

 

Historical Background

 

Formed on June 25, 1997, quepasa.com, inc., a Nevada  corporation, is a bilingual (Spanish/English) Internet portal and online community focused on the United States Hispanic market.  We provide users with information and content centered around the Spanish language.  Because the language preference of many U.S. Hispanics is English, we also offer our users the ability to access information in the English language.  The nominees for our board of directors to be elected in April 2002 intend to discontinue the English language version.

 

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 and 2001, in order to conserve cash, we terminated most of our strategic relationships with our third party content and service providers, significantly reduced the products and content we provide, outsourced the hosting and administration of the quepasa.com and realestateespanol.com websites, suspended the operation of the credito.com and eTrato.com websites,  reduced our work force to 2 employees and 2 part-time contractors, and sold substantially all of our furniture, fixtures and equipment, including our internal computer and server equipment.  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 conserving cash.

 

Immediately upon their engagement, Friedman, Billings began actively contacting companies about a merger or sale transaction.  During the period between May 2000 and August 2001, Friedman, Billings had discussions with over 75 companies that ranged from very large, publicly-traded and non-publicly traded diversified companies to small, privately-held, start-up companies.  Friedman, Billings contacted numerous technology companies, including:  large internet service providers and content providers and companies that competed against quepasa in the Hispanic-focused internet portal sector.  Other large companies that were contacted included:  diversified media companies, print media companies, radio media companies, Spanish-speaking television companies and English-speaking television companies, entertainment companies,

 

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beverage companies, consumer products companies, fast food conglomerates, automobile manufacturers and their captive finance companies, and domestic and international bank holding companies.  Friedman, Billings contacted companies in the United States, South America, Europe and Asia.

 

Our accountants issued their independent auditors’ report dated February 27, 2002, stating that quepasa has suffered recurring losses from operations, has an accumulated deficit, has been unable to successfully execute its business plan, has continued to use cash in its operating activities and is considering alternatives, including liquidation, all of which raise substantial doubt about its ability to continue as a going concern.

 

Merger Agreement with Great Western Land & Recreation, Inc.

 

On December 27, 2000, we announced that our board had approved the development of a plan of liquidation and sale of our assets in the event that no strategic transaction could be achieved.  Since that time, we actively pursued the sale of our assets and responded to numerous inquiries from interested parties.  In February 2001, Great Western Land and Recreation, Inc., an Arizona-based privately-held real estate development company with holdings in Arizona, New Mexico and Texas, expressed interest in acquiring us.  On February 27, 2001, our board reviewed with management and Friedman, Billings all of the proposals that had been received.  Other than Great Western, the companies interested in a combination with us were small or thinly-capitalized private companies that were operating at a loss and had limited opportunities to raise capital in the current market.  After reviewing the proposals, on February 27, 2001, the board directed management to continue negotiations with Great Western, as it was considerably more financially sound than the other interested parties.

 

On August 6, 2001, we executed a merger agreement with Great Western and, the following day, publicly announced the agreement to merge.  We immediately began to prepare proxy materials to solicit shareholder approval for  the merger and submitted our proxy materials in preliminary form to the Securities and Exchange Commission for its review.  Our proxy materials also requested that our shareholders authorize the board to liquidate the company in the event the merger was not approved by the shareholders or did not close.

 

We amended and restated the merger agreement with Great Western on October 11, 2001 because the merger was taking longer than expected to close and, as a result, we were spending more money than we had anticipated.  In connection with the amendment to the merger agreement, quepasa loaned Great Western $500,000 which bears interest at the prime rate plus 1% and matures on the earlier of March 15, 2002 or the date the merger agreement is terminated.  The loan is secured by a pledge of limited liability company interests representing a 25% interest in an apartment project in Glendale, Arizona.

 

On February 5, 2002, we announced that we terminated the merger agreement because Great Western had materially breached the agreement.  As a result of the termination of the merger agreement, quepasa’s outstanding $500,000 loan to Great Western became immediately due and payable under the terms of the loan.  We have not yet received repayment of the loan to Great Western.  On February 6, 2002, Great Western notified us that it was terminating the merger agreement and on February 11, 2002, Great Western initiated a lawsuit against us in the Superior Court of Arizona.  In its complaint, Great Western alleged, among other things, that we breached the merger agreement and, as a result, Great Western is entitled to receive a $500,000 termination fee. Great Western asserted that the $500,000 loan that we made to Great Western in October of 2001 should be deemed paid in full as payment of the termination fee.  We intend to vigorously defend the lawsuit filed by Great Western. See Part I, Item 3 – Legal Proceedings.

 

Shareholder Lawsuits

 

On October 31, 2001, five of our stockholders, Mark Kucher, Michael Silberman, Gregory Steers, Nick Tintor and Bruce Randle, commenced a legal proceeding against us seeking to compel us to hold a separate stockholder meeting to elect directors prior to the stockholder meeting at which time the Great Western merger would be voted upon.  On or about December 5, 2001, quepasa and the plaintiffs in this action stipulated that one meeting would be held to elect directors and vote upon the Great Western merger.

 

Messrs. Kucher and Silberman commenced another legal proceeding on December 19, 2001 against us, each of our officers and directors and Great Western.  This action alleged, among other things, that our board of directors had breached its fiduciary duties in connection with the Great Western merger.

 

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Messrs. Kucher and Silberman and Kevin Dieball filed preliminary proxy materials with the Securities and Exchange Commission on January 16, 2002 in order to solicit proxies of our stockholders for the purpose of voting against the proposed merger with Great Western and for their own slate of directors to our board.

 

On February 13, 2002, we entered into a settlement of all litigation and potential litigation with the shareholder group that had commenced litigation against us, our officers and directors.  See Part I, Item 3 – Legal Proceedings.

 

Our Market in the U.S.

 

Hispanic population growth and concentration

 

According to the U.S. Census Bureau and published sources, the Hispanic population:

 

•       Was estimated to be 35.3 million or 12.5% of the total U.S. population in 2000, an increase of approximately 57% from 22.5 million or 9% of the total U.S. population in 1990;

 

•       Is expected to account for 43% of the total U.S. population growth between 1998 and 2010 and is expected to grow to 41.1 million or 14% of the total U.S. population by 2010; and

 

•       Is relatively young, with almost 70% of U.S. Hispanics under 35, compared to less than 50% of non-Hispanics, and with a median age of 26, compared to 35 for the rest of the population.

 

We believe the relative youth of the Hispanic population will furnish growth opportunities for products and services that appeal to a younger market, such as that found on the Internet. In addition, 70% of all U.S. Hispanics live in 12 metropolitan areas, which makes U.S. Hispanics an attractive demographic group for advertisers, enabling them to cost effectively deliver messages to a highly targeted audience.

 

Increasing Hispanic purchasing power

 

Total U.S. Hispanic purchasing power:

 

•       Rose at a compound annual growth rate of 7.5%, compared with 4.9% for the rest of the population from 1993 to 1998.

 

•       Was projected to be $443.0 billion or 7% of U.S. consumer expenditures in 2000, and $938.0 billion or 9% of U.S. consumer expenditures by 2010.

 

Continuing use of the Spanish-language by U.S. Hispanics

 

According to published sources, approximately 90% of U.S. Hispanic adults speak Spanish at home. Moreover, U.S. Hispanics are expected to continue to speak Spanish because:

 

•       Approximately two-thirds of U.S. Hispanic adults were born outside the U.S.;

 

•       Hispanic immigration into the U.S. is continuing;

 

•       Hispanics generally seek to preserve their cultural identity; and

 

•       Population concentration encourages communication in Spanish.

 

The quepasa.com Community

 

Our strategy has been to establish quepasa.com as a bilingual (Spanish/English) Internet portal and online community, offering our content to Hispanic Internet users primarily in the U.S.  In November 1998, we launched the quepasa.com website which allowed individuals to quickly access content and features which appeal to Hispanic Internet users.  Although our content is directed toward Spanish-speaking users, to better serve the U.S. Hispanic population, quepasa.com is also

 

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offered in English.  Quepasa’s nominees for our board of directors to be elected in April 2002 intend to discontinue the English language version.

 

In the second half of 2000 and throughout 2001, we reduced the products and content we offered in order to conserve our cash.  In the first quarter of 2001, in order to further conserve cash, we sold all of our internal computer and server equipment and outsourced the hosting and administration of the quepasa.com website for approximately $2,000 per month.

 

Marketing of the quepasa.com Site

 

At the end of 2000 and throughout 2001, we ceased marketing our website, terminated most of our co-branding and marketing arrangements with content providers and significantly reduced the services and content we provide.

 

Advertising on the quepasa.com Site

 

Advertisements on our website were of the banner or billboard style, which were designed to display additional advertisements as the consumer selected various topics on the website.  From each advertisement banner, users could proceed directly to an advertiser’s own website, thus enabling the advertiser to directly interact with a user who had expressed interest in the advertisement.  During the first quarter of 2001, we discontinued the use of our banner ad software and no longer offer advertising on our website.

 

Our on-line Auction and Credit Communities

 

In January 2000, we acquired eTrato.com, inc., an online auction site linking Hispanic buyers and sellers of goods and services, and credito.com, inc., a Spanish language Internet company providing personal credit content and information.   In the first quarter of 2001, in order to conserve cash, we suspended operation of the eTrato.com and credito.com websites.

 

Our on-line Real Estate Services Community

 

In March 2000, we acquired realestateespanol.com, a real estate services site providing the Hispanic-American community with home buying services in both English and Spanish.  quepasa.com members via realestateespanol.com were able to search for a real estate agent, apply for a mortgage, and view homes for sale among the more than 800,000 online listings provided through a partnership with homeseekers.com.

 

In May 2001, realestateespanol entered into various termination agreements with the National Association of Hispanic Real Estate Professionals, or NAHREP, and EMTA, under which, among other things, NAHREP agreed to release, with the approval of the National Council of La Raza, or NCLR, and Freddie Mac (additional parties to one such agreement), realestateespanol of all of its rights and obligations under certain agreements dated December 1999 and October 2000 regarding the implementation of a Hispanic Community Technology Initiative, and NAHREP and EMTA assumed realestateespanol’s rights and obligations. In exchange for realestateespanol’s release, including its obligation to pay NAHREP an annual $50,000 fee for the next nine years and its obligation to pay the costs associated with hosting and maintaining the realestateespanol.com website, realestateespanol (a) transferred ownership of certain technology to NAHREP, (b) licensed to NAHREP certain other technology necessary for the hosting and maintenance of the realestateespanol.com website, (c) permitted NAHREP to retain $150,000 of the sponsorship fee due to be paid to realestateespanol during the first quarter of 2001 and (d) permitted NAHREP to retain possession and ownership of 200 computers that realestateespanol donated under the terms of the original agreements.

 

See  Part I, Item 1 — Developments Since December 31, 2001.

 

Competitors and Competitive Factors Affecting our Business

 

The market for Internet products, services, advertising and commerce is intensely competitive, and we expect that competition will continue to intensify.  We believe that the principal competitive factors in these markets are name recognition, distribution arrangements, functionality, performance, ease of use, the number of value-added services and features, and quality of support. Our primary competitors are other companies providing portal and online community services, especially

 

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to the Spanish-language Internet users, such as Yahoo!Español, America Online Latin America, Univision Online, StarMedia, Terra Lycos, MSN and El Sitio.

 

In addition, a number of companies offering Internet products and services, including our direct competitors, recently began integrating multiple features within the products and services they offer to users. Integration of Internet products and services is occurring through development of competing products and through acquisitions of, or entering into joint ventures and/or licensing arrangements involving other, Internet companies and our competitors.

 

Many large media companies have announced that they are contemplating developing Internet navigation services and are attempting to become “gateway” sites for web users.  In the event these companies develop such portal or community sites, we could lose a substantial portion of our user traffic.  Further, entities that sponsor or maintain high-traffic websites or that provide an initial point of entry for Internet viewers, such as the Regional Bell Operating Companies or Internet service providers, such as Microsoft and America Online, currently offer and can be expected to consider further development, acquisition or licensing of Internet search and navigation functions.  These functions may be competitive with those that we offer.  Our competitors could also take actions that could make it more difficult for viewers to find and use our products and services.  Consolidations, integration and strategic relationships involving competitors could have a material adverse effect on our business.

 

In addition to the larger portals and online communities, we compete with a number of smaller portals and communities that provide region-specific information to users or market to users with specific interests.

 

Most of our existing competitors, as well as new competitors such as Spanish-language media companies, other portals, communities and Internet industry consolidators, have significantly greater financial, technical and marketing resources than we do. Many of our competitors offer Internet products and services that are superior to ours and achieve greater market acceptance. There can be no assurance that we will be able to compete successfully against current or future competitors or that competition will not have a material adverse effect on our business.

 

Sale of Assets

 

In December 2000, we sold for $981,870 to Gateway, Inc. a substantial portion of the computers we purchased from Gateway one year earlier.  We received this cash payment of $981,870 from Gateway in January 2001.  In March 2001, in order to conserve cash and as a result of our reduction in work force, we sold substantially all of our furniture, computer equipment and office equipment for $277,000 cash.

 

Employees

 

We reduced our work force from 80 employees on December 31, 1999 to 20 employees on December 31, 2000, and again, to 2 full-time employees and 2 part-time contractors as of December 31, 2001.

 

Developments Since December 31, 2001

 

Cancelling of Telemundo Shares

 

On January 7, 2002, in accordance with the arbitrator’s award dated November 15, 2001 with respect to the arbitration proceeding between us and Telemundo Network Group LLC, Telemundo returned the 600,000 shares it previously acquired as part of the underlying contract between us and Telemundo dated April 26, 1999.  Those shares were subsequently cancelled and are no longer outstanding.  See Part I, Item 3 – Legal Proceedings.

 

Termination of Great Western Merger Agreement; Subsequent Lawsuit

 

On February 5, 2002, we announced that we terminated the merger agreement with Great Western because Great Western had materially breached the agreement.  As a result of the termination of the merger agreement, our outstanding $500,000 loan to Great Western automatically and immediately accelerated and became due and payable under the terms of the loan.  We have not yet received repayment of the loan to Great Western.  However, On February 11, 2002, Great Western initiated a lawsuit against us in the Superior Court of Arizona.  See Part I, Item 3 – Legal Proceedings.

 

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Relocation of Corporate Offices

 

On October 31, 2001, we vacated our property in Phoenix, Arizona.  Thereafter, to conserve cash, we relocated our offices to Great Western’s headquarters in Scottsdale, Arizona.  On February 8, 2002, we relocated our corporate offices from Great Western to the law offices of Brown & Bain, P.A. in Phoenix, Arizona.  We are using this space free of charge.

 

Settlement of all Litigation and Potential Litigation with Concerned Shareholder Group

 

On February 13, 2002, we entered into a settlement of all litigation and potential litigation with the shareholder group that had commenced litigation against us, our officers and directors.  See Part I, Item 3 – Legal Proceedings.

 

Nomination of new Directors; New Business Plan

 

On two occasions, our board met with several members of the shareholder group that had opposed the proposed merger with Great Western, including our two founders, Jeffrey Peterson and Michael Silberman.  At these meetings, Messrs. Peterson and Silberman presented their plans for quepasa if their director nominees were elected to our board. As a result, our board of directors decided not to stand for re-election and to withdraw the shareholder proposal to authorize our board to completely liquidate quepasa in the event the merger with Great Western was terminated and to distribute all remaining cash to our shareholders and dissolve quepasa at the discretion of the board.  Instead, our board agreed to nominate Messrs. Peterson and Silberman and three other candidates to the board.  Our board determined that nominating these individuals and withdrawing the liquidation proposal was in the best interests of our shareholders.

 

Messrs. Peterson and Silberman have told our board of directors that they plan to build quepasa as a Spanish language Internet portal focused on the international Hispanic market. They intend to rely on quepasa’s established brand to penetrate national and international Hispanic markets.  In addition, they plan to provide users with limited information and content centered around the Spanish language, email, a search engine, chat rooms and message boards.  The website will no longer be accessible in English.  The website is expected to feature a pay-for-placement advertising program in which consumers and businesses that search the Internet through our website will be introduced to advertisers who provide products, services and information.  Messrs. Silberman and Peterson intend to contract with Vayala Corporation, a privately-held search and retrieval technology company of which Messrs. Silberman and Peterson are co-founders, directors and officers, to provide search results to our users.  This relationship will be an arm’s length transaction on terms no less favorable than those that could have been obtained from unaffiliated third parties.  Our website will enable advertisers to bid in an ongoing auction for priority placement in such search results.  Priority placement means that the search results appear on the page ranked in descending order of bid price, with the highest bidder’s listing appearing first.  Each advertiser will pay quepasa the amount of its bid whenever a user clicks on the advertiser’s listing in quepasa’s search results. Advertisers will pay quepasa for each clickthrough, so advertisers bid only on keywords relevant to the products, services or information they offer. Because each advertiser chooses the bid amount and advertisement placement that is optimal for its business, Messrs. Silberman and Peterson believe that the pay-for-placement advertising program will provide advertisers with a cost-effective way to target Spanish language consumers and businesses.

 

Messrs. Peterson and Silberman intend to develop, market and sell end-user networking applications for Spanish language users and offer domain name registration services for the international Spanish language community through our website.  They believe that they can operate quepasa for at least one year with the company’s current cash reserves.  They intend to hire one or two employees to build, operate and maintain the website, to provide limited content and to manage the pay-for-placement advertising program.  Thereafter, they intend to raise capital to finance quepasa’s business through their relationships, along with those of the other board nominees and anticipated advisory board members, with venture capital and private equity investors.  There are no current commitments to provide financing to quepasa and there is no assurance that such financing will be obtained.

 

There is no assurance that Messrs. Silberman’s and Peterson’s plans for quepasa in the event their nominated slate of directors are elected to our board will be implemented and, if implemented, will be successful.  We have never been profitable and have been unable to successfully execute our business plan following our initial public offering. In addition, see Part II, Item 7 – Risk Factors.

 

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Item 2.  Properties

 

During 2000, we leased approximately 13,277 square feet of space for our executive offices in Phoenix, Arizona for $25,400 per month, increasing to $26,000 in July 2001, pursuant to a lease which would have expired in November 2002.  As a result of our reduction in work force and changes in our business strategy, on August 1, 2001, we executed an agreement with our landlord pursuant to which we made a $130,000 lump sum payment for any and all amounts due and owing under the lease, including any and all future amounts to be paid thereunder.  We vacated the property on October 31, 2001 and subsequently leased space, free of charge, from our prospective merger partner Great Western. On February 8, 2002, we relocated our corporate offices from Great Western to the law offices of Brown & Bain, P.A. in Phoenix, Arizona.  We are using this space free of charge.

 

Item 3.  Legal Proceedings

 

Telemundo Arbitration

 

In April 1999, we entered into an agreement with Telemundo Network Group LLC (Telemundo).  In January 2001, Telemundo asserted that the agreement was terminated alleging that we had failed to develop and maintain the Telemundo website.  In February 2001, we initiated arbitration against Telemundo to defend the enforceability of the agreement, and submitted a damages claim for $4.3 million, plus reasonable attorneys’ fees and costs.  Telemundo also asserted a damages claim for $655,000, plus reasonable attorneys’ fees and costs.  On November 15, 2001, we received a decision of the American Arbitration Association in the arbitration proceeding, pursuant to which: (1) we are not permitted to transfer, sell or use any of the unused advertising credits that were issued under the original agreement with Telemundo, (2) Telemundo is required to return the 600,000 shares of our common stock that it owned (representing 3.6% of our issued and outstanding capital stock), (3) we have no further duties or obligations under the agreement and (4) we are required to make a cash payment to Telemundo as reimbursement of attorneys’ fees, costs and expenses incurred in connection with the arbitration.   Pursuant to a settlement agreement between us and Telemundo, on January 7, 2002, Telemundo returned the 600,000 shares of common stock to us and we made a cash payment of $200,000 to Telemundo, which payment reflects a discount from the amount set forth in the arbitrator’s award.

 

Concerned Shareholders Lawsuits

 

On October 31, 2001, Mark Kucher, Michael Silberman, Gregory Steers, Nick Tintor and Bruce Randle commenced a legal proceeding against us seeking to compel us to hold a separate shareholder meeting to elect directors prior to the shareholder meeting at which the merger would be voted upon and prohibiting us from effecting the proposed merger with Great Western.  On or about December 5, 2001, quepasa and the plaintiffs in that action stipulated that one meeting would be held to elect directors.  Thereafter, on December 19, 2001, Messrs. Kucher and Silberman commenced another legal proceeding against us, each of our officers and directors and Great Western.  This action alleged, among other things, that our board of directors had breached its fiduciary duties in connection with the Great Western merger.

 

Messrs. Kucher and Silberman and Kevin Dieball filed preliminary proxy materials with the Securities and Exchange Commission on January 16, 2002 in order to solicit proxies of our shareholders for the purpose of voting against the proposed merger with Great Western and for their own slate of directors to our board.

 

On February 13, 2002, we entered into a settlement of all litigation and potential litigation with the shareholder group that had commenced litigation against us, our officers and directors. The settlement provides for dismissal of all claims with prejudice and full releases of all parties for all claims, whether yet asserted or not.  The settlement agreement states that through the date of our 2002 annual meeting, we do not expect to make any expenditures or distributions other than in the ordinary course of business and in connection with Robert Taylor’s employment agreement, the Great Western merger agreement, the litigation settlement, and the preparation and mailing of a proxy statement in connection with our annual meeting.  The settlement also requires that we continue to indemnify all of our officers and directors to the fullest extent permitted by law.  A copy of the Stipulation of Settlement and Notice Order related to the settlement has been filed as an exhibit to our Form 8-K filed with the Securities and Exchange Commission on February 28, 2002.

 

Complaint Filed by Great Western

 

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On February 5, 2002, we announced that we terminated the merger agreement because Great Western had materially breached the agreement.  As a result of the termination of the merger agreement, quepasa’s outstanding $500,000 loan to Great Western became immediately due and payable under the terms of the loan.  We have not yet received repayment of the loan to Great Western.  On February 6, 2002, Great Western notified us that it was terminating the merger agreement and on February 11, 2002, Great Western initiated a lawsuit against us in the Superior Court of Arizona.  In its complaint, Great Western alleged, among other things, that we breached the merger agreement and, as a result, Great Western is entitled to receive a $500,000 termination fee. Great Western asserted that the $500,000 loan that we made to Great Western in October of 2001 should be deemed paid in full as payment of the termination fee.  We intend to vigorously defend the lawsuit filed by Great Western.

 

We are from time to time involved in various other legal proceedings incidental to the conduct of our business.   See Part I, Item 7 – Risk Factors.

 

Item 4.  Submission of Matters to a Vote of Security Holders

 

No matters were submitted to a vote of security holders during the quarter ended December 31, 2001.

 

PART II

 

Item 5.  Market for Registrant’s Common Equity and Related Shareholder Matters

 

As of March 1, 2002, there were approximately 400 shareholders of record of our common stock.  Our common stock began trading on the Nasdaq National Market on June 24, 1999, the date of our initial public offering (IPO).  Prior to June 24, 1999, there was no public market for our common stock.

 

Our common stock was traded on the Nasdaq National Market under the symbol “PASA” through December 26, 2000.  On December 27, 2000, following the announcement that our board approved the development of a plan of liquidation and sale of our assets, the Nasdaq Stock Market halted trading on our common stock.  On January 18, 2001, our common stock was delisted from the Nasdaq National Market.  Our common stock has traded on the Pink Sheets for the period between December 27, 2000 and March 13, 2001, and the period between May 24, 2001 through December 31, 2001, and on the OTC Bulletin Board for the period between March 13, 2001 and  May 23, 2001.

 

The following table sets forth the high and low closing prices of our common stock as reported on the Nasdaq National Market from January 3, 2000 through December 26, 2000:

 

 

The following table sets forth the high and low closing prices of our common stock as reported on (1) the over-the-counter market (frequently referred to as “Pink Sheets”) for the interim periods of December 27, 2000 through March 13, 2001 and May 24, 2001 through December 31, 2001 and (2) the OTCBB from March 13, 2001 through May 23, 2001:

 

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Dividend Policy

 

We have never declared or paid any dividends on our common stock.  We do not anticipate paying any cash dividends in the foreseeable future.

 

Sale of Unregistered Securities

 

Since December 31, 1997, we issued unregistered securities as set forth below:

 

1.                    In May 1998, we issued 1,420,000 shares of common stock to Michael Silberman.  296,492 of those shares of common stock were issued to Mr. Silberman in error, and at the company’s request, he transferred those shares to an outside director.  The consideration received for such shares was $1,420.

 

2.                    In November 1998, we issued 50,000 shares of common stock to Enver Zaky upon conversion of $50,000 of convertible debt issued in May 1998.

 

3.                    In November 1998, we issued 666,666 shares of common stock to Mitchell Pierce and Tim Pring upon conversion of $1,000,000 of convertible debt issued in July 1998.

 

4.                    In November and December 1998, an aggregate of 1,259,167 shares of common stock was issued in a private placement.  The consideration received for such shares was $4,721,876.

 

5.                    In April 1999, we issued 50,000 shares of common stock to Gary Trujillo as compensation under his employment agreement.

 

6.                    In April 1999, we issued 25,000 shares of common stock to Southwest Harvard Group, an entity owned by Mr. Trujillo, for consulting services provided to us.

 

7.                    In April 1999, we issued 600,000 shares of common stock and a warrant to purchase 1,000,000 shares of common stock, exercisable in 2 years, with an exercise price of 120% of the public offering price, to Telemundo for $5 million of advertising credit on the Telemundo television network.  After completion of the IPO, the shares and warrant became fully vested and were not subject to return for nonperformance by Telemundo.  The fair value of the transaction was measured and based on the fair value of the common stock issued at our IPO price of $12.00 per share plus $2,920,192 assigned to the warrant based on the Black-Scholes pricing model using a 50% volatility rate.  As of June 25, 2001, the warrant issued to Telemundo was not exercised, and therefore, expired.

 

8.                    In April 1999, we issued 50,000 shares of common stock to Garcia/LKS for advertising services valued at $634,000.

 

9.                    On June 24, 1999, we completed an initial public offering of 4,000,000 shares of common stock at a price of $12.00 per share, resulting in net proceeds to us of $42.4 million.  In July 1999, we sold an additional 600,000 shares of common stock at $12.00 per share from the exercise of an option granted to our underwriter to cover overallotments from our offering, resulting in additional net proceeds of $6.3 million.  The aggregate gross proceeds from these issuances were $55.2 million and the cash expenses incurred were $4.95 million for underwriting discounts and commissions and $1.55 million for other expenses including legal, accounting and printing costs.  We used the net proceeds of the offering:  (1) to repay a working capital loan and a bridge loan, (2) for marketing and advertising expenses, (3) for general and administrative expenses, (4) for development and acquisition of additional content and

 

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features for the our website and (5) to purchase equipment.  The balance of the net proceeds was invested in short-term, investment grade, interest-bearing securities.

 

10.              In September 1999, we issued 156,863 shares of redeemable common stock to Estefan Enterprises, Inc. in connection with a spokesperson agreement.  Because Ms. Estefan’s tour was postponed, the spokesperson agreement was renegotiated.  Under the revised spokesperson agreement, the 156,863 shares of common stock were returned to quepasa.

 

11.              In January 2000, we issued 681,818 shares of common stock valued at approximately $9.6 million to the shareholder of eTrato.com to acquire eTrato.com.  Contingent consideration consisted of 681,818 shares of common stock which were held in escrow, deliverable upon eTrato’s achievement of certain performance targets.  In March 2001, because eTrato failed to achieve such targets, the escrowed shares were returned to us and canceled.

 

12.              In January 2000, we issued 681,818 shares of common stock valued at approximately $8.4 million in the aggregate, to acquire credito.com, Inc.  Contingent consideration consisted of a warrant to purchase 681,818 shares of common stock, exercisable upon the achievement of certain performance targets.  In March 2001, because credito.com failed to achieve certain performance targets, its right to exercise the warrant was terminated.