UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of the Securities
Exchange Act of 1934
PAWNBROKER.COM, INC.
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(Exact name of registrant as specified in its charter)
Delaware 33-0794473
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
85 Keystone, Suite F, Reno, Nevada 89503
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (775) 332-5048
Securities to be registered under Section 12(b) of the Act:
NONE None
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Title of each class to be so registered Name of each exchange on which each
class is to be registered
Securities to be registered under Section 12(g) of the Act:
Common Shares, Par Value $0.00001 Per Share
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(Title of Class)
Not Applicable
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(Title of Class)
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TABLE OF CONTENTS
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Page
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NOTE REGARDING FORWARD LOOKING STATEMENTS.........................................................................1
Item 1. Description of Business...................................................................................2
Item 2. Financial Information....................................................................................34
Item 3. Properties...............................................................................................41
Item 4. Security Ownership of Certain Beneficial Owners and Management...........................................41
Item 5. Directors, Executive Officers, Promoters and Control Persons.............................................43
Item 6. Executive Compensation...................................................................................45
Item 7. Certain Relationships and Related Transactions...........................................................50
Item 8. Legal Proceedings........................................................................................51
Item 10. Recent Sales of Unregistered Securities................................................................52
Item 11. Descriptions of Registrant's Securities to be Registered................................................53
Item 12. Indemnification of Directors and Officers ..............................................................54
Item 13. Financial Statements and Supplementary Data............................................................54
Item 14. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................54
Item 15. Financial Statements and Exhibits......................................................................54
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NOTE REGARDING FORWARD LOOKING STATEMENTS
Except for statements of historical fact, certain information contained herein
constitutes "forward-looking statements," including without limitation
statements containing the words "believes," "anticipates," "intends," "expects"
and words of similar import, as well as all projections of future results. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results or achievements of the
Registrant to be materially different from any future results or achievements of
the Registrant expressed or implied by such forward-looking statements. Such
factors include, but are not limited to the following: the Registrant's limited
operating history; history of losses; risks involving new product development;
competition; management of growth and integration; risks of technological
change; the Registrant's dependence on key personnel, marketing relationships
with pawnshops and third party suppliers; the Registrant's ability to protect
its intellectual property rights; government regulation of Internet commerce and
the pawn industry; economic and political factors; dependence on continued
growth in use of the Internet; risk of technological change; capacity and
systems disruptions; liability for Internet content; uncertainty regarding
infringing intellectual property rights of others; security risks; year 2000
compliance risks and the other risks and uncertainties described under
"Description of Business - Risk Factors" in this registration statement. Certain
of the forward looking statements contained in this registration statement are
identified with cross-references to this section and/or to specific risks
identified under "Description of Business - Risk Factors".
The Registrant's management has included projections and estimates in this
registration statement, which are based primarily on management's assessment of
the Registrant's results of operations, discussions and negotiations with third
parties, management's experience and a review of information filed by its
competitors with the Securities and Exchange Commission. Investors are cautioned
against attributing undue certainty to management's projections.
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Item 1. Description of Business.
General Overview
We, Pawnbroker.com, Inc., are a Delaware corporation in the development stage,
which means we are in the process of developing our business and have no
revenues from our operations and have not generated any profits. We intend to
launch a web site designed to provide online customers a fundamentally new
method to search for and buy merchandise from the inventories of pawnshops. Our
web site is located at www.pawnbroker.com.
We intend to enter into agreements with "brick-and-mortar" pawnshops with
existing physical locations under which each participating pawnshop will agree
to make certain items or all of their inventory available for purchase through
Pawnbroker.com at prices established by the pawnshop or on a "make an offer"
basis. Based on our discussion with potential participants, we believe that our
Pawnbroker.com web site services will be particularly attractive to small
independent pawnshops and small pawnshop chains, who sell their merchandise
exclusively through their physical locations and may be limited by the scope of
their geographic market. We intend to generate revenues by charging pawnshops a
transaction fee on successfully completed transactions.
We are currently in the process of completing the development of the software
and technology related to our business and intend to beta test our web site in
December 1999 with approximately 65 pawnshops that have verbally committed to
participate in the tests by each listing approximately 500 items of merchandise
on our site. After completing beta tests and debugging our software, we intend
to launch the roll out of our site to the general public in two phases:
o The soft launch is planned to have between 65 and 100 participating
pawnshops, each featuring approximately 300 to 500 items in January
2000; and
o The hard launch is planned to have between 100 and 200 participating
pawnshops, each featuring approximately 300 to 500 items in March
2000.
Our goal is to have a total of up to 2,000 participating pawnshops offering an
average of 500 items each by December 2000.
We have presented our web site concept to over 3,000 pawnshops at conventions
and tradeshows and have oral expressions of interest or requests for additional
information from approximately 2,000 pawnshops. We do not intend to enter into
any definitive agreements with pawnshops until we have completed the beta
testing of our web site. We also cannot assure you that we will successfully
complete the development of the technology required to launch our web site or
enter into any definitive agreements with pawnshops as planned or that we will
generate sufficient revenues to become profitable.
Participating pawnbrokers will be able to run our Pawnbroker.com software on
IBM-compatible PCs with Microsoft Windows 95/98. We anticipate that
participating pawnbrokers will be able to purchase an IBM-compatible PC with
Microsoft Windows 95/98 and a laser printer to print invoices and shipping
labels at a cost of less than $2,000. We will also recommend the use of a
digital camera to display pictures of merchandise on our web site. See
"Participating Pawnbroker Systems Requirements."
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Our web site will include an automated, easy-to-use search and retrieval system
that is designed to make purchasing merchandise on our Pawnbroker.com web site
easy and popular. We plan to incorporate visual displays on our web site that
permits a visitor to view pictures of merchandise and interactive capabilities
that allow buyers to make offers on merchandise at any point in their visit. Our
software developer, Banshee, Inc., is in the process of developing the
technologies that will allow us to integrate these features on our web site. The
software is anticipated to be ready for beta testing in December 1999.
We believe that our Pawnbroker.com web site will be attractive to consumers of
merchandise typically offered at pawnshops, such as jewelry, consumer
electronics, tools, collectibles, coins, cameras and musical instruments. We
intend to attract buyers by offering consumers an opportunity to locate and
purchase merchandise from an inventory that we anticipate will be larger than
any single pawnshop or pawnshop chain. We do not intend to post firearms, adult
materials or other potentially illegal merchandise for sale on our web site. Our
web site is designed to facilitate seamless, secure transactions, unlike other
existing systems that require buyers to visit other web sites or contact the
pawnshop directly to complete a secure transaction. We intend to create buyer
confidence by offering a unique 10-day Pawnbroker.com Satisfaction Program that
is intended to reduce the risk and uncertainty of purchasing merchandise from
independent pawnshops. See "Pawnbroker.com Satisfaction Guarantee."
We intend to increase repeat purchases and build loyalty to our service by using
post-sale marketing techniques including follow-up email messages to remind
customers of our web site and personalized services that will allow visitors to
(i) request merchandise that is not listed for sale on our web site, (ii)
notification by email when a particular item of merchandise is available on our
web site, and (iii) automatic email reminders of specific occasions like
birthdays, holidays or anniversaries.
We anticipate that the number of transactions facilitated on Pawnbroker.com will
increase and decrease during certain times of the year, similar to the sales
fluctuations experienced by physical pawnshops in their retail sales. Based on
our management's experience in the pawnshop industry, we anticipate our sales
will be higher during the periods immediately prior to Christmas, Valentine's
Day, Mother's Day and Father's Day than during other times of the year.
Our revenues will depend on transaction fees paid by pawnshops for successful
transactions completed with purchasers. Based on our discussions with potential
advertisers, we believe that when and if our site traffic reaches 10,000 or more
visitors per day, we may receive additional revenues by selling banner ads. In
the future, we plan to generate additional revenue by licensing a point-of-sale
& inventory management applications that allow participating pawnshops to
seamlessly post items in their inventory database for sale on our web site and
to manage their in-store and online inventory in an effective, efficient manner.
We have no revenues from our operations and we have a history of losses. As of
June 30, 1999, we had an accumulated deficit of $479,957. We anticipate that we
will continue to incur substantial losses for the foreseeable future. We
estimate that we will require additional financing of at least $5 million to
meet our cash requirements during through the fiscal quarter ending June 30,
2000. See "Note Regarding Forward Looking Statements." Our ability to fully
implement our business strategy will
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depend on our ability to raise future financing. Factors that will affect our
ability to raise such financing may include, among other things:
o the market acceptance of our Pawnbroker.com web site by buyers of
pawnshop merchandise;
o traffic on our web site;
o our ability to obtain participating member pawnshops; and
o the revenues generated from our operations.
We anticipate that we will raise additional financing through private placements
of our equity or debt during the fourth quarter of 1999. We are currently
seeking such financing by presenting our business plan to merchant and
investment banks, fund managers and investment advisors. We cannot assure you
that we will successfully complete any private placements or that we will obtain
additional financing to implement our business plans on acceptable terms, if at
all.
We intend to compete in the highly competitive Internet commerce industry. Many
of our competitors have substantially greater financial, technical and other
resources than us. Several competitors already have established web sites, brand
names, strategic relationships with advertisers and other web sites and user
loyalty, all of which create a competitive advantage over us. We have not
launched our web site or begun the process of developing our brand name or
promoting our web site. We cannot guarantee that we will be able to compete
effectively or that we will ever generate sufficient revenues from our
operations to make our business commercially viable.
Industry Background
The Internet is an increasingly significant global interactive medium for
communications, content and commerce. Growth in Internet usage has been fueled
by a number of factors, including
(i) the large and growing base of personal computers in the workplace
and home,
(ii) advances in the performance of personal computers and modems,
(iii) improvements in network systems and infrastructure,
(iv) readily available and lower cost access to the Internet,
(v) increased awareness of the Internet among businesses and
consumers,
(vi) increased volume of information and services offered on the Web
and
(vii) reduced security risks in conducting transactions online.
We believe that the growing adoption of the Internet represents an opportunity
for businesses to conduct commerce electronically without borders over the
Internet.
The Pawnshop Industry
According to information published by the National Pawnbroker's Association, the
pawnshop industry in the United States is a growing industry. Pawnshops are
primarily regulated by state and local laws. Based on information available from
the National Pawnbroker's Association, we believe that the majority of pawnshops
are owned by individuals operating one to three locations, and that the pawnshop
industry is fragmented and comprised primarily of several thousand independent
"mom and pop"
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pawnshops operating less than three stores. In recent years, several operators
have begun to develop multi-unit chains through acquisitions and new store
openings. The four largest publicly traded pawnshop companies are EZCorp, Inc.,
First Cash, Inc., U S Pawn Inc. and Cash America, collectively operating
approximately 1000 stores in the United States.
Each of the publicly traded pawnshop companies have, or are in the process of,
offering merchandise on the Internet through company-owned web sites. In
addition, there are several independent pawnshops that are offering merchandise
on the Internet through their own web sites. We also believe that pawnshops may
be offering merchandise on auction-type web sites such as eBay, Onsale, Bidz,
First Auction, Surplus Auction and uBid. Several pawnshops advertise on web
sites that post links to pawnshop web sites, such as Pawn Shop Links, and
classified ad web sites. We do not believe there is currently a web site that
compiles the inventory of participating pawnshops into a single searchable
database and that offers the transaction clearing capabilities of our
Pawnbroker.com web site.
Based on management's experience, we believe that several characteristics of the
traditional pawnshop industry have created inefficiencies in the industry.
Brick-and-mortar based pawnshops must make significant investments in credit
capital, inventory, real estate and personnel for each retail location. Further,
because most pawnshops obtain most of their inventory locally, they must contend
with the logistical problems of matching pawned merchandise to unpredictable
demand for such merchandise. We believe the growth of the Internet has
facilitated the development of solutions to some of these traditional problems
and will lead to growth and efficiencies in the pawnshop industry.
Competition
We intend to compete with a number of other companies with substantially greater
financial, technical and human resources than us. Our competitors, in connection
with the sale of merchandise, include numerous brick-and-mortar retail and
wholesale stores, including jewelry stores, discount retail stores, consumer
electronics stores, pawnshops, and other retailers of new and previously-owned
merchandise. Competitive factors in our business include:
(i) the ability to provide the customer with a variety of merchandise
at an exceptional value;
(ii) the quality of merchandise offered;
(iii) consumer brand loyalty to the merchandiser; and
(iv) level of service provided by the merchandiser.
We also compete with numerous other retailers who have significantly greater
financial resources than the Company.
At the present time, we believe we will compete with three principal types of
distribution channels available to pawnshops on the Internet: (i) list services,
(ii) independent pawnshop web sites, and (iii) large Internet resellers.
List Services
A variety of list services are presently available on the Internet. These
services, such as Secondhand.com and Pawn Shop Link, are similar to
advertisements in the yellow pages and make
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available to Internet shoppers lists of pawnshops and links to the web sites of
advertising pawnshops. We also believe that certain list services, including
ePawn.com, Forsale.com, Amazon.com's zShops, GoTthat.com, SelectPawn.com,
Pawn.Net, global pawnbroker's network, pawnbrokers auction, pawnshop link, and
virtual pawnshop may be in the process of developing web sites that will allow
pawnshops to post merchandise for sale on the Internet. These systems are
anticipated to allow buyers to locate items online, provided that their
description correlates with the description contained in the list compiled by
each participating seller. We anticipate that the buyer will contact the
pawnshop directly to purchase merchandise and that the pawnshop will deal
directly with the purchaser and handle a majority of the transaction-related
functions to sell merchandise.
For shoppers, these services typically require the buyer to complete a number of
steps including possibly linking onto individual pawnshop web sites to browse
for merchandise. The search and matching services are also problematic for
sellers because they effectively require pawnshops to deal directly with the
customer and to handle most of the functions related to processing the
transaction and updating the web site inventory.
We believe that there are severe limitations with list services that create
inefficiencies for buyers and sellers. Retail buyers experience multiple-step
purchasing and a likelihood for errors. We believe that the existing systems are
also inconvenient for participating pawnshops because the systems can require
high administrative and transactional costs. In the future, we intend to develop
or license an integrated Internet software system for pawnshops that is
compatible with an in-store inventory and point of sale system, which may allow
pawnshops to update both their in-store inventory and Pawnbroker.com postings
simultaneously.
Independent Pawnbroker Web sites
A number of pawnshops currently maintain retail web sites on the Internet. These
independent pawnshops range from large retailers, such as EZ Pawn, operated by
EZCorp, Inc., and First Cash, to small independent pawnshops.
Independent pawnshops' web sites generally allow buyers to search for
merchandise contained within the seller's inventory. In general, buyers search
for and acquire merchandise from independent pawnshops by visiting the web site
and dealing directly with the pawnshop. We believe that due to the limited
inventory of most independent pawnshops, retail customers may find searching for
merchandise an unsatisfactory experience. Customers may perceive purchasing
directly from independent pawnshops as risky.
Based on information available from the National Association of Pawnbrokers and
our discussions with industry experts, we believe there are more than 13,000
pawnshops in the United States that can benefit from our Internet system. We are
positioning our system to offer certain features including:
(i) the convenience created by offering visitors an opportunity to
browse and select from a large inventory;
(ii) search tools designed to allow a visitor to search for specific
items of merchandise, comparison shop specific brands,
merchandise and prices and view the merchandise of several
pawnbrokers throughout the United States at a single web site;
and
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(iii) our Pawnbroker.com Satisfaction Program, designed to reduce
consumer risk in the buying merchandise from pawnshops online.
We believe that by offering the merchandise of several hundred pawnshops on a
single web site with search and transaction processing capabilities will be
appealing to buyers. We also believe that by serving as an independent
facilitator of pawnbroker-to-consumer transactions featuring our unique
Pawnbroker.com Satisfaction Program, we can provide an Internet solution that
will appeal to consumers and to pawnshops. See "Our Pawnbroker.com Satisfaction
Program." We also believe our system may reduce start-up costs for participating
pawnshops related to marketing merchandise on the Internet.
Large Internet Resellers
The market for person-to-person trading over the Internet is new, rapidly
evolving and intensely competitive, and we expect competition to intensify in
the future. A variety of auction-type web sites are presently available on the
Internet. These services allow sellers to post merchandise on the Internet and
allow buyers to locate items and submit bids online. These services generally
organize merchandise by categories and provide descriptions, pictures or graphic
capabilities and allow bidders to submit bids on the merchandise. We believe
there are a number of pawnshops that post merchandise for sale on these auction
sites.
Barriers to entry are relatively low, and current and new competitors can launch
new sites at a relatively low cost using commercially available software. Our
web site will compete directly with online auction services such as eBay,
Amazon.com, MSN.com, Yahoo! Auctions, Fairmarket.com, Auction Universe, Onsale,
First Auction, Surplus Auction, uBid and a number of other small services,
including those that serve specialty or regional markets such as CityAuction.
Some of these auction services are free to sellers and buyers. We potentially
face competition from a number of large online communities and services that
have expertise in developing online commerce and in facilitating online
business-to-person interaction, including America Online, AOL, Lycos, Inc. and
Microsoft Corporation. Other large companies with strong brand recognition and
experience in online commerce, such as Cendant Corporation, QVC, USA Network and
large newspaper or media companies, also may seek to compete in the online
market to sell merchandise to our target customers.
Our Pawnbroker.com web site is designed specifically for the special needs of
pawnshops. We believe our Pawnbroker.com system may effectively reduce
transaction costs for pawnshops selling merchandise over the Internet because we
intend to charge a transaction fee based solely on successful transactions.
Pawnshops will be able to post their entire inventory on Pawnbroker.com and will
only be obligated to pay us a fee if we facilitate a transaction. We believe our
10-day Pawnbroker.com Satisfaction Program also will reduce the risk that a
visitor may associate with an Internet transaction, without charging the buyer a
service fee. See "Our Pawnbroker.com Satisfaction Program."
We are attempting to establish Internet traffic arrangements with other online
services like America Online, Yahoo!, Excite and other search engine companies.
Yahoo! has accepted our request to be listed on their search engine, and we
anticipate we will enter into other such arrangements once we have completed
beta testing of our web site in the first quarter of 2000. However, we cannot
assure you that these arrangements can be established on commercially reasonable
terms. Even if these arrangements
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are established, they may not result in increased usage of our service. In
addition, companies that control access to transactions through network access
or web browsers could promote our competitors' services or charge us substantial
fees for participation.
The Pawnbroker.com Solution
Pawnbroker.com offers Internet capabilities to traditional physical
brick-and-mortar pawnshops. We believe that our system may enhance the
distribution of pawnshop merchandise online and may lower the overall
transaction costs and risks of conducting business online by charging
transaction fees only for successfully completed transactions. Further, we
believe that our Pawnbroker.com web site will make purchasing pawnshop
merchandise more convenient for consumers than visiting physical stores and that
our Pawnbroker.com Satisfaction Program may provide an incentive to buyers to
purchase merchandise through our web site. Our long term goal will be to provide
pawnshops with an integrated inventory and Internet merchandising system that
will seamlessly allow a pawnshop to manage its in-store and online inventory
with one system.
A Transaction on Pawnbroker.com
Each transaction between the pawnshop and the purchaser is planned to be
structured as follows:
1. the pawnshop will register to become a participating member pawnshop
of Pawnbroker.com;
2. the participating pawnshop will electronically transmit a list of
available inventory to Pawnbroker.com, which they desire to post on
the Pawnbroker.com web site. The list will include (a) the category in
which each item of merchandise will be listed, (b) a brief description
of the merchandise, (c) pictures of the merchandise, if desired, (d)
the suggested or "ask price" for the merchandise, (e) a minimum bid
offer that will be considered, (f) full disclosure of the condition of
the item, and (g) any other useful information about the item;
3. we will post the listed merchandise on the Pawnbroker.com web site in
the predetermined category and post the information provided by the
participating pawnbroker;
4. we intend to establish oversight and quality control procedures to
monitor types of merchandise posted and the information provided by
the participating pawnshop;
5. we anticipate that visitors to our Pawnbroker.com web site will be
able to browse our site by category and view available merchandise
posted for sale by participating pawnbrokers;
6. if the visitor makes a purchase decision and chooses to pay the ask
price or to make an offer at other than the ask price, the visitor
will be required to register the purchase "offer" by providing us with
information such as (a) name, (b) shipping address, (c) special
shipping instructions, (d) method of payment, including credit card or
online electronic check, (e) the item the purchaser desires to
purchase and (f) the offer price;
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7. we will process offers as follows:
(a) offers at the ask price in accordance with Step 10 below;
(b) offers above the minimum offer a pawnshop has indicated it would
consider will be transmitted to the pawnshop immediately by
email; and
(c) offers below the minimum offer price will be rejected;
8. if the offer price is less than the ask price, the pawnshop may accept
the offer or counter-offer with a different price within 24 hours by
transmitting a message to us by email, and we will forward the
"counter-offer" to the offeror;
9. we will inform the offeror by email if the final offer is accepted or
rejected immediately after we receive notice from the pawnshop, all
offers not accepted within 24 hours will automatically be rejected;
10. if an offer or counter offer is accepted, we will send an acceptance
notification to the offeror, and we will simultaneously (a) process
payment, including shipping costs and the applicable taxes as
specified by the pawnshop, (b) establish an escrow for the
transaction, and (c) electronically transmit order shipping
information to the participating pawnbroker;
11. the pawnshop will be responsible for retrieving the merchandise from
inventory, packing it in a shipping container, labeling the package
with a Pawnbroker.com label, and shipping the merchandise to the
customer;
12. we intend to confirm receipt of the merchandise with the purchaser by
email, and the purchaser will have 10 days after delivery to examine
the merchandise under our Pawnbroker.com Satisfaction Program;
13. if the purchaser has not notified us or returned the merchandise to
the participating pawnshop within 10 days of receipt, we will
authorize the release of the escrow funds to the pawnshop; and
14. If the merchandise is returned during the Pawnbroker.com Satisfaction
Program period, we will credit the purchaser's credit card for credit
card purchases or send a check for cash purchases in the amount of the
purchase price, less shipping costs.
Participating pawnshops will be required to post merchandise; update their
available inventories; accept offers or submit counteroffers in a timely manner;
pack, label and ship merchandise to buyers and to notify us when merchandise is
returned by buyers under the Pawnbroker.com Satisfaction Program. We are in the
process of developing a policies and procedures manual for participating
pawnshops that will outline our policies and procedures for posting merchandise,
updating the inventory list, accepting offers, making counter-offers, packing,
shipping and processing orders, and rectifying credit and payment for
merchandise. We also intend to enter into agreements with each of our
participating pawnshops, pursuant to which they will agree to follow our
policies and procedures as a condition to posting merchandise for sale on
Pawnbroker.com and participating in our program. We intend to revise our
policies and procedures based on the results of our beta tests and the comments
of our customers and beta testers. If participating pawnshops do not follow our
policies and procedures or such policies and procedures do not allow us to
facilitate transactions in an efficient and effective manner, we may be unable
to facilitate a sufficient number of transactions to be commercially viable.
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Based on our discussions with prospective participating pawnbrokers, a majority
of prospective pawnbrokers currently ship items to customers or would be willing
to ship merchandise to online customers. In order to facilitate order
fulfillment, we are designing our policies to address logistical issues of speed
of order fulfillment, convenience, accountability and quality assurance. We are
considering options that will allow web-based tracking and other conveniences to
consumers. We are pursuing relationships with major carriers, including USPS and
FedEx to service our participating pawnshops.
In the future, we intend to develop or license other technology that will
improve the functionality of our web site and provide Internet solutions that
will assist participating pawnshops. Such technology may include inventory
management software that will permit participating pawnshops to integrate an
in-store inventory management and point of sale system with our Pawnbroker.com
web site. We anticipate that such a system will allow the participating pawnshop
to automatically update the inventory they offer on the Pawnbroker.com web site
with the inventory offered in their physical location. We cannot assure you that
we will successfully develop the technology required to complete the initial
launch of our Pawnbroker.com web site or that we will successfully attract
participating pawnshops to use our services.
Our Pawnbroker.com Satisfaction Program
Our Pawnbroker.com Satisfaction Program is designed to ensure customer
satisfaction with merchandise purchased on our web site. We intend to implement
the following policies related to our Pawnbroker.com Satisfaction Program:
(i) all orders for merchandise must be paid for at the time the offer is
accepted;
(ii) prior to shipment we will process the payment and establish an escrow
of the purchase price less shipping and handling costs;
(iii) the pawnshop will be responsible for shipping the merchandise, no
later than three days after the offer is accepted and the escrow is
established;
(iv) we will confirm the receipt of the merchandise with the purchaser by
email, we will credit the charge card of the purchaser if we have not
received verification of the shipment from the pawnshop within seven
days after the offer is accepted;
(v) the purchaser will have 10 days from the date the merchandise is
received to examine the merchandise;
(vi) if the purchaser is not satisfied with the merchandise, the purchaser
must (a) return the merchandise to the pawnbroker and (b) notify us by
email of the return no later than 10 days from the date the
merchandise is received;
(vii) we will notify the pawnbroker of the return;
(viii) once we have confirmed that the returned merchandise has been received
by the pawnbroker, we will credit the purchaser's credit card or send
a check to the purchaser in the amount of the purchase price less
shipping and handling costs;
(ix) In the event there is a dispute between the purchaser and the
pawnbroker:
(a) we will hold the purchase price in escrow
(b) our customer service department will attempt to resolve the
dispute; and
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(c) in the event the dispute is unresolved by our customer service
department, we will continue to hold the funds pending resolution
and written notification from the purchaser and the pawnbroker.
We intend to monitor the returns ratio for each participating pawnbroker and
each customer of Pawnbroker.com. We will establish an acceptable return ratio
for pawnbroker participation in our program. In the event the pawnbroker
experiences a returned merchandise ratio higher than our acceptable level or we
receive an unacceptable number of complaints from our customers, we will not
allow that pawnbroker to participate in our program. We also intend to establish
an acceptable return ratio for customers and will not accept offers from
customers that have a history of returning merchandise. We anticipate
establishing our definitive policies for our Pawnbroker.com Satisfaction Program
once beta testing is completed and we have received suggestions from
participating pawnshops.
Our Business Solution Goals
Key goals of our business solution include the following:
o Act as a trusted transaction host. Under our business plan, retail
customers purchasing merchandise at our Pawnbroker.com Web site will enter into
an electronic transaction with Pawnbroker.com in which we act as a financial
intermediary between the customer and the individual pawnshop that owns the
merchandise. By hosting the sale, we will take the customer's payment
information, place the proceeds into escrow during the 10-day Pawnbroker.com
Satisfaction Program period and remit payment for the merchandise to the selling
pawnshop, less costs and a transaction fee. We will effectively reduce
transaction risks for the consumer by offering our 10-day Pawnbroker.com
Satisfaction Program.
o Provide advantages over auction sites to consumers. Our Pawnbroker.com
system is designed to provide advantages to our customers. Our automated offer
and counter-offer mechanisms and other special features are designed to exert
downward pressure on prices, unlike in auctions, where prices are bid up and an
item cannot be bought until an auction is over. For the right price, the
consumer can buy an item quickly on the Pawnbroker.com site. We have designed
several features to distinguish our services from auction sites, including
integrated payment and shipping functions, standardized product descriptions,
our Pawnbroker.com Satisfaction Program and a wish-list function that allows
consumers to send an email to our participating pawnshops to request unlisted
items.
o Provide free services and novel shopping mechanisms. We plan to provide
free services such as email, chat rooms, consumer information, shopping tips, a
wish-list function and other services to visitors that we anticipate will
attract positive feed back from visitors and may encourage media coverage and
increased site traffic. We believe that these services, combined with advanced
personalization technology will make our site attractive to the public. We also
plan to use special promotions and advertising campaigns to build awareness and
interest in our site.
o Provide sophisticated business systems to pawnshops at low cost. We
believe that our system will lower transaction costs for pawnshops that desire
to conduct business over the Internet because we absorb the costs associated
with maintaining the computer systems and infrastructure and we update the
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technology. By absorbing the sunk costs generally associated with launching an
Internet web site and developing the technology, we believe we can bring a
pawnshop online faster with innovative and advanced technology. In the future,
we anticipate that we will make available to participating pawnshops an
integrated inventory control software to allow pawnshops to accurately track the
store's inventory by using a point of sale system that can be connected to and
used with our Pawnbroker.com web site.
o Create a master database of transactional data for use by pawnshops. We
intend to compile a master database of product sales, offer histories and
statistical data related to pricing, inventory turn around and sales by
geographic location. This master database will have `blue-book' or pricing
information that will allow pawnshops to view the ask price for merchandise,
data related to historical selling prices of merchandise sold on Pawnbroker.com,
statistical information on the number of days products are offered for sale and
sales patterns of various categories of merchandise during the year. This
database is designed to assist pawnshops in making purchasing, pricing,
inventory management and other business decisions.
o Create a global database of lost/stolen items. We intend to offer, at no
cost to the public, the ability to list missing items in a database. We intend
to make this list available, free of cost, to law enforcement agencies and also
offer it to businesses that purchase previously-owned merchandise.
o Expand the potential customer base for pawnshops. By joining our system,
a participating pawnshop opens for business on the Internet and has access to
global marketing opportunities. As a result, a pawnshop's base of potential
customers is not limited by geography or operating hours. Our Internet service
makes the store's inventory available for sale to customers around the world,
around the clock, and without the significant expense required to establish and
maintain an Internet web site. Also, we intend to launch a multi-million dollar
marketing campaign to build awareness of our Pawnbroker.com web site that would
be difficult for independent pawnshops to undertake with their own resources. A
pawnshop may also benefit from an increase in foot-traffic as a result of web
consumers who visit pawnshops listed in our online pawnshop directory.
o Benefits over listing with auction houses. We intend to charge minimal
fees and to offer an item-upload methodology that is tailored to the pawnbroker
business. Our upload system is designed to categorize merchandise commonly
offered by pawnshops into such types as jewelry, tools and electronics.
Pawnshops will be able to keep listed items on our site until sold. Our role as
facilitator is designed to eliminate the necessity of an email dialogue between
pawnshops and the public. Based on our discussions with potential participating
pawnshops, we perceive these to be advantageous over services offered by auction
sites.
o Membership benefits. We intend to provide a variety of services used by
the industry, including access to consumer wish-lists, access to our marketing
information database, educational resources, supplier directories, discussion
forums and trading areas on the site. Our offer of free web-based email on the
Pawnbroker.com domain is designed to assist pawnshops in branding themselves as
a member of an online pawnbroking community. Our Pawnbroker.com lost items
database is designed to provide pawnshops the ability to check items against
items that are reported stolen, which may result in lowering business insurance
rates for stores that use our service.
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Plan of Operation
Our plan of operation is based on information provided in discussions with
our consultants, discussions with pawnshop owners, our results of operations,
our negotiations and discussions with third party vendors, experience of
management and the decisions of our management. Set out below is a summary of
our plan of operation for each of our projects and for administration and
marketing through June 30, 2000. Our plan of operation for the next three fiscal
quarters is to (i) complete development of the Pawnbroker.com system, (ii)
commence the commercial launch of our Pawnbroker.com web site and operations and
(iii) enter into participation agreements with pawnshops in the United States
and Canada. The Company intends to accomplish this strategy through the
following activities:
o Hire Key Consultants and Personnel to Implement Our Business Strategy. We
hired Neil McElwee as our Chief Executive Officer and Vahid Rafizadeh as our
Chief Technology Officer. Mr. McElwee and Mr. Rafizadeh both have e-commerce
business experience. Joseph Schlader, our President, and William Galine, our
Vice President, have business experience in the pawnbroker industry. See
"Directors, Executive Officers, Promoters and Control Persons." We anticipate
hiring additional consultants and personnel with Internet e-commerce experience
to complement our current management team. Our management team will design,
manage and implement the operational and management systems for Pawnbroker.com
during the fourth quarter of 1999 and the first two quarters of 2000.
o Complete initial prototype of the item listing component of our
technology. We intend to develop a working version of the item-upload and
listing component of our technology during the fourth quarter of 1999. This
component of our technology will permit the tracking on an online database of
the uploaded inventory of participating pawnshops. We expect to beta test our
technology with 65 pawnshops, including Pacific Pawnbrokers, which operates
three pawnshops in Nevada and one in California. See "Certain Relationships and
Related Transactions."
o Use our Board of Advisors to assist us in developing our policies. We
have recently established a Board of Advisors, comprised of members with
experience in the pawnbroker industry. We intend to solicit feedback from our
Board of Advisors to develop our policies and to assist us in establishing a
base of participating pawnshops. Our Board of Advisors is as follows:
Ron Atlas, Wheeling, IL LLB, Certified Public Accountant
Edward Bean, Boston, MA Board of Directors and Board of
Governors, National Pawnbrokers
Association
Tim Cassidy, Stockton, CA Board of Directors, Collateral Loan
and Second Hand Dealers Association
of California Board of Directors,
National Pawnbrokers Association
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Harold Dambrot, Brooklyn, NY Executive V.P., Collateral
Loanbrokers Association of New York
State
Board of Directors, National
Pawnbrokers Association
Erminia Drobkin, Las Vegas, NV V.P., Collateral Loan Association
of Nevada
Steve Fowler, Tucson, AZ Board of Directors, National
Pawnbrokers Association
Nick Fulton, Ridgeland, MS Board of Directors, National
Pawnbrokers Association
Michael Hyman, Santa Rosa, CA Board of Directors, Collateral Loan
and Second Hand Dealers Association
Board of Directors, National
Pawnbrokers Association
Michael Isman, New Westminster, BC, Canada Board of Directors, National
Pawnbrokers Association
Director of BC Pawnbrokers
Association
Steve Krupnik, Southbend, IN President, Indiana Pawnbrokers
Association
Tim Lanham, Fort Collins, CO Board of Directors, National
Pawnbrokers Association
David Newman, San Francisco, CA Board of Directors, Collateral Loan
and Second Hand Dealers Association
of California
Board of Directors, National
Pawnbrokers Association
Brian Smith, Ridgeland, MS Board of Directors and Board of
Governors, National Pawnbrokers
Association
Sam Shocket, Los Angeles, CA Board of Directors, Collateral Loan
and Second Hand Dealers Association
of California
Mike Stogner, Greensboro, NC Board of Directors and Board of
Governors, National Pawnbrokers
Association
Curtis Sutherland, Austin, TX Board of Directors, Texas
Association of Pawnbrokers Board of
Directors, National Pawnbrokers
Association
Brooks Thiele, Scottsdale, AZ Mortgage Lending Consultant
Jerry Whitehead, Margate, FL Board of Directors, National
Pawnbrokers Association
o Unveil a fully-functional retail web site at www.pawnbroker.com by the
first quarter of 2000. We have oral commitments from approximately 65 pawnshops
to participate in our beta test launch in
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December 1999. After beta testing our technology, we intend to roll out our site
beginning with a soft launch including between 65 and 100 pawnshops in January
2000 and a full hard launch including between 100 and 200 pawnshops in March
2000. We intend to feature an inventory of approximately 300 to 500 items by
March 2000. We have presented our concept to approximately 3,000 potential
participating pawnshops at the National Pawnbroker Association 1999 Convention,
the Florida State Pawnbroker Convention, and the Oklahoma State Pawnbroker
Convention. Approximately 2,000 pawnshops have expressed interest in
participating in our Pawnbroker.com program or receiving additional information
about our program and web site. We are in the process of creating a master
database of those pawnshops that have expressed an interest in our program.
o Complete prototype of the point-of-sale component of our technology. The
other primary component of our proprietary system is expected to consist of an
inventory management and point of sale system that will function electronically
over the Internet in conjunction with in-store inventory management systems. We
intend to develop a working version of this component of our technology and to
begin testing it on a working web site during the fourth quarter of 2000.
We estimate that our current cash requirements are approximately $349,000 a
month, principally for salaries, professional services, marketing and office
expenses. We anticipate that our cash requirements will increase to
approximately $440,000 to $500,000 per month in the first quarter 2000 as a
result of professional services associated with the development of our
proprietary system and increased salary and related expenses associated with the
anticipated testing and pre-launch of the Pawnbroker.com Web site. We anticipate
that our cash requirements will increase during the first two fiscal quarters of
2000 as we launch our web site and expenditures related to marketing and
advertising increase. However, we cannot guarantee that we will generate
sufficient revenues from our operations to operate a commercially viable
business or to earn a profit.
In order to reduce our cash requirements, we intend to initially outsource
certain development, marketing, human resources, legal and accounting functions.
Similarly, in order to reduce capital expenditures, we intend to enter into
leasing agreements for hardware and other equipment requirements.
Summary of Operating Budget
Set forth below are our estimated operating budgets for operations and
research and development for the four fiscal quarters ending June 30, 2000.
<TABLE>
Description: Quarter Ending Quarter Ending Quarter Ending Quarter Ending
September 30, 1999 December 31, 1999 March 31, 2000 June 30, 2000
- ---------------------------------- ------------------- -------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
Research and Development $113,663 $116,000 $133,000 $353,000
Equipment/Hardware 46,576 113,400 109,200 132,000
Management salaries/ Consulting 225,075 122,000 154,000 154,500
fees
</TABLE>
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<TABLE>
Description: Quarter Ending Quarter Ending Quarter Ending Quarter Ending
September 30, 1999 December 31, 1999 March 31, 2000 June 30, 2000
- ---------------------------------- ------------------- -------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
Marketing Costs 134,816 425,000 435,000 435,000
Registrations/Licensing fees 2,119 6,150 6,900 6,900
Office Leases 17,525 21,075 42,525 48,525
Office Administration 257,100 469,800 567,400 666,300
Office/Telephone/Supplies 16,328 25,141 31,141 34,441
Insurance 375 12,375 15,375 15,525
Legal/Audit/Professional Fees 11,400 15,000 15,000 15,000
Travel Expense (Trade Shows, 57,579 88,500 90,000 95,000
Conventions)
Miscellaneous/Contingency 30,726 30,726 30,726 30,726
- ---------------------------------- ------------------- -------------------- -------------------- -------------------
Total: $913,282 $1,445,167 $1,630,767 $1,986,917
</TABLE>
Our operating budget for the period beginning July 1, 1999 through December 31,
1999 is estimated to be approximately $2,538,493, and $3,617,184 for the period
beginning January 1, 2000 through June 30, 2000. We cannot guarantee our actual
expenditures for these periods will not exceed our estimated operating budget.
Actual expenditures will depend on a number of factors, some of which are beyond
our control, including, among other things, timing of our software development,
beta testing, the availability of financing on acceptable terms, reliability of
the assumptions of management in estimating cost and timing, the time expended
by consultants, marketing costs associated with recruiting participating
pawnshops and professional fees. As of June 30, 1999, we had a working capital
of $2,538,743. We will need to raise approximately $5 million in additional
capital during the fourth quarter of 1999 to meet our anticipated cash needs for
the first two calendar quarters of 2000. If we are unable to raise additional
financing on acceptable terms, we may be forced to delay the implementation of
certain portions of our plan of operation, which may adversely affect our
business and results of operations.
Business/Strategic Associates
We intend to enter into agreements with existing pawnshops under which these
pawnshops will make inventory available to our customers at a price structure
established by the pawnshop. By acting as the host of online sales, we believe
that we can reduce the cost of conducting business on the Internet for the
participating pawnshops and assist them in increasing their overall sales. We
anticipate participating pawnshops will assist us in developing our policies and
procedures.
We have an agreement with Banshee, Inc. to develop our technology, software and
systems, and we anticipate we may enter into additional development agreements
with Banshee or other development companies to develop our Internet based
solutions for the pawnshop industry. See "Development Agreement - Banshee, Inc."
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We intend to enter into agreements with providers of hardware and equipment for
maintenance of our equipment and leasing companies to provide equipment and
capacity for our future needs. We have begun negotiations to provide us with
off-site servers for our web site. We also may enter into agreements with
potential providers of such services and expect to enter agreements for off-site
server capacity in October 1999, prior to the beta testing of our software.
We may enter into strategic relationships with other Internet providers to
direct traffic to our Pawnbroker.com web site. We may also participate in
cooperative marketing arrangements designed to build our brand name and our web
site presence on the Internet. Except for Yahoo!, which has accepted our request
to be listed, we have not entered into any arrangements with other Internet
providers. We anticipate such agreements will be made prior to our launch in
2000.
We intend to rely on third-party service providers of security and credit card
processing services to assist us in facilitating transactions on Pawnbroker.com
web site. We are currently in the process of negotiating with service providers
to provide us such services and anticipate to have agreements with such
providers when we launch Pawnbroker.com for beta testing in December 1999.
Research & Development
Our technology is currently being developed by Banshee, Inc. which is based in
Minden, Nevada. Under an agreement between Banshee and Pawnbroker.com (Nevada),
Banshee will initially develop the software and the e-commerce architecture for
the in-store item listing component, the Pawnbroker.com database and the
Pawnbroker.com Web site. At this time, we anticipate continuing our relationship
with Banshee to maintain our site and to engage in further research and
development efforts, and to enhance functionality for site upgrades, including a
point of sale system. During the fourth quarter 1999, we intend to begin
staffing our own in-house development team to further develop our technologies
and software. We intend to use currently available technology and products and
to contract out most technical services required for customization. We also
intend to retain rights to the proprietary intellectual property embodied in our
technology including, wherever possible, source code, and to maintain a
continual right to use the system for our purposes.
As of September 30, 1999, we have spent approximately $200,000 for research and
development including expenses related to programming, testing and prototyping
and technologies. We expect that research and development of our solution will
cost between approximately $500,000 to $1,750,000. Maintenance, updates and
developing additional components will cost a minimum of $25,000 per month after
launch. In addition, we intend to maintain a relationship with a data hosting
and Internet server center, which would provide reliability and scalability for
our networking needs; that service is expected to cost approximately $20,000 per
month upon commencement, and rise to approximately $50,000 per month by the end
of 2000.
Development Agreement - Banshee, Inc.
We entered into a development agreement with Banshee to develop our web site and
the technologies related to our web site. Under the Banshee agreement, Banshee
agreed to complete the following:
o Complete the initial design of our web site including determining the
hardware requirements, network requirements, browser design and
interface and page layout;
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o Develop and install web site hardware and systems requirements
including site server requirements, communication server requirements
and software requirements;
o Develop third-party system integration and interface software;
o Develop database systems;
o Assist us in the alpha and beta testing and debugging of software and
hardware systems; and
o Assist us in the commercial launch of our Pawnbroker.com web site.
We agreed to pay Banshee $100,000 upon signing of the agreement, $100,000 on
July 15, 1999 and $45,000 upon the completion and commercial launch of our web
site. As of September 30, 1999, we have paid Banshee $200,000. Upon completion
of the project, we will own the technologies developed by Banshee under the
agreement.
Our Technology
Our technology is designed to include three principal components: a web
inventory system, the web transaction interface, and the Pawnbroker.com
database.
Web Inventory System: The web inventory system will consist of an item listing
and uploading component that allows participating pawnshops to transmit for
posting (a) the category in which each item of merchandise will be listed, (b) a
brief description of the merchandise, (c) pictures of the merchandise, if
desired, (d) the suggested or "ask price" for the merchandise and (e) other item
specific information. The web inventory system is proprietary technology
developed exclusively for use by Pawnbroker.com. Our software will require that
the pawnbroker's system run Windows 95/98.
In the future, we may offer an inventory management system that incorporates
inventory management capabilities with a point of sale computer, printer, label
printer, credit card reader, bar code scanner and cash register. We anticipate
that users of the turn-key inventory management system will be connected to the
Internet with a persistent or "always on" connection in order to facilitate
transactions and offer real-time response to customers. Currently, a modem
dial-up to a local ISP through an additional phone line will suffice for
item-uploading purposes.
Web Transaction Interface: Our web transaction interface is expected to use
industry standard credit card clearing and security procedures such as SSL and
online transaction processing services. We anticipate that our web site will
also include custom components and the ability to randomly browse for
interesting merchandise, for an online experience more like shopping in
brick-and-mortar stores.
Pawnbroker.com Database: We intend to use the services of database
administrators who will maintain the underlying structure of the Pawnbroker.com
database. Vahid Rafizadeh, our Chief Technical
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<PAGE>
Officer, is in the process of selecting a database administrator to maintain our
database. Our Pawnbroker.com database was developed by Banshee based on the
specifications of the Pawnbroker.com transaction model and information
architecture.
Each participating pawnshop will be required to have Internet access and
hardware that meets minimum system requirements. See "Participating Pawnbroker
Systems Requirements." We intend to provide technical assistance to
participating pawnshops, including assistance with hardware system
configuration, software installation and technical support by telephone. Our
technical support staff is anticipated to assist participating pawnshops in our
initial launch pilot program without costs and, thereafter, we intend to provide
on site technical support to participating pawnshops for a fee based on our
actual costs.
Participating Pawnbroker Systems Requirements
We anticipate that each pawnshop will be connected to the Internet with a local
Internet service provider dial-up connection with a dedicated phone line in
order to facilitate transactions and offer real-time response to customers. A
persistent connection is highly recommended, but is not a requirement. The
minimum systems requirement for participating pawnshops consist of an
IBM-compatible PC, with a minimum of 32MB of RAM, a P-166 processor, 500MB of
available disk space, a VGA card and a 28.8 kbps modem. We expect most systems
in use and any value-priced new system to exceed these requirements. Our
software will require that the pawnshop's system run Windows 95/98 and recommend
that pawnshops use a digital camera to take advantage of our graphic
capabilities. We intend to offer hardware configurations to participating
pawnshops in the future that will consist of a computer, laser printer, high
speed modem, credit card reader, digital camera and bar code scanner.
In the future, we intend to develop software and a hardware system configuration
that can replace the software being used by participating pawnshops to permit
the posting of the pawnshops' entire inventory on our Pawnbroker.com web site.
Intellectual Property and Trademarks
We regard the protection of our copyrights, service marks, trademarks, trade
dress and trade secrets as critical to our success. We have filed trademark
applications with the United States Patent and Trademark Office for
"Pawnbroker.com", our Pawnbroker.com logo and "FreeFall." We are in the process
of filing trademark applications for "RecoverIt" and "SecureIt." We intend to
rely on a combination of patent, copyright, trademark, service mark and trade
secret laws and contractual restrictions to protect our proprietary rights in
products and services. We intend to enter into confidentiality and invention
assignment agreements with our employees and contractors, and nondisclosure
agreements with third parties with access to our business information and to
limit access to and disclosure of our proprietary information. These contractual
arrangements and the other steps taken by us to protect our intellectual
property may not prevent misappropriation of our technology or deter independent
third-party development of similar technologies.
We anticipate that we may receive communications alleging that certain items
listed or sold on Pawnbroker.com by our users infringe third-party copyrights,
trademarks and tradenames or other intellectual property rights. Upon receipt of
a written claim of intellectual property infringement, we
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intend to remove the offending item from the Pawnbroker.com web site and take
actions to prevent future infringing by listing pawnshops. An allegation of
infringement of third-party intellectual property rights may result in
litigation against us. Any such litigation could be costly, could result in
increased costs of doing business through adverse judgment or settlement, could
require us to change our business practices in expensive ways, or could
otherwise harm our business.
Sales & Marketing Strategy
Our goal is to be a leading facilitator of transactions between pawnbrokers and
purchasers of merchandise from pawnshops. Our marketing strategy is designed to
strengthen the Pawnbroker.com brand name, increase customer traffic to our
Pawnbroker.com web site, build strong customer loyalty, maximize repeat
purchases and develop incremental revenue opportunities. Our marketing strategy
and promotional activities will be aimed at both pawnshops that can benefit from
our services and the consumer.
We intend to employ a variety of methods to promote our brand and attract
potential buyers. We believe that our domain name is easy to remember and easy
to associate with the products we intend to list and the services we provide. We
intend to use our domain name to market our web site and establish the brand
name "Pawnbroker.com."
We expect our Internet advertising campaign to include banner ads. We intend to
engage in a coordinated program of print advertising in specialized and general
circulation newspapers and magazines. We will place additional advertisements
regionally in those areas we target for expansion. We expect the advertisements
in traditional media to result in traffic to our web site. We believe that such
advertising will serve to increase awareness of the Pawnbroker.com brand and our
URL. We also intend to provide superior customer service in an effort to
generate positive word of mouth referrals to our web site.
Our marketing efforts directed to existing pawnshops will include participation
in industry trade shows and direct selling efforts. We have exhibited in and/or
participated in the following industry trade shows and conventions:
o National Pawnbroker's Association Convention in June 1999;
o Florida State Pawnbroker's Convention in August 1999; and
o Oklahoma State Pawnbroker's Convention August 1999.
We have presented our web site concept to over 3,000 pawnshops and have verbal
expressions of interests or requests for additional information from approximate
2,000 of these pawnshops. We anticipate that we will exhibit in the North
Carolina State Pawnbroker's Convention in October 1999 and the California State
Pawnbroker's Convention in November 1999.
Based on feedback from potential participating pawnshops, we anticipate that the
benefits to pawnshop owners of a ready to use electronic-commerce Internet
solution will outweigh the initial cost of installing a compatible computer
system and the administrative cost of posting products. We anticipate that we
will install all the necessary hardware and software in the Pacific Pawnbrokers
stores and certain
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other test stores to beta test our technology, and that our representatives will
work closely with these stores' owners, managers, and employees to bring the
stores online and to test our systems.
We also intend to implement an after-sale marketing program that we anticipate
will include customer promotional and incentive programs to support customer
retention and to promote the Pawnbroker.com brand. Other programs targeted at
participating pawnshops may include volume discounts, software updates and
in-store promotional materials.
Employees
We currently have 10 employees. In addition to management, we employ marketing,
sales, product development and technical personnel. We expect to hire a customer
service manager, database administrator, a developer/IT specialist, customer
service representatives, technical support representatives and a Producer/HTML
code developer. In total, we expect to have a staff of 20 to 30 when we launch
of our full-scale operations, scheduled for the first quarter of 2000.
Development of Our Business to Date
Since June 30, 1999, we have taken the following steps to implement our business
plan:
o Acquired Pawnbroker.com (Nevada).
o Developed the Pawnbroker.com business plan and marketing strategy.
o Began development of operating software for our Pawnbroker.com web site.
o Secured computer software licenses related to our Pawnbroker.com
technology.
o Assembled a board of advisors to assist us in developing our policies and
procedures.
o Obtained verbal commitments from 65 pawnshops to assist us in beta testing
our software and web site.
o Completed a private placement totaling $3,003,000, which we anticipate will
provide sufficient capital to develop our plan through the fourth quarter
1999.
o Hired Neil McElwee, our Chief Executive Officer, and Vahid Rafizadeh, our
Chief Technology Officer, to join our executive and management team.
o Negotiated consulting and software development agreement with Banshee, Inc.
to develop software, technology and our web site.
o Entered into a strategic relationship with Pacific Pawnbrokers of Nevada to
assist us in the testing of our technology and implementation of live
testing of our Pawnbroker.com web site.
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o Attended a variety of trade shows and conventions to present our
Pawnbroker.com concept to potential participating pawnshops.
History of Our Corporation
We were incorporated in the State of Delaware on February 13, 1998 as "Digital
Sign Corporation" with an authorized share capital of 70,000,000 shares
consisting of 50,000,000 shares of common stock, with a par value of $0.00001
per share, and 20,000,000 shares of preferred shares, with a par value of
$0.00001 per share.
We were initially organized to acquire the issued and outstanding shares of
Digital Sign, Inc., a California corporation, and to engage in the business of
development and sales of scrolling outdoor digital display signs for commercial
businesses. On February 14, 1998, we issued 100,000 shares at par value for all
of the issued and outstanding shares of Digital Signs, Inc., which had no assets
or liabilities, to Edward F. Meyers III, our then President. We were unable to
obtain sufficient financing to implement our business plan, and we were inactive
until April 1999.
On April 6, 1999, we acquired all of the issued and outstanding shares of common
stock of Eriko Internet Inc., a Washington corporation engaged in the business
of developing Internet technologies, pursuant to a statutory share exchange
under the laws of the state of Washington. Pursuant to an Agreement and Plan of
Share Exchange, we issued four (4) shares of our common stock for each one share
of common stock of Eriko Internet Inc. We issued 8,500,000 (post-split) shares
of our common stock to the shareholders of Eriko Internet Inc. in exchange for
their shares. The value of the shares was based on a valuation of the net book
value of assets acquired of Digital Sign Corporation in the amount of $3,007.
See "Recent Sale of Unregistered Securities." On May 19, 1999, Cameron
Woodbridge, a founding shareholder of Eriko Internet, Inc., contributed
1,000,000 pre-consolidation shares to the corporation for $250. The shares were
initially issued as founder's shares for nominal consideration by Eriko
Internet, Inc., subject to Mr. Woodbridge serving as a director and officer of
Eriko. Mr. Woodbridge contributed the shares because he was no longer actively
involved in Eriko at the time of our share exchange with Eriko.
On June 10, 1999, we amended our Articles of Incorporation to (i) change our
name from "Digital Sign Corporation" to "Pawnbroker.com, Inc." and (ii) to
effect a 1-for-4 reverse-split of our issued and outstanding share capital.
Prior to the reverse-split, we had 37,499,000 issued and outstanding shares of
common stock, and after giving effect to the reverse-split, we had 9,374,750
issued and outstanding shares of common stock.
Under the terms of a share exchange agreement, we acquired all of the issued and
outstanding shares of Pawnbroker.com, Inc., a Nevada corporation, on June 14,
1999.
Our common stock is currently quoted on the National Association of Securities
Dealers' over-the-counter bulletin board and trades under the symbol "PBRR".
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Our corporate organization structure is as follows:
Pawnbroker.com, Inc.
Organizational Chart
--------------------------------------
Pawnbroker.com, Inc.
a Delaware corporation
--------------------------------------
<TABLE>
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Eriko Internet Inc. Pawnbroker.com, Inc. Digital Signs, Inc.
a Washington corporation "Pawnbroker (Nevada)" a California corporation
a Nevada corporation
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www.pawnbroker.com -
Inactive Internet Marketing Inactive
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We have not been subject to any bankruptcy, receivership or other similar
proceeding.
Our Acquisition of Pawnbroker (Nevada)
On June 14, 1999, we acquired all of the issued and outstanding share capital of
Pawnbroker (Nevada), our wholly-owned subsidiary, by issuing a total of
6,240,000 shares of our common stock at par value to Joseph Schlader, Cheryl
Schlader and William Galine. As a result of the acquisition, we acquired all of
the assets of Pawnbroker (Nevada), which consisted of the business concept of
offering the merchandise of pawnshops on the Internet; the domain names
Pawnbroker.com and Pawnbrokers.com; the contractual right to maintain the domain
names, all URL's associated with the domain names; all books, databases and
records relating to the Pawnbroker.com website; copyright in all graphics and
text displayed on the web site and all trademark and trade name rights
associated with the domain names. We are currently pursuing a business plan
based on Pawnbroker (Nevada)'s business concept. Under the terms of the
acquisition agreement:
(a) We effected a 1-for-4 reverse split of our share capital, whereby our then
outstanding capital of 37,499,000 shares of common stock, was consolidated
into 9,374,750 shares of common stock.
(b) We issued 6,240,000 post-split shares to Joseph Schlader (1,541,200
shares), Cheryl Schlader (1,591,200 shares), and William Galine (3,057,600
shares) for all of the issued and outstanding shares of common stock of
Pawnbroker (Nevada).
(c) We completed a private placement of 1,300,000 units at $2.31 per unit to
Packard Financial Group Inc., for proceeds to us of $3,003,000. Each unit
consisted of one share of common stock and one-half of one non-transferable
share purchase warrant. Each whole share purchase warrant is exercisable to
acquire one additional share of our common stock at a price of $2.31 per
share until June 23, 2000, and thereafter at a price of $2.90 per share
until June 23, 2001. See "Recent Sales of Unregistered Securities."
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(d) We filed this Form 10 registration statement with the SEC to register our
common stock under the Exchange Act of 1934, as amended.
(e) We appointed Joseph Schlader and William Galine as directors and officers
of our corporation.
(f) We acquired the assets of Pawnbroker (Nevada), which consisted of the
domain names Pawnbroker.com and Pawnbrokers.com, of the business concept to
launch our Pawnbroker.com web site, and other rights related to the
Pawnbroker.com and Pawnbrokers.com domain names.
The terms of the share exchange agreement were negotiated at arms' length by
parties represented by separate counsel. Prior to the share exchange, none of
our officers and directors had any relationship with Pawnbroker (Nevada) or its
officers, directors or shareholders.
RISK FACTORS
We are a development stage company in the process of developing an Internet
based business that is designed to allow pawnshops throughout North America the
ability to post merchandise for sale on the Internet and allow visitors to our
web site to search the inventories of participating pawnshops for merchandise.
Our business is subject to a number of risks, as outlined below. An investment
in our securities is speculative in nature and involves a high degree of risk.
You should read this registration statement carefully and consider the following
risk factors.
Our ability to meet our business projections through the second quarter of 2000
may depend on the securing of additional operating capital in the amount of $5
million or more in the fourth quarter of 1999
We anticipate we may need to seek additional capital in the amount of $5 million
or more in the fourth quarter of 1999 to support our capital requirements
through the second quarter of 2000. We cannot assure you that any additional
financing would be available or, if available, that it would be available on
terms acceptable to us. See "Note Regarding Forward Looking Statements."
Furthermore, any issuance of additional securities may result in dilution to the
then existing shareholders. If adequate funds are not available, we will lack
sufficient capital to pursue our business plan fully, which will have a material
adverse effect upon our ability to meet our business projections.
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We have a limited operating history and a history of losses, which makes our
ability to continue as a going concern questionable
We have incurred net losses since our inception and anticipate that we will
continue to incur losses. During the fiscal year ended March 31, 1999 and the
interim financial quarter ended June 30, 1999, we incurred cumulative net losses
of $223,733. We had no revenues prior to June 30, 1999. During this period, we
incurred operating expenses of $223,733 and spent $364,354 on property and
equipment, including $125,000 to acquire our domain names, $210,519 on equipment
and software, and $28,835 on furniture and fixtures. We do not believe that we
will generate sufficient revenues to support our operations in fiscal 1999
because of our projected development and marketing costs. Therefore, in the
foreseeable future, we believe that such expenses will increase our net losses,
and we cannot assure you that we will ever be profitable.
As of June 30, 1999, we had approximately $2,862,751 in cash. We will, on
average, spend approximately $349,000 per month through the third quarter of
1999, and approximately $440,000 to $500,000 per month thereafter until we can
generate revenues from our operations. We anticipate raising additional capital
through sales of our equity and/or debt; however, we cannot assure you that we
will be able to obtain adequate financing to support our operations.
Because we have recently begun operations, it is difficult to evaluate our
business and our prospects. Our revenue and income potential is unproven and our
business model is still emerging. We cannot assure you that we will attract
participating pawnbrokers, buyers or advertisers, to use our web site or
generate significant revenues in the future. We cannot guarantee we will ever
establish a sizeable market share or achieve commercial success.
Our success depends on the services of our key officers, Neil McElwee, our Chief
Executive Officer, Joseph Schlader, our President and Co-Founder, and William
Galine, our Vice President and Co-Founder, and our ability to attract and
maintain qualified, experienced personnel
Our future success will depend on Neil McElwee, our Chief Executive Officer,
Joseph Schlader, our President and Co-Founder, William Galine, our Vice
President and Co-Founder, and Vahid Rafizadeh, our Chief Technical Officer. We
also rely upon consultants and advisors who are not employees like Banshee,
Inc., our software developer. The loss of key personnel could have an adverse
effect on our operations. We are in the process of obtaining insurance to cover
losses that may result from the death of any of our key personnel, but do not
have coverage at this time. Competition for qualified employees is intense, and
an inability to attract, retain and motivate additional, highly skilled
personnel required for expansion of operations and development of technologies
could adversely affect our business, financial condition and results of
operations. Each of our officers and directors has been affiliated with us for
less than six months, including Mr. McElwee and Mr. Rafizadeh, who joined us in
the past two months. Our ability to retain existing personnel and attract new
personnel may also be adversely affected by our financial situation. We cannot
assure you that we will be able to retain our existing personnel or attract
additional, qualified persons when required and on acceptable terms.
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We may be required to sell additional common stock or parties may exercise
options and warrants that cause dilution of your shares
The number of shares of our outstanding common stock held by non-affiliates is
large relative to the trading volume of the common stock. Any substantial sale
of our common stock or even the possibility of such sales occurring may have an
adverse effect on the market price of the common stock.
As of August 15, 1999 we had outstanding warrants to purchase an aggregate of
650,000 shares of our common stock at $2.31 per share until June 23, 2000 and
thereafter at $2.90 per share until June 23, 2001.
Under our agreement with IRG Investor Relations Group Ltd., a consultant to
Pawnbroker.com, Inc., we granted options, vesting immediately upon grant, to
acquire 250,000 shares of our common stock at $6.75 per share and options to
acquire an additional 150,000 shares of our common stock at $6.75 per share,
vesting to acquire 50,000 shares each time we successfully obtain financing of
$5,000,000 or more.
We have reserved up to an additional 2,000,000 shares of common stock for
issuance upon exercise of options under an incentive plan, which we intend to
submit to a vote of our shareholders for approval and ratification at our next
annual shareholder meeting in September 2000 or such earlier time as may be
determined by our Board of Directors. We agreed to grant options to acquire up
to 690,000 shares of our common stock to the following employees under the plan:
o We agreed to grant Joseph Schlader, our President, options to acquire
250,000 shares of our common stock at $6.75 per share, vesting pro rata 25%
on each anniversary date, June 14, of his employment over the next four
years.
o We agreed to grant William Galine, our Vice President, options to acquire
100,000 shares of our common stock at $6.75 per share, vesting pro rata 25%
on each anniversary date, June 14, of his employment over the next four
years.
o We agreed to grant Mr. Rafizadeh, our Chief Technical Officer, options to
acquire up to 340,000 shares of our common stock. We are in the process of
entering into a definitive employment agreement with Mr. Rafizadeh with
regard to the terms of his compensation and options grants.
(a) We have agreed to grant options to acquire 170,000 shares exercisable
at $6.75 per share, vesting as follows: 100,000 in September 2000,
35,000 in October 2001, and 35,000 in October 2002, provided Mr.
Rafizadeh is an employee of our company on such date.
(b) We have also agreed to grant Mr. Rafizadeh, in each of his second and
third years of employment with our company, options to acquire 85,000
shares, exercisable at $6.75 per share and vesting over three years,
provided that our company meets certain milestones and that Mr.
Rafizadeh is an employee of our company on such date. We have not
determined these milestones.
As at September 30, 1999, we have not adopted an incentive stock option plan. We
intend to submit an incentive stock option plan to our shareholders for approval
and ratification at our next annual
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shareholder meeting scheduled in September 2000 or such earlier time as may be
determined by our Board of Directors.
We are in the process of negotiating and finalizing a definitive employment
agreement with Neil McElwee, our Chief Executive Officer. We have agreed to
grant options to Mr. McElwee exercisable at $6.75 per share to acquire a total
of 782,590 shares of our common stock vesting on anniversary dates as follows,
provided Mr. McElwee is an employee on such date: 260,864 on September 12, 2000;
260,863 on September 12, 2001; and 260,863 on September 12, 2002.
Holders of such warrants and options are likely to exercise them when, in all
likelihood, we could obtain additional capital on terms more favorable than
those provided by the options and warrants. Further, while our warrants and
options are outstanding, our ability to obtain additional financing on favorable
terms may be adversely affected.
The e-commerce industry is highly competitive, and we cannot assure you that we
will be able to compete effectively
The market for Internet products, services and marketing is new, rapidly
evolving and intensely competitive. Our Pawnbroker.com web site will potentially
compete with many providers of web classified advertisers, auction sites, web
sites of independent and chain pawnshops, and other e-commerce transaction
facilitators as well as traditional distribution channels including brick and
mortar stores. See "Competition." We expect competition to intensify in the
future. Barriers to entry may not be significant, and current and new
competitors may be able to launch new web sites at a relatively low cost.
Accordingly, we believe that our success may depend heavily upon achieving
significant market acceptance before our competitors and potential competitors
introduce competing services.
Many of our competitors offer additional features and content that we have
elected not to offer. Also, many of these competitors, as well as potential
entrants into our market, have longer operating histories, larger customer or
user bases, greater brand recognition and significantly greater financial,
marketing and other resources than we do. Many of these current and potential
competitors can devote substantially greater resources to promotion and Web site
and systems development than we can. In addition, as the use of the Internet and
other online services increases, larger, well-established and well-financed
entities may continue to acquire, invest in or form joint ventures with
providers of services similar to ours. Any of these trends may increase the
competition we face and could adversely affect our business and operating
results.
If we are unable to successfully develop a network of participating pawnshops
who are willing to adhere to our policies, we are unlikely to become profitable
We are currently in the process of developing a network of relationships with
participating pawnshops. We estimate that we will need to bring approximately
2,000 pawnshops offering an average of 500 items of merchandise into our system
by December 2000 to meet our goals. We cannot guarantee that these relationships
will develop, or that they will develop in a satisfactory manner.
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We intend to rely on participating pawnshops to post merchandise for sale on
Pawnbroker.com; update their available inventories; accept offers or submit
counteroffers in a timely manner; pack, label and ship merchandise to buyers;
and notify us when merchandise is returned by buyers under our Pawnbroker.com
Satisfaction Program. Most pawnshops have only limited experience, if any, with
merchandising products on the Internet and have not devoted a significant
portion of their marketing and sales expenditures to Internet marketing. We
initially intend to target a fragmented market of small to medium sized
pawnshops, some of which may not have computer based inventory management
systems or a computer system. Some pawnshops may be unwilling to invest the
capital required to establish such a system and others may be adverse to change
and may not participate because of a lack of technological proficiency or
Internet familiarity. We cannot predict if the level of acceptance by pawnshops
will support a market for our Internet based solution for merchandising
products.
If we are unable to achieve a significant number of visitors, successfully
facilitated transactions and consumers, we may be unable to generate sufficient
revenues to earn a profit
The success of our Pawnbroker.com web site may be dependent upon achieving
significant market acceptance of our web site by consumers. We anticipate that
this point will be reached when 10,000 visitors visit our web site regularly and
facilitate 1,000 or more transactions per day. Our Pawnbroker.com web site has
not been tested and we anticipate that we will have very limited market
acceptance until our brand name is established. Internet e-commerce is in the
early stage of development, and our business concept of offering an Internet
solution for merchandising to participating pawnshops has not been tested.
Our competitors and potential competitors may offer more cost-effective
merchandising solutions than us, which could damage our business and our ability
to successfully launch our web site. Our failure to attract visitors,
successfully complete transactions and generate pawnshop participation in our
program will seriously harm our business and our ability to earn a profit.
We are in the process of developing a policies and procedures manual, which
participating pawnshops will be required to agree to prior to posting
merchandise. If participating pawnshops do not follow our policies and
procedures or such policies and procedures do not allow us to facilitate
transactions in an efficient manner, we may be unable to facilitate a sufficient
number of transactions to be commercially viable.
If we are unable to develop online relationships with a network of affiliates
who provide links or other referrals to our web site, our web site may never
achieve market acceptance or generate any significant revenues
We anticipate that our Pawnbroker.com web site may depend on traffic from a
limited number of third party web sites. We anticipate we may obtain traffic
from these sources pursuant to short-term agreements. We currently have no
agreements in place and there can be no assurance that they will be successful
in obtaining any of these agreements on commercially acceptable terms.
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We may not be able to enter into arrangements with Internet affiliates to direct
Internet traffic to our Pawnbroker.com web site. Potential affiliates include
those businesses, such as America Online, Yahoo! and Excite, that index Internet
resources or publish Internet finding aids, and other compatible businesses with
which we might establish mutual links or other forms of mutual referrals,
including co-branding. We believe that establishing these relationships is
important in order to facilitate broad market acceptance of our service and
enhance our sales. Our future ability to attract consumers to our Pawnbroker.com
web site service may be dependent upon the growth of our network of affiliates,
which has not yet been established. If we are unable to obtain agreements or
arrangements for traffic on commercially acceptable terms or to establish a
relationship with a network of affiliates, our Pawnbroker.com web site business
may never be successfully launched. We cannot guarantee that we will be
successful in obtaining any of these agreements on commercially acceptable
terms.
We have capacity constraints and system development risks that could damage our
customer relations or inhibit our possible growth, and we may need to expand our
management systems and controls quickly
Our success and our ability to provide high quality customer service largely
depends on the efficient and uninterrupted operation of our computer and
communications systems and the computers and communication systems of third
party vendors in order to accommodate any significant numbers or increases in
the numbers of consumers and pawnshops using our services. Our success also
depends upon us and our vendors' abilities to rapidly expand
transaction-processing systems and network infrastructure without any systems
interruptions in order to accommodate any significant increases in use of our
service. We are still in the process of negotiating with potential providers of
such services and have not entered into any definitive agreements related to the
server, computer and communications systems required for our Pawnbroker.com web
site. We cannot assure you that we will enter into such agreements in a timely
manner, on acceptable terms or that the vendor we select will be capable of
accommodating any significant numbers or increases in the numbers of consumers
and pawnshops using our services. Such failures will have a material adverse
affect on our business and results of operations.
We have entered into a software development agreement with Banshee, Inc. to
develop software, technology and our web site, and are dependent on Banshee,
Inc.'s ability to deliver such services. In the future, we intend to rely on
Banshee, Inc., and other software developers which we may hire in the future, to
assist us in expanding our data base, our transaction-processing systems and
network infrastructure as we grow. We may experience periodic systems
interruptions and infrastructural damage, which may cause customer
dissatisfaction and may adversely affect our results of operations. Limitations
of our and our vendors' technology infrastructure may prevent us from maximizing
our business opportunities.
Changing technology may render our equipment, software and programming obsolete
or irrelevant
The market for Internet-based products and services is characterized by rapid
technological developments, frequent new product introductions and evolving
industry standards. The emerging character of these products and services and
their rapid evolution will require that we continually
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improve the performance, features and reliability of our Internet-based products
and services, particularly in response to competitive offerings. We cannot
guarantee that we will be successful in responding quickly, cost effectively and
sufficiently to these developments. In addition, the widespread adoption of new
Internet technologies or standards could require substantial expenditures by us
to modify or adapt our Internet sites and services and could fundamentally
affect the character, viability and frequency of Internet-based advertising,
either of which could have a material adverse effect on our business, financial
condition and operating results. In addition, new Internet-based products,
services or enhancements offered by us may contain design flaws or other defects
that could require costly modifications or result in a loss of consumer
confidence, either of which could have a material adverse effect on our
business, financial condition and operating results.
Increased security risks of online commerce may deter future use of our services
which may adversely affect our ability to generate revenues
Concerns over the security of transactions conducted on the Internet and the
privacy of consumers may inhibit the growth of the Internet and online commerce.
Our inability to prevent security breaches could significantly harm our business
and results of operations. We cannot be certain that advances in computer
capabilities, new discoveries in the field of cryptography, or other
developments will not result in a compromise or breach of the algorithms used to
protect our transaction data. Anyone who is able to circumvent our or our third
party vendors' security measures could misappropriate proprietary information,
cause interruptions in their operations or damage our brand and reputation. We
may be required to incur significant costs to protect against security breaches
or to alleviate problems caused by breaches. Any well-publicized compromise of
security could deter people from using the Internet to conduct transactions that
involve transmitting confidential information or downloading sensitive
materials.
We depend on third parties for uninterrupted Internet access and may be harmed
by the loss of any such service
We are the process of negotiating the terms of an agreement with an Internet
service provider located in Reno, Nevada, for uninterrupted Internet access. We
have not entered into a definitive agreement for such services. Our business is
dependent on uninterrupted Internet access and the loss of such services may
have a material adverse effect on our business, financial condition and
operating results. We also intend to rely on third parties for most of the
information and content on our web site, including the National Association of
Pawnbrokers, and the loss of services of from any one or more of these third
party content providers will may have a material adverse affect on our business.
We cannot assure you that we would be able to obtain such services from other
third parties in the event of the loss of any of such services.
Our business may be harmed by claims that we have infringed intellectual
property rights of others
Claims of infringement are becoming increasingly common as the software industry
develops and legal protections are applied to software products. Litigation may
be necessary to protect our proprietary
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technology, and third parties may assert infringement claims against us with
respect to their proprietary rights. Any claims or litigation can be
time-consuming and expensive regardless of their merit. Infringement claims
against us could cause product release delays, require us to redesign our
products or require us to enter into royalty or license agreements, which
agreements may not be available on terms acceptable to us or at all.
We cannot assure you that we will not be subject to third-party infringement
claims, especially as the number of competitors in our industry segment
increases.
Our success may depend on developing and defending intellectual property rights
without which competitors may copy aspects of our products or services
Our success and ability to compete are substantially dependent upon our
technology and data resources, which we intend to protect through a combination
of patent, copyright, trade secret and/or trademark law. We have no patents or
trademarks issued to date on our technology. We submitted applications with the
Trademark Office to trademark our Pawnbroker.com logo and the names
`Pawnbroker.com' and "FreeFall." We are in the process of filing trademark
applications for "RecoverIt" and "SecureIt."
We also intend to patent our business model and the proprietary features of our
service. Fenwick & West, L.L.P. is assisting us with our intellectual property
claims.
We cannot assure you that our intellectual property protection applications will
be granted or that we will be able to continue to successfully negotiate
agreements protecting our intellectual property. In addition, despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy aspects of our products or services or to obtain and use information that
we regard as proprietary. Third parties may also independently develop similar
technology without breach of our proprietary rights. In addition, the laws of
some foreign countries do not protect the proprietary rights to the same extent
as do the laws of the United States.
If we cannot protect our Internet domain name, our ability to conduct our
operations may be impeded
We anticipate that the Internet domain name, "pawnbroker.com" will be an
extremely important part of our business and the business of our subsidiaries.
We also own both the "pawnbroker.com" and "pawnbrokers.com" domain names.
Additionally, we own at this time, the following domain names:
"buysellshops.com", "bargainpurchase.com", "fairbargain.com",
"fairbargains.com", "collectibleshops.com" and "rarebargains.com". Governmental
agencies and their designees generally regulate the acquisition and maintenance
of domain names. The regulation of domain names in the United States and in
foreign countries may be subject to change in the near future. Governing bodies
may establish additional top-level domains, appoint additional domain name
registrars or modify the requirements for holding domain names. As a result, we
may be unable to acquire or maintain relevant domain names in all countries in
which we conduct business. Furthermore, the relationship between regulations
governing domain names and laws protecting trademarks and similar proprietary
rights is unclear. Therefore, we may be unable to prevent third parties from
acquiring domain names that are
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similar to, infringe upon or otherwise decrease the value of our trademarks and
other proprietary rights. Third parties have acquired domain names that include
"pawnbroker" or variations thereof both in the United States and elsewhere.
Our Pawnbroker.com business may be subject to government regulation and legal
uncertainties that may increase the costs of operating our web site or limit our
ability to generate revenues
We are subject to the same federal, state and local laws as other companies
conducting business on the Internet. Today there are relatively few laws
specifically directed towards online services. However, due to the increasing
popularity and use of the Internet and online services, it is possible that laws
and regulations will be adopted with respect to the Internet or online services.
These laws and regulations could cover issues such as online contracts, user
privacy, freedom of expression, pricing, fraud, content and quality of products
and services, taxation, advertising, intellectual property rights and
information security. Applicability to the Internet of existing laws governing
issues such as property ownership, copyrights and other intellectual property
issues, taxation, libel, obscenity and personal privacy is uncertain. In
addition, numerous states have regulations regarding the manner in which certain
types of transactions that may be considered "auctions" may be conducted and the
liability of "auctioneers" in conducting such auctions. We have not made a
determination with respect to the applicability of such regulations on business
to date and little precedent exists in this area. One or more states may attempt
to impose these regulations upon us in the future, which could have a material
adverse affect on our business.
Due to the global nature of the Internet, it is possible that the governments of
other states and foreign countries might attempt to regulate our transmissions
or prosecute us for violations of their laws. We might unintentionally violate
such laws. Such laws may be modified, or new laws may be enacted, in the future.
Any such development could damage our business.
Participating pawnshops may be subject to regulatory review under state and
federal laws governing pawnbrokers
Our participating pawnshops' operations are generally subject to extensive
regulation, supervision, and licensing under various federal, state, and local
statutes, ordinances, and regulations. Such laws and regulations require
pawnshops to transaction business and sell merchandise in accordance with
specific guidelines, including the required time periods which pledges of
merchandise must be held before it may be sold, reporting and other obligations
related to stolen merchandise, the interest rates a pawnshop may charge for
loans, restrictions on the type of merchandise that may be pawned, restrictions
on who may pawn merchandise and other restrictions that may vary from state to
state. Our policies will require that all our participating pawnshops certify
that they will adhere to their individual compliance obligations. We cannot
guarantee that we will not be subject indirectly to actions arising out of
violations by our participating pawnshops. Such action may have a material
adverse affect on our business and results of operations.
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Our business may be harmed by the listing or sale by our users of illegal items
The law relating to the liability of providers of online services for the
activities of their users on their service is currently unsettled. We are aware
that certain goods, such as firearms, other weapons, adult material, and other
goods that may be subject to regulation by local, state or federal authorities
that may be listed and traded on our service. We will forbid the sale of any
firearms, weapons and adult materials to the public. We may be unable to prevent
the sale of unlawful goods, or the sale of goods in an unlawful manner, by users
of our service, and we may be subject to civil or criminal liability for
unlawful activities carried out by users through our service. In order to reduce
our exposure to this liability, we intend to implement protective measures to
prevent posting of such merchandise. Such measures could require us to spend
substantial resources and/or to reduce revenues by discontinuing certain service
offerings. Any costs incurred as a result of liability or asserted liability
relating to the sale of unlawful goods or the unlawful sale of goods, could harm
our business. In addition, we may receive media attention relating to the
listing or sale of unlawful goods on our Pawnbroker.com web site, which may
damage our brand name and make users reluctant to use our services.
Our business may be subject to sales and other taxes, which may cause
administrative difficulties and increase our cost of operations
We intend to rely on the participating pawnshop to collect applicable sales and
other similar taxes on goods sold on Pawnbroker.com. One or more states may seek
to impose additional sales tax collection obligations on companies such as ours
that engage in or facilitate online commerce. Several proposals have been made
at the state and local level that would impose additional taxes on the sale of
goods and services through the Internet. These proposals, if adopted, could
substantially impair the growth of electronic commerce, and could diminish our
opportunity to derive financial benefit from our activities. The U.S. federal
government recently enacted legislation prohibiting states or other local
authorities from imposing new taxes on Internet commerce for a period of three
years ending October 21, 2001. This tax moratorium will last only for a limited
period and does not prohibit states or the Internal Revenue Service from
collecting taxes on our income, if any, or from collecting taxes that are due
under existing tax rules. A successful assertion by one or more states or any
foreign country that we should collect sales or other taxes on the exchange of
merchandise on our system could harm our business and adversely affect our
results of operations.
Our business may be harmed by fraudulent activities on our web site
Our future success will depend largely upon pawnshops reliably delivering and
accurately representing their listed goods and buyers paying the agreed purchase
price. We intend to take responsibility for delivery of payment to our
participating pawnshops after the 10-day Pawnbroker.com Satisfaction Program
period. However, our systems may not prevent customer dissatisfaction or the
delivery of defective merchandise. We anticipate that we will receive
communications from users who did not receive the merchandise described or that
the merchandise was defective. While we can suspend the accounts of pawnshops
that fail to fulfill their delivery obligations to customers, we do not have the
ability to require pawnshops deliver goods or otherwise make consumers whole.
Any negative publicity generated as a result of fraudulent or deceptive conduct
by pawnshops of our service could damage our reputation and diminish the value
of our brand name. We may receive requests from customers
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requesting reimbursement or threatening legal action against us if no
reimbursement is made. Any resulting litigation could be costly for us, divert
management attention, result in increased costs of doing business, lead to
adverse judgments or could otherwise harm our business.
We do not intend to declare dividends, which may lower the market value of our
shares
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not expect to pay any dividends in the foreseeable future.
Broker-dealers may be discouraged from effecting transactions in our shares
because they are considered penny stocks and are subject to the penny stock
rules
Rules 15g-1 through 15g-9 promulgated under the Exchange Act impose sales
practice and disclosure requirements on NASD brokers-dealers who make a market
in "a penny stock." A penny stock generally includes any non-NASDAQ equity
security that has a market price of less than $5.00 per share. Our shares are
quoted on the OTCBB and the closing price of our shares on September 30, 1999
was $4.813. Purchases and sales of our shares are generally facilitated by NASD
broker-dealers who act as market makers for our shares. The additional sales
practice and disclosure requirements imposed upon brokers-dealers may discourage
broker-dealers from effecting transactions in our shares, which could severely
limit the market liquidity of the Shares and impede the sale of our shares in
the secondary market. Under the penny stock regulations, a broker-dealer selling
penny stock to anyone other than an established customer or "accredited
investor" (generally, an individual with net worth in excess of $1,000,000 or an
annual income exceeding $200,000, or $300,000 together with his or her spouse)
must make a special suitability determination for the purchaser and must receive
the purchaser's written consent to the transaction prior to sale, unless the
broker-dealer or the transaction is otherwise exempt.
In addition, the penny stock regulations require the broker-dealer to deliver,
prior to any transaction involving a penny stock, a disclosure schedule prepared
by the Commission relating to the penny stock market, unless the broker-dealer
or the transaction is otherwise exempt. A broker-dealer is also required to
disclose commissions payable to the broker-dealer and the registered
representative and current quotations for the securities. Finally, a
broker-dealer is required to send monthly statements disclosing recent price
information with respect to the penny stock held in a customer's account and
information with respect to the limited market in penny stocks.
Item 2. Financial Information.
Selected Financial Data
The following table sets forth selected financial data regarding our
consolidated operating results and financial position. The data has been derived
from our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States
("US GAAP"). See "Management's Discussion and Analysis of Financial Condition
and Results of Operation." The following selected financial data is qualified in
our entirety by, and should be read in
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<PAGE>
conjunction with, the consolidated financial statements and notes thereto
included elsewhere in this Registration Statement.
<TABLE>
Three Month
Fiscal Period Ended Fiscal Year Period
June 30, 1999 Fiscal Year Ended from inception
(unaudited) March 31, 1999 (February 13, 1998) to March
31, 1998
---------------------- ----------------------------- ------------------------------
$ $ $
<S> <C> <C> <C>
Operating Revenues -- -- --
General & Administrative Expenses 200,472 21,869 1,392
Net (Loss) from Continuing (200,472) (21,869) (1,392)
Operations
Net Loss Per share (1) (0.02) (0.02) --
June 30, 1999 March 31, 1999 March 31, 1998
(unaudited)
------------------- ----------------------------- -------------------------------
$ $ $
Working Capital 2,538,493 -- 19,513
Total Assets 3,211,918 8,007 19,513
Total Liabilities 326,071 5,000 --
Shareholders' Equity 2,885,847 3,007 19,513
Long-term Obligations -- -- --
Cash Dividends -- -- --
</TABLE>
(1) After giving effect to a 1-for-4 reverse stock split that occurred on June
9, 1999.
Management's Discussion and Analysis of Financial Condition and Results of
Operation
The information contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operation contains "forward looking
statements." Actual results may materially differ from those projected in the
forward looking statements as a result of certain risks and uncertainties set
forth in this report. Although management believes that the assumptions made and
expectations reflected in the forward looking statements are reasonable, there
is no assurance that the underlying assumptions will, in fact, prove to be
correct or that actual future results will not be different from the
expectations expressed in this Registration Statement.
-35-
<PAGE>
Overview
We were incorporated in the State of Delaware on February 13, 1998 under the
name "Digital Sign Corporation" with an authorized share capital of 70,000,000
shares consisting of 20,000,000 Preferred shares of a par value of $0.00001 each
and 50,000,000 Common shares of a par value of $0.0001 each.
On April 6, 1999, we acquired all of the issued and outstanding shares of common
stock of Eriko Internet Inc., a Washington corporation engaged in the business
of developing Internet technologies, pursuant to a statutory share exchange
under the laws of the state of Washington.
On May 14, 1999, we acquired all of the issued and outstanding shares of
Pawnbroker (Nevada) and all of the assets of Pawnbroker (Nevada), including our
business concept and the domain names Pawnbroker.com and Pawnbrokers.com. After
we acquired Pawnbroker (Nevada), we undertook the process of designing, building
and operating an Internet based electronic-commerce Web site to provide retail
customers with the ability to search for and acquire, via the Internet,
merchandise in inventories of pawnshops throughout North America. At the time we
acquired Pawnbroker (Nevada), our operations were insignificant.
Results of Operations
Three Months Ended June 30, 1999 Compared to June 30, 1998
The three month fiscal period ended June 30, 1999 was our first period of
material operations. We had no revenues from operations. Our loss during this
period of $200,472 was as a result of costs associated with corporate
acquisition expenses, developing our business plan, research and development
expenditures related to the development of our Pawnbroker.com web site and
technologies and general overhead and administrative expenses. These expenses
included $52,719 in expenses related to research and development of our web
site; $33,517 in expenses related to marketing and promotion; $36,089 in salary
expenses; $18,996 in professional fees and $59,151 in expenses related to
general administrative expenses and overhead.
We expect expenses related to research and development and administrative
expenses to continue to be a material component of our expenses during the
start-up phase of our development. We anticipate that professional fees will
increase during the start-up phase of our development and as we complete the
Exchange Act registration process. We also anticipate that expenses related to
marketing and sales will increase substantially during the fourth quarter ending
December 31, 1999 and the first half of 2000, as we begin an extensive campaign
to market and promote our Pawnbroker.com Web site and develop strategic
alliances with participating pawnshops.
With the receipt of $3,003,000 by the private placement of private placement of
1,300,000 units at $2.31 per unit, as at June 30, 1999, our working capital
increased to $2,538,493.
We had no material operations during the fiscal quarter ended June 30, 1998, and
as a result, management does not believe a comparative analysis of such results
of operations would be meaningful.
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<PAGE>
Fiscal Period Ended March 31, 1999 Compared to period from inception (February
13, 1998) to March 31, 1998
Throughout both these periods we did not have any material business operations.
We had no revenues from operations. During the period from our inception
(February 13, 1998) to March 31, 1998, we had expenses of $1,392 and a loss of
$1,392, compared to expenses of $21,869 and a loss of $21,869 during our fiscal
year ended March 31, 1999. The increase in expenses incurred during our fiscal
year ended March 31, 1999 was attributable primarily to legal, accounting and
professional fees associated with the restructuring of our corporation structure
and general administrative expenses.
We raised $4,974 capital during the fiscal period April 1, 1998 to March 31,
1999. We had nominal cash of $8,007 on hand at March 31, 1999.
Liquidity and Capital Resources
As at June 30, 1999 we have $2,862,751 in cash or term deposits, which we
believe will be sufficient to satisfy our cash requirements through our third
fiscal quarter ending December 31, 1999. We will need to raise additional
financing to fund our operations after December 31, 1999. We intend to raise
such financing through private equity or debt offerings during the fourth
calendar quarter of 1999; however, we cannot assure you that we will acquire
this financing on acceptable terms, if at all.
Since our inception on February 13, 1998, we raised net cash from financing of
$3,319,584, including $26,258 from the issuance of stock on February 14, 1998
and $3,293,326 during the fiscal quarter ended June 30, 1999, including
$3,003,000 in capital through private placements of our common stock and
$290,326 in advances to us. Since our inception on February 13, 1998, we used
net cash of $172,980, including $1,382 during the period from our inception to
our fiscal year ended March 31, 1998, $16,869 during our fiscal year ended March
31, 1998, and $154,728 during the three month fiscal period ended June 30, 1999.
We received no cash from our operations during these periods, and our use of
cash during such periods were primarily as a result of expenses related to
research and development of our web site, expenses related to marketing and
promotion, salary expenses, professional fees and expenses related to general
administrative expenses and overhead.
During the period from our inception to our fiscal year ended March 31, 1999, we
had no cash flows from investing activities. During our fiscal quarter ended
June 30, 1999, we applied cash of $239,354 towards the purchase of capital
assets and $125,000 towards the payment of a debt related to the purchase of
domain names "pawnbroker.com" and "pawnbrokers.com". Our cash position at June
30, 1999 was $2,862,751.
Our operating budget for the period beginning July 1, 1999 through December 31,
1999 is estimated to be approximately $2,358,449, and $3,617,684 for the period
beginning January 1, 2000 through June 30, 2000. We cannot assure you that our
actual expenditures for these periods will not exceed our estimated operating
budget. Actual expenditures will depend on a number of factors, some of which
are beyond our control, including, among other things:
(i) timing of the development and testing of our software and web
site,
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<PAGE>
(ii) our ability to attract visitors to our web site,
(iii) our ability to attract pawnshops to use our services,
(iv) our ability to launch our web site in a timely manner,
(v) our ability to successfully complete transactions,
(vi) the availability of financing on acceptable terms,
(vii) reliability of the assumptions of management in estimating cost
and timing,
(viii) the time spent by consultants and professionals developing our
web site,
(ix) competition and
(x) other factors that may be beyond our control.
We will be required to raise approximately $5 million in additional capital
during the fourth calendar quarter 1999 to meet our anticipated cash needs
during the first two calendar quarters of 2000.
We intend to raise additional financing through private placements of our equity
or debt in the fourth quarter of 1999. We engaged Investor Relations Group to
assist us in develop a strategy to raise additional financing and to provide
investor relations services. Our relation with IRG has been as follows:
o IRG assisted in defining our investor relations goals and objectives;
o IRG Capital assisted us in preparing a corporate fact sheet for
distribution to targeted investment professionals and certain
accredited investors;
o IRG arranged periodic meetings with interested retail brokers, fund
managers and investment advisers;
o IRG provided potential investors with certain company approved due
diligence/investor relations kits; and
o IRG agreed to assist us in developing relationships with merchant and
investment banks, private placement professionals and other
intermediaries which could provide us with additional private
placement financing;
We have presented our business concept and marketing strategy to more than
twenty-one potential investors. We anticipate that we will complete a private
placement of approximately $5 million in the fourth calendar quarter of 1999. We
cannot assure you that we will successfully obtain additional financing on
acceptable terms, if at all. If we are unable to secure additional financing, we
intend to concentrate our resources on developing our web site and intend to
reduce the amount of resources we have budgeted for marketing our web site. Such
a reduction may have a material adverse affect on our business and results of
operations.
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<PAGE>
Recent Financing
Our business activities and operations have been funded to date through issuance
of shares of our common stock in the following transactions:
<TABLE>
Summary of Transactions
Number of Total Price of
Shares Shares ($)
-------------------- --------------------
<S> <C> <C>
Founders shares issued at par value (post-consolidated) 968,750(1) 388(1)
Issued as consideration for the acquisition of shares in Digital 25,000(1) 10(1)
Sign, Inc. (post-consolidated).
Issued for cash at $0.20 per share (post-consolidated) 24,875 4,975
Issued for cash issued at $0.05 per share (post-consolidated). 106,125(1) 20,895(1)
Issued as consideration for the acquisition of shares in Eriko 8,500,000(1)(2) 3,007(1)
Internet, Inc. (post-consolidated).
Issued as consideration for the acquisition of all the issued and 6,240,000 Nil(3)
outstanding shares of Pawnbroker.com.
Cancellation/surrender of 250,000 shares (250,000)(4) (250)
Issued for cash at $2.31 per share(4) 1,300,000 3,003,000
- -------------------------------------------------------------------- -------------------- --------------------
TOTAL 16,914,750 3,032,087
</TABLE>
(1) On a post split basis. On June 10, 1999, we amended our Articles of
Incorporation to effect a 1-for-4 reverse stock split of our issued and
outstanding share capital.
(2) We issued 34,000,000 pre-split shares in connection with a statutory share
exchange between us and Eriko Internet, Inc.
(3) The shares were issued in exchange for all of the issued and outstanding
shares of Pawnbroker (Nevada) to Joseph Schlader, our President, Cheryl
Schlader, and William Galine, our Vice President. The shares were issued
based on the book value of Pawnbroker (Nevada), which was nil.
(4) On May 19, 1999, Cameron Woodbridge, a founding shareholder of Eriko
Internet, Inc., contributed 1,000,000 pre-consolidation shares to the
corporation for $250. The shares were initially issued as founder's shares
for nominal consideration by Eriko Internet, Inc., subject to Mr.
Woodbridge serving as a director and officer of Eriko. Mr. Woodbridge
contributed the shares because he was no longer actively involved in Eriko
at the time of our share exchange with Eriko.
(5) We issued 1,300,000 Units consisting of one Common share and one-half of
one common Share Purchase Warrant. Each whole Share Purchase Warrant is
exercisable to acquire one additional common share at $2.31 per share until
June 23, 2000 and at $2.90 per share until June 22, 2001. There can be no
assurance that such warrants will be exercised.
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<PAGE>
Year 2000 Compliance
The Year 2000 issue arises with the change in century and the potential
inability of information systems to correctly "rollover" dates to the new
century. To save on computer storage space, many systems were programmed with a
two-digit century (i.e. December 31, 1999 would appear as 12/31/99) assuming
that all years would be part of the 20th century. On January 1, 2000, systems
with this programming will default to 01/01/1900 instead of 01/01/2000, and
calculations using or reporting the date will not be correct and errors will
arise (the "Year 2000 Issue"). To prevent this from occurring, information
systems need to be updated to ensure they recognize dates during and after the
Year 2000.
The potential exists that we and each of our subsidiaries are exposed to a risk
that certain aspects of their businesses will fail or suffer impairment as a
result of internally operated or externally contracted hardware or software
systems and services not being able to correctly "rollover" dates to the new
century. The risk stems from our reliance on certain hardware, software and
services to carry out the daily operation of our proposed respective businesses.
The exposure may result from, amongst other things, the use of computers,
general software and servers for office purposes and data storage; connections
to and use of the services of Internet Service Providers and telephone companies
for office purposes and customer and investor relations; the software underlying
the operation of the Web site web site and the online business operations and
the Registrant's servers.
We have only been operating and developing our business during the last four
months and the office hardware, administrative general software, software
development tools, servers and services of Internet Service Providers and
telephone companies have been acquired during this period. As a result, and in
oral consultation with the suppliers of this hardware, software and services, we
believe the related systems that we intend, directly or indirectly, to use in
our respective businesses are Year 2000 compliant. Our due diligence also
included an evaluation of supplier provided technology and the implementation of
new policies to require our suppliers to confirm in writing that they have
disclosed and will correct Year 2000 compliance issues. We have not received
written confirmation from all of our vendors. Although we are relying primarily
on systems developed with current technology and on systems designed to be Year
2000 compliant, we may have to replace, upgrade or reprogram certain systems to
ensure that all interfacing technology will be Year 2000 compliant when running
jointly.
In the event that we incur expenses associated with resolving Year 2000
compliance issues, we intend to expense the operating costs as they are incurred
and capitalize the capital costs as they are incurred. However, our purchases of
hardware and general and specific purpose software have been relatively recent,
and the more expensive of the hardware and general and specific software items
that we have purchased are covered under warranties that will extend over the
rollover period to January 1, 2000. As a result, we do not expect to incur any
major operating or capital expenditures that would have a material impact on our
financial condition or results of operations.
While we believe that our hardware and general and specific purpose software
applications will be Year 2000 compliant, there can be no assurance until the
Year 2000 occurs that all systems will function adequately. In the worst case
scenario, a Year 2000 problem would cause Internet systems to fail and we would
not be able to commercially launch our web site. Such a failure would cause us
to delay our commercial launch until the Internet is operational, and would have
a material adverse affect on our business.
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<PAGE>
We do not currently anticipate any disruption in our operations as the result of
the Year 2000 issue. We do not have any information concerning the Year 2000
compliance status of our suppliers and customers that would affect our
operations. Any failure of our material systems, our vendors' material systems
or the Internet to be Year 2000 compliant may have a material adverse effect on
our business and results of operations.
In order to protect against the possibility of any material disruption in our
operations as the result of the Year 2000 issue we have taken the following
precautions:
- - developed, initiated and maintained procedures that ensure that the
information stored on the office computer hard drives are backed up on a
regular basis and stored safely;
- - copies of the source code for the special purpose software are maintained
in secure offsite locations by the developers of the software;
- - installed a backup server in Minden, Nevada at the headquarters of Banshee,
Inc. ; and
- - implemented a policy of acquiring name brand hardware and retained
experienced consultants upon whose warranties we believe that we can rely.
We do not believe the Year 2000 issue will have any material affect on our
business or that we will have any material expenditures related to problems
arising out of the Year 2000 issue.
Quantitative and Qualitative Disclosures About Market Risks
We intend to transact our business in United States Dollars, and we anticipate
that we will have no material risks resulting from sales commitments, inventory
or similar items.
Item 3. Properties.
We currently lease our principal business office through our subsidiary, at 85
Keystone, Suite F, Reno, Nevada pursuant to a lease that expires on April 14,
2002. The monthly payments under the lease are approximately $1300.
Neither we nor any of our subsidiaries presently own or lease any other property
or real estate.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information concerning the number of
shares of our common stock owned beneficially as of August 15, 1999 by: (i) each
person (including any group) known to us to own more than five percent (5%) of
any class of our voting securities, (ii) each of our directors, and (iii)
officers and directors as a group. Unless otherwise indicated, the shareholders
listed possess sole voting and investment power with respect to the shares
shown.
-41-
<PAGE>
<TABLE>
Title of Class Name and Address of Amount and Nature of Percentage of Class(1)
Beneficial Owner Beneficial Ownership
- ---------------- -------------------------- ---------------------- ------------------------
<S> <C> <C> <C>
Common Stock Dotcom Fund, S.A. 1,600,000 9.46%
Box 571, Providenciales,
Turks & Caicos Islands
Common Stock Packard Financial Group 1,950,000(2) 9.01%(2)
#11 Old Parham Rd, St.
Charles Nevis, West Indies
Common Stock Doug McLeod(3) 1,243,750 7.35%
688-6 Ishikawa, Kanagawa,
Japan
Common Stock Neil McElwee nil nil
1111 Timberpine Court,
Sunnyvale, CA 94086
Common Stock William Galine 3,057,600 18.08%
4332 Amberwood Ave, Reno
NV, 89509
Common Stock Cheryl Schlader(4) 1,591,200(4) 9.41%(4)
3085 Windermere Way,
Sparks NV 89431
Common Stock Joseph Schlader(4) 1,591,200(4) 9.41%(4)
3085 Windermere Way,
Sparks NV 89431
Common Stock Officers and Directors as 6,240,000 36.89%
a Group
</TABLE>
(1) Based on an aggregate of 16,914,750 shares outstanding as of September 30,
1999.
(2) Includes Warrants immediately exercisable to acquire 650,000 shares at
$2.31 per share until June 23, 2000 and at $2.90 per share until June 22,
2001.
(3) Doug McLeod served as an officer and director of the Registrant from March
1999 to September 30, 1999.
(4) Joseph Schlader and Cheryl Schlader are husband and wife. As such, each
would be deemed to be the beneficial owner the other's shares. Together
Joseph Schlader and Cheryl Schlader own 3,182,400 shares of common stock or
18.81% of our issued and outstanding common shares.
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<PAGE>
Security Ownership of Management
We are not aware of any arrangement that might result in a change in control in
the future.
Item 5. Directors, Executive Officers, Promoters and Control Persons.
Directors and Officers
All of our directors are elected annually by the shareholders and hold office
until the next annual general meeting of shareholders or until their successors
are duly elected and qualified, unless they sooner resign or cease to be
directors in accordance with our Articles and Bylaws. Our next regular meeting
will be held in September 2000. Our executive officers are appointed by and
serve at the pleasure of our Board of Directors.
As at October 10, 1999, the following persons were our directors, executive
officers, promoters and control persons:
<TABLE>
Principal occupation and if not at present an
Director elected director, occupation during the
Name and present office held since preceding five years
- ---------------------------- ----- --------------------
<S> <C> <C>
Neil McElwee, Chief Executive Officer September Internet Marketing Consultant - Principal of
1999 McElwee & Associates, a consulting firm, since
1996 to present; director of business
development for Infoseek Corporation from 1998
to 1999; Vice President of Marketing for Caligari
Corporation from 1995 to 1996.
Joseph Schlader, Promoter, Director and June 1999 Pawnbroker Executive - Director, Pacific
President(1) Pawnbrokers from 1981 to present.
William Galine, Promoter, Director and June 1999 Pawnbroker Executive - Secretary and Treasurer,
Vice President(1) Director, Pacific Pawnbrokers from 1984 to present.
Vahid Rafizadeh, Chief Technical Officer October 1999 Software Architect - Chief Technical Officer and
Vice President, KSM, Inc. from 1998 to 1999; Chief
Software Architect, Lockheed Martin from 1996 to
1998; software architect, North American Drager from
1994 to 1996.
Doug McLeod, Promoter(2) March 1999 Internet Consultant - Director AbleAuctions.com,
Inc. from May 1999 to present; Blue Zone
Entertainment Inc. from May 1999 to present;
independent consultant from 1995 to present.
Cheryl Schlader, Promoter June 1999 Pawnbroker Executive - President and Director, Pacific
Pawnbrokers from 1992 to present.
</TABLE>
- ----------------------
(1) Member of the Registrant's audit committee.
(2) Doug McLeod served as an officer and director of our company from March
1999 to September 30, 1999.
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<PAGE>
The following is a brief biographical information on each of the officers and
directors of listed:
Neil McElwee, Chief Executive Officer - Age 53
Mr. McElwee joined as our Chief Executive Officer in September 1999. He has been
a senior marketing and business development executive for over 15 years. Mr.
McElwee has been a principal of McElwee & Associates, a consulting firm, since
1996 to present. Mr. McElwee also served as a director of business development
for Infoseek Corporation, an Internet commerce company, from 1998 to 1999. Mr.
McElwee was Vice President of Marketing for Caligari Corporation, a marketer of
3D graphics and animation software, from 1995 to 1996. Mr. McElwee will be
employed full time with Pawnbroker.com
Joseph Schlader, Director, President - Age 47
Joseph Schlader, who played a central role in the formation of the
Pawnbroker.com (Nevada), was appointed our President and a director in June
1999. Schlader has over eighteen years experience in the pawnbrokering industry.
In 1981, Schlader founded Pacific Pawnbrokers in Sparks, Nevada. Since that
time, Pacific Pawnbrokers has expanded its operations to four stores located in
the Reno and Lake Tahoe areas. Schlader is also a graduate of the Gemological
Institute of America and a member in the National Pawnbrokers' Association.
William Galine, Director, Vice-President - Age 48
William Galine has joined the Company as Vice-President and director in June
1999. Galine has worked in the pawn industry for the past fifteen years
expanding Pacific Pawnbrokers' operations. Currently, Galine is the
Secretary-Treasurer of the Nevada Pawnbrokers' Association and a member of the
National Pawnbrokers' Association.
Vahid Rafizadeh, Chief Technical Officer - Age 41
Mr. Rafizadeh has served as our Chief Technical Officer since October 1999. He
has served as Chief Technical Officer and Vice President of Product Development
at KSM, Inc., a software developer from 1998 to 1999, a personalization engine
that delivered sales, marketing, and support programs. Prior to joining KSM,
Inc., Rafizadeh was Chief Software Architect for Lockheed Martin in Valley
Forge, Pennsylvania, from 1996 to 1998, where he directed all technical aspects
of several state-of-the-art imaging projects, including technical design and
quality of implementation. From 1994 to 1996, Mr. Rafizadeh served as lead
software architect for North American Drager, a developer of cardiac output
monitoring and anesthesia products for the health care industry.
Doug McLeod, Promoter - Age 39
Doug McLeod served as our Treasurer and a director from March 1999 to October
1999. Mr. McLeod has spent the last five years as an Internet consultant and is
the President, Founder and Promoter of Eriko Internet Inc. Mr. McLeod attended
York University in Toronto, Ontario from 1992 to 1995 under the University's
Bachelor of Arts program. Mr. McLeod also serves as a director of
Ableauctions.com Inc., an Internet provider of auctions services for retail
auction houses, since May 1999 and a director of Blue Zone International, Inc.,
a provider of high speed Internet services for businesses since June 1999.
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<PAGE>
Cheryl Schlader, Promoter - Age 50
Cheryl Schlader is the spouse of Joseph Schlader and a promoter of our company.
Ms. Schlader has over 10 years experience in the pawnbrokering industry and has
served as President and Director of Pacific Pawnbrokers since June 1999, and an
operations manager of Pacific Pawnbrokers from 1992 to 1999.
Other Information
Members of the Board of Directors are elected by our shareholders. Our Board of
Directors meets periodically to review significant developments affecting our
company and to act on matters requiring Board approval. Although the Board of
Directors delegates many matters to others, it reserves certain powers and
functions to itself. This committee is directed to review the scope, cost and
results of the independent audit of our books and records, the results of the
annual audit with management and the adequacy of our accounting, financial and
operating controls; to recommend annually to the Board of Directors the
selection of the independent auditors; to consider proposals made by the
Registrant's independent auditors for consulting work; and to report to the
Board of Directors, when so requested, on any accounting or financial matters.
None of our directors or executive officers is a party to any arrangement or
understanding with any other person pursuant to which said he was elected as a
director or officer.
None of our directors or executive officers has any family relationship with any
other officer or director.
None of our officers or directors have been involved in the past five years in
any of the following: (1) bankruptcy proceedings; (2) subject to criminal
proceedings or convicted of a criminal act; (3) subject to any order, judgment
or decree entered by any court limiting in any way his or her involvement in any
type of business, securities or banking activities; or (4) subject to any order
for violation of federal or state securities laws or commodities laws.
Item 6. Executive Compensation.
The following table contains information concerning the annual compensation and
long-term compensation to named executive officers during the fiscal year ended
March 31, 1999, and the compensation payable for the during the fiscal year
ended March 31, 2000.
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<PAGE>
<TABLE>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
---------- ----------- ---------- --------------------------- -----------
Awards Pay-outs
------------ -------------- -----------
Other Securities LTIP
Annual Restricted Under-lying Payouts All Other
Compen- Stock Options/SARs Compen-
Name and Salary Bonus sation Award(s) (#) sation
Principal Position Year Ended ($) ($) ($) ($) ($)
- ---------------------- ----------- ---------- ----------- ---------- ------------ -------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Neil McElwee, 3/31/00 200,000 nil nil nil nil nil nil
Chief Executive 3/31/99 nil nil nil nil nil nil nil
Officer
Joseph Schlader, 3/31/00 90,000 nil nil nil nil nil nil
President 3/31/99 nil nil nil nil nil nil nil
William Galine 3/31/00 75,000 nil nil nil nil nil nil
Vice President 3/31/99 nil nil nil nil nil nil nil
Vahid Rafizadeh, 3/31/00 140,000 nil nil nil nil nil nil
Chief Technical 3/31/99 nil nil nil nil nil nil nil
Officer
</TABLE>
Our Directors do not receive any stated salary for their services as directors
or members of committees of the Board of Directors, but by resolution of the
Board, a fixed fee and expenses of attendance may be allowed for attendance at
each meeting. Directors may also serve our company in other capacities as an
officer, agent or otherwise, and may receive compensation for their services in
such other capacity.
Stock Options
No stock options/SARs granted to named executive officers during the fiscal year
ended March 31, 1999.
We have reserved 2,000,000 shares for issuance pursuant to a stock option plan
we intend to adopt. We intend to submit this plan to our shareholders for
approval and ratification at our next annual shareholder meeting scheduled in
September 2000 or at such earlier time as may be determined by our Board of
Directors. We anticipate we will grant options to certain of our directors,
executive officers and consultants after our stock option plan is adopted. We
intend to register our stock option plan under the Securities Act after we adopt
a plan.
We intend to grant stock options to the following officers, directors and
consultants after we approve and adopt a stock option plan:
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<PAGE>
<TABLE>
Grantee Number of Options Exercise Price Expiry
- ----------------------------- -------------------- ------------------------------ ---------------------
<S> <C> <C> <C>
Neil McElwee 782,590(2) $6.75 5 years
Joseph Schlader 250,000(1) $6.75 5 years
William Galine 125,000(1) $6.75 5 years
Vahid Rafizadeh 170,000(2)(3) $6.75 5 years
Total 1,327,540
- ----------------------------- -------------------- ------------------------------ ---------------------
</TABLE>
(1) We reserved for issuance and agreed to grant stock options to Joseph
Schlader and William Galine pursuant to a stock option plan after such
stock option plan is authorized and adopted. As of September 30, 1999, we
have not authorized or adopted such plan.
(2) We are in the process of negotiating the terms of definitive employment
agreements with Neil McElwee, our Chief Executive Officer, and Vahid
Rafizadeh, our Chief Technology Officer, pursuant to which we anticipate we
will issue options exercisable to acquire shares of our common stock at
$6.75 per share under our stock option plan. The terms of these grants have
not been finalized as of October 12, 1999.
(3) We have also agreed to grant Mr. Rafizadeh, in each of the second and third
years of his employment with our company, options to acquire 85,000 shares
at $6.75 per share in the event that our company meets certain milestones
and Mr. Rafizadeh is an employee on such date; these milestones have not
been determined.
We had no stock options/SARs held by named executive officers during the fiscal
year ended March 31, 1999. As such, no share purchase options were exercised
during our fiscal year ended March 31, 1999 or during the interim financial
period ended June 30, 1999.
Employment and Consulting Agreements
The following are employment, consulting or other service contracts or
arrangements between us or our subsidiaries and our directors, executive
officers and consultants.
Neil McElwee Employment Agreement
We in the process of finalizing a definitive employment agreement with Neil
McElwee, our Chief Executive Officer. The term of Mr. McElwee's employment will
be for three years beginning September 12, 1999 and ending September 12, 2002,
provided that we may terminate Mr. McElwee's employment upon (i) three months
written notice during the first year of his employment, (ii) six months notice
during the second or third year of employment or (iii) at an time during his
employment for cause, including conviction for criminal acts, committing acts
gross negligence or breach of the employment agreement. Mr. McElwee agreed to
serve full time as our Chief Executive Officer. We agreed to compensate Mr.
McElwee as follows:
(i) We will pay Mr. McElwee a salary of $200,000 per year during the first
year of his employment commencing on September 12, 1999 through
September 12, 2000. Mr. McElwee's salary will increase 12% per year
during the term of his employment after the
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<PAGE>
first year, subject to fulfilling the goals outlined by our board of
directors at the beginning of each year.
(ii) We agreed to grant Mr. McElwee options to acquire up to 782,590 shares
of our common stock at $6.75 per share under our stock option plan,
vesting as follows:
(a) options exercisable to acquire 260,864 shares on September 12,
2000;
(b) options exercisable to acquire 260,863 shares on September 12,
2001; and
(c) options exercisable to acquire 260,863 shares on September 12,
2002,
provided that Mr. McElwee is as employee on such date.
(iii)We agreed to pay Mr. McElwee a bonus of $25,000 in the event we close
a financing of at least $3 million prior to January 15, 2000.
Joseph Schlader Employment Agreement
We in the process of finalizing a definitive employment agreement with Joseph
Schlader, our President. The term of Mr. Schlader's employment will be for three
years beginning June 14, 1999 and ending June 14, 2002, provided that we may
terminate Mr. Schlader's employment upon (i) three months written notice during
the first year of his employment, (ii) six months notice during the second or
third year of employment or (iii) at an time during his employment for cause,
including conviction for criminal acts, committing acts gross negligence or
breach of the employment agreement. Mr. Schlader agreed to serve full time as
our President and a member of our board of directors. We agreed to compensate
Mr. Schlader as follows:
(i) We agreed to pay Mr. Schlader a salary of $90,000 per year during the
first year of his employment commencing on June 14, 1999 through June
14, 2000. Mr. Schlader's salary will increase at the discretion of our
board of directors.
(ii) We also agreed to grant Mr. Schlader options to acquire up to 250,000
shares of our common stock at $6.75 per share under our stock option
plan vesting pro rata 25% on each anniversary date, June 14, of his
employment over the next four years.
William Galine Employment Agreement
We in the process of finalizing a definitive employment agreement with William
Galine, our Vice President. The term of Mr. Galine's employment will be for
three years beginning June 14, 1999 and ending June 14, 2002, provided that we
may terminate Mr. Galine's employment upon (i) three months written notice
during the first year of his employment, (ii) six months notice during the
second or third year of employment or (iii) at an time during his employment for
cause, including conviction for criminal acts, committing acts gross negligence
or breach of the agreement. Mr. Galine agreed to serve full time as our Vice
President and a member of our board of directors. We agreed to compensate Mr.
Galine as follows:
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<PAGE>
(i) We agreed to pay Mr. Galine a salary of $75,000 per year during the
first year of his employment commencing on June 14, 1999 through June
14, 2000. Mr. Galine's salary will increase at the discretion of our
board of directors.
(ii) We also agreed to grant Mr. Galine options to acquire up to 125,000
shares of our common stock at $6.75 per share under our stock option
plan vesting pro rata 25% on each anniversary date, June 14, of his
employment over the next four years.
Vahid Rafizadeh Employment Agreement
We in the process of finalizing a definitive employment agreement with Vahid
Rafizadeh, our Chief Technology Officer. The term of Mr. Rafizadeh's employment
will be for three years beginning October 5, 1999 and ending September 16, 2002,
provided that we may terminate Mr. Rafizadeh's employment upon (i) three months
written notice during the first year of his employment, (ii) six months notice
during the second or third year of employment or (iii) at an time during his
employment for cause, including conviction for criminal acts, committing acts
gross negligence or breach of the agreement. Mr. Rafizadeh agreed to serve full
time as our Chief Technology Officer. We agreed to compensate Mr. Rafizadeh as
follows:
(i) We agreed to pay Mr. Rafizadeh a salary of $140,000 per year during
the first year of his employment commencing on September 16, 1999. Mr.
Rafizadeh's salary will increase at the discretion of our board of
directors.
(ii) We agreed to grant Mr. Rafizadeh options to acquire up to 170,000
shares of our common stock at $6.75 per share under our stock option
plan, vesting as follows: 100,000 in September 2000, 35,000 in
September 2001, and 35,000 in September 2002, provided that Mr.
Rafizadeh is an employee on such date.
(iii)We also agreed to grant Mr. Rafizadeh, in each of his second and
third years of employment with our company, options to acquire 85,000
shares, exercisable at $6.75 per share and vesting over three years,
if our company meets certain milestones in that year and Mr. Rafizadeh
is an employee on such date. We have not determined these milestones.
Other Consulting Agreements
We entered into a consulting agreement with IRG Investor Relations Group Ltd., a
consultant to Pawnbroker.com, Inc., dated June 25, 1999. Under the terms of the
agreement, IRG agreed to provide us certain investor relations consulting
services. We agreed to pay IRG as consideration for such services $100,000
(paid) upon execution of the agreement and a monthly fee in the amount of
$20,000 for the term of the agreement. We also agreed to grant options
exercisable to acquire up to 400,000 shares of our common stock for no
additional consideration, of which options to acquire 250,000 shares will vest
immediately upon grant and 50,000 shares will vest each time we successfully
obtain financing of $5,000,000 or more. The options we agreed to grant to IRG
will expire on June 25, 2000. We also
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<PAGE>
agreed to use reasonable efforts to file a registration statement to register
the shares issuable under the options pursuant to the Securities Act of 1933, as
amended. As of September 30, 1999, we have not granted such options to IRG.
IRG agreed to provide the following consulting and investor relations services:
o IRG assisted us in defining our investor relations goals and
objectives;
o IRG Capital assisted us in preparing a corporate fact sheet for
distribution to targeted investment professionals and certain
accredited investors;
o IRG arranged periodic meetings with interested retail brokers, fund
managers and investment advisers;
o IRG assisted us in preparing and disseminating press release materials
to the financial community and media;
o IRG assisted us in communicating with NASD market makers by informing
them of recent company developments;
o IRG provided potential investors with certain company approved due
diligence/investor relations kits;
o IRG provided us with recommendations to improve disclosure on our Web
site related to investors relations;
o IRG agreed to assist us in developing relationships with merchant and
investment banks, private placement professionals and other
intermediaries which could provide us with additional private
placement financing; and
o IRG assisted us in developing relationships with potential strategic
e-commerce affiliates.
Item 7. Certain Relationships and Related Transactions.
Joseph Schlader, a director and our President, and William Galine, a director
and our Vice President, are directors of Pacific Pawnbrokers. Mr. Galine is also
an officer of Pacific Pawnbrokers. Pacific Pawnbrokers has agreed to assisted us
in testing our Pawnbroker.com software. Pacific Pawnbrokers will participate in
the beta test launch of our Pawnbroker.com web site and be a participating
pawnshop during the initial soft launch of our site in the fourth quarter of
1999. Pacific Pawnbrokers will post merchandise for sale on our web site and
test our systems during the beta test phase. After the beta tests, Pacific
Pawnbrokers will offer and sell merchandise on the same terms as other
participating pawnshops.
We also paid a note to Pacific Pawnbrokers in the amount of $125,000 related to
the purchase of the domain names "pawnbroker.com" and "pawnbrokers.com".
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<PAGE>
We believe that our relationship with Pacific Pawnbrokers is no less favorable
to us than an arrangement with other unrelated parties at arms' length.
Mr. Schlader and William Galine were founders and promoters of Pawnbroker
(Nevada). We acquired Pawnbroker (Nevada) by issuing 6,240,000 shares of our
common stock to Mr. Schlader, Cheryl Schlader, and Mr. Galine. These shares were
issued at a nominal value of $62, which is equal to the par value of the shares
and the book value of the assets of Pawnbroker (Nevada) at the time of the
acquisition. Cheryl Schlader is Mr. Schlader's wife. The terms of the
acquisition were negotiated, at arm's length, by our management at the time of
the acquisition with Mr. Schlader, Ms. Schlader, and Mr. Galine. We were
represented by separate counsel.
Except for relationships and transactions that we have disclosed above and in
other sections of this registration statement such as (a) the ownership of our
securities and (b) the compensation described herein, to our knowledge, none of
our directors, executive officers, holders of ten percent of our outstanding
shares of common stock, or any associate or affiliate of such person, have had a
material interest, direct or indirect, since our inception or in any proposed
transaction which may materially affect us.
Item 8. Legal Proceedings.
To the best of our knowledge, we are not subject to any active or pending legal
proceedings or claims against us or any of our properties. However, from time to
time, we may become subject to claims and litigation generally associated with
any business venture.
Item 9. Market Price of and Dividends on Registrant's Common Equity and Related
Stockholder Matters.
On September 17, 1998 our common stock was approved for trading on the National
Securities Dealer's Association - over the counter bulletin board under the
symbol "DGSG". There was no material market for our common shares prior to March
31, 1999. Our trading symbol was changed to "PBRR" effective June 14, 1999. The
following table sets forth, for the periods indicated, the range of the high and
low bid quotations as reported by NASD. The bid quotations set forth below
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not reflect actual transactions:
OTCBB
<TABLE>
- ---------------------- -------------------------- ------------------------- --------------------------
1999 High Low Volume
- ---------------------- -------------------------- ------------------------- --------------------------
<S> <C> <C> <C>
2nd Quarter 7.50 6.75 266,000
3rd Quarter 8.00 4.625 1,148,745
- ---------------------- -------------------------- ------------------------- --------------------------
</TABLE>
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<PAGE>
On September 30, 1999, the last reported sale price of our common stock reported
by the NASD was $4.813. As of September 30, 1999, there were 13 holders of
record of our common stock.
We have not declared or paid any cash dividends on our common stock since our
inception, and our Board of Directors currently intends to retain all earnings
for use in the business for the foreseeable future. Any future payment of
dividends will depend upon our results of operations, financial condition, cash
requirements and other factors deemed relevant by our Board of Directors.
Item 10. Recent Sales of Unregistered Securities.
Pursuant to a resolution of the Board of Directors dated February 14, 1998, we
initially issued 968,750 (post-split)1 shares of common stock to certain
officers, directors and other related persons at par value. The issuance of
Original Shares was exempt from registration under the provisions of Section
4(2) of the Securities Act of 1933, as amended. The issuance of the shares did
not involve a public offering.
Pursuant to a resolution of the Board of Directors dated February 14, 1998, we
issued 25,000 (post-split)1 shares of common stock to Edward F. Meyers III,
President of Digital Sign Corporation, to acquire all of the issued and
outstanding shares of Digital Signs, Inc., a California corporation. The
issuance of the shares was exempt from registration under the provisions of
Section 4(2) of the Securities Act of 1933, as amended. The issuance of the
shares did not involve a public offering.
Pursuant to a resolution of the Board of Directors dated February 14, 1998, we
issued 106,125 (post- split) 1 shares of our common stock for $0.20 per share to
raise $20,895, and subsequent to March 31, 1998, we issued an additional 24,875
(post- split) 1 shares of common stock for $0.20 per share to raise $4,975.
These offerings were fully subscribed and the shares were issued on March 31,
1998 to the 86 private investors. The offering was not underwritten. This sale
was exempt from registration in reliance upon Rule 504 under Regulation D
promulgated under the Securities Act. The aggregate offering price did not
exceed $1,000,000, and the offering was otherwise in compliance with Rules 501
and 502 promulgated under the Securities Act.
On April 6, 1999, we acquired all of the issued and outstanding shares of common
stock of Eriko Internet Inc., a Washington corporation engaged in the business
of developing Internet technologies, pursuant to a statutory share exchange
under the laws of the state of Washington. Pursuant to an Agreement and Plan of
Share Exchange, we issued four (4) shares of our common stock for each one share
of common stock of Eriko Internet Inc. We issued 8,500,000 (post-split)1 shares
of our common stock to the shareholders of Eriko Internet Inc. in exchange for
their Eriko shares. The shares were issued to the following persons: Doug
McLeod, Cameron Woodbridge, Terra Growth Fund, Centennial Growth Fund, Jenner
Properties Ltd., GTL Financial Group Inc., Eurogrowth Investments, S.A., Ingleby
Investments Ltd., Dotcom Fund, S.A., Remington Capital Partners Ltd. and E.C.
Money Fund Ltd. The shares we issued were issued pursuant to an exemption from
registration pursuant to Rule 504 of Regulation D promulgated under the
Securities Act. The aggregate offering price of all Rule 504
- --------------------
1 On June 10, 1999, we amended our Articles of Incorporation to effect a 1-for-4
reverse split of our issued and outstanding share capital. Prior to the reverse
split, we had 37,499,000 shares of common stock issued and outstanding and after
the reverse split we had 9,374,750 shares of common stock issued and
outstanding.
-52-
<PAGE>
transactions completed by us did not exceed $1,000,000, and the offering was
otherwise in compliance with Rules 501 and 502 promulgated under the Securities
Act. On May 19, 1999, Cameron Woodbridge, a founding shareholder of Eriko
Internet, Inc., contributed 1,000,000 pre-consolidation shares to the
corporation for $250. The shares were initially issued as founder's shares for
nominal consideration by Eriko Internet, Inc., subject to Mr. Woodbridge serving
as a director and officer of Eriko. Mr. Woodbridge contributed the shares
because he was no longer actively involved in Eriko at the time of our share
exchange with Eriko.
Effective on June 14, 1999, we acquired all of the issued and outstanding shares
of Pawnbroker (Nevada) by issuing 6,240,000 post-split shares of common stock to
Joseph Schlader, Cheryl Schlader and William Galine. The shares we issued were
issued pursuant to an exemption from registration pursuant to Rule 506 of
Regulation D promulgated under the Securities Act. The offering was otherwise in
compliance with Rules 501 and 502 promulgated under the Securities Act.
Pursuant to a Subscription Agreement dated June 14, 1999, we issued 1,300,000
units consisting of one common share and one-half of one Common Share Purchase
Warrant for $2.31 per unit to raise $3,003,000. Each whole Share Purchase
Warrant is exercisable to acquire one additional common share at $2.31 per share
until June 23, 2000 and at $2.90 per share until June 23, 2001. This offering
was made to Packard Financial Group Inc., a non-U.S. Person, outside the United
States. The offering was not underwritten. The shares were issued on an
exemption from registration pursuant to Regulation S promulgated under the
Securities Act. No placement agent was retained in connection with the offering
and no fees or commissions were paid in connection with the transaction.
Item 11. Descriptions of Registrant's Securities to be Registered.
Our authorized capital consists of 70,000,000 shares consisting of 20,000,000
Preferred shares of a par value of $0.00001 each and 50,000,000 common shares of
a par value of $0.0001 each. At August 15, 1999, there were 16,914,750 shares of
common stock issued and outstanding and an additional 650,000 shares of common
stock have been allotted and reserved for issuance pursuant to outstanding
private placement options to purchase shares and warrants. We also agreed to
grant options to acquire up to 400,000 shares of our common stock to IRG. We
have reserved 2,000,000 shares of our common stock for issuance under an
incentive stock option plan, which we intend to adopt. We intend to submit this
plan to our shareholders for approval and ratification at our next annual
shareholder meeting scheduled in September 2000 or at such earlier time as may
be determined by our Board of Directors.
All shares of common stock are of the same class and have the same rights,
preferences and limitations. Holders of shares of common stock are entitled to
receive dividends in cash, property or shares when and if dividends are declared
by our Board of Directors out of funds legally available therefor. There are no
limitations on the payment of dividends. A quorum for a general meeting of
shareholders is one shareholder entitled to attend and vote at the meeting who
may be represented by proxy and other proper authority, holding at least a
majority of the outstanding shares of common stock. Holders of shares of common
stock are entitled to one vote per share of common stock. Upon any liquidation,
dissolution or winding up of our business, if any, after payment or provision
for payment of all of our debts, obligations or liabilities shall be distributed
to the holders of shares of common stock. There are no pre-emptive rights,
subscription rights, conversion rights and redemption provisions relating to the
shares of common stock and none of the shares of common stock carry any
liability for further calls.
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<PAGE>
The rights of holders of shares of common stock may not be modified other than
by vote of majority of the shares of common stock voting on such modification.
Because a quorum for a general meeting of shareholders can exist with one
shareholder (proxy-holder) personally present, the rights of holders of shares
of common stock may be modified by less than a majority of the issued shares of
common stock.
Item 12. Indemnification of Directors and Officers
Our Articles of Incorporation and Bylaws require us to indemnify to the fullest
extent permitted by Delaware law, each person that we have the power to
indemnify.
Delaware law permits a corporation, under specified circumstances, to indemnify
its directors, officers, employees or agents against expenses, including
attorney's fees, judgments, fines and amounts paid in settlements actually and
reasonably incurred by them in connection with any action, suit or proceeding
brought by third parties by reason of the fact that they were or are directors,
officers, employees or agents of the corporation, if such directors, officers,
employees or agents acted in good faith and in a manner they reasonably believed
to be in or not opposed to the best interests of the corporation and, with
respect to any criminal action or proceeding, had no reason to believe their
conduct was unlawful. In a derivative action, that is, one by or in the right of
the corporation, indemnification may be made only for expenses actually and
reasonably incurred by directors, officers, employees or agents in connection
with the defense or settlement of an action or suit, and only with respect to a
matter as to which they shall have acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made if such person shall
have been adjudged liable to the corporation, unless and only to the extent that
the court in which the action or suit was brought shall determine upon
application that the defendant directors, officers, employees or agents are
fairly and reasonably entitled to indemnity for such expenses despite such
adjudication of liability.
Our Articles of Incorporation and Bylaws also contain provisions stating that no
director shall be liable to us or any of our stockholders for monetary damages
for breach of fiduciary duty as a director, except with respect to (1) a breach
of the director's duty of loyalty to the corporation or its stockholders, (2)
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (3) liability under Delaware law for unlawful payment
of dividends, or unlawful stock purchases or redemptions or (4) a transaction
from which the director derived an improper personal benefit. The intention of
the foregoing provisions is to eliminate the liability of our directors or our
stockholders to the fullest extent permitted by Delaware law.
54
<PAGE>
Item 13. Financial Statements and Supplementary Data.
Not Applicable.
Item 14. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
On March 1, 1999, the Company appointed Davidson and Company, Chartered
Accountants, as its independent auditors. Harlan & Boettger, LLP was dismissed
and has not been associated with any of our financial statements subsequent to
March 31, 1998. The change in independent chartered accountants was effective
for the fiscal year ended March 31, 1999, was approved by our board of directors
and was not due to any disagreement between us and Harlan & Boettger, LLP. Our
financial statements for the fiscal year ended March 31, 1998 contain no adverse
opinion or disclaimer of opinion and have not been qualified or modified as to
uncertainty, audit scope, or accounting opinion. Harlan & Boettger, LLP has not
been associated with any of our financial statements subsequent to the date of
the audit report by Harlan & Boettger, LLP, April 13, 1998. The change in
independent chartered accountants was effective for fiscal year ended March 31,
1999, was approved by our board of directors and was not due to any disagreement
between us and Harlan & Boettger, LLP.
During the period prior to and preceding the change in independent auditors,
there were no disagreements with Harlan & Boettger, LLP on any matter of
accounting principles or practices, financial statement disclosures or auditing
scope or procedure, which disagreements if not resolved to the satisfaction of
Harlan & Boettger, LLP would have caused them to make reference thereto in their
report on our financial statements for the period. We have authorized Harlan &
Boettger, LLP to respond fully to any subject matter of any potential
disagreement with respect to our financial statements.
We have not been advised by Harlan & Boettger, LLP or our current auditors,
Davidson and Company, Chartered Accountants, of any of the following: (A) lack
of internal controls necessary to for us to develop reliable financial
statements; (B) any information that has come to the attention of our auditors
that has led them to no longer be able to rely on management's representations
or that has made them unwilling to be associated with the financial statements
prepared by management; (C) any need to expand significantly the scope of our
auditors' audit or information that has come to our auditors' attention during
the period two financial years prior to and preceding the change in our
independent auditors that if further investigated, would (i) materially impact
the fairness or reliability of the previously issued audit report or the
financial statements issued or covering such period or (ii) cause our auditors
to become unwilling to rely on management's representations or that has made
them unwilling to be associated with our financial statements, or due to the
replacement of Harlan & Boettger, LLP or any other reason, our auditor did not
so expand the scope of the audit or conduct such further investigation; and (D)
any information that has come to the attention of our auditors that has led them
to conclude that such information materially impacts the fairness or reliability
of the audit reports or the
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<PAGE>
financial statements issued covering the period two financial years prior to and
preceding the change in our independent auditors (including information that,
unless resolved, to the satisfaction of such auditor, would prevent it from
rendering an unqualified audit report on those financial statements) and due to
the replacement of Harlan & Boettger, LLP or any other reason, any issue has not
been resolved to such auditor's satisfaction prior to Harlan & Boettger, LLP's
replacement.
We engaged Davidson and Company, Chartered Accountants, as our independent
auditors on March 1, 1999. We engaged Davidson and Company to audit our
financial statement for the fiscal year ended March 31, 1999. There were no
disagreements with Harlan & Boettger, LLP on any matter of accounting principles
or practices, financial statement disclosures or auditing scope or procedure,
which disagreements if not resolved to the satisfaction of Harlan & Boettger,
LLP would have caused them to make reference thereto in their report on our
financial statements for the period
Item 15. Financial Statements and Exhibits.
The following financial statements and related schedules are included in this
Item:
(a) Financial Statements
Unaudited Financial Statements for the Period Ended June 30, 1999
Unaudited Consolidated Balance Sheets as at June 30, 1999 and March 31,
1999.
Unaudited Consolidated Statements of Operations for the three month periods
ended June 30, 1999 and 1998.
Unaudited Consolidated Statements of Cash Flows for the three month periods
ended June 30, 1999 and 1998.
Notes to Unaudited Consolidated Financial Statements.
Audited Financial Statements for the Fiscal Years Ended March 31, 1999 and 1998
Auditors' Reports
Consolidated Balance Sheets as at March 31, 1999 and 1998.
Consolidated Statements of Operations for the fiscal periods beginning from
inception (February 13, 1998) to March 31, 1998 and fiscal year ended March
31, 1999.
Consolidated Statements of Cash Flows for the fiscal periods beginning from
inception (February 13, 1998) to March 31, 1998 and fiscal year ended March
31, 1999.
Notes to Consolidated Financial Statements.
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<PAGE>
(b) Exhibits
Exhibit
Number Description
- ------ -----------
2.1(1) Agreement of Reorganization by and between Digital Sign
Corporation, Edward F. Meyers III and Digital Signs, Inc. dated
February 14, 1998.
2.2(1) Agreement and Plan of Share Exchange by and between Digital Sign
Corporation and Eriko Internet, Inc. dated April 4, 1999.
2.3(1) Agreement and Plan of Reorganization by and among Pawnbroker.com,
Inc. and Joseph Schlader, Cheryl Schlader and William Galine
dated May 14, 1999.
2.4(1) Addendum to Agreement and Plan of Reorganization by and among
Pawnbroker.com, Inc. and Joseph Schlader, Cheryl Schlader and
William Galine dated June 11, 1999.
3.1(1) Certificate of Incorporation of Digital Sign Corporation filed
February 13, 1998.
3.2(1) Certificate of Amendment of Digital Sign Corporation filed June
10, 1999.
3.3(1) Bylaws of Digital Sign Corporation.
10.1(1) Form of Private Placement Subscription Agreement dated February
1998.
10.2(1) Contribution Agreement by and between Digital Sign Corporation
and Cameron Woodbridge dated May 19, 1999.
10.3(1) Subscription Agreement by and between Pawnbroker.com, Inc. and
Packard Financial Group Inc. dated June 14, 1999.
10.4(1) Form of Share Purchase Warrant issued to Packard Financial Group
Inc. on June 14, 1999
10.5(1) 85 Keystone Lease Agreement by and between Pawnbroker.com, Inc.
and The Kowalski Family Trust dated April 1, 1999.
10.6(1) Design and Development Agreement by and between Pawnbroker.com,
Inc. and Banshee, Inc. dated April 26, 1999
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Exhibit
Number Description
- ------ -----------
10.7(1) Consulting Agreement by and between Pawnbroker.com, Inc. and IRG
Investor Relations dated June 25, 1999
16.1 Consent and Acknowledgement of Harlan & Boettger, LLP.
21.1(1) Subsidiaries of the Registrant
27.1 Financial Data Schedule
- --------------------
(1) Previously filed on September 1, 1999.
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<PAGE>
PAWNBROKER.COM INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Prepared by Management)
THREE MONTH PERIOD ENDED JUNE 30, 1999
<PAGE>
PAWNBROKER.COM INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
(Unaudited - Prepared by Management)
================================================================================
<TABLE>
June 30, March 31,
1999 1999
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current
Cash $ 2,862,751 $ 80,500
Employee advances 500 -
Prepaid expenses 1,313 -
-------------- -------------
2,864,564 80,500
Capital assets (Note 4) 222,949 -
Domain name (Note 5) 124,405 -
-------------- -------------
$ 3,211,918 $ 80,500
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 35,745 $ -
Advances - Pacific Pawn Broker (Note 7) 15,326 -
Advances - A Canadian corporation (Note 7) 275,000 -
-------------- -------------
326,071 -
-------------- -------------
Stockholders' equity
Capital stock (Note 8)
Authorized
20,000,000 preferred stock with a par value of $0.00001
50,000,000 common stock with a par value of $0.00001
Issued and outstanding
June 30, 1999 - 16,914,750 common shares (March 31, 1999 - 8,500,000) 170 85
Additional paid-in capital 3,086,149 80,415
Deficit accumulated during the development stage (200,472) -
-------------- -------------
2,885,847 80,500
-------------- -------------
$ 3,211,918 $ 80,500
============================================================================================================================
</TABLE>
On behalf of the Board:
Director
----------------------------------------------
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
PAWNBROKER.COM INC.
(formerly Digital Sign Corporation)
(A Development Stage Company) CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited -
Prepared by Management)
================================================================================
<TABLE>
Cumulative
Amount
From
Incorporation
on
February 13, Three Month Three Month
1998 to Period Ended Period Ended
June 30, June 30, June 30,
1999 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING EXPENSES
Contract services $ 8,719 $ 8,719 $ -
Consulting 6,000 6,000 -
Depreciation 17,000 17,000 -
General and administrative 10,764 10,764 -
Management fees 21,000 21,000 -
Marketing and related expenses 9,009 9,009 -
Professional fees 18,996 18,996 -
Promotion 24,508 24,508 -
Rent 21,865 21,865 -
Salary and wages 36,089 36,089 -
Shareholder information and transfer agent fees 735 735 -
Taxes 2,156 2,156 -
Travel and related 23,631 23,631 -
--------------- -------------- -------------
Loss for the period $ (200,472) $ (200,472) $ -
=============================================================================================================================
Loss per common share (Note 3) $ - $ (0.02) $ 0.00
=============================================================================================================================
Weighted average shares outstanding - 11,873,212 -
=============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
PAWNBROKER.COM INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - Prepared by Management)
================================================================================
<TABLE>
Cumulative
Amount
From
Incorporation
on
February 13, Three Month Three Month
1998 to Period Ended Period Ended
June 30, June 30, June 30,
1999 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH PROVIDED BY (APPLIED TO):
CASH FLOWS FROM OPERATING ACTIVITIES
Loss for the period $ (200,472) $ (200,472) $ -
Item not affecting cash:
Depreciation 17,000 17,000 -
Net change in non-cash working capital items:
Increase in employee advances (500) (500) -
Increase in prepaid expenses (1,313) (1,313) -
Increase in accounts payable and accrued liabilities 30,557 30,557 -
--------------- --------------- ------------
Net cash provided by operating activities (154,728) (154,728) -
--------------- --------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of capital assets (239,354) (239,354) -
Purchase of domain name (125,000) (125,000) -
Acquisition of cash on purchase of subsidiary 8,007 8,007 -
--------------- --------------- ------------
Net cash applied to investing activities (356,347) (356,347) -
--------------- --------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 3,003,000 3,003,000 -
Advances from Pacific Pawn Broker and a Canadian corporation 290,326 290,326 -
--------------- --------------- ------------
Net cash provided by financing activities 3,293,326 3,293,326 -
--------------- --------------- ------------
Change in cash position for the period 2,782,251 2,782,251 -
Cash position, beginning of period 80,500 80,500 -
--------------- --------------- ------------
Cash position, end of period $ 2,862,751 $ 2,862,751 $ -
==============================================================================================================================
</TABLE>
Supplemental disclosure with respect to cash flows (Note 9)
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
PAWNBROKER.COM INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
(Unaudited - Prepared by Management)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
Deficit
Accumulated
Common Stock Additional During Total
---------------------------- Paid-in Development Stockholders'
Shares Amount Capital Stage Equity
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, February 5, 1999 - $ - $ - $ - $ -
Common stock issued for cash 8,500,000 85 80,415 - 80,500
------------- ------------ ------------ ------------ -------------
Balance, March 31, 1999 8,500,000 85 80,415 - 80,500
Capital stock of Eriko Internet Inc.
at April 1, 1999 (8,500,000) - - - -
Capital stock of the Company at April 1, 1999 1,124,750 12 26,256 - 26,268
Deficit of the Company at April 1, 1999 - - (23,261) - (23,261)
Common stock issued pursuant to the
acquisition of Eriko Internet Inc. (Note 6) 8,500,000 - - - -
Common stock issued pursuant to the
acquisition of Pawnbroker.com, Inc.
(Nevada) (Note 6) 6,240,000 62 - - 62
Common stock issued for cash 1,300,000 13 3,002,987 - 3,003,000
Share cancellation (250,000) (2) - - (250)
Loss for the period - - - (200,472) (200,472)
------------- ------------ ------------ ------------ -------------
Balance, June 30, 1999 16,914,750 $ 170 $ 3,086,149 $ (200,472) $ 2,885,847
==============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
PAWNBROKER.COM INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Prepared by Management)
JUNE 30, 1999
================================================================================
1. ORGANIZATION OF THE COMPANY
Digital Sign Corporation ("the Company), a Delaware corporation, was
incorporated on February 13, 1998. On February 14, 1998, the Company issued
100,000 (25,000 post-consolidation) common shares at par value for all of
the issued and outstanding shares of Digital Signs, Inc. On April 6, 1999,
the Company acquired all of the issued and outstanding shares of Eriko
Internet Inc. in exchange for 34,000,000 (8,500,000 post-consolidation)
common shares of the Company. On June 10, 1999, the Company consolidated
its issued and outstanding shares of common stock through a one for four
reverse stock split, from 38,499,000 issued and outstanding to 9,624,750
issued and outstanding. Effective June 14, 1999, the Company acquired all
of the issued and outstanding shares of Pawnbroker.com Inc. (a Nevada
corporation), in exchange for 6,240,000 common shares of the Company. On
June 10, 1999, the Company changed its name to Pawnbroker.com Inc.
The Company is in the development stage, and is currently developing an
internet based electronic-commerce web site to provide retail customers
with the ability to search for and acquire, via the internet, merchandise
in inventories of pawnshops throughout North America.
In the opinion of management, the accompanying consolidated financial
statements contain all adjustments necessary (consisting only of normal
recurring accruals) to present fairly the financial information contained
therein. These statements do not include all disclosures required by
generally accepted accounting principles and should be read in conjunction
with the audited financial statements of the Company for the year ended
March 31, 1999. The results of operations for the three month period ended
June 30, 1999 are not necessarily indicative of the results to be expected
for the year ending March 31, 2000.
2. GOING CONCERN
The Company's financial statements are prepared using the generally
accepted accounting principles applicable to a going concern, which
contemplates the realization of assets and liquidation of liabilities in
the normal course of business. However, the Company has no current source
of revenue. Without realization of additional capital, it would be unlikely
for the Company to continue as a going concern.
<TABLE>
----------------------------------------------------------------------------------------------------
June 30, March 31,
1999 1999
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Deficit accumulated during the development stage $ (200,410) $ -
Working capital 2,538,493 80,500
====================================================================================================
</TABLE>
<PAGE>
PAWNBROKER.COM INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Prepared by Management)
JUNE 30, 1999
================================================================================
3. SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include Pawnbroker.com Inc. (formerly
Digital Sign Corporation) and its wholly-owned subsidiaries, Digital Signs,
Inc., Eriko Internet Inc. and Pawnbroker.com Inc. (a Nevada corporation).
All significant inter-company balances and transactions have been
eliminated in consolidation.
Revenue recognition
The Company will recognize revenue from transaction fees charged to pawn
shops when completion of the sale of the related item has occurred and the
Company has received its portion of the sales proceeds released from
escrow.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amount of revenues and expenses
during the period. Actual results could differ from these estimates.
Cash and cash equivalents
The Company considers all investments with a maturity of three months or
less to be cash equivalents.
Loss per share
Earnings per share are provided in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share". Due to the Company's
simple capital structure, with only common stock outstanding, only basic
loss per share must be presented. Basic loss per share is computed by
dividing losses available to common stockholders by the weighted average
number of common shares outstanding during the period.
Income taxes
Income taxes are provided in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". A deferred tax
asset or liability is recorded for all temporary differences between
financial and tax reporting and net operating loss carryforwards. Deferred
tax expenses (benefit) results from the net change during the year of
deferred tax assets and liabilities.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment.
<PAGE>
PAWNBROKER.COM INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Prepared by Management)
JUNE 30, 1999
================================================================================
3. SIGNIFICANT ACCOUNTING POLICIES (cont'd.....)
Accounting for derivative instruments and hedging activities
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities" which establishes accounting
and reporting standards for derivative instruments and for hedging
activities. SFAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company does not anticipate that the
adoption of the statement will have a significant impact on its financial
statements.
Reporting on costs of start-up activities
In April 1998, the American Institute of Certified Public Accountant's
issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of
Start-Up Activities" which provides guidance on the financial reporting of
start-up costs and organization costs. It requires costs of start-up
activities and organization costs to be expensed as incurred. SOP 98-5 is
effective for fiscal years beginning after December 15, 1998 with initial
adoption reported as the cumulative effect of a change in accounting
principle. The Company has adopted this statement during the period.
Stock-based compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans at
fair value. The Company has chosen to account for stock-based compensation
using Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." Accordingly compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee is required to
pay for the stock.
Comprehensive income
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130 ("SFAS 130"), "Reporting Comprehensive Income". This statement
establishes rules for the reporting of comprehensive income and its
components. The adoption of SFAS 130 had no impact on total stockholders'
equity as of June 30, 1999 and March 31, 1999.
Software development
The Company has adopted Statement of Position 98-1 ("SOP 98-1"),
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use", as its accounting policy for internally developed computer
software costs. Under SOP 98-1, computer software costs incurred in the
preliminary development stage are expensed as incurred. Computer software
costs incurred during the application development stage are capitalized and
amortized over the software's estimated useful life.
<PAGE>
PAWNBROKER.COM INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Prepared by Management)
JUNE 30, 1999
================================================================================
3. SIGNIFICANT ACCOUNTING POLICIES (cont'd.....)
Capital assets
Capital assets will be recorded at cost less accumulated depreciation. The
cost of capital assets is depreciated over the estimated useful lives of
the related assets. Depreciation is computed on the Modified Accelerated
Cost Recovery System (MACRS) method for both financial reporting and income
tax purposes.
Domain names
The cost of domain name rights will be amortized over 15 years from the
date of commencement of operations.
Advertising costs
The Company recognizes advertising expenses in accordance with Statement of
Position 98-7, "Reporting on Advertising Costs". As such, the Company
expenses the cost of communicating advertising in the period in which the
advertising space or airtime is used.
4. CAPITAL ASSETS
<TABLE>
Net Book Value
--------------- --------------
Accumulated June 30, March 31,
Cost Depreciation 1999 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Furniture and fixtures $ 28,835 $ 938 $ 27,897 $ -
Equipment and software 210,518 15,466 195,052 -
-------- ------- -------- -----------
$ 239,353 $ 16,404 $ 222,949 $ -
====================================================================================================================
</TABLE>
5. DOMAIN NAME
<TABLE>
June 30, March 31,
1999 1999
--------------------------------------------------------------------------------------- ---------------
<S> <C> <C>
Domain name $ 125,000 $ -
Accumulated amortization (595) -
------------ -------------
$ 124,405 $ -
======================================================================================= ===============
</TABLE>
The cost of domain name rights will be amortized over 15 years on a
straight-line basis from the date of commencement of operations.
<PAGE>
PAWNBROKER.COM INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Prepared by Management)
JUNE 30, 1999
================================================================================
6. BUSINESS COMBINATIONS
Eriko Internet Inc.
On April 6, 1999, the Company acquired all of the issued and outstanding
share capital of Eriko Internet Inc. ("Eriko"). As consideration, the
Company issued 8,500,000 shares of the Company. Legally, the Company is the
parent of Eriko. However, as a result of the share exchange described
above, control of the combined companies passed to the former shareholders
of Eriko. This type of share exchange has been accounted for as a capital
transaction accompanied by a recapitalization of Eriko rather than a
business combination. Accordingly, the net assets of Eriko will be included
in the balance sheet at book values, with the net assets of the Company
recorded at fair market value at the date of acquisition. The revenues and
expenses and assets and liabilities reflected in the financial statements
prior to the date of acquisition are those of Eriko. Revenue and expenses
and assets and liabilities subsequent to the date of acquisition include
the accounts of the Company.
The cost of an acquisition should be based on the fair value of the
consideration given, except where the fair value of the consideration given
is not clearly evident. In such a case, the fair value of the net assets
acquired is used.
At April 6, 1999, the Company was inactive with a thin market for its
shares, making it impossible to estimate the actual market value of the
8,500,000 common shares. Therefore, the cost of the acquisition, $3,007,
has been determined by the fair value of the Company's net assets.
The total purchase price of $3,007 was allocated as follows:
Current assets $ 8,007
Accounts payable and accrued liabilities (5,000)
-------------
$ 3,007
Pawnbroker.com Inc.
On June 14, 1999, the Company acquired all of the issued and outstanding
share capital of Pawnbroker.com Inc., a Nevada corporation ("Pawnbroker
-Nevada"). As consideration, the Company issued 6,240,000 common shares of
the Company at a deemed value of $62, equal to the par value of the shares
issued.
7. ADVANCES
The advances are non-interest bearing and contain no terms of repayment.
<PAGE>
PAWNBROKER.COM INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Prepared by Management)
JUNE 30, 1999
================================================================================
8. CAPITAL STOCK
On May 19, 1999, a shareholder of the Company surrendered 250,000 shares of
common stock which were initially issued as a part of the total shares
issued for the acquisition of Eriko Internet Inc. Capital stock and
contributed surplus have been reduced by $2 and $248 respectively to
eliminate the values initially recorded on issuance.
9. SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS
June 30, June 30,
1999 1998
----------------------------------------------------------- ---------------
Cash paid for income taxes $ - $ -
Cash paid for interest - -
===========================================================================
Non-cash investing and financing transactions during the three month period
ended June 30, 1999 were as follows:
a) The Company issued 8,500,000 shares of common stock at a deemed value
of $3,007 to acquire 100% of the outstanding of shares of Eriko
Internet Inc.
b) The Company issued 6,240,000 shares of common stock at a deemed value
of $62 to acquire 100% of the outstanding shares of
Pawnbroker.com-Nevada.
c) The Company received 250,000 shares of common stock for cancellation
at a deemed value of $Nil.
There were no non-cash investing and financing transactions during the
three month period ended June 30, 1998.
10. COMMITMENT
On June 25, 1999, the Company entered into a one-year consulting agreement
commencing on July 1, 1999, whereby the Company is obligated to pay $20,000
per month. The first month's fee was due and payable upon execution of the
agreement. The Company further agreed to pay the consultant $100,000 upon
execution of the agreement. Both payments were paid subsequent to June 30,
1999. In addition, the consultant will be granted 400,000 options to
purchase common shares of the Company, exercisable at the market price,
post reverse stock split on the first day of trading on the newly
consolidated shares, for a period of one year from the date of execution of
the agreement. Of these options, 250,000 will vest immediately upon board
approval, the remaining 150,000 options will vest in equal amounts of
50,000 for each successful financing of $5,000,000.
<PAGE>
PAWNBROKER.COM INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Prepared by Management)
JUNE 30, 1999
================================================================================
11. SHARE PURCHASE WARRANTS
During the three month period ended June 30, 1999, the Company issued
1,300,000 units of a private placement consisting of one common share and
one-half of a share purchase warrant for $2.31 per unit for total proceeds
of $3,003,000. One full share purchase warrant entitles the holder to
acquire one additional common share at a price of $2.31 per share until
June 23, 2000 and at a price of $2.90 per share until June 23, 2001. As of
June 30, 1999, there were 650,000 share purchase warrants outstanding.
12. RELATED PARTY TRANSACTIONS
During the three month period ended June 30, 1999, the Company paid the
following:
a) Advanced $15,326 (1998 - $Nil) to a company with directors in common.
b) Management fees of $21,000 (1998 - $Nil) to directors of the Company.
c) Salaries of $14,052 (1998 - $Nil) to officers of the Company.
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
<PAGE>
A Partnership of
Incorporated Professionals
DAVIDSON & COMPANY=========Chartered Accountants================================
INDEPENDENT AUDITORS' REPORT
To the Directors and Stockholders of
Pawnbroker.com, Inc.
(formerly Digital Sign Corporation)
(A Development Stage Company)
We have audited the accompanying consolidated balance sheet of Pawnbroker.com,
Inc. (formerly Digital Sign Corporation) (A Development Stage Company) as at
March 31, 1999 and the related consolidated statement of operations, changes in
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform an audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of Pawnbroker.com, Inc. (formerly
Digital Sign Corporation) (A Development Stage Company) as at March 31, 1999 and
the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles in the United States of
America.
The accompanying financial statements have been prepared assuming that
Pawnbroker.com, Inc. (formerly Digital Sign Corporation) will continue as a
going concern. The Company is in the development stage and does not have the
necessary working capital for its planned activity which raises substantial
doubt about its ability to continue as a going concern. Management's plans in
regards to these matters are discussed in Note 2. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
The financial statements as at March 31, 1998 and for the period from
incorporation on February 13, 1998 to March 31, 1998 were audited by other
auditors who expressed an opinion without reservation on those statements in
their audit report dated April 23, 1998.
/s/ Davidson & Company
Vancouver, Canada Chartered Accountants
June 21, 1999
(except as to Note 1 which is
as of October 5, 1999)
A Member of Accounting Group International
==========================================
Suite 1270, Stock Exchange Tower, 609 Granville Street, P.O. Box 10372,
Pacific Centre, Vancouver, B.C., Canada V7Y 1G6
Telephone (604) 687-0947 Fax (604) 687-6172
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
AS AT MARCH 31
================================================================================
<TABLE>
1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current
Cash $ 8,007 $ 19,513
==============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued liabilities $ 5,000 $ -
------------- ------------
STOCKHOLDERS' EQUITY
Capital stock (Note 7)
Authorized
20,000,000 preferred stock with a par value of $0.00001
50,000,000 common stock with a par value of $0.00001
Issued and outstanding
March 31, 1999 - 1,124,750 common shares (March 31, 1998 - 1,099,875) 11 $ 11
Additional paid-in capital 26,257 21,282
Stock subscriptions receivable - (388)
Deficit accumulated during the development stage (23,261) (1,392)
------------- ------------
3,007 19,513
$ 8,007 $ 19,513
==============================================================================================================
</TABLE>
Subsequent events (Note 8)
On behalf of the Board:
Director
----------------------------------------------
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
Cumulative
Amounts
from Period from
Incorporation Incorporation
on on
February 13, February 13,
1998 to Year ended 1998 to
March 31, March 31, March 31,
1999 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING EXPENSES
Computer and related expenses $ 2,339 $ 2,339 $ -
Contract services 800 800 -
General and administrative 3,740 2,348 1,392
Marketing and related expenses 3,974 3,974 -
Professional fees 10,669 10,669 -
Shareholder costs 477 477 -
Transfer agent 1,262 1,262 -
------------- ------------- ------------
Loss for the period $ (23,261) $ (21,869) $ (1,392)
============================================================================================================================
Loss per common share (Note 3) $ (0.02) $ (0.00)
============================================================================================================================
Weighted average shares outstanding 1,122,297 994,013
============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
Cumulative
Amounts
from Period from
Incorporation Incorporation
on on
February 13, February 13,
1998 to Year ended 1998 to
March 31, March 31, March 31,
1999 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH PROVIDED BY (APPLIED TO):
CASH FLOWS FROM OPERATING ACTIVITIES
Loss for the period $ (23,261) $ (21,869) $ (1,392)
Change in non-cash working capital item:
Increase in accrued liabilities 5,000 5,000 -
Adjustments to reconcile loss to cash used in operating activities:
Stock issued for services 10 - 10
------------- ------------- ------------
Net cash provided by operating activities (18,251) (16,869) (1,382)
------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 25,870 4,975 20,895
Proceeds from stock subscription receivable 388 388 -
------------- ------------- ------------
Net cash provided by financing activities 26,258 5,363 20,895
------------- ------------- ------------
Change in cash position for the period 8,007 (11,506) 19,513
Cash position, beginning of period - 19,513 -
------------- ------------- ------------
Cash position, end of period $ 8,007 $ 8,007 $ 19,513
============================================================================================================================
</TABLE>
Supplemental disclosure with respect to cash flows (Note 5)
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
================================================================================
<TABLE>
Deficit
Accumulated
Common Stock Additional Stock During Total
---------------------------- Paid-in Subscriptions Development Stockholders'
Shares Amount Capital Receivable Stage Equity
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, February 13, 1998 - $ - $ - $ - $ - $ -
Common stock issued for
purchase of subsidiary 25,000 - 10 - - 10
Common stock issued for cash 106,125 1 20,894 - - 20,895
Common stock issued for
subscription receivable 968,750 10 378 (388) - -
Loss for the period - - - - (1,392) (1,392)
------------- ------------ ------------ ------------ ------------ -----------
Balance, March 31, 1998 1,099,875 11 21,282 (388) (1,392) 19,513
Common stock issued for cash 24,875 1 4,974 - - 4,975
Cash received for
subscription receivable - - - 388 - 388
Loss for the period - - - - (21,869) (21,869)
------------- ------------ ------------ ------------ ------------ -----------
Balance, March 31, 1999 1,124,750 $ 12 $ 26,256 $ - $ (23,261) $ 3,007
=============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
================================================================================
1. ORGANIZATION OF THE COMPANY
Pawnbroker.com, Inc. (formerly Digital Sign Corporation) ("the Company), a
Delaware corporation, was incorporated on February 13, 1998.
The Company is in the development stage, and is currently developing an
internet based electronic-commerce web site to provide retail customers
with the ability to search for and acquire, via the internet, merchandise
in inventories of pawnshops throughout North America.
2. GOING CONCERN
The Company's financial statements are prepared using the generally
accepted accounting principles applicable to a going concern, which
contemplates the realization of assets and liquidation of liabilities in
the normal course of business. However, the company has no current source
of revenue. Without realization of additional capital, it would be unlikely
for the Company to continue as a going concern. It is management's plan to
seek additional capital through a merger with an existing operating
company.
<TABLE>
------------------------------------------------------------------------------------------------------
March 31, March 31,
1999 1998
-------------------------------------------------------------------------------------- ---------------
<S> <C> <C>
Deficit accumulated during the development stage $ (23,261) $ (1,392)
Working capital 3,007 19,513
======================================================================================================
</TABLE>
3. SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include Digital Sign Corporation and
its wholly-owned subsidiary, Digital Signs, Inc., which was incorporated in
California on January 28, 1998. All significant inter-company balances and
transactions have been eliminated during consolidation.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amount of revenues and expenses
during the period. Actual results could differ from these estimates.
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
================================================================================
3. SIGNIFICANT ACCOUNTING POLICIES (cont'd.....)
Cash and cash equivalents
The Company considers all investments with a maturity of three months or
less to be cash equivalents.
Loss per share
Earnings per share are provided in accordance with Statement of Financial
Accounting Standards No. 128 "Earnings Per Share". Due to the Company's
simple capital structure, with only common stock outstanding, only basic
loss per share must be presented. Basic loss per share is computed by
dividing losses available to common stockholders by the weighted average
number of common shares outstanding during the period.
Income taxes
Income taxes are provided in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". A deferred tax
asset or liability is recorded for all temporary differences between
financial and tax reporting and net operating loss carryforwards. Deferred
tax expenses (benefit) results from the net change during the year of
deferred tax assets and liabilities.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment.
Accounting for derivative instruments and hedging activities
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities" which establishes accounting
and reporting standards for derivative instruments and for hedging
activities. SFAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company does not anticipate that the
adoption of the statement will have a significant impact on its financial
statements.
Reporting on costs of start-up activities
In April 1998, the American Institute of Certified Public Accountant's
issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of
Start-Up Activities" which provides guidance on the financial reporting of
start-up costs and organization costs. It requires costs of start-up
activities and organization costs to be expensed as incurred. SOP 98-5 is
effective for fiscal years beginning after December 15, 1998 with initial
adoption reported as the cumulative effect of a change in accounting
principle. The Company has not yet determined the effect that the adoption
of this statement will have on its financial statements.
Stock-based compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans at
fair value. The Company has chosen to account for stock-based compensation
using Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." Accordingly compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee is required to
pay for the stock.
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
================================================================================
3. SIGNIFICANT ACCOUNTING POLICIES (cont'd.....)
Comprehensive income
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130 ("SFAS 130"), "Reporting Comprehensive Income". This statement
establishes rules for the reporting of comprehensive income and its
components. The adoption of SFAS 130 had no impact on total stockholders'
equity as of March 31, 1999.
4. ACQUISITION
On February 14, 1998, the Company issued 100,000 shares of its common stock
at par value of $0.00001 for $10 to acquire 100% of the outstanding shares
of Digital Signs, Inc. The transaction was recorded using the purchase
method of accounting. At the date of the transaction, Digital Signs, Inc.
had no assets or liabilities. At the date of acquisition, the president of
Digital Signs, Inc. was also the president of the Company.
5. SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS
---------------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------------
Cash paid for income taxes $ - $ -
Cash paid for interest - -
===========================================================================
There were no non-cash transactions during the year ended March 31, 1999.
Non-cash investing and financing transactions during the period ended March
31, 1998 were as follows:
i) 3,875,000 shares of common stock was sold at $0.00001 in exchange for
subscriptions receivable, totalling $388.
ii) The Company issued 100,000 shares of its common stock at a deemed
value of $10 to acquire 100% of the outstanding shares of Digital
Signs, Inc.
6. INCOME TAXES
The Company's total deferred tax asset at March 31 is as follows:
-----------------------------------------------------------------------
1999 1998
-----------------------------------------------------------------------
Net operating loss carryforward $ 3,489 $ 209
Valuation allowance (3,489) (209)
------------ ------------
$ - $ -
=======================================================================
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
================================================================================
6. INCOME TAXES (cont'd.....)
The Company has a net operating loss carryforward of approximately $23,261
(1998 - $1,392). The valuation allowance increased to $3,489 from $209
during the period ended March 31, 1999. The Company provided a full
valuation allowance on the deferred tax asset because of the uncertainty
regarding realizability.
7. CAPITAL STOCK
Reverse stock split
Subsequent to March 31, 1999, the Company implemented a one for four
reverse stock split (Note 8). The consolidated statements of changes in
stockholders' equity has been restated to give retroactive recognition of
the reverse stock split for all periods presented by reclassifying from
common stock to additional paid-in capital the par value of consolidated
shares arising from the split. In addition, all references to number of
shares and per share amounts of common stock have been restated to reflect
the stock split.
8. SUBSEQUENT EVENTS
The following transactions occurred subsequent to March 31, 1999:
a) On April 6, 1999, the Company issued 34,000,000 (8,500,000
post-consolidated) common shares of the Company in exchange for
8,500,000 common shares of Eriko Internet, Inc. ("Eriko"). Legally,
the Company is the parent of Eriko. However, as a result of the share
exchange described above, control of the combined companies passes to
the former shareholders of Eriko. This type of share exchange has been
accounted for as a capital transaction accompanied by a
recapitalization of Eriko, rather than as a business combination.
Accordingly, the net assets of Eriko will be included in the balance
sheet at book values, with the net assets of the Company recorded at
fair market value at the date of acquisition. The revenues and
expenses and assets and liabilities reflected in the financial
statements prior to the date of acquisition are those of Eriko.
Revenue and expenses and assets and liabilities subsequent to the date
of acquisition include the accounts of the Company. Eriko is in the
business of acquiring and developing e-commerce related intellectual
property.
b) The Company consolidated its issued and outstanding shares of common
stock on a four to one basis from 38,499,000 issued and outstanding to
9,624,750 issued and outstanding effective on June 10, 1999. Loss per
common share amounts in the accompanying financial statements have
been adjusted for the reverse stock split (Note 7).
c) On May 18, 1999, the Company entered into a share purchase agreement
with the stockholders of Pawnbroker.com Inc. (Nevada) ("Nevada").
Under the terms of the agreement, the Company will acquire all of the
shares of Nevada in exchange for 6,240,000 post-consolidation common
shares (24,960,000 pre-consolidation common shares) of the Company at
a deemed value of $62. As the acquisition of Nevada was deemed to be
from a promoter of the Company, the purchase has been recorded at the
historical cost of the net assets of Nevada, which approximated the
par value of the shares issued.
d) The Company changed its name to Pawnbroker.com Inc. effective June 10,
1999.
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
================================================================================
9. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may incorrectly
recognize the year 2000 as some other date, resulting in errors. The
effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000 and, if not addressed, the impact on operations and
financial reporting may range from minor errors to significant systems
failure which could affect an entity's ability to conduct normal business
operations. It is not possible to be certain that all aspects of the Year
2000 Issue affecting the Company, including those related to the efforts of
customers, suppliers, or other third parties, will be fully resolved.
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities and Exchange Act of 1934, the
registrant caused this Amendment No. 1 to Registration Statement to be signed on
our behalf by the undersigned, thereunto duly authorized.
Date: October 13, 1999
/s/ Joseph Schlader
-------------------------------------
Joseph Schlader, President
<PAGE>
Exhibit
Number Description
- ------ -----------
2.1(1) Agreement of Reorganization by and between Digital Sign
Corporation, Edward F. Meyers III and Digital Signs, Inc. dated
February 14, 1998.
2.2(1) Agreement and Plan of Share Exchange by and between Digital Sign
Corporation and Eriko Internet, Inc. dated April 4, 1999.
2.3(1) Agreement and Plan of Reorganization by and among Pawnbroker.com,
Inc. and Joseph Schlader, Cheryl Schlader and William Galine
dated May 14, 1999.
2.4(1) Addendum to Agreement and Plan of Reorganization by and among
Pawnbroker.com, Inc. and Joseph Schlader, Cheryl Schlader and
William Galine dated June 11, 1999.
3.1(1) Certificate of Incorporation of Digital Sign Corporation filed
February 13, 1998.
3.2(1) Certificate of Amendment of Digital Sign Corporation filed June
10, 1999.
3.3(1) Bylaws of Digital Sign Corporation.
10.1(1) Form of Private Placement Subscription Agreement dated February
1998.
10.2(1) Contribution Agreement by and between Digital Sign Corporation
and Cameron Woodbridge dated May 19, 1999.
10.3(1) Subscription Agreement by and between Pawnbroker.com, Inc. and
Packard Financial Group Inc. dated June 14, 1999.
10.4(1) Form of Share Purchase Warrant issued to Packard Financial Group
Inc. on June 14, 1999
10.5(1) 85 Keystone Lease Agreement by and between Pawnbroker.com, Inc.
and The Kowalski Family Trust dated April 1, 1999.
10.6(1) Design and Development Agreement by and between Pawnbroker.com,
Inc. and Banshee, Inc. dated April 26, 1999
<PAGE>
Exhibit
Number Description
- ------ -----------
10.7(1) Consulting Agreement by and between Pawnbroker.com, Inc. and IRG
Investor Relations dated June 25, 1999
16.1 Consent and Acknowledgement of Harlan & Boettger, LLP.
21.1(1) Subsidiaries of the Registrant
27.1 Financial Data Schedule
- --------------------
(1) Previously filed on September 1, 1999.
EXHIBIT 16.1
[H&B LOGO] Harlan & Boettger, LLP
Certified Public Accountants
James C. Harlan III
William C. Boettger
P. Robert Wilkinson
Marshall J. Varano
October 12, 1999
Securities and Exchange Commission
Office of Chief Accountant
SECPS Letter File
Mail Stop 9-5
450 Fifth Street, NW
Washington D.C. 20549
Ladies and Gentlemen:
We were the previous principal accountants of Pawnbroker.com, Inc. (formerly
Digital Sign Corporation) and Subsidiary. On April 23, 1998, we reported on the
financial statements of Pawnbroker.com, Inc. (formerly Digital Sign Corporation)
and Subsidiary as of March 31, 1998 and the period from February 13, 1998 to
March 31, 1998.
We have reviewed Amendment No. 1 to the Form 10 registration statement (the
"Form 10") filed by Pawnbroker.com, Inc. (formerly Digital Sign Corporation)
(the "Company"), and agree with the statements disclosed by the Company under
Item 14, Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure. There have been no disagreements concerning accounting
principals or disclosures.
We consent to the use of our report and to the reference to our firm in the
registration statement on Form 10.
/s/ Harlan & Boettger, LLP
Harlan & Boettger, LLP
San Diego, CA
cc: Pawnbroker.com
85 Keystone Suite F
Reno, Nevada 89503
5415 Oberlin Drive * San Diego, California 92121
Telephone (619) 535-2000 * Facsimile (619) 535-2015
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Mar-31-1999
<PERIOD-END> Jun-30-1999
<CASH> 2,862
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,864
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,212
<CURRENT-LIABILITIES> 326
<BONDS> 0
0
0
<COMMON> 170
<OTHER-SE> 3,086
<TOTAL-LIABILITY-AND-EQUITY> 3,212
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (200)
<EPS-BASIC> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
