As filed with the Securities and
Exchange Commission on August 9, 2000 Registration No. 333-42592
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1/A
AMENDMENT NO. 1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pawnbroker.com, Inc.
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(Exact name of registrant as specified in its charter)
DELAWARE 7389 33-0794473
------------------------------- ------------------------- --------------------
(State of other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification No.)
organization) Code Number)
85 Keystone, Suite A, Reno, Nevada, 89503
(775) 332-5048
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(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Corporation Service Company
1013 Centre Road
Wilmington, Delaware 19805
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(Name. address, including zip code, and telephone number,
including area code of agent for service)
With copies of all correspondence to:
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Randal R. Jones
Kenneth G. Sam
Dorsey & Whitney LLP
1420 Fifth Avenue, Suite 3400
Seattle, WA 98101
Telephone Number: (206) 903-8800
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
<TABLE>
CALCULATION OF REGISTRATION FEE
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Title of each class of securities Amount to be Proposed maximum Proposed maximum Amount of registration
to be registered registered offering price per aggregate offering price fee
share
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<S> <C> <C> <C> <C>
Common stock, $0.0001 par value(1) 8,727,273 (1) $2.30(1)(6) $24,000,000(5) $6,336
Common stock, $0.0001 par value(2) 376,470(2)(4) $2.30(6) $ 865,881(6) $229
Common stock, $0.0001 par value (3) 727,348 (3) $2.30(6) $1,672,900(6) $442
Total 9,831,091 $27,173,476 $7,007
</TABLE>
1) Represents 8,727,273 shares of common stock, which may be sold by Gestrow
Investments Limited upon issuance under the common stock purchase
agreement. The number of shares of common stock indicated to be issuable in
connection with such transaction and offered for resale hereby is an
estimate based on the terms of the common stock purchase agreement and the
current market price and trading volumes of Pawnbroker.com's shares on the
OTCBB. The price per common share will vary based on the volume-weighted
average daily price of Pawnbroker.com's common stock during the drawdown
periods provided for in the common stock purchase agreement described in
this registration statement. The purchase price will be equal to 88% of the
volume-weighted average daily price for each trading day within such
drawdown pricing periods. The agreement allows for up to 12 draws over a
period of 12 months for amounts up to $2,000,000 per draw. This
presentation was not intended to constitute a prediction as to the future
market price of the common stock.
2) Represents 376,470 shares of Pawnbroker.com's common stock, which may be
sold by Lamothe Investing Corp. upon the conversion of 9% convertible
debentures. The number of shares of common stock indicated to be issuable
in connection with such transaction and offered for resale hereby is an
estimate based on registration rights agreements among Pawnbroker.com Inc.
and Lamothe Investing Corp., equal to 200% of the number of shares that
would be issuable upon conversion of 9% convertible debentures at an
estimated price of $2.65 per share based on the current market price of
Pawnbroker.com's shares on the OTCBB. The 9% convertible debentures are
convertible based on the lower of $5.54 per share or 85% of the market
price of the common stock on the conversion date. This presentation was not
intended to constitute a prediction as to the future market price of the
common stock or as to the number of shares of common stock into which the
Convertible Debentures would be converted.
3) The remaining shares represents shares of common stock, which may be sold
by selling securityholders upon the exercise of warrants, including 58,824
shares issuable to Lamothe Investing Corp. at $4.89 per share exercisable
until June 7, 2003; 334,262 shares issuable to Gestrow Investments Limited
at $3.59 per share exercisable until July 6, 2003; and 334,262 shares
issuable to Ladenburg Thalmann & Co. Inc. at $3.59 per share exercisable
until July 6, 2003.
4) Pursuant to Rule 416 under the Securities Act, includes additional shares
of common stock that may be issued as a result of the anti-dilution
provisions of the Convertible Debentures.
5) This represents the maximum purchase price that Gestrow Investments Limited
is obligated to pay Pawnbroker.com under the common stock purchase
agreement. The maximum net proceeds Pawnbroker.com can receive is
$24,000,000 less a 5% cash placement fee payable to its placement agent,
Ladenburg Thalmann & Co. Inc. and $1,500 in escrow fees and expenses per
drawdown.
6) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of 1933,
as amended. The aggregate offering price of shares of common stock of the
registrant is estimated solely for purposes of calculating the registration
fees payable, as determined in accordance with Rule 457(c), using the
average of the high and low sales price reported by the National Securities
Dealers Association Over-The-Counter Bulletin Board for the common stock on
July 21, 2000, which was $2.30 per share.
The registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the registrant files a
further amendment that specifically states that this Registration Statement will
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until the Registration Statement will become effective on such
date as the SEC, acting pursuant to Section 8(a), may determine.
<PAGE>
PART I
INFORMATION REQUIRED TO BE DELIVERED TO OFFEREES OR PURCHASERS
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<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 9, 2000
PRELIMINARY PROSPECTUS
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission ("SEC") is effective. This prospectus is not
an offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Pawnbroker.com, Inc.
[PAWNBROKER.COM, INC. LOGO]
9,831,091 SHARES OF COMMON STOCK
Of the shares being offered, up to 1,103,818 shares are being offered by
selling stockholders listed on page 21 and are being registered for resale by
the selling stockholders. These shares would constitute 1% of our issued and
outstanding common stock as of July 24, 2000. We will not receive any proceeds
from the sale of the shares by the selling stockholders. However, we will
receive the proceeds upon the exercise for cash of the stock purchase warrants
held by the selling stockholders.
The remaining 8,727,273 shares may be issued through a common stock
purchase agreement with Gestrow Investments Limited, as further described in
this prospectus. The number of shares of common stock, which may be issued
through the common stock purchase agreement would constitute 33.08% of our
issued and outstanding common stock as of July 24, 2000. We will receive the
sale price of any common stock that we sell through the common stock purchase
agreement and Gestrow may resell those shares pursuant to this prospectus.
The selling securityholders may sell all or any portion of their shares of
common stock in one or more transactions on the OTC Bulletin Board or in
private, negotiated transactions. Brokers or dealers engaged by the selling
shareholders may arrange for other brokers or dealers to participate. These
brokers or dealers may receive commissions or discounts from the selling
shareholders in amounts to be negotiated. These brokers, dealers and any other
participating brokers or dealers may be deemed to be "underwriters" within the
meaning of the Securities Act of 1933, as amended, in connection with sales.
Gestrow Investments Limited is an "underwriter" within the meaning of the
Securities Act of 1933 in connection with its sales. We will pay the costs of
registering the shares under this prospectus, including legal fees, other than
fees of counsel for the selling securityholders and any discounts or commissions
payable with respect to sales of the shares.
Our common stock currently is quoted on the National Securities Dealers
Association Over-The-Counter Bulletin Board (OTCBB) under the symbol "PBRR". On
July 21, 2000 the last reported sale price of our common stock on the OTC
Bulletin Board was $2.1875 per share.
Investing in our common stock involves a high degree of risk. See "risk
factors" beginning on page 6.
Neither the securities and exchange commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is August 9, 2000.
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<PAGE>
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; and the other
risks and uncertainties described under "Risk Factors" in this prospectus.
Certain of the forward looking statements contained in this annual report are
identified with cross-references to this section and/or to specific risks
identified under "Risk Factors".
We have included projections and estimates in this registration statement,
which are based primarily on management's assessment of our results of
operations, discussions and negotiations with third parties, management's
experience, and a review of information filed by our competitors with the SEC.
Investors are cautioned against attributing undue certainty to management's
projections.
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 covering
the shares being sold in this offering. We have not included in this prospectus
some information contained in the registration statement, and you should refer
to the registration statement, including exhibits and schedules filed with the
registration statement, for further information. You may review without charge a
copy of the registration statement at the public reference section of the SEC in
Room 1024, Judiciary Plaza, 450 5th Street, N.W., Washington, D.C., 20549; and
at the SEC's Regional Offices located at 7 World Trade Center, Suite 1300, New
York, New York, 10048, and 1400 Citicorp Center, 500 West Madison Street,
Chicago, Illinois, 60661. You may also obtain copies of such materials at
prescribed rates from the public reference section of the SEC in Room 1024,
Judiciary Plaza, 450 5th Street, N.W., Washington, D.C., 20549. In addition, the
SEC maintains a web site on the Internet at www.sec.gov, which contains reports,
proxy and information statements, and other information regarding registrants
that file electronically with the SEC.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms and their copy charges.
We furnish our stockholders with annual reports containing financial
statements audited by our independent auditors. We also file annual, quarterly
and current reports, proxy statements and other information with the SEC. You
can also request copies of these documents, for a copying fee, by writing the
SEC.
You may request free copies of any filing by writing or telephoning us at
our principal offices, which are located at the following address:
Pawnbroker.com, Inc.
85 Keystone, Suite A
Reno, Nevada 89503
(775) 332-5048
Attention: William Galine, Corporate Secretary
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY................................................................................................1
CORPORATE INFORMATION.............................................................................................2
THE OFFERING......................................................................................................2
SUMMARY CONSOLIDATED FINANCIAL DATA...............................................................................3
RISK FACTORS......................................................................................................4
CAPITALIZATION...................................................................................................12
PRICE RANGE OF COMMON STOCK......................................................................................13
DIVIDEND POLICY..................................................................................................13
DILUTION.........................................................................................................13
SELLING SECURITIES HOLDERS.......................................................................................17
OUR BUSINESS.....................................................................................................22
OUR MANAGEMENT...................................................................................................35
DIRECTOR'S COMPENSATION..........................................................................................37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................................................................39
FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................................................39
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......................................................43
EXECUTIVE COMPENSATION...........................................................................................44
RELATED PARTY TRANSACTIONS.......................................................................................48
PRINCIPAL STOCKHOLDERS...........................................................................................48
DESCRIPTION OF SECURITIES........................................................................................50
ANTI-TAKEOVER CONSIDERATIONS.....................................................................................51
TRANSFER AGENT AND REGISTRAR.....................................................................................52
SHARES ELIGIBLE FOR FUTURE SALE..................................................................................52
LEGAL MATTERS....................................................................................................53
EXPERTS..........................................................................................................53
</TABLE>
Until August 22, 2000 (25 days after the commencement of this offering),
all dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the obligation of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
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<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained in this prospectus. You should
read the entire prospectus, including "Risk Factors" and our financial
statements and related notes, before making an investment decision. Unless the
context otherwise requires, the terms "Pawnbroker.com", "we", "us", and "our" as
used in this prospectus include Pawnbroker.com, Inc. and its subsidiaries.
Pawnbroker.com, Inc.
We, Pawnbroker.com, Inc., are a development stage company, which means we
are in the process of developing our business and have no revenues from our
operations. We have not generated any profits. We have developed and launched a
web site that provides 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 completed the initial development of the software and technology related
to our business and began the beta test our web site in December 1999 with
approximately 65 pawnshops. In March 2000, we launched a pilot version of our
web site featuring limited inventory from 245 pawnbrokers representing 387
participating pawnshops. In June 2000, we launched the commercial version of
Pawnbroker.com featuring 317 pawnbrokers representing 492 pawnshops.
Our web site allows participating "brick-and-mortar" pawnshops to list
merchandise for sale using one of three methods:
o Firm Price: Allowing customers to purchase merchandise at an
established price;
o Negotiation: Offering merchandise at a list price and allowing
customers to submit a counter offer and negotiate a lower price; or
o Free Fall: Offering merchandise at a "free fall" price, an initial
price set by the pawnbroker that declines in incremental amounts by
the week, day, or hour.
Pawnbroker.com features items of merchandise from the inventories of
pawnshops, including merchandise such as jewelry, consumer electronics, tools,
collectibles, coins, cameras and musical instruments. We do not post firearms,
adult materials or other potentially illegal merchandise for sale on our web
site.
We offer a 10-day money back Pawnbroker.com Satisfaction Program, which
allows purchasers to return merchandise within 10-days of receipt for a full
refund. Our Pawnbroker.com Satisfaction Program is designed to ensure customer
satisfaction with merchandise purchased on our web site. See "Our Pawnbroker.com
Satisfaction Program."
We intend to generate revenues from several sources, including:
o transaction fees, ranging between 5% to 10% of the purchase price, in
successfully completed transactions beginning in the Summer 2000;
o charging our participating pawnshops listing and membership fees;
o membership fees to suppliers of services and merchandise that desire
access to our participating pawnshops;
o transaction fees for transactions facilitated through our web site
between suppliers of services and merchandise and our participating
pawnshops;
o transaction fees for inventory consigned and sold on our web site;
o promotional and advertising fees for banner ads and promotions;
o licensing fees for point-of-sale and inventory management applications
that we intend to develop; and
o fees for marketing services.
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<PAGE>
We compete in the highly competitive Internet commerce industry. We compete
against companies that 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 only recently
launched our web site and have not yet begun the process of developing our brand
name or promoting our web site. During the first half of 2000, several Internet
related companies with retail concepts have failed or been acquired by larger
competitors. Competitive pressures, lack of adequate financing and failure to
gain market acceptance are some of the factors that have caused such companies
to fail. We face these same challenges, and 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.
CORPORATE INFORMATION
We were incorporated in Delaware in February 1998. On June 14, 1999, we
acquired all of the issued and outstanding shares of Pawnbroker.com, Inc., a
Nevada corporation, and began implementing our business strategy of developing a
web site to list and offer for sale the merchandise of independent pawnshops
throughout North America. Prior to our acquisition of the Nevada corporation we
had no assets, liabilities, revenues or expenses. Our headquarters are located
at 85 Keystone, Suite A, Reno, Nevada, 89503, and our telephone number is (775)
332-5048.
Our web site address is www.pawnbroker.com. The information on our web site
is not a part of this prospectus.
THE OFFERING
We entered into a common stock purchase agreement on July 7, 2000 with
Gestrow Investments Limited. Pursuant to the common stock purchase agreement:
- we have the right, subject to certain conditions, to sell up to
8,727,273 shares of common stock to Gestrow, which Gestrow may resell
to the public through this prospectus; and
- we issued warrants to Gestrow and Ladenburg Thalmann & Co. Inc., each
exercisable to purchase up to 334,262 shares of our common stock at
$3.59 per share. The shares issuable upon exercise of these warrants
may also be resold to the public through this prospectus.
We entered into a Loan Agreement on June 7, 2000 with Lamothe Investing
Corp. Pursuant to the Loan Agreement:
- we issued a 9% convertible debenture in the principal amount of
$500,000 to Lamothe, convertible into approximately 188,235 shares of
common stock, which Lamothe may resell to the public through this
prospectus; and
- we issued warrants to Lamothe exercisable to purchase up to 58,824
shares of our common stock at $4.89 per share. The shares issuable
upon exercise of this warrant may also be resold to the public through
this prospectus.
This prospectus covers up to 9,316,437 shares of Pawnbroker.com common
stock to be sold by selling stockholders identified in this prospectus, issuable
pursuant to the common stock purchase agreement, the conversion of the 9%
convertible debenture and the exercise of the warrants by Gestrow, Ladenburg and
Lamothe.
SHARES OFFERED BY THE SELLING 9,316,437 shares of common stock, $0.001
SECURITYHOLDERS par value per share
OFFERING PRICE Determined at the time of sale by the
selling securityholders
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COMMON STOCK OUTSTANDING AS OF 17,654,750 shares
JULY 24, 2000
COMMON STOCK OUTSTANDING 27,485,841 shares.
ASSUMING THE ISSUANCE OF THE
MAXIMUM NUMBER OF SHARES UNDER The number of shares subject to this
THE COMMON STOCK PURCHASE prospectus represents 35.77% of our
AGREEMENT, THE CONVERSION OF ALL issued and outstanding common stock as
CONVERTIBLE DEBENTURES, AND THE of July 24, 2000 after issuance of all
EXERCISE OF ALL WARRANTS BY currently unissued shares included in
SELLING SECURITYHOLDERS this prospectus.
USE OF PROCEEDS We will not receive any of the proceeds
of the shares offered by the selling
securityholders.
Any proceeds we receive from the sale of
our common stock pursuant to the common
stock purchase agreement or the exercise
of the warrants by the selling
securityholders will be used primarily
for general corporate purposes. See "Use
of Proceeds."
DIVIDEND POLICY We currently intend to retain any future
earnings to fund the development and
growth of our business. Therefore, we
do not currently anticipate paying cash
dividends. See "Dividend Policy."
OTC BULLETIN BOARD SYMBOL PBRR
SUMMARY CONSOLIDATED FINANCIAL DATA
The following data presents certain financial information for Pawnbroker.com for
the periods indicated. This data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and related notes included elsewhere in
this prospectus.
<TABLE>
Year Ended February 5,1999
March 31, 2000 to March 31, 1999
-------------- -----------------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
<S> <C> <C>
Revenue.............................................. -- --
Total costs and expenses............................. $4,756,574 --
Net Loss............................................. $4,706,109 --
Net loss per share................................... $0.31 --
Weighted average number of common shares outstanding. 15,220,285 1,124,750
</TABLE>
<TABLE>
As of As of
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 424,678 $ 80,500
Working capital (deficiency)......................... (691,463) 80,500
Total assets......................................... 1,097,486 80,500
Total liabilities.................................... 1,122,159 --
Shareholders' equity................................. (24,673) 80,500
</TABLE>
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<PAGE>
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider the
risks described below and the other information in this prospectus before
deciding to invest in shares of our common stock. Any of these risk factors
could materially and adversely affect our business, financial condition or
operating results. In that case, the trading price of our common stock could
decline, and you could lose all or part of your investment.
BUSINESS RELATED RISKS
Our ability to continue as a going concern will be dependent on securing
bridge financing in July 2000 to support our capital requirements until the
registration statement, in which this prospectus is a part, becomes
effective
In their independent auditor's report dated June 21, 2000, Davidson & Co.,
our auditors, expressed substantial doubt about our ability to continue as a
going concern due to our lack of working capital for our planned business
activities. As of March 31, 2000, we had a working capital deficit of $691,463.
Subsequent to March 31, 2000, we obtained the following financing:
- $1 million line of credit, which we have drawn down; and
- $500,000 by issuing the 9% convertible debenture to Lamothe.
We currently do not have sufficient working capital to meet our obligations
through August 2000. We are in the process of negotiating bridge financing that
is expected to provide working capital to support our capital requirements until
the registration statement in which this prospectus is a part becomes effective
and we are able to make our first draw under the equity line. We anticipate that
we will obtain such financing in August 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."
We intend to finance our plan of operation through December 31, 2000 with
the proceeds from the sale of common stock under a common stock purchase
agreement, which may not provide us with sufficient working capital
We entered into a common stock purchase agreement on July 7, 2000 with
Gestrow Investments Limited. Our ability to raise funds through the agreement is
also subject to the satisfaction of certain conditions, including the
effectiveness of the registration statement in which this prospectus is a part,
at the time of each drawdown or sale of common stock to Gestrow. We may not be
able to satisfy the conditions to the initial drawdown and subsequent drawdowns
to Gestrow under the agreement.
Under the common stock purchase agreement, we are allowed to drawdown every
22 trading days up to $2,000,000 per draw over a period of 12 months. We may
make of up to 12 draws. The maximum amount that we may drawdown in any period
may be limited by the average price and the trading volume of our common stock
on the OTCBB. Under the agreement, the maximum we may drawdown in each draw is
equal to the lesser of:
- $2,000,000; or
- 20% of the weighted average trading price of our common stock on the
OTCBB during the 22 trading days prior to the drawdown, multiplied by
the average number of shares traded per day on the OTCBB during the 45
days prior to the drawdown, multiplied by 22,
less a 5% cash placement fee payable to its placement agent, Ladenburg Thalmann
& Co. Inc. and $1,500 in escrow fees and expenses per drawdown. We may be unable
to drawdown funds sufficient to meet our working capital needs in a timely
manner, if at all. In addition, business and economic conditions may not make it
feasible to draw down under the common stock purchase agreement at every
opportunity.
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<PAGE>
In addition, the common stock purchase agreement and our placement
agreement with Ladenburg Thalmann Co. Inc. restrict us from raising investment
capital during the term of the common stock purchase agreement except through
the common stock purchase agreement. If we need capital but are unable to
drawdown under the common stock purchase agreement for any reason, we will need
to separately negotiate with Ladenburg Thalmann and Gestrow to lift those
restrictions so we can obtain the capital from other sources. Our common stock
purchase agreement with Gestrow also limits our ability to sell our securities
for cash at a discount to the market price for 24 months from the effective date
of the registration statement of which this prospectus is a part.
We may not be able to obtain additional financing on terms favorable to us,
if at all. If adequate funds are not available or are not available on terms
favorable to us, we may not be able to effectively execute our business plan.
We have a limited operating history and a history of losses, which makes
our ability to continue as a going concern questionable
Since our inception, we have had no revenues from our operations. During
the fiscal year ended March 31, 2000, we incurred cumulative net losses of
$4,706,109 million and anticipate that we will continue to incur losses. During
this period, we incurred operating expenses of approximately $4,662,957 million
and spent approximately $442,000 on property and equipment. We do not believe
that we will generate sufficient revenues to support our operations in fiscal
2001 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 March 31, 2000,
we had $424,678 in cash and a working capital deficit of $691,463. We will, on
average, spend approximately $349,000 per month through June 30, 2000, and
approximately $175,000 to $200,000 per month thereafter until we can generate
revenues from our operations. Our ability to continue as a going concern is
questionable unless we are able to raise additional financing.
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 has not been fully implemented as of yet. 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 future success depends on the services of our key officers, Joseph
Schlader, our President and co-Founder, William Galine, our Vice President
and co-Founder, Vahid Rafizadeh, our Chief Technical Officer and Greig
Park, our Chief Financial Officer and our ability to attract and maintain
qualified, experienced personnel.
Our future success will depend on Joseph Schlader, William Galine, Vahid
Rafizadeh, and Greigory Park. The loss of key personnel could have an adverse
effect on our operations. Although we have insurance to cover losses that may
result from the death of any of our key executives, we cannot assure you that we
will be able to replace such key executives in a timely manner, if at all.
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 one year, including Mr.
Rafizadeh and Mr. Park. 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.
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 competes with
many providers of web classified advertisers, auction
5
<PAGE>
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. 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 that 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 475 items of merchandise
into our system by December 2000 to meet our goals. We currently have only
approximately 492 participating pawnshops that list merchandise for sale on
pawnbroker.com. We cannot guarantee that these relationships will develop, or
that they will develop in a satisfactory manner.
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 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.
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.
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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. Our network and server equipment is located at Millenia Vision and
AboveNet Communications in San Jose, California. Although we believe that our
current back-up methods are adequate, we cannot assure you that the back-up
servers will not fail or cause an interruption in our service. Such failures
will have a material adverse affect on our business and results of operations.
We have experienced slower response times and interruptions in service due
to malfunction at our hosting facilities and on the Internet backbone networks,
major software upgrades at Pawnbroker.com and undetected software defects. We
have had partial interruptions for periods ranging from a few minutes to three
hours. In addition, Pawnbroker.com could also be affected by computer viruses,
electronic break-ins or other similar disruptions. If we experience outages,
frequent or persistent system failures or degraded response times, our
reputation and brand could be permanently harmed. In addition, we could lose
revenues during these interruptions and user satisfaction could be negatively
impacted if the service is slow or unavailable.
The occurrence of an earthquake or other natural disaster or unanticipated
problems at our principal facilities or at the servers that host or back-up our
systems could cause interruptions or delays in our interactive network or a loss
of data. Our systems are vulnerable to damage or interruption from fire, flood,
power loss, telecommunications failure, break-ins, earthquake and similar
events.
Changing technology may render our equipment, software and programming
obsolete or irrelevant. Our general liability insurance policies may not
adequately compensate us for losses that may occur due to interruptions in our
service.
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 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
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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
Our users and customers depend on Internet service providers, online
service providers and other Web site operators for access to Pawnbroker.com.
Each of these providers has experienced significant outages in the past and
could experience outages, delays and other difficulties due to system failures
unrelated to our systems. We depend upon these Internet service provider to
provide us with Internet access, third party software development companies to
upgrade the software we may incorporate into our server and web site software
and third party credit card processing services to process credit card
transactions. In addition, our customers require the services of
telecommunications or cable companies for access to the Internet and our web
site. 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 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 filed a number
of trademark applications with the United States Patent and Trademark Office to
protect our trademarks. See "Intellectual Property." We have no patents or
trademarks issued to date on our technology. We also intend to patent our
business model and the proprietary features of our service, which we intend to
file in the early part of 2001.
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 own both the "Pawnbroker.com" and "Pawnbroker.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
8
<PAGE>
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 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.
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
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<PAGE>
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 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.
RISK RELATED TO OUR SECURITIES
We issued 9% Convertible Debentures on terms that may cause substantial
dilution of your shares.
We issued a $500,000 9% convertible debenture that is convertible into
common stock over time at the discretion of the selling securityholders. Under
the terms of the debenture, the outstanding 9% convertible debenture is
convertible at a floating rate based on the lower of $5.54 per share or 85% of
the market price of the common stock. As a result, the lower the stock price at
the time the holder converts, the more common shares the holder will receive
upon conversion. If the selling securityholders were to fully convert the 9%
convertible debentures into common stock on July 28, 2000 approximately 188,000
additional shares of common stock would be issued. In connection with this
offering we filed a resale registration statement, of which this prospectus is a
part, to register the underlying common stock for resale upon conversion. See
"Dilution."
To the extent the selling stockholder converts and then sell the common
stock, the common stock price may decrease due to the additional shares in the
market. This could allow the selling stockholder to convert the 9% convertible
debenture into greater amounts of common stock, the sales of which would further
depress the stock price. The significant downward pressure on the price of the
common stock as the selling shareholder convert and sell material amounts of
common stock could encourage short sales. This could place further downward
pressure on the price of the common stock.
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Any substantial decline in the price of our common stock will cause
substantial dilution and may materially affect the value of your shares.
We may issue common stock under the terms of the common stock purchase
agreement that may cause substantial dilution of your shares.
Under the terms of the common stock purchase agreement, we may drawdown
funds and issue shares of common stock to Gestrow at a floating rate based on a
formula that yields approximately 88% of the market price of our common stock on
the OTCBB. As a result, the lower the stock price at the time of the drawdown,
the more common shares the Gestrow will receive upon conversion. Assuming we
could draw down the maximum amount under the common stock purchase agreement on
July 28, 2000, we would issue Gestrow approximately 8,727,273 shares of common
stock. See "Dilution."
We filed a resale registration statement, of which this prospectus is a
part, to register the shares of common stock we intend to issue to Gestrow for
resale. To the extent we issue shares of common stock to Gestrow, the price of
our common stock may decrease due to the additional shares in the market. This
could require us to issue greater amounts of common stock in each subsequent
drawdown, the sales of which would further depress the stock price. The
significant downward pressure on the price of the common stock as we issue
additional shares to Gestrow and sell material amounts of common stock could
encourage short sales. This could place further downward pressure on the price
of the common stock.
Any substantial decline in the price of our common stock will cause
substantial dilution and may materially affect the value of your shares.
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.
We have reserved up to an additional 8,000,000 shares of common stock for
issuance upon exercise of options under an incentive plan. As of June 30, 2000,
we have granted options exercisable to acquire 2,976,665 shares of our common
stock under the plan at an average exercise price of $6.72 per share. In
addition, we have granted Neil McElwee and Vahid Rafizadeh options that have
non-dilution features, which increase the number of shares they are entitled to
under their option grants in the event we issue additional shares of our common
stock.
In addition, we issued warrants exercisable to acquire up to 799,348 shares
of our common stock at an average exercise price of $3.97 per share.
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 market price of our common stock may be highly volatile
The market price of our common stock could be subject to significant
fluctuations due to factors such as:
o variations in our operating results;
o announcements by us or our competitors;
o introduction of new services or technologies by us or our competitors;
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o trends in the pawnbroker industry; and
o realization of any of the risks described in this section.
The stock market has experienced extreme price and volume fluctuations,
which have particularly affected the market prices for emerging growth
companies. These broad market fluctuations may adversely affect the trading
price of our common stock, regardless of our actual operating performance.
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 price of our shares ranged from $9.38 (low) to
$10.06 (high) during the first calendar quarter of 2000. The closing price of
our shares on March 31, 2000 was $9.50 and $2.1875 on July 21, 2000. 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.
CAPITALIZATION
The following table sets forth Pawnbroker.com's total capitalization as of March
31, 2000. This table should be read in conjunction with our historical
consolidated financial statements and the related notes included elsewhere in
this prospectus.
<TABLE>
March 31, 2000
--------------
<S> <C>
Long-term obligations, less current portion ........................................ $ --
Stockholder's equity:
Common stock, par value $0.001 per share; 100,000,000 shares authorized;
17,654,750 issued(1) (actual)....................................................... 176
Additional paid-in capital.......................................................... 4,681,260
Cumulative foreign exchange adjustment.............................................. --
Accumulated deficit................................................................. (4,706,109)
Total stockholders' equity.......................................................... (24,673)
Total capitalization................................................................ $(24,673)
</TABLE>
(1) Excludes 3,407,654 shares of common stock acquirable by selling
securityholders upon the conversion of Convertible Debentures and the
Common Stock Purchase Agreement, subject to adjustment based on the market
price of the common stock; 779,348 warrants issuable upon exercise of the
warrants at
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an average exercise price of $3.97 per share; and 2,976,665 shares of
common stock issuable upon the exercise of options then outstanding with a
weighted average exercise price of $6.72 per share. See "Executive
Compensation - Stock Option Plan."
PRICE RANGE OF COMMON STOCK
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 reflects inter-dealer prices, without retail mark-up, mark-down or
commission and may not reflect actual transactions:
<TABLE>
1999 High Low
-------------------------------------------- ---- ---
<S> <C> <C>
First Quarter (from April 1, 1999 through June 30, 1999) 7.50 6.75
Second Quarter ended September 30, 1999 5.25 5.00
Third Quarter ended December 31, 1999 7.13 6.38
2000
--------------------------------------------
Fourth Quarter ended March 31, 2000 10.06 9.38
First Quarter ended June 30, 2000 9.63 3.13
</TABLE>
On August 8, 2000, the last reported sale price of our common stock on the
OTC Bulletin Board was $2.125 per share.
As of July 24, 2000, there were approximately 26 holders of record of our
common stock and 17,654,750 shares of our common stock outstanding.
DIVIDEND POLICY
We have never declared or paid any dividends on our common stock and do not
anticipate doing so in the foreseeable future. We currently intend to retain our
future earnings for use in operations and expansion of our business.
DILUTION
As of June 30, 2000, we had issued and outstanding 17,654,750 shares of
common stock.
The issuance of further shares and the eligibility of issued shares for
resale will dilute our common stock and may lower the price of our common stock.
If you invest in our common stock, your interest will be diluted to the extent
of the difference between the price per share you pay for the common stock and
the pro forma as adjusted net tangible book value per share of our common stock
at the time of sale. We calculate net tangible book value per share by
calculating the total assets less intangible assets and total liabilities, and
dividing it by the number of outstanding shares of common stock.
The net tangible book value of our common stock as of June 30, 2000 was
$(24,673). At that date, there were an additional 4,152,483 shares of common
stock reserved for possible future issuances as follows:
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o options to purchase 2,976,665 shares of our common stock at an
exercise price of $6.75 per share to employees of the Company, were
vested. We registered the shares issuable upon exercise of the options
under the Securities Act;
o warrants to purchase 72,000 shares of our common stock at $6.72 per
share. The shares will be deemed to be "restricted securities" when
issued;
o warrants to purchase 58,824 shares of our common stock at $4.89 per
share issued to Lamothe Investing Corp., all of which are covered by
this prospectus and will be freely tradable without restriction
(subject to prospectus delivery requirements) on the effective date of
the registration statement;
o warrants to purchase shares of our common stock at $3.59 per share,
including 334,262 shares issuable to Gestrow Investments Limited and
334,262 shares issuable to Ladenburg Thalmann & Co. Inc., all of which
are covered by this prospectus and will be freely tradable without
restriction (subject to prospectus delivery requirements) on the
effective date of the registration statement; and
o 9% convertible debentures convertible into shares of our common stock
by Lamothe Investing Corp. 376,470 of such shares (estimated based on
the current market price of our common stock multiplied by 200%) are
covered by this prospectus and will be freely tradable without
restriction (subject to prospectus delivery requirements) on the
effective date of the registration statement.
In addition, we may drawdown funds and issue shares of common stock to
Gestrow at a floating rate based on a formula that yields approximately 88% of
the market price of our common stock on the OTCBB. As a result, the lower the
stock price at the time of the drawdown, the more common shares the Gestrow will
receive upon conversion. Assuming we could draw down the maximum amount under
the common stock purchase agreement on June 30, 2000, we would issue Gestrow
approximately 8,727,273 shares of common stock.
Assuming that -
o on June 30, 2000 we issued a total of 8,727,273 shares to Gestrow
under the common stock purchase agreement at $3.60 per share, which is
88% of the closing price for our common stock on June 30, 2000 and
reflects Gestrow's 12% discount;
o on June 30, 2000, all vested options and warrants to purchase common
stock were exercised for cash at the exercise prices stated in the
options and warrants; and
o on July 7, 2000 you purchased shares under this prospectus for $3.125
per share, which is the closing price for our common stock on July 7,
2000;
our pro forma net tangible book value as of June 30, 2000 would have been
$25,498,877. This would represent an immediate increase in the pro forma net
tangible book value of $0.93 per share to existing shareholders on June 30, 2000
and would represent dilution to you of approximately $0.00 per share. The actual
dilution to you may be greater or less than in this example, depending on the
actual price you pay for shares, the actual prices at which we issue shares to
Gestrow under the common stock purchase agreement and how many of the vested
options and warrants outstanding have been exercised at the time of your
investment.
Furthermore, approximately 2,976,665 million stock options will vest within
the next five years, we may issue additional shares, options and warrants and we
may grant additional stock options to our employees, officers, directors and
consultants under our stock option plan, all of which may further dilute our net
tangible book value.
During the terms of the outstanding warrants and options, we must give the
holders the opportunity to profit from a rise in the market price of the common
stock. The existence of the options and the warrants may adversely affect the
terms on which we may obtain additional equity financing. Moreover, the holders
are likely to exercise their rights to acquire common stock at a time when we
would otherwise be able to obtain capital with more favorable terms than we
could obtain through the exercise of such securities.
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<PAGE>
The shares which will be deemed "restricted securities" may be sold under
Rule 144. Rule 144 permits sales of "restricted securities" by any person,
whether or not an affiliate of the issuer, after one year. At that time, sales
can be made subject to the Rule's volume and other limitations and after two
years by non-affiliates without adhering to Rule 144's volume or other
limitations. In general, an "affiliate" is a person with the power to manage and
direct our policies. The SEC has stated that, generally, executive officers and
directors of an entity are deemed affiliates of the issuing entity.
Terms of the Common Stock Purchase Agreement
We entered into a common stock purchase agreement with Gestrow Investments
Limited, a British Virgin Islands corporation, on July 7, 2000, for the future
issuance and purchase of shares of our common stock. The transaction closed on
July 7, 2000. The stock purchase agreement establishes what is sometimes termed
an equity line of credit or an equity drawdown facility. In connection with the
common stock purchase agreement, we also issued Gestrow a warrant exercisable to
acquire 334,262 shares of common stock at $3.59 per share in lieu of any minimum
drawdown commitment by us.
In general, the drawdown facility operates like this: the investor,
Gestrow, has committed to provide us up to $24 million as we request it over a
22 month period, in return for common stock we issue to Gestrow. Once every 22
trading days, we may request a draw of up to $2,000,000 of that money, subject
to a maximum of 12 draws. The maximum amount we actually can draw down upon each
request will be determined by the volume-weighted average daily price of our
common stock for the 22 trading days prior to our request and the average
trading volume for the 45 trading days prior to our request. Each draw down must
be for at least $250,000. At the end of a 22 day trading period following the
drawdown request, the final drawdown amount is determined based on the
volume-weighted average stock price during that 22 day period. We then use the
formulas in the common stock purchase agreement to determine the number of
shares we will issue to Gestrow in return for that money.
Under the Agreement, the maximum we may drawdown in each draw is equal to
the lesser of:
- $2,000,000; or
- 20% of the weighted average trading price of our common stock on the
OTCBB during the 22 trading days prior to the drawdown, multiplied by
the average number of shares traded per day on the OTCBB during the 45
days prior to the drawdown, multiplied by 22,
less a 5% cash placement fee payable to its placement agent, Ladenburg Thalmann
& Co. Inc. and $1,500 in escrow fees and expenses per drawdown.
We may make up to a maximum of 12 draws; however, the aggregate total of
all draws cannot exceed $24 million and no single draw can exceed $2 million. We
are under no obligation to request a draw for any period.
The average market price for our common stock for the 22 trading days prior
to July 24, 2000 was $3.17 and the average daily trading volume for the 45
trading days ended July 21, 2000 was 66,459. If our market price on July 24,
2000 and the 45-day average trading volume preceding July 24, 2000 each remained
constant over the 12 month period of the common stock purchase agreement and we
requested the maximum amount available to us under the common stock purchase
agreement, each draw would be capped at approximately $926,970 and we could make
12 draws for a total amount drawn of $11,123,641. As the example shows, if our
stock price stays at current levels, we will not be able to draw down all $24
million under the common stock purchase agreement.
The formula would dictate that for this example, we would issue Gestrow
3,986,968 shares at $2.79 per share. We have registered 8,727,273 shares
issuable under the stock purchase agreement for resale by Gestrow. Under the
common stock purchase agreement, there is a provision that prevents us from
requesting a drawdown that would result in us issuing, under the common stock
purchase agreement and the warrants we issued to Gestrow, more than 19.9% of our
issued and outstanding common stock to Gestrow, without shareholder approval, if
such approval is required by the principal market in which our shares are
traded. The number of shares we would issue
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<PAGE>
and the proceeds we would receive could be further limited by a provision of the
common stock purchase agreement that prevents us from issuing shares to Gestrow
to the extent Gestrow would beneficially own more than 9.9% of our then
outstanding common stock on any given date. Any resales of shares by Gestrow
under this prospectus would reduce the number of shares beneficially owned by
Gestrow, and would enable us to issue additional shares to Gestrow without
violating this condition.
The per share dollar amount Gestrow pays for our common stock for each
drawdown includes a 12% discount to the average daily market price of our common
stock for the 22-day period after our drawdown request, weighted by trading
volume. We will receive the amount of the drawdown less an escrow agent fee of
$1,500 and a 5% placement fee payable to the placement agent, Ladenburg Thalmann
& Co. Inc., which introduced Gestrow to us. Ladenburg Thalmann is a registered
broker dealer. In addition, we paid $35,000 to Gedstrow for attorneys' fee and
related expenses, and we issued Ladenburg a promissory note in the amount of
$35,000 to reimburse Ladenburg for costs and expense related to the purchase.
Any substantial decline in the price of our common stock will cause
substantial dilution and may materially affect the value of your shares.
Conversion Terms of Outstanding 9% Convertible Debentures
We issued a $500,000 9% convertible debenture that is convertible into
common stock over time at the discretion of Lamothe Investing Corp., a selling
securityholder. In connection with this offering we filed a resale registration
statement, of which this prospectus is a part, to register the underlying common
stock for resale upon conversion. Under the terms of the debenture, if the
holder of the 9% convertible debenture were able to fully convert their
debenture into common stock on July 7, 2000 and elected to do so, approximately
188,235 additional shares of common stock would be issued. In addition, you
should note the following:
o The outstanding 9% convertible debenture is convertible at a floating
rate based on the lower of $5.54 per share or 85% of the market price
of the common stock. As a result, the lower the stock price at the
time the holder converts, the more common shares the holder will
receive upon conversion.
o We entered into a registration rights agreement in connection with our
issuance of the 9% convertible debenture. Under the agreement, we
filed a resale registration statement, of which this prospectus is a
part, under the Securities Act of 1933, as amended, to register the
resale of the common stock issuable upon conversion.
o To the extent the selling stockholder converts and then sell the
common stock, the common stock price may decrease due to the
additional shares in the market. This could allow the selling
stockholder to convert the 9% convertible debenture into greater
amounts of common stock, the sales of which would further depress the
stock price. The significant downward pressure on the price of the
common stock as the selling shareholder convert and sell material
amounts of common stock could encourage short sales. This could place
further downward pressure on the price of the common stock.
o The conversion of the 9% convertible debenture may result in
substantial dilution to the interests of other holders of common stock
since the holder of the 9% convertible debenture may ultimately
convert and sell the full amount issuable upon conversion. In this
regard, even though the selling stockholder may not covert its
debenture into more than 9.9% of the then outstanding common stock,
this restriction does not prevent a selling stockholder from
converting and selling some of its holding and then converting the
rest of its holdings. In this way, an individual selling stockholder
could sell more than 9.9% of the outstanding common stock while never
holding more than 9.9% of the outstanding common stock at a time.
Any substantial decline in the price of our common stock will cause
substantial dilution and may materially affect the value of your shares.
Under the terms of the loan agreement with Lamothe Investing Corp., we are
required to file with the Securities and Exchange Commission a registration
statement, in which this prospectus is a part, to register the
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<PAGE>
shares of the common stock issuable upon conversion of the convertible debenture
and upon exercise of the related warrants to allow the investors to resell such
common stock to the public. If the registration statement in which this
prospectus is a part is not declared effective by the Commission on or before
October 4, 2000, the agreement provides that we pay liquidated damages equal to
2% of the aggregate principal amount of the debenture per month until the
registration statement is declared effective by the Commission.
Any substantial decline in the price of our common stock will cause
substantial dilution and may materially affect the value of your shares.
SELLING SECURITIES HOLDERS
Overview
Common shares registered for resale under this prospectus would constitute
approximately 35.77% of our issued and outstanding common shares as of July 28,
2000, if we issued the number of shares registered under this prospectus.
The shares of common stock being offered by this prospectus are shares that
have been issued and shares that are issuable:
- to Gestrow under the common stock purchase agreement;
- to Lamothe upon conversion of the 9% convertible debentures; and
- upon the exercise of warrants by Gestrow, Lamothe and Ladenburg,
respectively.
The number of shares we are registering is based in part on our good faith
estimate of the maximum number of shares we will issue to Gestrow under the
common stock purchase agreement and Lamothe under the 9% convertible debenture.
Accordingly, the number of shares we are registering for issuance under the
common stock purchase agreement may be higher than the number we actually issue.
Based on information provided to us by each selling stockholder, the following
table shows, as of July 7, 2000:
- The name of the selling stockholder;
- How many shares of common stock the selling stockholder may resell
under this prospectus; and
- Assuming the selling stockholder sells all the shares it is entitled
to sell under this prospectus, how many shares of common stock and the
percentage the selling stockholder will beneficially own after
completion of the offering, based on our common stock outstanding on
July 24, 2000 and the issuance of shares included in this prospectus.
<TABLE>
------------------------------------------- ------------------------------- --------------------------------
Name of Selling Securityholder Number of Shares Selling Number of Shares Beneficially
Securityholder May Sell in Owned After the Offering
the Offering
------------------------------------------- ------------------------------- --------------------------------
<S> <C> <C>
Lamothe Investing Corp. 435,294/2.41%(1) nil
Gestrow Investments Limited 9,061,535/33.92%(2) nil
Ladenburg Thalmann & Co. Inc. 334,262/1.86%(3) nil
TOTAL 9,831,091/35.77*(2)
------------------------------------------- ------------------------------- --------------------------------
</TABLE>
(1) Includes 58,824 shares of issuable upon exercise of warrants and 376,470
shares issuable upon the conversion of the 9% convertible debenture, based
on a $2.65 conversion price determined as of July 7, 2000, multiplied by
200%.
(2) Includes 8,727,273 shares of issuable under the stock purchase agreement
and 334,262 shares issuable upon the conversion of warrants.
(3) Consists of 334,262 shares of issuable upon exercise of warrants.
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<PAGE>
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as indicated, we believe each person
possesses sole voting and investment power with respect to all of the shares of
common stock owned by such person, subject to community property laws where
applicable. In computing the number of shares beneficially owned by a person and
the percentage ownership of that person, shares of common stock subject to
options or warrants held by that person that are currently exercisable or
exercisable within 60 days are deemed outstanding. Such shares, however, are not
deemed outstanding for the purpose of computing the percentage ownership of any
other person.
Gestrow Investments Limited
Gestrow Investments Limited is engaged in the business of investing in
publicly traded equity securities for its own account. Gestrow's principal
offices are located at Aeulestrasse 74, FL-9490 Vaduz, Liechtenstein. Investment
decisions for Gestrow are made by its board of directors. Other than the
warrants we issued to Gestrow in connection with closing the common stock
purchase agreement, Gestrow does not currently own any of our securities as of
the date of this prospectus. Other than its obligation to purchase common shares
under the common stock purchase agreement, it has no other commitments or
arrangements to purchase or sell any of our securities. There are no business
relationships between Gestrow and us other than the common stock purchase
agreement.
Lamothe Investing Corp.
Lamothe Investing Corp. is engaged in the business of investing in publicly
traded equity securities for its own account. Gestrow's principal offices are
located at 31 Avenue Princesse Grace, MC 98000 Monaco. Investment decisions for
Lamothe are made by its board of directors. Other than the warrants we issued to
Lamothe in connection with closing the common stock purchase agreement, Lamothe
does not currently own any of our securities as of the date of this prospectus.
Other than its obligation to purchase common shares under the common stock
purchase agreement, it has no other commitments or arrangements to purchase or
sell any of our securities. There are no business relationships between Lamothe
and us other than the common stock purchase agreement.
Ladenburg Thalmann & Co. Inc.
Ladenburg Thalmann & Co. Inc. has acted as placement agent in connection
with the common stock purchase agreement. Ladenburg Thalmann introduced us to
Gestrow and assisted us with structuring the equity line of credit with Gestrow.
Ladenburg Thalmann's duties as placement agent were undertaken on a reasonable
best efforts basis only. It made no commitment to purchase shares from us and
did not ensure us of the successful placement of any securities.
This prospectus covers 334,262 shares of common stock issuable upon
exercise of warrants we have issued to Ladenburg Thalmann as a placement fee for
introducing us to Gestrow. Those warrants are exercisable at $3.59 per share and
expire July 6, 2003. The decision to exercise any warrants issued, and the
decision to sell the common stock issued pursuant to the warrants, will be made
by Ladenburg Thalmann's officers and board of directors. Other than the
warrants, Ladenburg Thalmann does not currently own any of our securities as of
the date of this prospectus. Our agreement with Ladenburg Thalmann provides
Ladenburg Thalmann with a right of first refusal for one year after completion
of the offering under the common stock purchase agreement, as underwriter or
placement agent, all of our financing arrangements at terms no less favorable
than we could obtain in the market.
The selling stockholders have not held any positions or offices or had
material relationships with us or any of our affiliates within the past three
years other than as a result of the ownership of our common stock except Robert
Grosser is a consultant to us and is a client through an independent mortgage
company we helped establish. We may amend or supplement this prospectus from
time to time to update the disclosure.
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<PAGE>
PLAN OF DISTRIBUTION
Gestrow Common Stock
Gestrow is offering the common shares for its account as statutory
underwriter, and not for our account. We will not receive any proceeds from the
sale of common shares by Gestrow. Gestrow may be offering for sale up to
8,727,273 common shares acquired by it pursuant to the terms of the stock
purchase agreement more fully described under the section above entitled "Terms
of the Common Stock Purchase Agreement" and the warrants we issued to it in
connection with the transaction. Gestrow has agreed to be named as a statutory
underwriter within the meaning of the Securities Act of 1933 in connection with
such sales of common shares and will be acting as an underwriter in its resales
of the common shares under this prospectus. Gestrow has, prior to any sales,
agreed not to effect any offers or sales of the common shares in any manner
other than as specified in the prospectus and not to purchase or induce others
to purchase common shares in violation of any applicable state and federal
securities laws, rules and regulations and the rules and regulations of the
principal market for our common stock, which is currently NASD Over the Counter
Bulletin Board.
On July 28, 2000, we had 17,654,750 shares of common stock outstanding. The
following table shows the number of shares we would issue to Gestrow and the
price it would pay for those shares given the hypothetical variables shown in
the table, if
- we requested drawdowns of the maximum amounts under the common stock
purchase agreement;
- the volume-weighted average daily price in the table is the
volume-weighted average daily price of our common stock for the 22
trading days before each drawdown request under the common stock
purchase agreement and the 22 trading days after each drawdown
request;
- the average trading volume in the table is the average trading volume
for the 45 trading days before each drawdown request; and
- we do not issue more shares to Gestrow under the common stock purchase
agreement than we are currently registering for resale.
<TABLE>
------------------------------- ---------------------------- ---------------------------- ------------------------
Volume-Weighted Average Daily Average Trading Volume Number of Shares Issuable Price per share paid by
Price to Gestrow under Common Gestrow
Stock Purchase Agreement
------------------------------- ---------------------------- ---------------------------- ------------------------
<S> <C> <C> <C>
$3.74(1) 46,973(4) 234,865 $ 772,987
$5.61(2) 70,460(5) 352,300 $ 1,739,235
$1.87(3) 23,487(6) 117,435 $ 193,250
</TABLE>
(1) Represents the average closing price of our common stock for the 22 trading
days before July 7, 2000.
(2) Represents 150% of the average closing price of our common stock for the 22
trading days before July 7, 2000.
(3) Represents 50% of the average closing price of our common stock for the 22
trading days preceding July 7, 2000.
(4) Represents the average trading volume of our common stock for the 45
trading days preceding July 7, 2000.
(5) Represents 150% of the average trading volume of our common stock for the
45 trading days preceding July 7, 2000.
(6) Represents 50% of the average trading volume of our common stock for the 45
trading days preceding July 7, 2000.
Lamothe Investing Corp.
Lamothe is offering the common shares for its account, and not for our
account. We will not receive any proceeds from the sale of common shares by
Lamothe. Lamothe may be offering for sale those common shares
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<PAGE>
acquired by it pursuant to conversion of the 9% convertible debenture more fully
described under the section above entitled "Terms of the 9% Convertible
Debenture" and the warrants we issued to it in connection with the transaction.
Lamothe has, prior to any sales, agreed not to effect any offers or sales of the
common shares in any manner other than as specified in the prospectus and not to
purchase or induce others to purchase common shares in violation of any
applicable state and federal securities laws, rules and regulations and the
rules and regulations of the principal market for our common stock, which is
currently the NASD Over the Counter Bulletin Board.
The following table describes the number of shares of our common stock into
which the 9% convertible debentures would be convertible given the described
hypothetical variables.
<TABLE>
---------------------- ----------------------------------- -----------------------------------
Conversion Price Number of Shares Issuable to Percentage of Issued and
Lamothe Upon Conversion Outstanding Upon Conversion
---------------------- ----------------------------------- -----------------------------------
<S> <C> <C>
$3.125(1) 188,235 0.105%
$4.685(2) 125,557 0.71%
$1.56(3) 377,074 0.209%
</TABLE>
(1) Represents the closing price of our common stock on July 7, 2000.
(2) Represents 150% of the closing price of our common stock on July 7, 2000.
(3) Represents 50% of the closing price of our common stock on July 7, 2000.
We entered into registration rights agreement with each of Gestrow and
Lamothe to permit the resell their common shares and agreed to prepare and file
a registration statement and such amendments and supplements to the registration
statement and the prospectus as may be necessary in accordance with the
Securities Act and the rules and regulations promulgated thereunder. We must
keep the registration statement effective until the earliest of any of the
following dates:
- the date after which all of the common shares that are covered by the
registration statement of which this prospectus is a part have been
sold under the provisions of Rule 144 under the Securities Act of
1933;
- the date after which all of the common shares that are covered by the
registration statement have been transferred to persons who may trade
such shares without restriction under the Securities Act of 1933 and
we have delivered new certificates or other evidences of ownership of
such common shares without any restrictive legend;
- the date after which all of the common shares that are covered by the
registration statement have been sold by the selling shareholder;
- the date after which all of the common shares that are covered by the
registration statement may be sold, in the opinion of our counsel,
under Rule 144 under the Securities Act of 1933 irrespective of any
applicable volume limitations;
- the date after which all of the common shares that are covered by the
registration statement may be sold, in the opinion of our counsel,
without any time, volume or manner limitations under Rule 144(k) or
similar provision then in effect under the Securities Act of 1933; or
- the date after which none of the common shares that are covered by the
registration statement are or may become issued and outstanding.
Shares of common stock offered through this prospectus may be sold from
time to time by Gestrow, Lamothe, and Ladenburg Thalmann or by pledgees, donees,
transferees or other successors in interest to the other
20
<PAGE>
selling stockholders. We will supplement this prospectus to disclose the names
of any pledgees, donees, transferees or other successors in interest that intend
to offer common stock through this prospectus.
Sales may be made on NASD OTCBB, on the over-the-counter market or
otherwise at prices and at terms then prevailing or at prices related to the
then current market price, or in negotiated private transactions, or in a
combination of these methods. The selling stockholders will act independently of
us in making decisions with respect to the form, timing, manner and size of each
sale. We have been informed by the selling stockholders that there are no
existing arrangements between any selling stockholder and any other stockholder,
broker, dealer, underwriter or agent relating to the sale or distribution of
shares of common stock which may be sold by selling stockholders through this
prospectus. Gestrow is deemed to be a statutory underwriter. The remaining
selling shareholders may be deemed underwriters in connection with resales of
their shares.
The common shares may be sold in one or more of the following manners:
- a block trade in which the broker or dealer so engaged will attempt to
sell the shares as agent, but may position and resell a portion of the
block as principal to facilitate the transaction;
- purchases by a broker or dealer for its account under this prospectus;
or
- ordinary brokerage transactions and transactions in which the broker
solicits purchases.
In effecting sales, brokers or dealers engaged by the selling stockholders
may arrange for other brokers or dealers to participate. Except as disclosed in
a supplement to this prospectus, no broker-dealer will be paid more than a
customary brokerage commission in connection with any sale of the common shares
by the selling stockholders. Brokers or dealers may receive commissions,
discounts or other concessions from the selling stockholders in amounts to be
negotiated immediately prior to the sale. The compensation to a particular
broker-dealer may be in excess of customary commissions. Profits on any resale
of the common shares as a principal by such broker-dealers and any commissions
received by such broker-dealers may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933. Any broker-dealer participating in
such transactions as agent may receive commissions from the selling stockholders
(and, if they act as agent for the purchaser of such common shares, from such
purchaser).
Broker-dealers may agree with the selling stockholders to sell a specified
number of common shares at a stipulated price per share, and, to the extent a
broker dealer is unable to do so acting as agent for the selling stockholders,
to purchase as principal any unsold common shares at a price required to fulfill
the broker-dealer commitment to the selling stockholders. Broker-dealers who
acquire common shares as principal may thereafter resell such common shares from
time to time in transactions (which may involve crosses and block transactions
and which may involve sales to and through other broker-dealers, including
transactions of the nature described above) in the over-the-counter market, in
negotiated transactions or otherwise at market prices prevailing at the time of
sale or at negotiated prices, and in connection with such resales may pay to or
receive from the purchasers of such common shares commissions computed as
described above. Brokers or dealers who acquire common shares as principal and
any other participating brokers or dealers may be deemed to be underwriters in
connection with resales of the common shares.
In addition, any common shares covered by this prospectus which qualify for
sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to
this prospectus. We will not receive any of the proceeds from the sale of these
common shares, although we have paid the expenses of preparing this prospectus
and the related registration statement of which it is a part, and have
reimbursed Gestrow $35,000 for its legal, administrative and escrow costs.
Gestrow is subject to the applicable provisions of the Exchange Act,
including without limitation, Rule 10b-5 thereunder. Under applicable rules and
regulations under the Exchange Act, any person engaged in a distribution of the
common shares may not simultaneously engage in market making activities with
respect to such securities for a period beginning when such person becomes a
distribution participant and ending upon such person's
21
<PAGE>
completion of participation in a distribution, including stabilization
activities in the common shares to effect covering transactions, to impose
penalty bids or to effect passive market making bids. In addition, in connection
with the transactions in the common shares, Gestrow and we will be subject to
applicable provisions of the Exchange Act and the rules and regulations under
that Act, including, without limitation, the rules set forth above. These
restrictions may affect the marketability of the common shares.
The selling stockholders will pay all commissions and their own expenses,
if any, associated with the sale of the common shares, other than the expenses
associated with preparing this prospectus and the registration statement of
which it is a part. We have agreed to pay the expenses of registration of the
shares, including legal and accounting fees.
OUR BUSINESS
We, Pawnbroker.com, Inc., are a development stage company, which means we
are in the process of developing our business and have no revenues from our
operations. We have not generated any profits. We have developed and launched a
web site that provides 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.
Our Retail Solution
We completed the initial development of the software and technology related
to our business and began the beta test our web site in December 1999 with
approximately 65 pawnshops. In March 2000, we launched a pilot version of our
web site featuring limited inventory from 245 pawnbrokers representing 387
participating pawnshops. In June 2000, we launched the commercial version of
Pawnbroker.com featuring 317 pawnbrokers representing 492 pawnshops.
Our web site allows participating "brick-and-mortar" pawnshops to list
merchandise for sale using one of three methods:
o Firm Price: Allowing customers to purchase merchandise at an
established price;
o Negotiation: Offering merchandise at a list price and allowing
customers to submit a counter offer and negotiate a lower price; or
o Free Fall: Offering merchandise at a "free fall" price, an initial
price set by the pawnbroker that declines in incremental amounts by
the week, day, or hour.
Pawnbroker.com features items of merchandise from the inventories of
pawnshops, including merchandise such as jewelry, consumer electronics, tools,
collectibles, coins, cameras and musical instruments. We do not post firearms,
adult materials or other potentially illegal merchandise for sale on our web
site.
Pawnbroker.com 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 have 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
incorporate visual displays permitting visitors to view pictures of merchandise
and interactive capabilities that allow buyers to make offers on merchandise at
any point in their visit.
We offer a 10-day money back Pawnbroker.com Satisfaction Program, which
allows purchasers to return merchandise within 10-days of receipt for a full
refund. Our Pawnbroker.com Satisfaction Program is designed to ensure customer
satisfaction with merchandise purchased on our web site. See "Our Pawnbroker.com
Satisfaction Program."
We have presented Pawnbroker.com to over 4,300 pawnshops at conventions and
tradeshows and have oral expressions of interest or requests for additional
information from approximately 3,500 pawnshops. We currently
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<PAGE>
have over 317 registered member pawnbrokers representing 492 pawnshops. Our goal
is to have a total of up to 2,000 participating member pawnshops offering an
average of 475 items each by December 2000. There can be no assurance that we
will continue to register member Pawnbrokers to our web site as planned or that
we will generate sufficient revenues to become profitable.
Participating Pawnbrokers are able to run our Pawnbroker.com software on
web-ready PCs. We also recommend the use of a digital camera to display pictures
of merchandise on our web site. See "Participating Pawnbroker Systems
Requirements."
We intend to generate revenues from several sources, including:
o transaction fees, ranging between 5% to 10% of the purchase price, in
successfully completed transactions beginning in the Summer 2000;
o charging our participating pawnshops listing and membership fees;
o membership fees to suppliers of services and merchandise that desire
access to our participating pawnshops;
o transaction fees for transactions facilitated through our web site
between suppliers of services and merchandise and our participating
pawnshops;
o transaction fees for inventory consigned and sold on our web site;
o promotional and advertising fees for banner ads and promotions;
o licensing fees for point-of-sale and inventory management applications
that we intend to develop; and
o fees for marketing services.
We use post-sale marketing techniques to increase repeat purchases and
build loyalty to our service including:
o follow-up email messages to remind customers of our web site;
o request services to locate merchandise that is not listed for sale on
our web site;
o email notification when a particular item of merchandise is available
on our web site, and
o automatic email reminders of specific occasions like birthdays,
holidays or anniversaries.
We anticipate that the number of transactions facilitated on our web site
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.
We compete in the highly competitive Internet commerce industry. We compete
against companies that 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 only recently
launched our web site and have not yet begun the process of developing our brand
name or promoting our web site. During the first half of 2000, several Internet
related companies with retail concepts have failed or been acquired by larger
competitors. Competitive pressures, lack of adequate financing and failure to
gain market acceptance are some of the factors that have caused such companies
to fail. We face these same challenges, and 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
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o the large and growing base of personal computers in the workplace and
home,
o advances in the performance of personal computers and modems,
o improvements in network systems and infrastructure,
o readily available and lower cost access to the Internet,
o increased awareness of the Internet among businesses and consumers,
o increased volume of information and services offered on the Web, and
o 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 available from 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" 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 are, 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, Amazon, 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:
o the ability to provide the customer with a variety of merchandise at
an exceptional value;
o the quality of merchandise offered;
o consumer brand loyalty to the merchandiser; and
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o 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 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 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, 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 may be 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:
o the convenience created by offering visitors an opportunity to browse
and select from a large inventory;
o 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 a large number of pawnbrokers
throughout the United States at a single web site; and
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o 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 a large number of 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, 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. We
believe our 10-day Pawnbroker.com Satisfaction Program 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. However, we cannot assure you that these arrangements can be
established on commercially reasonable terms. Even if these arrangements 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 begin charging 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 enhances the distribution
of pawnshop merchandise online and lowers the overall transaction costs and
risks of conducting business online. We absorb the costs associated with
maintaining computer systems, infrastructure and software, and we have developed
technology that is specifically designed for pawnbrokers. By absorbing the sunk
costs generally associated with launching an Internet web site and developing
technology, we believe we can bring a pawnshop online faster with the benefits
of our innovative and advanced technology.
We also believe that our Pawnbroker.com web site makes purchasing pawnshop
merchandise more convenient for consumers than visiting physical stores and that
our Pawnbroker.com Satisfaction Program provides 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.
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A Transaction on Pawnbroker.com
Each participating pawnshop begins by registering to become a participating
member pawnshop of Pawnbroker.com. The participating pawnshop electronically
transmits a list of available inventory to Pawnbroker.com, which they desire to
post on the Pawnbroker.com web site. The list will include:
o the category in which each item of merchandise will be listed;
o a brief description of the merchandise;
o pictures of the merchandise, if desired;
o the suggested or "ask price" for the merchandise;
o a minimum bid offer that will be considered;
o full disclosure of the condition of the item; and
o any other useful information about the item.
We post the listed merchandise on the Pawnbroker.com web site by
merchandise category. Visitors to our Pawnbroker.com web site are able to browse
our site by category and view available merchandise posted for sale by
participating pawnbrokers.
There are three different methods in which a participating pawnshop may
offer merchandise on Pawnbroker.com:
Firm Price: Participating pawnbrokers can offer merchandise at a set price
and visitors can purchase the merchandise by ordering the merchandise at
that price.
Negotiation: Participating pawnbrokers can offer merchandise at an asking
price and inform us of the minimum price they will accept or consider for
the merchandise. A visitor may select the "negotiate" function by clicking
an icon and make an offer for the merchandise.
o If the pawnbroker sets a minimum price and a customer makes an
offer above the minimum, the offer will be accepted.
o If the pawnbroker sets a minimum price it will consider and a
customer makes an offer below the minimum, the offer will be
immediately transmitted to the pawnshop by email. 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 customer. The customer may
accept or reject the counteroffer. All offers not accepted within
24 hours are automatically rejected.
Free Fall: Participating pawnbrokers can offer merchandise using our unique
free fall pricing by setting a beginning price and the incremental amount
($ or %) in which the price will "free fall" or decline over time (weeks,
days, hours or minutes). For example, a pawnbroker may offer a watch at
$500 and allow the price to "free fall" by $10 per hour until the watch is
purchased. The merchandise remains in free fall until it is sold.
We process transactions as follows:
o When an order is finalized, we process the (credit card or check)
payment, including shipping costs and the applicable taxes as
specified by the pawnshop, record the transaction, and electronically
transmit order shipping information to the participating pawnbroker.
o The pawnbroker is 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.
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o We use email to confirm receipt of the merchandise by the purchaser.
o The purchaser will have 10 days after delivery to examine the
merchandise under our Pawnbroker.com Satisfaction Program.
o If the purchaser has not notified us or returned the merchandise to
the participating pawnshop within 10 days of receipt, we process the
transaction and credit the funds to the pawnbroker's account (less
shipping and handling costs and the appropriate percentage of the
transaction as a fee). We disburse funds to pawnbrokers twice a month.
o 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.
Our Pawnbroker.com Satisfaction Program
Our Pawnbroker.com Satisfaction Program is designed to ensure customer
satisfaction with merchandise purchased on our web site. We have implemented the
following policies related to our Pawnbroker.com Satisfaction Program:
o all orders for merchandise must be paid for at the time the offer is
accepted;
o prior to shipment, we process the payment;
o the pawnbroker is responsible for shipping the merchandise, no later
than three days after the offer is accepted;
o we confirm the receipt of the merchandise with the purchaser by email,
and 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;
o the purchaser has 10 days from the date the merchandise is received to
examine the merchandise;
o 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;
o we notify the pawnbroker of the return;
o once we have confirmed that the returned merchandise has been received
by the pawnbroker, we 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;
o In the event there is a dispute between the purchaser and the
pawnbroker:
1. we will hold the purchase price pending resolution of the
dispute;
2. our customer service department will attempt to resolve the
dispute;
3. 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 monitor the returns ratio for each participating pawnbroker and each
customer of Pawnbroker.com. We have established an acceptable return ratio for
pawnbroker participation in our program. In the event the pawnbroker experiences
a return merchandise ratio higher than our acceptable level or we receive an
unacceptable number of complaints from our customers, we suspend the pawnbroker
from participating in our program pending a review. We have also established an
acceptable return ratio for customers and will not accept offers from customers
that have a history of returning merchandise. We continue to evaluate our
policies as part of the Pawnbroker.com Satisfaction Program through regular
communication with customers, our Industry Council and registered member
pawnbrokers.
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Pawnbroker.com - Pawnbroker Membership Agreements
We have registered member agreements with each of our participating
pawnshops, pursuant to which they agree to follow our policies and procedures as
a condition to posting merchandise for sale on Pawnbroker.com and participating
in our program. Our participating pawnshop agreement provides the following
terms:
o pawnshops are required to post merchandise;
o update their available inventories;
o accept offers or submit counteroffers in a timely manner;
o pack, label and ship merchandise to buyers and to notify us when
merchandise is returned by buyers under the Pawnbroker.com
Satisfaction Program;
o pay membership, listing and transaction fees; and
o follow our policies and procedures.
We have relationships with major carriers, including UPS and FedEx to
service our participating pawnshops. We are considering options that will allow
web-based tracking and other conveniences to consumers.
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 integrate an in-store
inventory management and point of sale system with our Pawnbroker.com web site
or that we will continue to successfully attract participating pawnshops to use
our services.
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 enter
into an electronic transaction with Pawnbroker.com in which we act as
an intermediary between the customer and the individual pawnshop that
owns the merchandise. We 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 negotiation process, offer and counter-offer system, free
fall 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 provide free
services such as consumer information, shopping tips, a wish-list
function and other services to visitors that we believe attracts
positive feed back from visitors and encourages media coverage and
increased site traffic. In the future, we will 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 lowers transaction costs for pawnshops that
desire to conduct business over the Internet. We absorb the costs
associated with maintaining computer systems, infrastructure and
software, and we have developed technology that is specifically
designed for pawnbrokers. By absorbing the sunk costs generally
associated
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with launching an Internet web site and developing technology, we
believe we can bring a pawnshop online faster and that the pawnbroker
benefits from our innovative and advanced technology. In the future,
we intend to make available to our participating pawnbrokers
integrated inventory control and point of sale software that will be
designed to allow pawnshops to accurately track the store's inventory
and simultaneously list their entire inventory on our Pawnbroker.com
web site.
o Expand the potential customer base for pawnshops. Our goal is provide
participating pawnbrokers with global opportunities to market their
inventories on the Internet. Our Internet service makes a
participating pawnshop'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. As a
result, a pawnshop's base of potential customers is not limited by
geography or operating hours. We also intend to launch a multi-million
dollar marketing campaign to build awareness of our Pawnbroker.com web
site that would be difficult for independent pawnbrokers 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 Create a master database of transactional data for use by pawnshops.
We are in the process of compiling a master database of statistical
data to be made available to our participating pawnbrokers. This
master database is designed as a `blue-book' or pricing information
source that allows pawnshops to research pricing and product
information, including:
- examples of product descriptions for specific types merchandise;
- the ask price for specific types merchandise offered on
Pawnbroker.com;
- data related to historical selling prices of merchandise sold on
Pawnbroker.com;
- information on the number of days products are offered for sale;
- historical sales patterns of various categories of merchandise
during the year; and
- historical sales patterns of various categories of merchandise by
geographic location.
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 Membership benefits. We 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 free
web-based email on the Pawnbroker.com domain is designed to assist
pawnshops in branding themselves as a member of an online pawnbroker
community. Our Pawnbroker.com lost items database will be 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.
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 March 31, 2001. Our plan of operation for the fiscal year
ending March 31, 2001 is to:
o Raise additional financing to fund our operations and to market our
web site;
o Generate revenue through on-line sales of product;
o Implement a marketing program to generate traffic to our web site and
to build brand recognition;
o Continue to improve our Pawnbroker.com web site and technologies;
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o Increase the number of participating pawnshops in the United States
and Canada; and
o Develop a point of sale and inventory management system that will
interface with our Pawnbroker.com web site.
In order to reduce our cash requirements, we have initially outsourced
certain development, marketing, human resources, legal and accounting functions.
Similarly, in order to reduce capital expenditures, we have entered into leasing
agreements for hardware and other equipment requirements.
We estimate that our current cash requirements are approximately $440,000 a
month, principally for salaries, professional services, marketing and office
expenses. We anticipate that our cash requirements will increase to
approximately $500,000 to $600,000 per month in the second 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
continued development of the Pawnbroker.com web site and costs associated with
marketing our web site. We anticipate that our cash requirements will increase
during third and fourth quarters of 2000 as expenditures related to marketing
and advertising programs are implemented. However, we cannot guarantee that we
will generate sufficient revenues from our operations to operate a commercially
viable business or to earn a profit.
We currently do not have sufficient working capital to meet our obligations
past July 2000. We are in the process of negotiating bridge financing to provide
us with sufficient working capital to fund our operations until the registration
statement in which this prospectus is a part is declared effect and we are
permitted to make drawdowns under the terms of the common stock purchase
agreement with Gestrow. We anticipate that we will receive bridge financing in
August 2000. We, however, cannot assure you that we will successfully obtain
such bridge financing on acceptable terms, if at all, or that the funds we
received from Gestrow under the terms of the common stock purchase agreement
will be sufficient to meet our working capital needs. Our failure to obtain
additional financing or sufficient to meet our working capital needs in a timely
manner will have a material adverse affect on our business.
Business/Strategic Associates
We have entered into the following Strategic relations related to our
business:
o Our Industry Council consists of registered member pawnbrokers and
persons with experience in the pawn-broking industry who participate
in assisting us in recruiting participating pawnbrokers and in
developing our policies and procedures.
o We have developed a cooperative marketing arrangement with the
National Pawnbroker Association in which our web site will be
assessable through the National Pawnbroker Association web site. We
have also entered into an agreement to develop the National Pawnbroker
Association web site.
o We have a cooperative agreement with Redtagbiz.com designed to build
our brand name and our web site presence on the Internet. Under the
terms of this agreement, we will offer our participating pawnbrokers
access to inventory available from Redtagbiz.com.
o We use Cybersource, third-party service providers of security and
credit card processing services, to assist us in facilitating
transactions on Pawnbroker.com web site.
o We have leasing agreements with Sun Microsystems and F5 for our
hardware needs, web site management is outsourced to Millenia Vision,
and Above Net is our internet service provider.
We cannot assure you that we will continue to maintain these strategic
relationships or that such relationships will prove beneficial to our business.
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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 consists of an item listing
and uploading application that allows participating pawnshops to transmit for
posting:
o the category in which each item of merchandise will be listed,
o a brief description of the merchandise,
o pictures of the merchandise,
o the suggested or "ask price" for the merchandise and
o other item specific information.
We developed the web inventory system, which is proprietary technology
exclusively for our pawnbroker.com web site.
We intend to develop a turnkey inventory management system that will
incorporate inventory management capabilities with a point of sale computer,
printer, label printer, credit card reader, bar code scanner and cash register.
We do not anticipate that such a system will be available until at least 2001.
Web Transaction Interface: Our web transaction interface uses industry
standard credit card clearing and security procedures employing SSL and online
transaction processing services. Our web-browser includes custom components
providing the ability to randomly browse for interesting and or specific
merchandise, for an online experience more like shopping in brick-and-mortar
stores.
Pawnbroker.com Database: We use the services of Millenia Vision as our
database administrators who maintain the underlying structure of the
Pawnbroker.com database.
Each participating pawnshop that wants to load content remotely requires
Internet access and hardware that meets minimum system requirements. See
"Participating Pawnbroker Systems Requirements." We offer technical assistance
to participating pawnshops, including assistance with hardware system
configuration, software installation and technical support by telephone. Our
technical support staff is available to load content for registered pawnbrokers
who do not have Internet access or the minimum system requirements. Technical
support is available without costs as we strive to meet our membership and
listing goals. During the fall of 2000, we intend to offer fee-based remote and
on site technical support to registered pawnbrokers.
Scalability and Operations
Our e-Commerce platform runs on arrays of Sun/Solaris,
Intel-based/Microsoft NT and Intel-based/Linux servers, forming three distinct
server farms. The e-Platform is written in the Java computer language and is
optimized to handle high traffic volumes, so that the scalability is simply
achieved by adding more server boxes to the server farms. The Pawnbroker.com,
Inc.'s service provides 24 hour a day, seven-days a week availability, subject
to a short maintenance periods for a few hours one night per week. Our system
architectures has been designed to reduce downtime in the event of outages or
catastrophic occurrences. Pawnbroker.com, Inc. system hardware is hosted at the
AboveNet facility in San Jose, California, which provides redundant
communications lines and emergency power backup.
Our system consists of Sun database servers running Oracle relational
database management systems and a suite of Pentium-based Weblogic Application
Servers running on the Windows NT operating system. Pawnbroker.com, Inc. has
built a robust, scalable user interface and transaction processing system that
is based on internally-developed proprietary software and Oracle database. Our
Internet servers also use VeriSign Inc. digital certificates for authentication.
We use F5 load balancing systems and our own redundant servers to provide for
fault tolerance.
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Participating Pawnbroker Systems Requirements
In general, 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 requires 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 offer hardware configurations to registered pawnbrokers that
consist of a computer, laser printer, high-speed modem, credit card reader,
digital camera and bar code scanner.
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
following trademarks:
<TABLE>
------------------ ------------------------------ -------- ----------------- --------------- ------------------
Docket Mark Class Serial No. Filing Date Response Deadline
------------------ ------------------------------ -------- ----------------- --------------- ------------------
<S> <C> <C> <C> <C> <C>
81862 MISCELLANEOUS DESIGN 36 75/802,493 9/16/1999 7/10/2000
81865 PAWNBROKER.COM 36 75/802,607 9/16/1999 7/27/2000
81861 FREEFALL 42 75/816,893 10/5/1999 8/16/2000
81871 RECOVERIT 36 75/839,172 11/2/1999 9/8/2000
81864 PAWNASSISTANT 42 75/838,958 11/2/1999 9/13/2000
81869 PAWNNEWS 36 75/838,961 11/2/1999 9/13/2000
81872 SECUREIT 36 75/839,157 11/2/1999 9/20/2000
81863 PAWNALERT 36 75/838,962 11/2/1999 9/22/2000
81866 PAWNCENTER 36 75/839,144 11/2/1999 9/22/2000
81867 PAWNEXCHANGE 38 75/839,145 11/2/1999 9/22/2000
81870 PAWNRESOURCE 36 75/839,171 11/2/1999 9/22/2000
81868 PAWNMAIL 38 75/839,646 11/2/1999 Pending
</TABLE>
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 have entered 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 trade names or other intellectual property rights.
Upon receipt of a written claim of intellectual property infringement, we 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
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<PAGE>
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 are aimed at both pawnshops that can benefit from our
services and the consumer.
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 use our
domain name to market our web site and establish the brand name
"Pawnbroker.com."
Our Internet advertising campaign includes banner advertising. We intend to
engage in coordinated programs of print advertising in specialized and general
circulation newspapers and magazines, in targeted cities. We will begin to 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. In addition, we 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 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;
o Oklahoma State Pawnbroker's Convention August 1999;
o North Carolina State Pawnbroker's Convention in October 1999; and
o National Pawnbroker's Association Convention in June 2000.
We have presented our web site concept to over 4,300 pawnshops and have
oral expressions of interests or requests for additional information from
approximate 3,500 of these pawnshops.
Based on feedback from participating pawnshops, we believe the benefits to
pawnshop owners of a ready to use electronic-commerce Internet solution outweigh
the initial cost of installing a compatible computer system and the
administrative cost of posting products.
We have implemented an after-sale marketing program that includes customer
promotional and incentive programs to support customer retention and to promote
the Pawnbroker.com brand. Other programs targeted at registered members include
volume discounts, software updates and in-store promotional materials.
Employees
We currently have 35 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.
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<PAGE>
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.
On June 14, 1999, we acquired all of the issued and outstanding shares of
Pawnbroker.com, Inc., a Nevada corporation, in exchange for 6,240,000 shares of
our common stock.
On May 17, 2000, we amended our Certificate of Incorporation to increase
our authorized share capital to 150,000,000 shares, including 100,000,000 shares
of common stock and 50,000,000 shares of preferred stock.
Our common stock is currently quoted on the National Association of
Securities Dealers' over-the-counter bulletin board and trades under the symbol
"PBRR".
We have not been subject to any bankruptcy, receivership or other similar
proceeding.
OUR MANAGEMENT
Prior to May 3, 2000, 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. On May 3, we amended our bylaws to create a classified or staggered
board of directors, which consists of three classes of directors, which will be
elected at our next annual meeting scheduled for September 8, 2000 as follows:
o Class A directors will serve for an initial term of one (1) year and
their successor will be elected at the next annual meeting for a term
of three (3) years;
o Class B directors will serve for an initial term of two (2) years and
their successor will be elected at the annual meeting follow the
expiration of their term for a term of three (3) years; and
o Class C directors will serve for a full term of three (3) years and
their successor will be elected at the expiration of their term for a
term of three (3) years.
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<PAGE>
Under the amendment to the Bylaws, vacancies and newly created
directorships may be filled by a majority of the remaining directors or by a
majority of the shareholders, constituting a quorum at an annual or special
meeting of the shareholders, and such director shall hold office until their
successor is elected and qualified at the next annual meeting or until their
earlier resignation or removal.
Our executive officers are appointed by and serve at the pleasure of our
Board of Directors.
As at June 30, 2000, the following persons were our directors and executive
officers:
<TABLE>
----------------------------- ------------------ ----------------------------------------------------------------
Name and present office Director/officer Principal occupation and if not at present an elected
held since director, occupation during the preceding five years
----------------------------- ------------------ ----------------------------------------------------------------
<S> <C> <C>
Neil McElwee(1) September 1999 Internet Marketing Consultant - Principal of McElwee & Associates,
Chief Executive Officer to August 8, 2000 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 June 1999 Pawnbroker Executive - Director, Pacific Pawnbrokers from 1981
Chairman, President and to present.
Director (2)
----------------------------- ------------------ ----------------------------------------------------------------
William Galine June 1999 Pawnbroker Executive - Secretary and Treasurer, Director,
Vice-President and Pacific Pawnbrokers from 1984 to present.
Director(2)
----------------------------- ------------------ ----------------------------------------------------------------
Vahid Rafizadeh October 1999 Software Architect - Chief Technical Officer and Vice President,
Chief Technical Officer KSM, Inc. from 1998 to 1999; Chief Software Architect, Lockheed
Martin from 1996 to 1998; software architect, North American
Drager from 1994 to 1996.
----------------------------- ------------------ ----------------------------------------------------------------
Greigory Park March 2000 Connectinc.com - Chief Financial Officer, 1997 to 1999;
Chief Financial Officer IMSI, Inc. Corporate Controller 1995 to 1997; IFS, Inc. -
Corporate Controller 1992 to 1995.
----------------------------- ------------------ ----------------------------------------------------------------
</TABLE>
(1) On August 8, 2000, Mr. McElwee was terminated as our Chief Executive
Officer.
(2) Member of the Registrant's audit committee.
The following is a brief biographical information on each of the officers
and directors of listed:
Neil McElwee, Chief Executive Officer - Age 54
Mr. McElwee joined as our Chief Executive Officer in September 1999. He has
been a senior marketing and business development executive for over 25 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. On August 8,
2000, Mr. McElwee was terminated as our Chief Executive Officer.
Joseph Schlader, Chairman, President and Director - 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 pawnbroking 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.
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<PAGE>
William Galine, Vice-President and Director - Age 48
William Galine joined the Company as Vice-President and director in June
1999. Galine has worked in the pawn industry for the from 1984 to 1999 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.
Greigory Park, Chief Financial Officer - Age 43
Mr. Park joined the Company in March 2000 as Chief Financial Officer. Prior
to joining the Company, from June 1999 to March 2000, Mr. Park worked as a
consultant for Ask Jeeves, Inc., inSolicon, Inc., and TCSI Corp., in various
senior finance capacities involving Initial Public Offering, and Merger and
Acquisitions. Prior to this from April 1998 to June 1999, Mr. Park was Chief
Financial Officer for Connectinc.com, an enterprise software Company. Prior to
this from 1995 to 1998, Mr. Park was Corporate Controller for International
Microcomputer Software, Inc., a leading developer and publisher of visual
productivity software for businesses and consumers.
DIRECTOR'S COMPENSATION
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.
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.
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
the financial statements and notes thereto appearing elsewhere in this
prospectus.
The information contained in this Management's Discussion and Analysis
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 out in this prospectus. See "Note Regarding Forward
Looking Statements."
Our financial statements have been prepared in accordance with United
States generally accepted accounting principles.
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
$0.0001 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. Our transaction with Eriko
Internet Inc. was considered a merger of non-operating entities with nominal
assets and Eriko Internet Inc. is deemed to be the surviving entity for
accounting purposes.
On May 14, 1999, we acquired all of the issued and outstanding shares of
Pawnbroker (Nevada). Pawnbroker (Nevada) was a shell company with no assets,
liabilities, revenues or expenses. 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
Years Ended March 31, 1999 and March 31, 2000
Revenues. We had no revenues from operations. Our loss for the twelve
months ended March 31, 2000 of $4,706,109 was as a result of costs associated
with corporate acquisition expenses, developing our business plan, product
development expenses related to the development of our Pawnbroker.com web site
and technologies, sales and marketing expenses and administrative expenses. We
anticipate our expenses and losses will increase as we increase our web site
development and marketing efforts.
Salaries and Payroll. Salaries and wage expenses for the twelve months
ended March 31, 2000 were $891,940. The increase in expense resulted from hiring
personal in product development $286,528, sales and marketing $265,820 and
general and administrative $268, 943.
We believe that development of additional functions and features are vital
for our site to remain competitive in our industry, therefore we anticipate that
we will devote substantial resources to product development and as a result,
payroll costs are expected to continue to increase in the future. We expect to
add strategic personnel in the sales, marketing and the general and
administrative departments and as a result payroll cost in these departments are
expected to continue to increase in the future.
38
<PAGE>
Contract Services. Outside service expense for the twelve months ended
March 31, 2000 were $476,899, which consist primarily of investor relations,
$260,000, public relations $76,228 and market research $85,039. We intend to
continue pursuing an aggressive brand-enhancement strategy, which will include
investor relations, public relations and market research activities. These costs
are expected to continue to increase in the future.
Consulting. Consulting expense for the twelve months ended March 31, 2000
were $377,441 which consist primarily for assistance related to the evaluation
and development of our Internet business strategies, development of a Internet
business plan and interim executive personnel. These costs are associated with
early stage companies and we anticipate a reduction in these cost in the future.
Professional Fees. Professional fees for the twelve months ended March 31,
2000 $386,939, which consist primarily of legal and accounting expenses. The
increase in expense is attributed to legal and accounting support that
accompanied the emergence and growth of our business. As our business continues
to grow, we anticipate these costs will continue to increase in the future.
Marketing and Related Expense. Marketing and related expenses for the
twelve months ended March 31, 2000 were $300,706, which consist primarily of
creative printing $163,677 and advertising $71,300. We intend to continue
pursuing an aggressive brand-enhancement strategy, which will include mass
marketing, multimedia, advertising and promotional programs. These costs are
expected to continue to increase in the future.
General and Administrative. General and administrative related expense for
the twelve moths ended March 31, 2000 were $1,657,250, which consist of general
office $221,710, printing $129,259, purchased software $220,000, recruiting
$232,858 and facility costs of approximately $262,700. We anticipate that with
the growth of our Company, these costs are expected to continue to increase in
the future.
Travel and Related. Travel and related expenses for the twelve moths ended
March 31, 2000 were $227,976 which consist of raising capital and business
development. We anticipate that as the Company grows, these costs are expected
to continue to increase in future periods.
We had no material operations during the year ended March 31, 1999 and as a
result, management does not believe a comparative analysis of such results of
operations would be meaningful.
Period From February 13, 1998 (Inception) to March 31, 1998 and March 31,
1999
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 $4,975 capital during the fiscal period April 1, 1998 to March
31, 1999. We had nominal cash of $3,007 on hand at March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through the
private placement of equity securities. As of March 31, 2000 we had $424,678 in
cash or term deposits. As of March 31, 2000, we had a working capital deficit of
$691,463. Net cash used in operating activities was $3,395,555 for the year
ended March 31, 2000. Net cash used in operating activities resulted primarily
from net losses adjusted for increase in accounts payable and accrued
liabilities. Net cash used in investing activities was $764,767 for the year
ended March 31, 2000. Net cash used in investing activities related to purchase
of property and equipment and our domain name. Net cash provided by financing
activities was $4,504,500 for the year ended March 31, 2000, related primarily
to net proceeds from the sale of common.
In their independent auditor's report dated June 27, 2000, Davidson & Co.,
our auditors, expressed substantial doubt about our ability to continue as a
going concern due to our lack of working capital for our planned business
activities. We currently do not have sufficient working capital to fund our
operations through August
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<PAGE>
2000. We are currently in the process of negotiating bridge financing to provide
us with sufficient working capital to fund our operations until the registration
statement in which this prospectus is a part is declared effective and we are
permitted to obtain financing through drawdowns under the terms of our common
stock purchase agreement with Gestrow Investments Limited.
Under the common stock purchase agreement, we are allowed to drawdown every
22 trading days up to $2,000,000 per draw over a period of 12 months. We may
make up to 12 drawdowns. The maximum amount that we may drawdown in any period
may be limited by the average price and the trading volume of our common stock
on the OTCBB. Under the agreement, the maximum we may drawdown in each draw is
equal to the lesser of:
- $2,000,000; or
- 20% of the weighted average trading price of our common stock on the
OTCBB during the 22 trading days prior to the drawdown, multiplied by
the average number of shares traded per day on the OTCBB during the 45
days prior to the drawdown, multiplied by 22,
less a 5% cash placement fee payable to its placement agent, Ladenburg Thalmann
& Co. Inc. and $1,500 in escrow fees and expenses per drawdown. We may be unable
to drawdown funds sufficient to meet our working capital needs in a timely
manner, if at all. In addition, business and economic conditions may not make it
feasible to draw down under the common stock purchase agreement at every
opportunity.
Our ability to raise funds through the agreement is also subject to the
satisfaction of certain conditions, including the effectiveness of the
registration statement in which this prospectus is a part, at the time of each
drawdown or sale of common stock to Gestrow. We may not be able to satisfy the
conditions to the initial drawdown and subsequent drawdowns to Gestrow under the
agreement.
Our operating budget for the period beginning April 1, 2000 through March
31, 2001 is estimated to be approximately $11.1 million. We cannot assure you
that our actual expenditures for these periods will not exceed our estimated
operating budget. Actual expenditures will depend on a number of factors, some
of which are beyond our control, including, among other things:
- cost associated with the continuing development of our web site.
- our ability to attract visitors to our web site,
- our ability to attract pawnshops to use our services,
- our ability to successfully complete transactions,
- the availability of financing on acceptable terms,
- reliability of the assumptions of management in estimating cost and
timing,
- competition; and
- other factors that may be beyond our control.
We cannot assure you that we will successfully obtain additional financing
on acceptable terms, if at all. If we are unable to secure additional financing,
we intend to concentrate our resources on developing our web site and intend to
reduce the amount of resources we have budgeted for marketing our web site. Such
a reduction may have a material adverse affect on our business and results of
operations.
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<PAGE>
FINANCING ACTIVITIES
As of March 31, 2000, we have funded our business activities and operations
through issuance of shares of our common stock in the following transactions:
<TABLE>
Summary of Transactions
Number of Shares Total Price of
Shares ($)
-------------------- --------------------
<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(5) 1,300,000 3,003,000
Issued for cash at $2.31 per share(6) 650,000 1,501,500
-------------------------------------------------------------------- -------------------- --------------------
TOTAL 17,564,750 3,032,087
</TABLE>
(1) On a post split basis. On June 10, 1999, we amended our Articles of
Incorporation to affect 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 Eriko Internet, Inc and us.
(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.
(6) We issued 650,000 shares of Common Stock in exchange for the Purchases
Warrants, called in February 2000, at exercise price of $2.31.
Events Subsequent to March 31, 2000
We obtained a one million dollar ($1,000,000) line of credit from BWI
Avionics Ltd. that the Company has completely drawn down as of June 30, 2000.
The line of credit has interest payable at the rate of twelve percent (12%) per
annum. The Note is due and payable May 1, 2001, with the option of extending the
term upon the agreement of BWI Avionics Ltd., William Galine, and Joseph
Schlader. Each of William Galine and Joseph Schlader and their entity Pacific
Pawnbroker guaranteed $500,000 of the line of credit. The Company drew down the
loan for the purpose of purchasing certain equipment.
On June 7, 2000, we issued a 9% convertible debenture and warrants to
Lamothe Investing Corp. pursuant to a loan agreement dated June 7, 2000 to raise
gross proceeds of $500,000. The convertible debenture is
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<PAGE>
convertible into common shares at the lesser of lesser of $4.89 or (ii) 85% of
the average five (5) lowest closing bid prices for our shares on the OTCBB or
other principal market during the twenty-two trading day period prior to the
conversion date. The warrants are exercisable to acquire 58,824 shares of our
common stock at $4.89 per share. We issued the 9% convertible debenture and
warrants pursuant to an exemption from registration under 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. We paid a loan fee
to of Lamothe Investing Corp. equal to 10% of the gross proceeds of the
offering.
On July 7, 2000, we entered into a common stock purchase agreement with
Gestrow Investments Limited for the future issuance and purchase of shares of
our common stock. See "Terms of the Common Stock Purchase Agreement."
Year 2000 Compliance
As of June 30, 2000, we had not incurred any material cost directly
associated with our year 2000 compliance efforts, except for compensation
expense associated with our salaried employees who have devoted some of their
time to our year 2000 assessment and remediation efforts. We do not expect the
total cost of year 2000 issues to be material to our business, financial
condition and operating results.
As of June 30, 2000, we had not encountered any material year 2000 problems
with the hardware and software systems used in our operations. In addition, none
of our critical venders have reported any material year 2000 problems nor have
we experienced any decline in service levels from such venders.
We expect to continue to monitor internal and external issues related to
year 2000. While no material problems have been discovered, we cannot assure you
that material problems will not materialize in the future.
Recent Accounting Pronouncements
In December 1999, the SEC released Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition in Financial Statements," which provides guidance on
the recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. Subsequently, the SEC released SAB 101A, which delayed the
implementation date of SAB 101 for registrants with fiscal years that begin
between December 16, 1999 and March 15, 2000 to the second quarter of their
fiscal year. We do not anticipate that the adoption of the new statement will
have a significant effect on our business or operating results.
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued. We
are required to adopt this statement in fiscal 2001. Because we do not currently
use any derivative instruments, we do not anticipate that the adoption of the
new statement will have a significant effect on our business or operating
results.
In December 1998, the American Institute of Certified Public Accountants
issued SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions." SOP 98-9 amends SOP 97-2 and SOP 98-4
extending the deferral of the application of certain provisions of SOP 97-2 as
amended by SOP 98-4 through fiscal years beginning on or before March 15, 1999.
All other provisions of SOP 98-9 are effective for transactions entered into in
fiscal years beginning after March 15, 1999. We have adopted SOP 98-9 and it did
not have a material effect on our operating results or financial position.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
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<PAGE>
EXECUTIVE COMPENSATION
The table below shows, for the last two completed fiscal years ended March
31, 2000 and 1999, compensation paid to Pawnbroker.com's Chief Executive Officer
and the four most highly paid executive officers serving at June 30, 2000 whose
total annual compensation exceeded or is expected to exceed $100,000. These
officers are referred to as the "Named Executive Officers."
Summary Compensation Table
<TABLE>
Annual Compensation Long Term Compensation
----------------------------------------- ---------------------------------------------------
Awards Payouts
-------------------------- ------------------------
Name and Principal Position Year(1) Salary Bonus Other Restricted Securities LTIP(2) All Other
(US$) ($) Annual Stock Underlying Payouts Compensa-tion
Compensation Award(s) Options/ ($) ($)
($) ($) SARs(#)
---------------------------- -------- ----------- -------- ------------ ------------ ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Neil McElwee(3) 2000 $107,692 $ -- $ 4,200 $ -- 782,590 $ -- $ --
1999 -- -- -- -- -- -- --
Joseph Schlader(4) 2000 74,423 -- 2,853 -- 250,000 -- --
1999 -- -- -- -- -- -- --
William Galine(5) 2000 60,019 -- 2,853 -- 125,000 -- --
1999 -- -- -- -- -- -- --
Vahid Rafizadeh(6) 2000 73,769 -- 2,266 -- 391,295 -- --
1999 -- -- -- -- -- -- --
Greigory Park(7) 2000 5,769 -- -- -- 300,000 -- --
</TABLE>
(1) Years ended March 31, 2000 and 1999.
(2) Long-term incentive plan. We have no LTIP.
(3) CEO from September 12, 1999 to August 8, 2000.
(4) President from June 14, 1999 to present.
(5) Senior Vice-President from June 14, 1999 to present.
(6) CTO from October 5, 2000 to present.
(7) CFO from March 9, 2000 to present.
Employment Contracts
On September 12, 1999 we entered into an employment agreement with Neil
McElwee, our Chief Executive Officer, for a term of 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 pay Mr. McElwee a salary of $200,000 per year
increasing by 12% per year. We also 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 over 3 years, and bonus options exercisable to acquire
up to 1% of our issued and outstanding shares of common stock following each
year of his employment. On August 8, 2000, Mr. McElwee was terminated as our
Chief Executive Officer for cause.
On June 14, 1999 we entered into an employment agreement with Joseph
Schlader, our President, for a term of 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. We agreed to pay Mr.
Schlader a salary of $90,000 per year
43
<PAGE>
increasing by 12% per year. 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 over 3 years.
On June 14, 1999 we entered into an employment agreement with William
Galine, our Vice President, for a term of 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 employment agreement. Mr.
Galine agreed to serve full time as our Vice President. We agreed to pay Mr.
Galine a salary of $75,000 per year increasing by 12% per year. We also agreed
to grant Mr. Galine options to acquire up to 250,000 shares of our common stock
at $6.75 per share under our stock option plan vesting over 3 years.
On October 5, 2000 we entered into an agreement with Vahid Rafizadeh, our
Chief Technology Officer, for a term 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 employment agreement. Mr.
Rafizadeh agreed to serve full time as our Chief Technology Officer. We agreed
to pay Mr. Rafizadeh a salary of $140,000 per year increasing by 12% per year.
We also agreed to grant Mr. Rafizadeh options to acquire up to 391,295 shares of
our common stock at $6.75 per share under our stock option plan vesting over 3
years.
We hired Mr. Park as our Chief Financial Officer on March 9, 2000. We are
in the process of finalizing an employment agreement, which we anticipate will
be finalized during in the summer of 2000.
Option Grants
The following table sets forth information regarding stock option grants to
our Chief Executive Officer and four most highly compensated executive officers
during the year ended March 31, 2000. The potential realizable value is
calculated based on the assumption that the common stock appreciates at the
annual rate shown, compounded annually, from the date of grant until the expiry
of the term of the option. These numbers are calculated based on SEC
requirements and do not reflect our projection or estimate of future stock price
growth. Potential realizable values are computed by:
o multiplying the number of shares of common stock subject to a given
option by the exercise price;
o assuming that the aggregate stock value derived from that calculation
compounds at the annual 5% or 10% rate shown in the table for the
entire term of the option; and
o subtracting from that result the aggregate option exercise price.
44
<PAGE>
Option Grants in Last Fiscal Year Ended March 31, 2000
<TABLE>
Individual Grants Potential Realized
Value at Assumed Annual
Rates of Stock Price
Appreciation for Option
Term
---------------------------------------------------------------------------------- -------------------------
(a) (b) (c) (d) (e) (f) (g)
Name Number of % of Total Exercise Expiration 5% ($) 10% ($)
Securities Options or Base Date
Underlying Granted to Price
Options Employees ($/Sh)(2))
Granted (#) in Fiscal
Year(1)
------------------------ -------------- ------------- ------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Neil McElwee (3)(8) 782,590 27% 6.75 9/13/2009 1,545,223 8,678,970
Joseph Schlader (4) 250,000 9% 6.75 6/13/2009 492,500 2,772,500
William Galine (5) 125,000 4% 6.75 6/13/2009 246,250 1,386,250
Vahid Rafizadeh (6) 391,295 14% 6.75 10/4/2009 474,630 3,559,460
Greigory Park (7) 300,000 10% 7.13 3/8/2010 363,000 4,114,000
</TABLE>
(1) During our fiscal year ended March 31, 2000, we issued options to purchase
2,894,665 shares to employees.
(2) The exercise price per shares was equal to the fair market value of the
common stock on the date of grant as determined by the Board of Directors.
(3) Represents options vesting according to the following schedule: one third
of the options granted shall vest on September 12, 2000. Thereafter, one
thirty-sixth of the options granted shall vest on the 12th day of each
calendar month for two consecutive years
(4) Represents options vesting according to the following schedule: one third
of the options granted shall vest on June 14,, 2000. Thereafter, one
thirty-sixth of the options granted shall vest on the 14th day of each
calendar month for two consecutive years
(5) Represents options vesting according to the following schedule: one third
of the options granted shall vest on June 14, 2000. Thereafter, one
thirty-sixth of the options granted shall vest on the 14th day of each
calendar month for two consecutive years
(6) Representing option vesting according to the following schedule: one third
of the options granted shall vest on October 5, 2000. Thereafter, one
thirty-sixth of the options granted shall vest on the 5th day of each
calendar month for two consecutive years
(7) Representing option vesting according to the following schedule: one third
of the options granted shall vest on March 9, 2001. Thereafter, one
thirty-sixth of the options granted shall vest on the 9th day of each
calendar month for two consecutive years
(8) On August 8, 2000, Mr. McElwee was terminated as our Chief Executive
Officer.
Option Exercises
During the fiscal year ended March 31, 2000, none of the Named Executive
Officers exercised options to purchase shares of our common stock.
Compensation of Advisory Council Members
Advisory Council Members do not currently receive cash compensation from
Pawnbroker.com for their services as members of the Board of Directors, although
they may be reimbursed for certain expenses in connection with attendance at
council member meetings and for their efforts as council members. From time to
time, certain of our council members have received grants of options to purchase
shares of our common stock pursuant to the 1999 Stock Option Plan. As of March
31, 2000, we grant options exercisable to acquire a total of 82,000 shares of
our common stock to members of our Advisory Council.
During our fiscal year ended March 31, 2000, the Board of Directors was
responsible for establishing compensation policy and administering the
compensation programs of our executive officers.
45
<PAGE>
The amount of compensation paid by Pawnbroker.com to each of its directors
and officers and the terms of those persons' employment is determined solely by
the Board of Directors, except as otherwise noted below. We believe that the
compensation paid to our directors and officers is fair to Pawnbroker.com.
In the past, our board of directors has negotiated all executive salaries
on behalf of Pawnbroker.com. Our Board of Directors believes that the use of
direct stock awards is at times appropriate for employees, and in the future
intends to use direct stock awards to reward outstanding service or to attract
and retain individuals with exceptional talent and credentials. The use of stock
options and other awards is intended to strengthen the alignment of interests of
executive officers and other key employees with those of our stockholders.
Stock Option Plan
On October 28, 1999, our Board of Directors and a majority of our
stockholders approved the 1999 Stock Option Plan. The Plan was amended on May 3,
2000, at a special meeting of our shareholders. The Plan provides for the grant
of incentive stock options and non-qualified options to purchase up to 8,000,000
shares of common stock to officers, directors, employees, and other qualified
persons selected by the Plan Administrator (which currently is the Board of
Directors). The Plan is intended to help attract and retain key employees and
any other persons that may be selected by the Plan Administrator and to give
them an equity incentive to achieve our objectives.
Incentive stock options may be granted to any individual who, at the time
of grant, is an employee of Pawnbroker.com or any subsidiary. Non-qualified
stock options may be granted to employees and other persons selected by the Plan
Administrator. The Plan Administrator uses its discretion to fix the exercise
price for options, subject to certain minimum exercise prices in the case of
incentive stock options. Options will not be exercisable until they vest
according to a vesting schedule specified by the Plan Administrator at the time
of grant of the option.
Options are non-transferable except by will or the laws of descent and
distribution. With certain exceptions, vested but unexercised options terminate
on the earlier of:
o the expiry of the option term specified by the Plan Administrator at
the date of grant (generally 10 years; or, with respect to incentive
stock options granted to greater-than 10% shareholders, a maximum of
five years);
o the date an optionee's employment or contractual relationship with
Pawnbroker.com or any subsidiary is terminated for cause;
o the expiry of three months from the date an optionee's employment or
contractual relationship with Pawnbroker.com or any subsidiary is
terminated for any reason, other than cause, death or disability; or
o the expiry of one year from the date of death of an optionee or
cessation of an optionee's employment or contractual relationship by
death or disability.
Unless accelerated in accordance with the Plan, unvested options terminate
immediately on termination of employment of the optionee by Pawnbroker.com for
any reason whatsoever, including death or disability.
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.
LEGAL PROCEEDINGS
To the best of our knowledge, there are no active or pending legal
proceedings or claims against us or any of our properties.
46
<PAGE>
RELATED PARTY 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 assist 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 acquired the domain names "pawnbroker.com" and "pawnbrokers.com"
from Pacific Pawnbrokers for $125,000.
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.
We obtained a one million dollar ($1,000,000) line of credit from BWI
Avionics Ltd. that the Company has drawn down nine hundred thousand dollars
($900,000) as of May 31, 2000. The line of credit has interest payable at the
rate of twelve percent (12%) per annum. The Note is due and payable May 1, 2001,
with the option of extending the term upon the agreement of BWI Avionics Ltd.,
William Galine, and Joseph Schlader. Each of William Galine and Joseph Schlader
and their entity Pacific Pawnbroker personally guaranteed $500,000 of the line
of credit. The Company drew down the loan for the purpose of purchasing certain
equipment.
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.
PRINCIPAL STOCKHOLDERS
The following table sets forth information concerning the beneficial
ownership of our outstanding common stock as of June 30, 2000 and as adjusted to
reflect the sale of the shares of common stock by the selling shareholders for:
- each person or group that we know owns beneficially 5% or more of our
common stock;
- each of our directors;
- each of our four most highly compensated executive officers;
- each selling shareholder; and
- all directors and executive officers as a group.
The term "beneficial ownership" includes shares over which the indicated
beneficial owner exercises voting and/or investment power. The rules also deem
common stock subject to options or warrants currently exercisable, or
exercisable within 60 days, to be outstanding for purposes of computing the
percentage ownership of the person holding the options or warrants, but they do
not deem such stock to be outstanding for purposes of
47
<PAGE>
computing the percentage ownership of any other person. The applicable
percentage of ownership for each shareholder is based on 17,564,750 shares of
common stock outstanding as of June 30, 2000, together with applicable options
and warrants for that shareholder. Except as otherwise indicated, we believe the
beneficial owners of the common stock listed below, based on information
furnished by them, have sole voting and investment power over the number of
shares listed opposite their names.
<TABLE>
------------------------------- ---------------------------- ---------------------------- ----------------------------
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Ownership Percentage of Class(1)
Title of Class
------------------------------- ---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
Dotcom Fund, S.A.
Box 571, Providenciales,
Common Stock Turks & Caicos Islands 1,600,000 9.11%
------------------------------- ---------------------------- ---------------------------- ----------------------------
Packard Financial Group
#11 Old Parham Rd, St.
Common Stock Charles Nevis, West Indies 1,950,000 11.10%
------------------------------- ---------------------------- ---------------------------- ----------------------------
William Galine
85 Keystone, Suite A
Common Stock Reno, Nevada 89503 3,099,266(2) 17.60%(2)
------------------------------- ---------------------------- ---------------------------- ----------------------------
Cheryl Schlader(3)
85 Keystone, Suite A
Common Stock Reno, Nevada 89503 3,265,534 (3) 18.50%(3)
------------------------------- ---------------------------- ---------------------------- ----------------------------
Joseph Schlader
85 Keystone, Suite A
Common Stock Reno, Nevada 89503 3,265,534 (4)(5) 18.50%(4)(5)
------------------------------- ---------------------------- ---------------------------- ----------------------------
Neil McElwee (6) nil(6)
85 Keystone, Suite A
Common Stock Reno, Nevada 89503
------------------------------- ---------------------------- ---------------------------- ----------------------------
Vahid Rafizadeh (7) nil(7)
85 Keystone, Suite A
Common Stock Reno, Nevada 89503
------------------------------- ---------------------------- ---------------------------- ----------------------------
Greigory Park (8) nil(8)
85 Keystone, Suite A
Common Stock Reno, Nevada 89503
------------------------------- ---------------------------- ---------------------------- ----------------------------
Officers and Directors as
Common Stock a Group 6,364,800(2)(5) 36.10%(2)(5)
------------------------------- ---------------------------- ---------------------------- ----------------------------
</TABLE>
(1) Based on an aggregate of 17,564,750 shares outstanding as of June 30, 2000.
(2) Includes 41,666 shares acquirable upon the exercise of options within sixty
days of June 30, 2000. Does not include 83,334 shares acquirable upon the
exercise of options, which vest as to 3,472 shares on the 12th day of each
calendar month for two consecutive years.
(3) Joseph Schlader and Cheryl Schlader are husband and wife. As such, each
would be deemed to be the beneficial owner the other's shares. Includes
1,674,534 shares of common stock owned by Joseph Schlader.
(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. Includes
1,591,200 shares of common stock owned by Cheryl Schlader.
(5) Includes 83,334 shares acquirable upon the exercise of options within sixty
days of June 30, 2000. Does not include 166,666 shares acquirable upon the
exercise of options, which vest as to 6,944 shares on the 12th day of each
calendar month for two consecutive years.
(6) Mr. McElwee has options exercisable to acquire 782,590 shares of our common
stock, which vest according to the following schedule: one third of the
options granted shall vest on September 12, 2000. Thereafter, one
thirty-sixth of the options granted shall vest on the 12th day of each
calendar month for two consecutive years. Mr. McElwee was terminated as our
Chief Executive Officer on August 8, 2000.
(7) Mr. Rafizadeh has options exercisable to acquire 391,295 shares of our
common stock, which vest according to the following schedule: one third of
the options granted shall vest on October 5, 2000. Thereafter, one
thirty-sixth of the options granted shall vest on the 5th day of each
calendar month for two consecutive years.
(8) Mr. Park has options exercisable to acquire 300,000 shares of our common
stock, which vest according to the following schedule: one third of the
options granted shall vest on March 9, 2001. Thereafter, one thirty-sixth
of the options granted shall vest on the 9th day of each calendar month for
two consecutive years.
48
<PAGE>
DESCRIPTION OF SECURITIES
On June 10, 2000, we filed a Certificate of Amendment to amend our Articles
of Incorporation to increase our authorized capital stock to 150,000,000 shares,
consisting of 100,000,000 shares of common stock and 50,000,000 shares of
preferred stock. As of June 30, 2000, there were 17,564,750 shares of common
stock outstanding.
Common Stock
Holders of common stock are entitled to one vote per share. All actions
submitted to a vote of stockholders are voted on by holders of common stock
voting together as a single class. Holders of common stock are not entitled to
cumulative voting in the election of directors.
Holders of common stock are entitled to receive dividends in cash or in
property on an equal basis, if and when dividends are declared on the common
stock by our board of directors, subject to any preference in favor of
outstanding shares of preferred stock, if there are any.
In the event of liquidation of our company, all holders of common stock
will participate on an equal basis with each other in our net assets available
for distribution after payment of our liabilities and payment of any liquidation
preferences in favor of outstanding shares of preferred stock, if there are any.
Holders of common stock are not entitled to preemptive rights and the
common stock is not subject to redemption.
The rights of holders of common stock are subject to the rights of holders
of any preferred stock that we designate or have designated. The rights of
preferred stockholders may adversely affect the rights of the common
stockholders.
Preferred Stock
Our board of directors has the ability to issue up to 50,000,000 shares of
preferred stock in one or more series, without stockholder approval. The board
of directors may designate for the series:
o the number of shares and name of the series, the voting powers of the
series, including the right to elect directors, if any,
o the dividend rights and preferences, if any,
o redemption terms, if any,
o liquidation preferences and the amounts payable on liquidation or
dissolution,
o the terms upon which such series may be converted into any other
series or class of our stock, including the common stock and
o any other terms that are not prohibited by law.
It is impossible for us to state the actual effect it will have on common
stock holders if the board of directors designates a new series of preferred
stock. The effects of such a designation will not be determinable until the
rights accompanying the series have been designated. The issuance of preferred
stock could adversely affect the voting power, liquidation rights or other
rights held by owners of common stock or other series of preferred stock. The
board of directors' authority to issue preferred stock without shareholder
approval could make it more difficult
49
<PAGE>
for a third party to acquire control of our company, and could discourage any
such attempt. We have no present plans to issue any additional shares of
preferred stock.
Options and Warrants
As of July 24, 2000, we have reserved up to an additional 8,000,000 shares
of common stock for issuance upon exercise of options under an incentive stock
option plan. As of July 24, 2000, we have granted options exercisable to acquire
2,976,665 shares of our common stock under the plan at an average exercise price
of $6.72 per share. In addition, options granted to Neil McElwee and Vahid
Rafizadeh have non-dilution features, which increase the number of shares they
are entitled to under their option grants in the event we issue additional
shares of our common stock.
As of July 24, 2000, we had the following warrants outstanding:
- warrants exercisable to acquire up to 58,824 shares of our common
stock at an exercise price of $4.89 per share expiring on June 7,
2003;
- warrants exercisable to acquire up to 72,000 shares of our common
stock at $6.72 per share expiring on May 19, 2003;
- warrants exercisable to acquire up to 668,524 shares of our common
stock at $3.59 per share expiring on July 6, 2003.
All of our outstanding warrants and options provide for anti-dilution
adjustments if there are changes in our corporate structure, such as mergers,
consolidations, reorganizations, recapitalizations, stock dividends, or stock
splits.
Convertible Debentures
On June 7, 2000, we issued 9% convertible debentures and warrants to
Lamothe Investing Corp. pursuant to a loan agreement dated June 7, 2000 to raise
gross proceeds of $500,000. The convertible debenture is convertible into common
shares at the lesser of lesser of $4.89 or (ii) 85% of the average five (5)
lowest closing bid prices for our shares on the OTCBB or other principal market
during the twenty-two trading day period prior to the conversion date. The
warrants are exercisable to acquire 58,824 shares of our common stock at $4.89
per share. We issued the 9% convertible debenture and warrants pursuant to an
exemption from registration under Rule 506 of Regulation D promulgated under the
Securities Act. We paid a loan fee to of Lamothe Investing Corp. equal to 10% of
the gross proceeds of the offering.
ANTI-TAKEOVER CONSIDERATIONS
Our certificate of incorporation authorizes the issuance of up to
50,000,000 shares of $.0001 par value preferred stock. The issuance of preferred
stock with such rights could have the effect of limiting stockholder
participation in certain transactions such as mergers or tender offers and could
discourage or prevent a change in our management. We have no present intention
to issue any additional preferred stock. We also have a classified or staggered
board of directors, which limits an outsider's ability to effect a rapid change
of control of our board. Our staggered board, combined with the ability of our
board of directors to issue "blank check" preferred stock and the staggered
terms of the members of our board of directors, could have the effect of
delaying, deterring or preventing a change in control without any further action
by the stockholders. In addition, the issuance of preferred stock, without
stockholder approval, on such terms as our board may determine, could adversely
affect the voting power of the holders of the common stock, including the loss
of voting control to others.
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<PAGE>
INDEMNIFICATION OF OFFICERS AND DIRECTORS
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.
TRANSFER AGENT AND REGISTRAR
Our auditor is Davidson & Company, Chartered Accountants, of Vancouver,
British Columbia, Canada. The registrant and transfer agent for our shares of
common stock is Signature Stock Transfer Co., Inc., of Dallas, Texas.
SHARES ELIGIBLE FOR FUTURE SALE
There are 17,564,750 shares of our common stock outstanding as of July 24,
2000, of which 11,324,750 are freely tradable. Subject to the registration
statement being declared and remaining effective, 9,831,091 shares of our common
stock offered hereby will be immediately tradable without restriction or further
registration under the Securities Act.
We cannot predict as to the effect, if any, that sales of shares of common
stock by the selling shareholders, or even the availability of such shares for
sale, will have on the market prices of our common stock from time to time. The
possibility that substantial amounts of common stock may be sold in the public
market may adversely affect prevailing market prices for our common stock and
could impair our ability to raise capital through the sale of our equity
securities.
Subject to the provisions of Rule 144, 6,250,000 additional shares of our
common stock will be available for sale in the public markets.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares of our common stock for at least one year would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:
51
<PAGE>
o 1% of the number of shares of common stock then outstanding, which
equals approximately 17,565 shares as of June 30, 2000; or
o the average weekly trading volume of the common stock on the OTC
Bulletin Board during the four calendar weeks preceding the filing of
a notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us.
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, "144(k) shares" may be sold immediately.
As of June 30, 2000, options to purchase 2,976,665 shares of common stock
were issued and outstanding under our 1999 Stock Option Plan. We have a filed a
registration statement on Form S-8 to register all of the shares of common stock
reserved for issuance under our 1999 Stock Option Plan (including shares subject
to outstanding options). Accordingly, shares registered under such registration
statement are, subject to vesting provisions and Rule 144 volume limitations
applicable to our affiliates, available for sale in the open market.
DESCRIPTION OF PROPERTY
Our headquarters are currently located in a leased facility in Reno,
Nevada. In addition we have a sales and marketing office in Santa Clara,
California and a technology development office in Philadelphia, Pennsylvania.
The facilities consist of 5,505, 3,587 and 1,000 square feet, respectively. Our
annual rent expense under the leases is $323,841. The leases expire in 2003,
2004 and 2002, respectively.
LEGAL MATTERS
Dorsey & Whitney LLP, of Seattle, Washington, will pass on the legality of
the shares offered by this prospectus.
EXPERTS
The financial statements of Pawnbroker.com for the fiscal years ended
December 31, 1998 and 1999 were audited by Davidson & Company, independent
accountants, as set forth in their report thereon appearing elsewhere in this
prospectus, and are included herein in reliance upon the authority of such firm
as experts in accounting and auditing.
52
<PAGE>
PAWNBROKER.COM INC.
INDEX TO FINANCIAL STATEMENTS
Consolidated Balance Sheets.............................................. F-2
Consolidated Statement of Operations..................................... F-3
Consolidated Statement of Cash Flows..................................... F-4
Consolidated Statement of Changes in Stockholders' Equity................ F-5
Notes to the Consolidated Financial Statements........................... F-6
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
AS AT MARCH 31
================================================================================
<TABLE>
2000 1999
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current
Cash and cash equivalents $ 424,678 $ -
Prepaid expenses 6,018 -
Accounts receivable - 80,500
------------ -----------
430,696 80,500
Deposits 205,741 -
Capital assets (Note 4) 370,770 -
Domain name (Note 5) 90,279 -
------------ -----------
Total assets $ 1,097,486 $ 80,500
=================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 1,122,159 $ -
------------ -----------
Stockholders' equity
Capital stock (Note 7)
Authorized
20,000,000 preferred shares with a par value of $0.00001
50,000,000 common shares with a par value of $0.00001
Issued and outstanding
March 31, 2000 17,564,750 common shares
March 31, 1999 8,500,000 common shares 176 85
Additional paid-in capital 4,681,260 80,415
Deficit accumulated during the development stage (4,706,109) -
------------ -----------
Total stockholders' equity (24,673) 80,500
------------ -----------
Total liabilities and stockholders' equity $ 1,097,486 $ 80,500
=================================================================================================================
</TABLE>
History and organization of the Company (Note 1)
Commitments (Note 11)
Subsequent events (Note 14)
The accompanying notes are an integral part of
these consolidated financial statements.
F-2
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
Cumulative
Amounts From Period from
February 5, February 5,
1999 Year Ended 1999 to
to March 31, March 31, March 31,
2000 2000 1999
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING EXPENSES
Amortization $ 105,984 $ 105,984 $ -
Contract services 476,899 476,899 -
Consulting 377,441 377,441 -
General and administrative 1,657,250 1,657,250 -
Marketing and related expenses 300,706 300,706 -
Professional fees 386,939 386,939 -
Rent 178,784 178,784 -
Salary and wages 891,940 891,940 -
Stock-based compensation 93,617 93,617 -
Telephone 59,038 59,038 -
Travel and related 227,976 227,976 -
------------ ----------- ---------
4,756,574 4,756,574 -
OTHER ITEM
Interest income (50,465) (50,465) -
------------ ----------- ---------
Loss for the period $ 4,706,109 $ 4,706,109 $ -
=======================================================================================================================
Basic and diluted loss per common share (Note 3) $ - $ (0.31) $ -
=======================================================================================================================
Weighted average number of shares of common stock outstanding - 15,220,285 1,124,750
=======================================================================================================================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-3
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
Cumulative
Amounts From Period from
February 5, February 5,
1999 Year Ended 1999 to
to March 31, March 31, March 31,
2000 2000 1999
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Loss for the period $ (4,706,109) $ (4,706,109) $ -
Items not affecting cash:
Amortization 105,984 105,984 -
Stock-based compensation 93,617 93,617 -
Net change in non-cash working capital items:
Increase in prepaid expenses (6,018) (6,018) -
Increase in accounts payable and accrued liabilities 1,116,971 1,116,971 -
Increase (decrease) in accounts receivable - 80,500 (80,500)
-------------- ------------- -------------
Net cash used in operating activities (3,395,555) (3,315,055) (80,500)
-------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of capital assets (442,033) (442,033) -
Purchase of domain name (125,000) (125,000) -
Acquisition of cash on purchase of subsidiary 8,007 8,007 -
Increase in deposits (205,741) (205,741) -
-------------- ------------- -------------
Net cash used in investing activities (764,767) (764,767) -
-------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 4,585,000 4,504,500 80,500
-------------- ------------- -------------
Net cash provided by financing activities 4,585,000 4,504,500 80,500
-------------- ------------- -------------
Change in cash position for the period 424,678 424,678 -
Cash and cash equivalents, beginning of period - - -
-------------- ------------- -------------
Cash and cash equivalents, end of period $ 424,678 $ 424,678 $ -
==============================================================================================================================
</TABLE>
Supplemental disclosure with respect to cash flows (Note 10)
The accompanying notes are an integral part of
these consolidated financial statements.
F-4
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
================================================================================
<TABLE>
Deficit
Accumulated
Common Stock Additional During the 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 Pawnbroker.com, Inc. at
April 6, 1999 1,124,750 12 26,256 - 26,268
Deficit of Pawnbroker.com, Inc. at April 6,
1999 - - (23,261) - (23,261)
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) (248) - (250)
Common stock issued on exercise of share
purchase warrants 650,000 6 1,501,494 - 1,501,500
Stock-based compensation for options issued to
consultants and non-employees 93,617 - 93,617
Loss for the year - - - (4,706,109) (4,706,109)
------------- ------------ ------------- ------------- -------------
Balance, March 31, 2000 17,564,750 $ 176 $4,681,260 $(4,706,109) $ (24,673)
==============================================================================================================================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
================================================================================
1. HISTORY AND 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 September 10, 1999, 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 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.
These financial statements contain the financial statements of Eriko
Internet Inc. ("Eriko"), Pawnbroker.com, Inc., Digital Signs, Inc. and
Pawnbroker.com, Inc. (a Nevada Corporation) presented on a consolidated
basis. On April 6, 1999, Pawnbroker.com, Inc. acquired all of the issued
and outstanding share capital of Eriko by issuing 8,500,000 common shares
(Note 6). As a result of the share exchange, 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. Recapitalization accounting results in
consolidated financial statements being issued under the name of
Pawnbroker.com, Inc., but are considered a continuation of Eriko. As a
result, the financial statements present the financial position of Eriko as
at March 31, 1999 and its results of operations from February 5, 1999 to
March 31, 1999 and the consolidated financial position of the companies as
at March 31, 2000, the results of operations of Eriko for the year ended
March 31, 2000 and the results of operations of Pawnbroker.com, Inc.,
(Nevada) and Digital Signs Inc. from their respective dates of acquisition
during the year. The number of shares outstanding at March 31, 2000 and
1999 as presented are those of Pawnbroker.com, Inc.
The Company is a development stage online provider of previously-owned,
higher value merchandise available for immediate purchase and provides an
online network of pawnbrokers to trade and sell in the global marketplace.
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 in
this regard to obtain additional working capital through equity financings.
<TABLE>
=====================================================================================
2000 1999
-------------------------------------------------------------------------------------
<S> <C> <C>
Deficit accumulated during the development stage $ (4,706,109) $ -
Working capital (deficiency) (691,463) 80,500
=====================================================================================
</TABLE>
3. SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
These 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 upon consolidation.
F-6
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
================================================================================
3. SIGNIFICANT ACCOUNTING POLICIES (cont'd.....)
Revenue recognition
The Company recognizes 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 year. 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
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
requires basic and diluted earnings per share to be presented. Basic
earnings per share is computed by dividing income available to common
shareholders by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share takes into
consideration shares of common stock outstanding (computed under basic
earnings per share) and potentially dilutive shares of common stock.
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 September 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. In June 1999, the FASB
issued SFAS 137 to defer the effective date of SFAS 133 to fiscal quarters
of fiscal years beginning after June 15, 2000. The Company does not
anticipate that the adoption of the statement will have a significant
impact 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.
F-7
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
================================================================================
3. SIGNIFICANT ACCOUNTING POLICIES (cont'd.....)
Stock-based compensation (cont'd.....)
The Company accounts for stock-based compensation issued to non-employees
in accordance with the provisions of SFAS 123 and the Emerging Issues Task
Force consensus in Issue No. 96-18 ("EITF 96-18"), "Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring or in
Conjunction with Selling, Goods or Services".
Comprehensive income
The Company has 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, 2000.
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.
Capital assets
Capital assets will be recorded at cost less accumulated amortization. The
cost of capital assets is amortized using the straight-line method over the
following estimated useful lives of the related assets:
Furniture and fixtures 5 years
Computer equipment 3 years
Computer software 1.5 years
Leasehold imporvements 2 years
Domain names
The cost of domain name rights will be amortized over 3 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.
Financial instruments
The Company's financial instruments consists of cash and cash equivalents,
accounts receivable, deposits, accounts payable and accrued liabilities.
Unless otherwise noted, it is management's opinion that the Company is not
exposed to significant interest, currency or credit risks arising from
these financial instruments. The fair value of these financial instruments
approximate their carry values, unless otherwise noted.
F-8
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
================================================================================
4. CAPITAL ASSETS
<TABLE>
===================================================================================================
Net Book Value
Accumulated ------------------------------
Cost Amortization 2000 1999
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Furniture and fixtures $ 61,571 $ 7,848 $ 53,723 $ -
Computer equipment 145,300 11,417 133,883 -
Computer software 233,152 51,988 181,164 -
Leasehold improvements 2,010 10 2,000 -
----------- --------- ---------- ----------
$ 442,033 $ 71,263 $ 370,770 $ -
===================================================================================================
</TABLE>
5. DOMAIN NAME
=========================================================================
2000 1999
---------------------------------------------------------- --------------
Domain name $ 125,000 $ -
Less: Accumulated amortization (34,721) -
-------------- -------------
Net book value $ 90,279 $ -
=========================================================================
6. BUSINESS COMBINATIONS
Eriko Internet Inc.
On April 6, 1999, Pawnbroker.com, Inc. ("Pawnbroker") acquired all of the
issued and outstanding share capital of Eriko Internet Inc. ("Eriko"). As
consideration, Pawnbroker issued 8,500,000 shares. Legally, Pawnbroker 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 are included in
the balance sheet at book values, with the net assets of Pawnbroker
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
or assets and liabilities incurred subsequent to the date of acquisition
include the accounts of Pawnbroker.
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, Pawnbroker was inactive with a thin market for its
shares, making it difficult 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 Pawnbroker '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
F-9
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
================================================================================
6. BUSINESS COMBINATIONS (cont'd.....)
Pawnbroker.com, Inc. (Nevada)
On June 14, 1999, Pawnbroker acquired all of the issued and outstanding
share capital of Pawnbroker.com, Inc., a Nevada corporation ("Pawnbroker
-Nevada"). As consideration, Pawnbroker issued 6,240,000 common shares at a
deemed value of $62, equal to the par value of the shares issued. As the
acquisition of Nevada was deemed to be from a promoter of Pawnbroker, the
purchase has been recorded at the historical cost of the net assets of
Nevada, which approximate the par value of the shares issued.
7. CAPITAL STOCK
On April 6, 1999, Pawnbroker acquired all of the issued and outstanding
share capital of Eriko Internet Inc. As consideration, Pawnbroker issued
34,000,000 (8,500,0000 post-consolidation) common shares for cash proceeds
of $80,500.
On May 19, 1999, a shareholder of Pawnbroker 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.
On June 14, 1999, Pawnbroker acquired all of the issued and outstanding
share capital of Pawnbroker.com, Inc., a Nevada Corporation. As
consideration, Pawnbroker issued 6,240,000 common shares at a deemed value
of $62, equal to the par value of the shares issued.
On June 23, 1999, the Company issued 1,300,000 units through a private
placement at a price of $2.31 per unit, for total proceeds of $3,003,000.
Each unit consisted of one common share and one-half of a share purchase
warrant. One full share purchase warrant entitled 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. These share purchase
warrants were exercised during the year for total proceeds of $1,501,500.
On September 10, 1999, the Company consolidated its issued and outstanding
shares of common stock on a four to one basis. The consolidated statement
of changes in stockholders' equity has been restated to give retroactive
recognition of the share consolidation for all periods presented. In
addition, all references to number of shares and per share amounts of
common stock have been restated to reflect the share consolidation.
8. STOCK OPTIONS
At March 31, 2000, non-employee incentive stock options were outstanding
enabling the optionee to acquire the following number of common shares:
<TABLE>
=================================================================================================================
Number Exercise
of Shares Price Expiry Date
--------------- ------------------ ------------------------------------------------------------------------------
<S> <C> <C>
250,000 $ 6.75 November 1, 2002
150,000 6.75 3 years from the date when the Company receives a specified amount of
financing in private or public offerings after November 1, 1999.
=================================================================================================================
</TABLE>
F-10
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
================================================================================
9. STOCK BASED COMPENSATION EXPENSE
SFAS 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 quoted market price
of the Company's stock at the date of grant over the option price. The
Company accounts for stock issued to non-employees in accordance with the
provisions of SFAS 123 and the Emerging Issues Task Force consensus in
Issue No. 96-18, "Accounting for Equity Instruments that are Issued to
Other Than Employees for Acquiring or in Conjunction with Selling, Goods or
Services".
Following is a summary of the stock option activity:
<TABLE>
====================================================================================
Weighted
Average
Number Exercise
of Shares Price
------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at March 31, 1999 - $ -
Granted 400,000 $ 6.75
Forfeited - $ -
Exercised - $ -
---------
Outstanding at March 31, 2000 400,000 $ 6.75
====================================================================================
</TABLE>
The weighted average fair value of options granted to non-employees during
the current year was $0.23 per share.
Following is a summary of the status of options outstanding at March 31,
2000:
<TABLE>
=====================================================================================================================
Outstanding Options Exercisable Options
------------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Exercise Price Number Life Price Number Price
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 6.75 400,000 2.67 $ 6.75 250,000 $ 6.75
====================================================================================================================
</TABLE>
Compensation
The Company granted 400,000 options to consultants and non-employees during
the current period which are accounted for under SFAS 123 and EITF 96-18.
Accordingly, using the Black-Scholes option pricing model, the options are
marked to fair value through charges to operations as stock-based
compensation. Stock-based compensation recognized during the year ended
March 31, 2000 was $93,617 (1999 - $Nil). This amount can be allocated to
the other expense categories in the accompanying statements of operations
as consulting fees of $93,617.
F-11
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
================================================================================
9. STOCK BASED COMPENSATION EXPENSE (cont'd.....)
Compensation (cont'd.....)
The assumptions used in calculating the fair value of options granted using
the Black-Scholes option pricing model are as follows:
===============================================================================
March 31, March 31,
2000 1999
-------------------------------------------------------------------------------
Risk-free interest rate 5.935% -
Expected life of the options 1 year -
Expected volatility 32% -
Expected dividend yield - -
===============================================================================
10. SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS
==========================================================================
March 31, March 31,
2000 1999
--------------------------------------------------------------------------
Cash paid for income taxes $ - $ -
Cash paid for interest - -
==========================================================================
Non-cash investing and financing transactions during the period from
February 5, 1999 to March 31, 2000 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.
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-Nevada.
c) The Company received 250,000 shares of common stock for cancellation
at a deemed value of $250.
11. COMMITMENTS
a) The Company leases office and production premises and certain office
equipment pursuant to operating leases which expire in 2003 and 2004:
Future annual lease payments are as follows:
2001 $ 233,030
2002 225,074
2003 159,739
2004 103,710
F-12
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
================================================================================
11. COMMITMENTS (cont'd.....)
b) 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 (paid) upon execution of the agreement. In
addition, the consultant was 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 of the newly
consolidated shares, for a period of one year from the date of
execution of the agreement. Of these options, 250,000 has vested
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.
c) The Company has formed a Stock Option Plan ("Plan") under which it may
grant stock options to employees and officers to acquire up to a total
of 2,000,000 shares (changed to 8,000,000 subsequent to year-end) of
the Company's common stock, at a price to be determined by the Plan
administrator. Approximately 2,977,000 options have been granted under
the Plan subsequent to year-end.
d) The Company entered into a lease agreement commencing on April 1,
2000, to lease certain computer equipment, whereby the Company is
obligated to pay $13,235 per month for a total term of 24 months. The
total equipment costs are $326,657 and the Company has an option to
purchase the equipment at their fair market values prior to expiration
of the lease term.
12. RELATED PARTY TRANSACTION
During the year ended March 31, 2000, the Company paid $125,000 (1999 -
$Nil) to a company controlled by two officers and directors for purchase of
the Company's domain name.
13. INCOME TAXES
Subject to certain restrictions, the Company has certain operating losses
available to reduce taxable income of future years. Future tax benefits
which may arise as a result of these losses and resource deductions have
not been recognized in these financial statements.
The Company has not recorded potential future income tax benefits of
$1,600,077 in operating losses which expire as follows:
2020 $ 1,600,077
===============
A reconciliation of the U.S. statutory federal income tax rate to the
effective rate is as follows:
<TABLE>
==================================================================================================
2000 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. federal statutory graduated rate 15.00% 15.00%
State income tax rate, net of federal benefit 7.00% 7.00%
Net operating loss for which no tax benefit is currently available (22.00)% (22.00)%
---------- ----------
0.00% 0.00%
==================================================================================================
</TABLE>
F-13
<PAGE>
PAWNBROKER.COM, INC.
(formerly Digital Sign Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
================================================================================
13. INCOME TAXES (cont'd.....)
At March 31, 2000, deferred taxes consisted of a net tax asset of
$1,600,077 due to operating loss carryforwards of $4,706,109, which was
fully allowed for in the valuation allowance of $1,600,077. The valuation
allowance offsets the net deferred asset for which there is no assurance of
recovery. The change in the valuation allowance for the year ended March
31, 2000 was $1,600,077. Net operating loss carryforwards will expire in
2020.
The valuation allowance will be evaluated at the end of each year,
considering positive and negative evidence about whether the asset will be
realized. At that time, the allowance will either be increased or reduced;
reduction could result in the complete elimination of the allowance if
positive evidence indicates that the value of the deferred tax asset is not
longer impaired and the allowance is no longer required.
14. SUBSEQUENT EVENTS
The following are events which occurred subsequent to year end:
a) The Company amended the Company's Certificate of Incorporation to
increase authorized capital of the Company to 150,000,000 shares,
consisting of 100,000,000 shares of common stock with $0.0001 par
value and 50,000,000 shares of blank check preferred stock with
$0.0001 par value.
b) The Company increased the number of shares authorized to be issued by
the Company under the Company's 1999 stock option plan to 8,000,000
shares of common stock. In addition, the Company granted 2,976,665
stock options which vest over a period of 3 years and are exercisable
at prices ranging from $4.50 to $8.13 per share.
c) The Company will effect a change in the Company's fiscal year to
December 31, effective December 31, 2000.
d) A credit facility in the amount of $1,000,000 at 12% per annum from an
unrelated party was approved. Two directors have agreed to provide
personal guarantees to secure up to 50% of the $1,000,000 line of
credit.
e) On June 7, 2000, a 9% convertible debenture and warrants from an
unrelated party for $500,000 was approved. The convertible debenture
and the warrants are convertible into common shares of the Company at
the election of the issuer, beginning October 4, 2000.
F-14
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The table below lists the fees and expenses which the registrant will pay
in connection with the offering described in this registration statement. All
the expenses are estimates, except for the Securities and Exchange Commission
registration fee.
AMOUNT TO BE PAID
SEC registration fee $7,007
Printing and engraving expenses $10,000
Legal fees and expenses $100,000
Accounting fees and expenses $25,000
Blue Sky qualification fees and expenses $5,000
Miscellaneous fees $10,000
Total: $157,007
Item 14. 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.
II-1
<PAGE>
Item 15. 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
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.
------------
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.
II-2
<PAGE>
In February, 2000, we issued 650,000 shares of our common stock to Packard
Financial Group Inc., a non-U.S. Person, outside the United States at $2.31 per
share pursuant to the exercise of the Common Share Purchase Warrant issued on
June 14, 1999. 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 fees or commissions were paid in
connection with the transaction.
On May 19, 2000, we issued RedTagOutlet.com a warrant exercisable to
acquire 72,000 shares of our common stock at $6.72 per share. We issued the
warrant pursuant to an exemption from registration under 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. No fees or
commissions were paid in connection with the transaction.
On June 7, 2000, we issued a 9% convertible debenture and warrants to
Lamothe Investing Corp. pursuant to a loan agreement dated June 7, 2000 to raise
gross proceeds of $500,000. The convertible debenture is convertible into common
shares at the lesser of $5.54 or (ii) 85% of the Market Price on the Conversion
Date, which begins 120 days after the date of the agreement. The date on which
Notice of Conversion is given (the "Conversion Date") shall be deemed to be the
date on which the Holder faxes the Notice of Conversion duly executed to the
Company. The warrants are exercisable to acquire 58,824 shares of our common
stock at $4.89 per share. We issued the 9% convertible debenture and warrants
pursuant to an exemption from registration under 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. We paid a loan fee
to of Lamothe Investing Corp. equal to 10% of the gross proceeds of the
offering.
On July 7, 2000, we issued warrants to Gestrow Investments Limited
exercisable to acquire 334,262 shares of common stock at $3.59 per share until
July 6, 2003. We issued the warrants pursuant to an exemption from registration
under 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.
On July 7, 2000, we issued warrants to Ladenburg Thalmann & Co. Inc.
exercisable to acquire 334,262 shares of common stock at $3.59 per share until
July 6, 2003. We issued the warrants pursuant to an exemption from registration
under Section 4(2) under the Securities Act.
Item 16. Exhibits and Financial Statement Schedules
(a) Subject to the rules regarding incorporation by reference, furnish the
exhibits as required by Item 601 of Regulation S-K.
Except for contracts made in the ordinary course of business, the
following are the material contracts that have been entered into by
Pawnbroker.com within the two years preceding the date of this
registration statement:
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.
II-3
<PAGE>
Exhibit
Number Description
------ -----------
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(3) Certificate of Amendment of Pawnbroker.com, Inc. filed June
1, 2000.
3.5(1) Bylaws of Digital Sign Corporation. (Previously filed as
Exhibit 3.3 to Form 10)
3.6(3) Amended and Restated Bylaws of Pawnbroker.com, Inc.
5.1 Opinion of Dorsey & Whitney LLP
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
10.7(1) Consulting Agreement by and between Pawnbroker.com, Inc. and
IRG Investor Relations dated June 25, 1999
10.8(2) Lease Agreement by and between Pawnbroker.com, Inc. and Don
Pearlman Joint Venture Six dated December 2, 1999
10.9(2) Employment Agreement by and between Pawnbroker.com, Inc. and
Neil McElwee effective September 13, 1999
10.10(2) Employment Agreement by and between Pawnbroker.com, Inc. and
Joseph Schlader effective June 13, 1999
10.11(2) Employment Agreement by and between Pawnbroker.com, Inc. and
William Galine effective June 13, 1999
10.12(2) Employment Agreement by and between Pawnbroker.com, Inc. and
Vahid Rafizadeh
II-4
<PAGE>
Exhibit
Number Description
------ -----------
10.13(2) Severance and Release Agreement by and between
Pawnbroker.com, Inc. and Daniel McElwee effective May 18,
2000
10.14(2) Letter Agreement by and between Pawnbroker.com, Inc. and
Jefferies & Co., Inc. dated December 1, 1999
10.15(2) 12% Promissory Note in the Principal Amount of $1,000,000
dated April 26, 2000 issued to BWI Avionics, Ltd.
10.16(2) Agreement by and between Pawnbroker.com, Inc. and
RedTagOutlet.com, Inc. dated May 10, 2000
10.17(4) Letter Agreement by and between Pawnbroker.com, Inc. and
Ladenburg Thalmann & Co. Inc. dated June 7, 2000
10.18(4) Letter Agreement by and between Pawnbroker.com, Inc. and
Ladenburg Thalmann & Co. Inc. dated June 7, 2000
10.19(4) Loan Agreement by and between Pawnbroker.com, Inc. and
Lamothe Investing Corp. dated June 7, 2000
10.20(4) Registration Rights Agreement by and between Pawnbroker.com,
Inc. and Lamothe Investing Corp. dated June 7, 2000
10.21(4) Escrow Agreement related to the Loan Agreement dated June 7,
2000
10.22(4) Form of 9% Convertible Debenture issued to Lamothe Investing
Corp.
10.23(4) Form of Warrant issued to Lamothe Investing Corp.
10.29(3) Amended and Restated Stock Option Plan, filed June 1, 2000.
10.30(5) Common Stock Purchase Agreement by and between
Pawnbroker.com, Inc. and Gestrow Investments Limited dated
July 6, 2000
10.31(5) Registration Rights Agreement by and between Pawnbroker.com,
Inc. and Gestrow Investments Limited dated July 6, 2000
10.32(5) Escrow Agreement related to the Common Stock Purchase
Agreement dated July 6, 2000
10.33(5) Form of Warrant issued to Gestrow Investments Limited
10.34(5) Form of Warrant issued to Ladenburg Thalmann & Co. Inc.
10.35(5) Letter Agreement dated July 7, 2000
II-5
<PAGE>
Exhibit
Number Description
------ -----------
10.36(5) Promissory Note issued to Ladenburg Thalmamm & Co. Inc.
10.37(5) Letter Agreement with Gestrow Investments Limited dated July
19, 2000
21.1(1) Subsidiaries of the Registrant
23.1(5) Consent and Acknowledgement of Davidson & Co.
23.2 Consent and Acknowledgement of Dorsey & Whitney LLP
(see Exhibit 5.1)
24.1(5) Power of Attorney
27.1(5) Financial Data Schedule
-------------------
(1) Previously filed September 1, 1999 on Form 10.
(2) Previously filed October 13, 1999 on Form 10/A.
(3) Previously filed on June 1, 2000 on Form 8-K.
(4) Previously filed on June 30, 2000 on Form 10-K.
(5) Previously filed on July 31, 2000 on Form S-1.
(b) The financial statement schedules are omitted because they are inapplicable
or the requested information is shown in our consolidated financial
statements, and related notes.
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) that, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement; and
(iii)To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment will be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time will be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered that remain unsold at the termination of
the offering.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registered
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Reno, State of Nevada, on
August 9, 2000.
PAWNBROKER.COM, INC.
By /s/ Greigory Park
-------------------------------------
Its: Chief Financial Officer
<PAGE>
EXHIBIT INDEX
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(3) Certificate of Amendment of Pawnbroker.com, Inc. filed June
1, 2000.
3.5(1) Bylaws of Digital Sign Corporation. (Previously filed as
Exhibit 3.3 to Form 10)
3.6(3) Amended and Restated Bylaws of Pawnbroker.com, Inc.
5.1 Opinion of Dorsey & Whitney LLP
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
10.7(1) Consulting Agreement by and between Pawnbroker.com, Inc. and
IRG Investor Relations dated June 25, 1999
10.8(2) Lease Agreement by and between Pawnbroker.com, Inc. and Don
Pearlman Joint Venture Six dated December 2, 1999
10.9(2) Employment Agreement by and between Pawnbroker.com, Inc. and
Neil McElwee effective September 13, 1999
<PAGE>
Exhibit
Number Description
------ -----------
10.10(2) Employment Agreement by and between Pawnbroker.com, Inc. and
Joseph Schlader effective June 13, 1999
10.11(2) Employment Agreement by and between Pawnbroker.com, Inc. and
William Galine effective June 13, 1999
10.12(2) Employment Agreement by and between Pawnbroker.com, Inc. and
Vahid Rafizadeh
10.13(2) Severance and Release Agreement by and between
Pawnbroker.com, Inc. and Daniel McElwee effective May 18,
2000
10.14(2) Letter Agreement by and between Pawnbroker.com, Inc. and
Jefferies & Co., Inc. dated December 1, 1999
10.15(2) 12% Promissory Note in the Principal Amount of $1,000,000
dated April 26, 2000 issued to BWI Avionics, Ltd.
10.16(2) Agreement by and between Pawnbroker.com, Inc. and
RedTagOutlet.com, Inc. dated May 10, 2000
10.17(4) Letter Agreement by and between Pawnbroker.com, Inc. and
Ladenburg Thalmann & Co. Inc. dated June 7, 2000
10.18(4) Letter Agreement by and between Pawnbroker.com, Inc. and
Ladenburg Thalmann & Co. Inc. dated June 7, 2000
10.19(4) Loan Agreement by and between Pawnbroker.com, Inc. and
Lamothe Investing Corp. dated June 7, 2000
10.20(4) Registration Rights Agreement by and between Pawnbroker.com,
Inc. and Lamothe Investing Corp. dated June 7, 2000
10.21(4) Escrow Agreement related to the Loan Agreement dated June 7,
2000
10.22(4) Form of 9% Convertible Debenture issued to Lamothe Investing
Corp.
10.23(4) Form of Warrant issued to Lamothe Investing Corp.
10.29(3) Amended and Restated Stock Option Plan, filed June 1, 2000.
10.30(5) Common Stock Purchase Agreement by and between
Pawnbroker.com, Inc. and Gestrow Investments Limited dated
July 6, 2000
10.31(5) Registration Rights Agreement by and between Pawnbroker.com,
Inc. and Gestrow Investments Limited dated July 6, 2000
10.32(5) Escrow Agreement related to the Common Stock Purchase
Agreement dated July 6, 2000
10.33(5) Form of Warrant issued to Gestrow Investments Limited
10.34(5) Form of Warrant issued to Ladenburg Thalmann & Co. Inc.
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Exhibit
Number Description
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10.35(5) Letter Agreement dated July 7, 2000
10.36(5) Promissory Note issued to Ladenburg Thalmamm & Co. Inc.
10.37(5) Letter Agreement with Gestrow Investments Limited dated July
19, 2000
21.1(1) Subsidiaries of the Registrant
23.1(5) Consent and Acknowledgement of Davidson & Co.
23.2 Consent and Acknowledgement of Dorsey & Whitney LLP
(see Exhibit 5.1)
24.1(5) Power of Attorney
27.1(5) Financial Data Schedule
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(1) Previously filed September 1, 1999 on Form 10.
(2) Previously filed October 13, 1999 on Form 10/A.
(3) Previously filed on June 1, 2000 on Form 8-K.
(4) Previously filed on June 30, 2000 on Form 10-K.
(5) Previously filed on July 31, 2000 on Form S-1.
